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REV Group, Inc. (NYSE:REVG)
Q4 2017 Earnings Conference Call
Dec. 20, 2017, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the REV Group's Fourth Quarter 2017 Earnings. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions].

I would now like to turn the conference over to Sandy Bugbee. Thank you. You may begin.

Sandy Bugbee -- Vice President, Treasurer, and Investor Relations

Thank you, Sherry. Good morning, everyone, and thanks for joining us. Last night, we issued our fourth 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. It is also available on our website. Please refer now to Slide Two 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 a quarter or a year are to our fiscal quarter or fiscal year unless otherwise stated.

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

Tim Sullivan -- President and Chief Executive Officer

Thanks, Sandy. I think we'll mix it up a little bit today. Dean, why don't you go first and give us some of the financial highlights?

Dean Nolden -- Chief Financial Officer

Yeah, thanks, Tim. Good morning, and I will start on Slide Seven. We're very pleased to report strong growth and improved profitability for the Fiscal 2017 fourth quarter. Quarterly net sales of $684 million were up 26% over last year. And, for the full year, we grew sales by 18%. Strong organic growth in our fire and emergency and recreation segments drove our sales performance, as well as the introduction of innovative new products across all of our businesses.

Acquisitions, the core element of our ongoing growth strategy, also contributed to our growth for the quarter and for the year. We are very happy with the initial performance of our acquisitions. All of them have driven sales and backlog increases in their respective segments. We continue to make capital investments in these businesses to increase their scale and enhance their profitability as we move into Fiscal 2018 and beyond.

Net income in the fourth quarter was $22.7 million, or $0.35 per diluted share, and $31.4 million and $0.50 per diluted share for the year. Adjusted net income grew by 59% for the quarter, to $29.2 million, or $0.44 per share. For the full year, adjusted net income grew by 42% to $75.9 million, or $1.22 per share. These are significant year-over-year improvements driven by growth in core earnings and a reduction of interest expense.

Speaking of significant achievements, adjusted EBITDA for the fourth quarter increased 39% to $58.4 million. And full year adjusted EBITDA grew by 32% to $162.5 million. Adjusted EBITDA grew from increased sales, the impact of our ongoing procurement and production, cost optimization initiatives, pricing, and contributions from acquisitions.

We are very proud of our growth and profits for the year and the resulting 80 basis point improvement in adjusted EBITDA margin. We expect the pace of this operational leverage to continue to accelerate in Fiscal 2018 as a benefit from the continued improvement made in operations as well as form our increased scale.

Let me now turn to Page Eight to discuss the performance of our segments. Fire and emergency segment sales grew 30% for the fourth quarter and 28% for the full year. The primary drivers of this increase were higher unit sales, contribution from our acquisition of Ferrara and a greater mix of higher content, higher value vehicles.

F&E adjusted EBITDA for the quarter grew 34% and 29% for the full year, driven by this increase in sales and mix, and also due to the actions we took to improve segment profitability, including productivity, pricing, and operational initiatives, particularly, at our T&E and Ferrara businesses.

Going forward, we see continued strength in our F&E businesses from continued high demand in both fire and ambulance end markets, which are still recovering from prior recessionary levels. As show on Slide Nine, in our commercial segment, quarterly sales were down 2%, and 9% for the full year, primarily from lower sales in our shuttle bus product category, where we continue to be more selective in pursuing higher margin business.

The shuttle market decline in fourth quarter was driven by sales increases in other commercial product categories, which include trains and buses, terminal trucks, and sweepers. Looking forward, we exited the year with a very healthy commercial backlog increase of 44% sequentially and 62% versus the prior year.

Commercial adjusted EBITDA margin was 8.4%, down 60 basis points for the quarter. But, for the full year, commercial adjusted EBITDA margin was 8.2%, which is an increase from 7.9% in the prior year.

Going forward, we believe the end markets in the commercial segment are also strengthening as transportation services continue to be outsourced and legislative replacement cycles continue. And, we believe our commercial margins will continue to increase through added scale, a return to sales growth in 2018, and the benefit of actions that have been taken this year.

Turning to Slide Ten, quarterly sales in the recreation segment grew 57% and 38% for the full year. Practically driven by sales from our acquisitions of Renegade and Midwest, segment sales also benefited from increased unit sales and higher average net selling prices. We exited the year with a segment backlog of 80% on a year-over-year basis and 25% sequentially versus the third quarter.

Recreation adjusted EBITDA increased 250% for the fourth quarter and 229% for the full year. Currently, these higher volumes are also because of our ongoing procurement initiatives focused on quality, operational improvements, and the impact of our acquisitions.

Our full year recreation adjusted EBITDA margin grew 320 basis points, 5.5% of net sales, up from 2.3% last year. Looking ahead, the recreation also remained very strong as customer demand across many demographic groups continue to embrace the RV lifestyle. Overall, consumer confidence remains strong, which also bodes well for continued growth in the segment.

Turning to our balance sheet, total debt on October 31st was $230 million. As a result, we had $186 million available under our ABI revolving credit facility. Capital expenditures were $4 million for the quarter and $54 million for the full year, as we made investments in our production plans, equipment, service locations, and our IT system to try to scale in growth.

Looking forward, we expect capital expenditures for Fiscal 2018 to be consistent with Fiscal 2017 at the $50 million level. Finally, we are forecasting that we will realize improvements in our management and working capital and realize positive free cash flow and net debt reduction in Fiscal 2018, before the impact of any future acquisitions.

In addition, we have more than adequate liquidity, low leverage, and access to external markets that will be the fuel to our growth initiatives in Fiscal 2018 and beyond.

I'll now turn the call back to Tim.

Tim Sullivan -- President and Chief Executive Officer

Thanks, Dean. Obviously, very exciting times here at REV. I'm usually fairly measured in my self-evaluation of our corporate performance, but when I reflect back on our fourth quarter and full year performance in 2017, I'm amazed at what our team accomplished. Let me give you a few highlights from the quarter and the year.

We began the year executing a very successful IPO in January, pricing at $22.00, which was one dollar above our initially projected range. In October, we completed a highly successful follow-on equity offering of $11.5 million. Both of those offerings -- the IPO and the secondary follow-on -- were significantly over subscribed.

We achieved 32% increase in adjusted EBITDA on sales up 18% year-over-year. This was the second year in a row that we achieved such results. I'm hard pressed to find any industrial company, or any company for that matter, that's achieved this level of success in two years back-to-back.

We introduced 17 new products. We acquired four companies. We became the first ever OEM to be qualified by Ford Motor Company to sell genuine Ford parts. So, we look back on the year and we're just -- I'm very proud of the team. The team did an outstanding job.

But, we actually completed our high-fives seven weeks ago, and we're already well into Fiscal 2008 (sic). Let me set the stage for what we see for 2008 (sic) going ahead. First and foremost, we are reiterating today guidance that we presented in October, during our follow-on, which is net sales of $2.4-2.7 billion dollars and adjusted EBITDA of $200-220 million for full year Fiscal 2018.

This is now three years in a row of revenue growth exceeding 15% and adjusted EBITDA growth exceeding 30%. Again, I know of no other industrial company even close to this type of performance, and this is three years in a row.

I should also clarify that, in my entire career, it's always been about making money, which in turn directly impacts shareholder value. Revenue is a nice metric, but there are a lot of different ways to make money other than just growing the top line. You should know that at REV, it's all about making money.

Our business segments, our reporting, as Dean said, strong demand for our products. Consider our continued economic recovery in the United States and the fact that almost 60% of what we sell in the U.S. market is based on federal and local tax revenues. We have a very steady state of demand that is just going to continue to grow as we move through 2018 and beyond. Couple that with the incredible demand on the RV market, and I like our chances a lot as we move into 2018.

We are out of the blocks hot in Q1, with new initiatives. We announced that we have entered into a joint venture in China with Chery Holding Group, to manufacture RVs, ambulances, and other specialty vehicles for distribution not only within China, but also into select international markets. Chery is the largest exporter of passenger vehicles in China, serving 80 different countries and 6.5 million people worldwide.

We took two years and a lot of diligence before we chose the partner we wanted to collaborate with in China. Quite frankly, we couldn't be more pleased with our new relationship with Chery. The initiative, coupled with the establishment of our new plant in Brazil that was opened in May, is a huge step forward in meeting our desires to be a worldwide manufacturer of specialty vehicles.

Our Brazil plant, which serves all of Latin America, is already turning a profit after only six months of operation. It will take significantly longer to reach this type of financial performance in China with our China JB, but clearly demand will be much larger when the China operation is up and running.

We introduced our first new product for 2018 at the end of October at the LA Auto Show in conjunction with Chrysler. We introduced the first ever hybrid wheelchair accessible mobility van. The vehicle successfully completed its required crash testing earlier this week. We're very excited to get this vehicle into the market beginning in January.

Obviously, seven weeks into the new year, and we're already off to just a really great start. Very pleased by where we're at in 2008 (sic) so far. Before I turn over to questions and answers, I've asked Nicole Gustafson to join us. She's our VP of Tax. Obviously, a lot of interesting, breaking news coming out of Washington D.C. overnight. Many of you know that we are effectively -- today, at least -- a domestic centric company, which means we are paying the highest tax rate of any U.S. company. So, I wanted Nicole to give you some precise numbers as to what that means, assuming that the vote goes through congress today. We expect it fully will -- may have already been done. If she could give us some exact numbers as to what that will mean to us as a company in 2018.

Nicole Gustafson -- Vice President of Tax

President Trump is expected to sign tax reform into law, which is hugely beneficial to REV Group. Assuming a full year impact of cash reform in Fiscal 2018, we expect to normalize effective tax rates from approximately 28-30%, a decrease of nearly 10% from our previous rates. We estimate the Fiscal 2018 effective tax rate will be in the range of 23-25%, due to other one-time benefits from tax reform. This will also free up additional working capital each year, estimated at $15 million for 2018.

Tim Sullivan -- President and Chief Executive Officer

Thanks, Nicole.

...

With that, let's turn it over to questions and answers.

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question and answer session. [Operator instructions] Our first question is from Mig Dobre with Robert W. Baird. Please state your question.

Mircea "Mig" Dobre -- Robert W. Baird -- Analyst

Good morning and Happy Holidays to everyone. My first question is surrounding guidance. I'm wondering if maybe you can help us refine our assumptions a little bit at segment level. I'm curious as to how you're thinking of segment level growth versus your 12.5% overall growth guidance, and also some color by segment on margin progression. Thanks.

Tim Sullivan -- President and Chief Executive Officer

I think we're going to have more of the same, obviously, in 2018. We had a very strong fire and emergency performance in '17. That's going to continue. As a matter of fact, our fire backlog is significantly higher at this time than it was last year even at this time. I think all other segments are up, and they're going to be up, reflecting the type of guidance we gave. Is there any specific segment that you're asking about, Mig?

Mircea "Mig" Dobre -- Robert W. Baird -- Analyst

Yeah. These businesses all have different end markets and cadence here. I know in the past you've talked about fire and emergency seeing the highest growth in '18 and followed by commercial followed by RV. Is that still your expectation? And then, you are guiding for 100 basis points of EBITDA margin expansion. I don't know if you have a more refined view as to one segment potentially getting more expansion than the others.

Tim Sullivan -- President and Chief Executive Officer

More of the same, as I said. We have a couple of segments in there that have not been performing at the level we want them to -- commercial being the most obvious one. We need that to perform better in '18 to really help us get to that guidance number. You saw the improvement in RV in '17. We're going to see more improvement there, as we see in '18. RV and commercial have to pick up the pace and we have to make sure that fire and emergency continues on the path forward that they've been doing.

Mircea "Mig" Dobre -- Robert W. Baird -- Analyst

Well, sure, Tim. But, I'm wondering what's imbedded in your plan as you're looking into the year? Do you have -- RV has obviously done better than you expected initially. So, is that sustainable? Do we build upon this? Maybe more color on commercial, too.

Tim Sullivan -- President and Chief Executive Officer

Absolutely. The RV recovery that we had in '17 is just going to continue. We have all of these new products that we put out there in September. We've had some good backlog building and that market is not cold whatsoever. As a matter of fact, I think specifically the large As tend to be a little soft. But we're taking more share, as I mentioned in our last call. So, that's going to continue on it's upward movement.

We think that at lot of the changes we've made in commercial -- we've got some new products out there. I mentioned one here on the call, the new hybrid Chrysler. Those new products, plus better market positioning is going to turn that around. We've been very discerning on the deals we will take. We'll continue to be discerning, but that doesn't mean we're standing still and not trying to do things to improve the overall cost basis of our product. We think that will help us get that commercial segment performing much better than it has the last 12 months.

Mircea "Mig" Dobre -- Robert W. Baird -- Analyst

I guess I'll let other people follow-up on that. Before I get in the queue, a question on CapEx. If I understood properly, you talked about CapEx still remaining in the $50 million range. This is a little bit higher than what I expected and what I recall at the IPO. What changed here and how do we think about your CapEx needs beyond Fiscal '18.

Tim Sullivan -- President and Chief Executive Officer

It's going to 50 -- actually, I thought we guided to that during the IPO, that it would be probably about the same for '18 and then probably start drifting off. We're not going to be shy about spending money to make sure we position ourselves for growth. It takes money to make money, and we're putting some money into our plants to increase the efficiencies that help get our cost down. We continue to implement our ERP system and we continue to spend on the parts and service part of our business. We think that that's an appropriate spend for '18. It should start coming down after '18. We're not going to be shy. We think we need to be out there spending that kind of money to get the growth that we need.

Mircea "Mig" Dobre -- Robert W. Baird -- Analyst

Alright. Thanks.

Operator

Our next question is from Jamie Cook with Credit Suisse. Please state your question.

Themistoklis Davris-Sampatakakis -- Credit Suisse -- Analyst

Hi, good morning. This is actually Themis on for Jamie. Just a question going back to commercial a bit. I appreciate that you're being selective there in terms of the opportunities that you're pursuing, but there were some hopes for growth in Q4. So, when do you see these sales inflecting materially and how should we think about production ramping this year, given the healthy backlog growth we show in the quarter?

Tim Sullivan -- President and Chief Executive Officer

Well, we're introducing new products in the first quarter, as I mentioned. And, I think those products will star to build some backlog. As typical, we have a very backend loaded plan. It's going to be the same for '18. You'll see some nice ascension in the commercial area in Q2, 3, and 4 as we get out of the blocks with the new products here in Q1.

Jamie Cook -- Credit Suisse -- Analyst

Got it. Thank you. And going back to the JB in China, could you provide some more color on the market there and why you find it attractive? How should we think about the opportunity there longer term? You also mentioned some other select markets, so what geographies are you targeting there specifically?

Tim Sullivan -- President and Chief Executive Officer

Well, that's why I gave the detail on Chery. The reason we chose Chery is not only are they a very prominent vehicle manufacturer in the China market, but they are the number one exporter of passenger vehicles to 80 different countries around the world. So, signing up with them initially with our RVs and ambulances, and then expanding into the other specialty products that we do make, the biggest demand right now in China, believe it or not, is RVs and ambulance, and that's where they want to start.

But, it's not just for the China market. We are putting together a master plan whereby we will be exporting from China into select countries, certainly the 80 countries they export into now are all candidates for potential export. It's a two-play, if you want to call it that, that we executed with Chery. That's why we did choose Chery. It's going to take awhile for it to ramp. Nothing's done small in China, so it's going to take us awhile to make sure the plant gets effectively built, up, and running. But, we were very careful on picking the partner and making sure we actually have a dual pronged marketing approach with the partner we did choose.

Themistoklis Davris-Sampatakakis -- Credit Suisse -- Analyst

Thank you. Lastly, could you give us an update on your aftermarket strategy and where we currently stand in terms of aftermarket as percentage of total sales?

Tim Sullivan -- President and Chief Executive Officer

We'll give you the exact number here, but aftermarket as an initiative is growing. We plan to really get it moving at a much better pace here in '18. We put a lot of the blocking and tackling in place the last 18 months -- 24 months, really -- creating a database, getting a portal in place, getting warehouses up and running. It takes a lot of money and a lot of effort to put that together, and that's pretty much behind us now. So, now it's a matter of executing. We have a pretty aggressive plan in 2018 to grow parts, in particular, and that's part of the growth that we're showing in the earnings and revenue -- primarily on the earnings side because that is much more profitable than unit sales.

As far a percentage of total revenue, today it's about 4%, which is not very meaningful. But stay tuned. This doesn't happen overnight. To break the purchasing paradigms in the market, it takes a lot of blocking and tackling, and a lot of grassroots efforts. But, those have all started and we're confident that we're going to be able to pull those off here as we move forward in '18.

Themistoklis Davris-Sampatakakis -- Credit Suisse -- Analyst

Thank you. I'll get back in queue.

Operator

Our next question is from Nicole DeBlase with Deutsche Bank. Please state your question.

Nicole DeBlase -- Deutsche Bank -- Analyst

Yeah, thanks. Good morning. My first question is around the commercial business, just to clarify. Was any of the backlog growth you saw from the LA Bus order, or does that come into the backlog later?

Tim Sullivan -- President and Chief Executive Officer

No. That's in the backlog.

Nicole DeBlase -- Deutsche Bank -- Analyst

And did that come in this quarter or last quarter?

Tim Sullivan -- President and Chief Executive Officer

This quarter.

Nicole DeBlase -- Deutsche Bank -- Analyst

Got it. Can you possibly quantify how much of it was LA Bus?

Tim Sullivan -- President and Chief Executive Officer

Well, we don't list out specific deals because that allows our competition to back into the numbers. But, I can tell you on a macro basis, that order is worth a minimum of $400 million, but the order is a split order. So, it's half and half. Half of it goes in now and the other half goes in about a year from now. So, you can do the math, Nicole. It's about half of that.

Nicole DeBlase -- Deutsche Bank -- Analyst

Got it, Tim. That's helpful. The organic growth within fire and emergency is really strong this quarter, and even on a pretty tough year-on-year comp. Just curious -- the backlog growth did slow a little bit year-on-year, although pretty strong Q-on-Q. How do you think about organic growth within the fire and emergency business going into 2018?

Tim Sullivan -- President and Chief Executive Officer

It's actually very strong. Right now, our biggest concern in fire is being able to get the product out. Two out of the three segments we've got are already backlogged into the fourth quarter. The other one will likely be backlogged into the fourth quarter here within the next three to four weeks. Our biggest concern on fire is making sure that we can get our capacities up. The demand has been somewhat flat year-over-year, but we're doing much better with the product lines we've got.

Emergency the same thing. Emergency's been a little bit soft with the contractors and I think maybe some of that is this uncertainty around the ACA and what's going on there. But, they can't wait forever and we actually just got some nice business into our backlog here in the last two weeks from a large ambulance contractor that was kind of a surprise for us. So, I think they've been holding back a little bit, waiting to see what's going on in congress, but they can't wait forever. We feel, again, we're going to have a very strong year in fire and emergency across the board.

Nicole DeBlase -- Deutsche Bank -- Analyst

Thanks, Tim. I'll squeeze one more in before I pass it on. Recreation margins were also really strong this quarter. I know that you guys listed all of the factors behind that in the press release and you talked about it on the call. But, will those factors continue into 2018, driving a similar magnitude of margin expansion into next year?

Tim Sullivan -- President and Chief Executive Officer

Yeah, I think we're starting to feel really good about how we restructure ourselves down in Decatur in particular. I think you'll recall that we had everything in one plant and how we have three plants up and running in Decatur. That's really loosened up and allowed the products to flow. The team down on the ground there has really built some efficiencies and those continue to get better and better every month. Strong market. We're taking share on the high end and I just think the manufacturing efficiencies are going to continue through 2018.

Nicole DeBlase -- Deutsche Bank -- Analyst

Thanks, Tim. I'll pass it on.

Operator

Our next question is from Steve Volkmann with Jefferies. Please state your question.

Stephen Volkmann -- Jefferies -- Analyst

Hi, good morning. How much of commercial is these shuttle buses these days, roughly?

Tim Sullivan -- President and Chief Executive Officer

About a third of it, so about 35% of commercial is shuttle.

Stephen Volkmann -- Jefferies -- Analyst

Okay. Is that shuttle -- do you expect those shuttle buses to be up in '18 or are we going to continue to wean off the less profitable deals?

Tim Sullivan -- President and Chief Executive Officer

Well, as I mentioned a minute ago, we're not sitting still. We don't' like the fact that we're not as competitive as we want to be. So, I think you should see a much better movement in shuttle bus this year. We will be in the marketplace and we will be competing. I think some of what we're doing to make ourselves more competitive will start to show itself toward the back half of the year.

Stephen Volkmann -- Jefferies -- Analyst

I assume the backlog that you do have is more profitable since that's what you've been focusing on. Is it reasonable to expect that this segment, the commercial segment, will have maybe the strongest margin growth in 2018?

Tim Sullivan -- President and Chief Executive Officer

It's going to be good, but I don't think it's going to be necessarily the strongest just because of the momentum we've got built up in RV. I think RV is going to probably continue to be the strongest and fire and emergency keeps moving along as well. It's going to be good. It's going to be better than what we've had, but it's not going to be strongest. We just have too much momentum built up in those other two segments.

Operator

Our next question is from Charley Brady with Sun Trust. Please state your question.

Charley Brady -- Sun Trust -- Analyst

Thanks. Good morning. Tim, I hate to keep beating a dead horse on commercial, but I just want to make sure I'm squared up on this. With the LA County order, that business does not hit until beginning of Fiscal '19. Is that correct?

Tim Sullivan -- President and Chief Executive Officer

That's correct. We'll be shipping next year at this time.

Charley Brady -- Sun Trust -- Analyst

If I do the math you talked about with Nicole, it looks -- I backed that out of backlog. The backlog is down pretty meaningfully in commercial. Maybe there's a cadence or lag time, order time, of when that's going to pick up. I'm just trying to square it up with what expected growth you could see in commercial given that the LA stuff is not going to hit in '18 at all. And the base backlog ex that is down year-on-year.

Tim Sullivan -- President and Chief Executive Officer

Yep. You're doing the math correctly. Again, the basket that we do have in commercial has a lot of products into it. You have school bus in there, terminal trucks, sweepers, mobility vans, shuttle bus, and the transit buses. There are a lot of moving parts in that backlog, but all of the other backlogs are kind of seasonal in nature, particularly school bus. Anyone that's got school bus, you have almost no backlog. It's very, very low. That's the kind of thing you've got here, too, on shuttle. About 60% of shuttle buses are federally funded on FTA contracts and those dollars flow at different times of the year, as well.

You have the math right. This time of year, for all non-type of transit buses and that type of thing, unless you have a big backlog in one of those, like LA, the backlogs tend to be low this time of year.

Charley Brady -- Sun Trust -- Analyst

Okay. So, we don't' want to read into an organic backlog number in Q4 and carry that on to what we might expect in 2018 because it's obviously being skewed by timing and seasonality and some of the shorter lead time with some of the products and pick-up on new stuff. Correct?

Tim Sullivan -- President and Chief Executive Officer

You got it exactly right. Don't push the panic button.

Charley Brady -- Sun Trust -- Analyst

Got it. One more. Back to your comment on ability to ramp up production to meet demand, can you expand on that a little bit? What are you doing to get that ramp up to meet that high demand?

Tim Sullivan -- President and Chief Executive Officer

It's challenging. You look at our plants, we're doing everything we can to the point where we're trying to add people on to a second shift. Labor is always an issue in manufacturing and we're challenged there to some extent. But, we're working it. We're looking at different alternatives to maybe upload certain areas of the plant and do some things a little bit different in different areas where we have other capacity. We're managing it well, because there is a lot of pent-up demand in fire. We don't like our backlogs out that far. When we're running backlogs out to August/September, that's not healthy. They have to be less than that. So, we're working it every way we can. Working some second shift if we can and we get the people. We're offloading some of the processes to plants that have capacity.

Operator

Our next question is from Mike Baudendistel with Stifel. Please state your question.

Michael Baudendistel -- Stifel -- Analyst

Thank you. I just wanted to ask you about all of this international business you were talking about with China, etc. How big do you think the international revenue can be in say a percentage of your total revenue in say five years? As a little bit of background on those markets, is it just as fragmented as the markets that you compete in in the U.S. where you're going to be the big OEM competing against a number of small ones?

Tim Sullivan -- President and Chief Executive Officer

Yeah, that's a great question. I'd like to tell you it's going to be equal, but that's a big number. But, it's a big world out there and we've done a lot of research into it. We're dedicated to that market, but we're attacking it in a different way. For example, we get people all the time trying to have us take a look at Europe. We have zero interest in the European market. Zero. It's very much like our market here. It's very convoluted. It's not been consolidated and you'd have to buy a lot of different companies to make it work.

But, we like a lot of the rest of the world. Getting teed up in Latin America and moving that -- and that's moving very quickly. We like our presence there. We felt like we needed to be on the ground there, and that is growing very quickly. The China initiative will be much, much larger than even Latin America. It's just going to take some time to get that traction. But, keep in mind, it's a two-pronged strategy. It's a strategy to enter the China market, but it's also using that type of manufacturing base to attack a lot of different countries that aren't even on most people's radar screens today.

So, we expect it to be meaningful. A lot of us on the management team here have a lot of experience internationally, and we're very comfortable with it. We just wanted to make sure we put the right strategy together. I can tell you both strategies that we've embarked on are going to reap some very strong benefits. So, I don't know. Ask me a year from now and I'll have a better idea what it may look like. But, in five years, it could easily be equal to what we're doing now. Easily.

Michael Baudendistel -- Stifel -- Analyst

Great. Very encouraging. I just want to also ask you where you stand on consolidating the procurement across the enterprise. Can you give us some sense of how far you are along in that process?

Tim Sullivan -- President and Chief Executive Officer

Nicely along. I said it's all about making money, and if you're growing your top line by 15 or 18 and your bottom line by 30, it's got to be having a meaningful impact on the bottom line of our company, and it is. Our sourcing team is doing a great job. We are well into having that working along at a very nice pace. The nice thing about that, too, is when you look at when you pick up four companies, we can load those under the REV umbrella and start getting synergies almost immediately with the sources we do. It's the first thing we do. And the team's very good. I think we've got some good arrangements out there and we're reaping the benefits of those. That's why our bottom line's growing the way it is, as well.

Operator

Our next question is from Courtney Yakavonis with Morgan Stanley. Please state your question.

Courtney Yakavonis -- Morgan Stanley -- Analyst

I just wanted to go back to the partnership with Chery. I think in the press release you had said that we can expect to see some of the first production of the vehicles in the second half of next year. Appreciating that it's going to be a much larger initiative that will take some time, but how much are you guys expecting in your 2018 guidance right now?

Tim Sullivan -- President and Chief Executive Officer

Almost nothing. It's going to be a very cautious and slow ramp-up. It's going to be more of a '19 and beyond story. It takes awhile to get things up and running in China. As I mentioned, in China it's kind of like Texas. Everything's big, so it's going to take us awhile. So, very little to nothing in 2018.

Courtney Yakavonis -- Morgan Stanley -- Analyst

And then, just on the RV side, can you just give us a breakdown of your mix on Class A versus C in 4Q and what your projections are for next year with some of the new products you're rolling out?

Tim Sullivan -- President and Chief Executive Officer

As are about 75% of our sales and we compete mostly in the mid- and high-end range. In the mid-range has been very active. The high-end's been a little soft. But, about 75% are As, so 25% -- and that's split right now pretty evenly, Cs and Bs. As you know, the Cs and Bs are very active. Our challenge on Bs and Cs is our backlogs are too big there, too. We're trying to work as fast as we can to work down those backlogs. We're spending some money to ramp up our manufacturing capability, particularly around Bs. The Bs have had incredible acceptance in the marketplace.

Operator

Our next question is from Joel Tiss with BMO Capital Markets. Please state your question.

Joel Tiss -- BMO Capital Markets -- Analyst

Hey, guys. I wonder if you can give us some idea -- maybe even five years out? What kind of targeted EBITDA margins can we expect across the different divisions? Can you give us a sense of what the target is longer term?

Tim Sullivan -- President and Chief Executive Officer

Yeah, I think people will think I've got rocks in my head, but if you think back, Joel, in my prior life, if we got to 10-15% margins, we said, "Now, we're going to 20." We can get to 20 in five years. We need, though, meaningful aftermarket contribution to get to that type of EBITDA margins. That's how you do it. We will continue to get good at building product, and we will get above 10% EBITDA margins. When we get there, our next target will be 20. But, we can't get to 20 until we get some real good meaningful traction in the aftermarket area. As you know, we're spending a lot of money there because I believe in it and I think we can do it.

Joel Tiss -- BMO Capital Markets -- Analyst

So, aftermarket needs to be like 15% of the mix? Is that what you're thinking?

Tim Sullivan -- President and Chief Executive Officer

Yeah, if not more. If you look at the total universe we have out there, we don't even talk about service, but we know we have $800 million worth of parts purchased for our vehicles every year. $300 million of that is chassis parts. It's being able to break the purchasing paradigm. People say that's hard to do, and it is hard to do. It's not easy. But, parts is pretty basic. You get parts at people's fingertips at reasonable prices and you service them really, really well, you can break the paradigms built and they'll buy from you.

Plus, we also have the other advantage of working through dealers and telling the dealer they need to be buying their parts from us. So, there is some leverage there. But, it could be as high as 15-20% of revenue.

Joel Tiss -- BMO Capital Markets -- Analyst

I didn't know if you gave us a free cash flow guide for 2018. Also, I just want to make sure that your guidance doesn't yet include whatever we get on tax reform.

Tim Sullivan -- President and Chief Executive Officer

Yeah, we haven't yet. We'll give you something here.

Dean Nolden -- Chief Financial Officer

As I said in my remarks, we're forecasting positive free cash flow, even with the levels of CapEx we disclosed. We're forecasting, before tax reform, to be in the $40 million positive free cash flow range. So, Nicole gave you some numbers regarding cash taxes, which I think she quoted a $15 million benefit next year. That's what we're targeting.

Operator

[Operator Instructions] Our next question is a follow-up question from Mig Dobre with Robert W. Baird. Please state your question.

Mircea "Mig" Dobre -- Robert W. Baird -- Analyst

Just a couple of clarifications. Thanks for taking them. First, is on the DNA guidance. You guided last quarter for $34.5 million. You came out to $37.8 million. I'm wondering what the variance was here in just one quarter. Related to this one, I' looking at next year's guidance. When I'm looking at Fiscal '18, $40-43 million. Can you break out the amortization component out of that? That's what gets added back into adjusted EPS.

Dean Nolden -- Chief Financial Officer

Yeah, two things. One is, as we complete our acquisitions, particularly the ones we made in the middle of the year of Ferrara and Midwest, we settle in on what the intangible assets are. When making those acquisitions, you never know what those are going to settle in on because they're third-party evaluations that are done. But, the story for the increase in DNA is really amortization related to intangibles that we acquired as we closed out the year and recorded those purchase accounting adjustments, so to speak, or balance sheets. Next year, we're forecasting from an amortization perspective about a little over $4 million a quarter for our amortization expense.

Mircea "Mig" Dobre -- Robert W. Baird -- Analyst

That's helpful. And then, lastly, back to fire and emergency, you talked about the business being flattish, but when I'm looking at your implied orders I'm drawing a different conclusion. It looks to me like your implied orders were up 31% year-over-year in the fourth quarter. Some of that was acquisitions. But, even backing the acquisitions out, it seems like your orders here were up on a quarter basis, something like 15%. It looks to me like order growth here has been quite good.

Tim Sullivan -- President and Chief Executive Officer

Yep. The industry has been a little bit flat year-over-year, but we are taking share. We don't like to advertise that fact, that we're taking share.

Mircea "Mig" Dobre -- Robert W. Baird -- Analyst

Okay. Thank you.

Operator

I would like to turn the conference back over to Tim Sullivan for closing remarks.

Tim Sullivan -- President and Chief Executive Officer

Thanks, everybody, for joining us today. I can only reiterate how pleased we are with the 2017 performance. When I think back, I've been here for three years. When I joined three years ago to manage the assets that have been pulled together -- the 14 different assets that have been pulled together by our PE sponsor and put under the umbrella at that time called ASV -- we made $50 million the year I came in. To see where we're at today, after being REV for only two years, it's very encouraging.

It's very encouraging for us as a management team to see the fruits of our labor as we go forward. So, great '17. Looking forward to another really strong '18 and beyond as we start to see some of these new initiatives take hold in the marketplace.

All investors and analysts should've received an invitation from Sandy about our upcoming Investor Day in Orlando, Florida, on January 16th. I think you should really make an effort to be there. It's something that you will not be disappointed in. We'll have over 50 of our products on display, every single thing we make, and probably a couple of everything we make will be on display down there.

We have over 1,000 dealers and customers signed up to attend. We will have a session with all of you to allow you to take a deeper dive with us into our overall strategy. I'll give you a lot more color around some of our initiatives and some of our product offerings. We'll have some of our new products from the commercial segment there. We'll have a sneak preview of our 2019 RVs. It's going to be an annual event we'll do. If you can get there, it's a good thing. January 16th.

Also, if you can get there the night before, we're having an event at the House of Blues with Chicago entertaining our 1,000 customers and dealers. We'd love to have you participate in an informal atmosphere with us and our customers. So, mark your calendars if you can. I think I'll be well worth your while.

So, let me close. Merry Christmas. Happy Hanukah. Happy Kwanzaa. Happy Festivus. Happy New Year. See you guys in January, or we'll be on the call again in March.

...

Operator

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

Duration: 49 minutes

Call participants:

Sandy Bugbee -- Vice President, Treasurer, and Investor Relations

Tim Sullivan -- President and Chief Executive Officer

Dean Nolden -- Chief Financial Officer

Nico le Gustafson -- Vice President of Tax

Mircea "Mig" Dobre -- Robert W. Baird -- Analyst

Stephen Volkmann -- Jefferies -- Analyst

Michael Baudendistel -- Stifel -- Analyst

Joel Tiss -- BMO Capital Markets -- Analyst

Themistoklis Davris-Sampatakakis -- Credit Suisse -- Analyst

Nicole DeBlase -- Deutsche Bank -- Analyst

Charley Brady -- Sun Trust -- Analyst

Courtney Yakavonis -- Morgan Stanley -- Analyst

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