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Edited Transcript of REVG.N earnings conference call or presentation 5-Mar-20 4:00pm GMT

Q1 2020 REV Group Inc Earnings Call

MILWAUKEE Mar 28, 2020 (Thomson StreetEvents) -- Edited Transcript of REV Group Inc earnings conference call or presentation Thursday, March 5, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dean J. Nolden

REV Group, Inc. - CFO

* Drew Konop

REV Group, Inc. - VP of IR & Corporate Development

* Timothy Sullivan;President and CEO

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Conference Call Participants

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* Courtney Yakavonis

Morgan Stanley, Research Division - Research Associate

* Jamie Lyn Cook

Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst

* Jerry David Revich

Goldman Sachs Group Inc., Research Division - VP

* Joel Gifford Tiss

BMO Capital Markets Equity Research - MD & Senior Research Analyst

* Mircea Dobre

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* Peng Yao Wu

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to the REV Group, Inc. First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to your host, Drew Konop. You may begin.

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Drew Konop, REV Group, Inc. - VP of IR & Corporate Development [2]

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Good morning, and thanks for joining us. Last night, we issued our first quarter 2020 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 2 of that presentation. Our 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 experienced -- expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8-K 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 year are the 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. Please turn now to Slide 3, and I'll turn the call over to Tim.

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Timothy Sullivan;President and CEO, [3]

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Thank you, Drew, and thanks, everyone, for joining us on today's call. Slide 3 contains highlights for the fiscal first quarter. And you may note that we are trending green with the number of positive developments that we feel will serve as a foundation for the remainder of the year. First, our outlook for the entire year continues to be consistent with our initial forecast, which provides confidence in the changes and improvements we have made to the internal processes, organizational structure and support staff needed to deliver improved, consistent and reliable results. I'd like to thank the teams for the hard work that they have done as we continue to execute on our current year initiatives and navigate through any macro disruptions such as the most recent uncertainties caused by the coronavirus.

We are monitoring and adjusting to issues that have arisen or may arise within our supply chain, which to date are primarily related to electronic source from Asia by our Tier 1 suppliers. We have experienced limited disruption, and our material teams are in constant communication to limit any potential direct or indirect impacts from the virus. We learned from our prior challenges in 2018 that even though we don't purchase a significant amount of materials directly from China or other impacted areas, we are susceptible to second- or third-tier impacts on supply as subcomponents may be sourced from these areas by our suppliers.

We are, therefore, being proactive with our supply chain to protect the availability of needed materials. We are not currently expecting or forecasting any material negative impact on our supply chain. At this time, we continue to expect and look forward to building on several positive outcomes from our fiscal first quarter through the remainder of the year.

First, in our Fire & Emergency segment, we realized increased unit production primarily at our largest fire plant, and we continue to expect margin improvement to develop throughout the year. With the additional working days available in each of the next 3 quarters, we believe the labor that has been hired and trained over the past quarter will become more efficient and be absorbed against the higher production rates allowed by factory floor realignment, which includes new chassis and cab lines introduced within the past 6 months.

As a reminder, we set out to meaningfully increase the capacity of our plant in Ocala, Florida, which produces our E-ONE brand fire truck, to respond to higher backlogs and longer industry-wide delivery lead times. Through 2018, this plant had proved to be successful at about 400 to 450 units of output per year. And while productivity took a step back over the past year, we feel we have taken the necessary steps to continue a return to the historic profitability at a much higher production rate.

As expected, the Ambulance division began its recovery in the first quarter, with significant gross margin improvement at our largest plant, which benefited from a focus on process improvements driven by new management, our REV production systems as well as the benefits of a stronger backlog. Our divisional structure within Ambulance is beginning to take hold, and we are excited to work more closely with our customers and dealers in a manner that best aligns and elevates our go-to-market strategies.

This alignment was demonstrated by 2 product introductions over the past 6 months, developing close collaboration with dealers and customers namely the new Wheeled Coach Type II van and our new first Star product line. We plan to build upon this voice of the customer experience not only in the Ambulance division but across all of our businesses. The Commercial segment has once again continued to deliver consistent and improving results, both in terms of revenue growth and profitability. While there are many successes across the commercial businesses, I want to recognize both of our shuttle bus businesses, which have benefit from dealer development, pricing, product placement discipline as well as continuous operational process improvements.

Commercial backlog increased high single digits over the last year, reflecting strong municipal transit bus orders related to previously announced long-duration contract awards and increased orders within our shuttle bus businesses and a solid school bus end market. While the industry outlook for the recreation market is about flat for fiscal 2020, our RV businesses have received orders approximately in line with sales keeping the book to bill close to 1x in the first quarter, which is consistent with our expectations for the quarter and the full year as we continue to expect industry wholesale shipments to be in line with retail sales.

The new models introduced for 2020 are proven to be very successful, and we have recently begun production on our new 2021 models. Introduction and production of the new model year is taking place sooner than in prior years and our transition to new models has been much more efficient. We believe this will benefit us earlier in the selling season and lead to greater dealer stocking initiatives ahead of the all-important summer retail season, resulting in a greater share of dealer floor space this season.

Please turn to Slide 4. Last but certainly not least, the acquisition of Spartan Emergency Response on February 1 has solidified REV as the #1 player in the North American fire & emergency market. This is a collection of brands that we have been interested in acquiring for a number of years, and we were extremely excited when the opportunity to acquire this business became actionable. The strategic rationale is significant. First, Spartan meaningfully expands REV's competitive position in North American fire apparatus across all product categories. While there is an overlap on product offerings such as pumpers and aerials, the customer and geographical overlap is extremely minimal.

This morning, we announced a new 5-year contract award for 35 new Spartan and Smeal vehicles from the Detroit Fire Department. They currently have 26 Smeal brand vehicles and are adding to their fleet. I've said it before, but it's worth repeating that fire apparatus tends to be an incumbent business. Fire chiefs and firehouses are typically brand loyal, which creates a legacy brand that can be difficult to displace. Spartan introduces us into some of the country's largest cities like Detroit in regional markets that we previously had difficult time entering. It also dramatically expands our presence in Canada and provides established access to certain Latin American markets.

On the product side, aerials are some of the highest priced and margin products in the fire apparatus industry. The addition of Spartan and Smeal aerial brands puts us at approximately half of the North American market share for OEM units in this category.

We also have gained the unique designs of the Ladder Tower brand that uses an articulating boom allowing for a shorter wheel base resulting in improved maneuverability and access in congested urban areas and narrow streets. The Ladder Tower brand has a significant installed base, much of which was placed into service before the 2008 recession, which we believe provides a large replacement demand tailwind. Our acquisition of Spartan's emergency business also included the Spartan chassis product line which services regional OEM custom fire apparatus builders in the U.S. and Canada. Spartan has a long-standing and close relationship with these builders. We plan to continue to supply chassis and provide aftermarket service and support for these customers. Finally, Spartan has been an outsourced contract manufacturer of aerials for one of our legacy fire plants. This deal will generate immediate savings as we no longer will be charged a markup on ladder assemblies that are supplied under that contract.

The combined company will have the opportunity to leverage engineering and new product development while continuing to lead the industry in innovation. We will leverage our large shared procurement scale, dealer and customer relationships as well as work to eliminate cost redundancies that result from our combined operations and back-office support. I have placed our COO, Ian Walsh, in charge of the Spartan integration, and he is working with assigned project owners from both the REV and Spartan legacy leadership teams. We have a diligent process in place to track the progress of both our overall integration and the realization of the synergies we have identified as part of the business case for this acquisition. We look forward to working with the talented Spartan team as we begin the journey of combining our iconic brands and maximizing our combined portfolio's potential.

Now I'll turn the call over to Dean for a detailed review of the fiscal first quarter financials and revised outlook that includes this acquisition.

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Dean J. Nolden, REV Group, Inc. - CFO [4]

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Thanks, Tim, and good morning. Starting with Slide 5. I will review our consolidated first quarter results and then proceed with segment level performance. Consolidated net sales for the first quarter were $532 million, up 3% compared to the first quarter of last year. The increase in sales was the result of increased sales in the commercial and F&E segments, partially offset by lower sales in the Recreation segment. Adjusted EBITDA in the first quarter of 2020 was $11.3 million compared to $12.3 million in the first quarter of 2019, a decrease of 8% year-over-year. The decrease in adjusted EBITDA during the quarter was driven by lower profitability in the F&E and Recreation segments, partially offset by higher profitability within the Commercial segment. Corporate expense was also a partial benefit as it declined $2 million in the quarter, reflecting the impact of targeted cost-out initiatives.

Please turn to Page 6 of our slide deck now as I move to a review of the performance of our segments. Fire & Emergency segment sales increased by 1% to $207 million for the fiscal first quarter as the total volume of fire unit shipments increased year-over-year at our largest fire plant. New cab and chassis lines were opened at this plant in November of 2019, which improved the overall flow of trucks within the quarter. The number of units produced increased over 20% at this plant year-over-year. This was partially offset by the timing of deliveries at another fire plant, which shifted revenue and EBITDA out of the quarter. In addition, the mix of units shipped in the first quarter this year was skewed more heavily towards commercial trucks versus custom trucks, resulting in a lower average selling price. We expect some of the timing of shipments to be recouped in the second quarter and we expect the mix of trucks to shift more towards custom pumpers and aerials over the remainder of this year.

Ambulance unit sales were approximately flat year-over-year, but revenue was up due to an improvement in sales mix as one of our ambulance plants began delivery of a larger municipal order. The Ambulance division order cadence has improved as expected, and our Ambulance backlog is up over 25% year-over-year, which we believe will set us up well for the second and the third quarters. Total F&E backlog has grown 9% year-over-year to $807 million.

We believe growth in the full F&E segment backlog will slow in the second half of the year as we strive to reach a shorter backlog duration within our Fire division. F&E segment adjusted EBITDA was $1.7 million in the first quarter of 2020 as compared to $8.4 million in the first quarter of 2019. The decrease in adjusted EBITDA was due to a reduction in gross margin from a greater mix of commercial fire apparatus in the current year quarter and the impact of additional labor expenses and overhead costs put in place to facilitate a ramp-up of output at our Ocala fire facility.

Partially offsetting this EBITDA impact in the Fire division was a significant increase in profitability at our largest ambulance plant as it began to realize year-over-year and sequential production efficiencies from an increase in production and continued improvement from ongoing operational excellence initiatives. This is consistent with our fiscal 2020 guidance as we expected the Ambulance division to begin its recovery in the first fiscal quarter, while we expected the first quarter to be a trough in the profitability of our Fire division, and for our Fire division recovery to begin in the second quarter and be realized mostly in the second half of our fiscal year.

We have had several positive developments within Fire in the quarter that gives us confidence in the second half recovery. First, we have seen several weeks of improved cab and chassis production rates at our largest plant at the necessary cadence to reach final assembly and deliver the number of trucks we feel is needed to decrease our backlog duration and achieve our full year sales expectations. We've also seen our labor productivity metrics trend more favorable within the quarter. And given where we exited the quarter at the end of January, we believe this productivity trend will continue through the second quarter and carry into the second half of our fiscal year.

As shown on Slide 7, our Commercial segment, quarterly sales were up 12% to $158 million compared to the prior year period, driven by an increase in the number of municipal transit bus units sold and increased shuttle bus sales. This increase in transit and shuttle bus sales more than offset the expected revenue headwind related to one large commercial school bus order in the first quarter of 2019 that did not recur and a decrease in the number of terminal truck unit sales within our specialty division. Commercial adjusted EBITDA increased 116% to $10.8 million from $5 million in the prior year quarter, with the increase due to the mix of municipal transit bus shipments and a continuing and sustainable increase in profitability within our shuttle bus business. The shuttle bus business, which we announced has been under strategic review since our fiscal third quarter 2019, has experienced several hundred basis points of EBITDA margin improvement since this review began, as we introduce new products, improve portfolio alignment to market demands and preferences, fortify our pricing discipline and continue to deploy REV production systems for operational excellence.

Overall, Commercial segment adjusted EBITDA margin increased 320 basis points in the quarter to 6.8%, which is the highest fiscal first quarter profit margin we have experienced in the Commercial segment since going public in 2017. Commercial backlog at the end of the first quarter increased 7% to $456 million compared to the first quarter of 2019 due to firm orders received against a large municipal bus -- transit bus award previously announced, increased shuttle bus orders and the return of a large national account customer into the backlog for our street sweeper business. Backlog at the end of the first quarter also represents the high watermark for the commercial segment since going public in 2017.

Turning to Slide 8. The Recreation segment sales were more in line with the pace of retail sales in the quarter, and we believe we are nearing the end of dealer destocking started last year. Quarterly sales in Recreation segment declined 5% year-over-year to $167 million due to lower Class A revenue and, to a lesser extent, towable unit sales. Although unit sales of Class A RVs were approximately the same compared to the prior year quarter, a mix shift towards entry-level gas coaches within the current quarter resulted in lower dollar sales for this business year-over-year. Recreation adjusted EBITDA decreased 23% for the quarter to $7 million. This was due to decreased profitability from lower aggregate unit volumes year-over-year and previously described mix shift to lower end price points in certain categories, offset by over $1 million of realized cost reductions in the quarter from actions taken in fiscal 2019 related to our Class A operations, which its individual business unit EBITDA margin increased by 140 basis points year-over-year. You may remember, this also was a business under strategic review late last year. We are pleased with its progress related to product innovations, timing of new model year introduction and recent product award wins and order intake.

Segment backlog in the Recreation segment decreased 30% to $158 million versus the prior year quarter due to the result of lower orders for towables and campers, partially offset by increased orders in Class A and Class B categories. While total Recreation segment backlog is down year-over-year, it is encouraging to see that orders within the fiscal first quarter of 2020 are up 40% versus fiscal first quarter 2019, resulting in a book to bill that is much closer to 1x this year than the prior year quarter. We believe this reflects orders that are more in line with retail demand compared to the prior year quarter when a dealer destocking was just beginning.

Our current industry view aligns with the industry experts, and we anticipate the overall market to be approximately flat for the year. However, we feel the strength of our product lineup provides opportunity to take market share in this environment.

Net cash used in operating activities for the first quarter of 2020 was $13 million compared to net cash use of $39 million in the prior year quarter and a use of cash of $72 million in the first quarter of fiscal 2018. This continued decrease in cash used in operating activities quarter-over-quarter is related to improved net working capital efficiency. Net debt as of January 31, 2020, was $391 million versus $373 million at the end of fiscal 2019. And the cash on our balance sheet include $55 million that was borrowed and used to purchase Spartan ER on February 1. In anticipation of this acquisition, the company's ABL revolving credit facility capacity was raised to $500 million from $450 million, taking advantage of the acquired borrowing base. In addition, to facilitate the acquisition, our term loan net debt-to-EBITDA financial maintenance covenant was raised from 4x to 5x through the end of the fiscal third quarter of 2020. The company had more than adequate liquidity at $197 million of availability under our ABL revolving credit facility as of January 31, 2020.

Please turn to Slide 9 for a review of our outlook for full fiscal 2020, which is a reaffirmation of our organic full year guidance adjusted for the impact of the Spartan acquisition. We continue to expect our financial performance to improve sequentially throughout the year with year-over-year improvement taking place in the second half. With the addition of Spartan in our results starting at the beginning of our fiscal second quarter, we are now estimating fiscal 2020 net sales to be in the range of $2.6 billion to $2.8 billion. The additional ABL proceeds used to purchase Spartan is expected to result in additional interest cost of $1 million to $2 million for the remainder of the fiscal year, resulting in an updated range of $29 million to $33 million of total interest expense for REV group in fiscal 2020.

Net income is now estimated to be $9 million to $30 million and adjusted net income is expected to be $30 million to $50 million. Full year total adjusted EBITDA for the combined companies is expected to be in the range of $107 million to $123 million. Because certain liabilities of Spartan were retained by the seller and due to the cash flow profile of the underlying business, we also expect additional cash provided by operations to increase by approximately $15 million through the remainder of our fiscal year, resulting in a new range of $65 million to $85 million of cash from operations for the full fiscal year.

In addition, we are continuing to pursue monetization of noncore or nonoperating assets as a result of -- and as a result, expect an additional cash inflow from these financing activities of approximately $10 million -- investing activities of approximately $10 million for the full year.

With that, I will now turn the call back to Tim for some closing comments.

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Timothy Sullivan;President and CEO, [5]

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Thanks, Dean. This is clearly an exciting time for REV Group as we have had the opportunity to consolidate a major industry player into our Fire division in the F&E segment at the start of the second quarter. With the addition of Spartan ER, we have increased our exposure to tax-based revenue and related replacement demand, and this also improves our -- upon our cash flow generation capabilities and revenue visibility by adding longer cycle and more predictable backlog. We have seen improved performance within several of our businesses, including those that have been implementing REV production systems for over a year now and those we recently put under strategic review.

We are confident that the F&E segment operational shortcomings have troughed and we will begin gaining traction as a result of its operational excellence, initiatives, capacity expansion and trained workforce. We look forward to delivering against our updated guidance as the year progresses.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Andy Casey from Wells Fargo.

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Peng Yao Wu, Wells Fargo Securities, LLC, Research Division - Associate Analyst [2]

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This is actually Patrick Wu standing in for Andy. Related to the Spartan ER, the profitability of the company appears to be a little low. As you guys bring them onboard, how do you think about lifting the margins over time closer to the legacy F&E level. And also appreciate that you guys mentioned that there's some product overlap between Spartan and legacy F&E. Is it your intention or do you guys believe that you will reduce some of the product SKUs over time at some point here? Or is that not the intention at all here?

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Timothy Sullivan;President and CEO, [3]

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Yes, let me address the profitability first. Let me give you a couple of points of interest here. Our F&E business runs at about 7% SG&A. Spartan runs at 11%. Obviously, there's a synergy opportunity there. We also believe that the Spartan pricing structure is quite different than our traditional F&E pricing structure. We think there's a synergy there. We also believe that there's a way to use some of our REV production system excellence into improving the operations, which will also improve the profitability of the product line. As you correctly said, the business is not very profitable. Matter of fact, it showed a loss in fiscal year 2019. But we think that we've got all the pieces in place that we can take this to the same level of target that we have for all of our businesses within the REV Group, and that's a 10% EBITDA business.

As far as the product lines, there is overlap. There's overlap across, quite frankly, all 4 of our products, whether it be E-ONE, KME, Ferrara or now Spartan. The key, I think, for all of this is the fact that in my comments I mentioned that fire is quite incumbent. In other words, if you are going into a particular municipality and you create a following from the fire chief and the fire department in that municipality, incumbency is quite strong. So if I look at Spartan, let me give you just an example of where we will pick up additional markets just with the Spartan brands. We talked about Detroit, Philadelphia, St. Louis, Dallas, Western Canada, Vancouver. These are all markets that have been Spartan markets that have been difficult for any of us to break into. We plan to retain those markets with the Spartan brand of products. So even though there's some overlap, this is really about incumbency in providing products to the markets that require and value the brand of the product itself.

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Dean J. Nolden, REV Group, Inc. - CFO [4]

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And maybe I could just add one thing. Just one thing to add, which was that in addition to the synergy opportunities and income opportunities, we do see there's also opportunities in working capital improvement for the combined organization, which can provide additional cash flow for the business over the next 12 to 24 months.

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Peng Yao Wu, Wells Fargo Securities, LLC, Research Division - Associate Analyst [5]

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Got it. That's super helpful. Just moving on to F&E, your sentiment or your statement that the margins for the segment has troughed. I guess just -- can you help us a little bit in terms of wrapping our heads around how the cadence of the margin progression for that segment is going to progress over the next 3 quarters or so throughout the rest of the fiscal year? And I guess what type of incremental margins are you guys baking in as your absorption increases?

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Timothy Sullivan;President and CEO, [6]

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I'll let Dean answer the absorption question, but let me explain how we expect margins to improve in the F&E segment. And let me speak specifically on Fire because it's different than our Ambulance business. But it's all about labor and efficiency. If you look at the Ocala operation, we loaded 200 new individuals into that operation for the start of the new fiscal year, November 1. They've now gotten, so to speak, their sea legs. They've been trained. They're in position. They're in cells and they've learned their jobs. So the profitability losses have been primarily directly related to labor inefficiencies. As we move through Q2, 3 and 4, we plan to ramp that efficiency back to the point where we start to gain, obviously, profitability within the Fire segment. It's less so really in Ambulance. Ambulance was more about backlog and getting the product line full again, which is now the case, and we expect to really do a more normal year in Ambulance where Fire is going to be more back-end loaded. Maybe you want to mention the absorption.

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Dean J. Nolden, REV Group, Inc. - CFO [7]

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Yes. And as a result of the better absorption and improved labor productivity, I think we said we're going to benefit mostly in the second half of the year. But you'll see margins in F&E, we expect to be closer to prior year, maybe not quite as good as the prior year but much closer to the prior year margins in the second quarter with year-over-year improvements versus prior year quarter in the third and the fourth quarter and continuing to improve sequentially as well.

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Operator [8]

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Our next question is from Mig Dobre from Robert W. Baird & Co.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [9]

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Appreciate all the color on F&E margins. Obviously, that's the big topic, so maybe sticking with that. As you're thinking about this 10% margin goal for the company, obviously, we remember F&E operating at higher levels than that, how long do you think it's going to take to get there? And what are some of the steps that you're undertaking maybe beyond the very near term here in order to ensure that the business can operate at those levels on a sustainable basis?

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Timothy Sullivan;President and CEO, [10]

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To answer that as simply as I can, Mig, we think we're very close in Ambulance. At the Ambulance business was just really one of our entities that lost some backlog, that has that backlog down, are back now and they will recover very quickly. So Ambulance, we don't see it to be an issue at all. I think that's going to be a fairly quick recovery to 10%. Fire is strictly related to now 3, used to be 2, of our operations. We think Ocala will recover to start approaching that 10% by the end of this fiscal year and, well and truly, will be on it as we sit here next year at this time. KME, their mix of products are a little bit more complicated because they run a little bit higher percentage of commercial, which is much more challenging to get to 10% because we don't make the chassis. We buy it. So I think it's probably going to take us a little bit longer at KME to really get to that 10% level.

And then obviously, the new guy, Spartan, they're losing money. And it's going to take us probably a couple of years really to ramp that up. I think it's really a challenge to go from a negative to a positive. But it's going to take, obviously, executing all the synergies. But obviously, it takes a while for pricing and some of the production improvements that we plan to put in place to really relate to the bottom line. I think the SG&A difference, which is significant, we can attack that and we plan to attack that very quickly here in the next couple of weeks and that will be a helpful path towards that 10%. And we're just literally a little bit shy of the 10% right now at Ferrara. So it's a long answer to a simple question, but by next year at this time, we will be there I would guess in certainly 2 and, certainly, the biggest of the Fire side of the business. With kind of a work in process for maybe another year for Spartan and KME as we move through 2021.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [11]

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Okay. So if I get this correctly, then in fiscal '22, in theory, you should be operating at that level, that 10% or better level. Is that fair?

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Timothy Sullivan;President and CEO, [12]

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That is absolutely fair. And quite frankly, I'll bet you on the side that we get there.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [13]

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Excellent. Then maybe you can talk a little bit about demand as well. I mean, obviously, you're a big player in Fire now, the largest. You're, I think, still the largest player in ambulance. What's going on with demand on the Fire side and, obviously, you can't -- I understand that you can't estimate the coronavirus impact, but I'm wondering, based on what you know from the business or what the dealers have told you in the past, how hospitals and ambulance operators are reacting to things such as coronavirus or really any spikes, if you would, in demand for their services? Does that lead to some sort of an investment cycle? Or maybe conversely, does that prevent CapEx in the near-term from being dispersed?

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Timothy Sullivan;President and CEO, [14]

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Yes, let me tell you a side story and then I'll give you my opinion on what it means for us, I think, directly for the U.S. market. We actually got a phone call 2 weeks ago to see how many ambulances we could air freight to China as rapidly as possible and we actually were able to provide a pretty good number of ambulances. They decided that -- they thought they may get there too late. We are producing a lot of ambulances in our JV right now in Wuhu and basically have -- are not doing any RVs out of that plant to meet that demand in China. But that's not going to create a tremendous amount of profitability as we don't make a lot of profit on our JV just yet in China.

In the U.S., we're in discussions with the U.S. government making sure that they fully appreciate our capabilities with ambulance, which is the key, I think, to any type of an outbreak of meaningful levels here in the United States. Knock on wood, let's hope that doesn't happen from a personal standpoint. I think that, that would not be a good thing. But we are in discussions with our government about where we might be able to help if that is the case.

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Mircea Dobre, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [15]

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Okay. I see. Lastly, maybe some updated thoughts on portfolio management. You talked a little bit about the improvement in margin at shuttle as well as class A RV. Are you still considering potentially doing something with these businesses? Or are you essentially changing your mind now that margins are on the right track?

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Timothy Sullivan;President and CEO, [16]

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Good question. Obviously with margins improving, it does create a different dynamic of discussion with our Board of Directors. Having said that, I think, we're committed to the fact that we have to arrive at a 10% EBITDA margin in a relatively short period of time. And we'll have those discussions ongoing, but we don't think either one of those are potentially short-term type of recovery to 10%.

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Operator [17]

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Our next question is from Jamie Cook from Crédit Suisse.

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [18]

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I guess just first question back on the coronavirus unfortunately. Understanding that there's some opportunities on the Fire & Emergency side, but you talked about potential issues with suppliers or components, so can you talk about, one, what you're doing with Tier 2 and Tier 3 suppliers in the event that your Tier 1 suppliers can't meet demand like they're expected to? Are you building any inventory as a result of this, in particular, if there could be upside to your Fire & Emergency business? And are we assuming any incremental or elevated freight costs associated with this? And then, I guess, my second question outside of the coronavirus. You answered questions on long-term thoughts on margins in Fire & Emergency, I guess, Recreation continues to sort of underperform. What are your updated long-term targets there? And what's the right revenue level to get to that target?

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Timothy Sullivan;President and CEO, [19]

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Okay. On the coronavirus, first and foremost, we've had literally 4-part numbers that came up short recently, 4 out of, obviously, thousands -- 700,000 and those were easily obtainable. The good news, I think, about the timing of this whole thing is people tend to overstock for Chinese New Year because there tends to be, obviously, a pretty good falloff, so there was a lot of our distributors that overstocked literally right before the coronavirus hit. Those inventory levels are still pretty sound and strong. And so we're seeing very, very little issues with that. Our materials team are also advising that some of the plants that closed are already back up and running in China. So knock on wood, we think that really it's going to be a very minimal impact, at least for us, because we don't source much there either Tier 1, 2 or 3.

As far as the second question on RV. Obviously, we're cautious because we're in an election year. But we're also very encouraged by what happened in the southern -- we call it the southern buying season. Retail sales were up almost 30% in the month of January. That's the first month that we've had data on for RV. And I think that's obviously much, much higher than we thought it would be. As we look to our projections for 2020, we're seeing -- where we basically effectively budgeted flat, so we're conservative '19 over -- we're actually very conservative '19 over '20 because of the presidential year. I'm encouraged now that that will be a potential upside for us as we move into 2020 if the indications that we got from the retail market in January are a good indication.

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Operator [20]

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

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [21]

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I'll start off with a little bit of an unfair question. But how do you guys like the level of confidence you have in not acquiring another headache? We've seen a lot of plant consolidations. And you've been doing a lot of work on this company for a couple of years reengineering the whole manufacturing process. So how do you feel comfortable that the Spartan asset is not going to give you another headache?

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Timothy Sullivan;President and CEO, [22]

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Well, if anything, Joel, we actually probably are more confident today than we were 2 years ago or even 3 years ago, when we had Fire & Emergency above 10%. We know how to get there. We're very encouraged by what it's taken here in the last 12 months to muscle through some really major expansions. The good news was Spartan, it's not about expanding. Quite frankly, there's probably some synergies on some contraction of some brick and mortar at Spartan. But I think, as I mentioned, there are some pretty decent -- I hate to refer to it as low-hanging fruit, but it's low-hanging fruit on the synergy side. SG&A and pricing are obviously almost immediate things that we can affect and then it's really a matter of getting the operational excellence to where it needs to be, which is the heavy lifting side, as you know. But experience is a big deal. And the good news is we're very experienced at it. And we're happy to have this headache.

This is an asset we've been looking at for about 3, almost 4 years now. And I meant it when I said it. We were very excited when we saw that this opportunity was actionable. It really completes our portfolio. It was a missing link. It was missing because of some of the cities that it serves that we just couldn't break into. And now we're into those, and we're also into all these regional players, of which there's over 40 out there, that sell regionally. So it really completes the portfolio nicely, and I'm very, very confident we're going to get through and get this to a 10% EBITDA business.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [23]

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And have you guys given any numbers on the synergies and the timing and all that sort of stuff? You gave Mig a little bit of a sense by 2022, things will start to normalize. But any sense on the numbers? Okay.

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Timothy Sullivan;President and CEO, [24]

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We haven't, Joel. We've got a number -- I think, this is only a couple of weeks old. I think we'll probably give you some more color around that as we get into a little bit deeper. I did give you one quickie there, 7% versus 11% SG&A and pricing. But now there's meaningful synergies on this acquisition, very meaningful. And we didn't even really delve too deeply into the sourcing side. It's always interesting when we buy a company to find out what their buying things for versus us. It's not always the fact that we are achieving the lowest cost on our materials, so it's also a nice little pickup usually.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [25]

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And then to switch gears for a minute, can you give us a little sense -- can you run through the pieces of Commercial and give us a sense how the orders look and kind of a sense of contracts on the street like what are municipalities looking at in terms of bigger contracts for some municipal orders as we go through 2020 and 2021?

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Timothy Sullivan;President and CEO, [26]

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Yes. As you know, a very nice backlog at ENC and our transit bus business. We have the follow-on contract for L.A. We've got the follow-on, not 100% to what we thought we were going to get, but a follow-on from Chicago. We actually are getting additional business off of the foothills contract, that's kind of the suburbs of L.A. We got that contract. We didn't talk much about that over the last couple of years. So we're really in very, very solid shape, assuming we don't try to increase our production rates too much at ENC in Riverside, California, but we're good through 2021 with that backlog.

Collins school bus is always solid. This is the buying season. We see no falloff whatsoever in municipal spending on school bus. We think that's going to be fine. And we're actually very encouraged by the backlogs we've got, primarily at our Salina, El Dorado operations. It's our largest backlog we've had since I've been here. It's out beyond 6 months, which we never have that type of a backlog at Salina. Less at Imlay City for our Champion brand, but still a pretty decent backlog there. So on the Commercial side, we think we're in very good shape to maintain kind of the level of performance that we've demonstrated here in the first quarter as we go through the next 2 -- 3 quarters, and we also have some good things going on to improve upon the margins.

The one, I would say, that is a little worrisome and that we're trying to get our hands around right now, and that's our terminal truck, our yard truck business. It was very, very strong last year, and we think that was related to the whole activity around last mile, and it's soft. It's been soft the first quarter. We don't know if there was overspending in the fiscal year 2019, but right now that's the only Commercial segment that's a little bit off as we finished our first quarter and our visibility isn't really that great for the second quarter either. So we're doing a lot of work to figure out what's going on there, but that's cooled off here in the first quarter. That's the only little glitch, I think, that we have on the Commercial side. The bulk of the business is quite strong as we move through 2020.

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Joel Gifford Tiss, BMO Capital Markets Equity Research - MD & Senior Research Analyst [27]

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Okay. Great. And then just one last one. Dean, can you give us your 2020 free cash flow estimate? Or have you given us that?

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Dean J. Nolden, REV Group, Inc. - CFO [28]

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Yes. So we've disclosed the -- this is before, excluding the acquisition, obviously. But we disclosed cash from operations in the midpoint of about $75 million. We disclosed our CapEx. I think we're going to be at the low end of the CapEx guidance. We just didn't want to adjust it too aggressively right now as we are digesting the needs of Spartan making sure we adequately capitalize anything or invest in things that might be needed there, but I think we'll be at the low end of the CapEx spend. Interest, we disclosed and taxes plus other asset sales and we disclosed of about $10 million. So all that comes to about a free cash flow of like $30 million to $40 million positive.

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Operator [29]

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Our next question comes from Chad Dillard from Deutsche Bank.

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Unidentified Analyst, [30]

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It's [George] on for Chad. I just had a question on RV dealer inventories, how things are trending currently and where you expect to end fiscal '20.

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Timothy Sullivan;President and CEO, [31]

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RV inventories remain at an all-time low. I think everyone's very disciplined on keeping their retail lots probably lower than what they -- definitely lower than what they were the last 7, 8 years when there was the drive towards the current level of sales and we're also seeing kind of an equalization of wholesale to retail. So people are buying lesser units as they sell. So if they sell 10, they'll buy 10. That's not necessarily how things were moving in the last 7, 8 years. But it's steady. It's good. Order intakes are good. We actually have backlog at all 4 of our RV locations, which is unusual for Decatur. Our Class As have not had a meaningful backlog in 4 years. We obviously reduced our production rates quite a bit last year. But we have a backlog at all 4 locations, not huge but good to work towards. We're -- again, we basically planned flat year-over-year. It's an election year. I think everyone's cautious. But I think with the retail levels that everyone saw in January, I think we're cautiously optimistic now that it's going to be a better-than-average year as we move into 2020, especially with retail inventories as low as they are.

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Unidentified Analyst, [32]

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Great. That's helpful. Another question on commercial. Could you kind of walk through the cadence of the margin trajectory for the remainder of the year?

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Dean J. Nolden, REV Group, Inc. - CFO [33]

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Yes. So as you know, the first quarter from a commercial perspective was significantly better than the prior year quarter. As we move throughout the year, though, we have tougher comparables quarter-over-quarter because we started, if you remember, producing on the larger -- some larger contracts in municipal transit buses in the second quarter of fiscal 2019. So as we go through the quarter, I don't expect the beat on a comparable basis quarter-over-quarter from commercial margins, but I expect that they will sequentially continue to grow as the year progresses.

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Timothy Sullivan;President and CEO, [34]

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And keep in mind my comments on yard trucks. I think that's going to be a bit of a headwind for our Commercial segment as we move through the year. We were not aggressive with the yard truck projections just for the fact that it has started to soften before we started this fiscal year, but that will be a little bit of a headwind as we move through the year as well.

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Operator [35]

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Our next question comes from Jerry Revich from Goldman Sachs.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [36]

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Can you talk about the Commercial segment margin improvement? Just flesh that out for us if you don't mind. How are you folks able to achieve the operational turnaround on the shuttle bus business? Was that pricing, operating efficiencies? Just the major buckets there would be helpful for context.

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Timothy Sullivan;President and CEO, [37]

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All of the above, Jerry. It was -- it takes everything. We improved our pricing. We -- I think we're a little bit more discerning on the deals that we did take, and we did really do a full-court press with REV production systems over the last 18 months in shuttle bus. Shuttle bus was the first area that we attacked and are starting to reap the benefits there, too. So both, it's price and operational efficiency.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [38]

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Okay. And then, in Ocala, can you just talk about how much your man-hours per unit have declined? Just give us a little bit more context around productivity having turned a corner this past quarter, just a little more context if possible.

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Timothy Sullivan;President and CEO, [39]

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Well, the first quarter, not much compared to how we ended the fourth quarter. But now as we're moving into the second quarter, it started to drop significantly as far as the number of man-hours per unit. In round numbers, if you look at just the month of February, we're at about a 30% reduction, which is huge. But we expected that to kind of happen that way. When these guys are trained and they start to understand their job -- and remember, 200 new people and these are pretty young guys that come in there to learn their trade. We think that this should accelerate nicely as we move through the second and third quarter.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [40]

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Okay. And lastly, on the ambulance side, can you just talk about what the expected order cadence is out of private ambulance buyers? I think there's some concern in the market about balanced billing, and I'm wondering is that impacting their plans for orders over the course of '20.

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Timothy Sullivan;President and CEO, [41]

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What's interesting about that is they're looking for a little bit different product. And if you look at what we've been selling to the privates here in the last quarter, because their reimbursements are down and because of maybe some lag in some of their billing and receivables, they're starting to de-content the types of ambulances that they buy. And we've reacted very quickly to that, so it's not as if the volumes come down. The demand is still there. I think it's the type of ambulance that they want. It's morphing into something that has a lower content than what we historically would have sold them in the past.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [42]

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But comparable number of units then?

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Timothy Sullivan;President and CEO, [43]

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Yes. Yes, the demand is about the same. It's just the content they want to kind of de-content these. So our challenge is really how do we maintain good margins by de-contenting, which means, again, we've got to get our efficiencies up in the plants.

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Operator [44]

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(Operator Instructions) And our next question is from Courtney Yakavonis from Morgan Stanley.

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Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [45]

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I was just wondering if you can kind of -- you called out some of the headwinds that you think could to come into the Commercial segment for the remainder of the year. I think last quarter, you had guided to mid- to low single-digit growth overall in Commercial. Obviously, this quarter was much stronger than that. And I think actually, last quarter, you've been talking about the Collins bus order being a pretty big headwind. So obviously, a lot of sales came in that surprised versus what we were estimating. So just curious if you can give us -- what your thoughts are on the segment for the full year and whether any sales kind of shifted into the first quarter from the remainder of the year.

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Timothy Sullivan;President and CEO, [46]

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No shifting of sales. And as you correctly say, I think, the -- we budgeted accordingly. We obviously have plenty of time to know that we weren't going to repeat the New York order for Collins, so that was already baked into our projections and our guidance for the year. The only headwind that was not really put into the budget or the projections for guidance is the softness in yard trucks. It's not a huge segment for us as part of Commercial. Obviously, it's the smallest of our segments. So it could have a little bit negative impact as we move through the year, but as Dean reiterated and reconfirmed, we're very comfortable with our guidance. We think that what we have happening positive on shuttle and on transit and what should be our typical year for Collins, again, that's unknown as the orders are being placed now. But if we have a typical Collins year, we will easily hit guidance for the Commercial segment.

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Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [47]

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Okay. Great. And then I was just wondering if you can just help us disaggregate of the EBITDA margin decline in F&E. You called out some from the efforts to increase production at your fire plants, but you also called out mix. So how much was a result of mix? Can you help us understand within that segment what the custom versus non-custom mix was this quarter as a drag? And then, of the backlog, what gives you confidence that you're going to see more of those custom orders return in the remaining 3 quarters of the year?

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Timothy Sullivan;President and CEO, [48]

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Well, I'll start and let Dean kind of jump in on this one because he's got the numbers. But let me give you the color on it if I can. Mix in fire is -- it's not a simple answer, but let me try to keep it simple. You got 2 big categories, commercial and custom. Commercial, we buy the chassis. Custom, we build the chassis. And obviously, there's less margin on commercial because we can't mark up the chassis like we can on a chassis we manufacture. But we also have, obviously, the difference between pumpers and aerials, big difference. You're talking a $500,000 truck versus $1.5 million truck. Then you've got your ARFFs, of which we also have a fairly significant number of ARFFs going through. Those are the airport trucks. That's an unusual element in our backlog right now that roll through, as we go through the back half of the year and into 2021. Those sell at about $1.2 million. So you got a pretty big array of sell points. And if the margin percents are comparable, that's where the mix comes in with fire that really kind of hurts us a little bit when we have an inordinate number of pumpers in commercial.

That, we did have -- and Dean can give you the numbers. We did have a little bit higher percentage of commercial trucks in the first quarter. But I got to tell you, that was planned. The bigger -- it's hard for a lot of people understand this. But when you have a lot of people that you're paying and you're not getting the output in a plant the size of Ocala, where you got 800 people out there building fire trucks and 200 don't quite know what they're doing, it doesn't take you long to just eat up any dollar or margin or percentage of margins you put on those trucks. But Dean will give you maybe a little bit more color on the exact numbers on commercial versus custom there in the first quarter.

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Dean J. Nolden, REV Group, Inc. - CFO [49]

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Yes. And it's a little hard to describe, one, because we don't give guidance on ambulance versus fire. So as we talked about in prepared remarks, ambulance did well on a year-over-year basis compared to last year. So most of the year-over-year reduction in margin that you see for Fire & Emergency is related to the Fire division. And about 1/3 of that is related to mix. So as Tim said there, that was anticipated. We know what's in the backlog. We have scheduled production slots out into the 9- to 12-month future. And so that also gives us confidence as to know what's in the backlog and the production schedule for Q2 through Q4 and the remainder of the year in Fire.

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Courtney Yakavonis, Morgan Stanley, Research Division - Research Associate [50]

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Okay. Great. And then just lastly, if you can disaggregate what you're seeing between Class A and B, and then towables in recreation. It sounds like most of the increase in your orders is coming from increases in A and B, and the towables is down. But I think the industry data looks like towables was improving pretty significantly. So just curious if you can kind of help us understand how the towable segment is doing versus the industry and if there's anything else going on there.

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Timothy Sullivan;President and CEO, [51]

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No, you got it right. I think the Bs have remained strong. People like the Bs. And I think this -- really the phenomenon is a lot of the millennials continue to buy. They really are into RVs. So it's towables and Bs. In some respects, Cs, but not to that same level. Ironically, I think -- not ironically, but just I think the fact that we've got good products now, we're actually picking up a little bit of share on the As. The As are still very soft, but I think because of our new products that we introduced back in the fall, and the new products that we're introducing for 2021, they're very popular and they're moving off the retail lots. So I think we got the product dialed in. The market is soft, but we think our shares are improving slightly.

The other area that we're actually having some pretty good traction on right now are Super Cs. Super Cs are similar to the As. They're on the higher end of the purchase spectrum, but we're a strong #1 position in Super Cs in the marketplace. And that market continues to be good for us as well. So I guess to maybe summarize, Bs and towables are good. They're doing fine, and we're keeping pace for the market. I think we're picking up a little bit of share in Super Cs and As probably above what the market is -- demand is showing if that makes sense.

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Operator [52]

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And we have reached the end of the question-and-answer session. And I will now turn the call over to Tim Sullivan for closing remarks.

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Timothy Sullivan;President and CEO, [53]

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Thanks, everybody, for joining us. We took the full hour this time and that's great. I think we are very excited about the Spartan acquisition. It really fulfills the full portfolio. Provides us with a missing element that, as I said in my statements now a couple of times, that we've desired for the last 3 or 4 years. It's very exciting for us as a company. We think we'll be able to execute on it very well here in the near term and get that to the profitability levels that we all expect. As Dean confirmed, we feel good about fiscal 2020. We feel more encouraged every day by what's happened in Ocala. It's just a matter of time and time heals what we've gone through down there. So again, good quarter, looking for a good year, and appreciate your interest in our company, and we'll talk to you again in June.

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Operator [54]

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