Q4 2021 REV Group Inc Earnings Call
Okay.
Good morning, and welcome to Rev Group incorporated fourth quarter 2021 earnings Conference call.
At this time all 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.
This conference call is being recorded.
I would now like to turn the conference over to your host Mr. Drew thank.
Thank you you may begin.
Alright, Thanks, Rob good morning, and thanks for joining US earlier today, we issued our fourth quarter and full year fiscal 'twenty 'twenty. One results a copy of the release is available on our website at investors Dod Rev Group Dot com.
Today's call is being webcast and a slide presentation, which includes a reconciliation of non-GAAP to GAAP financial measures is available on our website.
Please refer now to slide two of that presentation.
Our remarks and answers will include forward looking statements, which are subject to risks that could cause actual results to differ from those expressed or implied by such forward. Looking statements. These risks include among others matters that we have described in our form 8-K filed with SEC earlier today and other filings we make with the SEC.
We disclaim any obligation to update these forward looking statements, which may not be updated until our next quarterly earnings call. If at all all references on this call to a quarter or year are fiscal quarter or fiscal year, unless otherwise stated.
Joining me on the call today are president and CEO rod rushing as well as our CFO Mark Schenectady. Please.
Please turn now to slide three and I'll turn the call over to Rob. Thank.
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 strategic achievements, including full year financial highlights then present, our consolidated fourth quarter performance I will then turn it over tomorrow for detailed segment financials.
Early in the year, we formally introduced the Rev drive business system defining our commitment to creating capabilities of commercial operational and organizational excellence to achieve value creation for our stakeholders. We've made significant progress throughout the year of building capabilities in each of these areas today's full year results reflect these efforts.
Our commercial actions combined with improved demand positioned us to exit fiscal year 2021, with a record $3 $1 billion backlog over the past year. Our sales teams have strengthened our customer relationships, we've optimized brand and dealer channels, while taking the required and necessary pricing actions.
As a result, we have achieved market share gains in many of our businesses. This year in February we were hosting revs first annual accelerate awarded him, which will recognize our highest performing dealers for fiscal year 2021.
This is an annual event, where we recognize and celebrate the excellent performance of our top dealer partners and encourage healthy competition for attendance at next year's event.
Over the past 18 months municipal budgets have been supported by several rounds of stimulus that includes funds being directed towards health and safety programs directly benefiting our fire and emergency segment within our fire group, we're still waiting for full year industry data, but the first half data shows that we have achieved market share gains.
And the order bookings in the second half were very strong.
Our ambulance group has reported its eighth consecutive quarter of record backlog since the cares Act of 2020 initial industry demand has been increasing.
And we estimate the north American image market could grow by 30% over the historical average wanted to reported for fiscal year 2021.
We have invested in industry advocacy working with a third party resource and government officials to clarify language and federal bills to more clearly identify that the funding is available to municipalities for animals purchases.
We believe our commercial segment is positioned to benefit from the recently passed bipartisan infrastructure bill that authorized $550 million of new spending.
The Bill includes allocations for electrification of buses sports EV charging infrastructure and Collins for modernization of airports transportation airports.
We estimate that over $70 billion of.
These funds are allocated to markets that include our vehicles.
While the type a school bus customers have been slower than large diesel type C. N type D bus is to adopt electric powertrain, we've experienced increased type aid quoting and sales activity within the quarter, we announced the expansion of our partnership with Lightning. He motors to include our type a school bus with a commitment to deliver.
Over 100 electric buses in the next two years.
We expect the public transportation markets to be a primary beneficiary of the $70 billion in infrastructure Bill.
Our E&C transit by business serves municipalities universities and airports.
We recently launched our battery electric bus for this segment to position us to compete for what we believe will be a growing demand for battery electric buses and I'll speak more about this in my prepared comments I had.
Within our specialty group our capacity terminal trucks are critical to moving in shipping shipping containers from the congested ports that we see today and throughout the country as distributions system.
Due to its operating nature of terminal trucks are a prime candidate for electrification and the infrastructure Bill allocate $17 billion for modernization of ports and waterways.
We produced the first North American hydrogen fuel cell electric hybrid truck with an active pilot program that includes two trucks now serving the port of long Beach today.
Separately, our partnership with the Hyster Yale group for the co development of a full battery electric terminal truck and a hydrogen fuel cell term a truck is also progressing very well and we expect the initial launch of a few with a few large retail customers when the within the first half.
Of 2022.
Our operations across 2021 worked in a unstable and challenged environment.
Exciting 2020, our end markets, we're still recovering from demand headwinds related to COVID-19.
School buses had not fully returned to classroom airport travel was limited in the public transportation spending remained challenge.
As we progressed through the first half of fiscal year 2021, we saw a steady improvement in demand and our supply chain was stable and our top and bottom line showed solid improvement.
We posted record first half results during demonstrating Rev drive initiatives being put in place.
And in the third quarter, the global supply chain deteriorated and various Rev business units were put on allocation of components, perhaps the most significant was has tripled down related to semiconductors and the implications. It's had on our OEM chassis partners the ability to deliver and previously committed levels or even at historical levels.
Additionally, there were challenges all components that rely on chips, such as diesel exhaust fuel tanks and other electronic items.
The impacts become more widespread to include other components that were not shipped to bend it such as actuals generators wiring harnesses seats and windows it.
It became very difficult to predict what components will be shorted on supply and as conditions still exist today.
We significantly improved purchasing and supply chain capabilities over the past year under the under the leadership of our supply chain officer, Rob This lasky.
His team has worked to diversify the supply chain accelerate strategies to mitigate the shortages we experienced throughout the past year.
As a result, we were able to breathe procure components and chassis that we would not have been able to acquire in the past.
We also added overseas third party services to source internationally added E auctions, where competitive online bidding and dual sourced a potion of portion of our exposure that was previously sole sourced.
Initiatives had a dual benefit of filling supply gaps and lowering costs during a highly inflationary environment.
Our sourcing and pricing actions allowed us to remain positive price cost throughout the year, but the implications of material shortage to our throughput did more than offset additional productivity gains that we otherwise may have realized during the year.
Despite these challenges we posted year over year adjusted EBITDA margin improvements in each quarter of the year in total we delivered 290 basis points of improved margin versus last year.
Not only not only do we convert sales to earnings but we also converted these earnings to cash with full year free cash flow conversion of 174%.
The quality of earnings allowed us to pay down 120 minded $129 million of net debt in fiscal 2021, placing us in a strong financial position.
Total liquidity under ABL credit facility is now $290 million, which provides significant flexibility and opportunity to pursue our strategic agenda.
We delivered capital allocation philosophy and depth in our Investor day in April involves deployment of capital for inorganic activity shareholder returns of cash in forms of dividends and share repurchase and maintaining appropriate leverage.
Turning to slide four I'd like to discuss the organic investments that we've made in the business in 2021.
In April 2021, we introduced the Rev dry business system and committed to building capabilities that this required.
Earlier I discussed the work that we've undertaken with our supply chain and purchasing since Rob. This laski joined US last December.
We have also been investing in our people to develop our continuous improvement and lean capabilities. Since January of 2021, we have trained nearly 12% of our 7000 employees on the tenants of waste reduction and lean thinking through formal classroom and on job programs. We are standardizing our processes and use technology to improve report.
To gain greater visibility at the center.
Today, we are actively dragging over 700 projects targeted on the elimination of waste and inefficiency to create value. We will continue to invest in advancing our employees capabilities and the number of certified Implementers will continue to grow making continuous improvement mindset part of our culture.
Within the fourth quarter, we announced the appointment of Eric <unk> to answer them as senior Vice President of Engineering and technology. This new role is critical to the achievement of our operational value engineering targets. In addition, Eric will focus on design process and engineering capabilities to deliver product platforming and innovation needed for immediate and long term.
Product simplification.
He also will lead our technology advancement in the areas of the vehicle electrification and data and analytics for our vehicles.
Prior to joining Rev Group, Eric was the global Chief engineer for electric propulsion systems at General General Motors and lead a team responsible for the development of propulsion system for the all electric Hummer S E T and SUV among others. He began his career at Borgwarner and help progressive leadership roles over 20 year period with a focus on global probably.
Strategy Engineering program management within the automotive industry I'm very pleased that Eric has joined our team and look forward to the impact that he will have on advancing our business performance innovation.
There are several recent announcements that we've made in electrification of our products in November our E&C Municipal transit bus business debuted its fully electric bus at the Apta Expo. This is this I mentioned previously in my comments. The buses built on the proven access platform, which has over 20 years of trusted performance.
And as the first battery electric bus in the industry to also feature a 100% zero corrosion steel construction.
Upon completion of Altoona attract testing this bus will be eligible for federal fund funding provided to municipalities and recently increased with within the infrastructure beer Bill.
We also announced.
A firm order for their first North American style fully electric fire truck named vector the city of Mesa, Arizona ordered Vectra from one of our E. One authorized dealers.
But the fully electric fire truck is also available in all brands and all the Rev Group our brands.
Customizable vector.
As the energy industries longest electric pump duration, which allows for hose lines to be.
US we're up to four hours on a single charge. It includes superior battery storage offers a safer lower center of gravity and regenerative break braking.
We've been actively quoting this unit and are excited to have it planned we're showing it to you at the FDIC show this spring.
Early this earlier this week, we announced several agreements that expand the prospects of electrifying ambulance in North America as well as overseas. The agreements include an order for five ambulance from the nations largest private medical transport company.
Medical American medical response.
The burst vehicles for EMR are expected to be completed in April 2022, and will be delivered to five communities in California.
Aim our holds an option to purchase 25 additional electric ambulance under this agreement.
Next time odd Medical Corporation guitars Premier non for profit health care provider is provided is conducting an operational trial of a state of the art zero emissions battery electric type two ambulance.
Finally, our rebel business announced its contract with General services Administration has been amended to include zero emissions battery electric ambulances.
G. S. A is the only sole source, where non tactical vehicles purchased by the federal government agencies in the United States.
Agencies with access to this contract includes the Department of Defense Department of Energy The Veterans Health Administration, The National Park Service and Indian Health Services. The addition of the zero emission ambulances to the GSA contract is well timed with the recent passing of federal infrastructure Bill that contains significant investments in support of electric vehicles.
Turning to slide five fourth quarter consolidated net sales decreased four 3% versus prior year quarter. The decrease primarily the result of lower F&I sales related to chassis and supply chain constraints parts, partially offset by higher sales in commercial and recreation segments.
Adjusted EBITDA increased by $3 $1 million or 80 basis points. The increase was primarily the result of increased sales in recreation segment, and lower corporate expenses, partially offset by lower contribution from Anthony and commercial segments. Despite.
Despite the revenue challenges experienced within the quarter, our consolidated segment performance maintained 17% decremental margin versus the fourth quarter of 2020.
I'll now turn it over to Mark for details on our fourth quarter financial performance Mark.
Thanks, Rod and good morning, everyone. Please turn to page six of the slide deck as I move to a review of our fourth quarter segment results and full year consolidated performance.
Fire and emergency fourth quarter segment sales were 277 million a decrease of 16% compared to the prior year. The decrease in net sales was primarily due to fewer shipments of fire apparatus and ambulance units, partially offset by price realization of trucks shipped within the quarter.
This is apply chain headwinds that we called out in our fiscal third quarter have not improved and in some cases they deteriorated within the fourth quarter. As you may recall, we entered the quarter with over 100 vehicles trapped in work in process due to missing component parts required to complete the vehicle as we acquired the needed components were up.
Quarter plants have needed to pull labor off the regular production line to rework and complete these units prior to delivery what does it become a consistent load a rework has resulted in lower line rates fewer completions and lower sales over the past two quarters. In addition to shortages of components and other material.
Our visibility into chassis supply from our OEM partners remains much shorter than normal due to changing production schedules and plant closures.
Within the quarter, we met fewer vehicles start due to chassis shortages compared to the third quarter, but we have needed to reduce production line rates in vehicle mix to match chassis availability within our ambulance group. We have continued to produce a greater mix of higher content modular units that require more labor hours to complete.
Get them bands. This results in lower ambulance group sales than if we had received a higher mix of bands within.
Within the fire group the demand the damage caused by Hurricane Aida to our holding plan was not significant but lost production days and changing delivery schedules, resulting in approximately 7 million in net sales shifting out of the fourth quarter.
Turning to EBITDA are for knee segment adjusted EBITDA was 10.1 million in the fourth quarter 2021 compared to $14 8 million in the prior year adjusted EBITDA margin of three 6% decreased 90 basis points compared to the prior year quarter. The decrease was primarily the.
All of the supply chain disruptions and labor inefficiencies lower volumes related to hurricane Ida and the return of selling expense related to a large trade show that was not held in 2020, partially offset by price realization within our backlog and favorable mix of the higher content ambulance units mentioned earlier.
Once again the segment mitigated the impacts of inflation in the fourth quarter and remain price cost positive due to commercial activities that drove price realization and supply chain team efforts to reduce costs.
These actions as well as productivity initiatives put in place over the past year limited the segment decremental margin to 9% and 52 million of lower sales.
Early in the fourth quarter, we announced the transition of Tami fire apparatus production from locations in Nasco hone and <unk>.
Pennsylvania in Roanoke, Virginia to other Rev. Buyer group facilities, we did not come to this decision lightly. This business has struggled to reach profitability since its acquisition in 2016, and finding a path to sustained profitability was a focus of our initial strategic portfolio or be on 2020.
Combined losses of these plants has been approximately $3 million per quarter for the past two years. Despite several efforts to improve profitability with structured programs utilizing both internal and external resources.
Ultimately the decision to shift can meet production to other facilities will advance the fire group platforming strategies and the step forward in developing manufacturing theatres of excellence leveraging the Spartan chassis operation acquired in 2020, reducing complexity and driving overall efficiency within the fire group our commit.
<unk> is to preserve the <unk> legacy and can you continue to deliver to our customers and dealer partners. What they have come to expect from Mccamey brand. The shifting production locations better enables us to enhance quality and improve delivery times by leveraging capabilities across the network, we expect the wind down and complete.
<unk> of trucks to remain a headwind until the transition expected completion in April 2022.
The move allows us to rationalize approximately one third of our fire group manufacturing footprint.
Total <unk> backlog was $1 5 billion, an increase of 55% over year over year. The increase in backlog was the result of strong orders over the past year with record orders for both fire apparatus and ambulance units in the quarter.
Fire orders increased 137% versus last year's quarter, while order for ambulance increased 59% against a strong quarter last year you meant municipal budgets remained strong and have been supported by another round of stimulus within the quarter as Ron as Rod mentioned this level of F need demand demonstrates the.
<unk> claim priority placed on our vehicles for the health and safety of local communities.
Turning to slide seven.
Commercial segment sales of $95 million was an increase of three 8% compared to the prior year. The increase was primarily related to higher sales of municipal transit buses terminal trucks and street sweepers, partially offset by lower sales of school buses due to a temporary suspension of production caused by limited chassis availability.
The five week suspension and subsequent production slowed down resulted in approximately $12 million of sales slipping from the fourth quarter and a 51% year over year decline.
Municipal transit bus sales increased 13% versus the prior year and included production against large municipal order, which is expected to be completed in the first fiscal quarter of 2022.
Momentum in our specialty business continued with year over year sales increases of 98% for terminal trucks and 152% for Street Sweepers. This has resulted in a mix shift with specialty group sales contributing 29% of commercial segment sales this year compared to 19% in 2020.
Commercial segment adjusted EBITDA of $5 7 million decreased 11% versus the prior year. The decrease in EBITDA was primarily the result of the lower production volume of school buses, partially offset by higher volumes of municipal transit buses terminal trucks and street sweepers.
Spansion of type a school bus production resulted in approximately $2 5 million of Unabsorbed manufacturing cost. The current school bus chassis availability is allowing our product our operations to run at reduced rates and therefore, we don't expect to incur the same level of Unabsorbed cost we experienced in our fiscal fourth quarter in the near term.
While we have not yet returned to full production.
In regards to chassis allocations from our OEM partners. The current allocation process allows much less planning visibility than in prior periods. Previously we could plan our production upwards of six months out but today's visibility is as short as 30 days our municipal bus business obtained a two year high adjust.
EBITDA margin under new leadership and is it work toward completion of a large municipal order within its backlog, which is expected build out in the first quarter. This may result in a mix of lower priced units, but we are confident that recent margin improvements will continue.
The specialty group continues to demonstrate improved year over year performance banning benefiting from increased sales favorable mix and responsive pricing actions.
<unk> group margins were a two year high and attractive to the segment and accretive to the segment within the quarter after being lower than the group average the prior seven quarters.
Commercial segment backlog at the end of the fourth quarter was 395 million, which reflects strong orders for school buses terminal trucks and street sweepers pent up tight based school bus demand has increased backlog to a record following soft demand as a result of school closures in 2020 and earlier this year.
Typically we expect about three to four months of school bus backlog, but today, we have nearly a year of sales secured at our chassis constrained line rates specialty group backlog increased 408% year over year to reach a third consecutive record level demand for terminal trucks remained strong with robust orders and quoting.
Activity from our customers and warehousing distribution and port operations.
Turning to slide eight.
Recreation segment sales of $218 million were up 12% versus last year's quarter.
<unk> sales versus the prior year were primarily the result of increased unit shipments of class B and class C products and a higher mix of class a units as well as increased pricing and lower discounts across all segment categories.
Partially offsetting the increase was lower units related to supply chain and labor shortages that our class a and towboat location. For example, our class a employee out of plant rates had been approximately 15% due to increases in COVID-19 positive tests and safety protocols many of our supplier.
<unk> have faced similar conditions compounding supply chain shortages as a result, our recreation businesses have had to do offline.
Off line work and anywhere from 70% to 95% of units within the quarter depending on location.
However, despite the challenges recreation segment adjusted EBITDA of $21 7 million was an increase of $1 2 million versus the prior year. The increase in EBIT da was primarily the result of stronger price realization and lower discounts volume leverage and favorable mix, partially offset by <unk>.
Inflation increased freight surcharges and labor inefficiencies due the rework and absenteeism mentioned.
We continued to generate mid teen EBITDA margins, our class B and class eight businesses within 21 within 2021. These businesses have been able to manage their way through chassis and supply chain tightness running at near capacity, which generate significant returns on invested capital the class eight business improved margins 200 and <unk>.
30 basis points year over year, and 30 basis points sequentially. Despite the out of plant rates mentioned earlier.
As we continue to value stream improved the throughput of this business. We are confident that we will obtain our peak to trough profitability targets.
In terms of the segment backlog segment backlog of $1 2 billion increased 129% versus the prior year and is the sixth consecutive record and market conditions remained strong with retail sales for several categories exceeding wholesale shipments despite having less product on the.
Showroom floor dealer inventories are now down an average of 70%, 80% compared to historic levels and reception for our brands has never been stronger.
Within the quarter, we received several new awards and gave us confidence that our businesses will continue to enjoy strong demand.
With frontier and renegade explore where each named RV Pro best New models a year. The frontier also received the RV business Top RV debut award in the Midwest Board passage and Patriot, One class B of the year from RV News magazine.
Turning to slide nine.
Full year consolidated net sales increased four 5% versus fiscal year 2020. The increase was primarily result of increased sales within the <unk> and recreation segments, partially offset by a decrease in the commercial segment. The increase in F&I segment sales was primarily due to higher unit shipments in the first half of fiscal year.
Before the onset of supply chain and chassis shortages as well as a year on year incremental quarter of sales related to the Spartan acquisition the.
The increase in full year sales in the Recreation segment was a result of increased demand and throughput that resulted in record recreation segment sales plus prior year softness related to COVID-19, the decline in commercial segment sales.
It was primarily a result of the prior year sale of the shuttle bus businesses. The production shutdown at our Collins School bus business, partially offset by increased sales in the specialty group full year, adjusted EBITDA increased $74 million or 110% year over year. The increase in EBITDA was primarily a result of improved performance.
<unk> and the <unk> and recreation segments, partially offset by lower contribution from the commercial segment.
During the second quarter update the guidance, we noted the potential headwinds from chassis and component supply disruption as well as incremental inflation pressure in the second half of the year.
Chassis and component supply constraints limited our topline in the second half, but we were able to offset inflation with additional pricing and cost actions to remain positive price cost for the full year. Despite the challenges we faced in the second half of the year, we delivered 72% incremental margin on mid single digit revenue growth.
For the full year fiscal 2021.
Turning to slide 10.
Trade working capital on October 31, 2021 was $368 million, a decrease of $59 million compared to $427 million at the end of fiscal 2020. The decrease was primarily a result of various initiatives. We have put in place over the past year to drive improvement in accounts receivable collections.
Accounts payable terms extensions ordering and management of inventory and expanding our customer deposit program.
Full year cash from operating activities was 158 million a $103 million increase from prior year as a result of higher net income and the trade working capital improvements I. Just mentioned, we spent $11 million on capital expenditures within the fourth quarter and a total of $25 million for the full year, resulting in full year.
Free cash flow of $134 million, which representing cash conversion rate of 174%.
During the quarter, we took a noncash charge of $6 million against net income for the planned exit of our investment in the China joint venture as well as $4 million related to restructuring related costs and impairments of real property related to the <unk> plant transition upon the expected successful completion of.
Try in a transaction, where we will have exited our international businesses within China, and Brazil reduced organizational complexity and generated over $6 $5 million of cash.
Net debt as of October 31 was 201 $202 million, including $13 million of cash on hand during the fourth quarter, we reduced debt by $39 million and for the full year debt reduction was $129 million from the $331 million net debt balance at the end of fiscal year 2020 within the <unk>.
Fourth quarter, we repurchased $3 9 million of shares under our existing share repurchase authorization and returned a total of $10 5 million of cash to shareholders in fiscal year 'twenty 'twenty. One we declared a cash dividend of <unk> <unk> per share payable January 14th to shareholders of record on December 31.
As Rod mentioned at quarter end, the company maintained ample liquidity with approximately $290 million available under the ABL revolving credit facility and our net debt to EBITDA leverage ratio was one four times well below our stated target range of two to two five times the improved balance sheet.
<unk> ample liquidity and $146 million remaining on the existing share repurchase authorization provides flexibility to continued capital allocation activities that are aimed at increasing shareholder value.
Turning to slide 11.
Today, we are providing full year revenue and earnings guidance, which reflects a range of uncertainties surrounding chassis availability and component supply labor markets and our expectation for increased inflationary pressures within fiscal 2020 to today's topline guidance of $2 three to $2 55 billion, which is.
Actually flat at the midpoint as I mentioned in the individual segment kind of commentary line rates at many of our businesses have been lowered over the past two quarters due to limited chassis and component supply.
Approximately $1 2 billion at the midpoint sales are reliant on chassis for new vehicle starts the midpoint of $2 4 billion revenue considers normal first quarter seasonality plus the supply chain pressure that we have experienced in the fourth quarter to continue throughout the first half of fiscal 2022, followed by a relief.
In the second half.
Full year adjusted EBITDA guidance is $125 million to $155 million, which is also approximately flat at the midpoint to our fiscal 'twenty 'twenty. One results as I mentioned earlier, we experienced increased inflationary pressure in the second half of fiscal 'twenty one.
Outlook for 2022 assumes material cost inflation will be nearly double the 2021 rate. We also have made a structural change to wages in certain geographies to attract and retain qualified labor, which is an incremental headwind to our normal annual merit increases these expected headwinds would offset.
<unk> of the planned productivity and procurement savings at Rev drives is anticipated to deliver in 'twenty two.
In fiscal year 'twenty, two however, coupled with the commercial actions we have taken we do expect to remain positive price cost in fiscal 2022.
Given the seasonality seasonally soft first quarter, and we expect the first quarter to be trough revenue and margin with sequential margin improvement in the second quarter at the midpoint supply chain relief anticipates revenue to flow more freely freely in the second half and we would expect additional sequential margin improvement through the third and fourth quarter.
<unk>.
We also plan to benefit from the transition of production of the <unk> brand in the second half within the <unk> segment.
We expect to convert cash at over 90% with free cash flow in the range of $58 million to $80 million. Adjusted net income is expected to be $64 million to $89 million and net income $45 million to $73 million adjusted.
Adjusted net income does include an additional one an additional $7 million to $10 million of restructuring costs related to the transition of <unk> production full year capital expense is estimated to be in the range of $30 million to $35 million, which includes investments in the fire facilities that will receive <unk> production.
As well as growth Capex within our other businesses maintenance Capex remains in the range of $15 million to $20 million per year, and our growth projects have internal payback and the IRR targets that must be met before being approved.
We remain committed to all facets of our capital deployment strategy, which includes a defined leverage target organic investment M&A dividends and share repurchases with that ill turn it to Rob for closing comments. Thank.
Thank you Mark we're excited about the operational improvements that we've demonstrated in fiscal year 2021, and the progress made on building capabilities that provide a path towards our long term targets and market demand remains strong we are optimistic that the supply chain headwinds will ease in the second half of fiscal year 2022, allowing increased throughput against our record.
<unk> I'd like to close with once again thanking our team members for their efforts and contribution to this year.
Without their efforts, we would not be able to make the progress that we did and we're going to continue to invest to make sure. They continue to put us in a position to win and improve and I'd like to thank each of you again for joining our call today with that operator, I'd like to now open it up the call for questions.
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One moment, please while we poll for questions.
Our first question comes from Jerry Revich with Goldman Sachs. Please proceed with your question.
Yes, hi.
Everyone.
Good morning, Good morning, Jay.
Can you talk about.
Supply chain indicators that you're tracking.
So what you're seeing in terms of the number of components that are in short supply today versus three months ago.
If you could help us understand that.
If you will in terms of number of problem components, we're tracking.
Now in any line of sight.
Uh huh.
Based on what you're hearing from the supply base now.
Yes, so I'll just read this is Ron I'll repeat what kind of what Mark said I think that what we're seeing now versus maybe three months ago, which you're asking the question is the same kind of challenge is the same type of challenges there and I mentioned a number of the.
The deep component level type trade challenges, we're facing and everyone is chassis and our line of sight on planning is just much shorter and the delivery against the commitments is much more variable than it has been in the past. So the idea of getting starts is a challenge for us Jerry on chassis, because we're looking at a 30 day playing cycle versus the <unk>.
Six month planning cycle, and that's creating pressure on our businesses and then once you get the chassis start.
Components that I mentioned in the prepared comments.
<unk>.
Actively managing it with our with our purchasing group, but what we saw in our RV business that we're touching 75% to 90%, depending on which business you're in.
At least twice to get to completion, it's not flowing through on a continuous low which is what you want to see in these businesses. So it's continues to be a problem, we do believe though.
As we said in our <unk>.
Comments upfront.
The back half based on what we're getting from suppliers. We think we'll get stabilize theres still work to do to make sure that that happens but.
We do believe in the back half of the year will be in a better position on the component level chassis is obviously something that we're working actively with our Oems because it's really a partnership.
To improve and we have work to do there as well because we've got to get that visibility beyond 30 days, it's hard to do production planning when youre looking at a 30 day window.
Taking a step back you folks have been focused on.
Driving continuous operational improvement.
Strengthening.
She capability can you talk about.
What we're learning coming out of this post COVID-19 experience.
How that impacts.
Thinking about structuring procurement and other processes.
Going forward based on what we're learning in this challenging environment today.
Well I think it's in my mind in many ways proven that that skill set those capabilities, we talked about on day, one that we had.
Develop in this company are really really important in the first half of the year.
Began to see the benefit of that work that we were doing.
In our in our yield.
As we got supply issues.
Right, you start having efficiency and throughput and you've got to make a decision do I do I lower my head count to my line right. When I got customers that need product I've got a bill to finish those units that are sitting on a lot.
I think we talked about in our third quarter comments, we're probably a little over staff right now for our throughput because we have we have so much rework attached to finishing goods that they are short of a components. So I think absent of the work we've done in and lean in Ci and the reductions we've taken and the head count that would manifest itself in a worse result.
But the fact that we have improved and we are still early in that process based on where we're at in terms of the value I think we can get out of it. It has allowed us to offset and maintain some level of maintain or maintain kind of getting to the point. We made in terms of our guidance that we've stated.
I'm glad we did it because having not done it we'd be in worse shape, but.
Right now, it's it's a battle because your line rates don't match your head count because you got rework and you just got to make that balance, but we got to balance the need to finished goods and get them to our customers in a reasonable time frame with the economics of what that yields is and in this environment. It means you probably are carrying a few more people than you need.
Okay and lastly, how are you.
Thinking about your longer term margin targets, clearly, we're going to need a step up off of the 22 run rate any updated thoughts on.
Essentially.
Uh huh.
We worked down significantly in 2023 years, what sounds like needs to happen to hit those targets.
If you could expand on that if you don't mind.
Yes. This is mark Gerry.
When we look at coming out of the second half are entering our second half and the ramp up that we're expecting in Q4.
Sort of like Rod said as we proved our exiting Q2 of this year our ability to do that will get us a run rate in Q4 that we could hold that would generate in that range that we presented in April between the $1 60, and $200 million range from an EBITDA perspective, but we believe if we get everything and we prove we demonstrated that with our Q2 performance.
That we can deliver on those if we have the supply chain.
We need and the labor as well so we believe that exiting Q4, we will provide a runway that will deliver on the 'twenty three targets.
I appreciate the discussion thanks.
Yeah. Thanks Terry.
Due to time constraints, we ask that you. Please limit to one question and one follow up.
Our next question comes from.
With Robert W. Baird. Please proceed with your question.
Thanks, guys and happy holidays, everyone.
Hey, Mike Thanks, Nick.
I guess I'm looking to maybe clarify.
Your your comments or.
Maybe the framework that you're using when you were talking about price cost can you can you sort of be specific in terms of how you were thinking what sort of costs you're thinking about.
When you win.
And about whether or not your price cost positive.
Yes, so when we talk about what we've consider out of our normal inflationary items like merit like I mentioned in my prepared remarks, we're talking about component price increase though inflation on component parts and anything where you're having to do for our market rate adjustments to labor offset by pricing and our purchasing savings.
So we expect our ci savings or operational savings to offset any normal increases within the operation as far as merit increases general insurance, all sorts of things and that our pricing strategies as well as our purchasing savings can offset the inflationary pressures.
Right because.
As I was listening to your prepared remarks.
It sounded to me like you were saying that your price cost positive in the fourth quarter.
Certainly you said that about a fire.
I'm not sure if that was the case with the other two segments and you were talking about being positive price cost in 2022, even though.
Cost inflation is going to be twice as high as what you've seen in 'twenty one.
And you've had some labor cost increases as well so.
I'm not going to make sure that we're all clear here that you're saying that you can cover all those costs and if so.
How are you doing it.
How flexible is your pricing what sort of price increases that we're talking about to be able to offset a kind of headwind.
Alright.
Yes, so as we've talked about before we have gone out with price increases throughout the throughout the year to make sure our backlog and our longer backlog businesses include an inflationary assumption in them and it's really getting through the backlog that's trending through now, but we've been able to offset some of the inflationary pressures with the.
Purchasing savings and its really differs by segment. So on a recreation just like our competitors that value chain, where the suppliers are past nine increases are going right to our dealers and to ultimately to the consumer. So you can view that is fully protected with an inflationary factors. So that's a pass through our commercial.
<unk> business, we have done some work with surcharges as well as some repricing in our backlog to cover that so we have replaced effectively our backlog and then ambulances and fire and we are in the longer backlogs, we have increased surcharge and ambulance and then on the fire business, we've been very effective and we've been very diligent in working with.
Our supply base to make sure that we're not accepting as many increases given the fact that we have a backlog of longer backlog in that business. So we are partnering with our supply base knowing that if we take an increase we can't pass that onto our our customers given the contracts we have so.
That's one of the things that we got a we got to manage but.
I guess that back to my last question here.
This is the case what do you have just described here.
Why wouldn't we be looking at higher margins in fiscal 'twenty two.
The fact that there were.
You know more than a handful of items that I think we're pretty discrete too.
Fiscal 'twenty, one I mean, the hurricane certainly seems good.
Something that hopefully doesn't repeat it might've been.
Items across the segments.
Would it be similar here is.
Is there some sort of factor of conservatism or is this just.
Supply chain is getting frankly, more challenging and you having even lower visibility in the way you are able to kind of frame. This guide that's right. That's right. So it is really a reflection of our two if nothing if you look at our range of guidance doing nothing more than what we did in Q4 and we are seeing heightened challenges in the components like rod.
About.
There. So it's really the fact that we're not going to get the throughput and the efficiencies that we had so we're still going to be challenged here in Q1 and Q2. When you look at the Q2 performance. We had this year and our ability to deliver that you know we have $45 million versus when you look at Q4 here at 31, there was a big step change that will not happen on a year on year base.
<unk> is coming out of our exit rate in Q4, so that sort of challenge we're dealing with and then assuming that that comes back in the Q3 and Q4 run rates. So it's really all around throughput that our ability to get the throughput and the efficiency improvements and we have become more inefficient as rod pointed out.
You know like in the Recreation segment and other solar we're dealing with that and just the uncertainty around component supply and our ability to complete units timely.
Alright, thank you.
Our next question comes from Joel tests with BMO. Please proceed with your question.
Hey, guys How's it going.
Good morning, Joe.
I think we'd beat that price cost pretty hard already and any can you talk a little bit about EV products and and if they are being designed to be more profitable a higher gross margin or hiring incremental margins than your existing product lines and also is there a need to come up.
With a hybrid product line to bridge the gap between you know between the your current makeup in a battery electric.
So on the first thing you know a lot of these or arb.
<unk> cell built prototype build even though we are getting orders and largely because as I kind of laid out in our comments. When you think about long term contribution margins than what you had more of an assembly.
The profit margin.
Honestly want to expect it will get better margins, but I think that that's going to play out over time based on the cost base in the supply chain and what the value creation is you could argue that margins.
Sure market for changing the powertrain won't change.
In market margin opportunity that once things stabilize maturity competition gets in place.
Thanks to get back, but I think there is an early an early entrant opportunity to reset the value equation on on these and get better margin and the question is how long can you hold that over time.
The second question you asked around hybrids.
Broadly.
The interest is a lot is primarily around all electric options in and fuel cell uncertainty in certain spaces, but.
But the fire truck.
We launched it actually it's a full electric it's got a DC motor on it it's got DC regeneration in it but it does have a generated a backup because it's an emergency vehicle. So it can recharge the fuel cells of the battery cells, if we need to if it goes beyond ever gets closer to it.
A charge down so.
That's not like a hybrid say, probably the way youre thinking about it but in some of these emergency vehicles, there will be probably alternatives to.
Keep them active and do.
Backup discharge the fuel cell, but that fire truck.
A full electric vehicle and then it's drivetrain as Barry It's all electric and we haven't generated backup on it.
So it would be out.
But broadly but abroad.
<unk>.
What we're seeing is interest and full electric at this point.
Most of our efforts are really joined developments with customers, we're not kind of working in a vacuum thinking about what we want.
We're trying to match the application for the use case and working the customer to fit a design that's going to meet what they want that we can broaden the apply to a broader market. So its commercial ready when we sell it versus getting a prototype and talking about we haven't E vehicles.
One really wants.
Okay, let's go to the dividend.
Yes.
And then just zeroing in on 2022 can you give us a little sense about first quarter below breakeven given the disruptions and the seasonality and maybe a little bit of a percentage of first half second half of earnings. Thank you.
Yes, sure so first half second half at the.
At the midpoint is probably going to be more what we traditionally would be the 40 60 within the range that we're talking about here right through that about 40, 60 mix, but not about a breakeven obviously, we're going to be profitable in Q1. So hopefully you didn't take that from our comments here Joel.
And again its seasonal if you look at that so we're expecting a normal seasonality coming out of Q4 down to Q1, but not anywhere near a breakeven or loss position.
Okay perfect. Thank you so much for clarifying I'll give it to somebody else.
Our next question is from Jamie.
Credit Suisse. Please proceed with your question.
Hi, Good morning, I guess I just wanted you to elaborate on some of the market share gains that you alluded to in fire and emergency I'm, just what's driving the market shares is it product is it better availability, although it sounds like everyones, having availability issues.
You know what regions. These are specific to our products and sort of how sustainable do you think these market share gains are and if you could quantify them. Thank you.
I'll start with the last question.
Our expectation is not as sustainable as it will continue to grow market share because of the investments we're going to make in products and the work that we're doing around our brands in our plants to improve quality and once we get through these material issues throughput ultimately.
Having industry, leading lead times is really important in these businesses and our my view that message I send our team is that I know, we have challenges now, but having the best cost quality and delivery and the best lead times. In these industries is really really important and we're not there yet we have opportunity in terms of what's driving one of the things.
I would give a lot of credit to both the <unk> and our leaders for those two businesses the customer intimacy and working with our dealers simplifying our brand simplifying our dealer footprint theres been a lot of work done in ambulance to kind of clean up some of the the brand channel issues that we've had and I think thats brought renewed enthusiasm around our dealer base.
<unk> gone to our dealer Council.
Got that feedback so I think that there is a renewed energy in our inter dealer base to go go sell the products because theres less conflict.
In the space and spec writing is really important but just also I think that the engagement with our dealers and.
The proactive.
Working on these deals and getting the right configurations, and the right cost and riding specs. The proactive activity you do to shape demand and work with customers really positions you well to sales I think it's a lot of the commercial activities that we're improving in the business and I also believe that.
We have a pretty good message.
<unk> done a lot of communication with our channel partners around we're in this for long haul were going to make better progress we're going to invest I think.
What we talked about today in terms of forward advancing going where the markets are going to go long term and being one of the early adopters and leaders in those spaces sends a good message to our dealers and that we're going to be there for them and give them products. They can win with that builds energy.
And our dealers want to win so I just think we're managing the channel activity a lot more aggressive than we have in the past and it's yielding benefit to us in the short term around so and it's obviously now this isn't necessarily what you're gaining share but the markets are really receptive right now to I think we've got nice demand in all of these all of these markets.
Maybe terminal buses is the one that's a little slower but all these other markets are responding very very nicely to the recovery.
Okay and is there any way you could quantify the market share gain.
Whenever you can buy.
Yes, I don't have that data in front of me, but it's maybe probably.
Secondly, we can talk in private session, we mind, Jamie some of that is a little bit lagging in to get the full year, we need to wait until the first quarter, but we can certainly talk about the first half trends.
But it's not something we usually probably go out with okay. Great. Thank you.
We've reached the end of the question and answer session I would now like to.
Turn the call over to rod rushing for closing comments.
So again, thank you I appreciate everyone joining today and we obviously, we're really pleased with the year. We just closed and you always wanted to do better, but I think all things said, we the progress we made in the last 18 months position us well to weather the challenges we've got.
Our leadership team these businesses and really excited about the next year, we have work to do but we're on a good path here and again I appreciate.
I appreciate you guys, joining and look forward to the one on one sessions. Thank you.
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