REV Group, Inc. (NYSE:REVG) Q2 2023 Earnings Call Transcript June 8, 2023
REV Group, Inc. beats earnings expectations. Reported EPS is $0.35, expectations were $0.18.
Operator: Greetings. Welcome to Rev Group Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I’ll now turn the conference over to Drew Konop, for opening remarks.
Drew Konop: Good morning, and thanks for joining us. Earlier today, we issued our second quarter fiscal 2023 results. A copy of the release is available on our website at investors.revgroup.com. Today’s call is being webcast and a slide presentation, which includes a reconciliation of non-GAAP to GAAP financial measures is available on our website. Please refer now to Slide 2 of that presentation. Our remarks and answers will include forward-looking statements, which are subject to risks that can cause actual results to differ from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we’ve described in our Form 8-K filed with the SEC earlier today and other filings that 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 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, I will turn the call over to Mark.
Mark Skonieczny: Thank you, Drew, and good morning, everyone joining us on today’s call. I’m pleased to be speaking to you today as CEO and would like to publicly thank the Board for providing me the opportunity to lead this company. Most importantly, I would like to recognize the efforts of our various business unit leaders and the people that come to work every day, making vehicles that make a difference in our daily lives. Over the past quarter, I continued my visits to our various manufacturing locations, meeting with local leadership and their staff, developing site-specific path forward to advance our strategic imperatives around product simplification and lean process capabilities. We have now successfully developed road maps with clear objectives in reaching throughput goals at several locations.
These detailed road maps are focused on resource planning, both internal and external, factory and production line configurations and upfront process capabilities across sales, engineering, purchasing and material management. The objectives and processes are aligned with the REV Drive business system tenants designed to deliver continuous improvement. This morning, I will provide an overview of our consolidated second quarter performance as well as detailed segment financials. Before I comment on the quarterly results, I would like to provide several highlights that occurred within our businesses during the quarter. Late last year, we announced that ENC, our municipal transit business released its next-generation hydrogen fuel cell and battery electric buses branded Axess EVO.
Since the launch, we have enjoyed robust bidding for both battery electric and hydrogen fuel cell models. Prior to the quarter, we announced the first order of 4 battery electric buses from the Dallas-Fort Worth Airport. Within the quarter, we announced the first order for EVO hydrogen fuel cell buses with 3 units going to the Genesee Rochester Regional Transportation Authority. ENC’s hydrogen fuel cell bus delivers an industry-leading range up to 400 miles and refuels in just 12 to 20 minutes. The Axess EVO fuel cell, which is only water as a byproduct will help the transportation authority work towards its goal of transitioning to a zero-emission fleet by 2035. They received funding for the buses through the Federal Transit Administration low and no emission program.
ENC was recently named as an FDA grant partner by a total of 12 transit agencies located throughout the U.S., streamlining the process to receive additional orders to be qualified for federal funding. Continued availability of FDA funding combined with community’s desire to improve their environments have resulted in a robust pipeline of new opportunities. Subsequent to the quarter, we announced an order for 19 fuel cell buses from the California public transit provider Foothill Transit who serves Southern California, San Gabriel and Pomona Valley, including Pasadena and Downtown Los Angeles. Foothill currently operates a fleet of 359 buses with a commitment to operate 100% zero-emission bus fleet. As a relatively small market share participant in a large public transportation market, we believe opportunities like this in the transition from internal combustion engines to new technologies will allow ENC the opportunity to be a disruptor and gain market share.
The mentioned contract wins will not only contribute to unit growth for ENC, but also top line revenue growth as the average selling price of zero-emission units can be up to two times that of an internal combustion engine. As we have previously discussed, our battery electric and hydrogen fuel cell platform has over 90% commonality and therefore, we also expect to gain additional manufacturing efficiencies from this plant as production ramps. Our Type A School bus business, Collins, is also participating in increased demand for battery electric transportation solutions. Within the quarter, its bidding pipeline for EV buses growing [ph] the hundreds of units and have active orders for 60 EV buses. In addition to providing a solution that converts traditional gas engines to electric, we recently announced the first site a bus an electric powertrain provided directly by a major OEM.
In collaboration with Ford, Collins began taking orders from the new E-Transit T350-low-4 single rear-wheel cutaway in May. Within the Specialty Group, we had 2 EV debuts from our capacity terminal truck business. The first was the launch of its new zero emissions hydrogen fuel cell electric terminal truck as the Technology and Maintenance Council in February. Its long-duration operating time, heavy loan capacity and quick refueling cycle have been well received. In May, capacity [ph] also debuted its new zero-emission lithium-ion-powered terminal truck in the Advanced Clean Transportation Expo. The EV terminal truck is powered by Hyster-Yale electric powertrain and available with an option of 130 kilowatt or a 260 kilowatt lithium-ion battery.
The truck is expected to operate the length of a normal shift before recharging is needed while delivering consistent power and maximizing uptime. The battery can be recharged in as short as 1 hour. Across the REV EV portfolio, bidding is active for both electric and fuel cell products as end users remain uncertain about the infrastructure, load requirements and use case for each technology. With these launches, we now offer both fuel cell and battery electric solutions for terminal trucks and transit buses, providing our customers maximum flexibility. I am pleased that today, we will be discussing results that include momentum of increased starts and completions across the F&E segment, including both the ambulance and fire groups. As you know, we faced keytone – shortages across many of our businesses throughout fiscal 2022.
Due to the complexity, customization and a large number of SKUs required in fire apparatus, the fire group was particularly impacted by shortages. Over the past 1.5 years, the starting [ph] teams have worked to qualify an increasing number of alternative sources, which limited the number of key component shortages within the quarter to isolated events. Material handling across our fire plants is improving with greater alignment between production planning, procurement and the presentation of materials aside of specific vehicles. To further mitigate potential shortages to keep the line moving, the fire businesses have enhanced dedicated response teams with pickers assigned to retrieve parts missing from production cells. Communication across functions is improving with management activities focused on daily accountability.
To help ensure that this accountability continues, I made a change of leadership and organizational structure in the fire group. Within the quarter, Mike Virnig assumed the role of President, REV Fire Group, overseeing all brands. Mike has been the Vice President of Global Sales and Marketing of REVs since 2018. Under his tenure, our backlog for fire apparatus has tripled, growing by over $1 billion. Like a deep relationship with our dealers and direct customers across all REV Fire brands, understand functionality and distinction of our product offerings and our capabilities and has a unique perspective on the importance of our parts and service business having owned a service center in the past. He’s been integral in our voice of customer feedback and led various programs to eliminate product complexity while enhancing and standardizing our portfolio.
Prior to joining the REV [ph] he served as Vice President sales at Spartan Emergency Response and he has prior management and ownership experience in other fire and specialty vehicle businesses. I was with Mike at the recent FDIC International Show, a leading Firepart [ph] conference, and the response to Mike’s promotion was overwhelmingly positive. In addition to this change, I have added Andy Thompson to the team as Rev Fire Group Chief Operating Officer. This is a new position dedicated to managing manufacturing operations across all fire brands. Andy joined REV in 2021 as VP of Operations across the enterprise, bringing the extensive experience in manufacturing operations, supply chain and Lean Six Sigma. Most recently, he was deployed as interim VP GM of the hold and fire facility, where he helped increase plant efficiencies and throughput by implementing many of the actions that I mentioned earlier, resulting in a 2-year high in quarterly shipments at the Holman facility.
Kaesler Media/Shutterstock.com
Under his leadership, the plant has leveraged all production slots and reduced or eliminated gaps, realigned the [indiscernible] lines to reduce bottlenecks constraints, launch several projects aimed at reducing production hours per value stream and set the intermediate agenda for improved profitability. I look forward to working with Mike and Andy to drive continued improvement in overall fire performance. Within the ambulance group, quarterly shipments reached a 2-year high and net sales reached a 3-year high as the division benefited from an improved supply chain and key plans to maintain higher direct labor headcount levels. On the last earnings call, we noted that with increased chassis supply, our ability to achieve or exceed the year production plan relied on the ability to effectively hire, train and retain new workers.
Within the quarter, we were successful in increasing the group’s headcount and lowering year-over-year turnover at each of the ambulance plants. I am confident that the group will experience improved productivity as new workers are onboarded and begin cross-training. Finally, we experienced an anticipated normalization of recreation segment backlog within the quarter. The industry backdrop remains challenged with retail sales in the fiscal quarter reported to be down in the low 20% range year-over-year. Many dealers have worked to reduce 2022 model year inventory and are expected to maintain a disciplined approach toward overall inventory levels given the current interest rate and economic environment. We have been flatly working with our dealer group with respect to age backlog.
This resulted in a reduction in orders primarily for towable and camper [ph] units at our East and West facilities and to lesser degree cancellations within the Class A business, which maintains a 6-month backlog. We continue to expect a portion of these orders will replace with 2024 mile year orders within the Class B and Class C categories, backlog remains in the 9-month range. These results are in line with the full year outlook provided in December in the first quarter update provided in March. Now turning to our second quarter results on Slide 4. Consolidated net sales of $681 million increased $105 million or 18% versus second quarter last year. The increase was driven by higher shipments and sales across all segments. Prior & emergency segment sales reflect higher sales in both the fire and ambulance groups.
Increased fire group sales were primarily a result of an improved supply chain resulting from dual sourcing initiatives as well as improved overall component supply environment in addition to productivity initiatives aimed at increasing throughput. Increased Ambulance Group sales were related to improved chassis supply, labor market and retention improvements mentioned earlier and price realization. Record commercial segment sales benefited from an improved supply chain, which enabled completion of units previously trapped in working product rents and price realization. Recreation net sales increased versus the prior year as productivity initiatives to hold in our West Coast Home [ph] plant, while segment pricing remained positive net at discount.
Consolidated adjusted EBITDA of $41.9 million increased $18.1 million or 76% versus the prior year, with increased contribution from all segments. Higher contribution from the F&E segment includes improved results in both the fire and ambulance groups. Commercial segment EBITDA was related to improved profitability in school bus and specialty businesses, partially offset by a declining in new municipal transit business. Recreation momentum continued within the quarter with increased volumes and price realization bump discounting, the net result of greater profitability across all segments was the 7-quarter high in adjusted EBITDA dollars and EBITDA margin. Please turn to Page 5 of the slide deck as I move to a review of our second quarter segment results.
Fire & Emergency second quarter segment sales were $283 million, an increase of 16% compared to the prior year. The increase in net sales was primarily due to increased shipments of fire apparatuses and ambulance units, a favorable mix of higher content ambulance units and price realization, partially offset by an unfavorable mix of lower content fire apparatus. Within the Fire Group throughput improved sequentially and year-over-year to reach a 6-quarter high in shipments and revenue. This includes improved performance at our two largest plants as well as increased shipments from our Holden’s facility that were up 70% year-over-year and 39% sequentially. With supply chain headwinds subsiding all plants have had greater success filling production slots with a more robust cleared build process.
A milestone for recoveries in the Fire Group will be reaching the revenue run rate achieved in the second and third quarter of fiscal ’21 prior to supply chain and labor market challenges. Within the quarter alone, we’ve recovered half of the definite [ph] between that period and the low point of revenue experienced in the first quarter in this fiscal year. We are focused on maintaining a cadence of new starts that are required to close the gap and position the group for additional improvement. We are encouraged that within the quarter, Fire Group started exceeded completions by 6%, demonstrating its momentum. As I mentioned earlier, ambulance [ph] group unit shipments reached a 2-year high, up 6% year-on-year, with revenue reaching a 3-year high.
Higher revenue was primarily related to increased shipments, higher content vehicles and price realization. As we have noted on past calls, the recent inflationary environment has required a disciplined forward pricing strategy across all businesses. Due to lower complexity and higher production volumes, the ambulance group started producing units that are in the early rounds of new price tiers enacted over the past 18 months. We are encouraged by the through point improvement we experienced in all locations within the group and the momentum that will carry into the second half of the year. F&E segment adjusted EBITDA was $9.6 million in the second quarter of 2023 compared to an adjusted EBITDA loss of $2.2 million in the second quarter of 2022.
The increase was primarily a result of higher volume, manufacturing efficiencies and improved price realization, partially offset by inflationary pressures. Fire Group profitability improved 550 basis points versus the prior year and 520 basis points sequentially, this was primarily due to higher sales volume and manufacturing efficiencies related to an improved supply chain environment and initiatives enacted to improve productivity. Ambulance group profitability improved 450 basis points year-over-year and 300 basis points sequentially. This was primarily a result of higher sales volumes, favorable mix, price realization and manufacturing efficiencies. Record F&E backlog was $2.9 billion, an increase of 60% year-over-year. The increase in backlog was a result of continued strength in unit orders in both the fire and ambulance groups and pricing actions over the past 12 months.
The Fire Group experienced greater conversion of close to firm orders within the quarter, while ambulance demand remained strong, resulting in individual records from backlog in both supplier and ambulance groups. For the remainder of the year, we expect the F&E segment to post sequential revenue and margin improvement with approximately 75% of segment earnings generated in the second half. Turning to Slide 6. Commercial segment sales of $142 million was an increase of 56% compared to the prior year. The increase was due to higher sales across all product categories and price realization, improved material availability allow completion of school buses, terminal trucks and street sweepers that have been trapped in inventory. Dual sourcing and improved chassis supply have allowed unit shipments of school buses to reach a 7-quarter high.
Like ambulance, school buses have less complexity and the faster production cadence that allowed us to experience new pricing tiers more quickly than many other businesses. We have also started to ship more EV units, which carry a higher average selling price. The combined result is a 3.5-year high in school bus sales. Unit shipments of terminal trucks and street sweepers increased 28% and 50%, respectively, as the Specialty Group implemented productivity actions designed to increase throughput. Within the municipal transit business, we continue to experience shortages of wiring harnesses and other components creating line rate inefficiencies and a significant amount of out-of-station work and rework, which limited unit shipments within the second quarter and is expected to continue through the third quarter. Commercial segment adjusted EBITDA of $10.7 million increased 143% versus the prior year.
The increase in EBITDA was primarily the result of higher shipments and improved profitability within the school bus, terminal trucks and street sweeper businesses, partially offset by manufacturing inefficiencies within the Transit Bus business. Record profitability for school buses is primarily a result of higher shipments and efficiencies gained from greater material availability, including chassis and price realization, partially offset by inflationary pressures. Profitability of terminal trucks and street sweepers benefited from higher shipments related to actions implemented over the past year to improve throughput, receipt of key components that allow completion with units and price realization. Municipal transit bus completions continue to be limited by shortages of critical components that resulted fewer than expected completions and trap [ph] labor that weighed on profitability.
Commercial segment backlog was $501 million at the end of the second quarter, a decrease of 6% versus the prior year. The decrease in backlog is primarily a result of increased throughput and the normalization of orders for terminal trucks and street sweepers, partially offset by record backlog for school buses, which includes strong second quarter orders as well as price actions enacted over the past 12 months. In the third quarter, we expect Commercial segment sales and margins to be constrained by supply chain challenges that are limiting completion of municipal transit buses. The benefit we experienced in this quarter by completing partially completed with units in the school bus and specialty business will also diminish in the second half of the year.
We expect lower segment sales and margin in the third quarter with improved shipments and an improved mix of municipal transit buses that benefit the segment’s revenue and margin profile in the fourth quarter. This will likely result in second half adjusted EBITDA being approximately the same as the first half of the fiscal year. As I mentioned earlier, we are encouraged by increased bidding for zero-emission school buses and transit buses and feel this provides opportunity in fiscal 2024 and beyond. Turning to Slide 7. Recreation segment sales of $257 million were up 6% versus last year’s quarter. Increased sales versus the prior year were primarily a result of increased shipments of Class A, Class C [indiscernible] units and pricing actions, net of discounts in certain categories.
Partially offsetting the increase were lower sales of Class B units related to supply chain and irregular dealer inventory related to the fourth quarter OEM recall that results in a large number of industry shipments early in the year. Shipments of travel trailers and campers improved sequentially and unit starts increased 35% throughout the quarter as the new able [ph] management team implemented productivity initiatives designed to increase throughput. As a result, unit shipments and net sales of non-motorized units increased 29% and 51% respectively versus the prior year. Recreation segment adjusted EBITDA of $29.1 million was an increase of 1% versus the prior year. The increase in EBITDA was primarily the result of price realization, net of discounting in certain businesses and volume leverage, partially offset by material inflation and an unfavorable mix of gas units and greater contribution from the non-motorized categories.
While towable units and campers are currently dilutive to the segment margin, the business increased adjusted EBITDA margin 690 basis points versus the prior year. Segment backlog of $495 million decreased 62% versus the prior year and 50% sequentially. This was anticipated and in line with guidance provided during the last earnings call for segment backlog to normalize in the 4 to 6-month range. The decrease is primarily due to continued production against backlog and cancellation of aged orders, primarily non-motorized and class 8 categories. We expect a portion of these cancellations to be replaced with upcoming by-year [ph] orders, Class B and Class C backlog remains in the 9- to 12-month range. The outlook for full year Recreation segment revenue remains in the range of flat to down low single digits.
Margins have likely peaked in the second quarter with an expectation for lower production volume in certain categories and additional discounting in the second half. We are focused on flexing costs when necessary to protect profitability and we’ll continue our work to claw back a portion of recent inflationary pressures. The full year segment adjusted EBITDA margin expectation remains in the high single-digit to 10% range. The combined result of strong first half shipments, lower production rates and potential discounting second half is expected to result in approximately 45% of full year adjusted EBITDA being generated in the second half. Turning to Slide 8. Year-to-date, cash from operating activities totaled $8.2 million. Trade working capital on April 30, 2023, was $363.3 million, an increase of $15.5 million compared to $347.8 million at the end of fiscal 2022.
The increase was primarily a result of increased health receivables and inventories, partially offset by an increase in health payable and customer advances. Inventory increased $92 million versus the prior year period when it was more difficult to procure chassis, parts and raw materials. Over the intermediate [ph] term, we believe there’s an opportunity for meaningful inventory reduction as we gain confidence in the stability of the supply chain and chassis supply. We spent $6.8 million of capital expenditures within the second quarter, resulting in free cash flow of $8.3 million. Net debt as of April 30 was $221 million, including $9 million of cash on hand. We declared a quarterly cash dividend of $0.05 per share payable July 14 to shareholders of record on June 30.
The Board approved a new share repurchase authorization of up to $175 million with flexibility to buy common stock in the open market and prevailing market prices or through block trades over the next 2 years. The new program replaces the prior $150 million authorization approved in September 2021, of which we purchased approximately $74 million of REV common shares. At the end of the quarter, the company maintained ample liquidity with approximately $306 million available under the ABL revolving credit facility, and our net debt-to-EBITDA leverage ratio was 1.8 times , below our stated target range of 2 to 2.5 times. Turning to Slide 9. Today, we are raising our full year outlook for net sales, adjusted EBITDA, adjusted net income and free cash flow.
The outlook for revenue is now in the range of $2.45 billion to $2.55 billion, an increase of $100 million at the midpoint. The range of adjusted EBITDA has been raised to $120 million to $135 million, an increase of $7.5 million at the midpoint. Guidance for adjusted net income is down in the range of $48 million to $62 million, and we continue to expect cash conversion to be 90% or greater with free cash flow in the range of $43 million to $56 million. Thank you again for joining us on today’s call. And operator, we’d now like to open the call up for questions.
See also Top 20 Information Technology Countries in the World and Top 20 Countries With The Highest Coffee Consumption.
To continue reading the Q&A session, please click here.