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.

Thank you. 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 two if you would like to remove your question from the queue. And for a participant choosing speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question is from Mike Schlitzke with DA Davidson. Please proceed.

Yes, good morning, and thank you for taking my questions. I'll start with your last bunch of comments there, Mark. I just want to get some commentary on the free cash flow outlook for the year. You know, I see EBITDA up, but taxes, you know, a point or two higher, interest costs a few million higher than the prior year. Perhaps I'm answering my own question here, but can you just give us some of the other parts of free cash flow that might be changing next year, especially inventory, and any other moving parts that kind of lead to you to believe there will be a slightly down year for free cash flow?

Yeah, I think a couple components, Mike, is obviously we're still managing through our inventory. We have the opportunity to reduced inventory, but as our backlog continues to flow in the F&E business, as we've discussed before, we'll see an outward flow related to our customer advances. So when you look at our overall capital, it's really a result of our customer advances decreasing. As you see, we've had an increase this year in advances. So as those normalize exiting 2023 or drop, it won't be as... It will be larger than our actual reduction that we're able to get in inventory. That's really the main driver of that, including the items you talked about, the interest expense. That is an increase, obviously, of $10 million year over year as well.

Okay, great. I also want to follow up on the same slide, just some of the color on your cadence about how earnings are going to play out from quarter to quarter in fiscal 23 as well. Looking at the first and second quarter might be a little bit rough. It sounds like you've still got some leering issues. But do you expect the third and fourth quarters to somewhat represent a more normalized problem-free environment at this point? And is that a good annualized rate to kind of think about going beyond those two quarters?

I would say, you know, like we talked about, it's hard to, we're getting first half, second half, but, you know, what our guidance would imply that we see the improvement, especially what we've been talking about recently in the last couple of earnings calls on the multi-sourcing that Rod even highlighted today, that some of these problematic key components, you know, we have internal plans in place to multi-source, so, you know, exiting the second quarter, entering the third, we'll see improved throughput, as well as anticipated chassis supply, picking up. We do have good visibility on the commercial side, as we've talked about, into Q2 with those chassis. So, you know, from a progression perspective, we'd probably be more normalized in a fourth quarter rate versus not fully realized in Q3, is sort of the way I would project it, with a ramp flowing, our typical ramp, Q1 through Q4, with Q1 really being down by what we highlighted on the, in recreation, as you know, that high-end... RVs that we have use that luxury van, so those are margin accreted to that segment. So those pushing from Q1 to Q2 will have a little shift there, but Q3 and Q4 will normalize as we exit the year.

Okay, great. And then turning to recreation, you had noted that dealer inventories are 50% below pre-pandemic levels. Could you comment on the desire of dealerships to replenish their inventories at this point with interest rates a bit higher and just you know in general consumers open to buying a six-figure car sight unseen with an online order it seems like how necessary our inventories at this point and their desire to come all the way back to what we saw back in 2019

Yeah, we continue, like Rod mentioned, our products that we're offering to the market, we continue to see our products not staying on the floor that long. We did see a drop in retail sell-throughs here, but at the same time, we continue to see good throughput on the dealer lots. And as we talked about before, in the recreation space, the dealers will carry what sells and what moves the quickest, right? So they don't have to incur their flooring costs. So we continue to see our products move through the channel versus the orders dropping off in the reduced likelihood of them carrying the units on the lots. Yeah, I just would add to that. We've been very cautious and conscious, and we talked about well before this peak in the RV of managing our throughput. So we didn't over- replenish inventories so we can get sell-through and get a good pull on demand. So a lot of our units are still retail sold as they come through. That percentage has dropped a bit, but we're still very conscious of working with our dealers around making sure units are turning and they're not stale on the lots so we get a better dealer pull from that.

Okay. Thanks so much. The colleagues appreciate it. Happy holidays.

All right. Thanks, Mike. Our next question is from Jerry Rivage with Goldman Sachs. Please proceed.

Hi, Jerry.

Jerry, check and see if your line is muted.

Yeah, I apologize. This far into earnings season, I should know where the mute button is. Sorry about that. Good morning and happy almost holidays, everyone. I'm wondering if we just talk about the 23 EBITDA guidance. Nice to see the growth versus 22. Can we just talk about it at the segment level, you know, how much of that growth is anticipated in RV versus the sequential improvement in fire and emergency and commercial that you spoke to earlier on the call? Can we just talk about by segment the growth drivers, 23 versus 22?

Yeah, so I think, you know, from an overall segment perspective, you know, we'd be looking at, as we talk about the throughput in our F&E side, you know, getting into that, you know, coming off of where we ended up, you know, relatively flat 2 to 2.5 to more into the 30 to 35 range for next year. And then, you know, commercial, you know, being in that 20 to 30 range, more of a normalized between 21 and 22 range. range and then some downward pressure on recreation related to the mix that we talked about right that having more of the totals as you know we've extended our reach into the east so we'll be selling more totals and eat through some of that backlog so the mix will have a downward pressure on recreation but we'd be more in that 95 to 100 million sort of range for recreation for those three segments to get you to where the full year number is with some choppiness as we talked about in Q1 and Q2 across those segments.

Super. And then, you know, can we just talk about recreation? I mean, you folks have done an outstanding job of expanding margins in that line of business. You know, obviously we're going to give a little bit back with mix, as you alluded to, but how do you think about the full cycle of range of margins for the business as it stands today, you know, what would you view as trough and peak as you run a range of scenarios of what volumes might look like given all the improvements you've made in RV?

Yeah, with the mix, Jerry, we're still confident that we're in that 10% range. So, you know, we've always said, you know, class A's can dip into little single digits, and there was a a real trough, but ultimately with the mix we have with the Bs and Cs exposure, as well as what we've done on the total side and improving that business as we do that, we're still, based on the guide we're given today, we're still in that 10 to 10.5% range for the year, but I guess you could say we're probably in that seven, a trough margin's probably in that seven with the mix that we have when you mix in the As and totals against our Bs and Cs.

Got it. Appreciate the discussion. Thank you. Thank you.

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

Good morning. Just two questions. One, if deflation starts to materialize, where do you think you can continue to have the most pricing power? And then my second question, understanding you have a strong backlog with recreational, But just given concerns of a consumer recession, this business has been driving the majority of your EBITDA growth. Mix of EPS from our emergency resources just relying on recreational. Thank you.

Yeah, I think on the recreation side, like we highlighted there, Jamie, previously, you know, I think we're in a different position than some of our competitors like Rod talked about. We didn't get ahead of ourselves in and stopping some of the dealer channels here. So when you look at our actual inventory, still down 50% from pre-COVID levels, and we can see strong demand for those B's and C's market, as well as we have, as we talked about before, our Lance product in that Tobel's unit, in that Tobel's business is more of a niche product, and it still has a strong draw from the market. So we have not seen a dip from that perspective, and we have actual... our backlog continues to hold up a full year's worth of production. So we're not seeing, even with the minimal cancellations I talked about, we're not seeing a hit to our full year guidance, at least what we're providing here. And then from a price realization perspective, obviously on the recreation side, that will be more maintaining the price that we have and going after inflationary pressures, make sure we get the savings that we deserve as some of the commodity prices come down. And when you talk about price realization, the majority of it is getting to that 21 and 22 pricing that I highlighted in my call, that just given the throughput challenges we have had in F&E, we have a lot of older units that haven't had the pricing that's been injected over the last couple of years. So it's really a throughput story. The first half is really both in commercial and F&E is getting through the units that have age in our backlog so that we get the units that have margin expansion opportunity in them in the second half of the year. That's really the story here. In the first half, it's all around throughput within F&E and commercial and getting some of the older units out of the backlog and then realizing pricing in the back half that's already been sold into the market.

Thank you.

Thank you, Jamie.

As a reminder to star 1 on your telephone keypad if you would like to ask a question. Our next question is from Meg Dobre with Baird. Please proceed.

Thank you. Good morning, and I hope you all managed to get over the colds that you're experiencing here. You know, I'm in the same boat as you are. So sticking with the discussion on recreation, sorry to be the dead horse here, but you know, in a press release, you talked about backlog normalization. And I'm sort of curious as to how you think about that dynamic in fiscal 23. What does normalized backlog look like in recreation? How would you expect backlog to exit the year?

Yeah, we're sort of more in the six to seven month window. You know, that's sort of what we traditionally have seen. As you know, last year we had over a two-year backlog, which was not normalized. So we're talking about getting back to the levels that we expect. You know, so we'll have less bumping products. We'll be eating through the backlog. And as you know, in this business, we do have new model years. So some items, like I highlighted in my discussion, It's orders that are placed on 22 that will be converted to 23 models. So there's always an ever-changing backlog dynamic there. But we are seeing reorder rates on the 23s and some of the things that Rob highlighted with the awards that we won at the open house. So we are very happy with those. So that's more of the six- to seven-month sort of window that we're talking about here on those versus the two years down to more of a one year that we're experiencing now.

Understood because you know, the, where I'm going with this, I'm trying to get a sense for, um, where underlying market demand really is for your product. Uh, I recognize that you have backlog, right? But if, if we're kind of thinking about the order run rate and how that should inform us into 24, um, I mean, if you're, if your backlog is coming down to the extent that you're talking about in fiscal 23, should investors be thinking that revenues are going to be down in 24? or do you think 24 can actually be a growth year for this business?

Yeah, well, you know, we're not actually not giving 24 guidance, but, you know, we know we've had elevated backlogs, so it's really getting that business back to a normalized level, which we're very comfortable in the performance. And as we've been talking about the last three years here, two and a half years, is we're really managing business for margin expansion and, you know, doing the work that we've done here. So even at a lower especially as you look at our performance issue in our Class A business, even at lower revenues, we've been able to produce margin expansion. So it's more around holding the margins here in a challenging market as we enter here.

Okay. And then maybe my final question surrounding your 23 guidance, and I appreciated all the color on the moving pieces here. the 35 to 65% split on EBITDA first half versus second half. I mean, if I look at fiscal 22, it was about 40, 60. So arguably speaking, you're a little bit slower in 23 relative to 22 in the way you start the year. So I guess I'm wondering what gives you the comfort or the visibility that you'll be able to achieve that ramp in the back half? Because it sounds like the the timing issue in recreation is really between first and second quarter, not first half, second half. So yeah, any help there would be great.

Yeah, so it's more around the units like we talked about. It's more around throughput and our ability to get these older units out, as I highlighted for Jamie. So it's really a margin discussion on, you know, we'll have the revenue, but these are lower margin units, like I highlighted on the commercial, which we talked about for the last couple earnings calls, as well as on the F&E side, as we convert, especially in our Holden facility, convert the older KME, as well as for our units there, those will have no pricing related to the 21 and 22 increases that were put out there. So it's really a margin discussion of, again, getting the throughput on those units. And we do have truck-by-truck visibility, so we know what we're producing and what the margins are in those trucks. So we feel pretty comfortable that that is the shift that will happen. Obviously, if there was a supply chain challenge that extended beyond 23, it's really beyond the – Q3, or Q2, I should say, into Q3, that would shift a little bit, but we feel comfortable with that, our ability to ramp, as well as, you know, obviously qualifier being making sure we get the chassis that we need to produce, but we do have ramps built into our plan as we continue to see improvements in supply chain, as well as in the chassis supply.

Okay, so it's really driven by fire rather than recreation.

Yeah, fire and commercial, really fire and commercial. Recreation, yeah, to your point, first half, second half, you wouldn't see that sort of jump there. It's really just a Q1 comment. Actually, in Q1 with this recall not being able to ship it, we're expecting to ship those in Q2, as you noted. So it's not a first half, second half challenge. That's more of a normalized revenue in recreation. It's more in the F&E and commercials. that you're going to see a disproportionate first half, second half, based on the items we've highlighted.

All right. Understood. Thank you. Appreciate it. All right.

We have reached the end of our question and answer session. I would like to turn the call back over to Rod Rushing for closing comments.

All right. Thank you. Okay. I appreciate everyone joining us on today's call. While fiscal 2022 presented continued external challenges, we maintained a course of action to deploy the elements of the RevDrive system, targeting multi-sourcing supply, improving our engineering, production planning, and materials management capabilities. We also remained disciplined in our pricing actions across all of our businesses, with price taken to offset inflation and provide margin expansion opportunity. We had just begun to realize the initial round of these price actions. These pricing actions combined with increased throughput From an improved supply chain environment, we believe we'll position us well for improved results as we move through this fiscal year and into our fiscal year 2024. In closing, I'd like to thank our entire team for the efforts throughout the past year and wish everyone a safe and happy holiday season. Thank you for your time today.

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