REV Group Inc (REVG) 2017 Q2 法說會逐字稿

Greetings, and welcome to the REV Group Second Quarter 2017 Earnings Conference Call.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Sandy Bugbee, Vice President, Treasurer and Investor Relations.

Thank you, you may begin.

Good morning, and thanks for joining us.

Last night, we published our second 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 conference call, if at all.

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

Joining me on the call today are our President and CEO, Tim Sullivan, as well as our CFO, Dean Nolden.

I will now turn the call over to Tim.

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

We generated another strong quarter growing EBITDA and expanding our profit margins.

We are especially pleased with the result as the second quarter was a slower quarter for us in the topline, largely due to our commercial segment mix of sales.

Dean will detail the second quarter revenues by segment shortly.

But I wanted to highlight the progress we have made in driving profitability in our business.

You'll recall from our IPO that our key expectation is to achieve 10% EBITDA margins company wide by 2019.

We are pleased to report that we are well on our way to achieving that goal.

A key piece of the path to achieving the 10% EBITDA margin growth is the introduction of new products and operational initiatives.

As you'll see on slide 3, we introduced six new products to the marketplace during Q2.

We announced the revolutionary new ambulance of the future and we booked several new orders in Q2.

ElDorado Mobility introduced the new Chrysler Pacifica mobility van with a patented in-floor dual side deploy ramp that will allow customers greater flexibility.

E-ONE introduced the First Metro 100 Quint to the marketplace to fill a gap in the market.

Its compact size provides ease of maneuverability, which will help departments that operate in congested areas.

The commercial segment introduced two new products.

First, the Krystal Luxury Sprinter van that is targeted to replace the standard limousine type of transportation.

This van has much easier access than the shuttle bus, yet it is smaller in size.

Secondarily, we introduced our new Eldorado Hotel van, which complements our current bus portfolio for hotels.

And lastly, Renegade RV introduced the new high-end Valencia Super C to the marketplace.

Subsequent to the end of our second quarter, we announced our new service partnership with Ryder.

This partnership will allow dealers and customers of REV Bus brands access to preventative and on-demand maintenance solution at hundreds of Ryder service locations throughout the United States.

Slide 4 provides details of our acquisitions from the quarter.

We announced the acquisition of Midwest Automotive Designs on April 13 and Ferrara Fire Apparatus on April 25.

We deployed $135 million worth of capital to expand our product lines and access to key markets and channels.

The addition of two companies adds approximately $185 million worth of annual revenue.

The total purchase price for both is less than five times fully synergized EBITDA.

Midwest rounds out our product line in RV with a Class B RV and it adds new product lines to our shuttle bus business with executive transport and custom built luxury vans.

Ferrara strengthens our scale in our fire apparatus market with access to key markets and channels.

Slide 5 provides an update of our full-year fiscal 2017 financial guidance.

First, we now expect full year consolidated net sales to be within the range of $2.3 billion and $2.4 billion.

Second, we are raising our expectation for full-year adjusted EBITDA to be in the range of $157 million to $162 million.

This guidance includes our acquisitions year-to-date.

Now, let me turn the call over to Dean for further discussion on our segment financials.

Thanks, Tim, and good morning, everyone.

As you saw from our release last night and on page 6 of the presentation, we reported 14% growth in net sales and 16% growth in adjusted EBITDA in the second quarter 2017 versus the same period last year.

In addition, during the quarter, we drove a 20 basis point expansion in adjusted EBITDA margin to 6.9% despite lower commercial sales and the impact of acquisitions.

This is also sequentially more than 200 basis points above our margins in the first quarter as we continue to see the benefits of our procurement and production optimization efforts and we experienced the normal seasonal trend in activity.

We generated 33% growth in year-over-year adjusted net income and drove adjusted earnings per share of $0.29 in the quarter, up from $0.28 per share in the second quarter last year on higher current quarter average shares outstanding.

We expect to continue this type of leverage on seasonally stronger incremental sales in the back half of the year that will create the earnings growth and margin expansion we are targeting in both 2017 and the years to come.

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 and the reconciliation of as reported sales and EBITDA to the related organic amounts for the quarter and year-to-date.

Now please turn to slide 7. Our F&E segment grew sales in the quarter by 23%, which was driven by the impact of the acquisition of KME in April of last year.

Sales growth in this segment was mostly in line with our expectation, across both fire and ambulance with one timing item due to a larger ambulance contract award which shifted second quarter net sales into the second half of this year.

Also as expected, our EBITDA margin for the segment declined 100 basis points year-over-year, reflecting the continued work through of KME's legacy backlog.

Excluding KME, F&E segment adjusted EBITDA margin increased 110 basis points in the second quarter versus last year.

We expect to be through the legacy KME backlog in the third quarter, at which point, we expect strong year-over-year and sequential accretion in our segment profitability.

In aggregate, the F&E backlog grew 10% versus last quarter and we are aware of a few meaningful government and municipal contracts that are likely to be announced in the third quarter for both fire and ambulance.

Lastly, we again saw strong year-over-year growth in parts sales in this segment.

As Tim mentioned, we announced the acquisition of Ferrara on April 25 and expect this business to add roughly $70 million in revenue over the remainder of 2017, and deliver pre-synergy EBITDA margins above industry averages for fire apparatus businesses.

Integration efforts are underway focusing on materials opportunities and leveraging the integration processes from KME.

On slide 8, our Commercial segment revenues declined 10% as we continued to be discerning about which contracts we booked due to margin profiles being below our targeted thresholds.

Similar to the first quarter, this impact is primarily in mix of sales.

Looking forward, we are encouraged as our backlog is benefiting from the implementation of our Platinum dealer program and should generate better margins going forward.

Sales in transit and school bus remained very strong in the second quarter following through on solid momentum from the first quarter including a few key municipal projects.

Overall, we are pleased that commercial EBITDA margins expanded by 70 basis points year-over-year to 9.2%.

The pipeline of commercial contract opportunities are robust and we will continue to be selective in awards, while also improving the value and cost position of our product offerings.

Turning to slide 9, our recreation segment again drove impressive sales gains that produced growth of 32% in the second quarter.

On an organic basis, adjusting for our acquisition of Renegade back in December and Midwest in mid-April, revenue growth was still a robust 14%.

We are pleased with the growth in the Class B and Class C product categories of the market, which are now even better -- which we are now even better positioned to take advantage of following the acquisitions of Renegade and Midwest.

For Renegade and Midwest, we are in the early stages of their integrations but are already realizing significant cost savings on major components and chassis.

We expect Midwest will contribute approximately $20 million of sales for the remainder of fiscal 2017 with EBITDA margins above the segment average.

Lastly, we are very pleased with the progress in our recreation segment profitability as adjusted EBITDA margins nearly doubled over last year to 4.4%.

As you know, recreation profitability improvement is a key aspect of our overall REV growth strategy.

And we expect results to continue this trend with better seasonal sales growth and continued improvement in legacy warranty expenses as the year progresses.

I would like to provide a few other REV Group detailed modeling items related to our full fiscal year 2017 financial expectations.

We expect a full year effective income tax rate in the mid to high 30% range, depreciation and amortization of $34 million to $36 million for the full year.

Approximately 65 million to 66 million weighted average diluted shares outstanding.

Capital expenditures of approximately $45 million to $50 million and full year interest expense of between $20 million and $22 million.

Thank you for your time and now, I'd like to turn the call back to the operator for question and answers.

(Operator instructions) Mig Dobre, Baird.

Yes, good morning, everyone and very nice work on the margins this quarter.

I guess, my first question is surrounding the recent deals you announced.

And based on what I'm seeing in the slides and Dean, maybe you can correct me if I'm wrong, but you upped your guidance to a tune of $7 million that had to do with acquisitions, I think, on an annualized basis, you're talking something maybe close to $14 million of EBITDA.

And based on your comment for five times fully synergized EBITDA, that would imply that in two years, you're looking at these businesses generating something like $27 million of EBITDA.

So certainly that's a very healthy number, and it implies a pretty healthy synergy grab on your part.

Maybe give us a little more context vis-a-vis how much of this is cost out versus other items?

How much of it is associated with Ferrara rather than Midwest.

I presume most of it is Ferrara.

Just help us put this into some kind of a framework.

Well, let me take a stab at it first, Mig.

You've got the numbers right.

Obviously, we've got about six months left in our plan for the acquisitions that we do have, but you have the math correct.

The synergies are good, they are strong, it really gets down to more on the sourcing side.

Number one, we obviously can use the sourcing I guess strength that we have with the size of our Company, which we've seen already with KME, as what we can do on some of those improvements in margin and obviously then EBITDA.

It's also efficiencies.

I think you know that we just completed a complete revamping of the entire production floor at KME here in the second quarter.

And I think, you are going to be very pleased by a lot of the efficiencies and a lot of the improvement in EBITDA performance kind of coming out of KME.

Accordingly, we planned to do the same thing with Ferrara.

So these synergies, and those are two big ones, those synergies take a while for us to kind of work through our business plan.

Effectively, KME took almost 12 months.

We don't see that with Ferrara, we see that we'll probably start picking up some nice margin improvements as early as the first quarter of 2018, but it takes a while for us to kind of move those nice synergies into the business units and the assets that we do buy, but your math is correct.

Okay.

Thank you, Tim and not to put words in your mouth here, but I interpreted your opening comments as implying that margin here can continue to build sequentially in F&E as we're looking at the second half of the year from the second quarter, maybe with some help from the stuff you just mentioned, am I my correct in that?

Correct.

I think if you remember, as we look through all of our markets and all of our products that we do have, our backlogs, Q3, Q4 are by far our strongest quarters.

We're very back-end loaded for several reasons.

First of all, that's the nature of our markets, but secondarily, as we grow our business, all these nice synergies are starting to move into all of our market segments or all of our product lines for our various market segments.

So you're exactly correct.

Mig, this is Dean.

I would like -- maybe add -- add just a little bit color from a first half to second half perspective.

Typically in prior years and it's consistent this year, we generate between 55% and 60% of our revenue in the first half.

But we generate 60% to 65% of our EBITDA -- I am sorry in second half, we generate 55% to 60% of our sales in the second half with 60% to 65% of our EBITDA in the second half.

So, as you know, seasonally second half is the strongest and this year will be no different.

Okay, great.

And then maybe one question on RV.

I'm trying to better understand your 13% core growth in this segment.

And what I'm looking for is maybe some color on how much the Class C product really contributed to the outgrowth, because obviously the Class A business is your largest.

And when we've looked at stats year-to-date or through the quarter for Class A industry shipments and such, they certainly didn't look anywhere as robust as what you reported.

So maybe some color there would be good too.

Yes.

The Cs really haven't kicked in yet.

We started those into production in January, but ramped it up fairly slowly through Q2.

So you're not seeing much in the Cs yet, you'll start seeing the Cs in Q3 and Q4.

Most of what you saw in Q2 was I would call our mid-range diesel and mid-range gas both in Class A, we did exceptionally well in those areas.

Primarily in the diesel side, it was with the Pace Arrow which we introduced last year, late last year and the Bounder.

So very, very strong growth in the mid-range.

We're excited about what we think we'll see in Q3 and Q4.

The Cs will start moving in a very meaningful way into the marketplace and obviously the Bs that we just picked up with Midwest will also see some really good traction in Q3 and Q4.

(Operator Instructions) Jamie Cook, Credit Suisse.

Hi, good morning, two questions.

One, I understand what's been driving the sales decline, as you are more selective in the type of work that you're doing within the commercial business, but it also sounds like there are some opportunities in the back half of the year.

So I am trying to balance that with how we think about revenue in the back half of the year for the commercial business.

And then my second question relates to the recreation business.

We're starting to see some modest margin improvement.

I'm just trying to think through how the acquisitions of Renegade and Midwest impact the profitability in the back half of the year, and should we continue to expect improvement broadly for this segment in the back half?

Thanks.

Let me start with the commercial side, which is entirely shuttle bus and let me explain that so everyone understands it clearly.

We completely revamped our commercial shuttle bus product line and we did that over the last, literally a year and a half, almost two years.

Part of that was to build; number one, the highest quality possible in the industry, but more importantly the safest shuttle bus we could possibly build.

We're the only manufacturer of shuttle buses that have done extensive crash testing on our product.

So not only do we say, we've got the highest quality, safest shuttle bus in the industry, we know, we have the safest and best shuttle bus industry.

So we tend to be very discerning on the jobs or the orders that we go after.

We go after and we are successful where the specifications require safety and quality.

And the ones that don't, quite frankly, we bid those, but safety and quality don't come for free.

And so, we're going to be very discerning as we go forward.

Our hope is, and I think this is starting to work its way through the marketplace is that people are valuing to a high degree the quality and safety that we're producing.

So we fully expect that as we move into 2018, 2019 that our market shares are actually going to grow.

Now having said that, it really gets down to the mix.

So in the first half of the year, there was not -- the mix, what I would call the good specs.

We see a lot of those good specs now in our pipeline for Q3, Q4.

So we see a pretty good reversal possibility with the revenue line on shuttle buses as we move forward in Q3, Q4, but more importantly, we really like the way we're positioned for 2018 and 2019.

Again, it's quality and safety first.

On the RV side, the two companies we purchased, Renegade and Midwest, we're really excited about both of them for a couple reasons; their product lines are completely complementary, there is no overlap whatsoever, very, very pleased with what Renegade has to offer.

We're already starting to see backlogs climb with Renegade in the Super Cs and on the high-end, the Class C RVs, which is where Renegade really positions their products.

Midwest, we love Bs.

Bs are very strong right now in the marketplace.

We were not in Bs.

That's going to be a very, very nice pick up as we move into the latter half of 2017 and move into 2018.

Backlogs in the very, very short time we've owned Midwest are already climbing significantly.

The better news on both those acquisitions is because of the markets that these products are in, the margins typically are above average RV margins.

And by that I mean, they're already above 10% EBITDA margins, which is obviously our goal for our overall RV business, but these are going to kind of lead the way to get us to an overall 10% EBITDA margin business in the next two to three years.

Mike Baudendistel, Stifel.

Thank you.

I wanted to ask you also on the RV segment, I mean during the IPO process, you talked about expanding the market share in some of your legacy brands on the Class A side.

I mean are you seeing evidence of that so far this year?

We are in the mid-range, but the real high-end has been a little soft here in the last three or four months, which is the high diesel pushers, the high-end diesel pushers, but the mid-range remains pretty solid.

Okay, good.

I also wanted to ask you just on the fire and emergency.

You talked a little bit about some timing of certain contracts or things there, but it seems like both there and in commercial, revenue was a little lighter than expected but made that up more so in the margin.

I mean, did you walk away from any business that you felt was not terribly compensatory?

No, not all.

Matter of fact the fire market is very strong right now.

And we've got very good backlogs in all three of our businesses.

The one thing that has held us back in fire is KME.

I think, if you recall, we've owned that asset now for about 12 months, we advised after we bought the asset last year that will take us about 12 months to flush through some bad backlog.

That's now behind us and it's clear sailing as far as good quality backlog for KME going forward, but the markets are strong and literally across the board domestically.

Let me qualify that.

We don't sell a lot internationally, but the domestic markets are very strong for all three brands.

Jerry Revich, Goldman Sachs.

Hi, good morning, everyone.

Tim, I'm wondering, if you could talk about with Ferrara, what's your approach to distribution.

And now that, as you pointed out, you've owned KME for a year can you just update us on the distribution optimization plan and adding Ferrara to that mix?

I guess, what's the incremental opportunity from penetrating additional territories?

How do you folks quantify the white space if you will?

Yes, good question.

I kind of refer to Ferrara as KME Act 2, and the reason being is KME was a very nice pickup for us.

If you remember there wasn't a tremendous amount of overlap in product offering, but more importantly, where we were strong with E-ONE, KME was not and vice versa.

Ferrara is exactly the same story.

Ferrara plays in regions that neither E-ONE nor KME are strong.

So we've actually improved and increased our market presence in regions where we were not strong.

So, I guess, what I'm saying is, if you look at the full mosaic now, for the first time ever, we've got the entire map covered extremely well.

And secondarily, I think even though fire trucks may look the same, they're not.

And Ferrara brings even complementary product offerings to both E-ONE and KME.

So, all-in-all, we like the geographic footprint, we like the full portfolio, we now have by far the largest portfolio of fire apparatus of any competitor in the United States, which means that we can effectively bid on everything that's out there.

And one of our initiatives, even though Ferrara or KME or E-ONE may have, strong specific regional plays, we really plan to synergize some of the engineering designs over the various products as well to make sure that we're getting full penetration of our portfolio into all markets.

So very, very pleased with the pick-up, it really was a nice addition.

And Tim, just to clarify the dealer base for Ferrara, I guess, how much have you been able to expand it already or plan to expand it within the next 12 months by pushing it through existing E-ONE or KME dealers?

Can you just give us a sense there?

Yes.

Let me clarify to be sure we're all on the same page.

E-ONE always sold almost exclusively through dealers.

KME was almost exclusively direct selling, and Ferrara is almost exclusively direct selling.

So as far as having to rationalize the dealer network, it was effectively not required.

There are few dealers out there and we'll work with those, but there's not many.

And so, that's why the integration is going to be almost seamless.

Okay, and lastly, can you characterize the M&A pipeline from here?

Do you have your hands full with the integration of the deals that you've made to date, or are you folks still active?

And do you -- if you could just help us understand what's the profile of the types of businesses that you're looking at in terms of the magnitude of investment required to bring them up to REV Group type performance would be helpful?

Yes, I think, first and foremost, we're pretty good at -- we are not pretty good, we are very good at integration.

And I think we can take what we've got with the new assets, assimilate them quickly and keep on moving forward.

Nothing's changed.

At any given day, we're looking at four to five new acquisitions, small, medium and large.

Obviously, the large acquisitions will be a lot more discerning on looking and pursuing those.

But we've done three acquisitions here in literally about four months.

That's a pretty strong pace.

We can handle it and we plan to continue.

So that's really how we plan to grow the business.

To answer your -- the second half of your question, we have three legs to the stool.

And we really want to make sure that those legs are complete and strong.

And so if you look at the acquisitions that we're concentrating on, today, we are really looking at acquisitions that will continue to strengthen those three primary areas where we have grouped our assets today.

That doesn't mean, we won't add a fourth leg to the stool some time, but that's clearly not our focus right now, and I think, you've seen that with the three acquisitions that we've done this year.

We'll continue to look at things that really bolster and strengthen our current core businesses.

(Operator instructions) Andy Casey, Wells Fargo Securities.

Thanks a lot.

Good morning, everybody.

Question on commercial, it's kind of a thematic one.

We've been hearing some rumblings about electrified powertrain demand kind of picking up over the next few years in some markets.

Are you starting to see any customer inquiries about that sort of thing?

And if so, how would you assess your supplier readiness for that?

In all honesty, the answer to that question is no.

Having said that, we are all over it and we're talking to no less than five suppliers right now for alternative type of propulsion for vehicles.

We think it's coming.

It's -- everyone is talking about it obviously, whether it be the automobile industry or specialty vehicles.

We plan to be ready when the market's ready.

Right now, everyone is -- tends to be in that look and see mode, let's test a few, let's see how they work.

Clearly, California is a market that is very, very serious about electric power.

But in all honesty, there is not a huge demand yet, but it's going to come.

And so, we are serious about it, we are -- like I said, we're talking to several companies that have a technology that that we will buy and/or partner with on a joint venture basis.

We do not plan to develop that internally ourselves.

There is enough really smart people out there that are doing really good things and we will pick and choose what we think are the -- is the best technology for us going forward.

Okay.

Thank you, Tim.

And then on -- kind of a shorter term question, Dean's comments imply a step up in interest expense during the second half.

I know, you commented that you have an active M&A pipeline.

Is there any -- well number one, does the interest expense guidance for the year include the recent acquisition?

And then number two, do you expect any potential debt reduction in the second half?

Yes, Andy.

Yes, the interest expense forecast includes the impact of the acquisitions we just made.

And as you know, we are a second half of the year cash generator.

So we are entering into the cash inflow and debt reduction portion of our year.

And we intend to be aggressive in utilizing our cash flow to pay down debt through the end of the year.

So we anticipate a meaningful reduction in our debt balance between the end of the second quarter and the end of the year.

There are no further questions.

I'd like to turn the call back over to Mr. Tim Sullivan for closing remarks.

Thanks again for everyone joining us today.

We are very pleased with where we sit right now from both a backlog standpoint, a profitability standpoint.

Every market that we are in remains very, very strong, lots of M&A opportunities out there.

If we can maintain our march forward organically as we professed here about six months ago at the time of the IPO, we'll be very pleased and I think we plan to do that.

So all good things here at REV, and I think more good things to come.

Look forward to talking to you again.

I think the next call will be in early September.

So until that time, enjoy your day and talk to you again soon.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day.