REV Group Q1 2024 Earnings Call Transcript

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March 6, 2024

Key Takeaways

  • REV completed the $308 million sale of Collins Bus and is winding down its El Dorado National California transit bus line, generating at least $250 million in net proceeds to fund a $3 special dividend and a $126 million share repurchase, cutting the share count by 13%.
  • For Q1 fiscal 2024, consolidated net sales held at $586 million while adjusted EBITDA jumped 43% YoY to $30.5 million, driven by strong margins in Specialty Vehicles despite a Recreational Vehicles decline.
  • The newly branded Specialty Vehicles segment saw sales rise 17% to $417 million and adjusted EBITDA surge to $26.2 million, with fire and ambulance shipments up over 20% and segment backlog growing 22% to $3.9 billion.
  • Recreational Vehicles segment sales plunged 25% to $159 million and adjusted EBITDA fell 52% to $11.6 million amid soft end-market demand, high dealer inventories and unfavorable category mix.
  • Full-year 2024 guidance remains at $2.45–$2.55 billion in revenue and $145–$165 million in adjusted EBITDA after divestitures, with first-half EBITDA now expected to represent about 40% of full-year results.
AI Generated. May Contain Errors.
Earnings Conference Call
REV Group Q1 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Greetings. Welcome to the REV Group's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

At this time, I'll turn the conference over to Drew Kono, Vice President, Investor Relations. Drew, you may now begin.

Speaker 1

All right. Good morning and thanks for joining us. Earlier today, we issued our Q1 fiscal 2024 results. A copy of the release is available on our website at investors. Revgroup.com.

Speaker 1

Today's call is being webcast and a slide presentation, which includes a reconciliation of non GAAP to GAAP financial measures, is also available on our website. Please refer now to Slide 2 of that presentation. Our remarks and answers will include forward looking statements, which are subject to risks that could cause actual results to differ from those expressed or implied by such forward looking statements. These risks include, among others, matters that we've described in our Form 8 ks filed with the SEC earlier today and other filings we make with the SEC. We disclaim any obligation to update these forward looking statements, which may not be updated until our next quarterly earnings conference call, if at all.

Speaker 1

All references on the call today to a quarter or a year are to our fiscal quarter or fiscal year, unless otherwise stated. Joining me on the call today is our President and CEO, Mark Skonechny. Please turn now to Slide 3 and I'll turn the call over to Mark.

Speaker 2

Thank you, Drew and good morning to everyone joining us on today's call. Shortly I'll provide an overview of our consolidated activities that have been recently executed. These actions were aimed at optimizing our portfolio products, creating a more focused operating structure and unlocking shareholder value. As we have previously announced, REV Group will be exiting bus manufacturing through the recent sale of Collins Bus and the winding down of manufacturing operations at our El Dorado National California or E and C Transit Bus Business. The sale of the Collins School Bus Business to Forest River closed on January 26 with an all cash deal price of $308,000,000 inclusive of certain preliminary working capital adjustments.

Speaker 2

The wind down of the operations of E and C is expected to be completed before the end of fiscal 2024. We expect to generate net cash proceeds of at least $250,000,000 from the exit of the bus manufacturing businesses. Approximately $179,000,000 of the immediate proceeds were used to return cash to shareholders through a $3 special cash dividend that was paid on Friday, February 16. The remainder of the proceeds were used to participate in a secondary offering that closed on February 20 by purchasing 8,000,000 of REV Group common shares at an average price of $15.76 or approximately $126,000,000 reducing the total amount of shares outstanding by 13% and our largest shareholders position from 46% ownership to approximately 18%. We believe these actions demonstrate our commitment to delivering shareholder value.

Speaker 2

Since 2020, we have returned over $400,000,000 to shareholders in the form of dividends and share repurchases while paying down debt and strengthening the balance sheet. We remain focused on generating high levels of cash from operations and are committed to a strong balance sheet that allows flexibility to pursue new growth opportunities and optionality for future returns of cash to shareholders. Finally, beginning with today's earnings release, the Fire and Emergency businesses have been combined with the Specialty Group business that manufactures capacity terminal trucks and lay more street sweepers and a new segment named specialty vehicles. The segment's 1st quarter results also include Collins operating performance through its divestiture date of January 26 and will include E and C's financial results through the wind down period. Specialty Vehicles is being led by Mike Berning, the former REVS Fire Group President.

Speaker 2

The Recreation segment has been renamed Recreational Vehicles and remains under the leadership of Mike Lanciati. Taken collectively, we believe these strategic actions create a more focused portfolio that provides opportunities for growth, consistent cash generation and improved margin performance, while maintaining a strong balance sheet. Turning to Slide 4, consolidated net sales of $586,000,000 were approximately flat compared to the first quarter of prior year. The year over year revenue result was primarily due to increased net sales including price realization within the Specialty Vehicle segment offset by lower net sales from the Recreational Vehicle segment. The increase in net sales in the Specialty Vehicle segment was related to increased unit shipments and price realization within the Fire and Ambulance businesses and increased bus manufacturing sales partially offset by lower sales of terminal trucks.

Speaker 2

Lower net sales in the recreational vehicle segment primarily a result of fewer shipments of Class A, Class B and Towable units, partially offset by higher shipments of Class B units. Consolidated adjusted EBITDA of $30,500,000 increased $9,200,000 or 43% from the prior year with increased contribution from the Specialty Vehicle segment partially offset by lower contribution from the Recreational Vehicle segment. The increased earnings in the Specialty Vehicle segment were primarily due to increased contributions from the Fire and Ambulance businesses. Lower earnings in the Recreational Vehicle segment were primarily related to lower contributions from the Class A, Class B and Towables businesses, partially offset by increased contribution from the Class C business. Please turn to Slide 5.

Speaker 2

Specialty Vehicles 1st quarter segment sales were $417,000,000 an increase of 17% compared to the prior year. The increase in net sales was primarily due to increased shipments of fire apparatus and ambulance units, higher sales from the bus manufacturing businesses and price realization partially offset by lower sales of terminal trucks. Unit shipments of fire apparatus increased 24% and shipments of ambulance increased 23% versus the prior year period, reflecting continued momentum of the operational improvement initiatives put in place aimed at increasing throughput. Net sales of fire apparatus and ambulance increased 36% 38% respectively and improved product mix and the benefit of price realization as we deliver a greater number of newer units from our backlog with pricing put in place throughout 20222023. Within the quarter, certain fire businesses accelerated shipments of aged units that were trapped in backlog improving the overall backlog mix and future price realization opportunity.

Speaker 2

Specialty Vehicle segment adjusted EBITDA was $26,200,000 in Q1 20 4, an increase of $21,000,000 compared to the adjusted EBITDA of $5,300,000 in the Q1 of 2023. The increase was primarily due to increased contributions from the fire, ambulance and bus businesses partially offset by lower earnings from the terminal trucks business. The increased fire group contribution was primarily related to higher unit volume, improved efficiencies and price resulting in increased profitability of 550 basis points for the Q1 of last year. This was aided by the strongest first quarter results of the Spartan businesses since its acquisition in 2020. In addition, the KME brand had its best quarterly performance in 2019.

Speaker 2

The increased Ambulance Group's contribution was primarily due to higher unit volume, improved efficiency and price realization, resulting in 600 basis points of margin expansion versus the prior year, Ambulance delivered the highest Q1 profitability since 2017. Adjusted EBITDA contribution from the legacy commercial segment businesses was a year over year net improvement of $3,000,000 which includes improved bus performance, partially offset by lower terminal truck volume. Segment backlog of $3,900,000,000 increased $692,000,000 or 22% versus prior year. The increase reflects strong orders for fire and ambulance units over the past year as well as the benefits of pricing actions, partially offset by the removal of the Collins bus backlog, lower demand for terminal trucks and a reduction in transit bus backlog. Excluding the impact of the sale of Collins, segment backlog increased $867,000,000 from prior year.

Speaker 2

Within the Q1, the combined emergency vehicle book to bill consisting of fire and ambulance orders was 1.3 times and the book to book ratio which compares Q1 2024 orders to the same period last year was 1.5 times demonstrating continued industry strength and demand for our products. We expect Specialty Vehicle segment revenue and earnings to benefit from the increased number of available working days in the 2nd quarter as compared to the first. For modeling purposes, note that future segment revenue and adjusted EBITDA do not include Collins Bus, which was previously disclosed at $150,000,000 $25,000,000 respectively for the remainder of fiscal 2024. In the Q2, we expect operating improvements from the remaining businesses to offset the loss of Collins revenue and earnings resulting in the Q2 being approximately flat versus the Q1. We expect continued momentum to build on the second quarter's performance with low single digit revenue improvement sequentially in the 3rd and 4th quarters as higher contribution from the Fire and Emergency businesses offset declines from the wind down of E and C.

Speaker 2

We expect sequential incremental margins in the range of 30% to 40% on increased revenue throughout the back half of the year. On Slide 6, Recreational Vehicle segment sales of 160 $9,000,000 decreased $56,600,000 or 25% year over year as we navigate through a soft end market environment. Within the industry, dealer inventories remain high with limited floor planning availability and reduced lot traffic. Lower segment sales versus the prior year were primarily a result of fewer shipments of Class A, Class B and Towable units, an unfavorable mix of motorized units and discounting, partially offset by increased shipments of Class C units and price realization. The segment's unit shipments declined by 39% versus prior year, driven primarily by an 80% decline in total units.

Speaker 2

Within motorized categories, consumer preferences for lower end gas units as compared to higher end diesel products continued to weigh on segment revenue within the quarter. Recreation segment adjusted EBITDA of 11.6 $1,000,000 was a decrease of $12,700,000 or 52% versus the prior year. The decrease in adjusted EBITDA was primarily a result of lower unit volume, unfavorable category mix, inflationary pressures and discounting, partially offset by price realization and cost reduction actions in the Class A and Towable businesses. Segment backlog of $377,000,000 at quarter end decreased $611,000,000 or 62% versus the prior year. The decrease is primarily due to production against backlog, cancellations and lower orders over the trailing 12 months.

Speaker 2

Within the quarter, the book to bill ratio for our most profitable Class B and Class C businesses was 1.2 times and 1.1 times respectively. However, this was offset by reduced demand for Class A and towable units. With 7 to 8 months of unit backlog in the Class B and Class C category, we expect production to increase from the seasonally low Q3 resulting in increased revenues throughout the remainder of the year. The profitability of the combined Class B and C businesses is expected to remain in the low to mid double digits while we continue to flex costs on the Class A and TOEMO businesses resulting in full year segment adjusted EBITDA margin in line with original guidance of high single digits. Turning to Slide 7, trade working capital on July 31, 2024 was $363,000,000 an increase of $45,000,000 compared to $318,000,000 at the end of fiscal 2023.

Speaker 2

The increase was primarily a result of lower accounts payable and customer advances, partially offset by a decrease in accounts receivable and inventory. Cash used in operating activities was $69,700,000 which includes the payment of annual management incentive compensation in the quarter, transaction expenses related to the Collins Bus sale as well as timing of certain tax payments. We spent $10,500,000 on capital expenditures that previously that previously housed the service and aftermarket parts business. Net cash on the balance sheet as of January 31 was 80 $7,900,000 prior to the special dividend payment on February 16 and repurchase of 8,000,000 common shares at an average price of $15.76 on February 20. We declared a regular quarterly cash dividend of $0.05 per share payable April 12 to shareholders of record on March 28.

Speaker 2

At quarter's end, the company maintained ample liquidity for strategic initiatives with approximately $534,000,000 available under our ABL revolving credit facility. Turning to Slide 8, we provided 2024 fiscal full year outlook which builds upon the momentum experienced within the Specialty Vehicles segment, today's update to top line guidance is a range of $2,450,000,000 to $2,550,000,000 which includes a 100 and $50,000,000 adjustment for the Collins Bus divestiture that I previously mentioned. We expect continued throughput gains and strong incremental performance within the fire and ambulance businesses to offset headwinds from cyclical end market softness within the recreational vehicle segment and terminal trucks business. At the midpoint of $2,500,000,000 revenue is expected to be approximately flat to last year after adjusting for the divested revenue from the Collins Bus sale. Adjusted EBITDA guidance is $145,000,000 to $165,000,000 or 100 and $55,000,000 at the midpoint, which includes a $25,000,000 adjustment for the Collins West divestiture.

Speaker 2

Given the solid performance of the first quarter, we now expect first half consolidated adjusted EBITDA to be approximately 40% of the full year guidance. Adjusted net income is expected to be in the range of $72,000,000 to $90,000,000 and net income in the range of $224,000,000 to 245,000,000 dollars Adjusted free cash flow is expected to be in the range of $57,000,000 to $72,000,000 which excludes approximately $71,000,000 of tax and transaction costs related to divestiture activities that are within cash from operations and offset by gross cash proceeds included in the investing section of the statement of cash flow. Full year capital expenditures remain in the range of $30,000,000 to $35,000,000 including growth investments in our businesses as well as ERP upgrades in certain businesses. Expected interest expense of $26,000,000 to $28,000,000 considers a typical seasonal use of cash in the first half of the year as well as the impact of the Collins Bus sale. E and C wind down and previously announced returns of cash to shareholders in the form of special dividend and share repurchase.

Speaker 2

Thank you again for joining us on today's call. And with that operator, we'd now like to open the call up for questions.

Operator

Thank you. We'll now be conducting the question and answer And our first question comes from the line of Mig Dobre with Baird. Please proceed with your question.

Speaker 3

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

Speaker 1

Hey, Joe. Hey, Joe.

Speaker 3

Hey, good morning. So I just wanted to clarify a few things that you went over in your prepared remarks, but kind of went over them quickly. The backlog for Collins Bus that you backed out of your backlog in the Q1 was that it sounded like it was around $175,000,000 Did I catch that correctly?

Speaker 1

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

Speaker 3

Okay. So the Specialty Vehicle backlog dropped by a little over 200,000,000 dollars Again, I'm trying to figure out is that all Collins bus or maybe ex Collins bus backlog in Specialty Vehicle was roughly flat. Is that the right way to think about it?

Speaker 1

No. Actually there was also a decline related to the wind down of the E and C operation of about $1,000,000

Speaker 3

Okay. So maybe apples to apples backlog was up modestly sequentially?

Speaker 1

Yes.

Speaker 3

Okay, great. Thank you. Next question and maybe there seems to be a little confusion about this, I'm not sure why. But you raised your EBITDA guidance by $5,000,000 versus the recast guidance back in late January. You actually beat our estimate by about $7,000,000 versus where we were back in December.

Speaker 3

So is it safe to say that the $5,000,000 raise in guidance was basically just flowing through the Q1 upside?

Speaker 2

That's right. Yes, that's right.

Speaker 3

Okay. And you're just we're just 1 quarter in and so you kept the rest of the year basically where you thought you were going to be back in December?

Speaker 2

Yes, that's right, Joe.

Speaker 1

That's exactly right.

Speaker 3

Okay, perfect. Helpful. Maybe last question for me and I can get back in the queue. Back in December, you mentioned that you thought recreation sales would be down roughly mid single digits. Obviously, they were down 25% in the Q1.

Speaker 3

I think you mentioned they were going to you thought they'd be up the rest of the quarters, but does down mid single digits still sound right or do we kind of need to tweak that a little bit?

Speaker 2

Yes, I think we got to we probably got to tweak that a little bit. It'd probably be more of the low single digits of low double digits down. Obviously, we are off $57,000,000 year on year in Q1. So, a majority of that will be in Q1. But probably building in sequentially increases of 10% going forward which would be more in that low double digit reduction.

Speaker 2

But obviously, we are happy with the conversion that we delivered on in Q1 from a margin. So we still feel that we are managing our costs down as the sales drop.

Speaker 3

Got it. Okay, very helpful. I'll jump back in queue. Thanks very much.

Speaker 1

Thanks. Thanks, Jeff. Jeff.

Operator

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

Speaker 4

I'm wondering if we could just talk about the Fire and Emergency business performance in the quarter. Can you just update us on where price realization was on units delivered in the Q1 compared to 2022 levels? And as we look out in the backlog out a year, year and a half plus, how much higher is that pricing point compared to what's flowing through the numbers now, Mark?

Speaker 2

Yes, I don't think, Jerry, we've obviously talked about that there is 6% to 7% margin realization opportunity over the year progressively, right? So and it performed well within the quarter as we have highlighted. So we still believe that in the original guide that everything is performing well. I have also said in my prepared remarks where we pulled forward some older units. So as we have accelerated throughput, we've been able to get through our backlog older backlog quicker.

Speaker 2

So the price realization in the back half of the year will improve as we move through it which is consistent what we have talked about the 3rd and 4th is really what we are counting on there is just fire throughput improvement. As we have talked about, ambulance, if you think about a baseball game, Amylin's probably in the 5th or 6th inning of price realization and fires in that 3rd to 4th inning. So we expect them to catch up here in the 3rd and 4th quarter. So nothing has really changed in Q1 from what we expected entering the year and executing on it.

Speaker 4

And so, just sticking with that analogy, Mark, the ending analogy, so 6 to 7 points of margin improvement this year, somewhere between 3rd and 5th inning depending on the business. Does that mean there's another 6 to 7 points of margin improvement as we get through the backlog and we're building the units that you're booking today?

Speaker 1

Yes, yes.

Speaker 4

Very good. And can I ask in the RV business, you folks are still delivering good profitability at a challenging point in the cycle? Can you talk about how you expect the margin cadence to play out over the rest of the year? Typically, the Q1, I think, is your seasonally lowest margin quarter in RV, but I don't know if that changes considering the production outlook. Can you just update us on how you expect RV cadence for margin specifically to play out this year?

Speaker 2

Yes. I think the cadence probably in Q2 as we said in the remarks probably similar to Q1 and Q3 a buildup there with ultimately Q4 depending on we are obviously cautious heading into the back half, but Q4 would show expansion which would still get us into that mid single digit for the full year, right? So progressively build from Q1 more or less flat in Q2 and then progressing in 3% and 4% to build from the 6.8% we were adding Q1 up to that full year 8% or so mid single digit sort of number by the end of the year.

Speaker 4

And last question for me. In prior downturns, the predecessor companies were for the RV business were breakeven to slight losses and you folks are delivering solid profitability here.

Speaker 5

How would you bridge the,

Speaker 4

call it, 6% to major driving pieces and the confidence in the sustainability?

Speaker 2

Yes, I think like we've talked about previously, we've managed the Towables business as well as the Class A to more of a trough level. So we flexed out costs and we were successful in doing that and didn't get ahead of ourselves during the COVID period, right? So we've been able to manage those costs for margin profitability versus just a volume play, right? So that's really we've been focused on that for the last 2 years to make sure that we have the right cost structures and have the ability to flex out as units come out as well as we build on different product types that may have less hours that we have the appropriate staffing. We don't have trapped labor sitting in those facilities.

Speaker 2

So it's really been all the way from an overhead down to the shop floor managing those business to a trough level, which we're experiencing right now.

Speaker 4

Well done. Thanks.

Speaker 2

Thanks, Terry. Thanks, Terry.

Operator

Thank you. Our next question is from the line of Mike Shlisky with D. A. Davidson. Please proceed with your question.

Speaker 5

Hi, Mike. Good morning. Thanks for taking my hey there. Thanks for taking my question. You had mentioned in your comments, Mark, that you have an ERP project underway.

Speaker 5

Can you share with us a little bit about how far along you are with getting that changeover done? And when we might start to see some of the margin implications of that changeover?

Speaker 2

What was your last point margin implications or?

Speaker 5

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

Speaker 2

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

Speaker 5

Got it. I also wanted to ask secondly about the changes you're making in your Ocala, Florida facility for fire emergency. Can you just talk a little bit about some of your kind of late developments there, things you've done to make that even more efficient for the last couple of months? I'm curious to see how far you've gone from kind of where you started to where you think you end up in that facility? Thank you.

Speaker 2

Yes. So, like we've talked about previously, we've really done a lot of work from a value stream perspective. We brought in people from an upfront process. So we've strengthened our purchasing and supply chain specific to that location to make sure that we're getting parts in when operations need it. We've also bolstered the operational leadership there as well.

Speaker 2

So we got a really nice cadence from a management perspective as far as first off value stream managers in each of the facilities. Again, that location is made up of 10 buildings manufacturing sites that go across 4 miles. So we talk about the sites is actually pretty expansive around a 4 mile radius. So we have value stream managers based on the product that they do, but we've also implemented some central people within that facility specifically around supply chain and engineering as well to make sure that our builds of material are being done accurately and on time. So, it's really been a microscopic change or a microcosm I guess of what you would expect a whole company to do.

Speaker 2

We are doing that on a site by site basis. So, that's really been the improvement there.

Speaker 5

Thanks so much.

Operator

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

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