REV Group, Inc.

Greetings. Welcome to the REV Group Incorporated first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the call over to your host, Drew Knopp. Please go ahead.

Thank you, Stacey. Good morning and thanks for joining us. This morning we issued our first quarter fiscal 2021 results. A copy of the release is available on our website at investors.revgroup.com. Today's call is being webcast and a slide presentation, which includes a reconciliation of non-GAAP to GAAP financial measures, is available on our website. Please refer now to slide two of that presentation. Our remarks and answers will include forward-looking statements which are subject to risks that could cause actual results to differ from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8K filed with the SEC this morning 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 call, if at all. All references to a quarter or year are our fiscal quarter or fiscal year, unless otherwise stated. Joining me on the call today are our president and CEO, Rod Rushing, as well as our CFO, Mark Skanechny. Please turn now to slide three, and I'll turn the call over to Rod.

Thank you, Drew, and good morning, everyone that's joining us on today's call. I will begin with an overview of the quarter's consolidated performance, and then I'll move to commercial and operating highlights achieved within the quarter before turning it over to Mark for our segment financial details. We're very pleased to report our best first quarter adjusted EBITDA performance since our IPO in 2017, with over 200 basis points of margin improvement versus our first quarter of last year. These results reflect the commitment of our employees toward building a culture of continuous improvement, combined with the changes that we've made over the last nine months. First quarter net sales of 554 million were up 4% versus last year quarter. Driven by increased sales in F&E and recreation segments, and partially offset by softness in school bus and municipal transit markets, which were impacted by COVID-19-related demand headwinds in the first quarter and throughout much of 2020. However, the quoting activity has picked up over the past few months, and we expect school bus end markets to respond favorably as more people have access to vaccines that are now available, and this will likely lead to reopening of schools next fall. First quarter adjusted EBITDA of 23.2 million increased 105% versus 11.3 million a year ago, and it also reflects 210 basis points of a consolidated margin improvement. The structural cost out actions and restructuring over the past year as part of our operating model review are delivering bottom line improvement. These cost actions combined with our building of operational excellence capabilities and implementing our cadence of operational reviews have realized opportunities to drive a waste out and operate more efficiently. Within the quarter, many of our businesses improved on their throughput and operating leverage that drove revenue growth and gross margin improvements. Strong first quarter order intake resulted in 12% organic bookings growth versus first quarter of last year, and we exited the quarter with a healthy $2 billion backlog. Turning to slide four, we had several milestones and accomplishments within the first quarter that highlight the strength of our brands, our commitment to innovation, and our focus on serving our customers. Across the portfolio, our brands hold market-leading positions within their categories. Three of these celebrated decade-long anniversaries that I'd like to publicly recognize. First, our Wheel Coach Ambulance celebrated an amazing 45 years of innovation and market leadership, having sold over 50,000 vehicles to commercial fleets and municipalities across the U.S., including the Fire Department of New York and the U.S. General Services Administration. Will Coach's tagline, trusted by the toughest, and this year's 45-year milestone, certainly backed that up. Also celebrating milestone anniversaries are two motorhomes within the Fleetwood brand portfolio. The Class A Bounder recently released its 35th anniversary edition model, and the Class A Discovery released its 25th anniversary edition. These motorhomes have been two of Fleet's top-selling RVs and have proudly represented the legendary Fleetwood brand. Their enduring presence for the Fleetwood brand and these models is a testament to being the best-loved RV for generations of families. We are pleased that families have and continue to be entering the RV lifestyle, and we look forward to another 25 years of delivering our customers the conveniences of home while they are on the road. Our Spartan Firebrand announced a new purpose-built chassis that is designed to provide fire departments with safety, comfort, and the performance of a custom cab and chassis while meeting lower budget requirements. Typically, these trucks have been built using a conventional commercial chassis with a standard cab that does not always accommodate the equipment and protective gear that fire personnel need in serving our communities. This provides our customers with the opportunity to meet their requirements that only a custom cab and chassis can deliver Why the commercial cabin chassis economics? And it is a real opportunity for Spartan to expand their cabin chassis market share. Ambulance fleet owners will be able to more efficiently, more effectively manage an efficiency of their crews and the safety of their patients with the advance, the issue of advanced vehicle informatics introduced within our AEV business in January of this year. Among the benefits of the TraumaHawk telematics are allowing real-time driver and fleet monitoring that includes GPS location service, accelerometer data, collision alerts, maintenance monitoring, and functional accessory information. This will enable our customers to respond more quickly and reduce their total cost of ownership by utilizing predictive maintenance and extend their fleet service life. In the first quarter, we announced a partnering agreement with Hyster Yale and our capacity business to develop electric and hydrogen automation-ready terminal trucks. These trucks have an attractive profile for fleet electrification. They operate in relatively close radius, they have high torque requirements, and they have relatively higher carbon emissions. The project is currently under development, and we expect prototypes on the ground by the end of this calendar year, beginning full-scale production within fiscal year 2022. In recreational vehicles, we continue to experience high demand. Our momentum continued at the Tampa Super Show this January, which marked record sales for a Class A business. This year's show, our motorhome and luxury coaches reported nearly 40% growth versus last year, despite the attendance being down 25%. Outside this show and in all categories, we're experiencing unprecedented pre-sale of units as inventory on dealer lots remains near historic lows. Within the quarter, we introduced innovations and product enhancements to the REV portfolio. I would like to highlight one that I feel offers differentiated features that provide enhanced value to our customers. The onset of COVID-19 has heightened safety protocols for all employers. REV, like all others, has substantially limited the presence of personnel in our offices and manufacturing sites. We've increased testing frequency and quarantined suspected cases to provide the necessary spacing for social distancing. The workplace situation that our nation's first responders face is no different, and it's actually probably even more challenging. We are proud to support those who are on the front lines every day and proud to provide an active air purification system that reduces exposure to airborne contaminants like COVID-19. The use of this system provides a safer cabin environment for first responders that have a hard time distancing from others and do not have the option to work at home. We have been working with municipalities, dealers, and contractors to retrofit existing units and equip new unit deliveries with this enhanced safety feature. Finally, we are placing focus on all areas of value creation for our shareholders. We have discussed our efforts in operational excellence, but we are equally focused on improving our commercial capabilities. This includes our product management, marketing, sales operation, and channel performance. We are very focused on how we can work more closely and better support our dealers. We have announced new dealer signings and we are focused on commercial operations and performance. These efforts coincided with the rationalization of certain brands over the past two quarters and the realignment of these brands within our dealer network. This focus on commercial excellence combined with our improving operational performance and our organizational cadence and rigor will enable us to continue to deliver improved financial performance with consistent conversion to free cash flow, increasing total shareholder returns. I will now turn it over to Mark for the details on our first quarter financial performance. Mark?

Thanks, Rod, and good morning, everyone. Please turn to page five of the slide deck as I move to review our segment level performance. For an emergency first quarter segment sales were $281 million, an increase of 36% compared to the prior year. This includes approximately $62 million of sales attributable to our acquisition of Spartan ER that occurred on February 1st of last year. making this the final year-over-year comparison that will include inorganic activity. Excluding Spartan, organic segment sales were up 6% as legacy fire and ambulance throughput increased despite lingering COVID-19-related disruptions. The disruptions we are currently experiencing are more limited and generally within a handful of geographies that have stricter quarantine policies, tighter labor markets, or regional outbreaks. The mix of ambulance shipments improved within the quarter with more high-content units being delivered, offsetting a reduction of lower-priced van units. Within the fire division, our businesses were able to realize price increases that were within their longer-duration backlogs. Over the last several weeks, businesses within the segment have experienced improved customer inspection and delivery acceptance. However, the on-site visits have not yet returned to a normalized level. F&E segment adjusted EBITDA was $10.2 million in the first quarter of 2021 compared to $1.7 million in the first quarter of 2020. The increase was primarily the result of improved profitability in both the fire and ambulance divisions. Productivity improvements at our largest ambulance plant contributed greater bottom line profitability, which resulted in the ambulance division EBITDA margin that was 180 basis points better versus the prior year quarter. Our largest fire plants productivity also significantly improved year over year as its lean practices and pricing discipline are taking hold with margins increasing over 800 basis points versus the last year's first quarter. The new management team that arrived last year has installed a regular cadence of operational reviews, Kaizans, and pipeline of cost reduction projects to support future improvements. Total F&E backlog was $1 billion, up 26% year-over-year. This includes backlog acquired in the Spartan ER acquisition, strong ambulance order intake over the past year, and a return to regular fire truck order patterns over the past several months. Organic fire orders increased 28%, and ambulance orders increased 5% versus the first quarter last year. We expect this level of backlog to support mid-single-digit organic growth for the segment in fiscal 2021 and the momentum in converting sales to EBITDA to continue with year-over-year and sequential EBITDA margin improvements throughout the year. Turning to slide 6, commercial segment sales of $83 million were down 48% compared to the prior year period. Prior year commercial segment revenue included approximately 50 million from the shuttle buses that were divested in May of last year. The remaining decline in sales was related to lower sales of school buses, which were down 29% year over year, and the decline of municipal transit sales that were down 23% versus the same period last year. This decline is consistent with transportation and markets that remain soft due to lingering impacts from COVID-19 within our first fiscal quarter. Partially offsetting the decline was an increase in sales of terminal trucks and street sweepers, which were up 60% and 80% respectively. Recall these specialty markets were depressed in 2020, but they have bounced back quickly and appear to be experiencing catch-up demand cycle. Specially division sales benefited from delivery against a large rental company order of street sweepers and increased restocking in the terminal truck markets. Commercial segment adjusted EBITDA of $7.1 million was down 34% for the prior year period, which included $800,000 of EBITDA related to divested shuttle bus businesses. The decline in EBIT was primarily due to lower volumes and the resulting reduced productivity within the school bus and municipal transit bus businesses due to COVID-19 related end market disruptions. Partially offsetting this was an increase in production volume and profitability in the terminal truck and sweeper businesses within our specialty division. These businesses leveraged the cost-out actions taken during last year's end market decline and improved EBITDA margin 260 basis points year-over-year. Commercial segment backlog at the end of the first quarter was $234 million, down 49% versus the prior year quarter, which contained $77 million of shuttle bus backlog. An organic backlog decline of 38% was a result of decreased school bus and municipal transit orders, as well as the timing of a large municipal order that entered the backlog in a prior year quarter, partially offset by an increase in specialty business backlog, which benefited from another strong quarter of order intake. The full year outlook for the commercial segment continues to be aligned with municipal budgets, school attendance in both undergraduate and graduate institutions, and the general population's willingness to travel. School bus quoting activity has returned to historical norms, and we are optimistic that greater availability and adoption of COVID-19 vaccines will drive confidence to convert these quotes to orders. Within a quarter, we announced the delivery of the state of Connecticut's first electric school bus, which is one of our Type A buses. Due to the relative size of carbon emissions, the larger Type B and C buses have been early adopters. However, we received 11 additional electrical school bus orders and quoted over 40 electric units in the first two months of 2021. We believe this category will benefit from the overall fleet electrification trends that the industry is experiencing and expect our Type A electric school bus unit sales to eventually grow at rates in line with the larger bus types. Municipal transit bidding activity remains soft in airport and university markets. However, we are advancing in the bid process for several municipality transit awards. Turning to slide 7, recreation segment sales of $190 million were up 14% versus last year, reflecting increased shipments of Class B and C units and approved Class A mix versus the prior year quarter. Production at our travel trailer and camper business located in California remained impacted by COVID-related absenteeism, work restrictions, and higher-than-normal temporary worker turnover. Production was also limited by labor constraints in our Class A business. Despite the challenges, shipments remained strong. As Rod mentioned earlier, our Class A business set a record at the Tampa Super Show, and the past two quarters have been all-time high sales for our Class B and Class C businesses. Recreation segment adjusted EBITDA was $15 million for the quarter, up 116% versus the prior year. The increase in EBITDA was primarily the result of our improved productivity across all categories, despite COVID-related disruptions that occurred primarily within our Class A business. in non-motorized businesses. Despite these challenges, the segment was able to improve EBITDA margin 370 basis points versus the first quarter last year and generated a solid 35% incremental margin on the sales increase. Segment backlog increased 377% year-over-year to $754 million, which was another record backlog as a result of strong order intake across all RV categories over the past three quarters. In our first fiscal quarter, orders were up 163% versus the prior year. Since the emergence of COVID-related shutdowns, we have gained retail share in each of our motorized product categories and travel trailers. Across the segment, retail sales continue to be in line with wholesale shipments, and dealer inventories for our brands are down an average of 50% year-over-year, with most at or near historic lows. First quarter net cash provided by operating activities was $1.9 million compared to use of $13.3 million in the prior year quarter. Cash generated was primarily related to higher net income, the receipt of a CARES Act tax refund, partially offset by decreases from the timing of accounts payable payments. Trade working capital on January 31st was $445 million compared to $427 million at the end of fiscal year 2020. The change was primarily a result of accounts payable management timing partially offset by efficient accounts receivable and inventory management. Net debt as of January 31st was $323 million, including $9 million of cash on hand versus $330 million at the end of fiscal 2020. At quarter end, the company maintained ample liquidity with $230 million available under our ABL revolving credit facility. We are currently working with our banking partners to refinance both our term loan and ABL credit facility and expect the refinance to be completed before the end of the second fiscal quarter before the facilities become current. During the quarter, we continued our portfolio review with a focus on our core markets and geographies. As a result, we reached a definitive agreement to divest our Rev Brazil business and classified as an asset held for sale, resulting in a non-cash $3.8 million loss on sale within the quarter. We expect to close this transaction in our second fiscal quarter. Today, we are initiating full-year fiscal 2021 guidance, with sales expected to be in the range of $2.45 to $2.6 billion, or 10% growth at the midpoint. Adjusted EBITDA in the range of $125 to $135 million, representing an increase of 85% to 100% versus fiscal 2020. We expect net income in the range of $38 to $52 million and adjusted net income from $56 to $70 million. We target 90% to 100% free cash flow conversion on adjusted net income in the range of $45 to $70 million, plus any additional funds from other activities. With that, I'll turn it back to Rod for closing comments.

Yes, thank you, Mark. And I'd just like to start by saying, you know, first off, again, we want to thank our employees for the work they're doing and the changes that we've put in the business here. They've responded to it remarkably, and we very much appreciate their efforts and what they've done. I'd like also to ask you to please remember to save the date of April 15th for our virtual investor day. And we used the registration link attached on our presentation deck today for that. The link will also be posted on our investor website page if you choose to do so in the future. The agenda for the morning will include a brief introduction to the REV group, our history, and the segments that make up those and also are new to the story. We will give more detail on the tools we are using to drive results across our business organization. It's been historically referred to as the REV business system. Finally, we will provide intermediate financial targets that we expect to achieve from the structure and process that we have put in place over the past year and continue to deploy. We won't take your entire day. We plan to do this in two hours for repair remarks, and we'll have 45 minutes of questions. I want to, again, thank you all for joining the call today, and now we'll open it up to the operator for any questions that you might have.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Meg Dobre with Robert W. Baird. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Meg.

I appreciate all the color on each segment. I guess I'd like to talk a little bit about fire and emergency. You know, as you noted in your slides, you had pretty nice order increase in both fire and ambulance. I'm looking for a little more context around what do you think is driving a growth here? Obviously, with COVID and with some pressure on municipal budgets, I mean, this has been an area of concern and potentially seeing weaker demand. so maybe you can comment on fire specifically, and then also, obviously, really good growth in ambulance, what's maybe going on there?

Well, I think, you know, it's throughout the COVID period, you know, we had issues, we were all kind of trying to figure out exactly what the short-term, mid-term, and long-term impacts were going to be to these municipal markets, and we saw, you know, periods of, I'd say, where things were delayed, a lot around people don't get together to approve things, and And certainly on the receiving end, we've talked about in their calls, people come into our plants to accept and inspect vehicles. But, you know, coming out of the fourth quarter, we've continued to see demand going back to what I would say is more of a historical norm. And I think, you know, I'm certain, at least on the ambulance side, the COVID funding, the extension of that initial funding that really came out for another year, And now with the new bill being passed, you know, there's some momentum, I guess, to offset deficit but also provide funding access to these municipalities. And we're still trying to understand the full nature of that, obviously. But I just think that, you know, we're working through a process here that's kind of first time for everyone to go through. And the reality is it's probably had – we're probably returning back to more of a normal in terms of orders, because we're speaking about order intake. On the execution side, it's just us being able to, you know, convert maybe a little bit better than we have in the past. But on the order side, we see good order intake and we see good bidding activity. And we talked about it even, you didn't ask about school bus, but we continue, we see bidding activity and that improving as well. So I think we're optimistic about, you know, coming through this and the the benefit these vaccines are built are going to offer and hopefully getting returning to a normal, um, in the U S here. So Mark, I don't know if you had anyone to add to that.

No, I think that's right. So obviously, uh, Meg with our backlog, you know, it gives us some momentum here to execute on there for the remainder of the year, but obviously the pipeline is, uh, what we're looking at here. And, uh, as Rod, Rod said, we're in, as I said, in my prepared remarks, we see our same bid activity that has normalized and, uh, You know, on the ambulance side, it's actually been heightened with the CARES Act, as Rod referred to. So we are seeing heightened activity in there and with the extension. And obviously what the new announcement holds and the new bill holds, I think, is only a tailwind for us from that perspective.

I see. Okay, that's helpful. You know, if we can talk a little bit about margin here, you're pretty clear about expecting improvements. But I'm just sort of wondering, if I'm looking at your overall guidance, by my math, it seems to imply about 25% incremental margin on the top line growth you're baking in. As you look at fire and emergency specifically, do you think this segment should have higher or lower incremental margins relative to company overall? And I ask because, like we talked in prior quarters, there are so many moving pieces here, your internal improvements, you know, incremental volume, pricing seems to be better. So some color here would be helpful.

Yeah, I think, you know, as we move in, we've been pretty transparent, right, with the improvements that are needed on the fire business specifically. So we would expect to see, you know, those incremental margins continue to improve throughout the, you know, definitely on a year-on-year basis as we've highlighted, especially on our Ocala, right, which we've talked about multiple times in the E1 business. And as we move you know, continue to focus on the other activities as well as the integration of Spartan as we move to look at that and vertically integrate some of the chassis opportunity. We will see, you know, some margin expansion there from that perspective. So I think we'll see year-on-year incrementals as we continue throughout the year.

But do you think they're going to be higher than the overall company in this segment specifically?

Yes, yes, yes.

Got it. And last question. Going back to Collins here and the EV platform that you're starting to build, it seems to me like this product is based on a F-450 chassis. Would this have applicability for ambulances as well, or is that not something that you're contemplating? Thank you.

Maybe rephrase the question, make sure I understand specifically what you're asking.

Yeah, so your school bus product, the EV product, right, that's based on a Ford F-450 chassis, and I know that you're using these types of chassis in ambulances as well. So I'm wondering if at a point in time we should be expecting a BEV ambulance product out of you as well.

Well, so I would say that all of our business units have development in the EV space, and they're all in somewhat different places in terms of the partnerships we're working through and how we're doing kind of the co-development. We're working with an integrator on the Collins offering, and when you think about the requirements for a school bus versus the requirement for an ambulance on loading, they're quite a bit different. So if you have to have a different process to go through for an ambulance. Now, we do have work going on there in our LEV business development work on the electric side that we're working on, and we also have some work in our other ambulance businesses that's more around idle mitigation and those types of things. So all of our businesses have the transferability from one to the other. There will be lessons learned, but there are, in these early stages of electrification and development, Some of these are more of a grassroots. How do you make it work for the application? Because the use cases are very, very different in these vehicles from one segment to the other. But there are learnings, I'm sure, that will transfer. So that's kind of how to think about it is that you've got to think about the end use and the design of that purpose. You might be working with the same integrator, but it would be a different set of requirements.

Sure. That makes sense. Thanks for taking my question. Yep.

Next question comes from Steven Volkmann with Jefferies. Please go ahead.

Hi. Good morning, guys. Maybe just to build off Meg's question there, are you willing to give us some kind of a range of what you think F&E segment margins could exit the year at, just so we can get a sense of how you think this builds?

I would say, you know, maybe Probably not from that perspective, I guess. I mean, obviously we'll be up year on year, but specifically where we're going to exit, the exit rate, you know, there's still a lot of work we have to do here from a margin accretion. We're confident that we're going to be in the 25%, 30% incremental margin there. But, you know, you can probably model off of that. But, you know, we will exit obviously higher than our 28%. So if you model that in, that growth and those incrementals off of the revenue base, I think you would get, you know, obviously closer to the mid single digits is what we said, you know, our last pair to March. So if you sort of earmark around there, mid single digits for there versus the three and a half that we exited last year.

Right. Okay. And longer term, you know, as you start to see the benefits of all the stuff you guys are doing, is there a margin target that kind of makes sense? Can this be a double-digit margin business over the next two or three years or something?

Sure. I mean, that is our goal. That's our stated goal to get there. And, you know, as we continue to progress through the portfolio and look at these brands and the operational cadence that we're building here, we definitely see that as a double-digit opportunity and We've proven that we can do that in the past, so that continues to be our goal here to reach that in that business.

And then maybe one more, just switching to RV. Actually, margin performance quite good there, but it feels like you were saying that's where the biggest COVID-19 related issues were. Please correct me if I'm misreading that, but it feels like You know, once those COVID-19 issues kind of pass through the chain, there should be some pretty significant near-term upside to that margin.

Yeah, definitely from that perspective. And specifically, we didn't highlight it here, but we did get hit. Pretty dramatically, just like our bus business that got hit in California, our Lance business, which is our Tobles business, which I quoted here, was significantly impacted in the quarter. So that is a well-performing double-digit business that was down from the perspective of being able to produce. So they have the backlog. All of our businesses have the appropriate backlog to build off of. So that is one, as well as our Class A Decatur business. which is in Decatur, has been hit significantly with the COVID. I would say more than even Elkhart, where some of our competitors are and where we are positioned as well. So we're also ramping up that facility. So as the line rates improve, the ability to get people a New hires, not to mention the people that are absentee because of COVID-19. We've been hit relatively hard. So we expect to see productivity improvements at our Class A as well as our Lance going forward. And our B's and C's business have operated very, very well. And I think you've heard, you know, RV business from a supply chain perspective been hit pretty hard industry-wide. But we've done a nice job managing the supply disruptions within that business.

Great. And do you think those supply disruptions fade as the year progresses? And I'll pass it on. Thanks.

Yeah, it's hard to say in the RV. We've done a nice job on materials management group where it probably we've been able to contain within the quarter, but it challenges every month as you build these and you have furniture shortages at the end of the line, you're waiting to build those out towards the end of the month. So we don't have the full completions as we would historically within that quarter. group on a week-to-week basis, but the team's done a nice job making sure we get completions by the end of the month and the end of the quarter. So we're managing within that supply chain, within that cycle, but the expectation would be that these would improve as we go along here. Thank you. Yep.

Next question, Jerry Rivich with Goldman Sachs. Please go ahead.

Yes, hi. Good morning, everyone, and nice quarter. Thank you. I'm wondering if we could talk about the electric vehicle opportunity for you folks. Can you just touch on if you folks have higher profitability per unit because of higher content on electric buses and potentially other electric products when they come down the line? Can you just calibrate us on how to think about profit per unit as we ramp up production over the next couple of years?

Yeah, first off, as you can imagine, when you're – a lot of these products are still – I would talk in terms of in-market demand, there's a couple exceptions, but the vast majority are like in a prototype development, right? You're still developing these. You're not at scale in production. So when you think about margins, contribution margins a day versus contribution margins when you are at scale, there's going to be a lot of maturity, maturing go out over time as you streamline the processes because you're actually – you know, the labor content and the amount of development in the product is different today. So our margins are, I would say, at par plus today, I think, with the few products that we have produced. And as we get demand, as we talked about in Collins, we'll continue to improve efficiencies and streamline the design. So I think that there's opportunity there to do better. But, you know, these are mature end markets. So when you think about the impacts of EV long-term, it's really substituting technology. You're not really shaping end markets. So the question is, how is the technology going to mature and the cost structure of these things going to change over time that's going to drive our ability to capture additional margin? I think we're optimistic on that from a technology standpoint, but we're early, I would say, in Cycler to understand what the end game is going to be like on margins as we get competitive platforms from a chassis standpoint to buy against versus working with people to co-develop. That dynamic will change the industry, I think, a lot. And the pace at which that happens is going to play out by segment. What I mean by that, transit is going to move different than commercial bus. It's going to move different than school bus and ambulance. All these are going to move at a different pace. And so as you see those mature and the competitors get lined out, that will be able to tell a better margin story going forward. But we're early in early in cycle there, I think, from my perspective, Omar.

Yeah, no, I agree. I agree.

And, you know, on that note, obviously, increasingly complex competitive structure, you know, across a broad range of traditional players plus potential new players. Can you talk about where on the initial set of orders that have come out to the street so far, if you will, you know, what your order share has been for EV products versus, you know, what it's been on conventional. In other words, how would you characterize the competitive landscape for EV-based school buses and transit buses versus what you had been used to seeing on the ICE side?

Yeah, I mean, I don't know that anyone could accurately reflect where they're at in, in their market share against on a competitive EV standpoint. I mean, I think, and you'd have to have that conversation as you suggested by segment, you know, Mark made a comment that the type A school bus is, is lagging behind C and B because of the, the, you know, it's just a, It's a gas bus, and so the diesel and the consumption is greater in the BNC, so the market's less mature there, so the amount of units being in the Class Type A are different or lower. But I think, you know, relative to what we're seeing, the incoming orders that Mark mentioned, the pipeline that we bid, that I like our position relative to our peers in that space. Transit bus is a bit different. It's probably a little bit ahead, and our share probably there on that one is a little bit lower. And the other ones are such fledgling when you think about fire truck and ambulance and RV, and there's really not really even a conversation to have there because there is no real end market right now in terms of people building and shipping electric vehicles in those segments.

Yeah, I think in the terminal truck, as we've highlighted, I think that gives us a great opportunity with a great partner there and someone who has the battery technology that they have as well. So I think we've partnered up with a great partner there in Hyster, I think we're looking very good from a terminal truck perspective.

Okay. And then, you know, in fire and emergency, really strong performance this quarter, both from production and margin standpoint. You know, if we apply just normal seasonality to your production schedule, that would imply organic growth should be in the low teens for the full year, which, you know, as somebody pointed out earlier, is a pleasant surprise relative to municipal budgets that, at least on paper, feel constrained. I'm wondering if you just expand on the earlier discussion. Is the strength that you're seeing from both an order standpoint and production standpoint relative to particular products that you're in or geographies that you're in, or do you think that's a market-wide concern? And, you know, what are you hearing in terms of the actual drivers of the big spending increase for fire trucks and ambulances when, you know, obviously budgets are coming back in 21, but they certainly had a top 20?

Yeah, I think that, you know, first of all, I'd say the intake activity has been very good. We mentioned that. So that's good. The forward courting activity is very good. And if you try to think about what would change that momentum or that, you think about, you know, the first CARES Act got extended. To the extent that has an impact, municipalities are somewhat opening up. I think the larger municipalities, I would say, have probably been a little more affected by COVID just because the nature of how COVID has affected us all, right? Population densities in the larger cities have had more to deal with there, and it's obviously impacted the municipalities more. I think the second wave of funding, which we're still, through this bill that got passed, we're still working to understand the implications of that, but it's hard to argue that that won't be also beneficial to forward demand because, one, there's money set aside specifically related to funding things like this that would help us, and also the relief that the states and municipalities are going to have around budget deficits is also going to help them get after some infrastructure things and capital expenses that they want to go get to as well. So I'm, I'm, I, we've got momentum both from an intake and from a quoting and everything I see suggests that there's this, there's more support for that momentum continuing and maybe even building. But, you know, we just, we just got it. We're obviously watching it carefully because we're just, we're still in a time where we want to get optimistic and, We want to believe we do know we're optimistic about our ability to execute on what we have. We continue to be very positive on that, but there is some element of looking at the market to say, man, we want to get through this. We want these vaccinations to take hold. We want to see the immunity step up. We want to see communities return to normal, and we think that's good for not only us but everybody. So that's kind of how I characterize it. Mark, do you have anything you want to add?

No.

Good. Well, I appreciate the discussion. Thanks.

Thank you.

Next question, Courtney Yacovonis with Morgan Stanley. Please go ahead.

Great. Thanks for the question. Just wondering if you can comment a little bit on the Brazil divestiture. I think that was entirely within fire and emergency, but can you just remind us how big was it and if it's in any other segments and how the margins were relative to the baseline business? And then I think you also had some international operations in China. Just curious if there's any plans for that.

Yeah, I would say, you know, Brazil is relatively small. So I would say it wouldn't have a material impact overall because obviously the challenges that we've had in Brazil and that economy. So it's not going to have a material impact, Courtney. It's more around exiting that country. get rid of the focus, right? It was just a distraction more than it was a core focus of ours. So, you know, getting out of that market, it was more of an upfitter. So it was just taking, you know, fully built chassis, not chassis, but units and upfitting them for ambulance or police, you know, putting sirens and things like that on. So, you know, you could argue it wasn't really in our core competency from that perspective, more of a lower end upfitter. operation, but I would say it's not going to have a material impact to that segment.

Okay, great. And any thoughts on the China JV?

Yeah, we continue to look at that. Our China JV is performing well. It does have an RV element to it, so China is also performing well from an RV perspective, so we do have that JV is making money. As you probably know, Brazil is historically has lost money for the company. And so, you know, we still had to look at that area as an opportunity for us, whereas South America, we didn't see that from a portfolio and its ability to get to double-digit earnings.

Okay, great. Thanks. And then I think you guys, you know, suggested mid-single-digit margins for F&E. I think last quarter, you know, you had suggested that recreation margins would step down. Appreciate some of the comments on supply chain issues mitigating there. But, you know, you did, you know, you were above that goal of, I think, 5% to 7% in recreation for the first quarter. I think you'd also talked about, you know, class A mix being an impact. But do you have any updated thoughts on your recreation goals? margin targets for the year, and then, you know, same question on commercial, where I think you were targeting high single digit.

Yeah, I think the commercial will hold, like we talked about, the high single digits, and then, you know, we can obviously talk on separate calls, but recreation, we're still, we're probably seeing the upside to that mid-single there, so we can walk through that, but, you know, we're probably in the higher, the six to eight, I would say. Again, there are supply chain issues there, but, you know, as I referred to in the quarter, we probably would have done even a little better if it wasn't for the Lance disruptions, because that is a well-performing business, and that was significantly down in the quarter. So we see momentum in a Class A, and it really comes down to Class A performance to be able to bring on new people to increase our line rates and make sure that we can build against our backlogs. So it really comes down to that, which is what we talked about last quarter. So as we see momentum in Class A, we'll feel more confident in the accretion of our margin going forward. Okay, great. Thanks.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Joel Tiss with BMO. Please go ahead.

Hey, guys. How's it going? Good.

Morning.

Morning. Just want to beat the dead horse on the margins. If we go to like 23 or 24 and we kind of get COVID and production disruptions and all these other things kind of normalized is, you know, and maybe it is just too early and it's not something you want to talk about. But, you know, you think that 25% incremental margins is still going to be about where we end up like other, you know, there'll be other puts and takes. Or you think that there's some pretty good upside to that? You know, as we normalize way out, maybe it's 23 or 24.

Yeah, so, Joel, maybe I would just ask if you could hold your patience to April 15th because that will be obviously with us coming out with the near-term guidance here that we will be providing mid-term guidance for our goals in the investor day on the 15th. So rather than take our thunder away since we provided guidance today, Drew is happy to provide our mid-term guidance or aspirations coming up here in April 15th. So we'll provide those then.

Maybe another jumping the gun question too then. Can you talk a little bit about other portfolio changes that you guys are thinking about making? And also your debt to EBITDA is starting to come down to pretty attractive levels. Are there things that you might want to add, again, as we normalize in 22 or 23?

Yeah, I think if you go back to the original premise or thesis here, there are as we get our operational act in order, and I think we're making great progress there, and get the debt numbers you just talked about where we want them to be, there's still a consolidation opportunity in the space as we're at adjacencies that we can explore. Now that we're operationally capable to go acquire things and operate and get those things to convert, I think that'll be something we'll look at. And as all companies, you have a pipeline of who you think that is by tangents in the segment you're in. And then there's other things that are more broad and more transformational that we would, you know, always be looking at as well. But I think, you know, as we talked about from the very first earnings call is we're focused keenly on operations. We're now making progress. We're starting to think around commercials and use of capital opportunities where you're going. And I think that's, you know, We get the debt in the right spot. There's both inside the spaces we're in today, there's opportunity, and there's opportunities more broadly as well, you know, technologies and whatnot that we'll always be open to. So I'd probably leave it at there, but I think that that's something that we're obviously looking at, and we'll talk a bit about that, I think, on investor day as well.

Yeah, and April 15th, we'll give some views on our capital allocation. You're right, Joel, as we continue to produce this Income, and again, as we said, it's all about producing income and driving it down to cash, right, and our cash conversion. So that's our focus here as we exit 21, and we'll provide some of that guidance on capital allocation strategy in the call, in the investor day.

Okay, great. And then just the last one, I'll glue two together. Can you talk a little bit about pricing power and maybe price cost and also is the Spartan backlog important? a little bit more profitable than the segment average or a little bit less or any help there would be great. Thank you.

Yeah, the Spartan backlog we're still working through. We're still working through it, obviously, with the integration, and you get a little challenges there with obviously being a chassis supplier, right, and providing intercompany through integration. our own brands as well as to OEM. So we're still working through that and the visibility to the backlog. And then from a cost price, that's one focus as Rod talks about on our commercial disciplines and making sure that we know what our costs are and how we're realizing price. So we continue to improve our visibility. But again, with some of the systems we have in place, we're still working through fully understanding with a backlog business that, you know, on average in fires 9 to 12 months, it's very important, obviously, to make sure that we're quoting things with anticipated inflationary factors as well as cost downs and make sure we don't give those away through the whole customer supply chain or value chain, right? So we're still working through that systematically, but it definitely is on our radar that we're able to deliver a positive cost-price equation. Okay, great.

I appreciate your time. Thank you.

All right, thank you.

I would like to turn the floor over to Rod Rushing for closing comments.

Okay, well, thank you. So in closing, I just say that, one, I think we're very pleased with the progress we're making. Again, I'm very thankful to the team for the amount of change we've put on them and the way they've embraced it. And we have a lot of work to do, but I think the momentum is building. I appreciate the questions today, and obviously, please note, again, April 15th, we look forward to that conversation as well, which will be a little bit more forward discussion around what we think the opportunity is. So with that, we'll end the call, and again, thank you for joining today.

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