REV Group, Inc.

Greetings. Welcome to the REV Group fourth quarter 2022 earnings conference call. At this time, 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 conference over to Drew Knopf, Vice President, Investor Relations. Thank you. You may begin.

All right. Thank you, Sherry. And good morning, everyone. Thanks for joining us. I apologize in advance for any rough voices. It's the cold and flu season here in Burfield, Wisconsin. Earlier today, we issued our fourth quarter and full year fiscal 2022 results. A copy of the release is available on our website at investors.repgroup.com. Today's call is being webcast and a slide presentation, which includes the reconciliation 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 FCC earlier today and other filings that we make with the FCC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All references on this call to a quarter or a year are to our fiscal quarter and fiscal year, unless otherwise stated. Joining me on the call today is 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 and our consolidated fourth quarter performance. I will then turn it over to Mark for detailed segment financials. Throughout fiscal year 2022, we continued to advance the strategic agenda that we put forth during our investor day presentation in April of 2021. During our investor day, we highlighted product development and simplification as a driver to unlocking shareholder value in our business. We stated that we have intermediate and long-term opportunity to simplify and commonize the design of our products and improve our designs for manufacturing while maintaining the brand identity and differentiations that our customers value and expect. In the past 12 months, the Rev Fire Group consolidation of five fire businesses has launched a new commercial chassis platform that leverages our Spartan chassis business as a center of excellence across the fire group brand portfolio. As we move forward, a greater percentage of REV fire apparatus will be built on the Spartan commercial chassis than before. In 2022, we developed an integrated product roadmap across our fire group brands to enable platforming and simplification. This will lead to the standardization of sub-assemblies and then to having centers of excellence for sub-assembly production. We will do this while retaining differentiation in our brands and our customers' ability to customize. We expect a portion of the FY 23 fire bookings will benefit from these standardized designs with continued momentum into 2024. Within the commercial segment, our EMC municipal bus business introduced its next generation transit platform with over 90% commonality between the battery electric and the hydrogen fuel cell models. This platform will offer municipal fleets flexibility with multiple links and multiple propulsion systems. The new platform design will not only reduce complexity and production costs for our business, but it will also lower the end-user's training and maintenance costs. These early wins within the fire group and the commercial segment are examples of our work in progress across the enterprise and will serve as enablers in our journey to double-digit EVDA margins. We continue investing in our people with formal, on-the-job training of operational disciplines. By the close of fiscal year 2023, Roughly half of our workforce will have achieved a bronze, green, or black lead certification. Together, these teams have built a pipeline of over 1,500 active cost savings projects designed to increase throughput and delivery efficiencies. Each of our businesses is now utilizing an integrated reporting and project management system that provides managers at all levels the ability to monitor progress and assist in the completion of this work. We have expanded our purchasing and engineering capabilities by engaging offshore resources to support our internal teams. Within purchasing, we are finalizing qualification for multi-source solutions to the top five key components that created the greatest challenges to throughput in fiscal year 2022. We expect these efforts will be completed by the end of the first calendar quarter and will enable improvement in throughput within our fire group and our commercial segment for the remainder of the year. We engaged our business with two offshore engineering firms to accelerate and advance our engineering capabilities. This work is progressing on two fronts. First, we are documenting our designs and improving the engineering document set that we present to our manufacturing floor. The completeness and accuracy of our bills of materials has been an unaddressed issue in the past and has been problematic for production during the supply chain challenges we have been working through. Secondly, we are collaborating with an offshore firm to supplement our application engineering. This will improve the quantity and quality of the engineering documents that are released to the floor and reduce the engineering cycle time, enabling the build of an engineering buffer before production execution. Over the past year, many of our businesses delivered or introduced new zero-emission products. Our battery electric portfolio includes the first North American-style fire truck, Type II ambulances, and Type A school buses. Terminal trucks and municipal transit buses are offered in both battery electric and hydrogen fuel powertrains. These efforts have been driven by the voice of the customer and supported by partners and suppliers that offer leading-edge technology. They demonstrate our commitment to leading the developments for the markets we serve by delivering solutions that fulfill our customers' needs while reducing the carbon footprint of our fleet of vehicles. This figure 2022 was a challenged operating environment with a continuation of external headwinds we faced exiting 2021. Chassis supply remained inconsistent with unfulfilled allocation in the first quarter, followed by a trough of just 10 receipts per week from a major OEM in the second quarter. Late in the third quarter, we began to receive unanticipated deliveries and a mix of chassis that was not aligned to our master production schedule. As we exit the fourth quarter, chassis supply has improved. Our visibility to future deliveries and mix of vehicles to be received remains uncertain. Most recently, a well-publicized recall was issued by a top luxury van OEM that is preventing unit shipments at this time. On the materials side, we did experience general supply chain improvement as we exited the year. However, shortages of key components have continued and in some cases have deteriorated. as we enter the fiscal first quarter of 2023. An example of this is that a leading HVAC provider to our ambulance group and commercial segment ceased operations in the fourth quarter, and we are currently managing through this transition to a new supplier for our HVAC requirements. Finally, like many manufacturing companies, we've experienced the impacts of a constrained labor market. We built specialized and highly customized vehicles, a skill that limits the opportunity for automation. Availability of the workers at the time has restricted our ability to achieve our target line rates. We have improved onboarding, employee tooling, and employee training to reduce employee attrition and position our associates for opportunity for advancement. The momentum of our lean training projects mentioned earlier is also expected to help our business improve efficiency and reduce the labor required per unit of completed vehicles. Despite the challenges noted, We exit fiscal 2022 with a record backlog of $4.2 billion. Our bookings remained strong throughout the fourth quarter, and that included additional price increases being implemented during the quarter. We had another successful year of converting earnings to cash with a full year of free cash flow conversion of 136%. We returned a total of $82 million of cash to our shareholders in the form of dividend and charity purchases and exited the year in a strong financial position. Total liquidity under our ABL credit facility is $308 million, which provides significant flexibility and opportunity to continue to pursue our strategic agenda. Turning to slide four, I'd like to present a few highlights from the quarter. Previously, I shared that our E&C municipal bus business announced the development of the next generation zero-emission products, the AXIS battery electric bus and the AXIS hydrogen fuel cell electric bus. its first order of products from the Dallas-Fort Worth International Airport. DFW ordered four-axis EDO battery electric buses along with 22-axis CNG-powered buses. The new fleet of buses is expected to be delivered to the airport in the summer of 2023. We believe emission-free buses will attract significant municipal interest as state and local governments pursue low- and no-emission transit buses under FTA grants. As we noted on our third quarter earnings call, the FTA announced a $1.7 billion of grants for low and no-emission buses. These are the first awards related to a bipartisan infrastructure bill, which provides a total of $5.5 billion over five years to help state and local government authorities buy, release zero-emission or low-emission transit buses. In September, we were pleased to see the return of the RV dealer open house in Elkhart. with strong dealer demand and enthusiasm. Recreation Group brands combined to showcase more than 60 models, including new and updated designs. New products on display at the open house included the brand new Fleetwood Frontier GTX Class A Diesel Luxury Motorhome that features an industry-first dedicated office. Land Camper debuted its Enduro Overland Concept Unit, which is designed for off-grid camping and the active outdoors person. The Fleetwood GTX 37 RT received several awards, including RV of the Year and Best New Model, while the Enduro won RV of the Year and the Must See RV. Within the fourth quarter, we announced the appointment of Andy Rochers as the president of the REV Fire Group. Prior to joining REV Group, Dan served as the president and chief operating officer at Morgan Truck Body, a division of J.D. Poindexter, where he led a team of 2,500 employees and oversaw 14 plans. Over his 30-year career, Dan has held leadership with Morgan Olsen, General Electric, United States Can Company, and Federal Signal, and comes to us with a strong history of operational performance. I'm very pleased that Dan has joined our team, and I look forward to the impact he will have in improving and advancing our fire group business. Turning to slide five, fourth quarter consolidated net sales increased 5.7% versus prior year. The increase was primarily the result higher sales in commercial and recreation segments, partially offset by lower F&E sales related to chastity and supply chain constraints. Adjusted EBITDA increased by 2.4 million. The increase was primarily a result of increased sales and profitability in the recreation segment, partially offset by lower contributions from F&E and in commercial segments. The fourth quarter marks a point where year-over-year comparables reflect supply chain constraints. As was the case throughout fiscal 2022, the operating landscape continues to change. As I previously mentioned, exiting the fourth quarter, we received a recall notice from an OEM partner that it is expected to delay shipments and shift revenue in fiscal year 2023. While we continue to face and address supply chain challenges, we are confident that the initiatives that we have put in place will improve our throughput and our financial performance. Now I will turn it over to Mark for details on our fourth quarter financial performance. Mark? Thanks, Rob, 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 $253 million, a decrease of 9% compared to the prior year. The decrease in net sales was primarily due to fewer shipments of fire apparatus and ambulances partially offset by price realization of trucks within the quarter. Within the fire group, completions and shipments continue to be impacted by shortages of critical parts such as radiators, wiring harnesses and axles, as well as lower than expected line rates at our holding facility, which continues to integrate the production of KME and Ferrara branded units. The result was a 9% decrease in unit shipments versus the fourth quarter of last year. unit sales improved versus the third quarter, reaching the highest level of fiscal 2022 with increased shipment from several fire plants. Although below expectations, we did see sequential improvement in shipment from our Holden facility. The Holden team remained focused on balancing feeder lines to increase production levels, with recent success filling its cab, chassis, and body lines to be aligned for final assembly. Within the ambulance group, we continue to experience unpredictable OEM chassis deliveries, creating production planning challenges that result in a 9% decrease in shipment versus the prior year. As Rod noted earlier, although we have been receiving a greater number of chassis from our OEM partners, the timing and mix of units remain varied. The ability to plan production, as well as aligned component parts supply, begins with the expected receipt date of a specific chassis. If the chassis delivery date is delayed or a different model is received, it is a downstream impact on the value chain. In addition to the disruption that's caused to our component inventory, we have continued to experience material shortages related to supply chain constraints. Despite these challenges, unit completions improved in the late quarter with shipments increasing compared to the third quarter. Turning to EBITDA, F&E segment adjusted EBITDA was $1.9 million in the fourth quarter of 2022 compared to $10.1 million in the fourth quarter of 2021. Adjusted EBITDA margin of 0.8% decreased 280 basis points compared to last year. The decrease of primary results, supply chain disruptions, labor inefficiencies, increased inflationary pressure, and costs related to Hurricane Ian partially offset by price utilization. As I mentioned earlier, production at the Holden facility has not supported the shipments of units at the rate we anticipated entering the fiscal year. In addition, slower completion of units that were booked prior to the recent inflationary environment resulted in a price-cost headwind in the fourth quarter, which is the first occurrence this year. Full-year segments and consolidated price costs remain positive, but production of age backlog remained a headwind entering fiscal 2023. Total F&E backlog was $2.6 billion, an increase of 73% year-over-year. The increase in backlog was the result of strong unit orders and pricing actions taken over the past year. Fire apparatus orders were quarterly record and increased 23% versus last year's quarter, while orders for ambulance increased 14%. Looking into fiscal 2023, we expect typical first quarter seasonality within the F&E segment with an approximate 10% revenue decline. As our multi-sourcing initiatives take hold in the fiscal second quarter, we expect sequential revenue growth throughout the year. Segment margins are expected to remain in the lowest single digits as we continue to complete age units within backlog. The midpoint of guidance anticipates that manufacturing efficiency and more favorable pricing will begin to improve segment margins in the second half of the fiscal year. Turning to slide seven, commercial segment sales of $111 million was an increase of 17% compared to the prior year. The increase was primarily related to higher sales of school buses, terminal trucks, and street sweepers, partially offset by lower sales of municipal buses. Commercial segment sales in the prior year were impacted by a five-week suspension of school bus production due to limited chest availability. Although school bus shipments were higher than previous year, the increase was limited by shortages of wiring harnesses and HVAC equipment, resulting in a 29% sequential decline in unit sales. HVAC supply will remain a headwind to throughput in the fiscal first quarter, while multi-sourcing initiatives are expected to improve supply in the second quarter. Within the specialty group, Terminal truck shipments increased for the 12th consecutive quarter, and street sweeper sales increased for the 5th consecutive quarter, each shedding a unit sales record. Municipal transit bus shipments were limited by continued supply chain constraints, key components, primarily wiring conferences. Commercial segment adjusted EBITDA of $3.3 million decreased 42% versus the prior year. The decrease in EBITDA was primarily the result of an unfavorable mix of municipal transit buses and rework in efficiencies related to supply chain constraints that impact the school bus and municipal transit bus completions, partially offset by increased contribution from specialty businesses. An unfavorable mix of municipal transit buses is primarily the result of low margin units sold during the highly competitive bidding cycle related to COVID. In the specialty group, efficiencies related to improved production velocity result in a three-year high margin performance despite challenges related to supply of key components. Commercial segment backlog was $526 million at the end of the fourth quarter, which reflects pricing actions taken throughout fiscal 22 and increased orders of municipal transit buses. Due to chassis constraints that impact the school bus industry, we have seen an increase in the number of school bus plus chassis orders, rather than body-only conversion orders. This change in order patterns not only requires us to procure more chassis directly from OEMs, but also impacts the margin profile of the business, as chassis costs are essentially treated as a pass-through, and therefore as margins diluted to the segment. We expect segment margins to trough in the first quarter of fiscal 2023 as we continue to ship low-margin municipal transit buses. We expect segment profitability to improve sequentially throughout the year as we build through the municipal transit backlog. Multi-sourcing of wire harnesses as well as resourcing the HVC equipment supplier mentioned earlier is expected to alleviate the supply chain headwinds within the second quarter, benefiting line rates in all businesses in the commercial segment. Turning to slide eight. Recreation segment sales of $260 million were up 19% versus last year's quarter. Increased sales versus the prior year were primarily a result of increased shipments of Class B and Class E units and pricing actions. Partially offsetting the increase was lower sales of towable units, grids, supply chain, and labor constraints. Our plants maintained a regular production schedule within the quarter as dealer inventories on our brands remained approximately 50% below pre-COVID levels exiting the year. Recreation segment adjusted EBITDA at $35.3 million was an increase of 13.6% million versus the prior year. The increase in EBITDA was primarily a result of price realization, volume leverage, and favorable mix, partially offset by material inflation and labor inefficiencies in the total business. Segment backlog of $1.1 billion decreased 9% versus the prior year. The decrease is primarily due to continued production against backlogs and lower orders across product categories. Class B and Class C unit orders have normalized to pre-COVID levels, and backlogs for these businesses remain at approximately one year of production. Class A and total backlogs extend beyond fiscal 2023 at the current production volumes. We did receive a small number of cancellations in these categories, but expect to regain a portion of those orders and to convert to the following model year orders. We do expect recreation segment backlog to decline throughout the year as we maintain production and to exit at a more normalized level. As Rob mentioned earlier, the timing of revenue and EBITDA in fiscal 23 will be impacted by a global recall from a luxury van OEM that prevents us from selling units. We do not expect these sales to be lost, but the timing of approximately $40 to $50 million of revenue is expected to shift from the first to second fiscal quarter as the OEM recall fix is received and units are delivered. Turning to slide nine, full-year consolidated net sales decreased 2.1% versus fiscal 2021. The decrease was primarily a result of decreased sales within the F&E segments partially offset by increased sales within the commercial and recreation segments. The decrease in F&E segment sales was primarily due to lower unit shipments related to supply chain constraints and chassis shortages and inefficiencies related to the transition of K&D production to our holding facility, partially offset by pricing actions. As a result, full-year F&E net sales decreased 15% on 13% lower unit sales versus the prior year. Within the year, we successfully repriced a portion of F&E backlog that was booked prior to today's inflationary environment. However, lower throughput within the segment limited our ability to realize pricing actions that were taken in fiscal 21 and 22. We expect greater contribution from these pricing actions in the back half as we exit fiscal year 2023. The increase in commercial segment sales was primarily a result of increased production of school buses, terminal trucks and street sweepers, and pricing actions. The increase in recreation segment sales resulted in favorable mix and pricing actions that resulted in record recreation segment sales. Full-year consolidated adjusted EBITDA decreased 36 million or 26% year-over-year. The decrease in EBITDA was primarily a result of decreased contribution from F&E and commercial segments partially offset by higher contribution from the recreation segment. The decrease in F&E segment EBITDA was primarily due to lower unit volume and inefficiencies related to supply chain constraints and the transition to K&B production to our holding facility. The decrease in the commercial segment EBITDA was primarily due to the completion of a large municipal transit bus order earlier this year, which resulted in an unfavorable mix of units. In addition, increased costs related to inefficiency associated with supply chain constraints and rework needed to complete units. Full-year recreation segment margin 11.6% was a record and benefited from pricing actions, a higher mix of diesel units of certain categories, and opportunities to batch build units to fulfill elevated demands. We do not expect to repeat this margin performance in 2023 with contributions from total and gas units increased and the opportunity for batch building decreases. Turning to slide 10, trade working capital on October 31st was $348 million, a decrease of $20 million compared to $368 million at the end of fiscal 2021. The decrease was primarily a result of increased accounts payable and customer advances partially offset by an increase in inventory. The increased inventory balance includes an increase of $37 million in third-party chassis and an elevated level of work in process as unfinished units wait for key components in order to be completed. Full-year cash from operating activities was $91.6 million. We spent $8.9 million on capital expenditures within fourth quarter and a total of $24.8 million for the full year, resulting in full-year free cash flow of $66.8 million, which represents a cash conversion rate of 136%. As Rob mentioned earlier, we returned a total of $82.4 million in cash to shareholders. Net debt as of October 31st was $209.6 million, including $20.4 million cash on hand. We declared a quarterly cash dividend of $0.05 per share payable January 13th to shareholders of record on December 30th. At quarter end, the company maintained ample liquidity was approximately $308 million available under the ABL revolving credit facility, and our net debt to EBITDA leverage ratio was two times at the low end of our stated target range of two to two and a half times. Turning to slide 11, today we are providing four-year guidance which reflects a range of continued uncertainty surrounding chassis visibility and key component supply and our expectation for increased inflationary pressure that has impacted a portion of units in the backlog, primarily in the first half of fiscal 2023. Today's top line guidance is 2.3 to 2.5 billion, or 3% growth at the midpoint. Adjusted EBITDA guidance is 110 to 130 million, an increase of 14% at the midpoint. Given the seemingly soft first quarter, lingering key component shortages, and the stop ship recall of luxury van chassis, We expect the first quarter to be the trough of revenue and adjusted EBITDA margin with sequential improvement throughout the year. We expect first-half consolidated revenue to be approximately 45% of the full-year guidance and first-half consolidated adjusted EBITDA to be approximately 35% of full-year guidance. Cash conversion is expected to be 90% or greater with free cash flow in the range of $39 to $55 million. Adjusted net income is expected to be $42 to $60 million, and net income $28 to $47 million. Full year capital expenditures is estimated to be in the range of $30 to $35 million, which includes carryover projects that were initiated in fiscal 2022. Maintenance cap tax 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. Expected interest expense in the range of $25 to $27 million is an increase compared to the recent run rate. This is a result of the current and anticipated interest rate hikes as well as an increase in customer advances. So with that, I'll turn it over to the operator for questions.