REV Group - Earnings Call - Q2 2020

Transcript

Speaker 0

Greetings, and welcome to the REV Group Inc. Second Quarter twenty twenty Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Drew Knopf, Vice President, Investor Relations. Thank you. You may begin.

Speaker 1

Good morning, and thanks for joining us. This morning, we issued our second quarter fiscal twenty twenty 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 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 have described in our Form eight ks filed with the SEC this morning 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 our fiscal quarter or fiscal year unless otherwise stated. Joining me on the call today are our President and CEO, Rod Rushing as well as our CFO, Dean Nolden.

Please turn to Slide three, and I'll turn the call over to Rod.

Speaker 2

Thank you, Drew. Good morning, everyone, and thank you for taking the time to join today's call. Given my short time with the REV Group and this being my first call, I thought I'd begin with a few opening comments. During my process of working with the Board in consideration of joining the REV Group, I learned the great work this company does in support of our nation's first responders and the communities that we all live in. Given the events that transpired on my onboarding and since that time, I've come to see firsthand the response of our employees.

As segments of the REV Group were broadly designated as essential businesses, many of our employees continue to work during the COVID pandemic to deliver equipment to first responders in our communities. I quickly recognize a sense of pride and purpose that are in the employees and the businesses that are part of the REV Group. And for their efforts, I'd like to take this opportunity to publicly thank them for their contributions. As I consider the role, I was encouraged with the engagement and support of the Board. We are aligning the goals that we have set out to achieve.

I do not and I will not pretend to have all the answers after only sixty days, but I will offer you a little bit about my initial impressions and thoughts. Over the past several weeks, I've conducted business reviews with each of our business segments and business units to familiarize myself and to establish a baseline of our current situation. I've gained an understanding and insight of our execution capabilities, our current operating model and the many products and channel strategies. Despite limitations to travel, I've been able to tour about half of our facilities. These efforts have confirmed the opportunity I saw from the outside that there is solid value creation opportunity for our shareholders at the REV Group.

Today, have more enthusiasm for the road ahead than I did when I first accepted the role. I've seen enough to validate the opportunity within our businesses to improve our performance as we endeavor to become a top quartile industrial performer. There's much work that needs to be done, but we will improve our core execution capabilities and drive simplification across this business, creating value for our shareholders. Our commercial operations will be focused on demand creation, beginning with market backed voice of customer approach that will help us understand the needs of our customers regarding our products, our brands and our services. When we have this market backed understanding, we will be positioned to effectively provide the required differentiation in our brands, opening up the opportunities for product platforming.

We can improve our channel performance through development of our channel partners and new channel acquisition. We also see significant opportunity in our upfront processes to improve the quality and efficiency of our work. This includes processes that establish our pricing and to build configurations for our demand fulfillment. On the demand fulfillment front, we have opportunity within the walls of our facilities to execute better. We currently do not have uniform manufacturing practices across all of our businesses, practices that focus every day on driving out complexity in waste and improving our throughput.

This presents real potential for margin expansion within our businesses. There have been discussions in the past of the REV Production System. The concept behind this is solid and proven and much good work has been done to build this framework to deploy throughout our businesses. Having said that, there is still much work to further develop the operational methods within Production System and then fully implement these capabilities across our enterprise. Inside our portfolio of businesses, there are real examples of excellent operational performance.

These practices have been embraced by a handful of our top performing businesses and the results reflect this. But regrettably, many businesses have not yet done this. Further, the way we think about the REV production system will evolve going forward. Much of the opportunity exists in upfront commercial processes that affect our operations. For that reason, going forward, we will change our approach from the REV Production System to the REV Business System to fully address the opportunity that exists across our entire value chain.

Our expectation is that all businesses will execute to the standards of the REV business system. This will take time and discipline, but this will happen. Regarding our use of capital, we will continue to evaluate and optimize our portfolio. We will define our core and optimize toward that end with businesses we believe we can move to double digit earning potential. We also have real potential for reduced complexity through product platforming as we invest in new product offerings, lowering design costs and leveraging our supply chain.

Identifying the brand requirements for differentiation are key to our product platforming strategies. We will build design capabilities around design for manufacturing and make buy analyses to simplify what we put on our plant floors that will greatly improve our operations. We'll make investments that align to our financial criteria of cash return investments. So that's a quick summary of my initial thoughts. Moving on to Q2.

We had a challenging quarter. The COVID related disruption of the underlying core execution impacted our results. We're not alone in this impacts of the pandemic, yet our execution did not meet our expectations within the quarter. I'm going to hand this over to Dean now and let him fill you in the details of our second quarter financial performance.

Speaker 3

Thanks, Rod, and good morning. Starting with Slide four, I'd like to review our consolidated second quarter results and then move to the segment level performance. Consolidated net sales for the second quarter were $547,000,000 down 11% compared to the second quarter of last year. Included in net sales were approximately $60,000,000 from our recent acquisition of Spartan Emergency Response and $40,000,000 from our shuttle bus businesses divested after the quarter's end. The year over year decrease in consolidated net sales was the result of lower sales in the Commercial and Recreation segments, partially offset by higher sales in the Fire and Emergency segment.

Adjusted EBITDA in the 2020 was $7,600,000 compared to $36,100,000 in the second quarter of twenty nineteen. This decrease in adjusted EBITDA during the quarter was driven by lower profitability in all three segments, largely the result of production and delivery disruptions from the impact of the COVID-nineteen pandemic. Lower corporate spending served as a partial offset to these lower operating results. Please now turn to Page five of our slide deck as I move to a review of the performance of our segments. Fire and Emergency total segment second quarter sales increased by 17% compared to last year to $289,000,000 As I mentioned, this includes approximately $60,000,000 from sales of sales from recently acquired Spartan Emergency Response.

Organic sales decreased 9% as the number of fire trucks shipped by legacy businesses was lower this quarter. Fewer truck shipments was largely due to inefficiencies caused by absenteeism at two plants near larger urban COVID hotspots. In addition, it was more difficult to get final inspections and deliveries completed in the quarter due to customer travel restrictions. Despite our efforts to accommodate with virtual interactions, we were unable to ship as many fire trucks and ambulances as were completed within the quarter. North American ambulance sales were approximately flat year over year.

Increased demand from large municipalities was partially offset by a decrease in contractor deliveries. Lower ambulance contractor demand was due to a decrease in nonemergency transport demand. F and E segment adjusted EBITDA was $10,200,000 in the second quarter twenty twenty compared to $15,100,000 in the second quarter last year. This decrease was primarily from the impact of the previously mentioned absenteeism and delivery disruptions. These difficulties had the largest decremental margin impact on our company performance within the quarter.

Partially offsetting these items in the quarter were the positive contributions from Spartan and our Ocala fire facility, which experienced sequential and year over year performance improvement. Spartan's second quarter results were in line with our expectations, and the integration is currently on schedule and tracking according to our acquisition business case. Total F and E backlog was $1,100,000,000 up 40% year over year. This includes backlog acquired from Spartan and reflects strong ambulance order intake year to date. Legacy fire truck backlog was down in select geographies on the West Coast and in the Northeast as certain municipalities take a wait and see approach to their budgets pending federal stimulus proposals.

That said, order intake tends to be seasonal, and it's worth noting that we have experienced strong fire order flow after the end of the second quarter compared to prior months and the prior year. To date, we have not had any F and E segment backlog cancellations, and we continue to manage fire truck throughput with a target of balancing predictability and customer satisfaction through attainment of a nine to twelve month backlog duration. Our outlook for F and E will continue to be impacted by outside forces such as chassis availability by way of chassis OEM manufacturing decisions with an ambulance and customer travel practices that could push final acceptance, delivery and revenue recognition to the right. There is also uncertainty around the impact of the pandemic driven economic slowdown on state and municipal budgets that could hinder incoming order rates for ambulances as the year progresses and for all F and E vehicles as we enter into fiscal twenty twenty one. Turning now to Slide six.

Commercial segment quarterly sales of $143,000,000 were down 16% compared to the prior year period. Reported Commercial segment revenue included approximately $40,000,000 from the shuttle businesses that divested just after the quarter close. Although it is a smaller part of the consolidated portfolio, our Specialty division was the largest contributor to the decline of sales within the Commercial segment. Sales to specialty end markets were down over 50 as demand from ports declined in the face of tariffs and more recently the pandemic, and rental customers decreased their capital spending activities. Additionally, school bus production was suspended for two weeks within the quarter as we experienced some supply chain issues and a slower seasonal uptick in school bus order rates.

Commercial segment adjusted EBITDA of $8,000,000 was down 46% versus the prior year. Previously mentioned headwinds of seasonality, soft demand in school bus, supply challenges and labor availability impacted the profit in the Commercial segment businesses. In addition, at our Transit bus business, although we shipped more units in the second quarter this year, the current quarter sales mix shifted towards less content units under the same multiyear municipal contract. Commercial segment backlog at the end of the second quarter was $413,000,000 down 5% year over year. This reflects the delay of the normal seasonal school bus order rates and continued delivery of municipal transit buses under a larger long term contract.

In addition, the Specialty division portion of the commercial backlog decreased due to end market headwinds. On a positive note, as a part of the shuttle bus divestiture, we were given existing Type A school bus backlog from the buyer, which will start to transition to our school bus business in the third quarter and was not included in our reported second quarter backlog. We expect this will provide additional school bus production volume in the third quarter and future orders will be included in our backlog as they come to fruition later this year and over the longer term. Regarding the outlook for the Commercial segment, orders for Type A school buses are pending school districts' decisions regarding their fiscal budgets and plans for schools to reconvene in the fall. This business will be ready to ramp up production to meet demand as needed when customers return to their normal ordering patterns.

To date, we have had no bus backlog cancellations. In order to help with the estimation of Commercial segment revenues going forward, please note that total revenue for the divested shuttle bus businesses was approximately $200,000,000 over the last twelve months, and these businesses were most recently operating at a low single digit adjusted EBITDA margin. Turning to Slide seven. Recreation segment sales of $114,000,000 were down 43% versus last year. As we previously announced, RV production was shut down during the second quarter anywhere from three weeks to six weeks, depending on the location of the business and status of order backlog or work in process at the time that the stay at home orders were put in place.

Typically, our second quarter is a strong selling quarter for the Recreation segment. Entering the recent quarter, including the March, we were tracking to our plan and felt very good about our dealer inventory levels, new product offerings and recent dealer development wins. Starting in mid March, COVID related shutdowns took place, and as a result, segment sales ended up coming in approximately 40% below our plan for the quarter. The largest impacts to the segment's revenue decline were from the businesses that were shut down the longest, our Class A and Towables businesses. Recreation adjusted EBITDA was a loss of $1,000,000 for the second quarter despite taking aggressive actions to take cost out during the shutdowns, including temporary layoffs and furloughs.

We made a conscious effort to minimize the impact of this disruption on our employees by continuing to pay all employees' health care costs during the shutdowns, which also impacted our bottom line. Some cost reductions also resulted in permanent cost takeouts, such as the segment has now lowered its breakeven point exiting the crisis. Segment backlog decreased 27% year over year to $123,000,000 This decline resulted from lower dealer order rates because of decreased foot traffic and retail sales caused by stay at home orders. In addition, we were experiencing lower non motorized RV order rates pre COVID as a strong 2019 backlog was largely delivered and being rightsized by the dealer channel. We now expect trailer and camper orders to be more closely aligned with retail sales going forward this year.

Early indications in our third quarter are that the RVN market is emerging briskly from the COVID-nineteen pandemic. Orders and dealer feedback have been consistent with recent positive industry reports of pent up demand and the potential for new RV buyers entering the market. All RV businesses have now resumed production, and we expect to ramp our schedules in a manner that is consistent with wholesale and retail demand, but also dependent on OE chassis availability through the remainder of the year. Net cash generated by operating activities for the 2020 was $22,000,000 compared to a net use of cash of $39,000,000 in the prior year period. This significant year over year improvement is due to better net working capital management and the result of liquidity management initiatives during the temporary production shutdowns in March and April.

Second quarter cash from operations was also bolstered by net positive cash generated by Spartan. Net debt as of 04/30/2020, was $421,000,000 including $21,000,000 of cash on hand versus $373,000,000 at the end of fiscal twenty nineteen. We had a very comfortable $215,000,000 of availability under our ABL revolving credit facility at the end of the quarter. Subsequent to the quarter, on May 8, the shuttle bus divestiture generated an additional $49,000,000 of cash at closing, and we anticipate approximately $5,000,000 more cash from this transaction later this year. Cash received at closing was used to pay down debt, and future cash receipts will also be used to reduce outstanding debt at the time they are received.

Net working capital on April 30 was $429,000,000 approximately $30,000,000 lower than the prior year period. Net working capital at the end of the second quarter was positively impacted by the reclass of approximately $29,000,000 of shuttle bus working capital to assets held for sale, but also includes $46,000,000 related to Spartan. We continue to emphasize and focus on working capital efficiency across the enterprise, and our cash and liquidity efforts demonstrated this focus in the second quarter and year to date. As previously disclosed, our term loan agreement was amended prior to the end of the second quarter. As a result of this amendment, our net leverage covenant was replaced by a fixed charge coverage ratio covenant through and including the end of our current fiscal year.

A minimum fixed charge ratio of 1.25x is required through 10/31/2020, after which a maximum net leverage covenant is reinstated effective with the end of our first quarter of fiscal twenty twenty one, starting at 5.25x. Included in this amendment was a provision for the pro form a addition of a fixed level of Spartan synergies to adjusted EBITDA at specified amounts according to detailed forecasts provided to our bank group. Under the revised agreement, we are precluded from stock buybacks through the remainder of the life of the agreement, which runs until April 2022. In addition, we are unable to pay common stock dividends to equity shareholders until our net leverage ratio is reduced to under 3.5 times if we choose to do so. We currently expect satisfactory covenant compliance through the 2020 and at least through the first half of fiscal twenty twenty one.

We have suspended our formal financial guidance, and we do not intend to reinstitute new guidance at least through the end of our current fiscal year. This This is due to uncertainties still existing within our end markets and the inability to predict possible continued impacts of the pandemic shutdowns and stay at home orders across the nation. Before I turn the call back to Rod, I would like to just add one of many improvements that is being implemented and will become part of our business system and management culture going forward. This execution focused and data driven improvement will be the introduction of a relevant and specific cash return on investment hurdle rate that will guide our decision making for short long term initiatives. This is something that we have used but not formalized or consistently applied across our enterprise in the past.

I believe this will be a significant component to reinforcing and maintaining a fact based and shareholder value linked decision making process. Rod?

Speaker 2

Thanks, Deane. So we have much work to do as we move forward. We have a near term action plan that will address core areas of nonperformance and structural costs. Our operational intensity will increase and the REV business system will become fundamental to our execution. These processes of commercial and operational excellence will be developed, deployed, implemented and inspected throughout each of our business units.

In addition to this work, a top priority of mine is to shape our culture. We are still a relatively new company made up of many cultures, all unique and all valued. We will continue to develop a culture of integrity, diversity and inclusion where our people know they are valued and their efforts are appreciated and rewarded. Many of our businesses have strong and successful entrepreneurial spirit, which we want to embrace and retain. But to reach our potential, we need to balance this with the implementation of capabilities that drive consistency in our business on our journey towards moving toward an operating company.

We will build our operational culture around a few key areas. Our leadership will be aligned around operational intensity that is data driven, fact based and decisive, moving with urgency and accountability. We have great people committed to quality of our products and brands. They hold a great fit of pride in serving our first responders and our communities. We'll use that same sense of purpose in developing a culture to execute and serve our shareholders.

As I said in the beginning, there's significant opportunity to create value at REV. It will not be built overnight, but it starts with me and executive leadership team. Operator, we'd now like to open up the call for questions.

Speaker 0

Thank you. We'll now be conducting a question and answer session. In the interest of time, we ask that you please limit yourself to one question and one follow-up, and we welcome you to rejoin the queue for any additional. Our first question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.

Speaker 4

Hi, good morning, guys.

Speaker 3

Good morning. Good morning.

Speaker 4

So Rod, since this is your first call, welcome, but I thought I might ask a couple of sort of big picture questions, if I might. Now that you've been there a bit and done some of your reviews, I guess we here on this side have been hearing about REV Group and lean manufacturing and various things that have been tried over the past few quarters. And obviously, the results were not, I guess, what we wanted them to be. So I guess my first question is, what do you think you bring that's different that sort of can jump start this? And I have a quick follow-up to that.

Well,

Speaker 2

I think the first thing I would say, and this is just based on my observations, is that I think the execution of you used the word lean as an example of many things that we can do to improve performance, but the execution of lean was not consistent through the business. We do have examples within our portfolio of businesses that do this very, very well, But it's not broad enough, I think, to see an impact at the bottom line. So I still believe fundamentally that, in this example, lean is something that we can gain great benefit and is broadly utilized across our portfolio, which it is not today. I think specific to me, because you asked what do I think I bring, I mean, my expertise and what I have is a great ability to execute and follow through. Plans are great.

Putting ideas on paper, what you think needs to be done are great. But what really matters is the cadence and the rhythm and the accountability you place around getting things done quickly. That's kind of my storyline is that we figure out what we got to go do and then we execute it and we follow through on how that's performing. So that sense of urgency, that sense of commitment to do what we say is really important to me. That's kind of what I'm going break, make sure that we do for our shareholders.

Speaker 4

So do you think that's a question of personnel or incentives? Or what's the secret sauce to get folks kind of rowing in the right direction?

Speaker 2

I'm a big believer that you got to have operating cadence and rhythm. You got to have defined expectations. You got to follow through. You got to establish targets and measure them. You got to measure gap targets.

So there's a resiliency and a sense of urgency that you put in the business with follow through relentless follow-up. Certainly, incentives aligning incentives to management performance are important. The one thing is having the right people in the right seats with commitment to do the things that you lay before you that you're going to get done is critically important as well. So all the things you mentioned are important. But I still go back to talk is one thing, execution is another, and execution is the key to getting things done and creating value.

So that's paramount in what we're going get done going forward.

Speaker 4

Okay, great. And then a quick follow-up. In your prepared remarks, you said something to the effect of some business have double digit margin opportunities. I may not have gotten that quite right. We're talking fast.

But can you just expand on that a little bit? I mean, there businesses that don't and that maybe you're looking at potential divestitures or any kind of numerical bookends you can put around what you think the opportunity is somewhere down the road would be great.

Speaker 2

Yes. I think, Steve, in the comment you were referring to, I made a comment about as we look at our portfolio and we think about once we demonstrate great operational capabilities and what we have today, as we look forward, we'll look at businesses that are close to our core that we believe that has the potential for double digit earnings as we think about being more acquisitive in the road ahead. Certainly today, if you look at our portfolio, we have businesses that are double digit. We have businesses that are not. We'll continue to evaluate that portfolio against what we think to be core and things we don't think we have the potential to be the rightful owner to and we'll make decisions accordingly.

So yes, that's kind of I think critical is knowing the businesses you want in your portfolio in terms of what's core and then looking at your ability to execute and deliver double digit earning potential in those businesses over time.

Speaker 4

Okay. Thank you very much.

Speaker 0

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

Speaker 5

Yes, thank you. Good morning. And Rod, welcome to the calls. Maybe sticking with the same line of questioning as Steve. I'm wondering, from your perspective, as you look at the company's portfolio and you think about the footprint here, obviously, REV Group has been an amalgamation of multiple acquisitions over long period of time.

What do you think the principal levers in terms of improving the business lie? Is it I understand lean, but should we also be thinking footprint? Should we be thinking product simplification? Any of these other items in your mind at this point?

Speaker 2

Yes. I think that if you look I'd answer that question with a couple of different lenses on it. One would be if you look at the current your current product offering, look at your current footprint, your current operations, there's and I've only walked, as I mentioned in my previous comments, about half plants. But there is tremendous opportunity to be more efficient and more effective in what we do. If you look at the flows of our plants, you look at the material presentation, you look at our makebuy analysis, how we make what we buy, the complexity we bring in the plant forward.

I believe there's significant opportunity to free up space and be more efficient in how we flow our plants and decide what we do and what we don't do. I think there's great opportunity inside purchasing to improve our purchasing leverage. It's our biggest piece of our cost structure. So we'll be looking at that area is to figure out how we can be more effective there and drive value. And you mentioned designs.

We're an amalgamation of a bunch of small companies today. And when you look across our portfolio, we do everything a little bit in silos. I think there's opportunity and value to be unleashed and thinking about how you look across your businesses and think about product platforming, always being keen on end markets and the differentiation required to add value, but being more efficient in how you plan that differentiation so you can platform your products and drive more commonality in your designs, which improves purchasing leverage, reduces complexity. It does many, many things. It takes those details off your plant board that allows you to then look at your footprint.

It's a highly variable cost business. I think footprint is always something you look at in terms of opportunities. But in terms of our cost structure, that's probably not the largest lever. It's more design costs and efficiencies and purchasing leverage, I think, where the opportunity is. And just one other comment.

The opportunities when you do platforming around what you're going to make and what you're going to buy and designing for manufacturing are really critical and can unleash a lot of value, too. So those building those capabilities into our operating system are going be critical going forward to get it to shareholder value that we think is trapped up inside the business.

Speaker 5

I see. Then I guess my follow-up. In the slides and in your comments, you certainly highlighted COVID-nineteen impact on the labor force absenteeism and inefficiencies that you had in the quarter. As we're moving into June, can you give us an update as to where you might be in that regard? How close are you to what you would consider normal operations?

And can you also comment maybe as to what you're seeing in the supply chain? I'm particularly interested in what's happening with chassis and chassis availability.

Speaker 3

Mig. This is Dean Nolden. I'll answer that question. And if Rod wants to give any color afterwards, he can do that. I'll first start with the people and the absenteeism.

I think absenteeism was a meaningful impact to our second quarter in a couple of our locations that are near large urban centers. And where we weren't shut down because we were an essential business, it was less predictable, obviously. So that impacted primarily the Fire and Emergency segment. Otherwise, the people from the standpoint of furloughs and temporary layoffs and recreation also took place, but obviously much more predictable. Since some of the stay at home orders have been lifted and since late May, we have now restarted all of our businesses.

All of our businesses are operating under, I guess, I would say, COVID production rates, to take into consideration working capital management and not getting ahead of ourselves, but also making sure that we are addressing the end market demand that we see coming forward and still with some uncertainty to it. So from a people perspective, a lot of the issues we ran into are, for the most part, kind of behind us, but somewhat lingering in a couple of places, but not a big issue in Q3 so far. From a supply perspective, we had a number of suppliers, obviously, that also closed down because of COVID in the second quarter. For the most part, all of our suppliers are back up and running. And the biggest issue we are watching and looking at is, obviously, always, our chassis suppliers, our large OEMs.

All of them are also back up and running for the most part and came back when they intended to come back. But there have been some fits and starts that you hear in the news in terms of some of the larger plants. So nothing is an issue currently. We're working more on a just in time chassis availability today, but don't foresee any issues. But that's one thing we're watching to make sure that doesn't trip us up going forward.

Otherwise, the supply chain is doing okay, and we don't see large issues right now.

Speaker 5

Great. Thank you.

Speaker 0

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

Speaker 6

Hi, thanks for the question guys. Rod, think Steve asked this a little bit earlier, but about the portfolio, but I think historically Rev has talked about Class A RVs being one of those segments that might not be able to get to double digit margins. Just curious, especially given the current environment where you're starting to see that backlog accelerate, what your thoughts on that business has been and some of the repositioning that's happened on the Class A side?

Speaker 2

Well, I think broadly, we'll always we're going to continue to review the portfolio for that core, noncore piece. And as I mentioned before, the earnings potential and what we believe we can get the rights to get to double digit is really, really important. I would say that the work that's been done in that business in the last year and one years point has dramatically improved its performance. We do see the efforts that's been put in place there through our leader, Bill Reith, has done a nice job in positioning that business for improvement. Certainly, we look at the demand that's coming at this post COVID, there's great demand placed on that business in terms of new production demand.

So we're seeing some short cycle improvement and we're seeing demand. So those are all good things. And not to make a comment about intentions, I would just say that you have to look beyond short cycle improvement in markets to understand what you should be the owner and what you shouldn't be the owner. And I think we're going to continue to look not only at that business but all our business to say and this is a process we have go through as a team with me as a new leader and with the Board around what is core and what's not core. And certainly, the RV businesses, as many other businesses, will be part of that discussion.

But we do see improvement in the performance of the business. We do see improvement in demand. But we also are mindful of the cyclical nature of that business. That market will return back to historical norms regardless if it peaks on a post COVID environment or not. We're going to be mindful of that going forward.

Speaker 6

Okay, great. Thanks. And then, Dean, you mentioned that you guys hadn't really seen many cancellations on the F and E side. I think you did talk about school bus orders not materializing. Can you just remind us how big is school bus as a percent of commercial?

And also if you can just kind of quantify how big municipals are within each segment in which you kind of view at most risk based on some of your comments earlier in the call?

Speaker 3

Yes. I won't get down into an individual kind of school bus versus other product types within the commercial segment. But I can say broadly, the commentary we made about the size of the shuttle bus business that we divested that now the commercial segment is still two divisions, the bus division and the specialty division. And bus represents about 75% of that segment, which includes school bus and transit buses now. So those are the two bus businesses in that segment.

So hopefully, helps. From a municipal state exposure standpoint, I think as you look at the segments broadly going from top to bottom, F and E, other than the contractor business in the ambulance side, which is indirectly state municipal or otherwise, that's pretty much dependent and benefits from municipal, state and other governmental agencies' tax based revenues. As you look at commercial now with bus at 75%, bus school bus is pretty much municipal budgets and tax based revenue, whereas transit bus has a little bit of a mix, some municipalities, but then they have some schools and airports and things of that nature. Specialty, which is 25% of commercial, that's really not municipal based. Obviously, it's ports, it's logistics and it's the rental houses for transportation and highways, for example.

And then obviously, recreation, which doesn't have any exposure really to state municipal. Hopefully that Yes,

Speaker 6

that's helpful. And sorry, just to comment on cancellations, aside from the inspection issues you guys have had on the fire side, have there been any delays or kind of push outs of orders that you were expecting to fulfill earlier in the year that are either getting pushed out to later or into 2021?

Speaker 3

No delays or push outs actually customers want their fire trucks faster, right? And so we're working with our customers to make sure we satisfy their needs as best as we can. That's our intention to our intention is to slow or to shorten the duration of our backlog to be even more responsive to our customers and their needs for their equipment. No cancellations or delays. They actually want them faster.

Speaker 6

Got you. And then just lastly on the non motorized backlog for RV, you mentioned that you expect it to be fairly consistent with retail sales for the rest of the year. Can you just comment, I acknowledge it's pretty tough at this point, but what your expectation is for how retail sales will recover within RV at this point?

Speaker 3

I think retail sales is the one part of the RV business as we look forward and plan that is a little bit less predictable right now. I mean, obviously, we've had a great couple of weeks or months post pandemic that anecdotes from the industry are that retail sales are doing quite well compared to prior periods. But we got to look at wholesale and retail demand. And I think as it relates to retail demand, it's kind of a wait and see. As the summer progresses, if trends continue, obviously, we'll take advantage of that in our wholesale shipments and flow through to the dealers, to end users.

But right now, I think it's a little early for us to be planning on continued robustness from a retail perspective until we see a little bit more data.

Speaker 0

Our next question comes from the line of Jamie Cook with Credit Suisse.

Speaker 7

I guess my first question, can you talk about any incremental opportunities you see on the SG and A side for the company to take out costs? How efficient you were? My second question is just as you look at the investment that was under the prior leadership, mean, you think there's opportunities or a need for you guys to invest more in your product lines? And then last question for you, Dean. Any help at all on just how you're sort of thinking about cash flow in the back half of the year?

Thank you.

Speaker 3

So let me start with I'll start with the last question first on the cash flow side. I think we're going to continue to manage aggressively for positive cash flow and debt reduction as the year progresses, not resting on our laurels post COVID. If you look at the second half of the year, it's typically our strongest cash flow portion of the year. I think this year will be no different, but maybe a little muted because, as you can imagine, we are ramping up again post COVID in some areas from perspective, and we're trying to do that judiciously and at the right pace. But I think in the second half, our working capital cash from working capital will be about flat.

I think most of our cash flow in the second half will be earnings related. I think our CapEx will be pretty consistent with the first half of the year. And then there's a couple of things we're going to still be focused on with regard to non operating kind of cash flow opportunities. We had a couple that we talked about previously in land or excess land sales. That is still progressing, albeit slower because of the stay at home orders.

So we expect some cash from that activity in the second half. And we've been taking advantage of the opportunities afforded to us through the CARES Act for the company to carry back some NOLs. So we're going to also receive some cash tax refunds in the second half. So all that together will, again, I think, provide a positive cash from operations and free cash flow for the remainder of the year such that ex the Spartan transaction, we will be positive for the whole year on a free cash flow basis.

Speaker 2

Okay. And this is Rod. So I think the first question you asked was about structural cost, SG and A. And when you walk in the business, one of the first things you look at is how does the business operate, how are decisions made. And we're certainly going to take time and look at our operating model and how we make decisions around how we run the business.

So where things sit when you think about things like shared services and decision rights, how you look at engineering product management, commercial activities, top to bottom, how is the organization structured and how does it run, that's all going to be on table here in the next sixty to ninety days of coming some decisions around how we want to run this business as a prelude for the operating system that we're going to deploy going forward. The belief is in that there will be structural cost opportunities that emerge from that discussion that I think once you understand how you want to run the business and how you want to make decisions about where things sit, that you will see different ways of looking at the business and opportunities will emerge from that. So that's a yes. The second piece is around, I think you asked about product investments and how we're thinking about use of capital. I talked a little bit about that in prepared comments.

But I think largely, we'll start with going we're going to do some work, market back to understand the customer and the segments and the channels and whatnot. But my first past look would be that there are opportunities in terms of when you think about product investments. And I mentioned this as well in the upfront section around opportunities to do product platforming. And if market back, understanding the value of your brands, the strength of those brands, the differentiation, the value props of those brands and bring those bring that differentiation to the table. But under the standpoint of looking across your businesses around where's the opportunity to commonize and reduce complexity and simplify your operations.

You take only the required complexity you're planning for and it leads into all other types of decisions too. So I do think there's opportunity to look at how we make investments. I think as we go forward, we'll think about product investments maybe slightly differently than what I in the past. Part of that's just the natural cycle where we've had, I think, a lot of acquisitions and good acquisitions that I think will now that they're on the table, we could think about the business differently that we have the opportunity to do that.

Speaker 7

I'm sorry, Rod. And a follow-up, could you talk about a lot of opportunities that you have, understanding you've only been at the firm about sixty days or so. But do you have a time line for when you'll sort of have more concrete plans and be able to quantify what the impact is, like financial targets like a time frame for when you'll come back to the Street and sort of put more meat around the different items you're talking about for margin targets like by year end or

Speaker 2

Yes. Subject to forward statements, I think we'll setting aside the fact we're not giving guidance right now, we're going to work a process here in the next three to six months that is going to yield us an operating methodology of the business, which from that will establish targets. And then as we go forward and we move back into where we're doing forward based statements around guidance, then we'll disclose those. But that's part of the process size the price of what you want to do and how you want to operate and organize around doing it for sure. Yes, we're going to be doing that.

Speaker 7

Thank you very much and welcome aboard.

Speaker 2

Thank you.

Speaker 0

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

Speaker 8

Hi, good morning everyone and Rod welcome.

Speaker 2

Thank you, Jerry.

Speaker 8

Rod, I'm wondering if you could talk about the fire business in particular where the team has been working to improve throughput. What's your assessment of the manufacturing process there? How quickly can you move to reduce the variability option as I understand it, that's been the key issue in terms of the amount of mask customization there in particular behind the operating challenges. Can you just expand on how quickly we can get the process humming, if you will, your assessment there?

Speaker 2

Yes. There's work going on in each fire business right now. And it's really inside the walls of those plants to understand how can we improve throughput and take out complexity and all the things you look at and walk in a plant material flow. So each plant, each business has its own unique set of opportunities and challenges that we're solving. And I think when you think about improving those businesses, you think about it in steps.

There's doing what you do today, leaning out those processes and simplifying things, value streaming, as an example, around getting your throughput up. That's going on in each of the businesses today. That would you should it won't be the full benefit of all the things you would do over time as you talk about make buy analyses and design for manufacturing and product platforming. There's a long cycle opportunity here to continue to drive value in these businesses. But the short term opportunity, I think in a three to six month basis, we should be able to start seeing benefit in each of these businesses as we make the changes.

Some of the businesses are more mature and farther along in those processes than others, but each has its own problem to solve. If our businesses are ones I have towards, I've got a couple spots left to see, but I have seen some of our larger facilities. And it's a great opportunity for us to go in and apply some principles to get benefit. But it's going to take a while to address the opportunities that are on the plant for us. And to fully address that, it's a longer cycle opportunity.

Speaker 8

And in terms of as you folks think about the portfolio as it stands now, are we nearing the end of the portfolio culling process? Was the shuttle bus transaction the last sizable one? Or are there a few things that you and the Board are still evaluating as possible divestiture candidates that are meaningful?

Speaker 2

I don't know that you're always looking at your portfolio for opportunities to improve. But I would say, biased short term, our focus is on operational intensity and how we improve the underlying performance of our business. That's first and foremost in the minds of the leadership team right now. There are always going to be opportunities that you'll evaluate as they come forward. You have an obligation to do that.

But I think if I were to suggest where our minds are at right now, it's around making things perform and then addressing situationally opportunities that present themselves to improve our portfolio.

Speaker 8

All right. Thank you.

Speaker 0

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

Speaker 9

Thank you. Good morning and welcome, Rod. Thanks, Andy. I guess a question directed at you, Rod, so sorry. I understand it's early to quantify the financial targets.

But when you are talking about transforming the REV Group into a top quartile industrial performance, can you kind of give us some guidance on what metrics you may be looking at?

Speaker 2

Yes. I think that obviously, you look at the performance of we talked about our cash return investment as being a driver. So you think about the numerator and denominator there of what that is, and that's your earnings and you think about your net working capital, you think about the operational and asset intensity of businesses. But you're always looking for efficiently getting more out of your asset base and better returns. The returns piece is easy.

It's hard to do, but it's easy to talk about. It's getting your business more profitable and continuing to grow at or above market rates, doing a better job of cost configuration. You get products on the floor you can build for cost at a price you've sold. All that speaks into operational discipline. But margin rates, EBIT, quality of your quality operations, you're not doing rework.

There's all kinds of operational metrics that fall through from that numerator and denominator that we're going to focus on. So you translate from financial metrics on the right all the way down to operational metrics on the left that drive that capability to perform on balance sheet and on your income statement.

Speaker 9

Okay. And then for the team, guess, could you discuss any investments that are required to transition to the REV business system from REV production system? Are we talking like ERP systems? Or is it something else?

Speaker 3

Yes. Andy, this is Dean. I think from the standpoint of investments, I think over the longer term, as we mature, there probably are some investments in people and capabilities that aren't within our four walls today that a mature top quartile company would have inherent in the business within the business. So I think that's one thing. We don't have any large ERP kind of investments that we need to make, maybe more of the overarching kind of data warehouse, data lake types of things where you can take multiple ERPs and bring all of the information together in one place, and that's a much smaller kind of dollar value investment.

Still a lot of work to do, but less from a capital perspective. So I think the investments aren't huge. So I wouldn't call that a headwind. I would call it actually a net positive because as we look at our as Rod said, our cash return on investment and the hurdle rates we're putting in place, we're going to make sure that those things bring back more than we spend. So they have a payback that's effective and proper for a top quartile company.

Speaker 2

I'll just add a little color to that. I agree with what Dean said. You don't broadly need to look at ERPs as part of this discussion. I do think things like customer data for driving working capital opportunities and thinking about opportunities for shared service operations, vendor data, all part of this data like discussion that Dean talked about, those are all critical. You think about mechanisms for tracking operational improvements, so continuous improvement tracking, purchase price tracking, VAVE, value engineering tracking systems where you can operationalize and get good data and accountability around target setting.

Those are pretty from an investment standpoint, those types of systems that stand up are pretty nominal, but they're very, very important for getting visibility, transparency on tracking and target setting, which is all part of the operational kind of discipline that we need to build in the business. So there are things we need to stand up, but they're not of the scale and nature of ERPs to actualize what we've got to go do to get our business systems operational.

Speaker 9

Thank you very much.

Speaker 2

Thanks.

Speaker 0

Thank you. We have reached the end of our question and answer session. I'd like to turn the call back over to Rod Rushing for any closing remarks.

Speaker 2

Thank you. So as you probably gathered from the conversation, we have a lot of work to do in our business operationally. But there is great potential here for this business to create shareholder value. It's a lot of hard work, and we'll continue to keep you updated on our progress. But it's a visible plan that I can see.

We just got to get ourselves lined around and operational on it. I do want to thank again our employees. We've gone through a very challenging time as a country and as a business, as all businesses have. And without the great work and efforts of our employees, we couldn't have continued to execute for our customers and also done what we needed to do to make it through this difficult time. So I want to again thank them for that.

And in closing, I just want to thank all of you for being so kind to me on my initial call. I look forward to the road ahead, and I'm very excited about being here and really excited about what I think can get done. So appreciate it. I look forward to talking to you all again very soon. Thank you.

Speaker 0

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