REV Group - Q1 2024

Transcript

Operator (participant)

Greetings. Welcome to the REV Group's Q1 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. If anyone should require operator assistance during today's conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to Drew Konop, Vice President of Investor Relations. Drew, you may now begin.

Drew Konop (VP of Investor Relation)

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. 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 the Slide two 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-K, filed with the SEC earlier today, and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all.

All references on the call today are 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 Skonieczny. Please turn now to Slide three, and I'll turn the call over to Mark.

Mark Skonieczny (President and CEO)

Thank you, Drew, and good morning to everyone joining us on today's call. Shortly, I will provide an overview of our consolidated Q1 performance, as well as detailed segment financials. Before I comment on the quarterly results, I would like to review the strategic initiatives, including capital allocation activities, that have been recently executed. These actions were aimed at optimizing our portfolio of 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 ElDorado National California, or ENC, transit bus business. The sale of the Collins school bus business to Forest River closed on January 26th, with an all-cash deal price of $308 million, inclusive of certain preliminary working capital adjustments.

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

We believe these actions demonstrate our commitment to delivering shareholder value. Since 2020, we have returned over $400 million 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 LayMor street sweepers in a new segment named Specialty Vehicles. The segment's Q1 results also include Collins' operating performance through its divestiture date of January 26th and will include ENC's financial results through the wind down period.

Specialty Vehicles is being led by Mike Virnig, the former REV's Fire Group president. The Recreation segment has been renamed Recreational Vehicles and remains under the leadership of Mike Lanciotti. 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 four, consolidated net sales of $586 million were approximately flat compared to the Q1 of the prior year. The year-over-year revenue result was primarily due to increased net sales, including price realization, within the Specialty Vehicles segment, offset by lower net sales from the Recreational Vehicle segment.

The increase in net sales in the Specialty Vehicles 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. Lower net sales in the Recreational Vehicles segment were primarily a result of fewer shipments of Class A, Class B, and Towables, partially offset by higher shipments of Class B units. Consolidated Adjusted EBITDA of $30.5 million increased $9.2 million, or 43%, from the prior year, with increased contribution from the Specialty Vehicles segment, partially offset by lower contribution from the Recreational Vehicles segment. The increased earnings in the Specialty Vehicles 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 contributions from the Class C business. Please turn to Slide five. Specialty Vehicles Q1 segment sales were $417 million, 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% and 38%, respectively, in an 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 2022 and 2023. 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. Specialty Vehicles segment Adjusted EBITDA was $26.2 million in Q1 of 2024, an increase of $21 million compared to the Adjusted EBITDA of $5.3 million 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 realization, resulting in increased profitability of 550 basis points versus the Q1 of last year. This was aided by the strongest Q1 results of the Spartan businesses since its acquisition in 2020. In addition, the KME brand had its best quarterly performance since 2019. 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 million, which includes improved bus performance, partially offset by lower terminal truck volume.

Segment backlog of $3.9 billion increased $692 million, or 22% versus the 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 million from prior year. 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 Vehicles segment revenue and earnings to benefit from the increased number of available working days in the Q2 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 million and $25 million, 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 Q2's performance, with low single-digit revenue improvements sequentially in the Q3 and Q4, as higher contribution from the fire and emergency businesses offset declines from the winding down of ENC.

We expect sequential incremental margins in the range of 30%-40% on increased revenue throughout the back half of the year. On Slide six, Recreational Vehicle segment sales of $169 million decreased $56.6 million, 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 Towables 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 the prior year, driven primarily by an 80% decline in Towables units.

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 million was a decrease of $12.7 million, 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 million at quarter end decreased $611 million, or 62%, versus the prior year. The decrease is primarily due to production against backlog, cancellations, and lower orders over the trailing twelve months....

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 7-8 months of unit backlog in the Class B and Class C category, we expect production to increase from the seasonally low Q1 resulting in increased revenue 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 out of the Class A and towable businesses, resulting in full-year segment Adjusted EBITDA margin in line with our original guidance of high single digits. Turning to Slide seven.

Working capital on July 31st, 2024, was $363 million, an increase of $45 million compared to $318 million at the end of fiscal 2023. 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 $69.7 million, which includes the payment of annual management incentive compensation within the quarter, transaction expenses related to the Collins Bus sale, as well as timing of certain tax payments. We spent $10.5 million on capital expenditures, including the purchase of a service center for our Class C RV business, which we expect will allow additional unit production and manufacturing facility that previously housed the service and aftermarket parts business.

Net cash on the balance sheet as of January 31st was $87.9 million. Prior to the special dividend payment on February 16th, and repurchase of 8 million common shares at an average price of $15.76 on February 20th. We declared a regular quarterly cash dividend of $0.05 per share, payable April 12th, to its shareholders of record on March 28th. At quarter's end, the company maintained ample liquidity for our strategic initiatives, with approximately $534 million available under our ABL revolving credit facility. Turning to Slide eight. We provide a 2024 fiscal full-year outlook, which builds upon the momentum experienced within the Specialty Vehicle segment.

Today's update to top-line guidance is a range of $2.45 billion-$2.55 billion, which includes a $150 million adjustment for the Collins Bus divestiture, as 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 $2.5 billion 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 million-$165 million, or $155 million at the midpoint, which includes a $25 million adjustment for the Collins Bus divestiture.

Given the solid performance of the Q1, 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 million-$90 million, and net income in the range of $224 million-$245 million. Adjusted free cash flow is expected to be in the range of $57 million-$72 million, which excludes approximately $71 million of tax and transaction costs related to divested 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 million-$35 million, including growth investments in our businesses as well as ERP upgrades in certain businesses.

Expected interest expense of $26 million-$28 million considers the typical seasonal use of cash in the first half of the year, as well as the impact of the Collins Bus sale, ENC wind down, and the previously announced returns of cash to shareholders in the form of special dividend and share repurchase. Thank you again for joining us on today's call. With that, operator, we'd now like to open the call up for questions.

Operator (participant)

Thank you. We'll now be conducting the question-and-answer session. If you'd like to ask a question today, please press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you. Thank you. Our first question comes from the line of Mig Dobre with Baird. Please proceed with your question.

Joe Grabowski (Senior Research Associate)

Hey, good morning, guys.

Mark Skonieczny (President and CEO)

Good morning.

Joe Grabowski (Senior Research Associate)

It's Joe Grabowski on for Mig this morning.

Mark Skonieczny (President and CEO)

Hey, Joe. Hey, Joe.

Joe Grabowski (Senior Research Associate)

Hey, good morning. So 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 million. Did I catch that correctly?

Mark Skonieczny (President and CEO)

Yeah, on a year-over-year basis, Joe. So actually, we had 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 thirty-first.

Joe Grabowski (Senior Research Associate)

Okay, so the Specialty Vehicle backlog dropped by a little over $200 million. 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?

Mark Skonieczny (President and CEO)

No, actually, there was also a decline related to the wind down of the ENC operation of about $50 million.

Joe Grabowski (Senior Research Associate)

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

Mark Skonieczny (President and CEO)

Yes.

Joe Grabowski (Senior Research Associate)

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 million versus the recast guidance back in late January. You actually beat our estimate by about $7 million versus where we were back in December. So is it safe to say that the $5 million raise in guidance was basically just flowing through the Q1upside?

Mark Skonieczny (President and CEO)

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

Joe Grabowski (Senior Research Associate)

Okay. We're just one quarter in, and so you, you kept the rest of the year-

Mark Skonieczny (President and CEO)

Exactly.

Joe Grabowski (Senior Research Associate)

Basically where you thought you were gonna be back in December?

Mark Skonieczny (President and CEO)

Yeah, that's right, Joe. That's exactly right.

Joe Grabowski (Senior Research Associate)

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. I think you mentioned they were gonna... 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?

Mark Skonieczny (President and CEO)

Yeah, I think we gotta. We probably gotta tweak that a little bit. It'd probably be more of the low, low single digits, low double digits, down. Obviously, we're off $57 million year-on-year in Q1, so a majority of that will be in Q1. But, you know, probably building in sequentially increases of 10%, going forward, which would be more in that, low double-digit reduction. But obviously, we're happy with the conversion that we delivered on in Q1 from a margin, so we still feel that we're managing our costs down as the sales drop.

Joe Grabowski (Senior Research Associate)

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

Mark Skonieczny (President and CEO)

Great. Thanks, Joe.

Operator (participant)

Thank you. As a reminder, to ask a question today, you may press star one. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your questions.

Jerry Revich (Managing Director)

Yes. Hi, good morning, everyone, and nice quarter. Hi, Mark, Drew. 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? You know, as we look out in the backlog, you know, out a year and a half plus, how much higher is that pricing point compared to what's flowing through the numbers now, Mark?

Mark Skonieczny (President and CEO)

Yeah, I don't think, Jerry, we've obviously talked about that there's, you know, 6%-7% margin realization opportunity over the year progressively, right? So it performed well within the quarter as we've highlighted. So we still believe that in the original guide, everything's performing well. I've also said in my prepared remarks where, you know, we pulled forward some older units. So as we've accelerated throughput, we've been able to get through our older backlog quicker. So the price realization in the back half of the year will improve as we move through it, which is consistent with what we've talked about. That third and fourth is really what we're counting on there, just fire throughput improvement.

As we've talked about, ambulance, if you think about a baseball game, ambulance probably in the fifth or sixth inning of the price realization and fires in that third to fourth inning. So we expect them to catch up here in the Q3 and Q4. So, you know, nothing's really changed in Q1 from what we expected entering the year and executing on it.

Jerry Revich (Managing Director)

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

Mark Skonieczny (President and CEO)

Yes. Yes.

Jerry Revich (Managing Director)

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?

Mark Skonieczny (President and CEO)

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

Jerry Revich (Managing Director)

You know, last question for me. In prior downturns, you know, the predecessor companies were for the RV business break even to slight losses, and you folks are delivering solid profitability here. How would you bridge the, call it, 6-8 points of margin improvement this cycle versus last, in terms of the major driving pieces and the confidence and the sustainability?

Mark Skonieczny (President and CEO)

Yeah, I think like we've talked about previously, you know, 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 two 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 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.

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.

Jerry Revich (Managing Director)

Well done. Thanks.

Mark Skonieczny (President and CEO)

Thanks, Jerry. Thanks, Jerry.

Operator (participant)

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

Mark Skonieczny (President and CEO)

Hi.

Mike Shlisky (Managing Director and Senior Equity Research Analyst)

Hi, good morning. Thanks for taking my question. You had mentioned in your comments, Mark, that you have an ERP project underway. 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?

Mark Skonieczny (President and CEO)

What, what was your last point? Margin implications or?

Mike Shlisky (Managing Director and Senior Equity Research Analyst)

Yeah, I was curious when you start to see the operational benefits of the implementation of the new ERP.

Mark Skonieczny (President and CEO)

Yeah, that's really what we're doing there. It's not, you know, 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 business operation or ERP with a new Microsoft application. And we are—it, we'll be going live this quarter, so it's gone very well, and we're expecting to go live this quarter and kick off that.

Mike Shlisky (Managing Director and Senior Equity Research Analyst)

Got it. I also wanted to ask secondly about, the changes you're making in your Ocala, Florida facility for Fire and Emergency. Can you just tell us a little bit about some of your kind of latest developments there, things you've done to make that even more efficient over 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'll end up in that particular facility. Thank you.

Mark Skonieczny (President and CEO)

Yeah, so like we've talked about previously, we've really done a lot of work from a value stream perspective. We brought in, you know, 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. So we got a really nice cadence from a management perspective as far as, first off, value stream managers in each of the facilities. That, again, that location is made up of 10 buildings, manufacturing sites that go across 4 miles. So we talk about the site 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, you know, a microcosm, I guess, of what you would expect a whole company to do. We're doing that on a site-by-site basis, so that's really been the improvement there.

Mike Shlisky (Managing Director and Senior Equity Research Analyst)

Thanks so much.

Operator (participant)

Thank you.

Mark Skonieczny (President and CEO)

All right.

Operator (participant)

At this-

Mark Skonieczny (President and CEO)

Thanks, Mike.

Operator (participant)

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