REV Group, Inc. (NYSE:REVG) Q1 2024 Earnings Call Transcript
REV Group, Inc. (NYSE:REVG) Q1 2024 Earnings Call Transcript March 6, 2024
REV Group, Inc. beats earnings expectations. Reported EPS is $0.25, expectations were $0.09. REVG isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the REV Group's First Quarter 2024 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] Please note, this conference is being recorded. At this time, I'll turn the conference over to Drew Konop, Vice President, Investor Relations. Drew, you may now begin.
Drew Konop: All right. Good morning, and thanks for joining us. Earlier today, we issued our first quarter fiscal 2024 results. A copy of the release is available on our website at investors.revgroup.com. Today's call is being webcast, and a slide presentation, which includes a reconciliation of non-GAAP to GAAP financial measures, is also available on our website. Please refer now to Slide 2 of that presentation. Our remarks and answers will include forward-looking statements, which are subject to risks that could cause actual results to differ from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we've described in our Form-8K filed with the SEC earlier today and other filings we make with the SEC.
We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All references on the call today are to a quarter or a year or to our fiscal quarter or fiscal year, unless otherwise stated. Joining me on the call today is our President and CEO, Mark Skonieczny. Please turn now to Slide 3, and I'll turn the call over to Mark.
Mark Skonieczny: Thank you, Drew, and good morning to everyone joining us on today's call. Shortly, I will provide an overview of our consolidated first quarter performance as well as detailed segment financials. Before I comment on the quarterly results, I would like to review the strategic initiatives, including capital allocation activities that have been recently executed. These actions were aimed at optimizing our portfolio products, creating a more focused operating structure and unlocking shareholder value. As we have previously announced, REV Group will be exiting bus manufacturing through the recent sale of Collins Bus and the winding down of manufacturing operations at our ElDorado National-California, or ENC, transit bus business.
The sale of the Collins school bus business to Forest River closed on January 26th with an all-cash deal price of $308 million inclusive of certain preliminary working capital adjustments. The wind-down of the operations of ENC is expected to be completed before the end of fiscal 2024. We expect to generate net cash proceeds of at least $250 million from the exit of the bus manufacturing businesses. Approximately $179 million of the immediate proceeds were used to return cash to shareholders through a $3 special cash dividend that was paid on Friday, February 16th. The remainder of the proceeds were used to participate in a secondary offering that closed on February 20th by purchasing 8 million of REV Group common shares in an average price of $15.76 for approximately $126 million, reducing the total amount of shares outstanding by 13% and our largest shareholders position from 46% ownership to approximately 18%.
We believe these actions demonstrate our commitment to delivering shareholder value. Since 2020, we have returned over $400 million to shareholders in the form of dividends and share repurchases while paying down debt and strengthening the balance sheet. We remain focused on generating high levels of cash from operations and are committed to a strong balance sheet that allows flexibility to pursue new growth opportunities and optionality for future returns of cash to shareholders. Finally, beginning with today's earnings release, the Fire & Emergency businesses have been combined with the Specialty group business that manufactures Capacity terminal trucks and LayMor street sweepers in a new segment named Specialty Vehicles. The segment's first quarter results also include Collins' operating performance through its divestiture date of January 26, and will include ENC's financial results through the wind-down period.
Specialty Vehicles is being led by Mike Virnig, the former REV Fire Group President. The Recreation segment has been renamed Recreational Vehicles and remained under the leadership of Mike Lanciotti. Taken collectively, we believe these strategic actions create a more focused portfolio that provides opportunities for growth, consistent cash generation, and improved margin performance while maintaining a strong balance sheet. Turning to Slide 4. Consolidated net sales of $586 million were approximately flat compared to the first quarter of the prior year. The year-over-year revenue result was primarily due to increased net sales, including price realization within the Specialty Vehicles segment offset by lower net sales from the Recreational Vehicles segment.
The increase in net sales in the Specialty Vehicles segment was related to increased unit shipments and price realization within the fire and ambulance businesses and increased bus manufacturing sales partially offset by lower sales of terminal trucks. Lower net sales in the Recreational Vehicles segment were primarily a result of fewer shipments of Class A, Class B, and towable units, partially offset by higher shipments of Class B units. Consolidated adjusted EBITDA of $30.5 million, increased $9.2 million, or 43%, from the prior year, which increased -- with increased contribution from the Specialty Vehicles segment, partially offset by lower contribution from the Recreational Vehicles segment. The increased earnings in the Specialty Vehicles segment were primarily due to increased contributions from the fire and ambulance businesses.
Lower earnings in the Recreational Vehicles segment were primarily related to lower contributions from the Class A, Class B, and towable businesses, partially offset by increased contribution from the Class C business. Please turn to Slide 5. Specialty Vehicles' first quarter segment sales were $417 million, an increase of 17% compared to the prior year. The increase in net sales was primarily due to increased shipments of fire apparatus and ambulance units, higher sales from the bus manufacturing businesses, and price realization, partially offset by lower sales of terminal trucks. Unit shipments of fire apparatus increased 24% and shipments of ambulance increased 23% versus the prior-year period, reflecting continued momentum of the operational improvement initiatives put in place aimed at increasing throughput.
Net sales of fire apparatus and ambulance increased 36% and 38%, respectively, and improved product mix and the benefit of price realization as we deliver a greater number of newer units from our backlog with pricing put in place throughout 2022 and 2023. Within the quarter, certain fire businesses accelerated shipments of aged units that were trapped in backlog, improving the overall backlog mix and future price realization opportunity. Specialty Vehicles' segment adjusted EBITDA was $26.2 million in the first quarter of 2024, an increase of $21 million compared to the adjusted EBITDA of $5.3 million in the first quarter of 2023. The increase was primarily due to increased contributions from the fire, ambulance and bus businesses, partially offset by lower earnings from the terminal trucks business.
The increased fire group contribution was primarily related to higher unit volume, improved efficiencies and price realization, resulting in increased profitability of 550 basis points for the first quarter of last year. This was aided by the strongest first quarter results of the Spartan businesses since its acquisition in 2020. In addition, the KME brand had its best quarterly performance since 2019. The increased ambulance group's contribution was primarily due to higher unit volume, improved efficiency and price realization, resulting in 600 basis points of margin expansion versus the prior year. Ambulance delivered the highest first quarter profitability since 2017. Adjusted EBITDA contribution from the legacy Commercial segment businesses was a year-over-year net improvement of $3 million, which includes improved bus performance, partially offset by lower terminal truck volume.
Segment backlog of $3.9 billion increased $692 million, or 22%, versus the prior year. The increase reflects strong orders for fire and ambulance units over the past year, as well as the benefits of pricing actions, partially offset by the removal of the Collins bus backlog, lower demand for terminal trucks, and a reduction in transit bus backlog. Excluding the impact of the sale of Collins, the segment backlog increased $867 million from the prior year. Within the first quarter, the combined emergency vehicle book-to-bill consisting of fire and ambulance orders was 1.3 times, and the book-to-book ratio, which compares first quarter 2024 orders to the same period last year, was 1.5 times, demonstrating continued industry strength and demand for our products.
We expect Specialty Vehicles segment revenue and earnings to benefit from the increased number of available working days in the second quarter as compared to the first. For modeling purposes, note that future segment revenue and adjusted EBITDA do not include Collins Bus, which was previously disclosed at $150 million and $25 million, respectively, for the remainder of fiscal 2024. In the second quarter, we expect operating improvements from the remaining businesses to offset the loss of Collins' revenue and earnings, resulting in the second quarter being approximately flat versus the first quarter. We expect continued momentum to build on the second quarter's performance with low single-digit revenue improvements sequentially in the third and fourth quarters as higher contribution from the fire and emergency businesses offset declines from the wind-down of ENC.
We expect sequential incremental margins in the range of 30% to 40% on increased revenue throughout the back half of the year. On Slide 6, Recreational Vehicles segment sales of $169 million decreased $56.6 million, or 25%, year-over-year as we navigate through a soft-end market environment. Within the industry, dealer inventories remain high with limited floor planning availability and reduced lot traffic. Lower segment sales versus the prior year were primarily a result of fewer shipments of Class A, Class B and towable units, an unfavorable mix of motorized units and discounting, partially offset by increased shipments of Class C units and price realization. The segment's unit shipments declined by 39% versus the prior year, driven primarily by an 80% decline in towable units.
Within motorized categories, consumer preferences for lower-end gas units as compared to higher-end diesel products continued to weigh on segment revenue within the quarter. Recreational segment adjusted EBITDA of $11.6 million was a decrease of $12.7 million, or 52%, versus the prior year. The decrease in adjusted EBITDA was primarily a result of lower unit volume, unfavorable category mix, inflationary pressures, and discounting, partially offset by price realization and cost reduction actions in the Class A and towable businesses. Segment backlog of $377 million at quarter-end decreased $611 million, or 62%, versus the prior year. The decrease is primarily due to production against backlog, cancellations and lower orders over the trailing 12 months.
Within the quarter, the book-to-bill ratio for our most profitable Class B and Class C businesses was 1.2 times and 1.1 times, respectively. However, this was offset by reduced demand for Class A and towable units. With seven to eight months of unit backlog in the Class B and Class C categories, we expect production increase from the seasonally low first quarter, resulting in increased revenue throughout the remainder of the year. The profitability of the combined Class B and C businesses is expected to remain in the low- to mid-double digits while we continue to flex costs of the Class A and towable businesses, resulting in full year segment adjusted EBITDA margin in line with our original guidance of high single-digits. Turning to Slide 7.
Trade working capital on July 31, 2024 was $363 million, an increase of $45 million compared to $318 million at the end of fiscal 2023. The increase was primarily a result of lower accounts payable and customer advances, partially offset by a decrease in accounts receivable and inventory. Cash used in operating activities was $69.7 million, which includes the payment of annual management incentive compensation within the quarter, transaction expenses related to the Collins Bus sale as well as timing of certain tax payments. We spent $10.5 million on capital expenditures, including the purchase of a service center for our Class C RV business, which we expect will allow additional unit production and a manufacturing facility that previously housed the service and aftermarket parts business.
Net cash on the balance sheet as of January 31st was $87.9 million prior to the special dividend payment on February 16th and the repurchase of 8 million common shares at an average price of $15.76 on February 20th. We declared a regular quarterly cash dividend of $0.05 per share payable April 12th to its shareholders of record on March 28th. At quarter's end, the company maintained ample liquidity for our strategic initiatives with approximately $534 million available under our ABL revolving credit facility. Turning to Slide 8. We provided 2024 fiscal full year outlook, which builds upon the momentum experienced within the Specialty Vehicles segment. Today's update to top-line guidance is a range of $2.45 billion to $2.55 billion, which includes $150 million adjustments for the Collins Bus divestiture I previously mentioned.
We expect continued throughput gains and strong incremental performance within the fire and ambulance businesses to offset headwinds from cyclical end-market softness within the Recreational Vehicles segment and terminal trucks business. At the midpoint of $2.5 billion revenue, it is expected to be approximately flat to last year after adjusting for the divested revenue from the Collins Bus sale. Adjusted EBITDA guidance is $145 million to $165 million or $155 million at the midpoint, which includes a $25 million adjustment for the Collins Bus divestiture. Given the solid performance of the first quarter, we now expect first half consolidated adjusted EBITDA to be approximately 40% of the full year guidance. Adjusted net income is expected to be in the range of $72 million to $90 million and net income in the range of $224 million to $245 million.
Adjusted free cash flow is expected to be in the range of $57 million to $72 million, which excludes approximately $71 million of tax and transaction costs related to divestiture activities that are within cash from operations and offset by gross cash proceeds included in the investing section of the statement of cash flow. Full year capital expenditures remain in the range of $30 million to $35 million, including growth investments in our businesses as well as ERP upgrades in certain businesses. Expected interest expense of $26 million to $28 million considers the typical seasonal use of cash in the first half of the year, as well as the impact of the Collins Bus sale, ENC wind-down and previously announced returns of cash to shareholders in the form of a special dividend and share repurchase.
Thank you again for joining us on today's call. With that, operator, we'd now like to open the call up for questions.
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