REV Group, Inc. (NYSE:REVG) Q1 2023 Earnings Call Transcript

REV Group, Inc. (NYSE:REVG) Q1 2023 Earnings Call Transcript March 8, 2023

Operator: Greetings and welcome to the REV Group, Inc. First Quarter 2023 Earnings Conference Call. . It is now my pleasure to introduce your host, Drew Konop, VP, Investor Relations. Thank you. You may begin.

Drew Konop: Good morning and thanks for joining us. Earlier today, we issued our first quarter fiscal 2023 results. A copy of the release is available on our website at investors.revgroup.com. Today’s call is being webcast and the slide presentation which includes a reconciliation of non-GAAP to GAAP financial measures, is available on our website. 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 Form 8-K filed with the SEC earlier today 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 year or our fiscal quarter or fiscal year, unless otherwise noted. Joining me on the call today is our CFO and Interim President and CEO, Mark Skonieczny. Please turn now to Slide 3 and I’ll turn the call over to Mark.

Mark Skonieczny: Thank you, Drew and good morning to everyone joining us on today’s call. This morning, I will provide an overview of our consolidated first quarter performance as well as detailed segment financials. Before I comment on the quarterly results, I would like to thank the Board for the opportunity to serve in the role of Interim President and CEO. Over the past several weeks, I visited many of our locations with significant time dedicated to businesses within the Fire & Emergency segment. While I’ve done this over the past years in my role as CFO, the latest visits in my new role, provide additional insight and understanding of our current production capabilities, business strengths and the resources needed in individual operations.

As we have noted in the past, our operational capabilities vary across our landscape of businesses. During my visits, I was encouraged by the local team demonstration of lean tools and disciplines regardless of where they are in the maturity curve and the overall commitment to a culture of lean. I have also spent time with my staff coordinating and communicating our path forward. I’d like to reiterate externally what I’ve told my team internally. The strategic agenda set forth at our 2021 Investor Day remains intact. We are committed to putting in place the systems and processes we feel will streamline operations, reduce costs and improve efficiency, resulting in increased unit throughput across the enterprise. There has been a great deal of progress over the past several years, both at the division and individual business unit level.

I will share a few examples and results of these efforts within the quarter. During our Investor Day, we gave examples of how product platforming have reduced quoting and manufacturing complexity and improve efficiencies by, converging the design of certain products across various brands within the Fire Group. The Fire Group has remained committed to its platforming agenda with continued focus on common designs despite the dynamic supply chain environment we have been operating in. While we have not had time to fully, converge designs and leverage our scale, the teams have worked through multi-sourcing and engineering process strategies to develop solutions for recovery. Within the quarter, it made advances on cab and body fabrication that are expected to reduce bottlenecks and assembly constraints and also expect pump module manufacturing and design changes to provide increased efficiencies as we exit the fiscal year.

Engineering teams across the enterprise continue to supplement their efficiency projects with external resources. These engagements have allowed several businesses to advance their drawing and design capabilities as well as assist with the completion of bill of material documentation, both critical steps for increased throughput. Proper drawings and associated bills of material not only provide the foundation for detailed work instructions they allow more efficient use of inventory and will assist throughout the network and capital reduction efforts. Repeating this process across REV will provide each of our businesses an opportunity for increased line rates, material savings, labor efficiency gains and improved profitability. As I mentioned earlier, I feel a real sense of commitment to operational excellence and the lean culture which we outlined at our Investor Day 2 years ago.

At the time, we had just started the initial waves of Brown, Green and Black Belt training for Lean Six Sigma. We have trained 500 of our 7,000 employees and developed a pipeline of 385 projects. Today, we expect to complete the fiscal year with over half of our employees Lean-certified and have grown a number of projects to over 1,500. While the projects represent various degrees of cost savings, all are representative of the bottoms-up efforts of our employees to improve daily performance. I’m proud of all the efforts and the momentum this program has demonstrated. As we move through the first quarter, we began to experience an improved operating environment that benefited from a loosening supply chain improved OEM chassis fill rates and the actions of our sourcing team.

I would characterize the overall component supply is improving with shortages being more infrequent than the widespread nature we experienced over the previous 18 months. In regards to chassis, during the quarter, we experienced increased receipts which enabled several businesses within the F&E and Commercial segments to plan production into the third quarter, some with increased line rate assumptions. At quarter end, we maintained a chassis balance of $103 million, a $40 million increase from the same time in the prior year. The current chassis balance is more in line with pre-COVID levels. In regards to multi-sourcing, to-date, we have completed over 25% of our initial targeted projects which includes many of the key components that limited throughput over the past 18 months.

However, wiring harnesses continued to challenge our transit bus business within the quarter due to a variety of complex harnesses used in its manufacturing process. Our sourcing team continues its efforts to multi-store harness supply and will pursue qualification and on-boarding of new suppliers for all targeted components throughout the remainder of the year. Within the first quarter, we announced a return of the long-time ambulance manufacturing team of Mark Van Arnam and Randy Hanson. Mark will serve as President of REV Ambulance Group and Randy will return as Chief Operating Officer of the Group and Vice President and General Manager of our AEV brand. Mark has a long and successful executive history of the REV Group and within the Ambulance community.

Over the past 35 years, he has served as President and CEO of AEV and Vice President, Sales & Marketing of Wheel Coach. Randy returns to AEV, where he served for 30 years as the General Manager and the brand became the number one Ambulance brand in the U.S. I’m very pleased that Mark and Randy have rejoined the team and look forward to the impact that they will have as we begin to return production to more historic levels. And finally, we continue to build our portfolio of zero-emission vehicles with the launch of a new capacity brand hydrogen fuel cell terminal truck. This truck is expected to operate for at least 1 full shift before refueling which can be done in as little as 15 minutes. At the same time, it takes a traditional diesel truck.

It received accolades at the Technology and Maintenance Council Annual Meeting last week and we expect significant interest as ports, intermodal customers, distributors and retailers seek to reduce their carbon footprint. We are enjoying a robust bidding environment to other EV product lines, including Type A school buses, municipal transit buses and fully electric fire trucks. Within the quarter, our next-generation battery electric and fuel cell transit bus EVO was added to a primary state contract which will allow our ENC business to sell directly to other transit agencies nationwide without the need for a bidding process. And as you can see on the slide, we are proud that the all-electric Vector was selected as 1 of the 4 REV fire pumpers that will be part of the firefighting fleet used at the Daytona International Speedway in 2023.

Now turning to our first quarter results on Slide 4, consolidated net sales of $584 million increased $47 million versus the first quarter of last year. The increase was driven by higher sales within the Commercial and Recreation segments, partially offset by a decrease in sales in Fire & Emergency segment. Commercial segment sales benefited from an improved supply chain which enabled final completion of units previously trapped in with. As a result, unit completions, shipments and segment revenue reached the highest level since the second quarter of fiscal 2020. Recreation segment sales were also higher than expected as we received an OEM fix for a previously announced luxury van recall. Receiving the software update 2 months ahead of expectations allow greater than anticipated shipments of Class B and Class C units within the quarter.

Partially offsetting the increase in Commercial and Recreation segment sales was a decline in F&E segment sales, fewer shipments of fire apparatus was partially offset by increased shipments of higher content ambulance units. Consolidated adjusted EBITDA of $21.3 million increased $3 million versus the prior year. Increased contribution from the Recreation segment was partially offset by lower contributions from the F&E and Commercial segments. Higher Recreation segment EBITDA was primarily a result of favorable category mix, the efficiencies in certain businesses and pricing actions. Lower contribution from the F&E segment was primarily a result of underperformance of our Fire Group, specifically our holding facility, partially offset by improved profitability in the Ambulance Group.

Decreased EBITDA within the Commercial segment was related to a reduced mix of municipal transit buses as we ship lower price units compared to the completion of a multiyear contract for higher content buses in the prior year quarter. Please turn to Page 5 of the slide deck as I move to a review of our first quarter segment results. Fire & Emergency first quarter segment sales were $229 million, a decrease of 3% compared to the prior year. The decrease in net sales was primarily due to fewer shipments of fire apparatus and ambulance units, partially offset by price realization and improved mix of higher content ambulance. Within Fire Group, completions of shipments continue to be impacted by lower than expected line rates at our Holden facility as we continue the integration of KME and Ferrara branded production, partially offsetting lower shipments from this facility was an increase of shipments from our 2 largest plants.

Sequential improvements and completion rates throughout the quarter resulted in Fire Group shipments reaching a 15-month high in the month of January. Within the Ambulance group, increased fill rates and received some OEM chassis over the past 2 quarters, improved visibility and production planning. Greater availability of heavy-duty chassis provided an opportunity to produce higher content units which carry a higher selling price and margin. F&E segment adjusted EBITDA was a loss of $2 million in the first quarter of 2023 compared to adjusted EBITDA of $1.8 million in the first quarter of 2022. The decrease was primarily a result of lower volume, labor inefficiencies and increased inflationary pressure, partially offset by price realization.

As I mentioned, production at the Holden facility is not supporting the shipment of units at the rate we anticipated. Increased labor hours per completion and fewer units produced across the fixed cost base have weighed on group profitability. We made structural and process changes in Holden as we exit Q1 and expect these changes to provide sequential margin improvement as we progress through the second quarter. In addition, as multi-sourcing efforts continue to take hold, we also expect unit sales and productivity to improve at our other fire plants within the second quarter. Ambulance group profitability improved 160 basis points sequentially and 100 basis points versus the prior year. This was primarily a result of improved labor utilization related to an improved supply chain, price realization and the greater mix of higher content units.

With the current stabilization of chassis allocation and fill rates, certain Ambulance businesses have started to bring on additional labor and are planning to increase production rates. Our ability to achieve or exceed these rates to rely on effective training and retention of new hires which we have been addressing with localized programs. The level of chassis inventory within the Ambulance group affecting the quarter supports these production plans in the fiscal third quarter. Total F&E backlog was $2.7 billion, an increase of 62% year-over-year. The increase in backlog was a result of strong unit orders and pricing actions over the past 12 months as well as lower than expected production related to supply chain constraints and labor inefficiencies experienced over the past year.

We expect the F&E segment to return to positive EBITDA in the second quarter as supply chain pressure ease with sequential margin improvement throughout the fiscal year as we realize manufacturing efficiencies and more favorable pricing. Turning to Slide 6, Commercial segment sales of $129 million was an increase of 32% compared to the prior year. The increase was primarily related to higher sales of school buses, terminal trucks and street sweepers and price realization, partially offset by fewer shipments in municipal transit buses. Dual sourcing and improved material availability aided the completion of school buses and terminal trucks that have been trapped in inventory. Within the municipal transit business, we continue to experience shortages of wiring harnesses which limited unit shipments.

Exiting the quarter, the transit business was waiting to receive over 2,300 past due harnesses complete units. This was an improvement from over 3,100 past due as we exited December and the result of our sorting team’s efforts to reduce single and full source exposures across the enterprise. Commercial segment adjusted EBITDA of $7.3 million decreased 6% versus the prior year. The decrease in EBITDA was primarily the result of lower shipments and an unfavorable mix of municipal transit buses, partially offset by higher shipments and improved profitability within school bus and terminal truck businesses. An unfavorable mix of municipal transit buses continue to be the result of low-margin units sold during the highly competitive binding cycle during COVID.

We continue to believe that improved receipt of key components will allow greater shipments of these legacy price units and that we will begin to realize more favorable pricing within the second half. Improved profitability for school buses and terminal trucks as a result of higher shipments and efficiencies gained from greater material availability and price realization, partially offset by inflationary pressures. Chassis allocation and fill rate for school buses has improved production planning current chassis supply secured plant production through the third quarter. Commercial segment backlog was $498 million at the end of the first quarter, an increase of 8% versus prior year. Increased backlog is primarily a result of pricing actions and increased orders for municipal transit buses, partially offset by increased throughput in the first quarter and a, normalization in orders for terminal trucks.

For the remainder of the year, we expect Commercial segment revenue to return to a run rate similar to the second half of fiscal 2022 as we complete lower-priced municipal transit buses and begin shipping higher content units, including battery electric and hydrogen fuel cell buses, we expect segment margins to recover from the current mid-single-digit range to high single-digits exiting the year. Turning to Slide 7, Recreation segment sales of $226 million were up 12% versus last year’s quarter. Increased sales versus prior year were primarily a result of increased shipments of Class A and Class B units and pricing actions. Partially offsetting the increase was lower sales of Class B units related to the van chassis recall noted earlier and fewer towable units related to supply chain constraints.

Approximately $40 million of revenue related to the recall fix was realized in the first quarter versus our expectation that it would be delayed until the second quarter. As a result, we expect second quarter revenues to be approximately in line with the first quarter as we complete the shipment of recall units and continued normal production activities across the businesses. Recreation segment adjusted EBITDA of $24.3 million was an increase of 42% versus the prior year. The increase in EBITDA was primarily a result of price realization, volume leverage and favorable category mix, partially offset by material inflation and labor inefficiencies related to rework of units in the towable business. Segment backlog of $988 million decreased 23% versus the prior year.

The decrease was primarily due to continued production against backlog and lower orders in certain categories. Class B and Class C orders have normalized pre-COVID levels and backlogs for these businesses remain at approximately 10 to 11 months of production. We did receive model year 2023 cancellations of Class A and towable units. Our backlog has remained over 1 year for each of these businesses. We believe that a portion of these cancellations will be replaced with upcoming model year orders as dealers evaluate inventory levels during the spring selling season. We continue to expect the Recreation segment backlog to decline throughout the year as we maintain normal production activities and to exit the fiscal year at a more normalized level of 4 to 6 months production.

The outlook for the Recreation segment remains the same as what we described in December. Although there was a revenue and EBITDA shift between the first and second quarter, we continue to expect approximately 45% of full year sales and earnings to occur in the first half of the year. Turning to Slide 8, cash used in operating activities totaled $6.9 million. Trade working capital on January 31 was $352 million, an increase of $4.3 million compared to $348 million at the end of fiscal ’22. The increase was primarily a result of increased inventories, partially offset by an increase in accounts payable and customer advances. The increased inventory balance includes $20 million of additional chassis which returned to levels more in line with the pre-COVID period, as I noted earlier.

We spent $3.8 million on capital expenditures within the first quarter, resulting in a cash outflow of $10.7 million. Net debt as of January 31, were $227 million, including $23 million of cash on hand. We declared a quarterly cash dividend of $0.05 per share payable on April 14 to shareholders of record on March 31. At quarter end, the company maintained ample liquidity was approximately $286 million available under the ABL revolving credit facility and our net debt-to-EBITDA leverage ratio was 2.1x at the low end of our stated target range of 2 to 2.5x. Turning to Slide 9, today, we are reaffirming our full year outlook for net sales, adjusted EBITDA, adjusted net income and free cash flow. We are updating net income to reflect legal matters and restructuring-related charges that occurred in the first quarter.

As a result, the range of net income was lowered to $13 million to $32 million. The outlook for revenue remains in the range of $2.3 billion to $2.5 billion. Growth of 3% at the midpoint is expected primarily from the F&E and Commercial segments, while the Recreation segment is expected to remain flat to down low single-digits versus the prior year. Adjusted EBITDA remains in the range of $110 million to $130 million with approximately 40% occurring in the first half of fiscal 2023 and 60% in the second half. Guidance for adjusted net income remains in the range of $42 million to $60 million and we continue to expect cash conversion to be 90% or greater with free cash flow in the range of $39 million to $55 million. Finally, we remain committed to our roadmap for shareholder value creation and a balanced use of capital.

This begins with a strong balance sheet, organic investments in our businesses, a sustainable dividend policy and targeted share repurchases. As we continue to evaluate our portfolio of businesses, there may be opportunities for strategic M&A, including tuck-in acquisitions or divestitures. However, our immediate priority is to drive execution with the current portfolio, increase our completion and shipment rates and complete legacy price units within the backlog so that we begin to realize the new pricing tiers enacted over the past year. Thank you again for joining us on today’s call. And with that, operator, we would now like to open the call up for questions.

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Q&A Session

Operator: Our first question is from the line of Mig Dobre with Baird.

Unidentified Analyst: It’s Joe on for Mig this morning. So Mark, you gave a really good summary at the beginning of the call about the current initiatives that are underway. But you’ve been interim CEO for about 30 days. Obviously, you’re not new to the company but I would just wonder sort of at a high level, how your vision for REV might differ from your predecessor?

Mark Skonieczny: Yes, I think and as we’ve talked before and as we said in my prepared remarks, the vision really is intact from what we laid out in the Investor Day. So from my perspective, it’s really which I sprinkled out throughout the comments here, it’s really about local execution and making sure that we can ramp in the — like in our Ambulance facilities but also get after the WIP units in order to get the most throughput here in the short term. So as you saw in the commercial group in Q1 as we got loosening supply chain, we were able to accelerate the completions and get through the majority of our backlog that was caught in with — so that’s really been my focus and I spent the last 3 weeks here in the 30 days going to different facilities.

And really, that’s been my focus is how do, we make sure that we take advantage of the loosening supply chain and how are we going to get the units in WIP. But also more importantly, maintain the starts that we need when we look out into the future. So it’s really a balancing act of maintaining our starts for the future but also making sure we get through these WIP units that we’ve highlighted over the last few quarters.

Unidentified Analyst: Got it. And maybe kind of keeping along that line, it sounds like — well, I mean, supply chain and labor constraints are improving in ambulance but maybe not quite there and fire, it sounds like they’re going to — those issues are going to improve through the year. But maybe talk about the issues in fire, maybe some internal related, some external related and kind of how those challenges kind of improve as we progress through the year?

Mark Skonieczny: Yes, so as I noted in the prepared remarks, we look at fire, we’ve said over the last few quarters here, that’s probably the business unit given the custom nature of that product that had the most units in WIP. So and we haven’t been able to get out as many units as we expected, given the supply chain challenges which I think were more acute in those when you talk about — source on custom products. So first off, we got to get the component supply. And then second, to your point is, how do we most effectively get that out. When I talk about Holden, I’m very encouraged on my most recent visit, the step change that has happened there with all the changes we’ve made, not only replacing the leadership, the general manager that was there with but also a lot of work they’ve done in regards to material flow, just an example, increased their ability to build certain units by 33% within a month timeframe.

So we’ve got a lot of momentum in that Holden facility just with a 30-day change of the leadership team there. So I feel very good there. And then our other business is, it really comes down to taking advantage of the supply chain and getting those units and produced.

Unidentified Analyst: Got it, okay. And then my final question. I’m sure as these issues get rectified that the profitability will follow. But F&E has been kind of roughly breakeven for the past 5 quarters. How do you kind of diagnose what the issues have been there from a profitability standpoint? And what the outlook is for the ramp in EBITDA margin through the year and maybe even beyond this year?

Mark Skonieczny: Yes, I still think we’re into what we had said before, probably our exit rate will be lower than what we originally expected, given our Q1 results and then some of the impact of these units going into Q2, like we said, we will be profitable in Q2 and the ramp that we’re seeing in Ambulance obviously will allow us to get to the pricing tiers quicker and it will be more of a drag from fire just getting through the WIP unit. So as those units are older, we obviously have more labor on those units and some, inefficiencies. So that’s really important here getting those units out and we look at the consolidated F&E, it hasn’t significantly changed from an exit rate but the overall profile will be, like you said, it will trend more gradually throughout the year.

Operator: Our next question is from the line of Jamie Cook with Credit Suisse.

Jamie Cook: I guess 2 questions. First, just the comments you made around the portfolio, looking at acquisitions and divestitures, can you just talk to the criteria that you would use to evaluate which businesses should be core, not core and/or where you’d be interested on the acquisition side? And then my second question, could you just — on the price cost, how positive do we expect price cost to be? And can you talk to sort of the pricing trends by segment?

Mark Skonieczny: Yes, I think overall, I guess Jamie, from an acquisition perspective, we said when you look at our businesses, when we’re in the fire and ambulance space, you’re probably talking about smaller tuck-ins which is consistent with what we’ve said previously. And then within our commercial group, when you talk about the 3 really different businesses there, we’re not talking about adding a fourth leg. So if you were going to add something in that space, it would be more tangential. So but again, as I talked in my remarks, my real focus right here in the short-term is to address the — our throughput and what’s in our internal 4 walls here. So I have really put other than one of my old CFO role. We’re obviously always looking for opportunities and we have certain criteria that we would meet. But again, it’s not something that’s top of mind right now given the improvement profile we have here in the short-term.

Drew Konop: Then with price cost.

Mark Skonieczny: And then price cost overall, we will see some on the F&E side, there will be a mix as we get through the units and we are price cost positive in all of our businesses. There is pressure within the recreation side. As you know, we took advantage of pricing — last year we were ahead of some of the inflation curve. So we’re seeing with discounting, we’re still able to absorb some of the discounts will still be price/cost positive there and still be margin accretive to that — to the overall business. And then on the commercial side, we remain price cost positive. A lot of those have more heavy industrial increases. So we’ve been pretty proactive to make sure as we get surcharges from our supply base that we’re passing those on through to the customer.

So I think from an overall perspective, you would expect us to be more price cost positive, as we’ve talked about as we exit the year in those 3 businesses in Fire & Emergency and commercial and then recreation, we’re still looking at how that market is going to play out with any necessary discounting as we move forward.