REV Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
September 13, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to REV Group Third Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Drew Conop, Vice President, Investor Relations. Thank you.

Operator

You may begin.

Speaker 1

Good morning and thanks for joining us on today's call. Earlier today, we issued our Q3 and answer session will be recorded in the press release. 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 available on our website.

Speaker 1

Please refer now to Slide 2 of that presentation. Our remarks and answers will include forward looking statements, which are subject to risks that could cause actual results to differ from those expressed or implied by such forward looking statements. These risks include, among others, matters that we've described in our

Speaker 2

and answer session will be filed with

Speaker 1

the SEC earlier today and other filings that we make with the SEC. We disclaim any obligation to update these forward looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All references on the call today to a quarter or a year are our and answer

Speaker 2

session will be recorded

Speaker 1

for fiscal quarter or fiscal year unless otherwise stated. Joining me on the call today is our President and CEO, Mark Skenechne, please turn to Slide 3 and I'll turn the call over to Mark.

Speaker 2

Thank you, Drew and good morning to everyone joining us on today's call. Today, we will be discussing our Q3 performance that continues to reflect top and bottom line improvements compared to the prior year. I am very pleased with the progress we are making to advance the initiatives we laid out in prior quarters to increase throughput at several locations across the enterprise, particularly within the F and E segment. As you may recall, these detailed initiatives are focused on resource planning, both internal and external, Improving upfront process capabilities across sales, engineering, purchasing and material management teams and optimizing factory and production line configurations. Shortly, I will provide an overview of our consolidated 3rd quarter performance as well as detailed segment financials.

Speaker 2

Before I comment on the quarterly results, I would like to highlight some notable items that occurred within the quarter. 1st, demand for our products remains strong with consolidated backlog up 5% from the prior year to $4,100,000,000 The resiliency of the company's consolidated backlog is primarily a result of strong order intake within the Fire and Emergency segment, Which ended the Q3 with its 11th consecutive quarter of record backlog as well as strong orders for school buses over the past year within the commercial segment. Municipal budgets remain strong with the backing of multi year federal stimulus programs, plus local funds aimed at modernizing public service vehicle fleets. A total of 5 businesses within the Fire and Emergency segment and our Type A School Bus business set records for order revenue within the quarter. We believe this reflects the quality of our vehicles, strength of our brands and breadth of the dealer network across our portfolio.

Speaker 2

The stability of municipal based backlog provides long term visibility for sourcing strategies and production planning as well as Our platforming and operational improvement roadmaps. Industry leadership, Fox innovation and a continued focus and answer session are among the reasons we hold top positions in the markets we serve. Within the quarter, Horton Emergency Vehicles delivered its first ambulance equipped with The Horton occupant protection system featuring Embrace to New Orleans EMS. This advanced airbag safety and answer session is designed specifically to protect emergency care providers against head and neck injuries during frontal impacts and rollover situations while they are inside the patient compartment. Enbrace integrates an airbag into an innovative multi point restraint that protects emergency care providers while allowing them mobility and freedom to work is an important milestone for the an example of our company's commitment to deliver solutions that provide safety enhancements to our nation's first responders.

Speaker 2

Within the quarter, we converted earnings to cash with free cash flow conversion at 2 68 percent of adjusted net income. Quarterly net income was a 2 year high and trade working capital decreased by $51,000,000 sequentially. Year to date free cash flow conversion reached 110 percent of adjusted net income. We believe there is opportunity to continue to reduce our trade working capital over the next several quarters. Despite the overall solid working capital performance in the quarter, consolidated inventory is $45,000,000 higher than prior year, which includes $50,000,000 of additional chassis.

Speaker 2

In previous calls, I stated that we would be willing to accept delivery and put more chassis on the balance A key lever to the F and E and Commercial segment revenue growth year to date. Exiting the Q3, our chassis inventory not only 4th quarter production, but in many cases production into and through the Q1 of next fiscal year. As we exit the year, we will continue efforts We are pleased with the momentum we are building with our productivity and product simplification initiatives. Within the quarter, several of our businesses saw improvement in their throughput rates resulting in increased starts and completions. With increased product completions, these locations are experiencing improved price realization as they work through their older backlog and produce higher priced units that resulted from the price increases that were enacted over the past 18 months.

Speaker 2

Increased throughput, coupled with other operational improvements resulted in bottom line momentum within the F and E segment and helped 2 of 3 businesses within the Commercial segment to exceed our 2023 profitability targets provided at the 2021 Investor Day. Within the Recreation segment, Backlog and shipments from our 2 most profitable businesses provided path to deliver on our fiscal 2023 margin guidance provided last December. As a result, we have raised the consolidated midpoint of guidance for net sales by 3% and adjusted EBITDA by 10% for fiscal year 2023. Now turning to our Q3 results on Slide 4. Consolidated net sales of $680,000,000 increased $85,000,000 or Partially offset by lower sales in the Recreation segment.

Speaker 2

F and E segment sales reflect a 34% increase in Fire Group sales and a 51% increase in ambulance group sales. The fire group increase was primarily a result of higher unit shipments, Which benefited from an improved supply chain, price realization and early success of productivity initiatives aimed at increasing throughput. Unit shipments of fire apparatus increased 30% from the prior year, reaching a 2.5 year high. Increased ambulance group sales were related to higher unit shipments as well as price realization from early rounds of increases enacted throughout fiscal 2021 2022. Ambulance shipments increased 42% versus last year's trough that was impacted by supply chain and chassis constraints.

Speaker 2

Record commercial segment sales continue to benefit from higher shipments of school buses and terminal trucks and price realizations. Due to the relatively short backlogs entering 2022, these two businesses have been the first Some non motorized categories and an unfavorable mix of lower priced gas units within the Class A business. Consolidated adjusted EBITDA of $39,400,000 increased $9,900,000 or 34% versus last comes from the Q4 of 2019 with increased contribution from the Fire and Emergency and Commercial segments, partially offset by lower contribution from the Recreation segment. Higher contribution from the F and E segments includes improved results in both the fire and ambulance group. Commercial segment EBITDA benefited from improved profitability in the School Bus and Specialty Businesses, partially offset by a decline in municipal transit business.

Speaker 2

The lower recreation contribution was primarily related to fewer shipments and increased discounting within certain categories. Please turn to Page 5 of the slide deck as I move to a review of our Q3 segment results. Fire and Emergency 3rd quarter segment sales were 3 $23,000,000 an increase of 40% compared to the prior year. The increase in net sales was primarily Due to increased shipments of fire apparatus and ambulance units, a favorable mix of higher content ambulance units and price realization. Fire group throughput increased sequentially and year over year to reach a 2 year high in net sales.

Speaker 2

All fire businesses contributed with 3rd quarter shipments mark a fiscal year to date high. The Holden plant which received the majority of KME brand production after its footprint was rationalized Shipments of ambulance reached an 11 quarter high, Resulting in the group's highest quarterly sales over the past 6 years. All ambulance businesses increased throughput sequentially and year over year as improved material availability provided confidence to higher labor and ramp production throughout the year to date period. Success of productivity initiatives resulted in sequential unit shipment increases of 20% 12% at our 2 largest plants. F and E segment adjusted EBITDA was $18,100,000 in Q3 of 2023 compared to adjusted EBITDA of $1,000,000 in Q3 and answer session.

Speaker 2

Higher Group profitability improved 430 basis points versus the prior year and 320 basis points sequentially. Improved profitability was primarily due to higher sales volume, manufacturing efficiencies and improved price realization at several plants. Profitability that our largest fire apparatus plant reached a 2 year high and our primary chassis plant reached a 3 year high. The Holden plant has Continue to advance the integration of the KME branded product into its production cadence. Although these KME units are lower margin given the slow ramp Inflationary headwinds experienced since the move, improved starts and a more continuous workflow over the past few quarters has produced increased completions of these units And accelerated the plant's opportunity for improved sales and margin in the 4th quarter and beyond.

Speaker 2

Ambulance Group profitability improved 6 70 basis points compared to last year with the largest plant reaching a and answer session will be on a 5 year high and adjusted EBITDA margin and dollars. Year to date, 2 of the group's 4 businesses have reached 2020 margin target provided at the 2021 Investor Day. There has been significant progress in the other two businesses as well With year to date margin improvement of 3 70 and 500 basis points compared to the same period last year. This momentum positions the group well to achieve our intermediate margin target goal set forth at the 2021 Investor Day. Record F and E backlog of $3,200,000,000 increased 49% year over year reflecting strong orders and pricing actions.

Speaker 2

Industry demand remains above historical trends with a unit year to date book to bill ratio of 1.4x. Our lead times remain industry and our pricing strategy will continue to consider current and anticipated inflation that aligns with expected delivery dates. Today's update to the full year outlook anticipates maintaining F and E segment's 3rd quarter revenue run rate with approximately 50 to 75 basis points of Margin improvement as we continue to execute on our rev drive operational excellence initiatives and produce more current priced units. Turning to slide 6, commercial segment sales of $143,000,000 was an increase of 29% and price realization partially offset by an unfavorable mix and supply chain challenges in the municipal transit bus business. Within that business, we continue to experience shortages of key components such as seats and wiring harnesses that are creating manufacturing inefficiencies and limiting shipments of complete units.

Speaker 2

Commercial segment adjusted EBITDA of $11,600,000 increased 71% versus the prior year. The increase in EBITDA was primarily a result of higher Commercial segment backlog was $508,000,000 at the end of the 3rd quarter, a decrease of 4% versus the prior year. The decrease in backlog is primarily a result of higher completion rates of school buses, terminal trucks and street sweepers And lower orders for terminal trucks and street sweepers, partially offset by record orders for school buses in the 3rd quarter. Unit backlog for terminal trucks and street sweepers have normalized in the 3 to 4 month range at current production rates and municipal transit has normalized 12 months, while school bus backlog remains higher than the historical trend. In the Q4, we expect segment Commercial segment revenue and adjusted EBITDA margin to be similar to the past 2 quarters.

Speaker 2

Turning to Slide 7, Recreation segment sales of $215,000,000 was down 16% versus last year's quarter. Lower sales were primarily a result of fewer Class A, Class B Towable and Camper units and unfavorable mix of Class A gas units, which carry a lower average selling price and increased discounts in certain categories. Partially offsetting the decrease were higher sales of Class C units and price realization. Recreation segment adjusted EBITDA of $18,400,000 was a decrease of 38% versus the prior year. The decrease was primarily a result of lower shipments and unfavorable mix of Class A gas units and increased discounting certain categories, Partially offset by price realization and material savings.

Speaker 2

Segment backlog of $409,000,000 decreased 67% versus the prior year. The decrease is primarily due to continued production against backlog and order cancellations primarily in the towable, camper and Class The overall segment net book to bill ratio, including our order cancellations, was 0.6 times within the quarter. However, over 90% of 3rd quarter unit sales were replaced with orders for new model year 2024 units. Sequentially, new model year orders increased 13%

Speaker 3

compared to

Speaker 2

the Q2. Exiting the 3rd quarter, our motorized business represented over 90% of year to date segment profit and the backlog in those categories remains in a normalized range of 6 to 8 months. Today's updated guidance lowers the outlook for full year Recreation segment revenue and as a result of adjusted EBITDA dollars reflect soft consumer demand and cautious dealer stocking activity, primarily in the Towable, Camper and Class A categories. We now expect full year segment revenue to be down mid single digit versus last year's record performance. This was a slight decrease from the prior outlook of is flat to down low single digits and reflects lower production rates that are aligned with lower order rates in the categories I just mentioned.

Speaker 2

Adjusted EBITDA margin is still expected to be in the high single digit to 10% range as we work to claw back material cost increases, reflects cost to reflect lower sales activity in the categories mentioned and our expectation that Class B and Class C categories will continue to perform at a high level as they produce against backlog. Turning to Slide 8, Year to date, cash from operating activities totaled $73,400,000 which reflects a strong third quarter performance. Trade working capital on July 31, 2023 was $313,000,000 a decrease of $34,000,000 compared to 340 $7,800,000 at the end of fiscal 2022 and a $50,000,000 reduction sequentially. We spent $9,100,000 in capital expenditures, and answer session. Year to date free cash flow of $53,700,000 Net debt as of July 31 was $168,000,000 Including $11,000,000 of cash on hand, a reduction of $53,000,000 compared to the 2nd quarter.

Speaker 2

We declared a quarterly

Speaker 3

and answer session will be recorded.

Speaker 2

A cash dividend of $0.05 per share payable October 13 to our shareholders of record on September 29. At the end of the quarter, the company maintained the ample liquidity with approximately $356,000,000 available under the ABL revolving credit facility And our net debt to EBITDA leverage ratio is 1.2 times, below our stated target range of 2 to 2.5 times. Debt reduction and internal investments to drive organic growth remain our top allocation priorities within today's rising $2,600,000,000 an increase of $75,000,000 at the midpoint. The range of adjusted EBITDA has been raised to $135,000,000 to 145 $1,000,000 an increase of $12,500,000 at the midpoint. Guidance for adjusted net income is now in the range of $3,000,000 to $73,000,000 and we raise expected cash conversion to 100% or greater with free cash flow in the range of $70,000,000 to 75,000,000 Thank you again for joining us on today's call.

Speaker 2

Operator, we would now like to open up the call for questions.

Operator

Our first question comes from Jerry Revich with Goldman Sachs. Please proceed with your question.

Speaker 4

Hi, good morning, everyone. This is Jatin Khanna on behalf of Jerry Revich. Excellent Fire and Emergency bookings, How much higher would you estimate the booked margins are compared to what flowed through the 5.6% margins this quarter?

Speaker 1

So the book margins, is that the question?

Speaker 4

Right. Just an estimate of the book margins and how much higher are they compared to what flowed through the quarter?

Speaker 1

Yes. So I think we've over the last several quarters talked about the price increases we put in over the past 18 months and within the Fire and Emergency segment. There's a little bit of difference between the ambulance in fire businesses, but on ambulance, we've said it's if you compound them, it's about 40 And 35 on the fire side. So obviously that's accretive to the margin profile for the orders that are coming in.

Speaker 2

In that sense, the implementation date of 2 years ago, right, that we've talked about over the last 18 months or so. So there are some obviously, the mix is a little different than So we quote price realization. So that's the realization that we would get over the life of that backlog from start 0 to the

Operator

Our next question is from Mike Schlosky with D. A. Davidson. Please proceed with your question.

Speaker 5

Good morning and thanks for taking my question. Maybe wanted to ask first about Chesapeake Supply going forward. There have been some cutbacks in, call it, Class V, Class IV through 6 maybe, chassis over the last couple of quarters. It doesn't seem there's going to be much improvement ahead from what I've gathered so far. I'd just be curious to tell us how you feel about your business to test supply, Particularly on the ambulance side over the next couple of quarters here.

Speaker 2

Yes, Mike. Like we said, we feel real good about our testing Like in my prepared remarks, I did quote, we have test supply through Q4 and then on the ambulance side, There is obviously a mix difference between vans and mods. But looking out through Q1 at our current production rates, we would be with our chassis supply through Q1 and in some cases beyond that. So, we feel real good on the ambulance side of having chassis availability. The mix might be the only challenge from that perspective.

Speaker 2

But overall, we feel good that we have at least physical chassis on the ground through Q1 of next year.

Speaker 5

Yes. Just to kind of follow-up on that answer. So when you say you've got chassis supply, you have physical chassis on the on-site. I'm kind of curious why you've got a plan in place with if there to be any major labor disruptions with some of the contracts at the automakers out there, which Do build some of the commercial chassis too. Just curious if you have to have any kind of plan in place or if you do have one?

Speaker 5

Yes. So I would say

Speaker 2

Yes. Mike, I would say the biggest impact is like I quoted there is the mix, right? So we have physical chassis On hand and our production schedule obviously goes out a few months. So we are already looking at what units we have produced against. If there were a strike Our contracted supply of some sort, we just might have a different mix that we would have to then change our production schedule.

Speaker 2

But given It might come up here in the next week or so. We'll be able to revert to a different schedule based on what ultimately happens there. So, it's really a mixed discussion and making sure that we can change our production plans to meet what chassis we do have on hand.

Speaker 5

Okay. And I just wanted to ask about Recreation real quick as well. This marked the Q1 below 10% same time margins in quite some time. Even with all the seasonal ups and downs, you had a pretty good margin run here. You're now below 10% as of this quarter.

Speaker 5

I know there are some ups and downs, seasonally. I'd be curious as you feel like maybe over a 12 month period, whether it's the next 12 months or a near term 12 month period, whether you could hold the line on the double digit margin. And I'm curious, and particularly whether you've got so many new year orders, such solid orders for the new year models, But you've got good pricing there to get these enough margins?

Speaker 2

Yes, I think so. Again, we're not going to give 24 guidance We have always said that we feel comfortable we are going to be in that 8% to 10% which is our range and I think what we in the call there. We are seeing some momentum in the new orders that we are seeing in 2024s. We did have less 22 and 23 units and our competition on the dealer lots, as we have talked about previously, we didn't get ahead of ourselves in the last 2 years, we actually produced at a relative modest level. So, we don't have a lot of aged units out on our dealer lots.

Speaker 2

So we have seen A nice take rate on the 24s, as I said in my prepared remarks. And again, the next couple of weeks Are going to be key for the recreation to see what the market is going to do at the Hershey show this week and then open house in 2 weeks in Elkhart. We'll see what the consumer demand is and then also with our dealers in the open house in a couple of weeks. So, we'll be able to see what The order appetite is going to be going forward coming out of the performance of those two shows.

Speaker 5

Okay. Exciting. I'll pass it along. Thanks so much.

Speaker 1

All right.

Operator

Our next question is from Mig Dobre with Baird. Please proceed with your question.

Speaker 3

Yes. Thank you. Good morning, guys, and congrats on the quarter. Maybe to follow-up on Michael there With Recreation, just a point of clarification here. I heard you, I think, in your prepared remarks say that 90% of sales were replaced with new orders in the quarter.

Speaker 3

I guess by my math that would imply $193,000,000 Of orders that you've received in Recreation, so the GAAP would be, call it, give or take $60,000,000 relative to the bookings you reported. So is that all cancellations that still happened this quarter? Yes. Okay. Then, when we're looking at the backlog that you have here, the 409,000,000 do you anticipate any need for additional cancellations because it seems like all of that is coming from Towables and such.

Speaker 3

What is that backlog mix at this point? And should we start to think that orders start to normalize here relative to current levels of demand going forward?

Speaker 2

Yes. They will and you're exactly right, Mig. The towables has hit the trough here and it's actually lower than historical norms. So it's a very shortened. So that backlog has been exhausted from a Towables perspective and when you look at our other businesses, we still have normalized and in our Class B and C, we still have an extended backlog from a historical trend there.

Speaker 2

So, It is we would expect as these shows or as orders or as Demand picks up. That was the backlog. I think most of the cancellations have flushed through the backlog now, especially with the 'twenty three and 'twenty two orders obviously. So it's more around just the new products we have in 2024.

Speaker 3

So going back to that math, the $193,000,000 you would say that that order intake is actually pretty reflective of demand and that as we're thinking about your production maybe into 2024, we should be thinking of ranging it around that level. Is that kind of the right takeaway here?

Speaker 2

No, I think on the motorized, it's reflective motorized. I think there is going to be, again, I would say that towables is at a trough right now. So we would see some pickup on the towable side. But again, we don't have a lot of exposure, as you know, on the towable side. So it's not going to Swing significantly from a backlog revenue dollars, but would on the units perspective.

Speaker 2

So Again, our backlog has almost been fully exhausted in Towables with probably a flat sort of backlog there. So, I would expect that to normalize back to maybe 2 to 3 month basis as we've seen historically.

Speaker 3

And I'm sorry, last question on this segment. In terms of production in the Q4 for Towables, where are you relative to sort of end market demand? I mean, are we to infer here that your production Has been drastically curtailed as well close to 0 in Towables in the Q4 or not?

Speaker 2

Not 0. It's about a 1 month backlog. So, again, it's somewhere in the 80 to 120 units a month there. So down 50%, similar to the market, right, as we've traditionally done in the 200 type range, 150 to 200, so.

Speaker 3

Okay. Okay. Then I have a couple more questions on Fire and Emergency. And I guess the first one, I appreciate all the details in terms of the moving parts within that segment. But just for clarification, which portions of Business are still operating at suboptimal level relative to sort of your longer term plans.

Speaker 3

So where do we still need to see recovery and how much visibility do you have in terms of a timeline here for where you expect full normalization?

Speaker 2

Yes. We are still working through that, Mig. It's really on a plant by plant basis and the new management team we have put in there with the President and COO is really Reflective and why we want to give that level of detail just to show that we are the President and the COO are addressing these Location by location and we have localized plans as we've talked about before. So there is work to do. Obviously, we're not there.

Speaker 2

Our extra rate doesn't imply that we're We're going to be at that target. So there's probably half of the businesses still have some work to do to get us to that full Range that we're talking about 7% to 8% in the mid term here. And then obviously long term, we feel real good with the momentum we've built And the price realization and the margin expansion that we'll see in Q4 and then as the aged units exit the backlog with the new pricing we put in, That will see margin expansion with that throughput increase.

Speaker 3

Right. When we're looking at the backlog itself, dollars 3,200,000,000 can you help us understand how much of that is deliverable In fiscal 'twenty four and I guess related to your earlier comments about higher pricing flowing through now, why shouldn't we think about your exit run rate from Q4 margin as kind of the anchor for fiscal 'twenty four margin altogether? Thank you.

Speaker 2

Yes, I think that's right. That is the anchor going forward. So we will see momentum Coming off of that, I would say on the buildable part of 2024, we're still working through obviously our plan for next year. So I don't give the guidance there. We are working to also increase throughput there.

Speaker 2

So actually in Q4, we'll get a better sense on what we're going from a throughput as well as a ramp perspective. We still have ramp opportunities in majority of our businesses to get back to either historical highs. We are seeing labor, more quality labor come in as well as have implemented gainshare programs that have been effective in increasing throughput here. So we continue to pull some levers to increase throughput. So I would hold off to say what's ultimately going to be buildable in 2024.

Operator

Turn the call back over to Mark Czonecki for closing comments.

Speaker 2

Thank you, operator. Again, I would like to thank everyone Again for joining us on today's call. As I said in my prepared remarks, we are encouraged by the progress demonstrated over the past several quarters And we will continue to execute localized plans to improve upon this performance as we exit fiscal 2023 and into the next year. I look forward to providing an update in December. Thank you again.

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