REV Group - Earnings Call - Q4 2017

Transcript

Speaker 0

Greetings, and welcome to REV Group Fourth Quarter twenty seventeen Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. I would now like to turn the conference over to Sandy Bugbee. Thank you.

You may begin.

Speaker 1

Thank you, Sherry. Good morning, everyone, and thanks for joining us. Last night, we issued our fourth 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.

It is also available on our website. Please refer now to Slide two of that presentation. Our remarks 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. I think we'll mix it up a little bit today. And Dean, why don't you go first and give us some of the financial highlights?

Speaker 3

Yes. Thanks, Tim. Good morning, and I will start on Slide seven. We are very pleased to report strong growth and improved profitability for the fiscal twenty seventeen fourth quarter. Quarterly net sales of $684,000,000 were up 26% over last year, and for the full year, we grew sales by 18%.

Strong organic growth in our Fire and Emergency and Recreation segments drove our sales performance as well as the introduction of innovative new products across all our businesses. Acquisitions, a core element of our ongoing growth strategy, also contributed to our growth for the quarter and for the year. We are very happy with the initial performance of our acquisitions. All of them have driven sales and backlog increases in their respective segments. We continue to make capital investments in these businesses to increase their scale and enhance their profitability as we move into fiscal twenty eighteen and beyond.

Net income in the fourth quarter was $22,700,000 or $0.35 per diluted share and $31,400,000 or $0.50 per diluted share for the year. Adjusted net income grew by 59% for the quarter to $29,200,000 or $0.44 per share. For the full year, adjusted net income grew by 43% to seventy five point nine million dollars or $1.22 per share. These are significant year over year improvements, driven by growth in core earnings and a reduction of interest expense. Speaking of significant achievements, adjusted EBITDA for the fourth quarter increased 39% to $58,400,000 and full year adjusted EBITDA grew by 32% to $162,500,000 Adjusted EBITDA grew from increased sales, the impact of our ongoing procurement and production cost optimization initiatives, pricing and the contribution from acquisitions.

We are very proud of our growth in profits for the year and the resulting 80 basis point improvement in adjusted EBITDA margin. We expect the pace of this operational leverage to continue and accelerate in fiscal twenty eighteen as we benefit from the continued improvements made in our operations as well as from our increased scale. Let me now turn to Page eight eight to discuss the performance of our segments. Fire and Emergency segment sales grew 30% for the fourth quarter and 28% for the full year. The primary drivers of this increase were higher unit sales, contribution from our acquisition of Ferrara and a greater mix of higher content, higher value vehicles.

F and E adjusted EBITDA for the quarter grew 3429% for the full year, driven by this increase in sales and mix, but also due to the actions we took to improve segment profitability, including productivity, pricing and operational initiatives, particularly at our TME and Ferrara businesses. Going forward, we see continued strength in our F and E businesses from continued high demand in both the fire and ambulance end markets, which are still recovering from prior recessionary levels. As shown on Slide nine in our Commercial segment, quarterly sales were down 29% for the full year, primarily from lower sales in our shuttle bus product category, where we continue to be more selective in pursuing higher margin business. The shallower decline in the fourth quarter was driven by sales increases in other commercial product categories, which include transit buses, terminal trucks and sweepers. Looking forward, we exited the year with a very healthy commercial backlog increase of 44% sequentially and 62% versus the prior year.

Commercial adjusted EBITDA margin was 8.4%, down 60 basis points for the quarter. But for the full year, Commercial adjusted EBITDA margin was 8.2%, which was an increase from 7.9% in the prior year. Going forward, we believe the end markets in the Commercial segment are also strengthening as transportation services continue to be outsourced and legislative replacement cycles continue. And we believe our commercial margins will continue to increase through added scale, a return to sales growth in 2018 and the benefit of actions that we've taken this year. Turning to Slide 10.

Quarterly sales in the Recreation segment grew 5738% for the full year, Partially driven by sales from our acquisitions of Renegade and Midwest, segment sales also benefited from increased unit sales and higher average net selling prices. We ended the year with segment backlog up 80% on a year over year basis and 25% sequentially versus the third quarter. Recreation adjusted EBITDA increased 250% for the fourth quarter and 229% for the full year, primarily related to these higher volumes, but also because of our ongoing procurement initiatives focused on quality, operational improvements and the impact of our acquisitions. Our full year Recreation adjusted EBITDA margin grew three twenty basis points to 5.5% of net sales, up from 2.3% last year. Looking ahead, the end markets for recreation also remained very strong as customer demand across many demographic groups continues to embrace the RV lifestyle.

Overall, confidence remains strong, which also bodes well for the continued growth in the segment. Turning to our balance sheet. Total debt at October 31 was $230,000,000 As a result, we had 186,000,000 available under our ABL revolving credit facility. Capital expenditures were $4,000,000 for the quarter and $54,000,000 for the full year as we made investments in our production plants, equipment, service locations and our IT systems to drive scale and growth. Looking forward, we expect capital expenditures for fiscal twenty eighteen to be consistent with fiscal twenty seventeen at the $50,000,000 level.

Finally, we are forecasting that we will realize improvements in our management of working capital and realize positive free cash flow and net debt reduction in fiscal twenty eighteen before the impact of any future acquisitions. In addition, we have more than adequate liquidity, low leverage and access to external markets that will be the fuel to our growth initiatives in fiscal twenty eighteen and beyond. I'll now turn the call back to Tim.

Speaker 2

Thanks, Dean. Obviously, very exciting times here at REV. I'm usually fairly measured in my self evaluation of our corporate performance. But when I reflect back on our fourth quarter and full year performance in 2017, Quite frankly, I'm amazed at what our team accomplished. Let me give you a few highlights from the quarter and the year.

We began the year executing a very successful IPO in January, pricing at $22 which was $1 above our initially projected range. In October, we completed a highly successful follow on equity offering of 11,500,000.0 shares. Both of those offerings, the IPO and the secondary follow on, were significantly oversubscribed. We achieved 32% increase in adjusted EBITDA on sales of 18% year over year. This was the second year in a row that we achieved such results.

I'm hard pressed to find any industrial company or any company for that matter that achieved that's achieved this level of success in two years back to back. We introduced 17 new products. We acquired four companies, and we became the first ever OEM to be qualified by Ford Motor Company to sell genuine Ford parts. So you look back on the year, and we're just really I'm very proud of the team. The team did an outstanding job.

But we actually completed our high fives seven weeks ago, and we're already well into fiscal two thousand and eight. Let me set the stage for what we see for 2,008 going ahead. First and foremost, we are reiterating today guidance that we presented in October during our follow on, which is net sales of 2,400,000,000.0 to $2,700,000,000 and adjusted EBITDA of 200,000,000 to $220,000,000 for full year fiscal twenty eighteen. This is now three years in a row of revenue growth exceeding 15% and adjusted EBITDA growth exceeding 30%. Again, I know of no other industrial company even close to this type of performance, and this is three years in a row.

I should also clarify that in my entire career, it's always been about making money, which in turn directly impacts shareholder value. Revenue is a nice metric, but there are a lot of different ways to make money other than just growing the top line. You should know that at REV, it's all about making money. Our business segments are reporting, as Dean said, strong demand for our products. Consider our continued economic recovery in The United States and the fact that almost 60% of what we sell in The U.

S. Market is based on federal and local tax revenues, we have a very steady state of demand that just is going to continue to grow as we move through 2018 and beyond. Couple that with the incredible demand in the RV market, and I like our chances a lot as we move into 2018. We are out of the blocks hot in Q1 with new initiatives. We announced that we have entered into a joint venture in China with Cherry Holding Group to manufacture RVs, ambulances and other specialty vehicles for distribution not only within China but also into select international markets.

Cherry is the largest exporter of passenger vehicles in China, serving 80 different countries and 6,500,000 people worldwide. We took two years and a lot of diligence before we chose the partner we wanted to collaborate with in China. And quite frankly, we couldn't be more pleased with our new relationship with Cherry. The initiative, coupled with the establishment of our new plant in Brazil that was opened in May, is a huge step forward in meeting our desires to be a worldwide manufacturer of specialty vehicles. Our Brazil plant, which serves all of Latin America, is already turning a profit after only six months of operation.

It will take significant longer to reach this type of financial performance in China with our China JV, but clearly, demand will be much larger when the China operation is up and running. We introduced our first new product for 2018 at the October at the LA Auto Show in conjunction with Chrysler. We introduced the first ever hybrid wheelchair accessible mobility van. The vehicle successfully completed its required crash testing earlier this week, and we're very excited to get this vehicle into the market beginning in January. So obviously, seven weeks into the New Year, and we're already off to just a really great start.

Very pleased by where we're at in 2008 so far. Before I turn over to questions and answers, I've asked Nicole Gustafson to join us. She's our VP of Tax. Obviously, a lot of interesting breaking news coming out of Washington, D. C.

Overnight. Many of you know that we are effectively today, at least, a domestic centric company, which means that we are paying probably the maximum, not probably, we are paying the highest tax rate probably of any U. S. Company. So I wanted Nicole to give you some really precise numbers as to what that means, assuming that the vote goes through Congress today.

We expect it fully well, may have already been done. But if she could give us some exact numbers as to what that will mean to us as a company in 2018.

Speaker 4

President Trump is expected to sign tax reform into law, which is hugely beneficial to REV Group. Assuming a full year impact of tax reform in fiscal twenty eighteen, we expect a normalized effective tax rate of approximately 28 to 30, a decrease of nearly 10% from our previous rate. We estimate the fiscal twenty eighteen effective tax rate will be in the range of 23% to 25% due to other onetime benefits from tax reform. This will also free up additional working capital each year, estimated at $16,000,000 for 2018.

Speaker 2

Thanks, Nicole. And with that, let's turn it over to questions and answers.

Speaker 0

Thank you. At this time, we'll be conducting a question and answer Our first question is from Mig Dobre with Robert W. Baird. Please state your question.

Speaker 5

Yes. Good morning and happy holidays to everyone.

Speaker 3

Good morning. Good morning Mig.

Speaker 5

My first question is really surrounding guidance. I'm wondering if maybe you can help us refine our assumptions a little bit I'm curious as to how you're thinking of segment level growth versus your 12.5 overall growth guidance and also some color by segment on margin progression.

Speaker 2

Well, I think we're going have more of the same, obviously, in 2018. We had a very strong fire and emergency performance in 'seventeen. That's going to continue. As matter of fact, our fire backlog is significantly higher at this time than it was last year even at this time. I think all other segments, quite frankly, are up, and they're going to be up, obviously, reflecting the type of guidance

Is there any specific segment that you're asking about, Mig?

Speaker 5

Yes. I mean, obviously, businesses all sort of have different end markets and cadence here. I know that in the past, you've talked about Fire and Emergency seeing the highest growth in 2018 and followed by Commercial followed by RV. I'm wondering if that's still your expectation. And then you are guiding for 100 basis points of EBITDA margin expansion.

I don't know if you have a more refined view as to one segment potentially getting more expansion than the others.

Speaker 2

Well, more of the same, as I said. And obviously, we've got couple of segments in there that have not been performing at the level we want them to, commercial being the most obvious one. And we need that to perform better in 'eighteen to really help us get to that guidance number. And you saw the improvement in RV in 'seventeen. We got to see more improvement there as we see in 'eighteen.

So RV and commercial have to pick up the pace, and we got to make sure that fire and emergency continues on the path forward that they've been doing.

Speaker 5

Well, sure, Tim. But I'm wondering what's embedded in your plan as you're looking into the year. Do you have because RV has obviously done better than you expected initially, right? So is that sustainable? Do we build upon this?

And maybe more color on commercial, too.

Speaker 2

Yes, absolutely. I mean the RV recovery that we had in 'seventeen is just going to continue. We've got all these new products that we put out there in September. We've had some good backlog building, and that market has not cooled whatsoever. As matter of fact, I think specifically, the large As tend to be a little soft.

They continue to be a little soft, but we're taking more share, as I mentioned, I think, in our last call. So that's going to continue on its upward movement. We think that a lot of the change that we've made in commercial, we've got some new products out there. I mentioned one here on the call, the new hybrid Chrysler. Those new products plus, I think, better market positioning is going to turn that around.

We've been very discerning on the deals we will take. We'll continue to be discerning, but that doesn't mean we're standing still and not trying to do things to improve the overall cost basis of our product. And we think that will help us get that Commercial segment performing much better than it has the last twelve months.

Speaker 5

All right. Well, I guess I'll let other people follow-up on that. But before I get in the queue, a question on CapEx. If I understood properly, you talked about CapEx still remaining in the $50,000,000 range. This is frankly a little bit higher than what I expected and what I recall at the IPO.

What changed here? And how do we think about your CapEx needs beyond fiscal 'eighteen?

Speaker 2

It's going to be $50,000,000 actually, I thought we guided to that during the IPO that it would be probably about the same for 'eighteen and then probably start drifting off. We're not going to be shy about spending money to make sure sure we're positioning ourselves for growth. It takes money to make money, quite frankly. And we're putting some money into our plants to increase the efficiencies that help get our costs down. We continue to implement our ERP system, and we continue to spend on the parts and service part of our business.

We think that that's an appropriate spend for 'eighteen. It should start coming down after 'eighteen. And I think we really we're not going to be shy. We think we need to be out there spending that kind of money to get the growth that we need.

Speaker 5

Our

Speaker 0

next question is from Jamie Cook with Credit Suisse. This

Speaker 6

is actually Themes on for Jamie. Just a question on going back to commercial a bit. I appreciate that you're being selective there in terms of the opportunities that you're pursuing, but there were some hopes for growth in Q4. So I guess when do you see the sales inflecting materially? And how should we think about production ramping this year given the healthy backlog growth we saw in the quarter?

Speaker 2

Well, we're introducing new products in the first quarter, as I mentioned. And I think those products will start to build some backlog. And as typical, we have a very back end loaded plan. It's going to be the same for 'eighteen. So you'll see some nice ascension in the commercial area in Q2, 'three and 'four as we really get out of the blocks with the new products here in Q1.

Speaker 6

Got it. And then maybe going back to the JV in China, could you maybe provide some more color on the market there? Why you find it attractive? And how should we think about the opportunity there longer term? And you also mentioned some other select markets.

So what geographies are you targeting there specifically?

Speaker 2

Well, that's why I gave the detail on Cherry. The reason we chose Cherry is not only are they a very prominent vehicle manufacturer in the China market, but they are the one exporter of passenger vehicles to 80 different countries around the world. So signing up with them initially with RVs and ambulances and then expanding into the other specialty products that we do make, the biggest demand right now in China, believe it or not, is RVs and ambulance, and that's where they want to start. But it's not just for the China market. We are really putting together a master plan whereby we will be exporting from China into select countries.

Certainly, the 80 countries that they export into now are all candidates for potential export. So it's a two play, if you want to call it that, that we executed with Cherry. That's why we did choose Cherry. It's going to take a while for it to ramp. Nothing is done small in China.

So it's going to take us a while to make effectively built up and running. But we were very careful on picking the partner and making sure that we actually have a dual pronged marketing approach with the partner that we did choose.

Speaker 6

And then lastly, could you give us an update on your aftermarket strategy and where we currently stand in terms of aftermarket as a percentage of total sales?

Speaker 2

Yes. Aftermarket continues. We'll give you the exact number here. But aftermarket, an initiative is growing. We plan to really get it moving at a much better pace here in 'eighteen.

We put a lot of the blocking and tackling in place the last eighteen months, twenty four months really, creating a database, getting a portal in place, getting warehouses up and running. It takes a lot of money and a lot of effort to put that together, and that's pretty much behind us now. So now it's a matter of executing. And we have a pretty aggressive plan in 2018 to grow parts in particular. And that's obviously part of the growth that we're showing in the earnings and the revenue, primarily on the earnings side because it is much more profitable than unit sales.

As far as a percentage of total revenue today, it's about 4%, which obviously is not very meaningful, but stay tuned. This doesn't happen overnight. To break the paradigms, the purchasing paradigms in the market, it takes a lot of blocking and tackling and a lot of grassroots efforts. But those have all started, and we're confident that we're going to be able to pull those off here as we move forward in 'eighteen.

Speaker 6

Our

Speaker 0

next question is from Nicole DeBlase with Deutsche Bank.

Speaker 1

Yeah, thanks. Good morning.

Speaker 7

So my first question is around the commercial business. Just to clarify, was any of the backlog growth that you saw from the LA bus order or does that come into the backlog later?

Speaker 2

No, that's in the backlog.

Speaker 7

And was that did that come in this quarter or last quarter?

Speaker 2

This quarter.

Speaker 7

Okay. Got it. Can you possibly quantify how much of it was LA bus?

Speaker 2

Well, I can tell you, we don't obviously list out specific deals because that allows our competition to back into the numbers. But I can tell you on a macro basis, that order is worth a minimum of $400,000,000 but the order is a split order. So it's half and half. Half of it goes in now and the other half goes in about a year from now. So if you do the math, Jamie, it's or I'm sorry, Sorry about that.

It's about half of that, so you could do the math.

Speaker 7

Okay. Got it, Jim. That's helpful. And then the organic growth within Fire and Emergency is really strong this quarter and even on a pretty tough year on year comp. So just curious the backlog growth did slow a little bit year on year although pretty strong Q on Q.

How do you think about organic growth within the fire and emergency business going into 2018?

Speaker 2

It's actually very strong. Right now, our biggest concern in Fire is being able to get the product out. We're three of our segments or two out of the three segments we've got are already backlogged into the fourth quarter. The other one will likely be backlogged into the fourth quarter here within the next three to four weeks. So our biggest concern on Fire is making sure we can get our capacities up.

The demand has been somewhat flat year over year, but we're doing much better with the product lines that we've got. Emergency, the same thing. Emergency has been a little bit soft with the contractors, and I think maybe some of that is this uncertainty around the ACA and what's going on there. But they can't wait forever, and we actually just got some nice business into our backlog here in the last two weeks from a large ambulance contractor that was kind of a surprise So I think they've been holding back a little bit, waiting to see what's going on in Congress, but they can't wait forever.

So we feel, again, we're going to have a very strong year in Fire and Emergency across the board.

Speaker 7

Okay. And then I'll just squeeze one more in before I pass it on. Recreation margins were also really strong this quarter. I know that you guys listed all of the factors behind that in the press release and you talked about it on the call. But will those factors continue into 2018 driving a similar magnitude of margin expansion into next year?

Speaker 2

Yes. I think we're starting to feel really good about how we really restructure ourselves down Decatur, in particular. Recall that we had everything in one plant. Now we've got three plants up and running in Decatur. That's really loosened up and allowed the products to flow.

The team down on the ground there has really built some nice efficiencies, those continue to get better and better every month. So strong market. We're taking share on the high end. And I just think the manufacturing efficiencies are going to continue through 2018.

Speaker 0

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

Speaker 5

Hi, good morning.

Speaker 2

Much of commercial is these shuttle buses these days roughly? Onethree of it. So about 35% of commercial is shuttle. Okay. And is that shuttle do you expect, Tim, those shuttle buses to be up in 'eighteen?

Or are we going to continue to kind of wean off the less profitable deals? Well, we're as I mentioned just a minute ago, we're not sitting still. We don't like the fact that we're not as competitive as we want to be. So I think you should see a much better movement in shuttle bus this year. We will be in the marketplace, and we will be competing.

I think some of what we're doing to make ourselves more competitive will start to show itself towards the back half of the year. Okay. And just given I assume the backlog that you do have is more profitable since that's what you've been focusing on. Is it reasonable to expect that this segment, the commercial segment will have maybe the strongest margin growth in 2018? It's it's going to be good, but I don't think it's going be necessarily the strongest just because of the momentum we've got built up in RV.

I think RV is going to probably continue to be the strongest, and Fire and Emergency keeps moving along as well. It's going to be good. It's going to be better than what we have, but it's not going to be the strongest. I mean we just got too much momentum built up in those other two segments.

Speaker 0

Our next question is from Charlie Brady with SunTrust. Please state your question.

Speaker 8

Hi, thanks. Good morning. Hey, Tim, I hate to keep beating a dead horse on commercial, but I just want to make sure I'm squared up on this. With the LA County order, that business does not hit until 2019. Is that correct?

Speaker 2

That's correct. We'll be shipping next year at this time.

Speaker 8

So I guess if I do the math that you talked about with Nicole, it looks and I backed out of backlog, but the backlog is down pretty meaningfully in commercial. And I'm just trying to understand, maybe there's a cadence or a lag time order time when that's going to pick up. But I guess I'm just trying to square it up with kind of what expected growth you could see in commercial given that the LA stuff is not going to hit really in 2018 at all. And the base backlog ex that is down year on year.

Speaker 2

Yes. No, you're doing the math correctly. And again, the basket that we do have in commercial has got a lot of products into it. You got school bus in there, you have terminal trucks, You have sweepers. You have mobility vans.

You have shuttle bus and you got the terminal or I'm sorry, the transit buses as well. So there's a lot of moving parts in that backlog. But all the other backlogs, it's they're kind of seasonal in nature, particularly school bus. I mean school bus right now, I mean anyone that's got school buses, it's not you got almost no backlog. It's very, very low.

And that's kind of the time of thing that you've got here too on shuttle. About 60% of shuttle buses are federally funded on FTA contracts. And those dollars kind of flow at different times of the year as well. So you got the math right. This time of year for all non type of transit buses, that type of thing, unless you've got a big backlog in one of those, like L.

The backlogs tend to be kind of low this time of year.

Speaker 8

Okay. So we shouldn't really I guess what I'm trying to get to is we don't want to read into an organic backlog number in Q4 and carry that on through what we may expect in 2018 because it's obviously being skewed by timing and seasonality here and obviously some of the shorter lead time in some of the products and the pickup on new stuff, correct?

Speaker 2

You got it exactly right. Don't push the panic button.

Speaker 8

Got it. And just one more. On the Fire side, expect your comment about ability to ramp up production to meet demand. Can you just expand on that a little bit? What are you doing to get that ramp up to meet that high demand?

Speaker 2

Well, it's challenging. I think you look at our plants, we're doing everything we can to the point where we're trying to add people on to a second shift. Labor is always an issue in manufacturing, and we're challenged there to some extent. But we're working at we're looking at different alternatives to maybe unload certain areas of the plant, do some things a little bit different in different areas where we've got other capacity. We're really managing well because, as you know, there's a lot of pent up demand in fire.

And we don't like our backlogs out that far. When we're running backlogs out to August, September, that's not healthy, and they got to be less than that. So we're working it every way we can, working some second shift. If we can, we get the people or offloading some of the processes to plants that have capacity.

Speaker 0

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

Speaker 9

Thank you. I just wanted to ask you about all this international business you were talking about with China, etcetera. Just how big do you think the international revenue can be as, say, a percentage of your total revenue in, five years? And just as a little bit of background on those markets, I mean, it just as fragmented as the markets that you compete in, in The U. S, where you're going to be the big OEM competing against a number of small ones?

Speaker 2

Yes. This is it's a great question. I'd like to tell you it's going to be equal, but that's a big number, right? But it's a big world out there. And we've done a lot of research into it.

We're dedicated to that market, but we're attacking it in a different way. For an example, we get people all the time trying to take have us take a look at Europe. We have zero interest in the European market, zero. It's very much like our market here. It's very convoluted.

It's not been consolidated, and you'd have to buy a lot of different companies to make it work. But we like a lot of the rest of

Speaker 9

the world

Speaker 2

and getting teed up done in Latin America and moving that, and that's moving very quickly. We like our presence there. We felt like we needed to be on the ground there, and that is growing very quickly. The China initiative will be much, much larger than even Latin America. It's just going to take some time to get that traction.

But keep in mind, it's a two pronged strategy. It's a strategy to enter the China market, but it's also using that type of manufacturing base to attack a lot of different countries that aren't even on most people's radar screens today. So we expect it to be meaningful. A lot of us on the management team here have a lot of experience internationally, and we're very comfortable with it. We just wanted to make sure we put the right strategy together.

And I can tell you both strategies that we've embarked on are going to reap some very strong benefits. So I don't know, ask me a year from now, and I'll have a better idea of what it may look like. But in five years, it could easily be equal to what we're doing now, easily.

Speaker 9

Great. Very encouraging. Just wanted to also ask you just where you stand on consolidating the purchasing, the procurement sort of across the enterprise. If you can give us some sense of how far you are along in that process.

Speaker 2

Nicely along. I said it's all about making money, right? And if you're growing your top line by 15% or 18%, your bottom line by 30%, it's got to be having a meaningful impact on the bottom line of our company. It is. Our sourcing team is doing a great job.

We are well into having that working along at a very nice pace. The nice thing about that, too, is if you look at when we pick up four companies, we can load those under the REV umbrella and start getting synergies almost immediately with the sourcing that we do. It's the first thing that we do. And the team is very good. And I think we've got some good arrangements out there, and we're reaping the benefits of those, and that's where our bottom line is growing the way it is as well.

Speaker 0

Our next question is from Courtney Yakinovas with Morgan Stanley. Please state your question. Courtney, please state your question.

Speaker 10

Sorry, I think I was on mute. I just wanted to go back to the partnership with Cherry. I think in the press release, you had said that we can expect to see some of the first production of the vehicles in the second half of next year. And appreciating that it's going to be a much larger initiative that will take some time, but how much are you guys expecting in your 2018 guidance right now?

Speaker 2

Almost nothing. With it's going to be a very cautious and slow ramp up. It's going to be more of a 'nineteen and beyond story. It takes a while to get things up and running in China. And as I mentioned, in China, it's kind of like Texas.

Everything is big. So it's going to take us a while. So very little to nothing in 2018.

Speaker 10

Okay, got you. And then just on the RV side, can you just give us a breakdown of your mix on Class A versus C in 4Q and then kind of what your projections are for next year with some of the new products that you're rolling out?

Speaker 2

Yes. As are about 75% of our sales. And as you know, I think we compete mostly in the mid and high end range. The mid range has been very active. The high end has been a little soft.

But about 75% are As. So that remained so 25%, and that's split right now pretty evenly Cs and Bs. As you know, the Cs and Bs are very active. Our challenge on Bs and Cs is our backlogs are too big there, too. We're trying to work as fast as we can to work down those backlogs.

And we're spending some money to ramp up our manufacturing capability, particularly on bees. The bees have had incredible, I think, acceptance in the marketplace.

Speaker 0

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

Speaker 11

I wonder if you can give us some idea, maybe even five years out, like what kind of targeted EBITDA margins can we expect across the different divisions? Can you give us a little sense of that, like what the target is longer term?

Speaker 2

Yes. I think people will think I've got rocks in my head. But if you think back, Joel, when we got to in my prior life, when we got to 10% to 15% margins, we said now we're going to 20%. We can get to 20% in five years. And we need, though, meaningful after market contribution to get to that type of EBITDA margins.

And that's how you do it. I mean we will continue to get good at building product, and we will get above 10% EBITDA margins. And when we get there, our next target will be 20%. But we can't get to 20% until we get some real good meaningful traction in the aftermarket area. And as you know, we're spending a lot of money there because I believe in it, and I think we can do it.

Speaker 11

So aftermarket needs to be, what, like 15% of the mix? Is that what you're thinking?

Speaker 2

Yes. Yes. If not more. I mean it could be if you look at the total universe that we get out there, we don't even talk about service, but we know we have $800,000,000 worth of parts purchased for our vehicles every year. Dollars 300,000,000 of that is chassis parts.

It's really being able to break the purchasing paradigm. And people say, well, that's hard to do. It is hard to do. It's not easy. But parts is pretty basic.

You get parts at people's fingertips at reasonable prices and you service them really, really well. You can break the paradigms, though, and they'll buy it from you. Plus, we also have the other advantage of working through dealers and telling the dealer that they need to be buying their parts from us, which so there's some leverage there. But it could be as high as 15% to 20% of revenue.

Speaker 11

And then just a clarification and then one more question after that. I didn't know if you gave us a free cash flow guide for 2018. And also, I just want to make sure that your guidance doesn't it doesn't yet include the whatever we get on tax reform.

Speaker 2

Yes, we haven't yet. We'll give you something here.

Speaker 3

Yes. As I said in my remarks, we're forecasting positive free cash flow even with the levels of CapEx we disclosed. We're forecasting before tax reform to be in the $40,000,000 positive free cash flow range. So Nicole gave you some numbers regarding cash taxes, which I think she quoted $15,000,000 benefit next year. That's what we're targeting.

Speaker 0

Our next question is a follow-up question from Mig Dobre with Robert W. Baird. Please state your question.

Speaker 5

Yes. Just a couple of clarification. Thanks for taking them. First is on the D and A guidance. You guided last quarter for $34,500,000 you came out to 37,800,000.0 I'm wondering what the variance was here in just one quarter.

And related to this, when I'm looking at next year's guidance, when I'm looking at fiscal 'eighteen, dollars 40,000,000 to $43,000,000 can you break out the amortization component out of that because that's what gets added back into adjusted EPS?

Speaker 3

Yes. Two things. One is as we complete our acquisitions, particularly the ones that we made in the middle of the year, Ferrara and Midwest, we settled in on what the intangible assets are related to those acquisitions. You never know what those are going to settle in on because there's third party valuations that are done. But the story for the increase in D and A is really amortization related to intangibles that we acquired as we've closed out the year and recorded those purchase accounting adjustments, so to speak, or balance sheets.

Going forecasting from an amortization perspective about 4,000,000 a quarter for amortization expense.

Speaker 5

Okay. That's helpful. And then lastly, back to Fire and Emergency, you talked about the business being flattish. But I guess, when I'm looking at your implied orders, I'm sort of drawing a different conclusion. Correct me if I'm wrong, but it looks to me like your implied orders were up 31% year over year in the fourth quarter.

Some of that was acquisitions, but even back in the acquisitions out, it seems like your orders here were up on a core basis, something like 15%. So correct me if these stats are wrong, but it looks to me like order growth here has been quite good, right?

Speaker 2

Yes. We don't the industry has been a little bit flat year over year, Mig, but we are taking share. We don't like to advertise that fact, but we're taking share.

Speaker 5

Okay. Thank you.

Speaker 0

I would like to turn the conference back over to Tim Sullivan for closing remarks.

Speaker 2

Thanks, everybody, for joining us today. I can only reiterate how pleased we are with the 2017 performance. When I think back, I've been here for three years. And when I joined three years ago to manage the assets that have been pulled together, the 14 different assets that have been pulled together by our PE sponsor and put under the umbrella at that time called ASV, we made $50,000,000 the year I came in. And to see where we're at today, after being REV for only two years, that's it's very encouraging.

It's very encouraging for us as a management team to see the fruits of our labor, I guess, as we go forward. So great 'seventeen, looking forward to another really strong 'eighteen. And I think, obviously, beyond that, as we start to see some of these new initiatives take hold in the marketplace. All of you should have received, and this is investors and analysts, all of should have received an invitation from Sandy about our upcoming Investor Day in Orlando, Florida on January 16. I think you should really make an effort to be there.

It's something that will I think you will not be disappointed. We'll have over 50 of our products on display. Every single thing we make and probably a couple of everything we make will be on display down there. We have over 1,000 dealers and customers signed up to attend. We will have a section, obviously, or a session with all of you to allow you to take a deeper dive with us into our overall strategy, give you a lot more color around some of our initiatives and some of our product offerings.

We'll have some of our new products from the commercial segment there. We'll have some of our sneak preview of our 2019 RVs. It's

Speaker 5

going to

Speaker 2

be an annual event that we're going to do. And if you can get there, I think it's a good thing, January 16. Also, if you can get there the night before, we're having an event at the House of Blues with Chicago, entertaining our 1,000 customers and dealers. We'd love to have you participate in an informal atmosphere with us and our customers as well. So mark your calendars if you can.

I think it will be well worth your while. So let me close. Merry Christmas, Happy Hanukkah, Happy Kwanzaa, Happy Festivus, Happy New Year. See you guys in January or we'll be on the call again in March.

Speaker 0

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