REV Group, Inc. (NYSE:REVG) Q4 2022 Earnings Call Transcript

REV Group, Inc. (NYSE:REVG) Q4 2022 Earnings Call Transcript December 14, 2022

REV Group, Inc. beats earnings expectations. Reported EPS is $0.28, expectations were $0.25.

Operator: 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. Please note this conference is being recorded. I will now turn the conference over to Drew Konop, Vice President of Investor Relations. Thank you. You may begin.

Drew Konop: 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 Brookfield, 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.revgroup.com. Today’s call is being webcast and a slide presentation which includes a reconciliation of non-GAAP to GAAP financial measures is also 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.

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These risks include, among others, matters that we’ve described in our Form 8-K filed with the SEC earlier today and other filings that we make with the SEC. We disclaim any obligation to update these forward-looking statements which may not be updated until our next quarterly earnings conference call if at all. All references on this call to a quarter or a year are to our fiscal quarter and fiscal year unless otherwise stated. Joining me on the call today are our President and CEO, Rod Rushing, as well as our CFO, Mark Skonieczny. Please turn now to slide three, and I’ll turn the call over to Rod.

Rod Rushing: 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 strategic agenda that we put forth during our Investor Day presentation in April 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 opportunities to simplify and commonize the design of our products and improve our designs for manufacturing, while maintaining the brand identity and differentiation that our customers value and expect.

In the past 12-months, the REV Fire Group consolidation of fire apparatus businesses as long as the 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 subassemblies and in addition having centers of excellence for subassembly production. We will do this while retaining differentiation of our brands and our customer’s ability to customize. We expect a portion of the FY ’23 fire bookings will benefit from the standardized design with continued momentum into 2024.

Within the commercial segment, our ENC 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 users’ 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 EBITDA 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 broad screen or black certification — lean certification.

Together, these teams will build 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 engineering capabilities by engaging offshore resources to support our internal teams. Within purchasing, we are finalizing qualification for multisource 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 approving the engineering documents that we present to our manufacturing floor. The completeness and accuracy of our bills and materials has been another direct issue in the past, 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 to build 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, Type A — 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 voice of the customer and supported by partners and suppliers that offer leading-edge technology. They demonstrate our commitment to leading in 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. Fiscal year 2022 was challenged — was a challenged operating environment with the continuation of external headwinds we faced in 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 an anticipated deliveries and the 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 material side, we did experience dual supply chain improvement as we exited the year. However, the shortages of key components have continued and in some cases, they’re constrained as we entered the fiscal first quarter of 2023.

An example of this is the leading HVAC provider Group in commercial segment ceased operations in the fourth quarter and we are currently managing through this transition with a new supplier for HVAC requirements. Finally, like many manufacturing companies, we’ve experienced the impacts of the constrained labor market, we built specialized and highly customized vehicles and scale that limits the opportunity for automation. Availability of the workers and the times 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 products mentioned earlier is also expected to help our business improve efficiency and reduce the labor required per unit to complete the vehicles.

Despite the challenges noted, we exit fiscal 2022 with a record 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 full-year free cash flow conversion of 136%. We returned a total of $82 million of cash to our shareholders in the form of dividend and share repurchases and exited the year with a strong financial position. Total liquidity under our ABL credit facility was $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 for the quarter. Previously, I shared that our ENC municipal bus business announced the development of the next generation zero emission products, the Axess battery electric bus and the Axess hydrogen fuel cell electric bus.

ENC announced its first order of products from the Dallas Fort Worth International Airport. BMW ordered four active EVO battery electric buses along with 22 Axess (ph) powered buses. The new fleet of buses is expected to be delivered to the airport in December of 2023. We believe emission’s free buses will attract significant municipal interest as state, 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 million of grants for low and no emission buses. These are the first awards related to the bipartisan infrastructure they’ll — which provide a total of $5.5 billion over five-years to help state and local government authorities by release zero emission or low emission transit trucks.

In September, we were pleased to see the return of the RV dealer open house at Elkhart with strong new demand and enthusiasm. REV 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 in fleetwood, Frontier, GTX, Class A, Diesel, Luxury Motorhome that features an industry first dedicated office. Lance Camper debuted it’s Enduro overlaying concept unit, which is designed for off grid camping and the active outdoor sports. The Fleetwood GTX 37RT received several awards, including, RV of the Year and best in the model, while the Enduro 1 RV of the Year and the . Within the fourth quarter, we announced the appointment of Dan DesRochers 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 JB Poindexter, where he led a team of 2,500 and oversaw 14 plants. Over his 30-year career Dan has held leadership with Morgan Olson, General Electric, United States Can Company and Federal Signal, and comes to us with a strong history of operation performance. I’m very pleased that Dan has joined our team and I look forward to the impact he will have improving 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 of higher sales in commercial recreation segments, partially offset by lower FNE sales related to chassis 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 FNE and in commercial segments. The fourth quarter marks a point where our 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, it’s exiting the fourth quarter, we received a recall notice from an OEM partner that is expected to delay shipments and ship 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 over to Mark for details on our fourth quarter financial performance. Mark?

Mark Skonieczny: Thanks, Rod, and good morning, everyone. Please turn to page six of the slide deck as I move to 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 shipped within the quarter. Within the Fire Group, completions of shipments continued to be impacted by shortages of critical parts such as radiators, wiring harnesses, and axles, as well as lower than expected line rates in our holding facility, which continues to integrate the production of KME and for our branded units.

The result was a 9% decrease in unit shipments versus the fourth quarter of last year. Sequentially, unit sales improved versus the third quarter reaching the highest level of fiscal 2022 with increased shipments from several fire plants. Although below expectations, we did see sequential improvement in shipments from our Holden facility. The Holden team remained focused on balancing feeder lines to increase production levels with recent success of telling its cab & chassis and body lines to be aligned for final assembly. Within the Ambulance Group, we continue to experience unpredictable OEM chassis deliveries framing production planning challenges that resulted a 9% decrease in shipments 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 align component parts supply begins with the expected receipt date on a specific chassis. If the chassis delivery date is delayed or a different model is received, it has a downward impact — downstream impact on the value chain. In addition to the disruption this caused to our component inventory, we have continued to experience material shortages related to supply chain constraints. Despite these challenges, unit completions improved late in the quarter with shipments increasing compared to the third quarter. Turning to EBITDA. F&E segment adjusted EBITDA was $1.9 million in fourth quarter 2022, compared to $10.1 million in fourth quarter 2021. Adjusted EBITDA margin of 0.8% decreased 280 basis points, compared to last year.

The decrease was primarily the result of supply chain disruptions, labor inefficiencies, increased inflationary pressure, and costs related to Hurricane Ian, partially offset by price realization. As we mentioned earlier, production at the Holden facility have 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 segment and consolidated price cost remain positive, but production of aged backlog remains 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 a result of strong unit orders and pricing actions taken over the past year.

Fire apparatus orders were a 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 low single digits as we continue to complete aged units within backlog. The midpoint of guidance anticipates that manufacturing efficiencies 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 the 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 chassis availability. Although school bus shipments were higher than previous year 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 12 consecutive quarter and street sweepers sales increased for the fifth consecutive quarter, each setting a unit sales record.

Municipal transit bus shipments were limited by continued supply chain constraints of key components, primarily wiring harnesses. 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 inefficiencies related to supply chain constraints that impacted school buses and municipal transit bus completions, partially offset by increased contribution from the 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 the chassis constraint that impacts 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 is margin dilutive in the segment. We expect segment margins to trough in the first quarter of fiscal 2023 and 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 the resourcing the HVAC equipment supplier mentioned earlier is expect to alleviate the supply chain headwinds within the second quarter benefiting line rates in all businesses in the commercial segment. Turning to Slide 8. Recreation segment sales of $260 million were up 19% versus last year’s quarter. Increased sales versus the prior year were primarily results of increased shipments of Class B and Class C units and pricing actions, partially offsetting the increase in lower sales in towable units related to supply chain and labor constraints. Our plan to maintain the regular production schedule within the quarter as dealer inventories on our brands remain approximately 50% below pre-COVID levels exiting the year.

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Recreation segment adjusted EBITDA of $35.3 million was an increase of 13.6% versus the prior year. The increase in EBITDA was primarily results of price realization, volume leverage, and favorable mix, partially offset by material inflation and labor inefficiencies in the towable business. Segment backlog of $1.1 billion, decreased 9% versus the prior year. The decrease was primarily due to continued production against backlog and lower orders across product categories. Class B and Class C unit net orders have normalized to pre-COVID levels and backlog through these businesses remain at approximately one-year production. Class A and towable 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 orders and to convert to the following model year of orders.

We do expect recreation segment backlog to decline throughout the year as we maintain production to a more normalized level. As Rod mentioned earlier, the timing of revenue and EBITDA in fiscal €˜23 will be impacted by global recall from a low — luxury van OEM that prevents us from selling units. We do not expect these sales will be lost, but the timing of approximately $40 million 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 the result of decreased sales within the F&E segment, 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 KME production to our Holden facility, partially offset by pricing actions. As a result, full-year F&E net sales decreased 15%, 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 segment limits 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 the result of increased production of school buses, terminal trucks, street sweepers, and pricing actions.

The increase in the Recreation segment sales results from 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 the 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 KME production from our Holden 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 to increased costs related to inefficiencies associated with supply chain constraints and rework needed to complete units.

Full-year Recreation segment margin of 11.6% was a record and benefited from pricing actions and higher mix of diesel units for certain categories and opportunities to batch-build units to fulfill elevated demand. We do not expect to repeat this margin performance in 2023. The contribution from towable and gas units increases the opportunity for batch building decreases. Turning to slide 10. Trade working capital on October 31 was $348 million, a decrease of $20 million, compared to $368 million at the end of fiscal 2021. The decrease was primarily the result of increased accounts payable, customer advances, partially offset by an increase in inventory. The increased inventory balance includes an increase of $37 million in the 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 in 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 Rod mentioned earlier, we returned a total of $82.4 million of cash to shareholders. Net debt as of October 31 was $209.6 million, including $20.4 million of cash on hand. We declared a quarterly cash dividend of $0.05 per share, payable January 13 to shareholders of record on December 30. At quarter end, the company maintained ample liquidity with 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 2 times to 2.5 times.

Turning to slide 11. Today, we are providing full-year guidance which reflects a range of continued uncertainty surrounding chassis business building, key components supply, and our expectation for increased inflationary pressure that has impacted a portion of units in the backlog, adequate earnings in the first half of fiscal 2023. Today’s topline guidance of $2.3 billion to $2.5 billion or 3% growth at the midpoint. Adjusted EBITDA guidance is $110 million to $130 million, an increase of 14% at the midpoint. Given the seasonably soft first quarter lingering key components shortages and the stop-ship recall of luxury van chassis, we expect the first quarter to be the trough for revenue and adjusted EBITDA margin with sequential improvement throughout the year.

We expect first half consolidated revenue to be approximately 45% for 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 million to $55 million. Adjusted net income is expected to be $42 million to $60 million and net income $28 million to $47 million. Full-year capital expenditure is estimated to be in the range of $30 million to $35 million, which includes carryover projects that were initiated in fiscal 2022. Maintenance CapEx remains in the range of $15 million 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 million to $27 million is an increase, compared to the recent run rate that was resolved in 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.

Q&A Session

Operator: Thank you. Our first question is from Mike Shlisky with D.A. Davidson, please proceed.

Mike Shlisky: Yes, good morning and thank you for taking my questions. I’ll start that with your last comments there, Mark. Just wanted to get some commentary on the free cash flow outlook for the year. I see, EBITDA up the taxes, pointed to higher interest costs, a few million higher than the prior year, perhaps mentioned my own question here, 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 you to believe there will be a slightly down year for free cash flow?

Mark Skonieczny: I think a couple of components, Mike, obviously, we’re still managing through our inventory. We have the opportunities to reduce inventory, but as we — as our backlog continues to flow in the F&E business as we’ve discussed before, we will see an outward fall 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 — will be larger than our actual reduction that we are able to get in inventory. So that’s really the main driver of that including the items you talked about, the interest expense that is an increase, obviously, $10 million year-over-year as well.

Michael Shlisky: Okay, great. And I also want to talk on the same slide, just some color on your cadence about how earnings is 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 still got some lingering 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 like a good annualized rate to kind of think about going beyond those two quarters?

Mark Skonieczny: I would say, like we talked about, we’re good in 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, and the multi-sourcing that Rod even highlighted today that some of these problematic key components, we have internal plans in place to multisource, so 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, from a progression perspective, we probably be more normalized in fourth quarter rate versus not yet fully realized in Q3.

Certainly, I would project with a ramp following, a typical ramp in Q1 through Q4, with Q1 really being down by what we highlighted in the recreation, as you know that high-end RVs that we have used that luxury van, so those are margin accretive to that segment. So those pushing from Q1 and Q2 will have a little shift there, but Q3 and Q4 will normalize as we exit the year.

Michael Shlisky: 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, in general, consumers open to buying a six figured car, a sight unseen with an online order, it seems like how necessary are inventories at this point and their desire to come all the way back to what we saw back in 2019.

Mark Skonieczny: We continued, like Rod mentioned, our products that we’re offering to the market, we continue to see our products not staying on 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’ve talked about before in the Recreation space, the dealers will carry what sells and what moves as quick as rightfully OEMs incur the flooring cost, 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 lot.

Rod Rushing: Yes, I just would add to that, we’ve been very cautious and conscious when we talk about well before this peak in the RV of managing our throughput. So we did overfund and replenish inventory, so we can get sell-through and get a good pull in advance. So a lot of our units are still retail sold as they come through and that percentage has dropped a bit, but we’re still very consciously working with our dealers around making sure it’s returning and did not stay on the loss, so we get a better dealer pull for that.

Michael Shlisky: Okay, thanks so much. The color is appreciated. Happy holidays.

Mark Skonieczny: Thanks, Mike.

Operator: Our next question is from Jerry Revich with Goldman Sachs, please proceed.

Rod Rushing: Hi, Jerry.

Operator: Jerry, check and see if your line is muted.

Jerry Revich: Yes, I apologize, this far into the earnings season, I should know where the mute button is, sorry about that. Good morning and happy almost holidays, everyone. I’m wondering if you just talk about €˜23 EBITDA guidance, nice to see the growth versus ’22, can we just talk about it at the segment level, 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?

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

Jerry Revich: Super. And then, can we just talk about Recreation, I mean, you folks have done an outstanding job of expanding margins in that line of business. Obviously, we’re going to give a little bit backward mix as you alluded to, but how do you think about the full cycle range of margins for the business as it stands today, 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?

Rod Rushing: Yes, with the mixture, we’re still confident that we’re in that 10% range, so we’ve always said, Class A can dip in the low single digits since there was 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 towable side and improving that business, as we do that, we’re still — based on the guide we’ve 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 7% trough margins following the mix that we have when you mix in the As and towables against our Bs and Cs.

Jerry Revich: Got it. I appreciate the discussion. Thank you.

Rod Rushing: Yes. Thank you.

Operator: Our next question is from Jamie Cook with Credit Suisse, please proceed.

Jamie Cook: 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 Fire and Emergency or just relying on Recreational? Thank you.

Mark Skonieczny: Yes, I think on the Recreation side, like we highlighted, Jamie, previously, I think we’re in a different position than some of our competitors like Rod talked about that and we didn’t get ahead of ourselves in stopping some of the dealer channels here. So when you look at our actual inventory, it’s still down 50% from our pre — from pre-COVID levels and we continue to see strong demand for those Bs and Cs market, as well as we have — as we’ve talked about for our REV’s product and the towables unit, and the towables’ 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. So — and then from a price realization perspective, obviously on the Recreation side, that will be more maintaining the price that we have going after inflationary cost to make sure we get the savings that we deserve as some of the commodity prices come down. And when you talk about price realization, 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, it’s getting through the units that have aged in our backlog so that we get the units that have margin expansion opportunity 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.

Jamie Cook: Thank you.

Mark Skonieczny: Thank you, Jamie.

Operator: Our next question is from Mig Dobre with Baird, please proceed.

Mig Dobre: Thank you. Good morning, and I hope you all managed to get over the cold that you are even I’m in the same boat as you are. So sticking with the discussion on Recreation, sorry to be the dead horse here, but in the 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 is normalized backlog look like in Recreation, how would you expect backlog to exit the year?

Mark Skonieczny: Yes, so it’s sort of more in the six to seven-month window, that’s sort of what we traditionally have seen, as you know like we’re over two-year backlog, which was not normalized, so we’re talking about getting back to the levels that we expect, so we’ll have less booking, but we’ll be aiding through the backlog, and as you know, in this business, we do have new model year. So some items like I highlighted in my discussion, if orders are replaced in €˜22, that’ll be converted to €˜23 model, so there’s always the ever-changing backlog dynamic there, but we are seeing reorder rates on the €˜23 and some of the things that Rod highlighted with the awards that we won at the open house, so we are very happy with those. So it’s more of a 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.

Mig Dobre: Understood. Because, where I’m going with this, I’m trying to get a sense for where underlying market demand really is for your product. I recognize that you have backlog, right, but if we’re kind of thinking about the order run rate and how that should inform us into €˜24, I mean, if your backlog is coming down to the extent that you are 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?

Mark Skonieczny: Yes, well, I don’t think I have given €˜24 guidance, but we know we’ve elevated backlog. 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 this for the last 3 years to 2.5 years is we’re really managing the business for margin expansion and doing the work that we’ve done here. So even at a lower revenue, especially as we 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 about holding the margins here in a challenging market as we enter here, so.

Mig Dobre: Okay. And then maybe my final question, surrounding your €˜23 guidance and I appreciate it 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 and 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 timing issue in Recreation is really between first and second quarter, not first half or second half, so any help there would be great?

Mark Skonieczny: Yes, so it’s more around the units like we talked about around throughput and our ability to get these older units out, as I highlighted for Jamie, so it’s really a margin discussion and we’ll have the revenue, but these are at lower margin units like I highlighted on the commercial, which we’ve talked about in the last couple earnings calls, as well as on the F&E side as we convert, especially in our Holden facility could be — convert the older KME, as well as for our units there, those will have no pricing related to the €˜21 and €˜22 increases that we have put out there. So it’s really a margin discussion now, 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 — beyond Q3 or Q2 I should say, into Q3, that would shift a little bit, but we feel comfortable about our ability to ramp as well as through obviously qualifier 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.

Mig Dobre: Okay. So it’s really driven by Fire rather than Recreation?

Mark Skonieczny: Yes, Fire and Commercial, really Fire and Commercial. Recreation, yes, to your point, first half, second half, you wouldn’t see that sort of jump there. It’s really just the Q1 comment, actually in Q1, with this recall not being able to ship, but 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 recreation. It’s more in the F&E and Commercial segments as you can see a disproportionate first half, second half based on the items we highlighted.

Mig Dobre: All right, understood. Thank you. Appreciate it.

Mark Skonieczny: All right.

Operator: 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.

Rod Rushing: All right, thank you. Okay, I appreciate everyone joining us on today’s call. While fiscal 2022 presented continued external challenges, we maintain a course of action deploying the elements of the REV Drive System, targeting multi-sourcing supply, improving our engineering and production planning and materials management capabilities. We also remain disciplined in our pricing actions across all of our businesses with price taken to offset inflation and provide margin expansion opportunities. We have just begun to realize initial round of these priced actions. These pricing actions combined with increased throughput from an improved supply chain environment, we believe will position us well for improved results as we move through this fiscal year and in 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.

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