REVG - NYSE

Greetings, and welcome to the REV Group Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Drew Konop, Vice President, Investor Relations. Thank you, sir. You may begin.

Good morning, and thanks for joining us. Earlier today, we issued our fourth quarter and full year fiscal 2023 results. A copy of the release is available on our website at investors.revgroup.com. Today's call is being webcast and a slide presentation which includes a reconciliation of non-GAAP to GAAP financial measures is available on our website. Please refer now to Slide 2 of that presentation. Our remarks and answers will include forward-looking statements which are subject to risks that could cause actual results to differ from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we'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 year are to our fiscal quarter or fiscal year unless otherwise stated. Joining me on the call today is our President and CEO, Mark Skonieczny. Please turn to Slide 3, and I'll turn the call over to Mark.

Thank you, Drew, and good morning to everyone joining us on today's call. This morning, I'll provide an overview of the year's commercial, operational, and strategic achievements, including full year financial highlights and our consolidated fourth quarter performance. I will then go over the detailed segment financials. First off, I would like to thank our employees for their hard work and dedication over the past year. Their commitment to the initiatives we have enacted to improve operations and our financial performance are apparent in the results we reported earlier today. Throughout the year we delivered year-over-year and sequential improvements that resulted in a six year high and full year adjusted EBITDA, and I want to recognize the individuals in our manufacturing facilities that are getting their job done on a daily basis. Municipal end markets remain robust and we exited the year with a record $4.5 billion backlog driven by strength in the Fire & Emergency segment. Elevated demand for both fire apparatus and ambulance resulted in a quarterly order intake record within fiscal 2023 for each of the fire and the ambulance groups. While demand for units has remained above historic trends for each of these businesses, backlog revenue has also benefited from pricing actions put in place over the past two years. We believe improved execution, higher selling prices, and the reliability of our $3.6 billion F&E backlog, which is largely municipal tax-based, positions us well for 2024. Fiscal 2023 demonstrated the success of pricing actions across the REV portfolio. As we have noted in past calls, the Recreation and Commercial segments were the first to enjoy pricing tailwinds within fiscal 2022 and early into fiscal 2023. The Recreation segment benefited from increased industry pricing, strong market reception of our new product introductions, and a relatively low 2023 model year lot inventory entering the year, which allowed this segment to manage through a challenging market as we exited 2023. In the Commercial segment, limited backlogs for school bus, terminal trucks, and street sweepers emerging from COVID combined with a short production cycle allowed the businesses to realize the benefits of previously enacted price increases within 2023. Improved efficiencies and volume leverage also contributed to strong margin performance in the Commercial and Recreation segments. Within the Fire & Emergency segment, increased production rates and shipments from the ambulance group resulted in improved price realization in fiscal 2023. We expect fire group shipments to begin experiencing similar tailwind in the second half of fiscal 2024. Within the year, we invested in our workforce by implementing gain-sharing programs to an expanding group of businesses, making targeted pay scale adjustments and adding headcounts to support increased production rates at many of our plants. To support the success of these investments in our people, the human resources and local management teams have worked to improve recruiting and expand training programs designed to more effectively onboard workers while minimizing inefficiencies. Managers across the enterprise have shared best practices for developing the required skills and new hires. These efforts contributed to a reduction of voluntary turnover in all segments and a 23% reduction in turnover for the REV Group in total. We will continue these training programs in fiscal 2024 and expect them to provide additional benefits to new hires, current employees and REV bottoms line through an increased labor efficiencies and higher production rates. In fiscal 2023, we improved the conversion of sales to earnings versus 2022 and continued to convert adjusted income to cash with full-year free cash conversion of 116%, the third consecutive year of conversion greater than 100%. We demonstrated a disciplined use of capital by paying down debt in an environment of rising interest rates and economic uncertainty. The result was an improved balance sheet including $81 million of net debt reduction and increased availability in our ABL credit facility. Exiting the year, we had a net debt to trailing 12-month adjusted EBITDA leverage ratio of just 0.8 times, well under our targeted range of 2 times to 2.5 times. Although debt reduction remains a primary use of cash, we continue to look at organic and inorganic opportunities and review our portfolio of existing businesses to ensure that they meet our long-term financial objectives. Now turning to Slide 4. Full year consolidated net sales increased $306 million, or 13% versus fiscal 2022. The increase was primarily the result of increased sales within the F&E and Commercial segments, partially offset by decreased sales within the Recreation segment. The increase in F&E segment sales was primarily due to increased shipments of fire apparatus and ambulance, a favorable mix of ambulance units, and price realization partially offset by an unfavorable mix of fire apparatus. The increase in Commercial segment sales were primarily as a result of increased production of school buses, terminal trucks, and street sweepers and pricing actions, partially offset by fewer shipments and an unfavorable mix of municipal transit buses. The decrease in Recreation segment sales was a result of fewer unit shipments, an unfavorable mix of gas units that carried a lower selling price, and discounting in certain categories, partially offset by price realization. Full year consolidated adjusted EBITDA increased $52 million or 49% year-over-year. The increase in adjusted EBITDA was primarily the result of increased contributions from the F&E and Commercial segments, partially offset by lower contribution from the Recreation segment. The increase in F&E segment EBITDA was primarily due to higher unit volume, a favorable mix of ambulance units, and price realization, partially offset by an unfavorable mix of fire units, lingering inefficiencies related to the relocation of KME branded manufacturing and inflationary pressures. The increase in the Commercial segment EBITDA was primarily due to increased shipments of school buses, terminal trucks, and street sweepers, and price realization, partially offset by an unfavorable mix of municipal transit buses and inflationary pressures. The decrease in Recreation segment EBITDA was related to fewer unit shipments and an unfavorable mix of gas units, increased discounting and inflationary pressures, partially offset by price realization. Turning to Slide 5. I will provide fourth quarter highlights and then move on to detailed segment financials. Throughout the year, we implemented programs designed to increase throughput and improve manufacturing efficiencies across the organization. Within the quarter, the benefits from these programs were most significantly demonstrated in the F&E segment as it delivered fourth quarter sales that were 34% higher than the prior year. Year-over-year, the fire group increased net sales by 28% and unit shipments of fire apparatus reached a 2.5-year high by increasing 21%. Ambulance group net sales increased 46% and unit shipments increased 33% versus the prior year remaining at a level near the third quarter three-year high. Commercially, our businesses were actively engaged with their customers, dealers, and industry groups. The REV fire group demonstrated its commitment to the first responder community by hosting the 27th Annual Fire Truck Training Conference, the largest and most in-depth combined training and testing event in the nation. FTTC provided training to approximately 400 first responders, driver operators, technicians, equipment manufacturers, dealers, and service center representatives through 50 individual courses over four days. Attendees met with suppliers one-on-one to address specific troubleshooting issues and learn the latest maintenance tips and techniques. In September, the REV ambulance group showcased two highly customized critical care transport ambulance at the EMS World, a leading education event for emergency service providers worldwide. Critical care transport is considered the highest level of patient care for most critically injured or ill patients. The showcased AEV brand ambulance were designed to accommodate the extra equipment required when transporting patients in critical condition are an example of the customization capabilities of REV's ambulance brands to fulfill any requirement. Finally, I am pleased to announce that Steve

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Mig Dobre with Baird. Please proceed with your question.

Morning, Mig.

Thank you for taking my question. Yeah. Good morning. I guess my first question, in Fire & Emergency, I appreciate the context on how you're framing 2024, but as I understood it, you're looking at mid-single digit unit production growth, maybe low-double digit revenue growth. I guess that implies somewhere in the mid-single digit pricing year-over-year that you're recognizing. So maybe can you confirm that? And I'm sort of curious as you're sort of looking at what's flowing out of your backlog because you have quite a large backlog that's built up. Are we to expect that pricing will then further accelerate or become a further tailwind as we think about fiscal '25 relative to '24? Thank you.

Yeah. I think in my prepared remarks that -- you did the math correctly there, Mig. So you're correct, that is -- I will confirm that the pricing, that is the mid-single-digits like you talk about there, mid- to high-single digits. And specifically in the '25 when you talk about the back half of '24, as I said in my prepared remarks is when fire will start realizing the pricing that we have seen come through an ambulance and they've been quicker to execute their backlog. So we would expect similar type of increases as we exit '24 into '25.

Great. And from a capacity standpoint, when you're kind of looking at both fire and ambulance, where are you now? Are you able to further increase production volume beyond fiscal '24 or will that require incremental investment of any sort?

No, I think we can. We've done a lot of work as we talked about throughout the year in increasing our throughput in the existing facilities and again, a lot of our locations are 410, so we have the ability to flex beyond that. So we feel good right now what we're doing from a production cadence and the ramp plans we have in '24 and then exiting obviously '24 into '25.

I see. Your comment on incremental margins here 35% to 40%. It sounds like you're getting that without maybe the full tailwind from pricing in fiscal '24. What's the right way to think about incremental margins longer term if you would here as we think about '25 or even beyond that?

Yeah. I don't want to give anything there, but obviously, we would want to continue to meet that 15%, you know, incrementals. But with the pricing still kicking in, once we see the execution at '24 on our backlog, then we'll be able to give a better view on -- into '25. So I would just say for '24, you know, it includes also operating improvements as we talked about in our Holden facility, which we've talked about the last couple of quarters, right? Then flushing out in the KME units and getting more of a production cadence there. So that's where you're seeing those heavy incrementals as well as improvement in that facility as well.

Sure. Then last question for me. The balance sheet, as you pointed out, you made big progress in delevering your sub one-time net debt to EBITDA, and obviously, you're going in the right direction here. So I'm sort of curious, based on your guidance, you're expecting free cash flow to be about $30 million, about $40 million. How do you think about deploying this cash in fiscal '24? Do you think more towards share buybacks, given where your stock is trading in valuation or are you active in the -- in pursuing any sort of M&A deal? Thank you.

Yeah. I would say we’re not active, but we’re always looking, like I said in my prepared remarks, we still have a lot of value creation in our four walls. So we are entertaining looking at opportunities, where we’re not active in that process. But obviously, we’ll look at as we always do what’s best for the shareholders and from an overall perspective and there’s a share buyback opportunity, we pursue that as we talked about previously.

All right. Good luck.

Thank you. Thanks, Mig.

Thanks, Mig.

[Operator Instructions] Our next question comes from the line of Mike Shlisky with D.A. Davidson. Please proceed with your question.

Yes. Hello. Good morning and thanks for taking my questions.

Hi, Mike.

Hey, guys. I want to touch first on the Recreation segment. Obviously, there's been some downside in the last couple of quarters here. Things as still be challenged. But do you think you might be able to end fiscal 2024 on a positive note, recent easier comps or just a lot of the issues that are facing this segment might eventually flush through by then or do you think it'll be for essentially the entire year in the next fiscal year here?

Well, I think I can see the first half of the year, which we talked about in prior March was we're still a little bit of tailwind from the industry and then the back half, obviously has a slower than we've been talking about. So as you exit '24, I think we'd get more normalized than what we saw in '23, '20, the comps are more difficult in the first half of the year. And I think we'll be really -- and we judge that coming out of January here in our Tampa show, which is the largest REV show in the U.S. So we'll be able to see what the consumer and dealer appetite is coming out of Q1 here. So I think we'll have a better view exiting Q1 than we currently do in the market right now.

Okay. Great. I also wanted to follow up on some of your comments about street sweepers. It seems like elsewhere, they haven't been calling out too many challenges in the street sweeper business, given infrastructure bill tailwind and just generally positive government spending trends. I'm curious if you can give us more details on what you're seeing there in a certain part of the country, a certain size, sweeper, et cetera, that might be reasons why some reason your segments just now working right there.

Yeah. I think at a more of it is the utilization. So like we talked about, we sell a lot of rental houses and what they've seen is a drop in utilization in the dealers that we use as well as the operator. So again, it's one that we continue to follow. I think we are seeing increased quote activity, but we just haven't seen the improvement from an order fulfillment perspective. So I think that's a wait and see as well as we exit the season here into the winter. So I think what we're seeing here is more of a normalization of that business coming off a historic high in '23 and the fact that we'll get back to where we used to be. We're building stock within the winter units and then as spring kicks off, we start seeing the order intake pick up. So I think what we're seeing overall is the normalization in street sweeper and our truck business, where we'll see a wall here in Q1, and then it will pick up as the shows kick-off in the spring time of the following year, which is the historic pattern at was that business previous to COVID.

Outstanding. Maybe just one last one for me. On the Type A school buses, I was wondering if you could give us an update on the EV products, how that’s been taking off and order intake for that particular area. Thank you.

Yeah. So I think for the school bus business, we’re seeing relatively low intake. I think we’re meeting the requirements. It’s still less than 100 when you look at our total Collins business that produces though. So it’s not -- those are accretive those buses, but it’s not a main driver on the results of our school bus business.

Okay. Thanks so much. I’ll pass the line.

All right. Thanks, Mike.

Thank you. Mr. Skonieczny, we have no further questions at this time. I would like to turn the floor back over to you for closing comments.

Yes. Thank you, operator. So in closing, I would like to thank our entire team for their efforts throughout the past year, and I wish everyone on the call a safe and happy holiday season. So thank you again for joining us today.