REV Group - Earnings Call - Q2 2018
June 7, 2018
Transcript
Speaker 0
Greetings and welcome to REV Group Inc. Second Quarter twenty eighteen Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. 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.
Speaker 1
Thanks, Dana. Good morning, and thanks for joining us. Last night, we issued our second quarter twenty eighteen 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 two 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 eight ks 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.
Speaker 2
Thanks, Sandy. Good morning, everyone. Thanks for joining us today. For the past two years, we've enjoyed relative tranquility in our markets where we were able to affect 15% top line and 30% bottom line growth. Unfortunately, year 2018 has proved to be more difficult and our second quarter results fell below our expectations as a result of several near term factors.
We're taking strong actions to address these factors. And despite the disappointing second quarter results, we believe our business remains well positioned over the mid and long term as we continue to experience strong demand in our end markets. Before I detail the near term challenges we're facing, I'd like to highlight some positives. One of the strongest characteristics of our business is the consistency and visibility of our sales. Approximately 60% of our sales come from end markets related to tax based revenue from necessary government and city municipality customers.
These sales include our fire apparatus, ambulance, transit buses, school buses and shuttle buses. We have very good visibility within these markets. And with these customers, our demand remains strong. Additionally, our Specialty Vehicles division, which includes yard trucks, sweepers and mobility vans, also continues to see significant growth opportunities in certain categories of our RV products, notably towables, Class Bs and Class Cs continue to grow. Most of our product groups continue to show a high level of order activity and our backlog is growing, up 15% to about $1,300,000,000 from $1,100,000,000 at the October 2017.
All of these positive factors resulted in us delivering revenue growth in line with our expectations and we continue to feel very good about the strength of our future organic growth opportunities. All of our businesses are seeing nice organic growth. Organic growth appeared roughly flat year over year in the second quarter due to product mix in our Fire and Emergency and Commercial segments, but we expect to show stronger organic sales growth during the remainder of the year. From an inorganic standpoint, we're maintaining a robust M and A pipeline with active opportunities in various stages. Over the past few years, we've developed a compelling track record of acquiring and integrating high return complementary businesses, and we believe the performance of our acquisitions underlines our strength as an acquirer of choice within the industry.
We've enabled many of our acquired product lines to grow their sales through our dealer networks and several of our acquisitions are doubling or tripling their pre integration results. Last notably, Lance, Midwest, Renegade and Ferrara, which were acquired in 2017 as prime examples of that success, and we expect to remain bright spots for us moving forward. Our healthy balance sheet and liquidity position will enable us to be opportunistic in the marketplace moving forward, and we remain committed to shareholder friendly capital allocation policies as evidenced by the repurchase of nearly $5,000,000 of our shares during the second quarter. We'll continue making capital investments in the business to foster continued growth and improve efficiencies along with our quarterly dividend policy, which currently reflects a $0.20 per share annual rate. Finally, we are pleased with the progress of our startup in Brazil, which is now thirteen months old.
That business has already captured 27% market share for the products we sell in that market compared to not being in the market at all prior to the startup of this business. Additionally, the pending backlog is very encouraging. Now for the challenges. Two of our higher quality business units struggled in the first February this year. In our Commercial segment, our Collins School Bus business declined to participate in a very large prebate requested by one of our school bus contractors.
This adversely affected our first half twenty eighteen performance, but we believe this was ultimately the right decision for the business and we believe we can recover and get close to plan by the end of fiscal twenty eighteen with new traditional school bus and contractor sales opportunities. Additionally, our transit bus business, which is also in our commercial segment, is facing a short term delay in activity between the end of our Chicago City contract and the beginning of our forthcoming Los Angeles County contract. As a result, our transit bus business will be below our plan for the full year, but we anticipate a return to higher production and profitability levels for this business in fiscal twenty nineteen. We remain encouraged by the good visibility we have to our financial performance in both of these commercial businesses between now and year end. Moving forward, in addition to the Los Angeles contract serving as a good base for the business, we maintain very strong market share in school buses and expect to begin participating in other commercial activity this year.
Our shuttle bus volumes are increasing, and we see favorable trends in specialty vehicles, particularly in mobility. Before I turn to the near term supply inefficiencies we're facing, I'd like to spend a few moments providing an update on our Class A RV market. Over the course of the past few quarters, we've experienced flat to soft growth in this market, and we've identified opportunities to increase profitability by repositioning the product line. We've had success with similar initiatives in the past with our Class B, Class C and towable products. So we're taking a page out of our own playbook.
We've launched a new Class A product line for 2019 that we believe will sell more profitable units than prior models. We're in selling mode for this new product line right now and backlog is growing. Now let's talk about our supply chain. We've experienced significant and rapid cost inflation during the second quarter within both our material supply chain, but also in our service supply chains, items like freight in, out, for example, which we are unable to offset in the quarter. As a matter of practice, we purchased many elements of our cost base well in advance in order to match backlogs with necessary inputs.
For example, we have approximately 60% of our aluminum spend purchased ahead through calendar year 2018 at historical prices. Nevertheless, the combination of the announced tariffs and the resulting turmoil has created pricing opportunity for our suppliers. In the past two months alone, we have seen almost $19,000,000 in cost increases on an annualized basis, which brings which breaks down to $6,000,000 in the first half of the year and $13,000,000 in the back half of the year. Clearly, this is disturbing, particularly when a large portion of the price increases are not related to steel and aluminum, which are the current targets of the tariffs. The tariffs have also created unintended unpredicted consequences.
As soon as tariffs were suggested, there is a run on many of the commercial chassis we purchase and convert. We are paying extra freight charges to get the chassis we need for the second half shipments. Over the sixty days of the last sixty days alone, this has resulted in approximately a $1,000,000 additional cost. We now need to get certain chassis shipped via truck due to railcar shortages based on what we believe to be abnormal and artificial demand. In efforts to maximize our throughput time despite these inefficiencies, in some cases, we have decided to build some products on racks while we wait for chassis deliveries.
This creates additional labor hours and expenses and labor availability and stability in some locations like high density Elkhart, Indiana, which has resulted in some escalation of labor costs. This is a 30,000 foot macro view of the near term supply chain inefficiencies we're facing, but there were two additional smaller events that exasperated these near term challenges during the second quarter. First, the move of Mercedes Benz Sprinter van production from Germany to The United States market has made on time deliveries challenging. And a recent plant fire of a key supplier to most of our domestic chassis manufacturers caused productions shutdowns in some cases up to four weeks. Additionally, just when we thought it was safe to exit the bunker, new tariff threats were announced last week.
We think most of the damage of cost increases is over, although notwithstanding the recent trade moves, we did anticipate some additional increases and that has been included in our $19,000,000 material cost projections. While costs in chassis were a big part of the story of the quarter, we experienced an unfavorable sales mix as well. In particular, our mix of sales for the quarter had less of many of our higher content and gross margin product segments, including large commercial buses, custom fire apparatus and certain RV bus and ambulance products. Some of the mix missed this quarter will recover in the second half of this year, but for certain products such as transit buses and certain Class A RV models, we will not likely make up the lost sales mix in the second half. Based on all the factors I just discussed, we are adjusting our guidance downward for the remainder of fiscal twenty eighteen.
Dean will detail the specific changes to our outlook shortly, but the midpoint of our revised guidance ranges translates to revenue growth of approximately 10% and adjusted EBITDA growth of approximately 11% year over year. We have worked diligently over the past several weeks to manage and contain as much of these issues as possible, including raising prices across all business units to help compensate for the cost increases. In some cases, we've also introduced surcharges where appropriate to ensure performance expectations. We estimate the impact of these price actions will be approximately $7,000,000 for fiscal year twenty eighteen. But based on backlog and lead time differentials, we don't believe we'll be able to recover the full amount of actual cost increases, which negatively impacted our second quarter and the increases that we anticipate will impact the second half of our year.
Furthermore, as you may have read in yesterday's earnings release, we implemented restructuring activities during the second quarter in an effort to preserve margins, specifically moved quickly to reduce headcount, consolidate and simplify our facility and management infrastructure. These actions resulted in a reduction of approximately $20,000,000 in annual fixed expenses, all of which have been implemented. Keep in mind, this is an annualized number, which means that less than half of this cost savings will be realized in our fiscal year twenty eighteen earnings. Finally, we have continued to invest in our business and add key talent in areas which we which will drive our long term growth and profitability. In particular, I'm pleased to welcome Ian Walsh to REV Group as our new COO.
We announced Ian's hire in a separate press release yesterday in conjunction with the earnings release, and we're very pleased to welcome him to REV. Ian had a long and distinguished career at Textron in a number of their business units and look forward to working with him to further drive operational excellence. I'll now turn it over to Dean to go through some of the financial and segment details.
Speaker 3
Thanks, Tim, and good morning. I will start on Slide four. As Tim discussed, this quarter was one of our toughest yet as a public company, driven by some external macro factors and some temporary product mix impacts. Total net sales for the second quarter were $6.00 $9,000,000 up 11.7% from the second quarter of last year. Acquisitions were the primary driver of sales growth for the quarter.
Excluding the impact of acquisitions, consolidated net sales were flat with the prior year period. Net income grew by 9.2% in the second quarter to $7,400,000 or zero one one dollars per diluted share. Adjusted net income fell by 17.9% for the quarter to $15,600,000 or $0.24 per diluted share. The decline in second quarter twenty eighteen adjusted net income was primarily the result of the near term supply chain inefficiencies and the lower quarter over quarter sales of school buses and transit buses that Tim detailed in his prepared remarks. In addition, we experienced higher interest costs in the quarter 2018 versus the 2017 due to the timing of our IPO and use of proceeds last year, offset partially by lower income tax expense due to the benefit of the new U.
S. Tax legislation. Adjusted EBITDA for the second quarter decreased 9.2% to $34,100,000 compared to adjusted EBITDA of $37,600,000 in the second quarter twenty seventeen. In addition to the increased cost of materials in the quarter on a consolidated basis, adjusted EBITDA was down due to sales mix in our F and E and Commercial segments that is not permanent and lower shipments of Class A RVs. We are currently estimating that the impact of supply chain inefficiencies and increased raw material costs in full fiscal year 2018 will be approximately $19,000,000 above our original plan.
The impact of these increases these increased costs roughly mirrors the split of our EBITDA performance between the first half and the second half of the year. However, we are anticipating operational performance will improve in the second half of the year as we benefit from increased volumes, price increases, implemented restructuring activities and other cost reduction initiatives. The impact of the pricing and cost reduction initiatives is estimated to be approximately $7,000,000 and $10,000,000 respectively, for the second half of the current year. Let me now turn to Page five to discuss the performance of our segments. Fire and Emergency segment sales increased 15.1% to two fifty two million dollars for the second quarter twenty eighteen.
The primary drivers of this increase were the contribution of our April 2017 acquisition of Ferrara and an increase in ambulance unit volumes. On an organic basis, quarterly segment sales grew 6% compared to the 2017. Starting in the third quarter, all of our prior acquisitions in this segment become organic. F and E adjusted EBITDA for the quarter declined 10.7% to $21,800,000 driven by a less favorable ambulance and fire truck sales mix in the quarter and increased material and labor costs. On an organic basis, adjusted EBITDA for the quarter decreased 15.6% year over year.
The first reason for this organic decline was due to a shift in ambulance customers and products that is not permanent. The ambulance market has proven to be more volatile than in previous years with a major ownership change with one of our large contract customers in addition to the timing of regular business with larger municipalities and international customers. These circumstances have contributed to this volatility in mix such as the sales profile for our Ambulance division in the second quarter was skewed towards lower margin vehicles. In addition, the mix of fire apparatus sales in the quarter were skewed toward lower content fire apparatus in the form of more retail custom trucks versus larger custom pumpers and aerials. Based on our backlog visibility for the remainder of the year, this negative mix in both fire and ambulance will improve in the second half of the year.
Going forward over the long term, we still see continued growth in our Fire and Emergency business from continued strong demand in both the Fire and Ambulance markets and positive macro trends. We also expect our leadership positions in these markets to foster continued growth and market leverage in this business through the remainder of this year and beyond. Our backlog increased 7.4% during the quarter and remained strong with a healthy product mix. As shown on Slide six in our Commercial segment, quarterly sales were down 1%, driven by a temporary decrease in transit bus and school bus units sold, partially offset by increased sales in shuttle bus, sweepers and mobility vans. Much of the sales decline in this segment during the quarter was a result of a lull between two large transit bus contract awards.
Commercial backlog was up 8.4% during the quarter to $397,200,000 and we believe the fundamentals of this business remain strong. Based on our visibility in the backlog for both Transit and School Buses, we are confident that the 2018 will be better and that we will have very good momentum going into 2019, such that these businesses will again contribute meaningful EBITDA and margin enhancement to our Commercial segment. Commercial adjusted EBITDA margin was down three twenty basis points compared to the second quarter of last year. This decrease is due to the lower school and transit bus sales, which both enjoy profit margins in excess of the segment average, offset by higher sales of shuttle bus products, which have profit margins below the segment average. In addition, the segment also experienced higher material and freight costs.
The Commercial segment, specifically the bus division, has been meaningfully impacted by the chassis availability and logistic cost issues that Tim described earlier. Turning to Slide seven. Quarterly sales in the Recreation segment grew 19.5 to $199,000,000 driven by strong performance from acquisitions, an increase in Class C unit volumes, specifically Super Cs, and an increase in sales at the company's molded fiberglass business. Class A unit volume declined compared to the prior year due to a strategic reduction in a number of different models produced and the timing of new model year introductions. As Tim mentioned, we've reduced the number of Class A models and floor plans we are selling as we believe there are opportunities to drive profitability improvements from a leaner portfolio of higher quality products.
We exited the quarter with segment backlog up 65.4% versus prior year end to $144,800,000 Recreation adjusted EBITDA increased 74% for the quarter to $12,700,000 The expansion in EBITDA and profit margin is attributable to the results from acquired companies. On an organic basis, Recreation adjusted EBITDA for the first quarter for the 2018 decreased 4% from the 2017. I'd also like to elaborate here on Tim's comments regarding the success of our acquisitions that are not included in our organic revenues and earnings in the quarter, especially in the Recreation segment, where our purchasing leverage and distribution channels quickly benefit acquired companies. Each of the acquisitions made over the last eighteen months in this segment, Renegade, Midwest and Lance, are up in backlog and sales by double digits, and adjusted EBITDA margin improvements have been even greater compared to the results prior to joining REV. Starting in the third quarter, all these RV businesses, except for Lance, will become organic.
On Slide nine, we provided a review of our balance sheet and working capital. Like prior years, we've experienced core seasonal working capital build in the first half of the year. Like prior years also, we expect working capital to peak early in the third quarter and then decline through the end of the third quarter and bottoming by year end. You can see that core net working capital as a percentage of trailing twelve months revenues has approximated 20% over the last four quarters. The current quarter working capital metric of 23% was higher due to the build for the strength of our second half and because some of our supply chain inefficiencies around chassis.
More importantly, we still believe and have not lost sight of the fact that there is a very meaningful longer term opportunity to permanently reduce our working capital requirements in our company over the next few years. Total debt at April 3038, was $369,700,000 net of deferred financing costs or 39% of total capital, and our net leverage ratio was 2.1 times. As a result, we had $142,000,000 of availability under our revolving credit facility, which was amended to increase its capacity to $450,000,000 in December 2017. We are still forecasting meaningful debt reduction in the second half of the year and expect to end fiscal year twenty eighteen at leverage of 1.4x to 1.6x adjusted EBITDA. Net cash provided for the year based on our updated guidance net cash from operations less CapEx for the year based upon our updated guidance should be approximately breakeven before the impact of acquisitions.
Capital expenditures were $10,000,000 for the second quarter compared to nineteen point one million dollars in the 2017. In addition, we are forecasting less CapEx requirements for the second half of the year. And therefore, we are reducing our guidance for full year CapEx to be in the range of $35,000,000 to $40,000,000 down $5,000,000 on both ends of the range from our prior guidance. Now I'd like to also spend a few minutes discussing the restructuring activities Tim mentioned in more detail that resulted in a $1,900,000 charge in the quarter. We implemented restructuring and cost reduction initiatives across each of our operating segments and our corporate office, and we expect these actions to result in approximately $20,000,000 of annualized cost savings with approximately $10,000,000 to be realized in the second half of this year.
These actions impacted headcount across the organization, including the closure of our Miami office, consolidation of Class B RV production into an existing REV facility and permanent reductions to other SG and A spending activities. Now please turn to Slide 10. As Tim noted, we are revising our full year outlook for revenue, adjusted EBITDA and net income. We now expect revenue to be in the range of $2,400,000,000 to $2,600,000,000 with the high end impacted versus our prior guidance by concerns over timing of chassis availability. Net income is expected to be in the range of $72,000,000 to $87,000,000 up $31,000,000 from $31,000,000 last year, and adjusted net income is expected to be in the range of $94,000,000 to 105,000,000 up from $76,000,000 last year.
We anticipate adjusted EBITDA will be in the range of $175,000,000 to $185,000,000 still up from $163,000,000 last year. We expect approximately 70% of full year adjusted EBITDA to be generated during the third and fourth quarter, consistent with historic trends, and we expect that our third and fourth quarters will also follow historic trends. Net income and adjusted net income guidance reductions are less than the reductions in adjusted EBITDA guidance due to a lower effective tax rate and decreased depreciation from reduced CapEx. We now expect our full year effective tax rate to range between 1013%, down from 20% to 22% previously due to the impact of new U. S.
Tax legislation on revised earnings. On Slide 11, I'd like to walk you through a bridge to our updated adjusted EBITDA guidance. Our previous midpoint guidance for adjusted EBITDA was $210,000,000 We now expect a midpoint of adjusted EBITDA of $180,000,000 This decline is driven by the previously mentioned $19,000,000 full year impact estimated from material costs, a $9,000,000 reduction due to the first half mix issue in Ambulance that we won't fully recover by the end of the year, a $20,000,000 impact primarily from the temporary lower transit bus and school bus product sales volumes and 8,000,000 from lower parts sales growth. These challenges are expected to be partially offset by higher recreation sales and EBITDA resulting in an increase of $9,000,000 as well as the expected $10,000,000 impact from implemented cost reductions and the previously mentioned $7,000,000 in price increases. On Slide 12, we have bridged our first half EBITDA performance to the midpoint of our revised second half EBITDA outlook.
The green bars on this slide represent the incremental EBITDA in the second half of the year from each of our segments over the first half of the year. First half adjusted EBITDA was $55,000,000 and we expect to generate $125,000,000 of adjusted EBITDA in the second half to the midpoint of our guidance. At the bottom right side, you can see the percent of second half adjusted EBITDA generated by each segment in 2017 compared to our revised outlook for the 2018. F and E's 2018 at 65% of the full year approximates the 2017, but is slightly higher due to more favorable ambulance sales mix and sales of higher content fire apparatus and continued improvements in our Brazil profitability. The second half EBITDA for the Commercial segment forecasted for 2018 is at 69% of full year is higher than the prior year due to a rebound in school bus sales, both traditional and contractor in the second half, improving transit bus volume and a later seasonal upturn for our terminal truck business.
The second half of twenty eighteen for the Recreation segment at 67% of the full year is forecast to be a smaller percentage than the prior year, giving us confidence over our ability to achieve this second half result in Recreation. Lastly, we expect to see $1,000,000 negative incremental impact from corporate and other costs in the second half, but this increase is related to the seasonality of our business and is lower than the plan due to the restructuring and cost reduction initiatives that were implemented. Altogether, this analysis illustrates our confidence in our revised guidance for the 2018 for the company. This all results in approximately $125,000,000 or 69 percent of adjusted EBITDA to be generated in the second half of the year. On Slide 13, we show our capital allocation over the last four quarters.
Note that M and A activity in this slide includes a recent equity investment in our China JV of approximately $1,000,000 As always, our goal is to maximize growth and shareholder return while being diligent with our capital allocation and maintaining adequate liquidity. We believe we've delivered a good balance of returns to shareholders through our capital allocation strategies over time, and our balance sheet will enable us to be opportunistic in the future with respect to M and A and other capital allocation decisions. You can see that we were opportunistic in the second quarter about our share repurchase authorization, buying back 253,000 shares. With that, I'll turn the call back to Tim for some closing comments.
Speaker 2
Thanks, Dean. In closing, while we're facing some near term challenges, we remain confident in the long term health of Rand markets and our ability to deliver compelling growth and financial returns. Our backlog is strong and growing with good order activity. We have very good visibility on future demand. With that, let's turn it over to questions.
Speaker 0
Our first question comes from the line of Jamie Cook from Credit Suisse. Please proceed with your question.
Speaker 4
Hi, good morning. I guess a couple of questions. Tim, understanding you're disappointed in the quarter and you want to restructure to take costs out, but as I think about if we dismiss the short term issues, which just seem to be demand is good, etcetera, you know, how concerned should we be that the cost reductions that you're taking sort of cut into the bone? You know what I mean? Because this really just seems like a short term problem.
So I'm just trying to understand that. And then how much is the 20,000,000 gonna cost you? And is the 20,000,000 in savings over the long term, is that structural, or do we have to add back if the markets continue to grow? And then my second question, if you can just sort of give more I mean, the chassis availability issue is is it's been an issue. Just a little more color on your strategy to deal with that 2018?
And does this extend into 2019? Thank you.
Speaker 2
Yeah. Well, as far as the restructuring, we we felt it was time. I felt it was time to, take a good look at the entire organization. What had happened, I think, as we were, building the portfolio, I think the corporate side of our business got a little heavy, as we were bringing on new assets and and actually, bringing these new assets under the fold and integrating them. It just seemed like the right time to to right size the corporate, effort in the company.
So the biggest reductions were really, in Miami, taking some of that corporate effort out, reducing expenses in other areas. It just seemed like the right time to do it. We were post IPO. We had just done several acquisitions that we had brought and integrated nicely into the company. And I think that even though M and A activity will continue at good pace, it's not gonna be at the robust, really high level that we had last year.
I mean, four acquisitions, two JVs in twelve months required a tremendous corporate effort, and we've just really trimmed back that and trimmed back some other expenses that we thought were appropriate. So it it was I I think the the best answer I'd give you, Jamie, is it was, timing was was right, and it seemed, to tie in nicely to help us protect with some of the cost increases that we've had. The chassis, situation is is a little unusual. You know, we we always tend to have at least some noise in the chassis channel, which we can manage through pretty well. You know, this this tariff thing, has been relatively significant.
As you can see, even though $19,000,000 sounds like a big number, it's just a little bit over 1% of our total material spend. So we don't like it. And quite frankly, we're not happy with some of the suppliers that we deal with, and we'll be looking for alternatives because I think they took advantage of a of a situation that had nothing to do with steel and aluminum price increases. But it also causes a run on on things like chassis. So as soon as these things were announced and everyone thought they were gonna get steel and potentially aluminum increases as they re as it relate to chassis, everyone started buying up every chassis that was available in The United States.
And it created a lot of noise in the channel. We're managing through it fairly well, and we thought that we were pretty much on top of it. And then the fire that affected every chassis manufacturer, with the exception of Mercedes Benz in The United States, hit, and it was kind of, you know, fuel to the fire. The the minimum plant shutdown was Ford for two weeks, and GM has been shut well well, it was shut down for four weeks. So that, in addition to the the turmoil of people grabbing chassis as quickly as they could, just exasperated the problem.
And, you know, the the whole situation with this kind of buying frenzy material has the biggest issue I think we're we're managing through right now is is the extension of lead times on almost everything. People are become hoarders. And when they hoard, they create issues for, normal operations and and companies. So we're gonna get through it. You know, it's a it's a short term situation, but it it's been painful.
Speaker 4
And then, sorry, just as a follow-up, how much did it cost for the 20,000,000? How much should does that cost to achieve the 20,000,000 in savings?
Speaker 3
Jamie, that was the 1,900,000 the $13,000,000 the quarter. That's all the cost that's going to be associated with that $20,000,000
Speaker 4
Okay. All right. Thank you for the clarification. I'll get back in queue.
Speaker 0
Our next question comes from the line of Mig Dobre from Baird. Please proceed with your question.
Speaker 5
Good morning, everyone. I want to pick up from Jamie's question here on the $20,000,000 So I am a little bit surprised because it seems like your your cost to generate these savings is is quite low. So I'm trying to understand, first and foremost, how how that's working out. And then second, is there any way to help us understand how much of this is coming from your supply chain initiatives versus facility versus maybe some other items like corporate? I'm also wondering if this is an initiative that's been generated by the challenges that you've experienced in the second quarter?
Or if this is still part of your bigger margin improvement plan? Actions that you would have taken anyway.
Speaker 2
I'll let Dean answer the number question on the expense that's been charged for the restructuring. But, you know, it's it's it's more big picture, Mig. I think, you know, I that's how I operate. I mean, I I look at expenses on a regular basis, and we got a little bloated with, all the activity that we had the last eighteen months on an m and a and and the integration process. I think, you know, we we executed exceptionally well, but the pace of of acquisitions is not gonna be at that type of, level of activity.
And plus, I think it was just time to push the reset button on some of these expenses. You know, a simple one. You know, our marketing expenses were were quite high, quite frankly, to get the, the rev name known. The name is only two and a half years old, and we spent a lot of money getting the rev name out into the marketplace. So, you know, there there's been a a pretty healthy amount of that 20,000,000 that is just a curtailing marketing expense, which is an easy one to do.
Right? I mean, it's not headcount. It's just basically stop spending money on promoting the the the corporate name. So it was it was things like that, but it was also, you know, I I am consolidating and shrinking and consolidating our entire corporate efforts to Milwaukee. It was with the change from Orlando to Milwaukee, we had some carryover that that ended up in in Miami, and I didn't feel that that was efficient.
So, that that's the story. I mean, this is we see this as more of a a permanent long term savings that was it was time to do it. And as far as the expense, Dean?
Speaker 3
Yeah, Mig. You know, about two thirds of the 10,000,000 or two thirds of the 20,000,000 on an annual basis is headcount related. And and the vast majority of the $1,900,000 charge related to severance for the for those those people. The other third is overhead reductions, fixed overhead reductions in our factories to to to that that were, you know, actually kind of bloated, as Tim had said, and we needed to take some costs out of these factories as well as the s g and a activities like marketing that that Tim alluded to. So, you know, it's it's a pretty simple list of actions, and and the cost was relatively low compared to the total because of that fact.
Speaker 5
Okay. That that's really helpful. And then maybe lastly, talking a little bit about this pricing action that you're taking, some color as to how you're going about it, surcharges versus outright pricing action. Then I'm presuming that this is not impacting what's already in your backlog. So is it sort of fair to assume that we're going to be seeing more of a fourth quarter effect here?
And what does that mean for pricing into 2019?
Speaker 2
Yeah. The the mix is interesting. The mix put that quite quite quite frankly, the mix of a price increase versus surcharge mirrored a lot of what we got from our material suppliers. So if we thought it was a fairly temporary thing, we went with surcharges. If we thought it was gonna be permanent, price increases are permanent.
Everyone says, no. No. It's just a short term pricing. It's not. And when prices are increased, they never go back down.
So we've tried to mirror and be be be be be responsible to our customers, by doing a mix of of price increases to surcharges mapped into what we were seeing from our material suppliers. Secondarily, the industries are a little bit different. Some, will not accept price increases, but they will accept short term surcharges. So, you know, for instance, ambulance accepts surcharges, but not price increases and vice versa. So, that's that's how we map that in.
As far as when it's gonna hit, it's hitting actually now for the things that are being priced out today that are not in backlog. So we will actually see some relief here in the third and fourth quarter. Our most complicated thing that we did, and we probably might have
Speaker 6
got we might have got a little
Speaker 2
heavy on estimating what those cost increases are with our pricing, but we wanted to make sure that we had it covered. And we did analysis. We modeled it to make sure that all the cost increases that we got are absolutely covered going forward. That does not that did not help us in the second quarter. It's going to be a little bit of an issue for us in the third quarter.
But with the exception of fire, it'll be flushed out completely in the fourth quarter.
Speaker 5
Thank you.
Speaker 0
Our next question comes from the line of Charlie Brady from SunTrust. Please proceed with your question.
Speaker 7
Hey, thanks. Good morning, guys. Tim, could you just talk a little bit about
Speaker 6
the visibility you've got in the backlog right now as you look into the second half of the year, in particular around Fire and Emergency? How much of this current backlog sitting here today gets delivered in the second half versus maybe carries over beyond that?
Speaker 2
Yeah. We we've got complete visibility on fire. Fire's actually sold out through, the end of the of the calendar year into literally, we're starting to sell into the the first part of the 2019. So fire's set. We we know we know very well what we have in fire for the rest of the year.
It's it's locked and loaded. As crazy as this sounds because the transit buses have been a challenge for us this year, We already know what our backlog in transit buses looks like for 2019 and the latter part of this year. So where we've got the longer lead times, we've got great visibility, where we've got the shorter lead times of ninety days or less in some instances. The good news is we can affect price increases on that, where we can't necessarily on longer term backlog. But, we will gain visibility as we move through the third quarter.
Speaker 6
And the transit buses that you've got the long visibility on, is that going to be impacted positively by pricing actions that you're taking? Or is that it's already kind of a done deal and it's going to
Speaker 7
be what it's going to be?
Speaker 2
No. That's I was speaking mostly of the LA contract, and that contract allows for adjustments. So we feel good about that contract.
Speaker 6
Right. Just a follow-up for me on parts. Parts, I
Speaker 7
guess you said, is a little
Speaker 6
bit slower than expected. Just maybe expand on that and what's driving that?
Speaker 2
Yes. It's off to a slow start. We talked about it in the last quarterly call. We are still 1000% committed to parts. What we're doing, and we're getting actually very positive responses from the major national accounts.
And these are major contractors in ambulance and in bus, major accounts, in terminal truck, yard trucks like Walmart, FedEx, UPS. We're negotiating long term contracts, for the supply of spare parts, and those take time. These are big companies. I think the the positive, news is that they're very receptive to having a global parts arrangement with us. We have one in place, and we have a couple that are are close to being in place in the next sixty days.
They take time to negotiate. We have to demonstrate to these these large national players that if they buy spare parts from us, they can get them at a preferential price, and we will have those parts at their fingertips. It's just taking longer to get these contracts in place, but I feel really good about the future of parts. It's just off to a slower start.
Speaker 3
Thanks.
Speaker 0
Our next question comes from the line of Steve Volkmann from Jefferies. Please proceed with your question.
Speaker 8
Hi, good morning guys. I was just wondering Dean, and sorry if I missed this, but is there any wisdom you'd like to give us as we think about the third quarter versus the fourth quarter? I'm wondering if the cost savings are kind of more fourth quarter loaded or the mix issues or just any of that that you guys can see relative to the next two quarters?
Speaker 3
Yes. I think as it relates to the cost reduction items, as we explained about regarding headcount and other SG and A or overhead savings, those have been implemented. So those aren't back end loaded at all. Those will start taking place immediately in the third quarter. I think as we said in the prepared remarks, the quarterly cadence, third and fourth quarter, will roughly approximate prior seasonality.
But I think what you will see is that some of the improvements, as Tim said, related to price for those longer items in the backlog or the rebound of transit bus and school bus will will start to take place closer to the fourth quarter. So I think in commercial, in particular, you'll start to see the meaningful improvement in margin in in q four versus q three. Or otherwise, think everything is pretty evenly split between the quarters other than volume increases as normally would be expected on a seasonal basis.
Speaker 8
Okay. Great. That's helpful. And then just looking ahead, if everything sort of were to be as it is today relative to everything you've done, do you think price cost is positive in 2019, or is that still sort of a challenge?
Speaker 2
No. We're ahead of it. As I've mentioned, I think, with the previous caller, we did the analysis. I wanted to make sure that we were completely covered across all of our segments with all the cost increases that we've got. And I I alluded to this, and I think I mentioned this.
We've actually estimated we've know, nothing static. We've estimated that, there could be, even though we hope not. We think there could be even a few more cost increases as we roll towards the October. We've baked those into our model, to make sure we're we're we're definitely absolutely ahead ahead of our cost increases as we complete the year and go into '19.
Speaker 8
Okay. Great. And then just a quick final one, Tim. I'm I'm curious about your view of the RV space. I guess, just because it's the only one with public data, it's the one everybody seems to pick on.
But are you seeing anything in the channels relative to inventory build or concern amongst dealers relative to the cycle or just kind of your thoughts there?
Speaker 2
Yeah. We had as an industry, I think if you've looked at the data, we had an record wholesale delivery month in the month of April, which is the last data that's available. That that's just obviously positive. That means that people are still loading their lots, and and the retail is is doing okay. We were off to a slow start, in the summer buying season.
So some of the retail lots are a little fuller than they were last year, but the dealers are optimistic and they feel that things are going well. I think what you're seeing is that, I think some of the low end towables in particular, kind of the real entry level has softened up a little bit. The very high end on the As has been, you know, fairly flat, but everything in between, has been really strong. So the very, very high and the very, very low have been a little soft or flat. Everything else seems to be doing very well.
And the dealers that I've talked to, and I do talk to them on a regular basis, you know, are are very optimistic.
Speaker 8
And in a flat market per se, you you would still expect to grow, I'm guessing, because of new product launches and so forth?
Speaker 2
Yep. That's exactly why we we we were a little bit late getting our nineteens to the market. Usually, we get our nineteens to the market in, in April. We brought them out in May, because we revamped the line. We wanted to reposition ourselves.
And the repositioning, is is really, to help us, quite frankly, be more profitable. We we see what we're doing in the b, c's, and towables, like it a lot. We're very profitable in those three product lines. We were not as profitable as I want to be in the As. So we were a little bit late to the market.
It hasn't hurt us, but we are late to the market. And that's going to affect, as Dean, I think, said in his comments, we're going to be a little bit less in the back half of the year than we normally are because we were we did miss about five weeks coming to the market. But having said that, we're our dealers are enthusiastic by the new product line, and I'm enthusiastic about the potential of additional profitability in the As.
Speaker 8
Thank you.
Speaker 0
Our next question comes from the line of Jerry Revich from Goldman Sachs. Please proceed with your question.
Speaker 5
Good morning everyone.
Speaker 3
Morning. Morning.
Speaker 9
Tim, I'm wondering if you could talk about how much you have to book in your commercial business to hit the EBITDA ramp that you're guiding for in the back half of the year? How much is in backlog already? What has to be booked? And specifically, you talk about on the shuttle bus side, had mentioned that there were some spec differences between your product and the industry. And can you just talk about how the order cadence is is looking on on your product lineup?
Speaker 2
Yeah. Dean's working on the booking number. I was doing some calculations here. But as far as the differentiation in our shuttle bus line, we have a fully crash tested product. As you know, we've talked about that in the past.
What our efforts have been in the last twelve months is to really do what we can on a plant efficiency basis to be able to compete more effectively even in the markets that we got to go toe to toe with our competitor that we believe has a little lesser product, if you will, as far as the booking number for the second half of the year.
Speaker 3
In the commercial backlog, is some of the LA County activity that will start in 2019. So we have about 200,000,000 to $250,000,000 of the commercial backlog is deliverable within the second half of the year. So it's about half of our visibility to the second half of the year for commercial.
Speaker 9
Okay. And then can you talk about within the ambulance business, can you just build our comfort level around post the acquisition among your customer base that you folks are maintaining your historical level of share on the higher end ambulances? And can you talk about what gives you confidence that this isn't the new normal level of mix between the low spec versus high spec ambulances that we've seen in the first half?
Speaker 2
Yes. We're very confident. We've got strong market share. We don't we haven't talked much about ambulance mix, but let me give you an idea of why that is important. The lowest cost ambulance we sell is $80,000.
The highest cost ambulance we sell is about $225,000. That's a big that's a big difference. So if you're starting to load in, some of the lower end ambulances and they and they take precedence in a particular quarter, that can skew the numbers. We haven't had that yet. This is it's a perfect storm.
Q2 was fun on all fronts. I mean, we had, an ambulance mix that we hadn't seen before. It's temporary. The backlogs are actually building nicely for the back half of the year on the more expensive ambulances. So and again, it's horses for courses.
Some of the contractors like to buy the lower cost ambulances mid and lower. Some of the municipalities, fire departments like to buy the mid and higher end ambulances. So it's just how the orders came in, in the first half of the year. But we feel very confident in Ambulance. We love the business.
This is kind of the first time, though, that we saw an unusual mix come through in a particular quarter.
Speaker 10
Okay. Thank you.
Speaker 0
Our next question comes from the line of Faheem Sabia from Longbow Research. Please proceed with your question.
Speaker 10
Hi, good morning. What's the restructures that Rev can pull if if if costs continue to rise or or can't be mitigated?
Speaker 2
Well, price increases. We gotta stay ahead of it with price increases. I think we've done everything we possibly can on on a cost basis, And I think what we have to do is stay diligent. The other thing, and alluded to this on previous comment, we're not happy. To say that we're not happy is an understatement.
We think some of our suppliers have taken advantage of of a situation that was inappropriate. We are getting cost increases for products that have nothing to do with steel and aluminum. I can assure you that we are diligently seeking out alternative suppliers for those components. That is egregious behavior, and that's another, I think, lever we can pull as we go forward. So we're going to broaden out our supplier base, stay diligent, make sure we keep our pricing ahead of any cost increases we have.
And the third thing, in all honesty, I think we are rethinking. We like backlog. We love backlog. We like, long backlogs that are out for months. But if we don't have the ability in some of our contracts to adjust pricing, it puts us in a bind.
So the third leg of that stool, I think, is all new contracts that we're contemplating right now. We are putting adjustment provisions in those contracts so we can react to, to material cost increases. We have it in some, but quite frankly, the percentage isn't good enough, and it really depends on the industry. So we will be continuing to work to make sure that that base is covered as we go forward.
Speaker 10
And then can you provide us with your current thoughts on capital allocation, just given where the shares are trading today? I mean, they're about 30% below the average price you paid in the second quarter. So just wondering if the focus is going to be more on accelerating your buyback program at this time?
Speaker 2
Well, I think we'd all agree that anyone that's on this call that this is probably one of the most inexpensive stocks in the market right now. So I guess our board will decide on that. We've got a program in place, and, you know, that that program has been announced. That will be a Board action when our window does open, which will be very soon. I think our window opens on Monday, and stay tuned for news.
Speaker 10
Okay. Thank you.
Speaker 0
Our next question comes from the line of Andy Casey from Wells Fargo. Please proceed with your question.
Speaker 7
Thanks a lot. Good morning. First, a couple of questions. First, your new adjusted EBITDA margin guide, point 2% at the midpoint. In the past, and you kind of alluded to it earlier, you've outlined fiscal twenty nineteen adjusted margin target of about 10% without a lot of market growth.
The internal initiatives that you announced you took in the second quarter seem to be likely to add about 100 basis points on a carryover basis. So it leaves about 200 to get to the 10. Are the in place initiatives still supportive to boost EBITDA margins to that 10 next year?
Speaker 2
We're not going to get to 10% next year. I think two things. Obviously, you're experiencing a pretty healthy speed bump that slowed us down on that path to 10 here in the second quarter. But the other part, the other element to getting to the 10 is a meaningful contribution from spare parts, and we're lagging in spare parts. We plan to continue to move in the right direction.
Our goal has not changed, but I can guarantee that we will not get to 10 in 02/2019, which was our initial goal two years ago two and a half years ago. But we will get there. And, you know, I don't we'll we'll have more visibility, I guess, on that, come, fiscal two thousand and nineteen, but it's it's a it's a goal. We we think we can get there. We need some things to happen, in in a positive way.
Speaker 3
I'd like to also add to that analysis, which is correct, about the impact of our initiatives. But as we see a more healthy deliveries and volumes from transit bus and school bus and a better mix that we expect in ambulance, that will also add to improve margins in 2019. And like Tim said, we see visibility or we see that opportunity, especially in transit bus with the backlog from that large contract. So in addition to the 100 basis points, there should be a tailwind from some of the mix that will rebound in 2019.
Speaker 7
Okay. Thank you. And then I just wanted to ask a near term question. The revenue guidance for this year implies about roughly 7.5% growth in the at the midpoint in the second half. How ex price, it moves to about seven.
How much of the 7 is organic? And is any of that related to the Cetra distribution agreement?
Speaker 2
No, none of it's really related to the Cetra distribution agreement. That agreement takes effect July 1. We actually do plan to gain some earnings off of that business between July and October. But effectively, those gains will be washed out with infrastructure costs that we're putting in place to handle that product line. So nothing on the Sector side.
Everything is really on our current product group. And as I mentioned, we may have been a little aggressive on our estimates on what cost increases may go up between now and October. There could be a little bit of a tailwind there if we're able to control that, but it's going to be all organic.
Speaker 7
All the 7,000,000 is organic, so there's no carryover benefit from Lance?
Speaker 3
Yes. The only one that will be inorganic is Lance, but all the other acquisitions that we have made over the last eighteen months will become organic in the next quarter. So Lance is a smaller piece compared to what we've had to report over the last few quarters regarding inorganic versus organic.
Speaker 7
Okay. Thanks. And then if I could ask one on the RV market. You had a few comments about the Class A business and about a new product introduction delay causing some share well, what I perceive to be share loss. And what's going on there?
Because in the past, we talked about improved quality was likely going to be a gateway to regaining some share. Has the competition changed? Or is there something going on that we should consider?
Speaker 2
No. Pricing is a complicated thing in RV. It's it's kind of, you know, set at certain levels based on the size of the coach that you're making. And, you know, quite frankly, I I saw us more running in place with the product offerings we were we were having. We're we're growing we're growing some share, but we weren't making any more money.
And, you know, in business, it's all about making money. So we shook it up a little bit and decided to revamp the product line to provide us with, quite frankly, more profitability, with some of the designs, repositioning the product line into segments that do provide the opportunity for more price, more profit with a different a slightly different product. So it was a revamping, retweaking of the As. We were fine, but I I don't think we were fine enough. I wanted to be in a position where we could make make meaningful earnings like we are the on the Bs, the Cs and the Towables.
Those business are making great returns in the RV industry, and our As just were not making those types of returns. So we made the changes.
Speaker 0
Our next question comes from the line of Mike Bordendisto from Stifel. Please proceed with your question.
Speaker 11
Thank you. Just wanted to ask you if you could break down that $19,000,000 headwinds from input costs down by segment. And I just want to make sure I heard you right. You think that those won't be a headwind at all in 2019 that by the beginning of next year, you will have those mitigation processes in place?
Speaker 2
I don't have it broken down by segment. Dean might. But, on a macro basis, I I just get it across the board as far as where it's at. But it's it it includes everything on the material side. I deal with Ronenba.
Speaker 3
There's a little bit more in some of the commercial businesses because of the fact that the shorter production times and lead times for buying materials. But it's not it's it kind of mirrors in total that over 1% across the board for all of our segments.
Speaker 2
The the other one, I'm just I'll I'll mention this because this was one of those egregious ones. I think in our RV area, one of the largest suppliers was coming out with price increases on certain commodities of 1020%. And so that segment in particular really bothers me a lot, and we will be looking for alternatives there. But it's kind of across the board. RV, kind of the one that bothered me the most, I guess.
Speaker 11
Okay. And and and all the mitigation, process are gonna be in place by the 2019. Is what
Speaker 10
you said earlier? So you don't think that's gonna
Speaker 11
be continue to be a headwind next year?
Speaker 2
Yeah. No. I think here's here's the disappointment for me. Our sourcing team now is gonna be tied on getting alternative suppliers versus working with our our our typically good suppliers to figure out how we can get their costs down. So, you know, we'll lose, I think, a little bit of a little of momentum over the three to five months as as we seek out alternative suppliers, where we felt that, the cost increases were unjustified.
But that'll set us up nicely for 02/2019. The goal is to get our cost back down as we get into the 2019 in the best way possible. And that, unfortunately, is gonna be some hard work to find some alternative suppliers.
Speaker 11
Got it. That makes sense. And then just wanted to ask you the the niche that you're trying to fill on the class a RV segment. Is that the gasoline segment of with class a? Or or or what what segment is that?
Speaker 2
It's both gas and diesel. You know, the team did I the team did a great job. I think I'm really pleased by the new products. The feedback I'm getting from the dealers, is an enthusiastic two thumbs up, but it's both gas and diesel. We we did we did, I think, really, in in in some instances, less is more.
We we did a little bit less as far as, the number of models that we have out there, but the models that we do have are really rocking it right now. We're getting some really good orders in for the new stuff.
Speaker 11
Sounds good. That's all I have. Thank you.
Speaker 0
Our next question comes from the line of Courtney Yakav onis from Morgan Stanley. This
Speaker 12
is Dylan Cumming on for Courtney. Just a point of clarification first on the chassis availability. Was there any one segment where that issue was more pronounced? Or did you feel that was spread out more evenly across the segments?
Speaker 2
Ambulance. Ambulance is our highest volume, and that's the one that's hurting the most right now. It's those are the ones that we're building on carts, basically, at all of our plants. We're it's starting to loosen up a little bit. Trust me, we've had very high level discussions within our chassis supplier network, but it's ambulance.
That's the one that's hurting the most right now.
Speaker 12
Okay. Got it. That's helpful. And then just the last one here. I wanted to come back to the result in Fire and Emergency.
Thinking back to last quarter, you mentioned about 1,000,000 to $1,500,000 in EBITDA that got pushed out into 2Q from last quarter's missed shipments. And so if you back that out of the 2Q number, it still kind of implies a more aggressive ramp in margin in the back half
Speaker 2
of the year. So when
Speaker 12
we think about what gets to that $36,000,000 in incremental second half EBITDA embedded in your guide, can you just parse out how much of that is attributable to mix improvement, supply chain normalization, pricing tailwinds? Just any more detail there would be helpful.
Speaker 3
Yes. On the fire side, it'd be less the pricing because of the backlog characteristic that we referred to and not repricing the backlog. It's much more the volume increase, but it's also visibility on the mix. What we had to do some in the first half is we had a little bit more mix of that kind of retail custom truck. We see a lot more, and we have delivery schedules for a lot more higher custom pumpers and aerials in the second half.
So in addition to the volume and the benefits of the volume, some of the cost reductions that we've initiated from a head count or overhead perspective, and then the mix, which is probably the strongest benefit in the last half for fire, that that's where it's coming from, but not not in price. We'll see price in the fire side of the, division of the, F and E business toward the end of the fourth quarter and into 2019.
Speaker 12
Okay. Great. Appreciate the color.
Speaker 0
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.
Speaker 2
Well, thanks, everyone, for joining us. Sorry we ran over. Obviously, we tried to be as descriptive as we could and as transparent as we could with the information to let you all fully understand what we've been through here in the second quarter. Tough quarter, a quarter that should not have been as difficult as it was. And we, you know, what they say doesn't kill you makes you stronger.
This was a good learning lesson for us in many respects that we will take to heart and make sure, that we will, use our our best efforts, in the future. But I think, again, looking at the business from a macro level, nothing's changed. This is a great group of companies, a great group of products with good visibility to the end markets, and backlogs that, are solid to to for us to execute on. We'll continue to to tweak our products and make them better, continue to concentrate on quality, and and finish the year strong and look towards 2019. Looking forward to talking to you all again at the end of Q3, and looking forward to hopefully a lot less consternation as we complete our year.
Thanks again for joining us.
Speaker 0
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
