REV Group - Earnings Call - Q3 2017

Transcript

Speaker 0

Greetings, and welcome to REV Group Third Quarter twenty seventeen Earnings. 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.

Speaker 1

Good morning, and thanks for joining us. Last night, we published our third quarter twenty seventeen 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 and 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 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

Thank you, Sandy, and thanks to everyone on the call for your interest in REV Group. We are pleased to report another strong quarter of EBITDA growth and expanding profit margins, and we remain well on our way to achieving our initial goal at IPO to double EBITDA and hit 10% EBITDA margins on a consolidated basis by 2019. We are proud of our third quarter results and we believe they validate the diversification and operating leverage in our model as we continue to achieve our group targets despite a slower quarter in our commercial segment. Dean will provide more detail regarding our segment results shortly, but I wanted to start with some key business updates from the quarter. First, we announced our collaboration with Ford Motor Company to provide our dealers with a complete catalog of genuine Ford chassis parts.

This agreement enables our dealers to offer a high level of quality end user parts and support for the more than 150,000 RAV4 chassis on the road today. Secondly, we announced the acquisition of AutoAbility, which closed on September 6 and is a best in class mobility van converter that specializes in the manufacture of rear entry wheelchair accessible vehicles. We are pleased to welcome Autoblility to the REV Mobility Group. The combination of the Autoblility and our Eldorado Mobility brands now enables us to address both the consumer and commercial mobility markets with a complete product offering of mobility vehicles. Thirdly, we announced that REV subsidiary Eldorado National California was officially awarded the LA County Transit Bus contract expected to be worth over $400,000,000 The contract is to supply two ninety five forty foot CNG powered transit buses and includes a provision for an additional three zero five buses for a total of 600 buses over a five year period.

We received a purchase order for the first group of two ninety five buses on Friday, September 1. Also, as we communicated last quarter, a key part of achieving the 10% EBITDA target is the introduction of new products. As you will see on Slide five, we introduced three new products to the marketplace during the third quarter. Our Recreation segment introduced two new products this quarter. First, we introduced the first American Coach Class B RV called the American Patriot.

This is a great addition to our American Coach product line and we will expand not only the American Coach distribution channel for this product, but we will also help in expanding our Midwest automotive distribution channel. Many American Coach dealers want a complete line of Class B vans. Secondly, we introduced the Fleetwood Class C Pulse right at the end of the third quarter. Most dealers will get their first glimpse of this product at the Elkhart open house in a couple of weeks, but those that have seen the early prototypes have expressed a strong desire for the product. This RV is made on the popular Mercedes Benz chassis and has proven to be a strong and growing market segment.

Our third new product is the Collins Low Floor Bus. This is a great innovation to the standard accessible bus entry. The ramp provides a much safer, faster and easy way to board accessible passengers. Lastly, our third quarter in the Fire and Emergency and Commercial segments was slightly impacted by a Ford Transit chassis recall, which halted shipment of any product in the Ford Transit chassis until a fix was in place. The parts and fix recall has been received and the Ford sanction repair is being implemented.

We will ship the impacted vehicles in the fourth quarter. Now before I turn the call over to Dean, I'd like to close by reaffirming our full year fiscal twenty seventeen financial guidance, which is detailed on Page six. To refresh, we expect full year consolidated net sales to be within the range of 2,300,000,000.0 to $2,400,000,000 Secondly, our expectation for full year adjusted EBITDA will be in the range of 157,000,000 to $162,000,000 As in previous quarters, our guidance includes our acquisitions year to date, but does not contemplate future M and A activity. Now let me turn the call over to Dean to further discuss our segment financials.

Speaker 3

Thanks, Tim, and good morning. As you saw from our release last night and on Page seven of our presentation, we reported 13% growth in net sales and 36% growth in adjusted EBITDA in the third quarter twenty seventeen versus the same period last year. As a result, we drove 130 basis point expansion in adjusted EBITDA margin to 7.6% despite lower commercial sales. This also represents 90 basis points of sequential margin expansion as we are realizing the benefit of our integration of KME and continue to drive gains across all of our businesses from our procurement and production optimization efforts, among other items. We generated 36% growth in year over year adjusted net income and reported adjusted earnings per share of zero three three dollars for the third quarter, up from $0.31 per share in the third quarter last year, with even 14,000,000 higher current quarter average shares outstanding.

As Tim mentioned, we're very pleased with our growth in profits and expect similar gains from increased operating leverage in the fourth quarter and year ahead. Please refer to the tables in the appendix of our financial results slide deck and our earnings release for detailed reconciliations of net income to adjusted net income and adjusted EBITDA and a reconciliation of as reported sales and EBITDA to their related organic amounts for the quarter and year to date. Now please turn to Slide eight. Our F and E segment grew sales in the quarter by 20%, which was driven partly by the impact of the Ferrara acquisition in April, but also from strong growth in the segment's organic businesses in the quarter. F and E sales growth in the quarter, excluding Ferrara, was 6%, driven by a higher mix of high content fire apparatus and an increase in ambulance unit sales.

For F and E, we are pleased to report that our EBITDA margin for the segment grew two forty basis points year over year, reflecting operational improvements in our F and E businesses, including KME, and the shipment of KME units in the quarter that were ordered after KME's acquisition last year. We are now largely through the legacy KME backlog and are seeing strong year over year accretion in our segment profitability and expect that improvement to continue for the remainder of the year. In aggregate, the F and E backlog declined 9% versus last quarter, reflecting the normal impact of strong seasonal shipments and customer order patterns. The end markets for fire and ambulance vehicles remain strong and backlogs are healthy. Lastly, for F and E, the third quarter was our first full quarter with Ferrara, which we acquired in April.

Our integration process is underway, but we did not realize significant synergies in this quarter. This business is performing as expected, and we look forward to improving profitability from its pre acquisition levels over the next year. On Slide nine, you'll see that our Commercial segment revenues declined nearly 16% in the quarter as we continue to focus on driving profitability through our various commercial and operational initiatives. The year over year sales impact this quarter was consistent with prior quarters and that it primarily related to our shuttle bus business, but also this quarter included impact from our mobility van business that's ramping up after completion of its production relocation earlier in the year. The end markets of all of our commercial businesses remain strong, and we are very encouraged by our sequential quarterly increase in commercial segment backlog.

Our backlog in this segment grew by 6% in the quarter, which does not include the award of the LA County Transit bus contract, of which the two ninety five buses Tim referred to will hit our backlog in the fourth quarter. In addition, we remain encouraged by the results we are seeing from the rollout of our Platinum Dealer program. Due to these and other initiatives, we expect the Commercial segment to return to year over year growth next quarter. Lastly, our EBITDA margins for Commercial declined 100 basis points year over year to 8.3%, again, impacted by the lower revenues and the mix of other vehicle sales in this segment during the quarter. Turning to Slide 10.

Our Recreation segment again drove impressive sales gains that produced total growth of 40% in the quarter. On an organic basis, adjusting for the acquisitions of Renegade in December and Midwest in mid April, revenue growth was still a robust over 9%. We are pleased with the growth in both the Class A and Class C product categories driven by the end markets and our market share gains. As Class A growth is less than the other motorized RV categories, but the market growth coupled with our market share improvements were especially beneficial given those are higher margin coaches. Additionally, the acquisitions of Renegade and Midwest make REV Group best positioned at the right time to take advantage of robust end market growth for Class B and Class C RVs.

For Renegade and Midwest, we also continue to realize cost savings on major components and chassis and are benefiting from commercial synergies that are driving incremental revenues for the combined group. These acquisitions also serve to improve the overall profitability of our Recreation segment, given the inherently greater EBITDA margins they enjoy. Lastly, but most importantly, we are very pleased with the progress in our Recreation segment profitability as adjusted EBITDA doubled over last year and margins grew nearly 200 basis points to 6.5%. As you know, Recreation profitability improvement is a key aspect of our overall REV growth strategy, and we expect to continue this trend as we enter the fourth quarter and next year. As among other items, we will continue to realize the financial benefits of the operational improvements we have made to lower costs in this segment.

I'd like to provide a few other REV Group detailed modeling items related to our full year fiscal twenty seventeen financial expectation. We expect depreciation and amortization of 34,000,000 to $35,000,000 for the full year, approximately $65,000,000 to $66,000,000 weighted average diluted shares outstanding, capital expenditures of approximately $50,000,000 and full year interest expense of between $19,000,000 and $20,000,000 Thank you for your time. And now I will turn the call back to the operator for questions and answers.

Speaker 0

Thank you. Our first question is from Mig Dobre with Robert W. Baird. Please state your question.

Speaker 4

Good morning, everyone. Maybe my first question on Recreation, very good margin there, much better than what we expected. And I believe better than what you were thinking initially at the time of the IPO. So I guess a little more detail on one win right versus your initial plan to be able to deliver this and the sustainability of margin as we're looking at the fourth quarter and into next year and how you're thinking about the margin potential of this business and the path to reaching 10%?

Speaker 2

Yes. Well, it's several things, Mig, as you can imagine. I think the biggest thing was the opening of the three new plants last year. By opening them up, we've been able to create a lot more efficiencies and more We were really very, very tight in the one large plant that we had in Decatur and the three new smaller plants have allowed us to move various products into those plants. So for instance, we moved our high end As into their own plant.

We moved our low end As into their own plant and our Seeds into their own plant. And by specializing and moving them into better locations, we've been able to get the efficiencies. The other thing that really kicked in nicely in the first three quarters of this year, and it continues to ramp up, is our ability to source better. The sourcing really is starting to pay some nice dividends in the RV business. And last but not least, it's no secret that we had some less than stellar products being shipped two years ago.

Those products typically have twelve month warranties on them, and those have now moved off of retail lots. They're all effectively gone, been retailed and the warranty periods are starting to expire. So those three phenomena really created the basis for the improvement in margin.

Speaker 4

I appreciate that. And in terms of it sounds to me like a lot of what you've described are items that are sustainable in nature. As we're looking towards fiscal 'eighteen, it seems like you're running ahead of schedule in delivering margin. How should we be at least high level thinking about margin for next year?

Speaker 2

Well, it's a process. Those initiatives will continue profitability performance in RV. I think we also are positioning ourselves really well for new product introductions. That's been slow. We didn't really introduce the number of new products we wanted to in fiscal fiscal twenty twenty sixteen.

We will have 11 new products introduced at open house in two weeks, which is a record number for us. Those have been really fully designed in a way to be more efficiently build and more profitable as well. So yes, it's a process, but all the building blocks are in place, and we just now have to continue to execute.

Speaker 4

All right. Then my follow-up, just trying to understand guidance, your top line guidance for the year a little bit better. If I'm looking at the low end of the guidance, the 2,300,000,000 unless there's something in acquisitions that perhaps I'm not getting or not modeling right, that really implies a pretty significant ramp in organic growth in the fourth quarter. So I'm trying to understand how we should be thinking about the sources of the step up in organic in the fourth quarter. Is it all driven by commercial?

Any kind of catch up there? Or are there other segments we should be thinking here?

Speaker 2

Yes. You're correct. If you look at the acquisition so far this year, obviously, Renegade was fairly small. Midwest was small. Ferrara was not small, but it really is going to be ramping that up as well.

The organic growth is really coming from all segments, with the exception of probably the Cutway bus that's been fairly static. Backlogs are really have built nicely in the shuttle bus segment, but that's going to be, I think, relatively flat in the fourth quarter. Everything else still is contributing. Everything else is up, which is obviously a nice situation organically.

Speaker 4

All right. I'll be back in the queue. Thanks.

Speaker 0

Our next question is from Steven Volkmann with Jefferies. Please state your question.

Speaker 5

Hi, good morning. Just a detail item first, the Ford chassis that got sort of pushed into the fourth quarter, just order of magnitude on revenue there?

Speaker 2

Yes. I mean, kind of round numbers, it wasn't huge because what we did do, Steve, we shifted some things around. For instance, on the in the ambulance side, the Ford Transit chassis are Type two ambulances. We shifted emphasis to our modular designs, our Type 1s and 3s. Kind of the same thing on bus.

We did have some other chassis that we're able to try to move around. But all in all, it wasn't huge. It's kind of rule of thumb about $10,000,000 in revenue that needed to be made up. Some of it was, some of it wasn't. And all that will flow out now in the fourth quarter.

Speaker 5

Okay, great. And is there any margin impact from that? I mean, do you have to pay people over time? Are they sort of building the wrong stuff in the wrong order or anything like that, that could be sort of a short term hit?

Speaker 2

No, nothing that we can measure. I mean, obviously, if you're moving production slots around, there's some hidden costs in that, but nothing that we really measured that was meaningful in the quarter.

Speaker 5

Okay, great. Thanks. And then just on RVs, Tim, where do you think we are in the various cycles? I mean, there's been, I guess, a little concern around the As maybe that things might be slowing. I'm just curious your perspective based on your order books and conversations and so forth.

What does the cycle look like from here?

Speaker 2

Yes, that's a great question. I think we're viewing As in a little bit different light than maybe others because they have been softer, as Towables, Bs and Cs, very strong. And that's why, obviously, we're emphasizing a lot more in those areas to make sure we're grabbing the opportunities that are available to us in the marketplace. As have been fairly quiet. And our belief was, is that people are going to gravitate up towards the A's.

We still think that's going to be the case. But we're kind of viewing it a little bit differently, too. We plan to take share in the A's. If you go back two, three years, we were almost a zero non player in the A market. And I think with a lot of the newer products that we're bringing to the marketplace now with the strength of our brands, even though the As may not rebound as quickly as far as in overall market as maybe had been anticipated, we plan to get more than our normal share.

So time will tell. I guess I don't really know. If history repeats itself, people are going to move into the As. It's been a little slow to happen. We're by making sure we got better product into the A market to make sure that we're going to get a bigger piece of what is out there to be had.

Speaker 5

Great. Thank you.

Speaker 0

Our next question is from Mike Bundesl with Stifel. Please state your question.

Speaker 6

Thank you. Just wanted to ask you on this announcement with the Ford relationship where you can sell the Ford chassis parts through your To your knowledge, do your competitors have a similar arrangement with Ford? Or is it relatively unique to you?

Speaker 2

It's unprecedented, quite frankly. And it took us eighteen months to get it done. This has never been done in the automobile industry before. We're very, very pleased by the fact that Ford was able to allow us to do this. Very unique, very special and very, very pleased.

I can't say how pleased I am that Ford understood what we were trying to do, which was, quite frankly, emphasizing and getting more genuine Ford parts into the channels that we're not seeing the flow of genuine Ford spare parts.

Speaker 6

Sounds great. I also wanted to ask you, mean, would you describe the RV inventory at the dealers currently?

Speaker 2

Very low. That's the good news. There's this is the time of year where the summer buying season is coming to an end and the dealers have run their retail lots pretty low. In two weeks, I think you understand the cycles. We have two really big buying cycles in the industry: Open House, which is in two weeks, the week of September 18, I guess it is, in Elkhart.

And then the model year change, which is in April, those are the two really large buying seasons. So retail lots are really quite empty. The dealers will be coming in with their checkbooks in two weeks, and that's when the backlog start to rebuild.

Speaker 6

Good. And also just wanted to ask you, do you have any preliminary thoughts on how the hurricanes could impact your various businesses? I mean, either selling more ambulances or inventory that's damaged in places. Just any preliminary thoughts there? I know it's early.

Speaker 2

It's early. Actually, we've seen a little bit of activity, obviously, with the Houston situation across some of our product lines. We have not been affected. The good news is, I guess, from our standpoint, we have two service facilities in Houston and a manufacturing facility in Holman, Louisiana. We none of those were affected in any meaningful way.

I don't expect anything really big to come out of that unless there's products that are damaged. But quite frankly, municipalities are pretty good about having contingency plans in place. So fire apparatus, ambulances, some of the emergency type vehicles are moved out of harm's way very quickly when hurricanes do arrive. That's what's happening right now in Florida. I I was on the phone this morning, though, with our two facilities in Florida.

We have one, as you know, in Orlando, and we have our fire at Barack's e one in in our Ocala. These guys are kind of experts in Florida on how and knowing how to deal with these situations. So to answer your question, don't see a real big pickup. There might be a little bit of activity. And we also have fingers crossed that we'll be in good shape from a plant standpoint in Florida.

Speaker 6

Got it. Thanks very much.

Speaker 0

Our next question is from Nicole DeBlase with Deutsche Bank. Please state your question.

Speaker 7

Good morning. This is Sarah Bloditsky on for Nicole. Just as you know, as we're starting to think about 2018, do you believe that you can sustain this EBITDA growth for another year? Are there any other puts and takes that we should start to think about?

Speaker 2

Well, if you go back to our business model that we presented at the IPO, we are obviously on track and above that performance for 2017. We are starting to model 2018. We have a number out there that we put out there at the time of the IPO, and we expect to hit that also. And that is a 30% plus EBITDA growth year over year 2017 to 2018. It's too early to confirm guidance.

Obviously, we have acquisitions that have to play into those numbers and things like that. But we feel very good about the model that we presented at the IPO.

Speaker 7

Okay. Thank you. That's very helpful. And then can you comment a little bit more on the expected cadence of the shipments for the LA bus order?

Speaker 2

Yes. That will pull out fairly slowly. LA requires prototypes to be built first and they evaluate those prototypes to make sure they're exactly to the specifications that they wanted. Then they fully test it and make sure they take a very cautious view, especially with a new contract like this where you're going to have in excess of 600 buses. This really will affect our backlog more towards the 2018 and meaningfully into 2019 and 2020.

So it's a great order. It's a great situation to get into a big contract like LA, but it's going to have minimal impact in our earnings in 2018.

Speaker 7

Okay. Thank you for taking my questions. I'll get back in queue.

Speaker 0

Our next question is from Jerry Revich from Goldman Sachs. Please state your question.

Speaker 8

Hey, everyone. This is Ben Berud on for Jerry. Good morning.

Speaker 3

Good morning.

Speaker 8

Just wanted to start with pricing in F and E. Could you just kind of give us some color on how that progressed in the quarter for both Fire and Ambulance? And then can you maybe kind of give us some color on the impact of the higher content vehicles in both of those business lines?

Speaker 2

Yes. It's well, both Fire and Emergency have product mix that has to be taken into consideration. We continue to increase pricing based on what we believe is appropriate, whether it be cost increases, inflation and or innovative ideas where we think we can get more margin. So that continues and that will always continue to go. Really, what's happened more, I think, this year on the whole F and E area has been the product mixed in fire.

We have a much larger portion of aerial shipments going on right now, and those tend to drive higher margins there. As you know, they're twice the price of a pumper. So when aerials start to flow through, there's a nice pickup in margin opportunity. Percents are similar, but obviously, you're pricing off of a sale price of $1,200,000 plus versus $600,000 So it's been primarily more in product mix, I think, so far this year. But we keep our pricing discipline in place.

Speaker 8

Got it. And when going through the presentation, I found it curious the amount of attention AutoAbility gets for being an 8,000,000 revenue company. Can you kind of discuss your plans for that business and what kind of revenue synergies you might be able to take advantage of?

Speaker 2

Yes. We love companies like AutoAbility. These are really small operations that have been undercapitalized and have limited channels, but it's a great product. Chuck Portenberry, who is running put that business together and running it, has just a phenomenally good product. So this is the type of acquisition we love because we bring it into our portfolio.

We're able to help capitalize the business, increase the channels, provide all the things that Chuck really has been limited in doing. So we see a renegade type result from automobility or a Midwest automotive where we take a great product, move it into our portfolio, enhance it with sourcing, getting the costs down, enhancing the go to market channels, all those types

Speaker 3

of

Speaker 2

things. I'd love to have another 20 auto abilities in the portfolio.

Speaker 8

Our

Speaker 0

next question is from Andy Casey with Wells Fargo Securities. Please state your question.

Speaker 9

Thanks a lot. Good morning. And the first question is the reaffirmed adjusted EBITDA guidance midpoint implies Q4 of about 55,000,000 which is a little bit it's 35% of the full year midpoint. That seems to be a little lower than the historical seasonality for Q4 to be roughly 40% of the full year. Is the difference really between thirty five percent and forty rounding in your opinion?

Or is there something occurring in this Q4 that would drive modestly lower seasonal performance?

Speaker 3

No. This is Dean, Andy. No, I think when we stated the Q4 expectation a couple of quarters ago, we were looking forward to the second half and the back end loaded nature of our business. It's really kind of a rounding effect that's happening. We performed a little bit better in Q3, as you saw, so that comes out of Q4.

But by our implied guidance, your math is correct.

Speaker 9

Okay. Thanks, Deane. And then if I could dive a little deeper into a question that I believe Steve was asking earlier. The commercial adjusted EBITDA margin kind of went up 80 basis points Q3 twenty sixteen versus Q2, and that was on $6,000,000 higher revenue. And then Q3 this year, it dropped about 90 basis points, still up year over year, but I'm just wondering about the sequential seasonality of the margin.

That's on a roughly $4,000,000 lower sales this Q3 versus Q2 'seventeen. What would normal seasonality for that segment be? And then what factors drove the sequential decrease this year?

Speaker 3

I think the one factor driving kind of the anomaly that you're pointing towards is the way in which our school bus business kind of went through the year quarter by quarter. Typically, third quarter is its strongest quarter. This year, we had some opportunities in the second quarter and drove higher sales in that business in the second quarter, which is not your normal seasonality for that business. So as a result, given that it's inherently higher EBITDA margins than the segment overall, that really caused the year over year comparison to be a little bit different.

Speaker 9

Okay. Thanks, Deane. And then lastly on the again on the Commercial segment. I think in your commentary, it sounds like the markets are firm. Once you get through some of the distortions that occurred in Q3, you should start to see growth.

Is that an inference that we should see growth as early as Q4? Or is that something in the future?

Speaker 2

You're going see a little bit in Q4, but the backlogs are just building now. It's going to be, I think, more of a Q1 phenomenon and probably even into 2018.

Speaker 9

Okay, great. Thanks a lot, Tim.

Speaker 0

Our next question is from Joel Tiss with BMO Capital Markets. Please state your question.

Speaker 10

Hey guys, how is it going? Just some housekeeping stuff. The accounts receivables and the inventories went up a lot. Is there anything behind that or just acquisitions?

Speaker 3

Partly because of acquisitions, obviously, we if you're looking year over year or versus last year end, we had the Renegade, Midwest and Ferrara businesses, but they also went up organically. As you can see, we have an expectation for a good fourth quarter, seasonally strong fourth quarter. So building inventory for fourth quarter sales. And so it's a normal seasonal pattern, but we have a good expectation for fourth quarter growth, and that's sitting in inventory at the end of the second third quarter.

Speaker 10

And anything with the receivables? Are you kind of changing some of the terms on the business? Or you're helping the customers sort of without having a finance division? You're helping the customers to buy more product? Or the same thing just because you're expanding your sales so much?

Speaker 3

I think as we make some of these acquisitions and we've said it in the past in terms of our long term strategy of direct versus dealer channel, we're doing more direct selling now with some of the acquisitions and some of our initiatives that causes some lengthening of the DSO periods. We do have a couple of larger customers that are doing quite a lot of business with us, but have some larger balances, no collection issues, just timing. So but I think the biggest item is either acquisition in addition to kind of the shift towards more direct selling will drive that DSO a little longer.

Speaker 10

Okay. And then and other liabilities, that's also just related to acquisitions? Other liability category up $32,000,000

Speaker 11

Yes.

Speaker 3

That's primarily related to acquisitions.

Speaker 10

Okay. And then in the future, are you guys going to talk about individual deals in terms of the amortization and how accretive each one can be and all that sort of stuff? I know it's still your first year, but as we roll into 2018, or that's going to be something that you don't want to break out?

Speaker 2

No. I think we want to be as transparent as possible, Joel. I think probably in the larger deals where they're more meaningful, we'll break that out. On these little ones, it's just we haven't paid that much attention to. We know we love them, and they're really going to be big payoffs for us.

But I think on the bigger deals, we owe that to you to be as transparent as we can as you understand how we look at these things.

Speaker 10

That's awesome. All right. Thank you so much.

Speaker 0

Our next question is from Nigel Coe with Morgan Stanley. Please state your question.

Speaker 11

Good morning, guys. This is Dylan Cumming on for Nigel. I just wanted to touch on price cost in the quarter. Obviously, you guys are still able to show some robust margin improvement in Fire and Emergency, which is kind of where I believe you guys would intuitively have some decent exposure to steel inflation. So just kind of want to get your thoughts on the raw material outlook for 2018 and maybe how that could flow through to your margins?

Speaker 2

Yes. Steel is not how do I want to put it? It's meaningful, but not nearly as big as something like aluminum. We buy just a huge amount of aluminum. A lot of the chassis that we buy that have steel in them, for instance, we're buying almost 2,000 chassis a year from Daimler.

Those prices are kind of locked in, in our contract with them. We work with them if there are issues, but we pretty well have that type of our that cost basis of what we build locked in. We also locked in aluminum last year for a short relatively short period of time for a couple of years. So right now, no issues. Raw material costs are contained.

And really, we see really no prospect that we will have to do anything unusual there.

Speaker 11

Got you. That's helpful. And then maybe just a second one, if you could kind of give us an update on the M and A backlog from here. I kind of know you mentioned during the process, you saw a pretty healthy backlog of opportunities within commercial. So I just wanted to see if the thinking has changed there at all and maybe where you guys are seeing the kind of greatest amount of low hanging fruit?

Speaker 2

No. I'd tell you, there's the backlog of opportunity is huge. I think we've made the comment before that on our list, there's over 100 potential targets. And they're small like auto ability, medium sized like Ferrari and some big things. And we look at them all from a timing standpoint.

Our strategy is clear. We want to bolster our current product portfolios to make sure that we have size and growth in the markets that we operate in. But we're not against going after a fourth leg to the stool, if that makes sense as well. But I'll just say this because this is consistent. We have four to five acquisitions in the hopper at any one point in time, and that will be continuing as we go forward.

So this company can grow nicely as we've shown organically. It's also going to grow meaningfully through acquisitions too as we progress forward.

Speaker 11

Understood. Thanks for the time guys.

Speaker 2

Thank

Speaker 0

you. Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back over to Tim Sullivan for closing remarks.

Speaker 2

Well, thanks again everyone for joining us today. Obviously, we're very pleased by our third quarter results. We're in good shape, and that's why we reiterated and reconfirmed our guidance for the year on both revenue and EBITDA. And as I said on this call, the model that we presented at IPO is still valid. And feel free to reference that at any point in time.

This company is in hyper growth mode, and we plan to continue that. We plan to perform and meet your expectations. Thanks again for joining us. We look forward talking to you again at the end of our fiscal year 2017, wherein we'll be providing you with hard and fast guidance also for 2018.

Speaker 0

This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.