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Edited Transcript of REVG.N earnings conference call or presentation 8-Mar-17 4:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 REV Group Inc Earnings Call

Mar 8, 2017 (Thomson StreetEvents) -- Edited Transcript of REV Group Inc earnings conference call or presentation Wednesday, March 8, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Sandy Bugbee

REV Group, Inc. - VP, Treasurer and IR

* Tim Sullivan

REV Group, Inc. - CEO

* Dean Nolden

REV Group, Inc. - CFO

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Conference Call Participants

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* Mig Dobre

Robert W. Baird & Company, Inc. - Analyst

* Jamie Anderson

Credit Suisse - Analyst

* Ben Burud

Goldman Sachs - Analyst

* Brady Cox

Stifel Nicolaus - Analyst

* Chris Olestrenko

Wells Fargo Securities, LLC - Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the REV Group Inc. first-quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Sandy Bugbee, VP, Treasurer and Investor Relations for REV Group Inc. Thank you, Miss Bugbee, you may begin.

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Sandy Bugbee, REV Group, Inc. - VP, Treasurer and IR [2]

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Good morning and thanks for joining us. Last night, we published our first-quarter 2017 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, and 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 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 call, if at all.

All references on this call to a quarter or a year are to our fiscal quarter or fiscal year unless otherwise stated.

Joining me on the call today is our President and CEO, Tim Sullivan, as well as our CFO, Dean Nolden. I will now turn the call over to Tim.

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Tim Sullivan, REV Group, Inc. - CEO [3]

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Thanks Sandy, and thanks to everyone on the call for your interest in REV Group.

We are pleased to report strong results for our first quarter as a public company and we are confident this is just the beginning of a unique and dynamic industrial growth story for years to come.

As you saw from our release last night, REV had a strong first quarter, both on the top and bottom line. We reported 19% growth in net sales and 40% growth in adjusted EBITDA in the first quarter 2017 versus the same period last year. We are encouraged by the sales growth we experienced in the first quarter but, even more importantly, we are excited about the incremental earnings growth. We expect to continue this type of leverage on incremental sales that will create the earnings growth and margin expansion we are targeting in the current year and over the long-term.

You may recall that the headline of our strategic plan is that we intend to achieve 10% EBITDA margins, which is essentially double our current level of profitability. This does not include the impact of expected future M&A, which we remain focused on.

Our markets are currently enjoying strong macro and demographic tailwinds and some of our -- some are characterized by pent-up demand that is driving our customers to replace their aging fleets. For context on this point, on Slide 4, you will note that REV vehicles in the market today represent an in-place fleet valued at approximately $32 billion. The replacement cycles of this installed base provide sales stability and predictability. We estimate that, any given year, between 60% to 80% of sales of a product category is derived from replacement of existing vehicles.

During the first quarter, we also made progress on our strategy to grow our aftermarket parts and service businesses. By continuing to improve customer access and parts availability, we experienced strong low double-digit growth in the aftermarket parts revenues in the first quarter of 2017 compared to the first quarter last year.

Now, if you'll turn to Slide 5, I would like to introduce our full-year fiscal 2017 guidance. First, we expect full-year consolidated REV Group net sales to be within the range of $2.225 billion to $2.325 billion. And second, we expect full-year REV Group adjusted EBITDA to be in the range of $150 million to $155 million. This guidance contemplates the recent acquisition of Renegade RV, but I would note that this fiscal 2017 guidance does not include the impact of any future M&A. Also, our plan will be to confirm or update you on an annual REV Group guidance on a quarterly basis.

Now let me turn the call over to Dean to further discuss our financial results.

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

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Thanks, Tim, and good morning.

Please turn to Slide 6. We had a strong quarter for consolidated sales, adjusted EBITDA, and adjusted earnings per share growth. Our consolidated revenue grew 19% and adjusted EBITDA grew 40%, which is an 80 basis point improvement in our adjusted EBITDA margins to 4.8%.

First-quarter adjusted net earnings grew 45% over last year to $5.7 million, and adjusted EPS in the quarter -- first quarter of 2017 -- was $0.11 per share compared to $0.07 in the first quarter last year. Please refer to the tables in the appendix of our financial results slide deck and in our earnings release for detailed reconciliations of net income to adjusted net income and adjusted EBITDA.

Moving on to our segments, please turn to Slides 7 and 8. Our F&E segment grew sales in the quarter by 44%, or nearly 17% on an organic basis, adjusting for the impact of the acquisition of KME in April of last year. During the quarter, we had strong sales growth from our ambulance business and growth in line with the markets in our fire business. We realized strong parts revenue uptake in F&E in the quarter and higher service revenues from its RTCs.

At the end of the first quarter of 2017, F&E backlog grew 4.8% to $577 million. F&E adjusted EBITDA was up 9% in the quarter to $16.7 million. As expected, adjusted EBITDA margin was down year-over-year as a result of the acquired lower margins in KME.

I'm pleased to report that we are on schedule with our KME integration, and we expect F&E to begin to benefit from higher KME margins as we work through its acquired backlog by the end of our second quarter, and we expect improved profitability from KME throughout the year from our cost reduction and operational actions.

On Slides 9 and 10, our commercial segment showed an expected decline in revenues of 7% as we have been more discerning about which contracts we participate in. As we have gotten past some of these (inaudible) long-term legacy contracts, and we build a higher quality backlog, the commercial segment realized an impressive adjusted EBITDA growth of 58% to $8.2 million in the first quarter.

During the quarter, we completed the closure of one facility in this segment and moved certain production to other existing plants. We are also acting upon our operational and cost improvement strategies, which will drive improved profitability over time. Growth in the commercial segment profitability in the quarter was the result of year-over-year profit improvement in all of its product categories.

Turning to Slides 11 and 12, our recreation segment produced solid results with revenue growth of 21%, driven by strong end markets, especially for our Mid-line Class A diesel product and our Holiday Rambler brand. Contributing to this segment's sales increase was also the impact of our acquisition of Renegade RV on December 30, 2016, which bolsters our growing Class C product offerings. Excluding the impact of the Renegade sales for one month, the quarter-over-quarter sales growth in this segment was still a very healthy 16%.

We are pleased with the progress in our recreation segment towards improved profitability as adjusted EBITDA margins grew to 2.2% in a seasonally weak first quarter, which represents a 390 basis point expansion over the prior-year quarter. As you know, recreation profitability improvement is a key aspect of our overall REV growth strategy, and this year-over-year improvement is a good start towards our ultimate goal to achieve 10% EBITDA margins in this business. The strong growth and profitability was driven by lower discounting from reduced age of dealer fleets, a higher mix of Class A diesel unit sales, and our ongoing procurement and product initiatives.

Turning to Slide 16 -- 13, excuse me, we used the net proceeds from our IPO to redeem our 8.5% senior notes and a portion of our outstanding balance under our ABL facility. Taking into consideration the pay down of debt after quarter end, our net debt would have been approximately $83 million. And as a result of this debt reduction, we expect the quarterly run rate for interest expense for the rest of fiscal 2017 to approximate $2 million per quarter.

We have a balance sheet post-IPO that positions us uniquely in our industries to aggressively capitalize on the internal and external investment opportunities we see across our specialty vehicle landscape. While I will not comment specifically on M&A for obvious reasons, we have currently a strong pipeline of opportunities and we're focused on this part of our growth plan.

Net working capital increased $64 million in the quarter over year-end. Our first-quarter working capital needs are seasonally higher as we build working capital for the stronger quarters in the back half of our year. Additionally, our capital expenditures for the year have been heavily front-end loaded with $18.6 million of CapEx year-to-date, which represents nearly 50% of our full-year capital expenditure plan.

I'd like to provide a few other REV Group detailed modeling items related to our full-year fiscal 2017 financial expectations. We expect a full-year effective income tax rate in the mid to high 30% range, depreciation and amortization of $31 million to $33 million for the full year, approximately 65 million to 66 million weighted average diluted shares outstanding starting in Q2, and capital expenditures of approximately $40 million to $45 million for the full year.

Before turning the call back to Tim, I'd like to reiterate the normal seasonality of our financial results. The first quarter of our fiscal year is always our lowest quarter in terms of sales and profitability, and the first quarter of 2017 was no different. Due to the application of our products and customer habits, in addition to the unique fiscal year and quarterly construct to our business, our second through fourth quarters normally get incrementally larger in terms of sales and profitability compared to the first quarter with the fourth fiscal quarter being the strongest quarter of our year.

Thanks for your time, and now I'll turn the call back to Tim for closing remarks.

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Tim Sullivan, REV Group, Inc. - CEO [5]

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Thanks Dean. I'd like to close out this segment with two brief comments. Firstly, we are pleased to announce that, last night, our Board of Directors declared a quarterly dividend of $0.05 per share payable on May 31, 2017 to shareholders of record on April 30. This equates to $0.20 per share on a full-year basis. We believe this dividend provides a yield component to our equity story but also provides the flexibility for us to maintain a disciplined capital allocation strategy with heavy emphasis on the organic and inorganic growth.

Lastly, our management team is excited to turn to the next chapter of the REV story as a public company with a clean balance sheet and unmatched scale in the markets we serve. We are off to a good start with the result of our first quarter and we are confident that we will be successful creating significant shareholder value over the long-term. We look forward to updating you on our progress throughout the year.

With that, let me turn it back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Mig Dobre, Baird.

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Mig Dobre, Robert W. Baird & Company, Inc. - Analyst [2]

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Thank you. Good morning. Can you hear me okay? Yes, hi there. So, maybe just a little more color on the guidance, Tim. Can you maybe parse out your revenue guidance and remind us as to what's included here in terms of contribution from KME and Renegade for the year, and then also update us as to how you're thinking about core growth or organic growth, if you would, by segment?

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Tim Sullivan, REV Group, Inc. - CEO [3]

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Let me hit on the high level first. The guidance that we gave is purely organic of nature, so that obviously does not include any future M&A. It does include Renegade on both the top and bottom line. I think you realize that Renegade at this juncture is not a major contributor to our mix on both the top and bottom line, but we see that to be much more meaningful as we go forward. We are just moving the Renegade products right now into our normal RV channels, which will effectively triple their scope in the marketplace. And so it's going to be much more meaningful really as we move into 2018 and beyond.

Effectively, all of the segments are contributing at about the same levels that they have in the past. We don't have any particular segment that's growing quicker on the top line. We are a little bit light right now on our shuttle bus business. We are being very discerning on how we are booking new business with shuttle buses. We see that that's going to pick up and be more at historical levels as we move through fiscal 2017.

The good news about shuttle buses, as you saw in the numbers, is they are really contributing a lot better to the bottom line than they have in the past as we work off some of those old contracts that we inherited when we bought that business.

The other one that was a little bit off on the top line this quarter, which will catch up, is KME. We did a major restructuring of the plant in Eskahonee. That is effectively 90% complete, so we will have a little bit of a carryover on some weakness in the top line for KME in Q2, but that will catch up also in Q3 and Q4. So, if you take those two out, shuttle bus and KME, from the first quarter, everything else will really ramp up nicely to normal historical levels.

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Mig Dobre, Robert W. Baird & Company, Inc. - Analyst [4]

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But Tim, to clarify, I want to make sure that I understand this. My understanding was that KME was going to contribute roughly call it $95 million or thereabouts of revenue to your fiscal 2017, whereas Renegade was going to be about $50 million and everything else would be apples to apples core organic. Do I have those numbers right?

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Tim Sullivan, REV Group, Inc. - CEO [5]

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Yes, you've got those numbers right. And again, right out-of-the-box a little bit light on shuttle and KME, but those will catch up.

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Mig Dobre, Robert W. Baird & Company, Inc. - Analyst [6]

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Great. Then my follow-up question is in RV. Is there any way you can give us a sense for what your -- so excluding Renegade, what your core orders were on a year-over-year basis in the first quarter? And maybe related to this, you can also comment a bit as to your -- what are you hearing from dealers with regards to inventories and your sense for where inventories are in the channel overall.

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Tim Sullivan, REV Group, Inc. - CEO [7]

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I'll have Dean give you an exact number on that for the quarter, but keep in mind RV is very seasonal. We've got two big buying periods. One is in September with the open house. The second one is right upon us now. Matter of fact, the model year change is April, and we will be rolling out our new pricing at the end of this week to all of our dealers, which that will create, quite frankly, a nice, big spike in backlog.

The first quarter tends to be probably, as far as backlog and bookings and that sort of thing, fairly weak. We get the big surge in September/October, and we get a big surge here in April/May. And we are kind of at the tail end of model year 2017, so the backlog is pretty light, but that will correct very quickly.

Inventories on RV lots are actually fairly low. They run their -- obviously their model years as low as they can before they load up for their new model year. So, with the 2018s coming out, inventory levels are low. We expect a big backlog change in shift here over the next four to eight weeks. And Dean, maybe give Mig a number.

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Dean Nolden, REV Group, Inc. - CFO [8]

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From a book-to-bill perspective, for the entire Company, we were over one time in the quarter with recreation just slightly below one time for the reasons Tim described in terms of the cadence of orders we expect from the recreation group. That's excluding acquisitions.

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Mig Dobre, Robert W. Baird & Company, Inc. - Analyst [9]

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Okay, great. I'll jump back in queue.

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Operator [10]

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Jamie Cook, Credit Suisse.

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Jamie Anderson, Credit Suisse - Analyst [11]

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This is Jamie Anderson on for Jamie Cook. Congrats on the first quarter as a publicly traded company. I was wondering if you could just help outline some of the margin initiatives in recreational that are going to get you guys to that 10% range, as well as kind of any incremental investment needed and your timeline to kind of drive that margin story, you know, as well as kind of like where are the areas that we should think about in terms of low-hanging fruit versus like what's more aspirational. Thanks.

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Tim Sullivan, REV Group, Inc. - CEO [12]

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Let me answer those a couple of different ways. First and foremost, I think you know that we opened up three new plants here in the last 12 months. We have plenty of capacity, and we plan to fill that capacity as we move forward. So, we are not constrained whatsoever from a capacity standpoint and feel really good about where we are at from that standpoint.

Obviously, volume does help drive margin realization up. The more volume you put through a plant, more efficiencies you get, the more overhead absorption you get, which obviously helps your bottom line.

The other thing that's really going to help us as we continue to grow our share in A's is with our new model year coming out in 2018, we have six new products hitting the marketplace here in the next week. And we are very happy about what we're going to introduce to the marketplace here for fiscal -- or not for fiscal, for model year 2018. Better products, more products that are going to address I think the needs in the marketplace will also help drive our margins up. Having said that, our margin -- our march towards 10% EBITDA margins in RV will not be a sprint. It will be a marathon. We'll work that out over the next three years, which is our goal. And you'll see incremental improvement on our margins in RV as we move through that path of fully utilizing a new plant capacity, getting some nice margins on some of our more innovative designs that we bring out with the model year changes.

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Jamie Anderson, Credit Suisse - Analyst [13]

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Great. Thank you very much. Then just one quick follow-up. Can you help frame what the margin headwind was from KME in the quarter, and then how you guys are tracking on your margin improvement initiatives there in terms of timelines to drive more in line with E1?

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Tim Sullivan, REV Group, Inc. - CEO [14]

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Right. KME, as you know, we inherited a pretty poor quality backlog with KME. The good news is that we've owned the business for almost one year, and, by the end of April, a lot of the very poor backlog will be flushed out. Now, we've taken, quite frankly, breakeven business. We are going to be making a little bit of money here in the second quarter, but that will start self-healing as we roll better backlog in, in Q3 and Q4, for KME. But right now, they are not really contributing really anything to our bottom line as we flush through that bad backlog.

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Dean Nolden, REV Group, Inc. - CFO [15]

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Just add to that, our F&E EBITDA, adjusted EBITDA, in the quarter was up 9% year-over-year. And without KME, it would have been very close to that as well. So to back up Tim's point, KME didn't have a big impact on the quarter from the standpoint of margins that we expect to improve over time.

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Jamie Anderson, Credit Suisse - Analyst [16]

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Great. Thanks so much. I'll hop back in queue.

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Operator [17]

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Jerry Revich, Goldman Sachs.

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Ben Burud, Goldman Sachs - Analyst [18]

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Hi Tim. Hi Dean. This is Ben Burud actually on for Jerry. Thanks for taking my questions. I just wanted to start with commercial. You guys obviously reported around a one times book-to-bill in the quarter. Could you just talk about any -- what visibility you have on the production ramp as we go through the remainder of 2017?

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Tim Sullivan, REV Group, Inc. - CEO [19]

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It's steep. Obviously, because of the seasonality of our booking and how we do things, we are going into a very heavily book period here with both school bus and with RV, which really drive the numbers significantly. We also start to see a kick in with a lot of the municipal spending. Their budgets are in place, the ones that are on calendar years were bid -- bidding a high level of both shuttle business, transit bus business, Fire and Emergency.

So what will happen here in the next 30 to 60 days is we'll start booking a great deal of what we will ship in Q3 and Q4. As you I think realize, we have very, very strong Q3s and Q4s on a regular basis because of the seasonality of how we book and how we produce. We've got plenty of capacity in all of our plants. We just basically ramp up and make sure that we get the shipments that we book in Q2 during the last two quarters of the year.

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Ben Burud, Goldman Sachs - Analyst [20]

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Got it. And then can you just quickly touch on the rollout of order managements systems at KME?

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Tim Sullivan, REV Group, Inc. - CEO [21]

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(inaudible) order management systems, I think -- we completely restructured that plant and put our normal I guess processes in place there that we've had at our other plans for some time. That plant was completely restructured. It was a major undertaking. It's about 90% complete. A lot of the blocking and tackling, a lot of the processes that we have in all of our other plants now have been put into KME, so we feel good about the fact that we will be able to hit our shipment targets in Q3 and Q4 with what we've put in place there.

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Ben Burud, Goldman Sachs - Analyst [22]

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Got it. Thank you.

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Operator [23]

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(Operator Instructions). Brady Cox, Stifel.

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Brady Cox, Stifel Nicolaus - Analyst [24]

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Thanks for taking my question. I just wanted to talk a little bit about the recent announcement of your partnership with Ferno on the ambulance. Obviously, you guys have talked a lot about the ambulance of the future, so it was good to see the announcement. If you could talk a little bit about the timing of when you might start to offer that design and what you are hearing from contractors and municipalities who might be buying the equipment? I'm sure obviously they're receptive to the safety features, but any insight on the additional costs and things you are hearing from customers there?

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Tim Sullivan, REV Group, Inc. - CEO [25]

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Yes, we've built a handful of prototypes already, so the prototypes have been done. We really plan to start rolling that out to the marketplace here in the second quarter, so it's imminent as far as entry into the marketplace. It's starting to collect orders.

We like the whole innovation concept of ambulance of the future. It's really about safety. And let me give you an example of why that's important.

On average, everyday, in the United States, 24 ambulances are in some type of an accident. And worse yet, a worst statistic is, every month, on average, four EMTs lose their life working in ambulances. So we think this is a big deal. This is incredibly innovative. We think it's going to be well received by the marketplace. Nothing like this has ever been done in ambulance. It effectively allows our EMTs to be seated and treat the patient in the ambulance in a seated three-point seatbelt configuration. It's a game changer for ambulance when you think about the statistics that we are trying to overcome from an accident and mortality standpoint.

So, more news to come. We are rolling it out. I think we are going to -- we are encouraged by the reception we think we will get around the country, but, obviously, we will be talking more about that as the quarters progress.

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Brady Cox, Stifel Nicolaus - Analyst [26]

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Great. Just a follow-up on that, other than AEV, McCoy Miller, and Wheeled Coach, will any other REV or non-REV brands be offering the Ferno iNTRAXX system in their vehicles initially, or able to in the future? And is that going to be on just type I or also type III or where is it going to be offered on types of ambulances?

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Tim Sullivan, REV Group, Inc. - CEO [27]

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We are going to offer it on those three that you mentioned initially. We fully expect that, quite frankly, we think this will be the standard with years to come. So we plan to offer it in all of our brands going forward.

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Brady Cox, Stifel Nicolaus - Analyst [28]

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Got it. Thank you.

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Operator [29]

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Chris [Olestrenko], Wells Fargo.

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Chris Olestrenko, Wells Fargo Securities, LLC - Analyst [30]

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Hi guys. Congratulations on the first quarter as public. I just wanted to kind of get a housekeeping item cleared up. The incentive comp was a little bit bigger in Q1 than initially expected. Just trying to see if I can get a little color on why it was a little higher, and do you expect any change to expectations for the rest of the year.

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Dean Nolden, REV Group, Inc. - CFO [31]

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This is Dean. In the first quarter, as we stated in the press release, that stock comp expense was related primarily to mostly, if not all, to the IPO and the impact of the IPO and the timing of vesting as a result of the IPO. And it was higher than expected from a good standpoint in that the IPO was -- the initial pricing of our IPO was higher than our modeling had previously estimated. So the fact that we came on at a higher per share amount on the IPO than we had previously estimated is the biggest reason why that expense was higher.

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Chris Olestrenko, Wells Fargo Securities, LLC - Analyst [32]

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Okay, great. And in the guidance that you gave for 2017, are there any future charges that are material that will affect the net income outlook for adjustments? And if you kind of strip those out, what would the adjusted net income guidance supplied for the adjusted EPS?

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

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We are not, at this point, giving adjusted net income or adjusted EPS guidance, but I would say there are a couple of unique items that will hit us in the coming quarters. One in particular is the loss on debt extinguishment for our 8.5% senior notes. Interestingly, our IPO process straddled the quarter. We went public in the first quarter and funded the IPO in the second quarter and paid down debt in the second quarter. So you'll see about a $11 million charge in the second quarter related to the pay down of those senior notes. Other than that, I don't think there's any significant one-time charges we are expecting at this point other than the normal ones you see there of a smaller nature that are in our reconciliations.

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Chris Olestrenko, Wells Fargo Securities, LLC - Analyst [34]

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Okay. And if I could squeak one in, do you expect kind of sequential growth throughout the year? I know September is kind of busy for two of the three segments. Are those deliveries expected to occur in the third quarter, or will those occur in the fourth?

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Dean Nolden, REV Group, Inc. - CFO [35]

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Typically, with our historical quarterly cadence, as you look back on our prior results, the first quarter through the fourth quarter, each quarter incrementally gets stronger in both revenue and EBITDA. So, this first quarter was the same where the second and third quarters are typically -- are higher than the first quarter and are near in terms of size and the fourth quarter is our strongest quarter. We expect the same for this year.

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Chris Olestrenko, Wells Fargo Securities, LLC - Analyst [36]

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Okay. Thanks, again, guys, and good luck in the second quarter.

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Operator [37]

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(Operator Instructions). Mig Dobre, Baird.

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Mig Dobre, Robert W. Baird & Company, Inc. - Analyst [38]

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Yes, thanks for taking my follow-up. A number of items. Can you actually tell us what the revenue number for aftermarket parts was in the quarter? I know it was up low double digits, but the actual number?

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Tim Sullivan, REV Group, Inc. - CEO [39]

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Yes, we were up about 10.5% year-over-year. What was the number?

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Dean Nolden, REV Group, Inc. - CFO [40]

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About $17 million in revenue in the quarter for parts.

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Mig Dobre, Robert W. Baird & Company, Inc. - Analyst [41]

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Okay. Excellent. And then in Fire & Emergency, the way I sort of read it in the press release, it implies that the ambulance business is actually doing pretty well and maybe outgrowing the fire business. And maybe you guys can talk a little more broadly about those two end markets, kind of separating the trends there. And I ask this because my understanding from talking to people in the industry is that it's sort of the other way around, that fire seems to have better growth than ambulance. So any color there would be helpful.

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Tim Sullivan, REV Group, Inc. - CEO [42]

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Obviously, we've had a lot of growth in ambulance over the last two years. We think the growth basically year-over-year, 2016 to 2017, is going to be relatively flat on the top line on ambulance. If you look at our backlog on fire right now, both KME and E1 are out almost 12 months.

If you look at the stats on fire, it looks like it's basically flat year-over-year as far as demand, but what we are seeing is that there's less demand on brush trucks and tankers, but an increased demand on custom pumpers and aerials. We are actually getting a little bit of activity on ARVs as well. So what you are hearing I guess on corroborating and saying is accurate, ambulance a little bit flat year-over-year, technically fire flat, but not really for us. It's actually up as far as demand. Quotation levels are up year-over-year and, again, our backlogs are up.

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Mig Dobre, Robert W. Baird & Company, Inc. - Analyst [43]

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And I don't know if you're going to want to comment on this or not, but I'm wondering what you're seeing in terms of pricing overall within fire for the industry.

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Tim Sullivan, REV Group, Inc. - CEO [44]

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I think we've been pretty forthright in our convictions that the pricing for both fire and emergency historically has not been adequate to support the type of manufacturing and the type of innovation that we have to embark on as a company. I think it's gratifying that the entire industry, both industries, both fire and emergency, have followed our lead and believe the same thing that we believe, and that's that we need more help on the margin side of our business to make sure that we continue to drive innovation. So, that continues. We started it two years ago. We are in our third year, and very gratifying to see that I think both industries understand that this has to be done.

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Mig Dobre, Robert W. Baird & Company, Inc. - Analyst [45]

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Okay, great. And then I guess the last question, looking at commercial, so going back to your initial comments, Tim, about how organic growth plays by segment, I guess my math is that, in commercial, you are essentially guiding for organic growth somewhere between call it 7% to 9% for fiscal 2017. And obviously, the first quarter we started slow. What -- how should we be thinking about the items that can drive sequential acceleration and growth? Because the comps here seem to be getting actually a little bit tougher in subsequent quarters than what you had in the first.

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Tim Sullivan, REV Group, Inc. - CEO [46]

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Yes. We actually are looking at -- you hit kind of the range, the 7% to 9%, for the entire area, the entire group. We actually think it's going to be a little higher. I think what we are seeing is some of it is generated by some of the actions that we are taking. We are quoting more transit bus opportunities than we ever have. Historically, the company that we bought steered away from some of the large municipality quotes. We are taking those on. And we are actually being -- we are gaining some success with that.

School bus, the type A's continue to grow. We continue to grow market share there. We have got a great bus, and it's well received in the marketplace, and it's in high demand. We've increased our footprint of dealers in that area to expand that.

We will be introducing next month our new Chrysler Pacifica into the marketplace on mobility. That also we feel strongly about. We've got, we think, a better product than our competitors in that area. We've got some new features that we will be introducing that we think will also help us grow the top line in mobility above probably historical levels, or not historical, but certainly over the last couple of years.

I also mentioned a couple of months ago that we have more products in the pipeline for the mobility area that we'd like to grow that segment. It's a good strong market. We think we just need better and more product in that area.

And last but not least, we just introduced last month our four-wheel sweeper, LayMor sweeper. And we have a very strong market share in the three-wheel sweeper, and the four-wheel now effectively offers another market segment to us that we haven't been in before.

So, I would say your projections on revenue are just a little bit light. We are actually projecting a little bit above those numbers as far as topline growth in the segment.

Last but not least, I started my comments today with where shuttle is as far as topline. We were off in the first quarter, and that was just really two things -- I think being very discerning on pricing and making sure that we are going to take orders that make sense for us. A little bit of it was timing. We wanted to make sure that we position ourselves well, but it was timing as well. We think shuttle will actually hit those high single-digit numbers as well as we move into Q2 through Q4. So, commercial in general is in really good shape. We like how we are positioning ourselves for the future.

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Mig Dobre, Robert W. Baird & Company, Inc. - Analyst [47]

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I see. So to kind of sum it up, it's fair to say that this acceleration is, in your view, driven mostly by new product introduction at this point, right?

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Tim Sullivan, REV Group, Inc. - CEO [48]

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Yes, new product and demand. Obviously, the markets are strong. So it's a combination of those two things.

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Mig Dobre, Robert W. Baird & Company, Inc. - Analyst [49]

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Okay, great. Thanks for taking my questions.

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Operator [50]

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Brady Cox, Stifel.

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Brady Cox, Stifel Nicolaus - Analyst [51]

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Thanks for taking my follow-up. I just want to follow up quickly with another question on the parts revenue. Can you just aggregate how much of that was organic and how much may have been driven by KME or Renegade in the quarter? Obviously, 10% growth was good, but if you could provide how much of that was pure organic, that would be helpful.

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Tim Sullivan, REV Group, Inc. - CEO [52]

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It was all organic. We actually have spent the last six to nine months trying to incorporate KME into our systems. That's not to say there wasn't anything out of the KME mix, but it was quite small compared to the overall mix in spare parts. It was really a lot of the initiatives that we're rolling out that really helped drive that revenue with parts.

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Brady Cox, Stifel Nicolaus - Analyst [53]

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Great. That's perfect.

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Tim Sullivan, REV Group, Inc. - CEO [54]

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Excuse me. I didn't answer Renegade. Renegade the same way, we really only had Renegade for a couple of months. And it's quite a small element to the parts right now. We expect that to grow.

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Brady Cox, Stifel Nicolaus - Analyst [55]

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Perfect. Then I just wanted ask one quick question on the bid going on for the USPS contract. Spartan announced recently that they're dropping out of the bidding process there. Can you talk about what you're seeing? I guess Spartan said they can't make the economics work on their end, but a lot of their issue it sounds like was chassis-related. Can you talk about what you are seeing on your end, understanding it's still very early in the process there?

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Tim Sullivan, REV Group, Inc. - CEO [56]

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Yes, very early in the process. I guess that was a surprise for us I think for the fact that the Utilimaster segment of Spartan is pretty well known in the USPS space, but a bit of a surprise there. I think it's still early in the process. I think there still may be some jockeying between all of the bidders just for the fact that there's a lot of different prototypes being built; there's a lot of different innovations being offered. We really won't see how that whole thing plays out probably for another nine to 12 months.

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Brady Cox, Stifel Nicolaus - Analyst [57]

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Got it. Thank you very much.

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Operator [58]

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Jamie Cook, Credit Suisse.

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Jamie Anderson, Credit Suisse - Analyst [59]

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I know you spoke a little bit in your prepared remarks about M&A, but I was wondering if we could just get a little more color in terms of the deal pipeline and as well as deal criteria. So for the deals that you are evaluating, how far along are you in the process? Are these like ready to close or are you just starting diligence, or what have you? In terms of segments, where do you think like the most likely targets are to get a potential deal done by the end of the year? And then maybe if you could just talk broadly to like about your criteria in terms of size, profitability, and return characteristics? Thank you very much.

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Tim Sullivan, REV Group, Inc. - CEO [60]

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Lots of questions. Let me attack them kind of a piece at a time.

Historically, in 2016, we looked very seriously at 10 deals, executed on two. I've made the comment that two or three of those deals could come back again in later years. We like the companies a lot. We thought they made a lot of sense for us. For various reasons, we were not able to execute on those deals.

At any point in time, we are seriously engaged with four to five potential targets on the M&A side of our business. And obviously, not all of those will be executed upon, but that's the average number of meaningful targets that we engage within a given week.

Our strategy is pretty clear on the assets that we are looking at. We really want to continue to bolster our various core businesses by bringing in like companies. So if you look at what we did in 2016, that will be a very common approach for us. We brought in KME, which was very complementary to what we have with E1. We bought in Renegade because it brought in not just one, but three new product lines that were complementary to our RV business. That will be our focus, primarily.

We want to look at various assets that can complement our current product lines in the industries that we are in. Obviously, the reason for that is all of these deals become accretive and really they continue to position us better for the future if we are able to create some synergies with these acquisitions. So, that will be our focus. That will be about the universe that we will look at at any one point in time. I can tell you, as you probably well know, the universe is extensive. We have, on our list, over 100 potential assets that we could evaluate and execute on. So we've got a lot of work to do over the next three to five years.

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Dean Nolden, REV Group, Inc. - CFO [61]

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And maybe to add on to some of the criteria just in a little detail, I would say we've been a very disciplined buyer over the last decade as the REV Group has grown through acquisition. We will continue to be disciplined in that regard. We think we have a competitive advantage on these transactions, given our scale and our balance sheet capacity, so we can maintain that discipline. And we are very aware of our valuation for REV Group in total, and want to make sure that these acquisitions are quickly accretive to overall REV Group value moving forward. So we are going to focus on returns and EPS and metrics that will make sure that we maintain that value accretion for those acquisitions.

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Jamie Anderson, Credit Suisse - Analyst [62]

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Okay. Great. Thanks. Sorry, one housekeeping question. I missed the diluted share count earlier. What was that?

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Dean Nolden, REV Group, Inc. - CFO [63]

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So, the diluted share count for the Quarters 2, 3 and 4 we estimate are going to be between 65 million and 66 million fully diluted shares, up from the first quarter obviously because of the impact of the IPO very late in the quarter.

One of the interesting dynamics maybe as you look forward is the way in which you calculate EPS and diluted shares for the full-year EPS. Probably 62 million to 63 million when you're looking at the full-year EPS would be a good estimate for diluted shares outstanding. So 65 million to 66 million for the quarters, 62 million to 63 million for the full year.

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Jamie Anderson, Credit Suisse - Analyst [64]

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I'm sorry, are you saying 55 million or 65 million?

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Dean Nolden, REV Group, Inc. - CFO [65]

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60 -- 6-5. Sorry.

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Jamie Anderson, Credit Suisse - Analyst [66]

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Great. Thank you.

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Operator [67]

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Chris Olestrenko, Wells Fargo.

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Chris Olestrenko, Wells Fargo Securities, LLC - Analyst [68]

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I'm just wondering if you could comment on what utilization in the quarter looked like year-over-year, and kind of what capacity relative to that you have to ramp.

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Tim Sullivan, REV Group, Inc. - CEO [69]

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It's obviously a very mixed bag because of the various plants we have, 16 different plants. But on average, our utilization is about 60%, which obviously gives us a lot of runway. It's actually more than that. Or I'm sorry, it's less than that in RV, with the three new plants. We are agging about just a little bit less than 50% in our ambulance plants, we are approaching more like 70% or so. It's really an average of 60% across the board.

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Chris Olestrenko, Wells Fargo Securities, LLC - Analyst [70]

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Okay, thanks.

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Operator [71]

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There are no further questions at this time. I'd like to turn the floor back to Tim Sullivan for closing remarks.

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Tim Sullivan, REV Group, Inc. - CEO [72]

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Thanks again, everyone, for joining us today, and your continued interest in REV. We feel we had a very solid first quarter, a good start to the year. We think that the guidance that we've provided is certainly achievable, and certainly a nice uptick over what we had in 2016. We look forward to executing on that guidance, and we look forward to talking to you again after Q2. Thanks again for joining us. Have a good day.

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Operator [73]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.