Q2 2020 REV Group Inc Earnings Call
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Greetings and welcome to the Rep Group Inc. second quarter 2020 earnings Conference call.
All participants Barney listen only mode. A brief question and answer session will follow the oral presentation, if anyone should require operators.
Conference. Please press Star zero on your telephone Keypad as reminder, this conference is being reported.
And it's now my pleasure to introduce your host drew cannot Vice President Investor Relations. Thank you you may begin.
Good morning, and thanks for joining us. This morning, we issued our second quarter fiscal 2020 results a copy of the release is available on our website that investors got record Dot com.
Today's call is being webcast slide presentation, which include a reconciliation of non-GAAP. The GAAP financial measures is also available on our website.
Please refer now to slide two of that presentation.
Our remarks unanswered going 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 have described in our form 8-K filed with the FCC. This morning, and other filings we make that the FCC.
It's getting disclaims 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 through a quarter 40 year, our fiscal quarter for fiscal year, unless otherwise stated.
Joining me on the call today, our president and CEO rod rushing as well there CFO didn't open.
Please turn to slide three and I'll turn the call over in Iraq.
Thank you drew good morning, everyone and thank you were talking taking the time to join todays call you in my short time with a Rep group and this be my first call I thought it began with a few opening comments.
During my process or working with the board in consideration of joining the Rep group I learned a great work. This company does in support of our nation's first responders the communities that we all live in.
You have any event the transfer tranche part of my on boarding and since that time I've come to see first Dan response of our employees.
Segments of the Ram group of broadly designated as such a bins businesses. Many of our employees continue to worry during the cold it pandemic to deliver equipment to first responders in our communities.
I couldn't be recognizes that surprised purpose.
During the employees or the businesses that are part of the Rep group and further efforts I'd like to take it missed opportunity you're probably thinking for their contributions.
No I consider the rule I was encouraged with engagement supported the board we're aligning the goals that we set out to achieve I do not and I will not reach and you have all the answers after only 60 days.
I will offer you a little bit about my initial impressions and thoughts.
Over the past several weeks have conducted conducting business reviews with each of our business segments of business units, but the winterize myself and establish a baseline recurrence situation.
Again understanding inside of our execution capabilities recurring operating model and then any products and channel strategies.
Despite limitations to travel I've been able to tour about half of our facilities.
His efforts have confirmed the opportunity I saw from the outside that there is solid dollar value creation opportunity for our shareholders at the rubber.
Today I have more enthusiasm for the road ahead than I did my first except the role I've seen enough to validate the opportunity within our businesses to improve our performance as we endeavor to become a top quartile industrial performer.
As Merck theres much work that needs to be done, but we will improve our poor execution capabilities and drive simplification across this business, creating value for our shareholders.
Our commercial operations will be focused on demand creation, beginning with market back voice of customer approach. The will help us understand the needs of our customers regarding our products brands or services.
We had this market back understanding we will be position to effectively provide the required differentiation to her brands.
Opening up the opportunities for probably platforming <unk>.
We can improve or channel performance through development of our channel partners.
And new channel acquisition, we also see significant opportunity in your upfront processes to improve the quality and efficiency of our work this includes processes and establish or pricing and to build configurations to where our demand fulfillment.
On the demand for some upfront we have opportunity within the was the facilities to execute better. We currently do not have uniform manufacturing practices across all of our businesses practice is the focus everyday on driving all complexity in waste improving or throughput.
This presents real potential for margin expansion within our businesses.
I've been discussions of the past the Rev production system. The concept behind this are solid and proven and much. Good work has been done to build this framework deployed throughout our businesses.
Having said that there's still much work to further develop the operational methods within the rent production system and then fully implement these capabilities across our enterprise.
Insider portfolio businesses. There are really examples of exists excellent operational performance.
Practices of in Britain been embraced.
By handful of our top performing businesses and the results reflect this but rather like regrettably many businesses had not yet done this.
Further the way, we think about the red production system will evolve going forward.
Most of the opportunity exists.
Brent commercial processes.
Sector operations for that reason going forward, we will change your approach from the rent production system to the Rev business system to fully address the opportunities that exist across our entire value chain. Our expectation is that all businesses will execute and stands the road business system. This will take time and discipline, but this will happen.
Regarding our use of capital we will continue to evaluate and optimize our portfolio, we will define our core and optimize toward that end with businesses. We believe we can move to double digit earning potential.
We also have real potential to reduce complexity through product platforming as we enter best the new product offerings, Lauren design costs and leveraging our supply chain.
Identifying the brand requirements for deferring differentiation are key to our product platform you strategies, we will build design capabilities around design for manufacturing and they buy analyses to simplify what we put our play floors that will greatly improve our operations will make investments that aligned to our financial criteria of cash returns.
Investments.
So thats a quick summary of my initial thoughts.
Moving onto Q2.
We had a challenging quarter, the colder really disruption to the underlying core execution impacted our results.
We're not alone in this.
Impacts of the pandemic, yes, our execution did not meet your expectations within the quarter I'm going to hand, this over to de now and they didn't bill you on the details over second quarter financial performance.
Thanks, Ryan and good morning, starting with slide four I'd like to review, our consolidated second quarter results and then move to the segment level performance.
Consolidated net sales for the second quarter were $547 million down 11% compared to the second quarter of last year.
Included in net sales were approximately $60 million from our recent acquisition Spartan emergency response.
And $40 million from our shuttle bus businesses divested after the quarter's end.
The year over year decreasing consolidated net sales was the result of lower sales in the commercial and recreation segments.
Partially offset by higher sales in the fire and emergency segment.
Adjusted EBITDA in the second quarter, 2020 was $7.6 million compared to $36.1 million in the second quarter of 2019.
This decrease in adjusted EBITDA during the quarter was driven by lower profitability in all three segments largely the result of production and delivery disruptions from the impact of the covered 19 pandemic.
Lower corporate spending served as a partial offset these lower operating results.
Please now turn to page five of our slide deck as I move to review of the performance of our segments.
Fire and emergency total segment second quarter sales increased by 17% compared to last year to $289 million.
As I mentioned this includes approximately 60 million from sales of sales from recently acquired Spartan Emergency response.
Organic sales decreased 9% as the number of fire truck shipped by legacy businesses as lower this quarter.
Do you or truck shipments was largely due to inefficiencies caused by absenteeism at two plants near larger urban Colgate Hot spots.
In addition, it was more difficult to get final inspections and delivery is completed in the quarter due to customer travel restrictions.
Despite our efforts to accommodate with virtually our actions we were unable to ship as many fire trucks and ambulances as were completed within the quarter.
North American ambulance sales were approximately flat year over year increased demand from large municipalities was partially offset by a decrease in contractor deliveries.
Our ambulance contractor demand was due to a decrease in non emergency transport demand.
Any segment adjusted EBITDA was 10.2 million in the second quarter 2020, compared to $15.1 million in the second quarter last year.
Decrease was primarily from the impact of the previously mentioned absenteeism and delivery instructions.
These difficulties had the largest decremental margin impact on our company performance within the quarter.
Partially offsetting these items in the quarter, where the positive contributions from Spartan.
And our Ocala fired facility, which experienced sequential and year over year performance improvement.
Spartan second quarter results were in line with our expectations and the integration is currently on schedule and tracking according to our acquisition business case.
Total any backlog was $1.1 billion up 41% year over year.
This includes backlog acquired from Spartan and reflect strong ambulance order intake year to date.
Legacy fire truck backlog was down in select geographies on the west coast and in the northeast.
Certain municipalities take a wait and see approach to their budgets pending spender pending federal stimulus proposals.
That said order intake tends to be seasonal and it's worth noting that we've experienced strong fire order flow. After the end of the second quarter compared to prior months and the prior year.
Today, we have not had any any segment backlog cancellations and we continue to manage fire truck throughput with a target of balancing predictability and customer satisfaction.
Two attainment of a nine to 12 month backlog duration.
Our outlook for asking you will continue to be impacted by outside forces such such as chassis availability by way of chassis OEM manufacturing decisions with an ambulance.
And customer travel practices that could push final acceptance delivery and revenue recognition to the right.
There is also uncertainty around the impact as a pandemic driven economic slowdown on state and municipal budgets that could hinder incoming order rates for ambulances as the year progressive.
For all any vehicles as we enter into fiscal 2021.
Turning now to slide six commercial segment quarterly sales of $143 million were down 16% compared to the prior year period.
Reported commercial segment revenue included approximately $40 million from the shuttle bus businesses that this divested just after the quarter close.
Although it is a smaller part of the consolidated portfolio, our specialty division wasn't the largest contributor to decline to the decline of sales within the commercial segment.
Sales to specialty end markets were down over 50% and demand from port declined in the face of tariffs and Myrisk more recently, the pandemic and rental customers decreased their capital spending activities.
Additionally school bus production was suspended for two weeks within the quarter as we experienced some supply chain issues and a slower seasonal uptick in school by school bus order rates.
Commercial segment, adjusted EBITDA of $8 million was down 46% versus the prior year.
Previously mentioned headwinds of seasonality.
Soft demand in school bus supply challenges and labor availability impacted the profit in the commercial segment businesses.
In addition at our transit bus business, although we ship more units in the second quarter. This year.
Current quarter sales mix shifted towards less content units under the same multiyear municipal contract.
Commercial segment backlog at the end of the second quarter was $413 million down 5% year over year.
This reflects the delay of the normal seasonal school bus order rates and continued delivery of mean municipal transit buses under a larger long term contract.
In addition, the specialty division portion of the commercial backlog decreased due to end market headwinds.
On a positive note as a part of the shuttle bus divestiture, we are given existing type a school bus backlog from the buyer, which will start to transition to our school bus business in the third quarter and was not included in our reported second quarter backlog.
We expect this will will provide additional school bus production volume in the third quarter and future orders will be included in our backlog as they come to fruition later this year and over the longer term.
Regarding the outlook for the commercial segment orders for type a school buses are pending school districts decisions regarding their fiscal budgets and plans for schools to reconvene in the fall.
This business will be ready to ramp up production to meet demand as needed when customers returned to their normal ordering patterns.
Today, we have had no bus backlog cancellations.
In order to help with the estimation of commercial segment revenues going forward. Please note that total revenue for the divested shuttle bus businesses.
As approximately $200 million over the last 12 months.
And these businesses are most recently operating at a low single digit adjusted EBITDA margin.
Turning to slide seven recreation segment sales of $114 million were down 43% versus last year.
As we previously announced Ivy production was shut down during the second quarter anywhere from three weeks to six weeks, depending on the location of the business and status in order backlog or work in process at the time that the stay at home orders were put in place.
Typically our second quarter is a strong selling quarter for the recreation segment.
Entering the recent quarter, including the first two weeks of March we were tracking to our plan and felt very good about our dealer inventory levels, new product offerings and recent dealer development wins.
Starting in mid March Colgate related shutdowns took place and as a result segment sales ended up coming in approximately 40% below our plan for the quarter.
The largest impacts to the segment's revenue decline were from the businesses that were shut down the longest our class a and towables businesses.
Recreation adjusted EBITDA was a loss of $1 million for the quarter second quarter, despite taking aggressive actions to take cost out during the shutdowns, including temporary layoffs and furloughs.
We made a conscious effort to minimize the impact of this disruption on our employees by continuing to pay all employees health care costs during the shutdowns, which also impacted our bottom line.
Some cost reductions also resulted in permanent cost takeouts such at the segment has now lowered its breakeven point exiting the crisis.
Segment backlog decreased 27% year over year 200 $123 million.
This decline resulted from lower dealer order rates because of decreased foot traffic and retail sales caused by stay at home orders.
In addition, we were experiencing lower non motorized RV order rates pre call that as a strong 2019 backlog was largely delivered and being right sized by the dealer channel.
We now expect Trailering camper orders to be more closely aligned with retail sales going forward this year.
Early indications in our third quarter are that the RV and market.
All right at the RV end market as emerging briskly from Nicole the 19 PEM that pandemic.
Orders and dealer feedback has been consistent with recent positive industry parts of pent up demand and the potential for new RV buyers entering the market.
All RV businesses have now resumed production and we expect to ramp our schedules in a manner that is consistent with wholesale and retail demand, but also dependent on OE chassis availability through the remainder of the year.
Net cash generated by operating activities for the first half of 2020 with $22 million.
Paired to a net use of cash of $39 million in the prior year period.
This significant year over year improvement is due to better net working capital management and the result of liquidity management initiatives during the temporary production shutdowns in March and April.
Second quarter cash from operations was also bolstered by net positive cash generated by spark.
Net debt as of April 32020 was $421 million.
Including $21 million of cash on hand.
Versus $373 million at the end of fiscal 2019.
We had a very comfortable $215 million of availability under our ABL revolving credit facility at the end of the quarter.
Subsequent to the quarter on me if the shuttle bus divestiture generated an additional $49 million of cash at closing.
And we anticipate approximately 5 million more cash from this transaction later this year.
Cash received at closing was used to pay down debt and future cash receipts will also be used to reduce outstanding debt at the time they are received.
Net working capital on April Thirtyth was $429 million approximately $30 million lower than the prior year period.
Net working capital at the end of the second quarter was positively impacted by the Reclass of approximately $29 million of shuttle bus working capital to assets held for sale.
But also includes $46 million related to Spartan.
We continue to emphasize and focus on working capital efficiency across the enterprise.
And our cash and liquidity efforts demonstrated this focus in the second quarter and year to date.
As previously disclosed our term loan agreement was amended prior to the end of the second quarter.
As a result of this amendment, our net leverage covenant was replaced by a fixed charge coverage ratio covenant through and including the end of our current fiscal year.
A minimum fixed charge ratio of 1.25 times is required through October 30, Onest 2020.
After which a maximum net leverage covenant is reinstated effective with the end of our first quarter fiscal 2021, starting at 5.25 times.
Included in this amendment was a provision for the pro forma addition of a fixed level of Spartan synergies to adjusted EBITDA.
Specified amounts according to detailed forecasts provided to our bank group.
Under the revised agreement.
We're precluded from stock buybacks through the remainder of the life of the agreement which runs until April 2022.
In addition, we are unable to pay common stock dividends to equity shareholders until our net leverage ratio is reduced to under 3.5 times, if we choose to do so.
We currently expect satisfactory covenant compliance through the end of fiscal 2020 and at least through the first half of fiscal 2021.
We have suspended up almost a formal financial guidance and we do not intend to reinstitute reinstitute new guidance at least through the end of our current fiscal year.
This is due to uncertainties still existing within our end markets and the inability to predict possible continued impacts of the pandemic shutdowns and stay at home orders across the nation.
Before I turn the call back to ride I would like to just add one of many improvements that is being implemented and will become part of our business system and management culture going forward.
This execution focused and data driven improvement will be the introduction of a relevant and specific cash return on investment hurdle rate that will guide our decision, making for short and long term initiatives.
This is something that we have used but not formalized are consistently applied across our enterprise in the past.
I believe this will be a significant component to reinforcing and end to end, maintaining a fact based and shareholder value linked decision making process.
Right.
Thanks, Steve.
So we have much work to do as we move forward. We have a near term action plan that will address quarter is not performance and structural costs, our operational intensity will increase in the web business system will become fundamental to our execution.
These processes of commercial and operational excellence will be developed deployed implemented inspected throughout each of our business business units. In addition to this work a top priority of mine is to shape our culture.
We are still a relatively new company made up with many cultures all unique in all value.
We will continue to develop a culture of integrity diversity and inclusion.
There are people know their value that their efforts are appreciated in rewarded.
Many of our businesses have strong and successful entrepreneurial spirit, which we want to embrace and retain but to reach our potential we need to balance this with the implementation of capabilities to drive consistency in our business on our journey towards moving toward an operating company.
We will build our operational culture around a few key areas our leadership will be aligned around operational intensity data, driven fact, based and decisive moving with urgency and accountability. We have great people committed to quality of our products and brands will agree to surprise and serving our first responders and our communities will use that same sense of purpose and development.
Culture to execute and server shareholders as I said, the beginning there's significant opportunity to create value at Roe.
Be built overnight, but it starts with me and the execution executive leadership team.
Operator, we'd now like to open up the call for questions.
Thank you will now be conducting a question and answer session.
Yes. Thank you please limit yourself to one question and one follow up and we welcome you to rejoin the queue for any additional.
A question. Please press star one on your telephone keypad.
Let me just wanted to keep your line is and the question Q Prestart Sue.
Your question and the queue for participants do you think speaker equipment, maybe necessary to pick up your hands that before passing the Starkey one moment. Please go for your question.
Our first question comes from the line Stephen Volkmann with Jefferies. Please proceed with your question.
Hi, good morning, guys.
Morning.
So right. Since this is your first call a welcome but I thought I might ask a couple of sort of big picture question. So if I might now that you've been there a bed and done some of your reviews I guess, we here on this side have been hearing about Rev group and lean manufacturing and various.
Things that have been try the over the past few quarters and obviously the results were not so I guess, what we wanted them to be so I guess my first question is what do you think you bring that's different.
That sort of can jump start this and.
Quick follow up to that thanks.
Well I think the first thing I would say and this is just based on my observations.
I think the execution of use the word lean as an example of many things that we can do to improve performance, but the execution of lean was was not consistent through the because we do have examples within our portfolio businesses at the students very very well, but it's not broad enough that being to see it impacted the bottom line. So I still believe.
Fundamentally that that in this example, lean is something that we can green gained great benefit is broadly utilized across our portfolio, which is not today I think specific to me could you ask would likely gibbering I mean, my expertise and what I have is a great.
The ability to execute and follow through plans are great.
Putting my views on paper, which is the needs to be done a great. What really matters is the cadence in the rhythm and accountability replenishment getting things done quickly and that's that's kind of my storyline is that we we figure out what we got to go do and we executed that we follow through on how that's performing so that sense of urgency that sincere commitment to do what we say is really important.
To me and men and Thats kind of what I'm going to brick make sure we do for our shareholders.
So do you think thats, a question of personnel or incentives or what's the what's the secret sauce to get folks kind of.
Rolling in the right direction.
I'm a big believer that you got to have operating cadence and rhythm you got to define expectations you have fallen through you get to establish targets and measure them you got to measure gap targets. So there is a resiliency in the sense of urgency that you put in the business would fall through relentless follow up.
Certainly incentives aligned incentives to management performance are important and in the one things have an IP buena ripe seats with commitment to do the things that you lay before you that you're going to get done is critically important as well. So all the things you mentioned are important.
But I still go back to you.
Talk is one thing executions. Another in execution is the key to getting things done and creating value. So that's not that's paramount and what we're going to get done going forward.
Okay, Great and then the quick follow up in your prepared remarks, you said something to the.
Effect of.
Some business have double digit margin opportunities I.
I may not have gotten that quite ready, we're talking fast, but can you just to expand on that a little bit I mean are their businesses that don't and that may be you know, where you're looking at potential divestitures or.
And any kind of numerical bookings you can put around what you think the opportunity is somewhere down the road would be great.
Yes, I think Steven the comment you were referring to the made a comment about as we look at our portfolio and we think about once we demonstrate great operational capabilities in our what we have today as we look for we'll look at business that are close to our core that we believe that has the potential for double digit earnings as we think about being more acquisitive and.
Road ahead, certainly today, if you look at our portfolio of businesses that are double digit new businesses or not we'll continue to evaluate that portfolio against.
What we think to be core and things. We don't think we have the potential to be the rightful owner too and we'll make decisions accordingly. So.
Thats kind of I think prequels Nolan business as you want your portfolio in terms of what's core and then when looking at your ability to execute and deliver.
Double digit earning potential in those businesses over time.
Okay. Thank you very much.
Thank you. Our next question comes from the line of make celebrate with Baird. Please proceed with your question.
Yes. Thank you good morning, and Rod welcome to the calls.
Maybe sticking with the same line of questioning is Steve Im wondering from from your perspective as you look at the Companys portfolio in Europe, and you think about the footprint here, obviously left group has been.
The automation of multiple acquisitions over.
Long period of time.
What do you think the principal lovers and in terms of improving the business lie in it I understand lean, but should we also be thinking footprints should we be thinking product simplification.
Any of these.
Other items in your mind at this point.
Yes, I think that leave you with.
To answer that question with a couple of different lenses, one would be looked at the current your current product offer you get your career front foot per your current operations Eurs and I've only walked as I mentioned in my in my previous comments about half plants, but there is tremendous opportunity.
To be more efficient and more effective than what we do if you look at.
The lows of our plan should look at material presentation, you look at our make by now how we make when we buy the complexity, we bring the plant boards and I believe there's significant opportunity to free up space and be more efficient and how we flow our plants and two side. What we do we don't do I think there's great opportunity inside purchasing to improve.
Purchasing leverage.
He is our biggest piece of our cost structure. So we'll be looking at that areas to figure out how we can be more effective there and drive value.
And you mentioned designs.
We're an amalgamation of a bunch of small companies today and when you look across our portfolio, we do everything a little bit and silos I think theres opportunity in value being used in thinking about how you you look across your your businesses and think about product platforming always been keen on end markets and differentiation required.
Add value, but but being more efficient how you plan that that differentiation. So you can plan from your products and drive more commonality in your designs, which Bruce purchasing leverage blues reduces complexity.
It does many many things it takes that those details off your plan for that allows you to then look at your your foot your footprint. It's highly variable cost business I think footprints always something you look at in terms of opportunities, but in terms of our cost structure, that's probably not the largest lever is more design cost inefficiencies.
And in purchasing leverage I think the with the opportunity is in just one other comment the the opportunities when you do platforming around what you're going to making what you're going to buy and design for manufacturing or or recruit really really critical to unleash a lot of value too. So those building those capabilities either operating system are going to be critical going forward.
Sure.
To get into shareholder value that leaving.
Wrapped up inside the business.
I see.
Then I guess my follow up.
In the slides and in your comments you certainly highlighted.
Cobot 19 impact on.
On the Labor force absenteeism and efficiencies that you had the quarter.
As we're moving into June.
To give us an update as to where you might be in that regard.
How close are you too when you would consider normal operations.
And can you also comment maybe as to what you're seeing in the supply chain I'm, particularly interested in what's happening with with chassis and chassis availability. Thank you.
Hey, guys that they know that I'll answer that question and if right wants to give any color afterwards.
You can do that at first start with the people.
Yes, and the absenteeism I think absenteeism, Tom was it was a meaningful impact to our second quarter in a couple of are.
Locations that are near larger than centers.
And where we work shutdown because we are in a central business. It was less predictable, obviously, so that that impact impacted primarily the fire and emergency segment.
Otherwise.
The people from the standpoint of of Furloughs, and temporary less and recreation and also took place, but obviously much more predictable since since some of the stay at home orders have been lifted and since.
Late may.
We have now restarted all of our businesses.
All of our businesses operating under I guess, I would say post coated.
Auction rates.
To take into consideration working capital management and not getting ahead of ourselves, but also making sure that we are addressing.
The end market demand that we see coming forward in still with some uncertainty to it so from a people perspective, a lot of the issues we ran into our.
Most part kind of behind us, but somewhat lingering in a couple of places, but not a big issue and that in Q3.
So far from a supply perspective.
We had a number of suppliers, obviously that also closed down because of coal bid in the second quarter.
For the most part all of our suppliers are back up and running.
And the biggest issue. We are we are watching and looking at is obviously as always our.
Our chassis suppliers are large Oems.
All of them are also back up and running for the most part almond came back when they intended to come back.
But there has been some fits and starts easier in the news in terms of some of the larger clients. So nothing is is an issue currently we're working more on a kind of just in time.
Chassis availability today, but Doug don't foresee any issues, but thats one thing are watching to make sure that doesn't trip us up going forward otherwise the supply chain is.
Is doing okay and.
And we don't see large issues right now.
Thank you.
Thank you. Our next question comes from the line of course.
With Morgan Stanley. Please proceed with your question.
Hi, Thanks for the question guys.
Right.
I think.
Steve asked us a little bit earlier, but about the portfolio, but I think historically talked about cost Hey, RV is being one of those segments that might.
Not be able to get to double digit margins I'm, just curious, especially given the kind of diamond restrained.
That backlog accelerate.
What your thoughts on that business has been in some of the repositioning.
Happened.
On the coffee side.
Well I think broadly.
We'll always we're going to continue to review the portfolio for core noncore piece and as I mentioned before the earnings potential what we believe we can get the rights to get to double digits really really important I would say that.
The work that's been done in that business in the last year now your math is dramatically improve its performance. We do see the efforts that's been put in place there through earlier Bill reason done a nice job in position that business for improvement in certainly in we looked at the demand it's coming out of this post Kobe, there's great demand.
Placed on that business in terms of new.
Production demand. So we're seeing some short short cycle improvement and we're seeing demand. So those are all good things.
Not to make a comment about intentions I wouldn't say.
You have to look beyond short cycle improvement in markets to understand what you should be the owner would you shouldn't be dealing I think we're going to.
We continue with not only of that business, but all the business to say.
And this is a process we have to go through as a team with with music New leader and with the board around what is going with noncore and.
Certainly in the RV businesses as many other businesses will be part of the discussion, but we do see improvement in the performance of the business, we do see improving demand.
But we also mindful of that.
The cyclical nature of their business. It is dead marketable returned back to historical norms, regardless, but peaks in the postcode environment or not so we're going to be mindful that going forward.
Okay, great. Thanks, and then theme you mentioned that you guys haven't really seen many cancellation on that on the attorneys side I think you did talk about.
It's not materializing can you just remind us how big a school bus.
Per cent of commercial and also if you can just kind of quantify.
How big municipal municipal are within each segment in which you kind of view at most threat.
And from your comments.
Yes, I won't get down into an individual kind of schoolbus versus other product.
Type within the commercial segment, but I can say broadly given the commentary we made about the size of the shuttle bus business that we divested that now now the commercial segment is.
Thats still to two divisions the bus Division specialty division.
And and boss represents about 75% of that segment, which includes school bus.
And transit buses now so those are the two bus businesses in that segment.
Hopefully that over that helps from municipal state.
Exposure standpoint, I think as you look at segments broadly going from top to bottom exony.
Other than the contractor business in the Andean side, which is indirectly state municipal or otherwise thats pretty much.
Dependent and benefits from municipal state and other governmental agencies text based revenues.
As you look at commercial now.
With boss at 75%.
Yes School bus is pretty much municipal budgets and tax base revenue.
Transit bus has a little bit of a mix some municipalities that than they have some schools and airports and things of that nature.
Specialty which is 25% of commercial.
Thats it thats really not municipal based obviously its parts, it's logistics and it's the rental houses for transportation and debt and highways for example.
And then obviously recreation, which doesn't have any exposure really to state municipal.
Hopefully that helps.
Yes, that's helpful and sorry, just to comment on cancellations aside from the inspection issues you guys have had on the fire side have there been any delays or kind of push outs of orders that you were expecting to fulfill early on here.
Thank God are getting pushed out to later into 2021.
No no no delays or push outs actually customers want their fair attract faster right and so we're working with our customers to make sure we satisfy their needs as best as we can and that's our intention to our intention is to slow or to shorten the duration of our backlog to be.
Even more responsive to our customers and their needs for their equipment. So.
No cancellations or delays, they actually want them faster.
Okay, and then just lastly on the non motorized backlog for RV.
You mentioned that you expect.
To be fairly consistent with retail sales for the rest of the here can you just comment.
Pretty tough but.
Your expectation is for how retail sales will recover within RV.
At this point.
Yes, I think.
Retail sales as the one one part of the RV business as we look forward and plan that is a little bit less predictable right now.
Obviously, we've had to.
Great couple of weeks or months post pandemic that.
The anecdotes from from the industry, our that retail sales are.
Doing quite well compared to prior periods.
Well, we I look at wholesale and retail demand and I think as it relates to retail demand, where it's kind of wait and see.
As the summer progresses, if trends continue.
Obviously, what we'll take advantage of that in our wholesale shipments and and flow through to the dealers to that to the end user but.
Right now I think its little early for us to be planning on your continued robustness from a from a retail perspective until we see a little more data.
Okay. Thank you.
Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Hi, Good morning, and welcome I guess my first question.
Can you talk about any incremental opportunities you see on that you know SGN ISI for the company to take out costs. Yeah. How efficient you are I got my second question is just.
As you look at the investment that was under the prior leadership I mean, do you think theres opportunities or I need for you guys to invest more in your product lines and then last question for you Dean I any help at all on just how you're sort of thinking about cash flow in the back half the year. Thank you.
So they sell it for the last question first on on the cash flow side.
I think.
We're going to continue to to manage aggressively on for positive cash flow and debt reduction.
As a year progresses, so I'm not resting on our laurels Paul post Covance.
We look at the second half of the year typically our strongest cash flow.
Portion of the year.
I think this this this year will be no different but maybe a little muted because.
As you can imagine we are.
Ramping up again post Colgate in some areas.
From a working capital perspective, and we're trying to do that judiciously and an at the right pace, but I think in the second half our working capital cash.
Cash from from working capital will be about flat.
I think most of our cash flow in this in the second half of the earnings related I.
I think our capex will be.
Pretty consistent with the first half of the year.
There's a couple of things were going to still be focused on with regard to non operating kind of cash flow opportunities. We had a couple of that we talked about previously lander excess land sales that is still progressing, albeit slower because of that stay at home order. So we expect some cash from from that activity in the second.
Half and we've been.
Taking advantage of the opportunities afforded to us into cares act on for the company to carry backs and then allows so we're going to also receive some cash tax refunds in the second half.
So so all that.
All that together will again I think provide a positive cash from operations and free cash flow for the remainder of the year such that acts. The Spartan transaction, we will be positive for the whole year on a free cash flow basis.
Okay and if this is Ron excuse me so I need to first question. You asked was about structural causes DNA and when you when you walk into business with the first thing you look at as how does the business operate power decisions made in.
We're certainly going to take time and look at our operating model and how we make decisions around.
How we run the business. So were you said you think about things like shared services and decision right. How you look at engineering product management commercial activities top to bottom how is the organization structured and how does it run that's all going to be on table here in the next 60 to 90 days of coming some decisions around how we want to run this.
This is approved for the the operating system that we're going to deploy going going forward. The belief isn't that there will be structural cost opportunities that emerge from that discussion that I think once you understand how you want to run the business and how you want to make decisions about where things.
That you will see different ways of looking at the business and opportunities will emerge from that so that that the units. The second piece is around I.
I think you ask about product investments that we're thinking about use of capital I talked a little about that in the prepared comments, but I think largely we'll start with going we're going to do some work market bag to understand the customer segments of the channels and whatnot, but I. My first pass look would be that there are opportunities in terms of when you think.
About product investments.
And I mentioned this is well in the in the upfront section around.
Opportunities to do product platform and it market back to understanding the value brands.
Strictly those brand differentiation the value props of those brands and bring those bring that differentiation to the table, but under the standpoint of looking across your businesses around where is the opportunity to commonize and reduce complexity in simple for the fire operation. So you you take only the required complexity your plant or.
And we ended leads into all other types of decisions do so I do think there's there's opportunity to look at our how we make investments and I think as we go forward, we'll think about product investments maybe slightly differently.
And then when I'm in the past the part of that just the natural cycle, where we've had I think a lot of acquisitions and good acquisitions I think will now grown the tree, we could think about the business differently than we have the opportunity to do that.
I'm, sorry, right and just a follow up I could you talk about a lot of opportunity that you have understanding you've only been at the from about 60 days or so but do you have a timeline for when youre sort of have more concrete plan and be able to quantify what the impact is like financial targets like a timeframe for when you'll come back to history in sort of.
Put more money around the different items, you're talking about.
Sure Mark.
By year end or.
Yes subject to forward statements I think we'll.
Setting aside the backwards on giving guidance right now we're going to work in process here in the next three to six months that or is going to yield as an operating methodology the business, which from that will establish targets and then as we go forward and we moved back into where we're doing for these statements are on guidance than we'll disclose those will that's part of the price.
Losses.
Besides the prize of what you want to do how you and operate in organized around doing it for sure yes, we're going to be doing that.
Thank you very much and welcome aboard.
Q.
Thank you. Our next question comes from the line of Jerry Ravished Goldman Sachs. Please proceed with your question.
Hi, Good morning, good morning, everyone and Rob welcome.
Thank you Gerry.
Well I'm wondering can you talk about the fire business in particular were.
He's been working to crude throughput what's your assessment.
Well the manufacturing process sale, how quickly can you mean to reduce the.
Variability option.
I understand that debts.
A key issue.
The amount of Boston customization.
There is in particular behind.
Turning challenges can you just expand.
How quickly we can.
Get across I was hoping if you will.
Yes.
Your assessment there.
Yes. There is there is we're going on in each bar business right now and it's really inside the walls those plans to understand how can we improve throughput.
Like our complexity in all the things you'd look at and walk in to plant material flow and.
So each each plant each business is it has its own unique set of opportunities and challenges that we're solving and I think you think about improving those businesses you think about in steps Theres doing what you do today leaning out those processes and simplifying things value streaming is an example around getting your throughput up.
Thats going on each of the businesses today.
That would you should you you won't be the full benefit of.
All the things you would do over time as you can talk about.
The main mine analyses and design for manufacturing and cross platform is there's a long cycle opportunity here to continue to drive value in these businesses with the short term opportunity I think in the three to six month basis, we should be able to start seeing.
Benefit in each of these businesses.
As we make the changes some of the businesses are more mature and more and farther along those processes than others, but each has its own problem to solve the far businesses are ones I. Afterwards on got I've got a couple spots love to see but I have seen some of our larger facilities and it's a it's a great opportunity for us to go in and applies in principle.
Most of you had benefit, but it's going to take a while to to address the opportunities that are on the plant doors for us.
And fully address that it's a longer cycle opportunities.
And in terms of as you.
Think about that portfolio as it stands now or are we nearing the end of the portfolio culling process.
Was the shuttle bus transaction blast sizable won or.
Are there few things that you on the board are still evaluating as.
Possible divestiture candidates that are meaningful.
Hi.
I don't know that you you're always looking at your portfolio for opportunities to do improve I, but I would be biased short term our focus is on operational intensity and how we prove the perform underlying performance of our business. That's first and foremost in the mines leadership team right now there are always or the opportunity.
Residual value is a come forward you have an obligation to do that but I think if I would.
We just where our minds around right now it's around is around making things perform in addressing situationally opportunities that present themselves to.
Improve our portfolio.
Thank you.
Thank you. Our next question comes from the line of Andy Casey with Wells Fargo Securities. Please proceed with your question.
Thank you good morning, and welcome Rod.
Thanks, David I guess.
I guess a.
Question direct to the Iraq, So sorry.
I understand it's it's early to quantify now the financial targets, but when you are.
Our talking about transforming.
The Rev group into top Cortile industrial performance can you kind of give us some guidance.
What metrics you may be looking at.
Yes, I think that.
Obviously, you know you looked at the performance of.
If you would view, we talked about our cash return investment as being a drivers you think about the numerator denominator there of what that is in us.
Your earnings and unique about your networking capital you think about the our operational and asset intensity of businesses.
But you're always looking for good efficiently getting more out of your asset base and better returns the returns pieces easy it's hard to do reviews and talk about what's getting your business more profitable and continue to grow at or above market rates.
Your job of cost configuration that you get products on the floor you can build for costs at them at a price you sold.
All that speaks in operational discipline, but.
Margin rates EBIT.
Quality.
Your quality operations, you're not doing rework theres all kinds of operational metrics that follow through from that numerator denominator that we're going to focus on so you translate from financial metrics on the right on the way down the operational nutritional left that drive that capability that to perform when you're on your balance sheet and on your income statement.
Okay. Thank you and then.
For the team I guess could you.
Discuss any investments.
That are required to transition that.
For the Rep business system from Rep production system are we talking.
Like ERP systems or is it.
Is it something else.
Yes, Andy this is dean I think from the standpoint of investments I think.
Over the longer term as we mature there probably are some investments in people and capabilities.
That arent within our four walls today that day mature top quartile company would have.
Inherent in the business within the business.
So I think Thats. That's one thing we don't have any large ERP kind of investments that we need to make that maybe more of the overarching kind of data warehouse data lake types of things, where you can take multiple ERP isn't and bring all the information together in one place and that's a much smaller kind of dollar value investments still.
A lot of work to do but but less from that from a capital perspective, So I.
I think I think the investments are huge so I wouldn't I wouldn't call that a headwind I would call. It actually had net positive now because if we look at art as Rod set a cash return on investment.
In the hurdle rates were putting in place we're going to make sure those things bring back more than the than they then we spend so they have a payback that effective and progress for a top quartile company. So.
Ill just add some little fluent fall into that I agree with wedding said there.
You don't draw we need to look at ERP use.
As part of this discussion I mean, I do think things like customer data.
And for driving working capital opportunities and thinking about options for shared service operations vendor data all part of this data like discussion with the being talked about those are all critical.
You think about mechanisms for tracking operational improvements so continuous improvement tracking.
Purchase price tracking the value engineering.
Tracking systems, where you can operationalizing get good data and accountability around target setting those are those are pretty not from an investment standpoint, those control systems to stand up are pretty nominal, but they're very very important forgetting visibility transparency on tracking and target setting, which is all part of the operational from the discipline that we need to build in the.
Business so.
Youre things, we need to stand up but there, but do not have the scale in nature of European.
Actualize, what we're going to go do to get our businesses is operational.
Okay. Thank you very much.
Thanks.
Thank you we reached the end of our question and answer session I'd like to turn the call back over to Rob rushing for any closing remarks.
Thank you so as you probably gathered from the conversation we have a lot of work to do.
In our business operationally, but there is great potential here for this business to create shareholder value. It's a lot of hard work and we'll we'll continue to keep you updated on our progress, but it's a visible plan that I can see what is going to get ourselves lined around an operational on I do want to I do want to thank again, our employees we've gone.
Through a very challenging times, the country and as a business is all businesses have and without degree work in efforts of our employees.
We couldn't have continued to execute for customers and also than what we needed to do to make it through this through this difficult times I want to again thinking for that and in closing I just want to thank all of you for being so kind to me or my initial call I look forward. The road ahead and I'm very excited about being here and really excited by what I think can get done. So appreciate it look we're talking to all again Bruce.
Thank you.
Thank you. This concludes today's teleconference. You may disconnect. Your lines. This time. Thank you for your participation and have a wonderful day.
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