REV Group, Inc.

Good morning, and welcome to REV Group Incorporated's fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mood. 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 call is being recorded. I would now like to turn the conference over to your host, Mr. Drew Connolly.

Thank you. You may begin. All right, thanks, Rob. Good morning, and thanks for joining us. Earlier today, we issued our fourth quarter and full year 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 8-K filed with the SEC earlier today 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 on this call to a quarter or a year or a 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 to everyone joining us on today's call. This morning I'll provide an overview of this year's commercial, operational, and strategic achievements, including full-year financial highlights, then present our consolidated fourth quarter performance, I'll then turn it over to Mar for detailed segment financials. Early in the year, we formally introduced the RevDrive business system, defining our commitment to creating capabilities of commercial, operational, and organizational excellence to achieve value creation for our stakeholders. We've made significant progress throughout the year building capabilities in each of these areas. Today's full year results reflect these efforts. Our commercial actions combined with improved demand positioned us to exit fiscal year 2021 with a record $3.1 billion backlog. Over the past year, our sales teams have strengthened our customer relationships. We've optimized brand and dealer channels while taking the required and necessary pricing actions. As a result, we have achieved market share gains in many of our businesses this year. In February, we are hosting REV's first annual Accelerator Award event, which will recognize our highest performing dealers for fiscal year 2021. This is an annual event where we recognize and celebrate the excellent performance of our top dealer partners and encourage healthy competition for attendance at next year's event. Over the past 18 months, municipal budgets have been supported by several rounds of stimulus that includes funds being directed towards health and safety programs directly benefiting our fire and emergency segment. Within our fire group, we are still waiting on full-year industry data, but the first half data shows that we have achieved market share gains and the order bookings in the second half were very strong. Our ambulance group has reported its eighth consecutive quarter of record backlog. Since the CARES Act of 2020, industry demand has been increasing, and we estimate the North American ambulance market could grow by 30% over the historical average when it's reported for fiscal year 2021. We have invested in industry advocacy, working with a third-party resource and government officials to clarify language in federal bills to more clearly identify that the funding is available to municipalities for ambulance purchases. We believe our commercial segment is positioned to benefit from the recently passed bipartisan infrastructure bill that authorized $550 million of new spending. The bill includes allocations for electrification of buses, supports EV charging infrastructure, and calls for modernization of airports, transportation, and ports. We estimate that over $70 billion of these funds are allocated to markets that include our vehicles. While the Type A school bus customers have been slower than large diesel Type C and Type D buses to adopt an electric powertrain, we have experienced increased Type A quoting and sales activity. Within the corridor, we announced the expansion of our partnership with Lightning E-Motors to include our Taipei school bus, with a commitment to deliver over 100 electric buses in the next two years. We expect the public transportation markets to be a primary beneficiary of the $70 billion in the infrastructure bill. Our E&C transit bus business serves municipalities, universities, and airports. We recently launched our battery electric bus for this segment to position us to compete for what we believe will be a growing demand for battery electric buses. And I will speak more about this in my prepared comments ahead. Within the specialty group, our capacity terminal trucks are critical to moving and shipping containers from the congested ports that we see today and throughout the country's distribution system. Due to its operating nature, terminal trucks are a prime candidate for electrification and the infrastructure bill allocates $17 billion for modernization of ports and waterways. We produced the first North American hydrogen fuel cell electric hybrid truck with an active pilot program that includes two trucks now serving the Port of Long Beach today. Separately, our partnership with the History Yale Group for the co-development of a full battery electric terminal truck and a hydrogen fuel cell terminal truck is also progressing very well, and we expect the initial launch with a few large retail customers within the first half of 2022. Our operations across 2021 worked in an unstable and challenged environment. Exiting 2020, our end markets were still recovering from demand headwinds related to COVID-19. School buses had not fully returned to classrooms, airport travel was limited, and the public transportation spending remained challenged. As we progressed through the first half of fiscal year 2021, we saw steady improvement in demand and our supply chain was stable and our top and bottom lines showed solid improvement. We posted record first half results during demonstrating REV drive initiatives being put in place. In the third quarter, the global supply chain deteriorated and various REV business units were put on allocation of components. Perhaps the most significant was this trickle-down related to semiconductors and the implications this had on our OEM chassis partners, their ability to deliver at previously committed levels or even at historical levels. Additionally, there were challenges on all components that rely on chips, such as diesel, exhaust fuel tanks, and other electronic items. The impacts become more widespread to include other components that were not chip-dependent, such as axles, generators, wiring harnesses, seats, and windows. It became very difficult to predict what components would be shorted on supply, and this condition still exists today. We significantly improved purchasing and supply chain capabilities over the past year under the leadership of our supply chain officer, Rob Vyslowski. His team has worked to diversify the supply chain and accelerate strategies to mitigate the shortages we experienced throughout the past year. As a result, we were able to procure components and chassis that we would not have been able to acquire in the past. We also added overseas third-party services to source internationally, added e-auctions for competitive online bidding, and dual-sourced a portion of our exposure that was previously sole-sourced. The initiatives had the dual benefit of filling supply gaps and lowering costs during a highly inflationary environment. Our sourcing and pricing actions allowed us to remain positive price costs throughout the year, but the implications of material shortage to our throughput did more than offset additional productivity gains that we otherwise may have realized during the year. Despite these challenges, we posted year-over-year adjusted EBDA margin improvements in each quarter of the year. In total, we delivered 290 basis points of improved margin versus last year. Not only did we convert sales to earnings, but we also converted these earnings to cash, with full-year free cash flow conversion of 174%. The quality of earnings allowed us to pay down $129 million of net debt in fiscal 2021, placing us in a strong financial position. Total liquidity under ABL credit facility is now $290 million, which provides significant flexibility and opportunity to pursue our strategic agenda. We delivered capital allocation philosophy in depth in our investor day in April. It involves deployment of capital for inorganic activity, shareholder returns of cash in forms of dividends and share repurchase, and maintaining appropriate leverage. Turning to slide four, I'd like to discuss the organic investments that we have made in the business in 2021. In April 2021, we introduced the RevDrive business system and committed to building capabilities that this required. Early, I discussed the work that we have undertaken with our supply chain and purchasing since Rob Dyslowski joined us last December. We have also been investing in our people to develop our continuous improvement and lean capabilities. Since January of 2021, We have trained nearly 12% of our 7,000 employees on the tenets of waste reduction and lean thinking through formal classroom and on-job programs. We have standardized our processes and used technology to improve reporting to gain greater visibility at the center. Today, we are actively tracking over 700 projects targeted on the elimination of waste and inefficiency to create value. We will continue to invest in advancing our employees' capabilities and the number of certified implementers will continue to grow, making continuous improvement mindset part of our culture. Within the fourth quarter, we announced the appointment of Eric Sandstrom as Senior Vice President of Engineering and Technology. This new role is critical to the achievement of our operational value engineering targets. In addition, Eric will focus on design process and engineering capabilities to deliver product platforming and innovation needed for immediate and long-term product simplification. He also will lead our technology advancement in the areas of vehicle electrification and data and analytics for our vehicles. Prior to joining REV Group, Eric was the Global Chief Engineer for Electric Propulsion Systems at General Motors and led a team responsible for the development of the propulsion system for the all-electric Hummer SUT and SUV, among others. He began his career at BorgWarner and held progressive leadership roles over a 20-year period with a focus on global product strategy, engineering, program management within the automotive industry. I'm very pleased that Eric has joined our team and look forward to the impact that he will have on advancing our business performance and innovation. There are several recent announcements that we have made in electrification of our products. In November, our E&C municipal transit bus business debuted its fully electric bus at the APTA Expo. This I mentioned previously in my comments. The bus is built on the proven access platform, which has over 20 years of trusted performance and is the first battery electric bus in the industry to also feature a 100% zero-corrosion steel construction. Upon completion of Altoona track testing, this bus will be eligible for federal funding provided to municipalities and recently increased within the infrastructure bill. We also announced a firm order for the first North American-style fully electric fire truck named Vector. The city of Mesa, Arizona ordered Vector from one of our E1 authorized dealers, but the fully electric fire truck is also available in all the Rev Group fire brands. The customizable vector has the industry's longest electric pump duration, which allows four hose lines to be in use for up to four hours on a single charge. It includes superior battery storage, offers a safer, lower center of gravity, and regenerative braking. We've been actively quoting this unit and are excited to have it planned for showing it to you at the FDIC show this spring. Earlier this week, we announced several agreements that expand the prospects of electrifying ambulance in North America as well as overseas. The agreements include an order for five ambulance from the nation's largest private medical transport company, American Medical Response. The first vehicles for AMR are expected to be completed in April of 2022. and will be delivered to five communities in California. AMR holds an option to purchase 25 additional electric ambulances under this agreement. Next, Hamad Medical Corporation, Qatar's premier not-for-profit healthcare provider, is conducting an operational trial of a state-of-the-art zero-emissions battery electric type 2 ambulance. Finally, our REVO business announced its contract with General Services Administration has been amended to include zero-emissions battery electric ambulances. GSA is the only sole source for non-tactical vehicles purchased by the federal government agencies in the United States. Agencies with access to this contract include the Department of Defense, Department of Energy, the Veterans Health Administration, the National Park Service, and Indian Health Services. The addition of the zero-emission ambulances to the GSA contract is well-timed, with the recent passing of federal infrastructure bill that contains significant investments in support of electric vehicles. Turning to slide five, fourth quarter consolidated net sales decreased 4.3% versus prior year quarter. The decrease primarily the result of lower F&E sales related to chassis and supply chain constraints, partially offset by higher sales in commercial and recreation segments. Adjusted EBDA increased by $3.1 million, or 80 basis points. The increase was primarily the result of increased sales in recreation segment and lower corporate sales. expenses partially offset by lower contribution from F&E and commercial segments. Despite the revenue challenges experienced within the quarter, our consolidated segment performance maintained a 17% decremental margin versus the fourth quarter of 2020. I'll now turn it over to Mark for details on our fourth quarter financial performance. Mark.

Thanks, Rod, and good morning, everyone. Please turn to page six of the slide deck as I move to a review of our fourth quarter segment results. and full year consolidated performance. Fire and emergency fourth quarter segment sales were $277 million, a decrease of 16% compared to the prior year. The decrease in net sales was primarily due to fewer shipments of fire apparatus and ambulance units, partially offset by price realization of trucks shipped within the quarter. The supply chain headwinds that we called out in our fiscal third quarter have not improved, and in some cases they deteriorated within the fourth quarter. As you may recall, we entered the quarter with over 100 vehicles trapped in work in process due to missing component parts required to complete the vehicle. As we acquired the needed components throughout the quarter, plants have needed to pull labor off the regular production line to rework and complete these units prior to delivery. What has become a consistent load of rework has resulted in lower line rates, fewer completions, and lower sales over the past two quarters. In addition to shortages of components and other materials, our visibility into chassis supply from our OEM partners remains much shorter than normal due to changing production schedules and plant closures. Within the quarter, we missed fewer vehicle starts due to chassis shortages compared to the third quarter, but we have needed to reduce production line rates and vehicle mix to match chassis availability. Within our ambulance group, we have continued to produce a greater mix of higher content modular units that require more labor hours to complete than vans. This results in lower ambulance group sales than if we had received a higher mix of vans. Within the fire group, the damage caused by Hurricane Ida to our holding plant was not significant. but lost production days and changing delivery schedules resulted in approximately $7 million in net sales shifting out of the fourth quarter. Turning to EBITDA, F&E segment adjusted EBITDA was $10.1 million in the fourth quarter of 2021 compared to $14.8 million in the prior year. Adjusted EBITDA margin of 3.6% decreased 90 basis points compared to the prior year quarter. The decrease was primarily the result of supply chain disruptions and labor inefficiencies. Lower volumes related to Hurricane Ida and a return of selling expense related to a large trade show that was not held in 2020, partially offset by price realization within our backlog and favorable mix of the higher content ambulance units mentioned earlier. Once again, the segment mitigated the impacts of inflation in the fourth quarter, and remained price-cost positive due to commercial activities that drove price realization and supply chain team efforts to reduce costs. These actions, as well as productivity initiatives put in place over the past year, limited the segment decremental margin to 9% and $52 million of lower sales. Early in the fourth quarter, we announced the transition of KME fire apparatus production from locations in Nescahontan, Pennsylvania, and Roanoke, Virginia to other Rev Fire Group facilities. We did not come to this decision lightly. This business has struggled to reach profitability since its acquisition in 2016, and finding a path to sustained profitability was the focus of our initial strategic portfolio review in 2020. The combined losses of these plants have been approximately $3 million per quarter for the past two years, despite several efforts to improve profitability with structured programs utilizing both internal and external resources. Ultimately, the decision to shift CAMI production to other facilities will advance the fire group's platforming strategies and step forward in developing manufacturing centers of excellence, leveraging the Spartan chassis operation acquired in 2020, reducing complexity, and driving overall efficiency within the fire group. Our commitment is to preserve the KME legacy and continue to deliver to our customers and dealer partners what they have come to expect from the KME brand. The shift in production locations better enables us to enhance quality and improve delivery times by leveraging capabilities across the network. We expect the wind down and completion of trucks to remain a headwind until the transition's expected completion in April 2022. The move allows us to rationalize approximately one-third of our fire group manufacturing footprint. Total F&E backlog was $1.5 billion, an increase of 55% year-over-year. The increase in backlog was a result of strong orders over the past year, with record orders for both fire apparatus and ambulance units in the quarter. Fire orders increased 137% versus last year's quarter, while orders for ambulance increased 59% against a strong quarter last year. Municipal budgets remain strong and have been supported by another round of stimulus within the quarter, as Rod mentioned. This level of F&E demand demonstrates the importance and priority placed on our vehicles for the health and safety of local communities. Turning to slide seven. Commercial segment sales of 95 million was an increase of 3.8% compared to the prior year. The increase was primarily related to higher sales of municipal transit buses, terminal trucks, and street sweepers, partially offset by lower sales of school buses due to a temporary suspension of production caused by limited chassis availability. The five-week suspension and subsequent production slowdown resulted in approximately 12 million of sales slipping from the fourth quarter and a 51% year-over-year decline. Municipal transit bus sales increased 13% versus the prior year and included production against large municipal order, which is expected to be completed in the first fiscal quarter of 2022. Momentum in our specialty business continued with year-over-year sales increases of 98% for terminal trucks and 152% for street sweepers. This has resulted in a mixed shift with specialty group sales contributing 29% of commercial segment sales this year compared to 19% in 2020. Commercial segment adjusted EBITDA of $5.7 million decreased 11% versus the prior year. The decrease in EBITDA was primarily the result of the lower production volume of school buses, partially offset by higher volumes of municipal transit buses, terminal trucks, and street sweepers. The suspension of type A school bus production resulted in approximately 2.5 million of unabsorbed manufacturing costs. The current school bus chassis availability is allowing our operations to run at reduced rates, and therefore we don't expect to incur the same level of unabsorbed costs we experienced in our fiscal fourth quarter in the near term, but we have not yet returned to full production. In regards to chassis allocations from our OEM partners, the current allocation process allows much less planning visibility than in prior periods. Previously, we could plan our production upwards of six months out, but today's visibility is as short as 30 days. Our municipal bus business attained a two-year high adjusted EBITDA margin under new leadership, and it worked towards completion of a large municipal order within its backlog, which is expected to build out in the first quarter. This may result in a mix of lower-priced units, but we are confident that recent margin improvements will continue. The specialty group continues to demonstrate improved year-over-year performance, benefiting from increased sales, favorable mix, and responsive pricing actions. Specialty group margins were a two-year high and attractive to the segment and accretive to the segment within the quarter after being lower than the group average the prior seven quarters. Commercial segment backlog at the end of the fourth quarter was 395 million, which reflects strong orders for school buses, terminal trucks, and street sweepers. Pent-up type A school bus demand has increased backlog to a record following soft demand as a result of school closures in 2020 and earlier this year. Typically, we expect about three to four months of school bus backlog, but today we have nearly a year of sales secured at our chassis-constrained line rates. Specialty group backlog increased 408% year-over-year to reach a third consecutive record level. Demand for terminal trucks remains strong with robust orders and quoting activity from our customers in warehousing, distribution, and port operations. Turning to slide eight, recreation segment sales of 218 million, 12% versus last year's quarter. Increased sales versus the prior year were primarily the result of increased unit shipments of Class B and Class C products and a higher mix of Class A units, as well as increased pricing and lower discounts across all segment categories. Partially offsetting the increase was lower units related to supply chain and labor shortages that are Class A and total locations. For example, our Class A employee out-of-plant rates have been approximately 15% due to increases in COVID-19 positive tests and safety protocols. Many of our suppliers have faced similar conditions, compounding supply chain shortages. As a result, our recreation businesses have had to do offline work on anywhere from 70 to 95% of units within the quarter, depending on location. However, despite the challenges, recreation segment adjusted EBITDA of $21.7 million was an increase of $1.2 million versus the prior year. The increase in EBITDA was primarily the result of stronger price realization and lower discounts, volume leverage and favorable mix, partially offset by material inflation, increased freight surcharges, and labor inefficiencies due to rework and absenteeism mentioned. We continue to generate mid-teen EBITDA margins that are Class B and Class C businesses. Within 2021, these businesses have been able to manage their way through chassis and supply chain tightness, running at near capacity, which generates significant returns on invested capital. The Class A business improved margins 230 basis points year-over-year and 30 basis points sequentially, despite the out-of-plant rates mentioned earlier. As we continue to value stream, improve the throughput of this business, we are confident that we will attain our peak to trough profitability targets. In terms of segment backlog, segment backlog of 1.2 billion increased 129% versus the prior year and is the sixth consecutive record. End market conditions remain strong with retail sales for several categories exceeding wholesale shipments despite having less product than the showroom floor. Dealer inventories are now down an average of 70% to 80% compared to historic levels, and reception for our brands has never been stronger. Within the quarter, we received several new awards that gave us confidence that our businesses will continue to enjoy strong demand. The Fleetwood Frontier and Renegade Explorer were each named RV Pro Best New Model of the Year. The Frontier also received the RV Business Top RV Debut Award. and the Midwest Ford Passage and Patriot won Class B of the Year from RV News Magazine. Turning to slide nine, full-year consolidated net sales increased 4.5% versus fiscal year 2020. The increase was primarily a result of increased sales within the F&E and recreation segments, partially offset by a decrease in the commercial segment. The increase in F&E segment sales was primarily due to higher unit shipments in the first half of fiscal year before the onset of supply chain and chassis shortages, as well as a year-on-year incremental quarter of sales related to the Spartan acquisition. The increase in full-year sales in the recreation segment was a result of increased demand and throughput that resulted in record recreation segment sales plus prior year softness related to COVID-19. The decline in commercial segment sales was primarily a result of a prior year sale with shuttle bus businesses. The production shut down in our college school bus business, partially offset by increased sales in the specialty group. Full year adjusted EBITDA increased 74 million or 110% year over year. The increase in EBITDA was primarily a result of improved performance in the F&E and recreation segments, partially offset by lower contribution from the commercial segment. During the second quarter update to guidance, we noted the potential headwinds from chassis and component supply disruption, as well as incremental inflation pressure in the second half of the year. Chassis and component supply constraints limited our top line in the second half, but we were able to offset inflation with additional pricing and cost actions to remain positive price costs for the full year. Despite the challenges we faced in the second half of the year, we delivered 72% incremental margin on mid-single-digit revenue growth for the full year fiscal 2021. Turning to slide 10, trade working capital on October 31st, 2021 was $368 million, a decrease of $59 million compared to $427 million at the end of fiscal 2020. The decrease was primarily a result of various initiatives we have put in place over the past year to drive improvement in accounts receivable collections, accounts payable terms extensions, ordering and management of inventory, and expanding our customer deposit program. Full year cash from operating activities was $158 million, a $103 million increase from prior year as a result of higher net income and the trade working capital improvements I just mentioned. We spent $11 million on capital expenditures within the fourth quarter and a total of $25 million for the full year, resulting in full year free cash flow of $134 million, which represents a cash conversion rate of 174%. During the quarter, we took a non-cash charge of $6 million against net income for the planned exit of our investment in the China joint venture, as well as $4 million related to restructuring related costs and impairments of real property related to the KME plant transition. Upon the expected successful completion of the Trina transaction, we will have exited our international businesses within China and Brazil, reduced organizational complexity, and generated over $6.5 million of cash. Net debt as of October 31st was $202 million, including $13 million of cash on hand During the first quarter, we reduced that by $39 million, and for the full year, debt reduction was $129 million from the $331 million net debt balance at the end of fiscal year 2020. Within the fourth quarter, we repurchased $3.9 million of shares under our existing share repurchase authorization and returned a total of $10.5 million of cash to shareholders in fiscal year 2021. We declared a cash dividend of $0.05 per share payable January 14th to shareholders of record on December 31st. As Rod mentioned, at quarter end, the company maintained ample liquidity with approximately $290 million available under the ABL revolving credit facility, and our net debt to EBITDA leverage ratio was 1.4 times, well below our stated target range of 2 to 2.5 times. The improved balance sheet, ample liquidity, and $146 million remaining on existing share repurchase authorization provide flexibility to continue capital allocation activities that are aimed at increasing shareholder value. Turning to slide 11, today we are providing full-year revenue and earnings guidance, which reflects the range of uncertainty surrounding chassis availability and component supply. labor markets, and our expectation for increased inflationary pressures within fiscal 2022. Today's top line guidance is 2.3 to 2.55 billion, which is essentially flat at the midpoint. As I mentioned in the individual segment commentary, line rates at many of our businesses have been lowered over the past two quarters due to limited chassis and component supply. Approximately 1.2 billion of the midpoint sales are reliant on chassis for new vehicle starts. The midpoint of $2.4 billion revenue considers normal first quarter seasonality plus the supply chain pressure that we have experienced in fourth quarter to continue throughout the first half of fiscal 2022, followed by relief in the second half. Full year adjusted EBITDA guidance is $125 to $155 million, which is also approximately flat at the midpoint to our fiscal 2021 results. As I mentioned earlier, we experienced increased inflationary pressure in the second half of fiscal 21. Our outlook for 2022 assumes material cost inflation will be nearly double the 2021 rate. We also have made a structural change to wages and certain geographies to attract and retain qualified labor, which is an incremental headwind to our normal annual merit increases. These expected headwinds would... offset much of the planned productivity and procurement savings that RevDrives anticipated to deliver in fiscal year 22. However, coupled with the commercial actions we have taken, we do expect to remain positive price cost in fiscal 2022. Given the seasonally soft first quarter, we expect the first quarter to be trough revenue and margin with sequential margin improvement in the second quarter. At the midpoint, supply chain relief anticipates revenue to flow more freely in the second half, and we would expect additional sequential margin improvement through the third and fourth quarter. We also plan to benefit from the transition of production of the KME brand in the second half within the F&E segment. We expect to convert cash at over 90% with free cash flow in the range of $58 to $80 million. Adjusted net income is expected to be $64 to $89 million, and net income $45 to $73 million. Adjusted net income does include an additional $7 to $10 million of restructuring costs related to the transition of KME production. Full-year capital expense is estimated to be in the range of $30 million to $35 million, which includes investments in the fire facilities that will receive KME production as well as growth capex within our other businesses. Maintenance capex remains in the range of $15 to $20 million per year, and our growth projects have internal payback and IRR targets that must be met before being approved. We remain committed to all facets of our capital deployment strategy, which includes a defined leverage target, organic investment, M&A, dividends, and share repurchases. With that, I'll turn it to Rod for closing comments.

Thank you, Mark. We're excited about the operational improvements that we've demonstrated at fiscal year 2021 and the progress made on building capabilities that provide a path towards our long-term targets. In-market demand remains strong. We're optimistic that the supply chain headwinds will ease in the second half of fiscal year 2022, allowing increased throughput against our record backlogs. I'd like to close with once again thanking our team members for their efforts and contribution to this year. Without their efforts, we would not be able to make the progress that we did, and we're going to continue to invest to make sure they continue to put us in a position to win and improve. And I'd like to thank each of you again for joining our call today. With that, operator, I'd like to now open it up for the call for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd 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'd 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. One moment, please, while we poll for questions. Our first question comes from Jerry Ribich with Goldman Sachs. Please proceed with your question.

Yes, hi. Good morning, everyone.

Morning. Morning, Jerry. Hey, Jerry.

Can you talk about the supply chain indicators that you're tracking and, you know, what you're seeing in terms of the number of components that are in short supply today versus three months ago? Just if you could help us understand that. the heat map, if you will, in terms of number of problem components we're tracking now and, you know, any line of sight on that easing based on what you're hearing from the supply base now?

Yeah, so I'll just read this. This is Rod. I'll repeat kind of what Mark said. I think that what we're seeing now versus maybe three months ago, which we asked the question, is the same kind of challenge, is the same type of challenge. And I mentioned a number of the challenges component level type challenges that we're facing. The number one is chassis, and our line of sight on planning is just much shorter, and the delivery against the commitments is much more variable than it has been in the past. So the idea of getting starts is a challenge for us, Jerry, on chassis, because we're looking at a 30-day planning cycle versus a six-month planning cycle, and that's creating pressure on our businesses. And then once you get the chassis start, the components that I mentioned in the prepared comments – It varies. We're actively managing it with our purchasing group. But, you know, what we saw in our RV business that we're touching 75% to 90%, depending on which business you're in, at least twice to get a completion. It's not flowing through on continuous flow, which is what you want to see in these businesses. So it continues to be a problem. We do believe, though, you know, and as we said in our comments up front, that the back half, Based on what we're getting from suppliers, we think we'll get stabilized. There's still work to do to make sure that that happens, but we do believe in the back half of the year we'll be in a better position on the component level. Chassis is obviously something that we're working actively with our OEMs because it's really a partnership to improve, and we have work to do there as well because we've got to get that visibility beyond 30 days. It's hard to do production planning when you're looking at a 30-day window.

And, you know, taking a step back, you folks have been focused on driving continuous operational improvement and strengthening the sourcing capability. Can you talk about what we're learning coming out of this post-COVID experience and how that impacts the way you're thinking about structuring procurement and other processes going forward based on what we're learning in this challenging environment today?

Well, I think it's, in my mind, in many ways proven that, you know, that skill set, those capabilities we talked about on day one that we had to develop in this company are really, really important. In the first half of the year, you know, we began to see the benefit of that work that we were doing in our yield. As we got supply issues, you know, right, you start having efficiency and throughput, and you've got to make a decision, do I – Do I lower my head count to my line rate? When I've got customers that need products, I've got to be able to finish those units that are sitting on a lot. So I think we talked about in our third quarter comments, we're probably a little overstaffed right now for our throughput because we have so much rework attached to finishing goods that are short of a component. So I think absent of the work we've done in lean and CI and the reductions we've taken in head count, that would have manifested itself in worse results. But the fact that we have improved and we're still early in that process based on where we're at in terms of the value i think we can get out of it it has allowed us to offset and maintain some level and maintain kind of getting to the points we've made in terms of our guidance that we've stated. So I'm glad we did it because having not done it, we'd be in worse shape. But right now it's a battle because your line rates don't match your head count because you've got rework and you've just got to make that balance. But we've got to balance the need to finish goods and get them to our customers. in a reasonable time frame with the economics of what that yields us. And in this environment, it means you probably are carrying a few more people than you need.

And lastly, you know, how are you thinking about your longer-term margin targets? Clearly, we are going to need a step up off of the 22 run rate. Any updated thoughts on that? essentially getting the rework down significantly in 2023 is what sounds like needs to happen to hit those targets. But, Rob, maybe you can expand on that if you don't mind.

Yeah, this is Mark Jerry. You know, when we look at coming out of the second half or entering our second half in the ramp-up that we're expecting in Q4, you know, sort of like Rod said, as we proved exiting Q2 of this year, our ability to do that will get us a run rate in Q4 that we could hold that would generate in that range that we had presented in April between the $160 and $200 million range from an EBITDA perspective. So we believe, you know, if we get everything and we've demonstrated that with our Q2 performance that we can deliver on those if we have the supply chain

um that that we need in the labor as well so we believe exiting q4 will provide a runway that will deliver on those 23 targets i appreciate the discussion thanks yep thanks jerry due to time constraints we ask you please limit to one question and one follow-up our next question comes from mig dobre with robert w baird please proceed with your question

Thanks, guys, and happy holidays, everyone. Hey, Mick. Thanks, Mick. I guess I'm looking to maybe clarify your comments or maybe the framework that you're using when you're talking about price-cost. Can you sort of be specific in terms of how you're thinking, what sort of costs you're thinking about when you're talking about whether or not your price cost positive?

Yeah, so we talk about what we consider out of our normal inflationary items like merit, like I mentioned in my prepared remarks, we're talking about component price increase, so inflation on component parts and anything we're having to do for market rate adjustments to labor offset by pricing and our purchasing savings. So we expect our CI savings, our operational savings to offset any normal increases within the operation as far as merit increases, general insurance, those sort of things, and that our pricing strategies as well as our purchasing savings can offset inflationary pressures.

Right, because as I was listening to your prepared remarks, it sounded to me like you were saying that your price cost positive in the fourth quarter. Certainly you said that about FIRE. I'm not sure if that was the case for the other two segments. And you're talking about being positive price cost in 2022, even though material cost inflation is going to be twice as high as what you've seen in 21. And you've had some labor cost increases as well. So I'm looking to make sure that we're all clear here that you're saying that you can cover all those costs. And if so, I mean, how are you doing it? You know, how flexible is your pricing? What sort of price increases are we talking about to be able to offset the kind of headwinds you've described?

Yeah, so maybe as we've talked about before, we have gone out with price increases throughout the year to make sure our backlog and our longer backlog businesses include an inflationary assumption in them. And it's really getting through the backlog that's turning through now, but we've been able to offset some of the inflationary pressures with the purchasing savings. And it's really differs by segment. So in the recreation, just like our competitors, that value chain where the suppliers are passing on increases are going right to our dealers and to ultimately to the consumer. So you can view that as fully protected with an inflationary factor. So that's a pass through. Our commercial business, we have done some work with surcharges as well as some repricing in our backlog to cover that. So we have repriced effectively our backlog. And then in ambulance and fire, we have no longer backlogs. We have increased surcharge in ambulance. And then on the fire business, We've been very effective and we've been very diligent in working with our supply base to make sure that we're not accepting as many increases given the fact that we have a backlog, a longer backlog in that business. So we are partnering with our supply base knowing that if we take an increase, we can't pass that on to our customers given the contracts we have. So, you know, that's one of the things that we've got to manage. Cool.

I guess that begs my last question here. If this is the case, what you've just described here, why wouldn't we be looking at higher margins in fiscal 22, considering the fact that there were more than a handful of items that I think were pretty discreet to fiscal 21? I mean, the hurricane certainly seems to have been something that hopefully doesn't repeat. There might have been other items across the segments that would sort of be similar here. Is there some sort of factor of conservatism, or is this just upright supply chains getting, frankly, more challenging, and you're having even lower visibility in the way you are able to kind of frame this guide?

That's right. That's right. So it is really a reflection of our Q. If nothing, if you look at our range of guidance, doing nothing more than what we did in Q4, And we are seeing heightened challenges in the components like Rod talked about there. So it's really the fact that we're not going to get the throughput and the efficiencies that we had. So we're still going to be challenged here in Q1 and Q2. When you look at the Q2 performance we had this year and our ability to deliver that, you know, at 45 million versus you look at Q4 here at 31, there's a big step change that will not happen on a year-on-year basis coming out of our exit rate in Q4. So that's sort of a challenge we're dealing with. assuming that that comes back in the Q3 and Q4 run rate. So it's really all around throughput, our ability to get the throughput and the efficiency improvements. And we have become more inefficient, as Rod pointed out, you know, like in the recreation segment and others. So we're dealing with that and, you know, just the uncertainty around component supply and our ability to complete units timely. All right. Thank you.

Our next question comes from Joel Tiss with BMO. Please proceed with your question.

Hey, guys. How's it going? Good morning, Joel. I think we beat the price-cost pretty hard already. Can you talk a little bit about EV products and if they're being designed to be more profitable, a higher gross margin or higher incremental margins than your existing product lines? And also, is there a need to come up with a hybrid product line to bridge the gap between, you know, between your current makeup and battery electric?

So on the first thing, you know, a lot of these are, you know, are cell built prototype bills, even though we are getting orders and larger, like as I kind of laid out in our comments. You know, when you think about long-term contribution margins and what should get on more of an assembly scale, You know, the profit margins, we obviously want to expect that we'll get better margins, but I think that that's going to play out over time based on the cost base and the supply chain and what the value creation is. You could argue that margins in a share market for changing the power train won't change the in-market margin opportunity that once things stabilize and mature and competition gets in place that things could get back, but I think there is an early inch and opportunity to reset the value equation on on these and get better margins. And the question is, how long can you hold that over time? The second question you asked around hybrids, you know, broadly the interest is primarily around all electric options and fuel cell in certain spaces. But the fire truck that we launched, it actually, it's a full electric. It's got a DC motor on it. It's got DC regeneration in it. But it does have a generator in the backup because it's an emergency vehicle. So it can recharge the fuel cells or the battery cells if we need to, if it goes beyond, if it gets closer to a full charge down. So I don't, that's not like a hybrid, say, probably the way you're thinking about it. But on some of these emergency vehicles, there will be probably alternatives to keep them active and do backup to charge the fuel cells. But that fire truck is a full electric vehicle. And then it's drivetrain, it's battery, it's all electric, and we have a generator backup on it. So, yeah. But broadly, what we're seeing is interest in full electric at this point. And most of our efforts are really joint developments with customers. We're not kind of working in a vacuum thinking about what we want. We're trying to match the application for the use case and working the customer to fit a design that's going to meet what they want that we can broadly apply to our broader market. So it's commercial ready when we sell it versus getting a prototype and then talking about we have any vehicle that no one really wants. Okay. Yeah.

And then just zeroing in on 2022, can you give us a little sense about first quarter below break even given the disruptions in the seasonality? and maybe a little bit of a percentage of first half, second half of earnings? Thank you.

Yeah, sure. So first half, second half at the midpoint is probably going to be more what we traditionally would be, the 40-60 in the range that we're talking about here, right through that 40-60 mix, but not about a break-even. Obviously, we're going to be profitable in Q1, so hopefully you didn't take that from our comments earlier. Here, Joel, so again, it's seasonal if you look at it. So we're expecting normal seasonality coming out of Q4 down to Q1, but not anywhere near a break-even or a loss position. Oh, okay, perfect. Thank you so much for clarifying. I'll give it to someone else.

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

Hi, good morning. I guess I just wanted you to elaborate on some of the market share gains that you alluded to in fire and emergency, just what's driving the market share. Is it product? Is it better availability? Although it sounds like everyone's having availability issues, what regions these are specific to or products, and sort of how sustainable do you think these market share gains are and if you could quantify them? Thank you.

I'll start with the last question. My expectation is not as sustainable as it will continue to grow market share because the investments we're going to make in products and the work that we're doing around our brands and our plants to improve quality. And once we get through these material issues, throughput, ultimately. I think having industry leading lead times is really important in these businesses. And my view and the message I send to our team is that I know we have challenges now, but having the best cost quality and delivery is and the best lead times in these industries is really, really important, and we're not there yet. We have opportunity. In terms of what's driving, one of the things, and I would give a lot of credit to both Anup and Ken, our leaders for those two businesses, the customer intimacy and working with our dealers, simplifying our brand, simplifying our dealer footprint. There's been a lot of work done in ambulance to kind of clean up some of the brand channel issues that we've had, and I think that's brought a renewed enthusiasm around our dealer base. I've gone to our dealer council, and I got that feedback. So I think that there's a renewed energy in our dealer base to go sell the products because there's less conflict in the space, and spec writing is really important. But just also I think that the engagement with our dealers and the proactive of us working on these deals and getting the right configurations and the right costs and writing specs, the proactive activity you do to shape demand and work with customers is really positions you well to sell. I think it's a lot of the commercial activities that we're improving in the business. I also believe that we have a pretty good message. We've done a lot of communication with our channel partners around We're in this for long haul. We're going to make better profits. We're going to invest. I think what we talked about today at EV in terms of forward advancing, going where the markets are going to go long term, and being one of the early adopters and leaders in those spaces sends a good message to our dealers that we're going to be there for them and give them products they can win with. That builds energy, and our dealers want to win. So I just think we're managing the channel activity a lot more aggressive than we have in the past. And it's yielding benefit to us in the short term. And it's obviously, this isn't necessarily why you gain share, but the markets are really receptive right now, too. I think that we've got nice demand in all these markets. Maybe terminal buses is the one that's a little slower, but all these other markets are responding very, very nicely to the recovery.

Okay. And is there any way you could quantify the market share gain or whatever you can say?

Yeah, I don't have that data in front of me, but maybe in the private section we can talk about it.

Yeah, in the private section we might. Jamie, some of that is a little bit lagging, and to get the full year we need to wait until the first quarter. But we can certainly talk about the first half trends, but it's not something we usually publicly go out with.

Okay, great. Thank you.

We've reached the end of the question and answer session. I would now like to turn the call over to Rod Rushing for closing comments.

So, again, thank you. I appreciate everyone joining today. You know, we obviously were really pleased with the year we just closed, and you always want to do better. But I think all things said, the progress we've made in the last 18 months positioned us well to whether the challenges we've got with our leadership team needs these businesses. And really excited about the next year. We have work to do, but we're on a good path here. And, again, I appreciate you guys joining and look forward to the one-on-one sessions. Thank you.

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