REV Group, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Specialty Vehicles: Ambulance business benefited from momentum with programs to increase line rates and efficiencies. Fire group drove operational improvements, leveraging Spartan Chassis production, and SIOP integration led to improved throughput and reduced inventory. Backlog was robust at $4.1 billion.
• Recreational Vehicle: Challenged end market with lower unit shipments, discounting, and unfavorable mix. Focused on aligning production with consumer preferences and managing costs. Awaited insights from RV shows in September and January.
• ENC Wind Down: Wind down of ENC municipal transit bus production is ahead of schedule, with final units expected in Q4, and net working capital benefit to be realized in Q4.
• Balance Sheet: Net debt was $165 million, net debt to trailing 12-month adjusted EBITDA ratio below 1x leverage. Continued focus on capital allocation, including investing in the business, paying down debt, and dividends.

Segment Performance

• Specialty Vehicles: Third quarter net sales were $432 million, a decrease of $34 million compared to the prior year. Excluding the Collins divestiture impact, net sales increased $12 million or 2.8%. Adjusted EBITDA was $44.3 million, an increase of $23.8 million year-over-year (116%). The increase was primarily due to increased performance in fire, ambulance, and municipal transit bus businesses, partially offset by lower adjusted EBITDA from terminal trucks. Backlog was $4.1 billion, increasing $386 million or 10% compared to the prior year.
• Recreational Vehicle: Net sales were $147.4 million, a decrease of $67.1 million or 31% year-over-year. Adjusted EBITDA was $9.4 million, a decrease of $9 million or 49% versus the prior year. Backlog at quarter end was $240 million, a decrease of $168 million or 41% versus the prior year.
• Terminal Trucks: Lower contribution due to soft industry demand.
• ENC Municipal Transit Bus: Wind down of production is progressing ahead of schedule, with final units expected in the fourth quarter, and net working capital benefit to be realized in the fourth quarter.

Guidance

• Consolidated net sales range from $2.35 billion to $2.45 billion.
• Adjusted EBITDA range from $155 million to $165 million.
• Adjusted net income range from $76 million to $89 million, net income range from $226 million to $240 million.
• Adjusted free cash flow range from $61 million to $72 million, full year capital expenditures range from $30 million to $35 million, interest expense range from $26 million to $28 million. Continued momentum in fire and emergency businesses, offset by end market softness in terminal trucks and RV.

Risks

• End market softness in recreational vehicles and terminal trucks.
• Uncertainty in RV demand affecting production levels and margins.
• Impact of industry competition and discounting on the recreational vehicle segment.

Question and Answer

Q: Unpack the fire and emergency portion of the performance, specifically the margin improvement bridge.

A: For legacy fire and emergency, revenue grew mid-teens, ~60% of growth was price/mix, ~40% was volumes. Inflationary costs were largely offset, with significant year-over-year and quarter-over-quarter margin growth.

Q: Update on RV dealer inventories.

A: RV dealer inventories are down 20% year-over-year, closer to pre-COVID levels. Retailers are outpacing wholesales, and feedback from RV shows in September and January will provide insight into demand.

Q: Cadence of margin expansion and next quarter outlook.

A: Expect slight sequential revenue growth and slightly higher specialty vehicles margin in the fourth quarter. Mid-single-digit pricing increases are anticipated in fiscal 2025.

Q: Status of ENC wind down and EBITDA drag.

A: ENC contributed ~$40 million in revenue in the quarter, wind down is ahead of schedule, and EBITDA margin was accretive in the quarter with full wind down expected in early Q4.

Q: Terminal trucks future outlook.

A: Terminal trucks are in a trough in the cycle with mid-single-digit margins, and no significant step down is expected next year beyond the trough.

Q: RV backlog and potential production cuts.

A: It's a wait-and-see situation, with costs being flexed to align with demand. No fixed schedule for production cuts.

Q: Specialty vehicles production rates.

A: Ambulance is at pre-COVID+ rates, fire is improving efficiency, and the specialty vehicles segment will exit Q4 with double-digit margins.

Q: Mix of custom vs standardized trucks and margin impact.

A: There's no significant margin difference between custom and standardized trucks. The S-180 is a semi-custom truck, but margins are similar across truck types.