Sandy Bugbee - VP, Treasurer and Investor Relations Tim Sullivan - President and CEO Dean Nolden - CFO.

Jamie Cook - Credit Suisse Steve Volkmann - Jefferies Jerry Revich - Goldman Sachs Mig Dobre - Robert W. Baird Chad Dillard - Deutsche Bank Andy Casey - Wells Fargo Securities Mike Baudendistel - Stifel Courtney Yakavonis - Morgan Stanley Faheem Sabeiha - Longbow Research Alex Yaggy - Cortina Asset Management.

Greetings and welcome to the REV Group Third 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..

Thank you, Dana. Good morning and thanks for joining us. Last night, we issued our third 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..

Thank you, Sandy. Good morning, everyone and thank you for joining us to discuss REV Group’s third quarter results. I’ll begin today with highlights from the third quarter. Then, I’ll turn the call over to Dean for a detailed review of the financials before I make some closing comments.

Our performance in the quarter was negatively impacted, particularly and primarily by the continuation of the near term supply chain headwinds that we discussed at length on last quarter's call, but there were several positives in the quarter.

First and foremost, we believe fundamental demand across our end markets remained strong and most of our product lines continued to show a high level of order activity during the quarter. Our backlog is up 16% to roughly 1.3 billion since the start of the year and we're well positioned for a much stronger year in fiscal 2019.

Specifically, we experienced increased transit bus and school bus sales activity, which are two of our highest margin products and we’ve continued to see very strong strength in our Class B, Class C and towable end markets where we're driving improvements in profitability.

The benefit of price increases as well as cost reductions and restructuring initiatives implemented during the second quarter also helped us preserve margins during the third quarter, despite the near term challenges we're facing. Both adjusted EBITDA performance and adjusted EBITDA margins for the third quarter were flat, compared to the prior year.

We also experienced good growth in both net income and adjusted net income, as the benefit of recent tax reforms have helped us drive more than 500% increase in earnings per share year-to-date as compared to fiscal 2017.

We have many reasons to believe that we’ll close the year with improved margins and performance momentum, as we enter fiscal year 2019, but let's shift to a discussion of the challenges we're facing.

On last quarter's call, we discussed at length how the recently imposed steel and aluminum tariffs created near term supply chain inefficiencies across our business.

These tariffs created pricing turmoil across our industry and resulted in significant cost inflation beginning in the second quarter, within both our material supply chain and also in our service supply chains.

The most significant impact was an immediate shortage of many of the commercial chassis we purchased to produce our vehicles, which has resulted in extra freight charges for us to get the chassis we need to our manufacturing facilities.

Our inability to anticipate and obtain all the exact materials we need for certain shipments has resulted in more complicated logistics than we expected during the third quarter and this negatively impacted third quarter revenue performance and profitability.

I think it's important to clarify that we've not experienced any order cancellations within this environment. It's truly just a matter of delayed shipments and longer material lead times in the supply chain.

In fact, lead times in some of our product lines more than doubled during the third quarter with lead time increases beginning in June and continuing into the summer. We estimate that one month of increased lead time during this period has resulted in approximately one month of lost sales on impacted products.

We don't believe these sales are lost forever, as most of what we've produced are critically important vehicles, but rather, they've been pushed into future periods and that has impacted our work in progress and finished goods inventory, which Dean will discuss later.

For some additional context, we purchased the majority of our chassis from Ford and General Motors, especially for our ambulances and shuttle bus product lines. Chassis shortages in these two parts of the business have had the most significant near-term impact on our performance, as we've missed scheduled shipments as a result of these shortages.

At the end of Q3, we had approximately 300 combined ambulance and bus orders waiting for chassis deliveries to begin manufacturing. In total, across all of our product lines and segments, we estimate that 570 units in production were missing material or chassis at the end of Q3.

Looking back, we believe delayed chassis and material issues in the third quarter resulted in an approximately $50 million of missed revenue during the quarter.

Dodge, Chrysler and Mercedes are having similar, but albeit smaller scale issues in terms of impact on our business, but overall, it seems chassis availability from the OEMs is beginning to improve.

We are expecting continual incremental improvement through the end of this year, as most of our suppliers have told us they expect chassis availability concerns to be fully resolved by the end of calendar year 2018.

We responded quickly to these near term challenges during the second quarter by implementing restructuring activities as well as raising pricing across all our business units to help compensate for increased costs.

These actions helped us preserve margins during the third quarter and I'm pleased to report that cost increases from vendors has slowed since the end of the second quarter.

Our price increases have been successful in most places where they've been implemented, with the exception being in commercial buses, which are dependent on each deal and in some cases, in large RVs, where dealer discounts can play an important role in securing large orders.

The bottom line is that we've been able to pass on price increases largely as we expected. While price increases helped us preserve margins in the quarter, we believe we still have not seen the full impact of margins, as it takes some time for order activity to flow through inventory.

We expect price increases and corresponding benefits to margins to be in full effect by the end of fiscal year 2018. We believe we have secured certainty on chassis pricing for 2019 through all of our major suppliers with the exception of Chrysler who provides only a small percentage of our required chassis.

We expect this price certainty combined with the benefits of price increases will enable us to improve margins next year. In addition to the chassis availability and related impacts in our supply chain during the third quarter, there were additional items that underperformed compared to our internal expectations.

The first relates to our Class A RV business. As previously advised, we are repositioning this product line towards the higher end of the various Class A product ranges. We began introducing our new product line with the 2019 model year change.

To achieve our design goals, we delayed the introduction of this new range of products by two months to the end of May. This delay meant that we missed the new model year buying season in late March and early April.

Since dealers tend to be cautious in their buying habits between the traditional buying seasons, our late introduction meant that we experienced reduced buying activity.

Nevertheless, we are ahead of the next buying season, which commences this month and we did see an uptick in order activity in our Class A products in the latter part of the third quarter. Based on dealer feedback, we are very optimistic about the success of our newly repositioned Class A RVs.

The second unexpected impact we experienced in the third quarter relates to legal expenses associated with the protection of our intellectual property. Legal expenses were approximately 1.1 million higher than we expected during the third quarter, largely due to our pursuit of a patent infringement case.

Another unforeseen impact in the third quarter performance related to our parts business, where we experienced a lag between higher material costs and price increases. Finally, we experienced delays in our order intake in our specialty vehicles and ambulance businesses, which resulted in an underperformance compared to our targets.

We estimate the combined impact of these items negatively impacted third quarter adjusted EBITDA performance by approximately 16% compared to our expectations. Dean will provide a bridge of more details on these items.

As we noted in our earnings release, we revised our full year outlook to reflect our lower than expected year to date performance and the revised outlook anticipates additional near term headwinds in the business during the fourth quarter.

I’d like to provide a brief summary of other important segment level details, as we approach the end of fiscal year 2018.

First, in fire and emergency, the decrease in net sales during the third quarter was primarily due to chassis availability disruptions, which resulted in lower ambulance unit shipments as well as the timing of some fire truck shipments. This segment was up against some difficult comps in the third quarter.

And as I mentioned earlier, our ambulance business has been significantly impacted by chassis availability and we have a significant number of orders currently awaiting chassis deliveries. I'd also like to clarify that the sequential decline in backlog in the segment was expected and was consistent with normal seasonality.

We are confident in our ability to drive margin expansion in this segment long term, both through operating efficiencies and organic growth. Ferrara started to experience organic growth during the third quarter and both KME and Ferrara had improving margins that we believe will drive segment profitability higher long term.

In our commercial segment, margins improved sequentially during the third quarter and we're anticipating higher production and profitability levels in fiscal year 2019. As a reminder, for the past two quarters, we've experienced reduced volumes in this segment due to the lag time between two major municipal city contracts.

However, we expect the County of Los Angeles contract will serve as a strong base for this business beginning next year. We enjoy strong market share in school buses, received encouraging levels of shuttle bus order activity and we believe we have significant long term opportunities in specialty vehicles.

In recreation, adjusted EBITDA margins in the third quarter improved by 250 basis points year-over-year as our acquisitions of Lance, Renegade and Midwest all continued to perform very well. We expect each of these brands will significantly outperform their fiscal 2017 results.

The segment has been approaching 10% adjusted EBITDA margins, even pending the repositioning of our Class A RVs, which make up almost 60% of total segment revenues. We also believe contributions from Lance will help us accelerate the pace of profitability improvement in this segment over the next several quarters.

We expect Class A performance will improve next year once our new product line finds its way into the marketplace. In the meantime, we expect that our other RV product categories will continue to grow.

In closing, while we're disappointed that fiscal year 2018 performance has been below our expectations, we believe underlying demand remains strong and we're positioned to return to historical levels of growth and profitability in 2019.

We believe our supply chain issues will be more effectively managed, it will have the full benefit of price increases and restructuring initiatives that were implemented this year. We also expect to a higher level of sales activity across all of our product lines as we enter 2019.

We feel our balance sheet and liquidity position will enable us to be opportunistic in the marketplace and we’ll remain committed to shareholder friendly capital allocation policies. We repurchased nearly $45 million of our shares during the first half of 2018.

Our board of directors has subsequently approved an increase to our share repurchase authorization of $50 million, which brings our total current share repurchase authorization to approximately $55 million over the next 24 months.

We plan to continue making capital expenditures in the businesses to foster continued growth and improving efficiencies along with our quarterly dividend policy, which currently reflects a $0.20 per share annual rate. I'll turn the conversation now over to Dean to go through the financials..

Thanks, Tim and good morning. I will start on slide 4 of the presentation. As Jim discussed, we continued to experience ongoing headwinds from last quarter, but we're able to preserve margins through our cost reduction and pricing actions implemented during the second quarter.

Total net sales for the third quarter were $598 million, up slightly compared to the third quarter of last year. The availability of commercial chassis and other materials delayed product shipments during the quarter and lower Class A RV unit volumes also impacted sales.

Excluding the impact of the Lance acquisition, consolidated net sales were moderately lower than the prior year period. Net income for the quarter increased 20.4% to $18.3 million or $0.28 per diluted share. Adjusted net income increased almost 6% to 23.2 million or $0.38 per diluted share.

The increase in third quarter 2018 adjusted net income was primarily the result of the benefit of lower income tax expense due to the US tax reform. We have communicated previously that REV is a significant beneficiary of the US corporate tax rate reduction due to our significant US footprint.

Recently implemented price increases and cost reduction initiatives helped us to offset rising costs during the third quarter and we were able to increase adjusted EBITDA dollars and realize flat adjusted EBITDA margins as compared to the prior year.

Greater adjusted EBITDA growth was mitigated by increased material cost on favorable sales mix in the commercial segment and lower shipments of Class A RVs, offset by impressive growth in other product categories within our recreation segment.

As Tim mentioned, we believe chassis availability concerns will be behind us by the beginning of calendar year 2019. Our pricing initiatives have been mostly accepted and our cost reduction actions were realized in the third quarter based on our expectations and we have certainty on chassis pricing for 2019 with most of our major suppliers.

The full year impact of our pricing and cost reductions along with pricing certainty on almost 40% of our product costs set us up well for renewed margin improvement next year. Please turn to page 5 where we'll discuss the performance of our segments. Fire and emergency segment sales decreased by 8.9% to $239 million for the third quarter.

The primary drivers of this result were the chassis supply disruptions, which resulted in lower shipments of ambulances and the mix of fire truck sales. As a reminder, all of our prior acquisitions in this segment became organic in the third quarter.

We did start to see organic growth in some product lines during the quarter, but that growth was masked by the delays in ambulance shipments tied to the availability of chassis. Approximately 150 ambulances -- shipments were deferred during the quarter due to chassis.

F&E adjusted EBITDA for the quarter declined 12.8% to $25 million, driven by an unfavorable sales mix, resulting from lower ambulance shipments, partially offset by favorability in SG&A spending.

Adjusted EBITDA margin of 10.6% was 50 basis points lower compared to the prior year quarter, but was up sequentially by 200 basis points versus the second quarter of 2018.

We expect our leadership positions in F&E markets and strong distribution partnerships to drive continued sales growth and margin expansions longer term, as both fire and ambulance markets are essential expenditures to municipalities and should continue experiencing the benefits of positive macro trends, including urbanization and ageing population in the future.

Our backlog increased 2.7% over last year's third quarter and the sequential decline in backlog as Tim described is consistent with stronger sales during the quarter and the seasonality of this business.

As shown on slide 6, in our commercial segment, quarterly sales were up 2.1% compared to the prior year period, driven by an increase in shuttle bus, school bus, mobility van and terminal truck units. Commercial backlog at the end of the third quarter was up 15% to $420 million compared to the end of fiscal 2017 and up almost 6% sequentially.

We believe the fundamentals of these businesses remain strong due to similar macro fundamentals of urbanization, population and aging. Based on our visibility in a few key product categories with stronger profit margin characteristics, we believe this business will enter fiscal 2019 with strong tailwinds.

Commercial adjusted EBITDA was down 8.5% compared to the third quarter of last year. The decrease was due to the lower volumes of transit bus sales. Adjusted EBITDA margin was down 90 basis points in the third quarter, driven by the impacts of these lower transit bus sales and increased material costs.

The commercial segment, specifically the bus division, also had meaningful impact from chassis availability. A total of 420 bus and specialty division vehicle shipment delays were caused by chassis availability and other material shortages in the quarter.

In addition, margins improved sequentially in the segment compared to the second quarter and we believe this business is positioned for a strong year in fiscal 2019, led by the fulfillment of two attractive municipal city contracts plus other opportunities as Tim described.

Turning to slide 7, quarterly sales in Recreation segment grew 10.9% over the year ago period to $197 million, driven by strong performance from the Lance acquisition and sales growth across the rest of the recreation brand lineup, except for Class A RV.

Class A sales in the quarter declined compared to the prior year period due to the strategic reduction in the number of different models produced and the timing of new model year introductions that Tim discussed previously.

The strength of our upcoming recreational -- recreation product sales opportunities as well as the favorable reception of our new Class A models resulted in the segment backlog being up 72% to $250 million versus the end of fiscal 2017 and up 4.4% sequentially compared to the second quarter.

Recreation adjusted EBITDA increased 53% for the quarter to $17.9 million. The expansion in EBITDA and profit margin is attributable to the results of our Class B, Class C product lines in addition to the results from Lance.

For the third quarter, profitability of our RV businesses acquired in the first half of 2017 was up double digits for the quarter. On an organic basis, excluding Lance, recreation adjusted EBITDA for the third quarter 2018 increased 7.3% from the third quarter of fiscal 2017.

Now, please turn to slide 9, where we've provided a bridge from our initial expectations for adjusted EBITA in the third quarter to actual results. Chassis availability and other material shortages resulted in a combined negative impact to adjusted EBITDA of approximately 16% as compared to our initial expectations for the quarter.

These were the two primary issues impacting the quarter versus our prior expectations. These issues are transitory in that they are not lost sales, but deferrals into a future period. Partially offsetting these headwinds were improvements in other businesses versus expectations such as I described in our RV segment, the recreation segment.

On slide 10, we’ve provided the update to our full year outlook, which reflects a lower than expected year-to-date performance as well as the expectation for continued near term impacts of supply chain inefficiencies through the end of this fiscal year. We knew we had opportunities and risks when we provided updated guidance last quarter.

Many of those items, both positive and negative, came to fruition in the quarter and even with those items, we may not have had to adjust our 2018 guidance. We had indications at the time of our last earnings release that the chassis issues were being solved or were going to be solved within weeks, not months.

The chassis issues persisted and bounced between suppliers and made matching chassis with customer orders more difficult throughout the quarter.

In addition, in mid-June and then again in early September, we, along with many other companies in our industries, started experiencing significant lead time extensions in not only chassis, but other materials. For example, lead times that were on average 6 to 10 weeks for some chassis stretched to 8 to 12 weeks and now sit at 14 to 20 weeks.

In addition, other material lead times were similarly impacted for such items as seeds, ramps, certain metals, hydraulics among others. The longer tail on the chassis availability issue along with these doubling and sometimes tripling of material lead times required us to adjust our guidance again this quarter.

Again, it is important to point out that we believe the impact of this current supply chain inefficiencies is not a lost sale, but a deferred opportunity that will benefit the company in future periods. We now expect net sales to be in the range of $2.4 billion to $2.5 billion and adjusted EBITDA in the range of $160 million to $170 million.

Net income is forecasted to be in the range of $57.9 million to $69 million and adjusted net income is expected to be in the range of $80.7 million to $88.8 million. This equates to roughly 10% top line growth year-over-year, meaningful growth in income and low single digit growth in adjusted EBITDA.

The opportunities for margin expansion to greater than 10% EBITDA margin are still available when the current supply chain disruptions are cleared up and we look forward to better probability results in the fourth quarter and a return to improved year-over-year profitability in fiscal year 2019.

Please note that the net income and adjusted net income guidance reductions are less than the reductions in adjusted EBITDA guidance due to a lower effective tax rate from the benefit of US tax reform and a lower depreciation from lower CapEx.

We now expect our full year effective tax rate to range between 5% and 10% and we will realize approximately $10 million of lower cash outflow for taxes related to our fiscal 2018 results. On slide 11, we provided a bridge to our revised full year 2018 adjusted EBITDA guidance of $165 million at the midpoint.

As you can see, we're expecting the combined impact of a chassis availability related to material shortages and increased lead times to have a combined impact of approximately $18 million on full year adjusted EBITDA. Next, on slide 12, I’ll discuss our working capital.

The increase in net working capital was primarily due to the normal seasonal increase in inventory compared to the prior year end and prior quarter.

The increase in working capital versus the prior year quarter was due to the impact of the Lance acquisition as well as indirect impact from the chassis availability and material lead times and higher fourth quarter production and shipment expectations.

As in prior years, working capital peaked early in the third quarter and is expected to decline through the end of the year. Core networking capital, as a percentage of trailing 12-month revenues, has approximated just over 20% for the last four quarters.

Although this has been increasing to some degree in the current quarter by the supply chain inefficiencies around chassis and other materials, we believe there is a meaningful opportunity to permanently reduce our working capital requirements over the next few years, starting in fiscal year 2019, generating a meaningful increase in cash and liquidity.

Net debt at July 31, 2018 was $427 million and our net leverage ratio was 2.7 times. We had almost $120 million of availability under our ABL revolving credit facility. Historically, we have said that we would prefer to stay below 2.5 times leverage.

But we feel comfortable being above that level at present, given the transitory impact of the current supply chain inefficiencies we’re experiencing and the fact that we're heading into our seasonally strongest period for cash generation.

Due to the impact from the repurchase of our shares in the third quarter, even though we maintain our prior expectation for cash generation from working capital and debt reduction from operations in the fourth quarter, we now anticipate our year end leverage ratio to approximate 2 times.

On slide 13, we show our capital allocation over the last five quarters. Capital expenditures were 8.2 million for the third quarter compared to 11.8 million in the third quarter of 2017.

We repurchased approximately 2.4 million shares during the third quarter for a total consideration of almost $41 million, representing an average repurchase price of $16.42 per share. We exercised the accordion on our term loan by $50 million in the quarter to support this repurchase activity.

Additionally, as Tim mentioned, our board of directors has subsequently approved and increased our share repurchase authorization of $50 million, which brings our total current share repurchase authorization to $55 million over the next two years.

We believe we've delivered a good balance of smart and appropriate capital allocation strategies over time, given circumstances and our relative low leverage and positive earnings growth potential will enable us to remain opportunistic around capital allocation in the future.

As always, our goal is to maximize our growth opportunities and shareholder return, while being good stewards of capital and maintaining adequate liquidity. With that, I'll turn the call back to Tim for some closing comments..

Thanks, Dean. In closing out our prepared remarks, I’d like to briefly summarize the quarter. While we are not satisfied with our performance year-to-date, we believe we’ll exit this fiscal year with good momentum heading into 2019 and significant opportunities to drive revenue growth and margin expansion.

These near term challenges have been largely out of our control, but we're confident of the long term health of our end markets and our ability to deliver compelling growth and financial returns to our shareholders longer term.

We have very good visibility within our end markets with 60% of our sales coming from end markets related to tax based revenue from necessary government and city municipality customers.

The near term supply chain inefficiencies we've been experiencing should be behind us, as we enter calendar year 2019 -- fiscal year 2019 and we’ll experience the full benefits of recent price increases, restructuring and cost reduction activities as well as strong sales growth, especially across some of our most profitable product lines.

We have a strong track record of acquiring and integrating high return businesses and our balance sheet will enable us to remain opportunistic in the marketplace.

We also have demonstrated our commitment to driving shareholder value through our dividend and our strong repurchase activity this last quarter, most importantly fundamental demand remains strong and our backlog continues to experience growth that gives us confidence in our ability to return to historic levels of growth and probability next year.

Operator, we’d now like to open the line up to questions..

[Operator Instructions] Our first question comes from the line of Jamie Cook from Credit Suisse..

Hi. Good morning. I guess, two questions. One, if we just take your guidance for the full year and what you've done for the first nine months, it implies margins in the fourth quarter have to ramp pretty nicely.

So I'm just trying to understand what would drive the ramp in margins in the fourth quarter, given these issues continue and it sounds like some of the cost savings already hit the third quarter? And then my second question, Tim, if you could just address -- I mean, you talk about these issues going into 2019.

How do we think about the impact to earnings in 2019? Is this something that just hurts the first quarter? Or could it potentially extend in to the second quarter in particular, as people are always worried about the seasonality of the earnings with the first quarter generally being weaker relative to the remaining nine months?.

Hi, Jamie. This is Dean. I'll start with the fourth quarter margin expectations. Yeah. There is a ramp that will be implied by our guidance, but as you know, fourth quarter is our strongest quarter and particularly in the fire business, fourth quarter is by far the strongest quarter at least this year and in most years.

So, we will expect -- we expect strong margin -- incremental margins from fire and emergency in the fourth quarter, primarily due to fire, but also to -- as well as the rebound of some of the catching up of some of the chassis issues, not all of them.

In commercial, we expect some margin expansion opportunities, because we are entering into one of the contracts with our Collins Bus business for one of the large municipalities and starting to ship those products and those are higher margin products and we had a little bit of a slower uptake in some of our specialty products that have more than average margins in the commercial segment in the fourth quarter.

And lastly, recreation, I think we're going to continue our recreation segment, the margin expansion, not only continued to improve month over month, the results of our Class A business and will experience the opportunities of the open house in September as Tim described, but continued improvement in the Renegade and Midwest and the Lance businesses that we have..

And as far as the carryover into 2019, we expect really that carryover to be absorbed in the first two quarters, not just the first quarter, primarily due to the fact that it's chassis availability and not all are equal. We think that Ford and GM are pretty much back on track.

We're concerned about Mercedes with their plant move, they're moving their production from Germany to Charleston, South Carolina this month. They're working through some backlog right now and we think that those products in particular could stretch into the second quarter.

So, we will see based on historical averages for the first quarter and the second quarter, a little bit higher than previous years, even though they're, as you correctly said, seasonally our worst quarters. That carryover should be absorbed in those first two quarters..

Jamie, maybe, I'd like to add to my comments two items that I just didn't mention.

One is the strength of our price increases we implemented in the second quarter and in the third quarter will start to take more hold in the fourth quarter than they did this quarter, because of timing as well as the cost reduction initiatives that we said a $10 million benefit for fiscal 2018.

More of it will be experienced in the fourth quarter than the third quarter, because of the timing as well. So those two provide some tailwinds to our year-over-year and quarter-over-quarter margin expansion..

And I’m sorry, Tim, if you attempted to quantify how materially impacted in the first half of ‘19..

No. We haven't yet. We're still kind of modeling out. Part of what that is too and the challenges, we only have so much labor, right, in our plants. What could happen is, we're trying to figure out exactly how the material availability rolls into the plants and then how we deal with it.

There is only so much over time we can work and quite frankly, we'd rather kind of balance it out now if we can rather than have a big spike in any one particular time, overtakes the plants..

Our next question comes from the line of Steve Volkmann from Jefferies..

Hi. Good morning. I'm just going to expand on what Jamie just asked and ask it another way. I mean, normally, I think roughly kind of 30% of your year is in the first half and 70% in the second half.

Are you saying that it's going to be more second half loaded in 2019?.

No. Well, our plan is always second half loaded. But I think, we’re going to have a little bit stronger first and second quarter because of the carryover, but the seasonality hasn't changed, Steve. I mean, we're still, as you know, heavy Q3, Q4 and that's not going to change..

But you're not telling us it's going to be like 20% in the first half and 80% in the second half?.

No. It'll be – there will be some slight increases over historical first half averages..

Okay. And then my next question is I just want to try to get a feel for your feel. I mean, you sort of thought this chassis stuff was going to get settled earlier. It didn't happen. Now, you're telling us by the end of the year.

I'm just curious why you feel strongly that that's something you want to commit to and how much visibility do you really have and what are the chances that this just keeps dragging out?.

Well, I think, in all honesty, I think we were probably a little naive and overly optimistic about chassis availability in Q3 and 4. When GM, Chrysler and other plants shut down for three weeks, that's almost a month of lost production.

They were probably overly optimistic, which caused us to be overly optimistic and it's just -- it's almost a month of lost production. You just don’t pick it up that quickly and the good news I guess about the US economy, it’s strong, which means that demand is up.

So we were -- we should have been less optimistic I think when we provided our guidance obviously at the end of Q2. And the other thing is they're not all created equal. They're different companies with different ramping capability. GM and Chrysler were down for three weeks.

Ford was only down for about 10 days, because they were able to bring components in from China. Well, then, you know, what's happened there. So, a lot of moving parts with the supply chain, but we feel pretty good. We're actually starting to see a better flow of chassis out of GM and Ford, which are our two main suppliers.

We’re very cautious on Mercedes, we’re very cautious on Chrysler. Those two have been challenging, even though, they're not the largest percent of what we do. We were short 70 chassis for Chrysler in Q3. That's not an insignificant number of chassis, even though that's not the preponderance of our purchases. We feel good.

I think, it's -- we feel good about our guidance for year-end ’18. We feel really good about what ’19 could bring us with our two divisions that kind of faltered in the first half of this year, back up on stream with good backlogs. And I think with the flow of the preponderance, a large portion of our chassis is coming in now from Ford and GM..

Have you built in some sort of cushion, so that there's a little bit of leeway here if the things don't go exactly the way you hope?.

Yeah. Because, as I just mentioned to Jamie, I think, we're going to do the best we can to satisfy our customers’ demands without overloading our plants.

So we’ve really kind of planned this to be kind of a steady ramp back to normalcy, if you want to call it that with an idea that, as we roll into the holiday period and first part of January, we're going to be probably well back into feeling good about our cadence on production..

Our next question comes from the line of Jerry Revich from Goldman Sachs..

I’m wondering if you folks can talk about, as you look across the portfolio, where do you see opportunities for order growth to accelerate, we're spending a lot of time talking about the production constraints, but order growth hasn't really been significant across the businesses.

So maybe it's an issue of timing, Tim, as you alluded to in your prepared remarks, but can you flush out to us your expectations for backlog over the next couple of quarters and what are the opportunities for order growth to accelerate when you look across the portfolio?.

We're right in the heart of the fire buying season right now. Part of that seasonality with the new tax money available coming in July, our backlogs are growing pretty quickly now across the three fire segments, where we're well into February, March type backlogs with that product line. So nice and strong there.

There's been some delays in some of the backlog build in ambulance, primarily because of some of the change in ownership of one of the large -- not one of -- it's actually the largest ambulance contract in the country.

A major customer of ours, there was a change in ownership there, which kind of caused them to pause some of their purchasing and reset. We see that actually resolving itself, as we move into late October, early November. So we see back to normal backlogs, normal growth opportunities there.

Plus, our normal customer base that’s pretty strong in ambulance as you know. Terminal trucks are up. Obviously, logistics is a big deal right now, with the economy being strong. Our backlog in terminal trucks is the highest it's been in the four years I've been here.

Shuttle bus activity is high right now and the two big things that I think we mentioned in the prepared remarks is that transit bus and school bus are back to normal and those really hurt us in the first half of this fiscal year, because of the lag and the follow-on contract that we were expecting in transit bus and then also our pass on the pre-bid [ph] for the school bus contract.

But those are back, their backlogs are back to normal levels. So, there's very little weakness across the product lines as far as demand and backlogs are actually higher in almost every segment than what we've experienced since I've been here..

And Jerry, maybe to add to that, I mean, we've been experiencing when you look at the book to ship ratio or the book to bill ratio of the segments in all of them, in the quarter, the two, commercial and recreational are above one.

So, the book to bill above 1 obviously, you're growing fire and emergency as we said from a seasonal perspective was just under. So that's one thing we watch..

And so as you put the pieces together, give or take, organic order growth year-to-date is in the low to mid-single digit range. I guess based on what you're seeing now, it sounds like you expect an acceleration over the next couple of quarters in organic order growth, if I'm putting together your comments correctly.

Is that your message? Can you just put a finer point on that for us?.

You hit the nail on the head. That’s the message. Organic growth has been the slim, really all fiscal 2018 and we see that with the demand that we've got out there and the backlogs that we're building that that's going to recover as we move into ’19 nicely..

Our next question comes from the line of Mig Dobre from Robert W. Baird..

So looking last quarter at the EBITDA guidance bridge that you provided, you had a category there for material cost increases from tariffs, chassis, that was about $19 million of headwinds to your guidance. Now, this quarter, we have 9 million of chassis availability headwind and another 9 million of material shortages.

Put them altogether, it's like $37 million of the hit that you’ve taken this year.

Is there any way that you can sort of maybe separate these items in terms of what might be going away at the end of this year and what might be still dragging on, as we look in to ’19?.

Yeah. I think -- this is Dean. The good news is the vast majority of the items you described are either going away at some point as we get into 2019 or we have actions in place to mitigate them that we always understood would be fully realized until we got into ’19. The material cost inflation of $19 million has been holding.

So, as you see, we didn't have to -- we did not increase that number in our current bridge. So, we feel pretty good about where we are from a material perspective compared to where we thought we'd be. And as we said in the prepared remarks, we have some certainty on pricing of major category of chassis in our cost for next year.

So that one will take care of itself, as we work through our backlogs and our price increases and we realize all of our cost reduction efforts. So that $19 million should be overcome next year with those items.

The new items that you talked about, the chassis supply and material shortages that are in the reconciliation now, those are temporary and we believe that those items will be realized in future quarters.

We said in the script there that -- or not in the script, but in the slide back, about $120 million of revenue we believe is shifting out of fiscal 2018 in to 2019. We’re not saying when that's going to be realized, but obviously we're going to work through that as fast as we can and that's about 1200 units.

And that’s the $18 million of EBITDA that you see in the material shortages and the chassis supply. So those items are real issues this year, but there are lost opportunities in deferred until next year.

So, the largest pieces of those items, the 19 million plus the material shortages plus the chassis supply issues are transitory and we believe we'll overcome those next year and benefit from those next year..

I think let me add one point, because I don’t want to have this overlooked.

The easiest thing in many respects for us to get our hands around our chassis deliveries, those are big items that we have good visibility to, albeit not good visibility as far as the fact that we don't deliver when we need them, but at least we know how to plan for those things.

I think the thing that's been the most difficult for us in Q3 and we're seeing it in Q4 and we're cautious based on again a couple of the other questions we've had in to Q1 are all the other material things that we buy. Dean talked about the extension on lead times on a lot of material. This is the nickel and dime stuff that are not chassis.

Those are the things that can prevent us from making a delivery and those are the things that are the hardest to manage, because they are small parts and I think as a company, I think, we've learned a lot as we've gone through this last quarter, just the sheer volume of those nickel and dime items that come from offshore.

And the dramatic increase in lead times when people stop sourcing offshore and start to try to source those onshore. Those things are the things that cause us the most pause as we finish Q4 and we go into Q1. We have to manage around lead times on nickel and dime items and that's challenging..

I see. And then maybe if we can kind of go back to what's implied in the fourth quarter, looking at fire and emergency, there is a seasonal uptick. I think that that's basically what's implied in the guidance here.

Can you comment at all as to, does this sequential uptick come primarily from the fire side of the business? Are you having any challenges there in terms of materials, chassis, anything like that or are you essentially saying that ambulances are picking up sequentially as well?.

There's three questions there and they're all very important. So let me try to attack them separately. Fire backlogs are up significantly, because of the buying season, you correctly assessed that. Very similar to probably what you're hearing from other manufacturers, steel prices are up, we're able to manage that.

Steel availability isn't too bad, it's a little lengthy, but nothing that we can't manage through because of our longer backlogs or longer lead times that we do have with our backlog. So we're managing through that. The ambulance has been a combination of two things, not just one thing.

It's been a combination of a weaker backlog, again primarily due to the fact that the largest contractor that we sell to has not purchased this year and that's because the ownership change. And we think that will self-correct itself for the next 60 days or so.

The orders we do have though in place, one of the areas that we're getting the hardest hit on shipments and any things move out of backlog is ambulance. So, it's two things there. The backlog is a little weaker than normal in ambulance and we're struggling to ship because of the lack of chassis..

Okay. And in the fourth quarter, I'm sorry, just to – so that I understand it very clear..

In the fourth quarter, our guidance is based on what we think we're going to get as far as chassis. I think we mentioned this on the second quarter call, we have over 80 ambulance bodies built on carts waiting for chassis right now. So if it was waiting for chassis to build on chassis, we never make the quarter.

The fact that we have pre-built ambulances waiting for chassis, we feel pretty good about our chances, as we roll through the fourth quarter..

Mig, I would add to that too then that you're right in the fourth quarter, the fire division of that segment will be the primary driver for the growth year-over-year or quarter-over-quarter and the good side of having longer lead times is -- and a visible backlog, is they have that material, they have less issues with some of the materials than the other divisions.

So they're ready to build. And they build on their own chassis, so they don't have to purchase chassis. So, that's another benefit they have. So it's fire that will be the primary driver of the fourth quarter for F&E..

Our next question comes from the line of Chad Dillard from Deutsche Bank..

So, can you give a little bit more color on your Class A RVs. You mentioned that you're introducing a new model. Just wanted to get a sense for how the order uptake is tracking versus expectations and just a broader -- more broadly on the Class A side, what the year-over-year comps look like for that if assigned.

And then secondly, can you talk about the dealer inventory situation for Class As? Maybe where they are now versus three months ago or a year ago?.

Okay. As far as the Class As, this was a conscious decision we made this year. We absolutely think it’s the right strategy based on our experience with Class Bs, Cs and towables.

All of those products are in the high end of their various ranges and within RV, there are ranges of price points and content and the margins tend to be better at the higher end of those ranges.

We were building As more in the mid and lower range, which means that the opportunity on margin were quite low and we've seen the real benefit of being on the higher end of the range.

So when lose or draw, we decided to make that change in January and we started the process to basically redesign the product line and move it up, all the gate, the gas and the diesels up to the higher end of the range. The good news is, we hit exactly where we want to be.

The bad news is, as I said in my prepared remarks, we came out between two buying seasons. The model year change buying season and in late March, early April and what they call open house, which is coming up here on the 24th of September. So we’re in a little bit no man's land as far as order intake on Class As.

And that also is reflected in B, Cs and towables, but we have big backlogs there. The reaction from the marketplace has been very positive towards our new product line and we're expecting some really nice news coming here as we go into the next buying season in Open House. As far as the demand for As overall, it's interesting.

As have been a little soft for the last year and a half. As far as year-over-year comps and that sort of thing, for the last couple of months, comps on As are actually showing higher retail activity than the previous year or 18 months.

And so we're pretty optimistic, looking at the retail lots on As, there's been some really good selling efforts in July and August. So we think the retail lots are fairly low and we're optimistic, as we go into the open house buying season here on the 24 of September..

And Chad, the Class A just to add to what Tim said is the only product category in the recreation segment that was down year-over-year from a revenue perspective. So it is the main driver for any organic revenue miss.

They're down a little bit over 10% year-to-date because of our change to the model year or the timing of the model year introductions and we expect to claw back on some of that in the fourth quarter based upon the current backlog in open house..

That's helpful. And just going back to the supply chain issues, I think you mentioned in your prepared remarks that pushed about $50 million out this quarter and maybe $120 million in total.

How should we think about that cascading into 2019? Will it be all recognized in the first half of the year or will it be more ratable through the year?.

No. It'll be the first half. I mean, again, with the caution that it's going to ramp somewhat slowly because of, as I mentioned, the nickel and dime items, that tend to slow us down too. Our shipments, as craze as it is, our shipments are off in our terminal trucks where we’ve got a great backlog on really small items.

So, it shouldn't flush through, certainly in the first half of the year, which is not bad. I mean, that tends to be our weakest period of time anyway. So -- and we've got the capability to do it if we get the material..

Our next question comes from the line of Andy Casey from Wells Fargo Securities..

I wanted to go back to the -- just kind of beating the dead horse, but I want to make sure I understand.

The catch up for lost revenue that you expect in 2019, outside of the Ford and GM chassis, are your other chassis and material suppliers promise to give more units to enable catch up for the lost 2018 volume during ’19 or have you been able to access capacity to grow more than just catching up for the deferred shipments?.

No. The people that came out of supplies now are saying that they can clean up our demand by the end of the calendar year. That's what they're telling us. And it obviously carries us into the first quarter of ’19 and those two suppliers are predominantly or primarily Chrysler and Mercedes.

We’re back to a pretty good run rate, all things being equal, Ford and GM, which are our two biggest suppliers there. And again, it's just -- they're all different and it's different on what the specification is for the various chassis. When we talk about chassis, we all kind of mentally, I think, gravitate towards, well, it's a spec. It's not.

We have 50 different specs of Ford chassis that we buy. So it's the chassis availability plus the actual specific spec. So in ambulance, we have some Ford chassis available in our commercial bus line right now that we can't use in ambulance, because they're not spec for that.

So, there's a lot of movement -- there's a little bit more to it than that, there is moving parts to all this..

And then question on commercial. You’ve realized in the past some revenue compression due to the removal of low barge at sales, Q3 had some modest growth.

Is the exercise to remove low margin revenue behind the company or is there still more to go in that specific segment?.

I refer to as a journey. It's -- there's always more. And, Ian Walsh that joined us a couple of months ago is into it in a big way with some great ideas. So if I probably would call that journey, we’re probably at half time. So there's a lot more opportunity and activity to be had in commercial..

Our next question comes from the line of Mike Baudendistel from Stifel..

Just wanted to ask you, I mean, with the chassis shortage.

I mean, when there's a shortage of chassis, I mean, where is REV Group on the pecking order if there's other customers that are chasing the same chassis and sort of how are those allocated?.

It depends again on the volume that we buy, Mike. On Ford and GM, we’re very high. As a matter of fact, that would put us probably at the very peak with Ford. Ford is our largest supplier and they actually are, I think, a good partner and they help us everywhere they can. I think GM does as well.

We're not as large of a customer with Mercedes, Freightliner, or Chrysler. And that's a challenge and obviously the big customers are the kind of squeaky wheel. So with our biggest volume, I think, we're in good shape, where our volumes are less, we’re in less good shape. I guess, that sounds kind of easy, but that's exactly how it does work..

And then just want to ask you on the ambulances that you’ve built the box and just need the chassis, I mean, how should we think about the costs flowing through the P&L.

I mean, with all those costs go through with the ambulance when it’s delivered or was there some overhead that you've already sort of -- sort of incurred there or just help us think through that?.

I think -- this is Dean, Michael. It’s a mix. Most of it is going to go through at the P&L as the units are shipped. And so, we’ve incurred costs related to, the cost to get the chassis in on time and in some cases, and expedite them. But then the inefficiencies around the chassis themselves and the build on the vehicle will be attached to that vehicle.

So, that'll come out of the P&L when we ship it..

And then just wanted to ask you on the Class A RV business, I mean, you're repositioning towards the higher end of the Class A.

I mean, do you think there's something to be said for some of the areas of growth, recently in RV, have been these sort of lower end type units, sort of younger people getting into the RV and then the Class A is somewhat of a declining market.

I mean, do you subscribe to that at all?.

That's true. I mean, the younger people go into the low end. We like the certainty of where we're at though across all four of our various areas. We don't really cater to the entry level customer. We cater to the repeat owner, the person that comes in that's trading up. We're not selling the lifestyle, we're not selling the low end.

The customers that have already bought into the lifestyle tend to be a lot more stable also. But in all fairness and in all honesty, we just like the margins better in the high end and we think it's a steadier business for us..

Our next question comes from the line of Courtney Yakavonis from Morgan Stanley..

I just wanted to get some clarification on the comments you guys made about your parts business. I think, Dean, you had mentioned that it was an issue of material cost inflation versus pricing lag. But I think in your slide deck, it also talked about volumes being down.

So, can you just clarify what's going on there and obviously, you have a big initiative to grow parts as -- and adding them all to your system. So just wanted to know if there's any issues going on there? Thanks..

I'll answer. Maybe, Dean, can jump in too. It’s the same issue we've got with the OE business as well, trying to stay on top of the cost increases and maintain margin levels.

So, our margins are down more than we thought they would be, just because we can’t keep on top of -- we couldn't keep on top of the cost increases fast enough or the price increases. So, it's a common denominator kind of across both the vehicles and the parts.

We are growing the business 10% this year, which -- it's not at the level we wanted to be, but we are growing it just a little bit less profitably..

And Courtney, this is Dean. Those are two issues. One, being the cost of material and freight, the other being the volume. The volume issue, we really kind of realized and put through to our revised guidance in the second quarter. So the volume issue versus our original fiscal ’18 expectations were addressed in our second quarter guidance update.

Now, in the third quarter here with this revision, it's primarily the material cost and the freight cost lag that we described..

And then just on the restructuring that you've been doing. I think you're targeting a 20 million realized cost savings by the end of the year. It seemed like this quarter was a little bit better than your expectations.

So, can you just give us a hint of, a, how much you annualized this quarter, and then, if there's any upside to that number as we think about into 2019?.

Yeah.

In this quarter, of the 10 million, under 50% was this quarter, $3 million or $4 million realized and we've just been very, as we proceeded through the quarter, in all of our businesses, in addition to the restructuring that we've done from an SG&A perspective, we've been very diligent about holding back on things that aren't really necessary in the near term, deferring them or canceling them.

So we're being pretty diligent with our SG&A spend in addition to the restructuring that we did..

Our next question comes from the line of Charley Brady from SunTrust..

This is actually Patrick who is standing in for Charley. I appreciate you squeezing me in. So I'll just leave it at one question.

So, as you sort out the supplier issues and the chassis and the material lag time issues, has that impeded your ability to go out and secure new orders and when you're talking to your customers, have you built in some level of expectations in terms of deliveries going forward as well?.

Yeah. I can tell you that it hasn't hurt our competitiveness. Quite frankly, I think the other question that came up, do we have more purchasing power because of our size with chassis suppliers, the answer to that is yes.

As crazy as this sounds, we're actually probably in a better competitive situation when the market gets tumultuous like it is right now, because of our relationship with our key suppliers. Even though it's been a challenge to get material in chassis, we're ahead of our competitors.

When it comes to chassis too and this is the hard one I think for the market to understand, our competitors tend to be privately owned. There's not another company out there that buys a number of chassis that we do that’s publicly traded.

So, our size being a public company, having the purchasing power we do, we're actually in a little bit better competitive situation than our competition that build ambulances and commercial buses, because they're private and they're smaller. So, if that makes sense, it's just kind of a unique and interesting dynamic..

Our next question comes from the line of Faheem Sabeiha from Longbow Research..

I appreciate that you guys are set up for margin expansion in 2019 due to the price certainties on the chassis buys and the price increases that you guys have implemented, but does that assume a certain volume level.

So I guess, if the demand were to fall off for any reason, would the price cost relationships turn negative?.

Good question. I can tell you that a lot of our purchasing power that was well and truly a very, very nice tailwind before the tariffs came into place, those are challenged right now. I think, we're watching it very carefully, but when scarcity evolves in material, your ability to maintain your margins, your cost levels is challenged.

Having said that, again, because of our size, we're better positioned than most anyone we compete with to have cost certainty, cost improvements and good margins accordingly..

The other thing I would say is if volumes decline, which we don't expect, we do have the tailwind of the deferrals, right, so that will kind of fill in some of those declines, but again, we don't expect it at this point. We haven't announced 2019 obviously, but we have the benefit of the carryover to help mitigate some of those issues..

Our last question comes from the line of Alex Yaggy from Cortina Asset Management..

The question that I had was, not so much on the chassis, but you had some turnover on your COO. Obviously, you had Mr.

Berto leave in the spring, and then you had an interim and now you have I guess Ian who came in, in June and I just wonder because it's not just the chassis you’ve had, it sounds like a number of other little and cumulative operational steps for a lack of a better term, because you have a lot going on.

So I wonder if you could talk about how the process of managing the business has changed. And I realize only a few months since Ian has joined, but can you talk about that a little bit and how much maybe you’d attribute recent issues to just a lot going on and now getting more disciplined on that..

Yeah. It’s at zero to do with personnel. We've had one change. Marcus Berto is no longer with the company. As we were waiting for Ian to arrive, I brought Tom Phillips, Our COO that retired at the end of November to come back in, in the interim. So quite frankly, we didn't miss a beat. Tom is still here.

Ian is ramping up his knowledge of our industries and our businesses and Tom has obviously been very, very helpful, as we move through Q3 and into Q4 and he’ll be here through Q4 to allow Ian some time to get a sea legs so to speak. But, it has nothing quite frankly to do with the management situation of the company.

It really all is centered around the availability of material and chassis..

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, thank you, everyone for joining us today. We’re over time, but I thought it was important that we got all the questions in today. It's obviously an important quarter. A lot going on, but in many respects, completely understandable.

I think as much as it pains us to change guidance and not really achieve our initial goals that we set out for ourselves this year, our markets are strong. Things are fine. We get our material, we’ll deliver product and we’ll deliver profitably.

So very, very short term that we're working through and I think certainly as the political landscape even gets more certainty around as far as the tariffs, we’ll get back to much more normal levels and we’ll continue to grow this business at the rapid pace that you've seen over the last two or three years. So, thanks again for joining us.

Look forward to talking again at the end of the fourth quarter and talking more about what we expect for 2019..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..