REV Group Inc

NYSE:REVG

Earnings Call Analysis

REV Group anticipates strong growth and shareholder returns through 2027.

In its latest earnings call, REV Group reported a consolidated net sales decrease of 9.8% for fiscal 2024, primarily due to the divestiture of Collins Bus. However, the company expects high single to low double-digit revenue growth for fiscal 2025, with adjusted EBITDA projected between $190 million to $220 million, a significant increase from the previous year. The Specialty Vehicles segment boasts a record backlog of $4.2 billion, driven by strong demand for fire apparatus. By 2027, REV targets annual revenue growth of 6% to 8% and consolidated adjusted EBITDA margins of 10% to 12%, reflecting a robust financial outlook and commitment to shareholder value through dividends and share repurchases.

Navigating Through Changes and Challenges

In the fourth quarter, REV Group reported consolidated net sales of $597.9 million, reflecting a significant decrease compared to the previous year, mainly due to the divestiture of Collins Bus, which contributed $54.2 million last year. When adjusting for this impact, net sales fell by 6.4%. The company acknowledged that its cyclical recreation and terminal truck segments faced ongoing market challenges, which are expected to persist through the first half of the fiscal year 2025.

Strength in Specialty Vehicles Segment

Despite challenges in some areas, strong performance emerged from the Fire and ambulance groups, driving adjusted EBITDA to $49.6 million for the quarter, marking a decline of only 4.4 million year-over-year but an increase of 22.2% when adjusting for the impact of Collins. The Specialty Vehicles segment showed resilience with fourth-quarter sales of approximately $440 million, which highlights an increase of 3.6% when removing the Collins effect. The adjusted EBITDA for this segment rose dramatically by 68%, showcasing operational efficiency gains and effective pricing strategies.

Record Backlogs and Future Growth

The Specialty Vehicles segment ended the quarter with a record backlog of $4.2 billion, which grew by 13.3% compared to the prior year, illustrating solid industry demand for fire equipment and ambulances. This backlog, coupled with an expectation for a robust fiscal 2025, leads the company to project revenue growth in the high single to low double-digit percentage range, forecasted on a pro forma base of $1.56 billion (excluding divested bus revenue).

Guidance for Fiscal 2025 and Beyond

Looking ahead, REV Group has set ambitious targets, aiming for consolidated top-line sales between $2.3 billion and $2.4 billion for fiscal year 2025. This indicates a mid-single-digit growth compared to the prior year's pro forma results. Importantly, adjusted EBITDA is expected to reach between $190 million and $220 million, illustrating a potential 48% increase, with higher margins anticipated throughout the year.

Long-Term Financial Goals

For the long-term, REV has established targets of 6% to 8% annual net sales growth through fiscal 2027, leading up to an adjusted EBITDA margin of 10% to 12%. The company is anticipating cumulative free cash flow over $350 million, allowing for dividends and share repurchase initiatives, especially with a new $250 million share repurchase program recently authorized by the Board.

Operational Efficiency Drives Profitability

REV Group emphasized improvements in operational efficiencies which enhanced earnings performance. Particularly, the company highlighted initiatives to reduce lead times and mechanism programs that have streamlined production workflows. These efforts yielded high profitability metrics, providing an adjusted EBITDA margin of 11.4%, representing the highest segment performance since the IPO, indicating a promising trajectory for achieving double-digit margins in the near term.

Impacts of Market Conditions and Consumer Trends

The company benefits from a stable demand environment driven by population growth, aging vehicles needing replacement, and urban expansion. These macro trends position REV favorably within the emergency vehicle market, forecasting a consistent revenue stream from municipalities that rely on municipal tax receipts and federal support for these essential services.

Attractive Investment Opportunities

With a strong liquidity position, noted by a cash holding of $24.6 million and $350 million available under the revolving credit facility, REV Group positions itself to capitalize on growth opportunities while returning capital to shareholders. The commitment to effective capital allocation reflects a disciplined approach to both organic growth operations and potential acquisitions in the longer-term strategy.

Earnings Call Transcript 2024-Q4

[Operator]

Good day, and welcome to the REV Group Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Drew Konop. Please go ahead, sir.

[Drew Konop, executive]

Good morning, and thank you for joining us. Earlier today, we issued our fourth quarter and full year fiscal 2024 results. A copy of the release is available on our website at investors.revgroup.com. This morning, we will discuss our fourth quarter and full year results, our fiscal 2025 outlook and then transition the call to our Investor Day presentation before opening the call to questions from analysts and investors.

Today's call is being webcast and a slide presentation titled Fiscal fourth quarter 2024 results, which includes a reconciliation of non-GAAP to GAAP financial measures is available on the website. Please refer now to Slide 2 of the 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 and Form 10-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 the call today to a quarter or a year or our fiscal quarter or fiscal year unless otherwise stated. Joining me on the call today is our President and CEO, Mark Skonieczny; and our CFO, Amy Campbell. Please turn to Slide 3, and I'll turn the call over to Mark.

[Mark Skonieczny, executive]

Thank you, Drew, and good morning to everyone joining us on today's call. This morning, I will discuss our fiscal 2024 consolidated results before highlighting select accomplishments as we exited the year and then move on to our consolidated fourth quarter financial performance. I will then turn it over to Amy to discuss our segment financials and our fiscal 2025 outlook before we transition the call to the Investor Day discussion, where we will provide our [ intermediate ] financial targets and a refreshed capital allocation framework. .

Full year consolidated net sales decreased $258 million or 9.8% versus the prior year. Fiscal 2023 included a full year results for Collins Bus, which was divested at the end of the first quarter of 2024. Collins contributed $147 million in revenue during the last 3 quarters of 2023. Adjusting for the $147 million of revenue, Collins generated in the last 3 quarters of 2023, net sales decreased $111 million or 4.4% year-over-year. Lower net sales were primarily related to our cyclical recreation vehicle and terminal truck businesses which experienced $257 million and $161 million full year sales reductions, respectively, on a year-on-year basis due to challenged market conditions that we have discussed on previous calls.

Partially offsetting these impacts was $281 million or 23% year-over-year increase in net sales within the Fire & Emergency groups that benefited from production ramps that drove throughput increases and price realization. Full year consolidated adjusted EBITDA of $162.8 million increased $6.2 million or 4% year-over-year despite lower sales. Adjusting for $32.8 million of earnings that Collins contributed during the last 3 quarters of 2023, adjusted EBITDA increased by $39 million or 31.5%. The programs aimed at improving operating efficiencies across the enterprise and favorable price realization within the specialty vehicles businesses resulted in an impressive 180 basis point year-on-year margin expansion when considering the sale of Collins.

Disciplined cost management within the recreational vehicle segment enabled the segment to maintain 19% decremental margin on a 28% sales decline and holds 6.3% margin for the full year. Turning to Slide 4. Throughout the year, we achieved a meaningful increase in our Fire & Emergency production rates, exceeding prepandemic levels of throughput. This improvement is a direct result of our focus on operational excellence, with lean initiatives that streamline workflows, reduce inefficiencies and improve production schedules.

Our cumulative internal efforts have driven a significant improvement in specialty vehicle results and positions us well for sustained operational performance. Increased throughput has also contributed to expanded adjusted EBITDA margins as higher output enabled greater price realization and operational leverage. Our enhanced profitability also reflects disciplined cost management and strategic pricing actions, which led to a 7-year high in adjusted EBITDA margins in both the fire and ambulance groups. These results demonstrate our ability to drive both growth and efficiency, creating lasting value for our stakeholders.

Specialty Vehicles segment adjusted EBITDA in the fourth quarter, 11.4% provides a solid foundation for the achievement of the updated intermediate targets that Amy will present shortly. Post pandemic, the emergency vehicles industry benefited from several favorable macro trends that increased demand for our products and has resulted in REV Group exiting fiscal 2024 with a robust 2.5-year overall emergency vehicle backlog of units based on fourth quarter production rates.

Key demand drivers including natural replacement cycle of aging vehicles, federal stimulus funding that bolstered municipal budgets, rising real estate values and general tax basis as well as population growth in urban sprawl. Our record high $4.2 billion specialty vehicles backlog provides a rare level of demand certainty and production planning visibility, setting us apart from industrial manufacturing peers who face greater variability in their order pipeline. In addition, within the fourth quarter, we completed the previously announced wind down of the Eldorado National California, or ENC municipal transit bus business. Upon completion of all units within backlog, we announced the sale of ENC on October 18 for a sale price of approximately $52 million before transaction costs to Rivaz, Inc. ENC has a long history with 5 decades in the mass transit industry, and we are pleased the brand is set to continue.

I want to thank all of our customers as well as the ENC employees and dealers for their support throughout this transition. With the wind-down and sale of both Collins and ENC, we successfully exited both of our bus businesses in 2024, resulting in a more streamlined and focused organization which will drive value going forward while also creating opportunity to return capital to shareholders.

I was pleased to announce that David Dauch was appointed to the Board of Directors in the fourth quarter. David serves as Chairman of the Board and Chief Executive Officer of American Axle & Manufacturing, a global Tier 1 automotive supplier headquartered in Detroit, Michigan. He has served on its Board since 2009 and currently serves on the Board of Amerisure Mutual Holdings and the National Association of Manufacturers. He's also a member of the Stellantis Supplier Advisory Council. We believe his significant knowledge and industry insight will further REV Group's operational and performance imperatives.

Finally, today, we are announcing that our Board has authorized a new $250 million share repurchase program and a 20% quarterly cash dividend increase. These actions underscore confidence in the company's financial strength and long-term growth prospects while demonstrating a focused strategy of returning capital to shareholders. The share repurchase program replaces the current program expires in 24 months and provides management flexibility and manage the capital structure effectively.

Meanwhile, the dividend increase reflects a sustained commitment to rewarding shareholders with a growing income stream. Together, these initiatives highlight the company's dedication to creating shareholder value aligning capital allocation with investor interest. Please turn to Page 5 of the slide deck as I move to a review of our fourth quarter consolidated financial results.

Fourth quarter segment sales were $597.9 million. As a reminder, the prior year's quarter included $54.2 million in net sales attributed to Collins Bus. Excluding the impact of the Collins divestiture, net sales decreased $41.2 million or 6.4% compared to the prior year quarter. As I previously mentioned, our cyclical recreation and terminal truck businesses continue to navigate through challenged markets in the fourth quarter. As we exit the year, we anticipate that these markets will remain challenged through the first half of our 2025 fiscal year.

Furthermore, the wind down and sale of the ENC municipal transit bus business, which was completed early in the fourth quarter this year creating additional year-on-year revenue comparison headwind in the quarter. These headwinds were partially offset by continued sequential and year-on-year momentum that delivered strong performance in the Fire and ambulance groups. Consolidated adjusted EBITDA of $49.6 million decreased $4.4 million, excluding the impact of Collins bus, which generated $13.4 million in the prior year quarter that did not recur this year. Adjusted EBITDA increased $9 million or 22.2%. This was largely due to strong performance within the Fire Group, driven by efficiency gains, price realization and a favorable product mix that more than offset lower performance within the Recreational Vehicles segment.

With that, please turn to Slide 6, and I'll turn the call over to Amy for detailed segment financials.

[Amy Campbell, executive]

Thank you, Mark. Fourth quarter Specialty Vehicles segment sales were about $440 million, a decrease of $38.9 million compared to the prior year. As Mark mentioned, the prior year's quarter included $54.2 million of net sales attributed to Collins Bus. Excluding the impact of the Collins' divestiture, net sales increased $15.3 million or 3.6% compared to the prior year quarter. This increase in net sales was primarily due to increased sales of fire apparatus and ambulance units along with favorable price realization and partially offset by lower sales of municipal transit buses, terminal trucks and industrial sweepers.

Segment adjusted EBITDA of $50.2 million increased $6.9 million. The prior year's quarter included $13.4 million of adjusted EBITDA attributed to Collins. Excluding the impact of the Collins' divestiture, adjusted EBITDA increased $20.3 million or 68% compared to the prior year quarter. The increase in earnings was primarily due to increased sales of fire apparatus and ambulances, price realization, operational efficiencies and higher contribution from municipal bus business, partially offset by lower sales of terminal trucks and industrial sweepers and inflationary pressures.

Segment profitability increased sequentially throughout the year achieving an adjusted EBITDA margin of 11.4% in the fourth quarter. Ex Collins, this represents a 440 basis point improvement versus the prior year quarter and is the highest segment margin performance since our IPO in 2017. Segment performance was aided by a favorable mix of fire apparatus shipments within the quarter that benefited from having higher content. We believe fourth quarter margin performance provides a strong indication of the segment's potential for double-digit margins and improved profitability as we progress through fiscal 2025.

As Mark mentioned, the Specialty Vehicles segment's backlog of $4.2 billion is also a record. Adjusting for the removal of $388 million of bus backlog that was included in the prior year's backlog, but by exiting the bus business no longer exist, backlog grew 13.3% versus the prior year. The increase was primarily related to solid industry demand for fire apparatus and ambulances as well as pricing actions and partially offset by increased production rates. At the fourth quarter production rate, the overall legacy Fire & Emergency backlog is in the range of 2 to 3 years, depending on the unit type and brand.

As we will detail shortly, it is our goal to reduce our lead times over the next 3 years and exit fiscal 2027 in a steady state of demand with lead times that are closer to prepandemic levels. We believe a reduction in lead times result from both increased throughput at our plants, along with the normalization of demand in the market. The fiscal 2025 outlook provided today builds on the momentum demonstrated by the Specialty Vehicles segment. We anticipate full year revenue to grow in the high single to low double digits as compared to a $1.56 billion pro forma revenue base.

The pro forma basis for sales excludes $164 million of divested bus revenue that was reported within the segment in fiscal 2024 but will not occur going forward. Revenue growth will be driven primarily by the fire and emergency businesses, which are expected to benefit from an increased mix of higher content units and price realization as well as low single-digit unit volume growth resulting from fiscal 2024 ramp rates. These impacts are expected to convert incremental revenue at an incremental margin of 30% to 40% in fiscal 2025 from a pro forma adjusted EBITDA base of $136.8 million, which excludes $17.6 million of fiscal 2024 earnings related to the divested bus businesses that will not recur.

For modeling purposes, we expect greater-than-usual seasonality in the first quarter, with an approximate 20% decline in revenue as compared to the fourth quarter of 2024 due to the favorable mix of higher-priced fire apparatus delivered in the fourth quarter that will not repeat in the first quarter. This mix impact is expected to result in a sequential decremental margin of approximately 25% quarter-over-quarter.

Turning to Slide 7. Recreational Vehicles segment sales of $158 million decreased 26.5% versus last year's fourth quarter. Lower sales were primarily the result of a decline in unit volume related to end market conditions and increased retail assistance. Fewer shipments in the Class A, Class B and towable categories were partially offset by a favorable mix of Class C units. Despite a decline in segment shipments, we believe that our Motorized brand shipments have outperformed their respective product categories throughout the year.

Adjusted EBITDA of $8.1 million was a decrease of $11 million versus the prior year. The decrease was primarily a result of lower unit volume, increased retail assistance and inflationary pressures, partially offset by actions taken to better align fixed and variable costs with end market demand. Segment backlog was $292 million at year-end, a 24% decline versus the prior year. The decrease is attributable to a challenging retail environment and dealer destocking throughout 2024.

After several challenging quarters of order intake and cancellations over the past 2 years, we are pleased to note that segment's fourth quarter net orders were the highest dollar total since the second quarter of fiscal 2022, and resulted in a revenue book-to-bill of 1.3x. We are encouraged that order patterns early in the first -- in the fiscal first quarter continued to remain favorable. Within the fiscal 2025 guidance provided today, we expect Recreational Vehicles segment revenue and adjusted EBITDA to be roughly flat versus fiscal 2024. After typical first quarter seasonality, we anticipate gradual market improvement to begin in the second half of the fiscal year, which assumes dealer inventories within motorized categories will stabilize and overall market conditions will improve.

Turning to Slide 8. Trade working capital on October 31, 2024, was $248.2 million, a decrease of $70.3 million compared to $318.5 million at the end of fiscal 2023. The decrease was primarily related to the divestitures of Collins and ENC. Full year cash flow from operating activities was $53.4 million and adjusted free cash flow was $102.2 million. We spent $5.3 million on capital expenditures within the fourth quarter and a total of $27.6 million for the full year, which included CapEx investments aimed to deliver organic growth, lower manufacturing costs and invest in our IT systems.

Net debt as of October 31 was $60.4 million, including $24.6 million of cash on hand. As Mark previously mentioned, the Board authorized a new share repurchase program of $250 million, which expires in 24 months and replaces the prior program. In addition, we declared a quarterly cash dividend of $0.06 per share, a 20% increase payable January 10 to shareholders of record on December 26. At quarter's end, the company maintained ample liquidity for our strategic initiatives, with approximately $350 million available under our ABL revolving credit facility.

Now turning to Slide 9. We provide a 2025 fiscal full year outlook, which builds upon the exit rate momentum delivered by the Specialty Vehicles segment. As I mentioned, we expect high single to low double-digit revenue growth in the Specialty Vehicle segment versus the 2024 pro forma $1.56 billion revenue base, which excludes sales from the divested bus businesses. Net sales in the Recreational Vehicles segment are expected to be roughly flat year-over-year.

Consolidated top line guidance is $2.3 billion to $2.4 billion or mid-single-digit growth at the midpoint versus fiscal 2024's pro forma of $2.2 billion net sales. Adjusted EBITDA guidance is $190 million to $220 million, an increase of 48% at the midpoint versus fiscal 2024's pro forma $145.2 million adjusted EBITDA. We anticipate sequential improvements in consolidated revenue, adjusted EBITDA and adjusted EBITDA margin throughout the year, with first half consolidated revenue expected to be approximately 45% of the full year guidance and first half consolidated adjusted EBITDA expected to be approximately 40% of the full year guidance.

Full year net income is expected to be $98 million to $125 million, and adjusted net income is expected to be $116 million to $140 million. Free cash flow is expected to be in the range of $90 million to $110 million. We anticipate a reduction in overall inventory to partially offset the expected impact of lower net customer advances as we ship units from the backlog. Full year capital expenditure is estimated to be in the range of $30 million to $35 million, with investments in our businesses to increase throughput and lower manufacturing costs. Expected interest expense in the range of $18 million to $20 million considers a seasonal use of cash in the first quarter that typically impacts the full year average debt level as well as interest payments on customer advances.

I would like now to turn it back over to Drew for an introduction to our virtual Investor Day presentation. Please refer to the Investor Day presentation on our website. After this presentation, we will then open it up for Q&A for both sell-side analysts and investors. Drew?

[Drew Konop, executive]

Thank you, Amy. In April of 2021, we introduced our first intermediate financial targets under our prior organizational structure that included 3 segments: Fire & Emergency, Commercial and Recreation. Following the announcement in January 2024 of our plans to exit the bus manufacturing business, we reorganized our operating structure into 2 segments: Specialty Vehicles and Recreational Vehicles. Today, we are providing intermediate financial targets under this new segmentation. .

In addition to providing a view of the earnings potential of the current portfolio of businesses, we'll provide targets for a 3-year accumulated free cash flow as well as an updated capital allocation framework aimed at delivering shareholder value. As Amy mentioned, at the conclusion of our prepared remarks, we will open the line to questions from our research coverage analysts as well as investors. If you prefer, you can message me directly in the chat box labeled Ask A Question at the bottom of the webcast, and I will moderate online questions.

Please turn to Slide 3, and I will turn the call over to Mark to begin.

[Mark Skonieczny, executive]

Thank you, Drew. I'll begin with a brief overview of REV Group for those that may be less familiar with the company and our journey. Founded through an initial private equity acquisition in 2006, REV has grown into a leading, diversified specialty vehicles manufactured with approximately 5,700 employees and a portfolio of 20 distinctive brands. This expansion was driven by strategic acquisitions of established businesses across the United States, allowing the company to build a diverse portfolio and manufacturing footprint, leveraging a broad base of regional expertise, dealer networks and customer relationships.

Over the past 4 years, we have been on a journey of transforming these businesses to scale operations, unlock manufacturing efficiencies, strengthen our presence in key markets and broaden capabilities to drive shareholder returns and meet diverse customer needs. Today, we are recognized as a market leader known for delivering quality, innovation and specialized solutions across an extensive portfolio of specialty vehicles.

Turning to Slide 4. During the 2021 Investor Day, we unveiled the REV Drive business system as a framework designed to drive excellence across all aspects of our organization, from operational efficiency and innovation to customer satisfaction and employee development. By leveraging a structured set of tools, processes and performance metrics, our operating system ensures consistent execution of our strategic priorities, fostering sustainable growth and profitability. It empowers teams at all levels to focus on continuous improvement, problem-solving and value delivery, creating measurable benefits for customers, employees, shareholders and communities alike.

This disciplined approach aligns our entire organization toward achieving world-class results while reinforcing our commitment to being a trusted leader in our industries. Application of the REV Drive tenets has served us well over the past 4 years as we are faced with challenges to overcome during and following the pandemic, along with tailwinds that provide opportunities to deliver improved financial performance over the immediate and long term.

As we emerge from the pandemic, over the last few years, we experienced strong market demand for Fire & Emergency vehicles, while demand for recreational vehicles softened. In both demand environments, we focused our efforts on optimizing efficiencies and building stronger operational capabilities. The segments remain disciplined and concentrate on enhancing margins and maximizing each dollar earned. Within the Fire and Ambulance businesses, we added rigor to the operating cadence of the plants with KPIs to track new vehicle starts against completions, creating more balanced production lines and improving stability.

As we achieved stability manufacturing, we then executed targeted production ramps on a plant-by-plant basis to further increase line rates. Within the cyclical end markets such as RV, we benefited from a decision to limit over investment capacity during peak demand and have managed our cost structure to align with lower industry volumes over the past 2 years. Looking deeper into the drivers of operational improvements, our teams have scrutinized production processes, looking for any inefficiencies that could be minimized or eliminated.

Enhanced efficiency from OpEx projects led to reduced operating cost and leaner, more streamlined manufacturing processes that supported enhanced profitability, fortifying the supply chain also playing a critical role in enhancing efficiency and creating a more stable production cadence. By developing strong relationships with suppliers, multi-sourcing key components and focus on inventory management, we ensured materials and components were more readily available when needed [indiscernible]. As a result, production accelerated, cycle times improved, and we have created a more responsive manufacturing environment capable of reducing backlog as [ we remain ] committed to providing reduced delivery times.

To enhance margins and drive efficiency, our businesses have enacted a comprehensive margin improvement strategy centered on product simplification and standardization, SKU rationalization and process optimization. This approach aims to reduce complexity, streamline production and boost efficiency while ensuring the brands retain their unique identities and continue to meet customer specifications.

By simplifying the upfront processes, we are reducing complexity across design, engineering and production. This could be a brand-specific focus or targeted cross-brand commonization where foundational elements and core features can be shared across brands to minimize design and manufacturing variations, thus decreasing costs, inventory and time to market. While we drive toward greater commonization, we remain committed to each brand's product identity, and we will retain the distinct design elements and specialized options to preserve its unique market placement and customer appeal.

Using an 80-20 approach to the portfolio, our businesses are identifying and reducing product options and configurations that provide limited value to customers but create manufacturing complexity. By streamlining the product lineup, engineering time can be significantly reduced, allowing teams to focus on high-value features and innovations. Simplified product configurations will also minimize manufacturing time and complexity and enabling more efficient supply chain strategy, lowering procurement costs while reducing lead times.

Converging designs across product lines will enable a shift toward more standardized manufacturing practices. This supports the implementation of repeatable, standard work enabling consistent production quality and reducing production variability. Standardization will also reduce SKUs and inventory requirements, improving cash flow and lowering warehousing costs, ultimately driving efficiency in manufacturing and supply chain processes.

Daily application of the continuous improvement and mindset through lean manufacturing principles is a key to our strategy. Our businesses are focused on eliminating waste, improving workflow and enhancing productivity at every stage of production. By promoting lean methodologies, employees are empowered to identify and act on areas for improvement, ensuring sustainable gains in efficiency and quality over time.

In addition to operational improvements, we implemented a pricing strategy to reflect both the growing backlogs and the increase in cost of materials and labor. Through carefully calibrated price adjustments, we align pricing with expected market conditions, adding value to our backlog without straining our customer base. The pricing adjustments not only protected margins but also reinforce the value proposition for the REV portfolio of vehicles in both the critical, first responders supporting industries as well as the consumer-facing recreational vehicle market, where premium brand differentiation creates an opportunity for higher margins.

Turning to Slide 5. Over the past 4 years and since our 2021 Investor Day, REV Group has achieved remarkable growth. Market capitalization has increased by 212% from $498 million to $1.55 billion, while adjusted EBITDA has compounded an annual growth rate of just over 24% since fiscal 2020. We generated strong adjusted free cash flow totaling $263 million over the trailing 3 years and strategically used it to return cash to shareholders while reducing our leverage ratio, strengthening our balance sheet and enhancing financial flexibility for future growth opportunities and returns of capital to shareholders.

Leverage decreased from pandemics peak of over 6x net debt to trailing 12-month adjusted EBITDA and 4.9x as we exit fiscal 2020 to under 0.4x as we exit fiscal 2024. These extraordinary accomplishments occurred even in the face of modest consolidated revenue growth, underscoring our strategic focus on improved operational efficiencies, pricing strategies and disciplined financial management. A focused application of the REV Drive principles and our strategic choices have contributed to a 380 basis point adjusted EBITDA margin increase since 2020, significant improvement that didn't rely on revenue growth but was achieved through our focus on operational excellence, process improvements and disciplined pricing strategies.

I've touched on demand and one item that jumps out on this slide is the growth of backlog. Fire and Ambulance have experienced strong demand, fueled by ongoing replacement and upgrades of aged fleets, robust tax receipts and federal stimulus, urban sprawl that results in new firehouses and EMS facilities and population growth that increases demand for equipment. Municipalities and contractors are increasingly prioritizing investments in emergency vehicles to meet safety standards, ensure quick, effective response times. These backlogs represent both a challenge and an opportunity. For REV, the increased demand provides a stable base of future revenue, but it also calls for careful planning to meet client time lines and to maintain quality.

Our focus has been to reduce these backlogs and by improving throughput by almost 30% through fiscal years 2023 and '24, we have demonstrated our ability to increase production while retaining our reliability as a partner and commitment to our customers. Beyond operational and pricing strategies, we have maintained exceptional financial discipline. Through diligent cash management practices, REV has generated an impressive $263 million of adjusted free cash flow that allowed us to pay down $269 million in debt over the past 3 years, while continuing to invest in our business and return cash to our shareholders.

By reducing debt, we have significantly strengthened the balance sheet, decreased financial risk and allowed ourselves more freedom and flexibility to direct future cash flow towards strategic initiatives and shareholder returns rather than debt servicing. Looking ahead, we are focused on maintaining a strategic edge and building on the successes we have demonstrated over the past 4 years. With a stable foundation of operational improvements, effective price realization and a strong balance sheet, the company is in an excellent position to continue leading in the specialty vehicles industry and driving shareholder value.

Turning to Slide 6. I would like to reflect on some key milestones that further the company's position to deliver value to our stakeholders. REV Group has undergone significant transformation recently marked by a transition in C-suite and segment leadership, a refreshed Board of Directors with 4 new directors replacing legacy members, increased public float and liquidity and a portfolio simplification and organizational restructuring. These changes signal our commitment to driving strategic realignment, enhancing governance and delivering shareholder returns.

First, I am pleased to have announced the addition of Amy Campbell to the team as CFO earlier this year. Amy is an experienced and highly respected finance executive with broad financial, operational and public company experience within manufacturing industries. Her financial acumen, strategic vision and strong communication skills have benefited the team, shaped the targets we are delivering today and will further our progress toward their achievement.

Steve Zamansky joined REV Group just over a year ago as General Counsel and Corporate Secretary. Steve's background in corporate governance and M&A experience were integral to Board reconstitution, several governance additions and reorganization we will discuss shortly. I would also like to mention the Presidents of our Specialty Vehicles and recreational vehicle segments, Mike Virnig and Mike Lanciotti. Each brings exceptional value to our team through their extensive industry knowledge and proven leadership expertise. Their deep understanding of industry dynamics, trends and challenges enables them to make informed strategic decisions that drive our businesses forward.

Recent updates to our corporate governance framework introduced significant benefits that align REV more closely with best practices and shareholder interest. A refreshed Board of Directors brings diverse expertise in finance, human capital and operational management, which enhances the Board's ability to provide well-rounded oversight and strategic guidance across critical areas. Strong finance expertise brings valuable insights into capital allocation, risk management and financial planning, which can directly support strategic decision-making around investments, M&A activity and cash management.

This financial acumen was especially valuable early in fiscal 2024 when the use of proceeds from our exit of school bus manufacturing was returned to shareholders in the form of special dividends and share repurchases. We will continue to rely on this expertise and future decisions aimed at maximizing long-term shareholder value. In addition, prowess and human capital has been and will be essential in supporting a positive culture, an effective succession planning approach and employee engagement strategies align with our evolving goals.

Finally, operational expertise offers practical insights on efficiency, supply chain optimization and quality control, helping us make informed decisions on operational priorities. This is especially valuable for identifying bottlenecks, refining production methods and implementing lean practices, all of which are crucial for driving higher throughput.

Additionally, this operational expertise helps us align strategic decisions for the practical hands-on approach to cost control and productivity, ultimately supporting profitability improvements. The combined experiences and skillfulness of the Board ensure it can better assess and guide management and scalable solutions that enhance both short-term performance and long-term operational resilience.

In addition to the Board of Directors composition, REV is proposing to enhance its governance policies in this year's proxy vote by removing the supermajority voting requirements from our charter. This change simplifies governance and makes it easier for shareholders to effect change when necessary. By empowering shareholders with more straightforward voting rights, we will increase accountability and foster a more direct relationship with our investor base aligning management actions more closely with shareholder interests.

Moreover, the Board has updated executive compensation to include performance-based shares and annual grants. One addition within the new structure is the inclusion of relative return on invested capital, or ROIC, to align management incentives clearly with those of our shareholders. We believe ROIC is a robust measure of management's effectiveness and generating returns on the company's investments, encouraging executives focus on disciplined capital allocation and profitable growth.

Earlier, Drew mentioned that we have streamlined operations by exiting noncore businesses and restructured our operating model from 3 segments to 2. This consolidation allows for a sharper focus on core businesses, improving operational efficiency and aligning resources more effectively. The proceeds from these transactions were used to return a substantial amount of cash to shareholders, reinforcing our focus on value creation and shareholder returns.

Together, these changes position the company for a more agile and focused path forward in core markets. Moving to Slide 7. REV Group presents a compelling investment opportunity to its well-diversified portfolio of products aligned with favorable macroeconomic trends. Among others, we are positioned to benefit from population growth an aging demographic and expanding urban sprawl and have been uniquely suited to meet the rising demand for mission-critical vehicles related to essential services across municipal markets.

These tailwinds enhance REV's revenue potential and sustainability as our vehicles directly address the evolving needs of communities and municipalities within critical infrastructure. We have experienced strong order volumes driven by pent-up demand and need for fleet upgrades within a substantial installed base of vehicles. This robust demand environment is expected to support top line growth and margin expansion over the long term as customers seek to modernize and expand fleets to meet current and future demands.

With a strong balance sheet and a disciplined approach to capital allocation, we are well positioned to continue to provide attractive returns to shareholders through a combination of organic growth, dividends, share repurchases and acquisitions when and if the opportunity to deliver accretive returns through M&A arises. We will make these decisions, with a focus on delivering consolidated ROIC returns greater than 15%, which we believe over time will continue to drive value to our shareholders.

Please turn to Page 8, and I'll turn the call over to Amy to present our updated targets.

[Amy Campbell, executive]

Thank you, Mark. Now let's start by taking a look at the targets we set in the 2021 Investor Day and our progress against those goals. After emerging from the pandemic impacts that were challenging for industrial manufacturers and arguably delayed our progress toward our original targets by a year, REV has achieved outstanding financial performance, exceeding its fiscal goals across key metrics, including adjusted EBITDA, free cash flow and return on invested capital. The strong performance reflects effective operational strategies, disciplined cost management and a focus on effective pricing discipline, which combined have allowed REV to surpass expectations and deliver substantial value for shareholders. Consolidated performance was driven by both the Specialty Vehicles and Recreational Vehicle segments meeting or exceeding their respective margin targets and posting impressive results. The legacy Fire & Emergency segment, which is more than 90% of the Specialty Vehicle segment and adjusted EBITDA margin target of 7% to 8% and and the Specialty Vehicle segment delivered an exceptional 8.9% margin in fiscal 2024, reflecting increased demand for emergency vehicles and improvements in production efficiency and margin performance.

Similarly, the Recreational Vehicles segment, aiming for an 8% to 10% target range, achieved an average of 9.5% adjusted EBITDA margin over the past 4 years, demonstrating sustainable performance across a cyclical demand cycle in a highly discretionary consumer-facing industry. These achievements underscore REV's operational strength and ability to deliver in both stable and challenging market conditions.

By capitalizing on demand trends, enhanced production processes and maintaining a rigorous financial discipline, we have positioned ourselves well for continued growth and profitability in the future. Now let's turn to Slide 9, and I'm excited to share our updated intermediate financial targets for fiscal 2027 and our vision for sustainable growth. Over the next 3 years, we're committed to ambitious goals that are intended to enhance our market position and deliver solid returns to our shareholders.

Let's start with our top line targets for 2027. We are targeting 6% to 8% net sales growth annually. Note that this growth is on top of a pro forma base restated for the exit of bus manufacturing that occurred in fiscal 2024. Adjusted EBITDA margin is targeted to reach a consolidated range of 10% to 12% by fiscal 2027. In addition, over the next 3 years, we are targeting cumulative free cash flow generation exceeding $350 million. This level of cash generation will enable us to invest in our businesses, return cash to shareholders in the form of share repurchases and dividends and make investments in high-impact future growth opportunities.

Finally, our target for ROIC is to exceed 15% throughout the forecast period, a level we believe is achievable with a continued focus on asset efficiency, disciplined capital allocation and strong operational performance across our segments. This target reflects our commitment to not only grow but to do so profitably and sustainably. Beyond the consolidated targets, today, we are also updating our intermediate, adjusted EBITDA margin targets for each of our segments. We expect to build upon the momentum demonstrated by the Specialty Vehicle segment over the past 2 years, with a 3-year target range of 14% to 16%.

In addition, we expect the mid-cycle recreational vehicle segment margin will be in the range of 7% to 9%. The targets we are sharing today reflect our assumption of normalization to mid-cycle demand in our cyclical end markets such as recreational vehicles by 2027. As we embark on this journey, let's look at our starting point in 2024 on Slide 10 and our path to double-digit adjusted EBITDA margins by 2027.

We ended fiscal 2024 with net sales and adjusted EBITDA of approximately $2.4 billion and $163 million, respectively, including the performance of the divested Collins Bus and ENC businesses, which were both divested in fiscal 2024. In fiscal 2024, these businesses contribute $163.6 million of revenue and $17.6 million of adjusted EBITDA. Excluding lease sales and earnings, which will not recur in the future, net sales and adjusted EBITDA were $2.2 billion and $145.2 million, respectively, on a pro forma basis in fiscal 2024.

With our growth trajectory and operational improvements, we're setting our sights on significant advancements over the next 3 years. The anticipated 6% to 8% annual revenue growth off of the 2024 pro forma basis will be driven by volume increases, price realization and an expectation of normalization to mid-cycle demand in our cyclical end markets of recreational vehicles and terminal trucks. Accounting for corporate expense of approximately 1.5% of net sales, we expect consolidated adjusted EBITDA margin to be in the range of 10% to 12% in fiscal 2027.

As the indicative revenue shown on the slide of $2.75 billion, which anticipates mid-cycle demand in the recreational vehicle segment, this would result in adjusted EBITDA in the range of $310 million. Based on pro forma fiscal 2024 adjusted EBITDA of $145.2 million, achieving these targets would deliver annual compounded earnings growth of over 25% through the next 3 fiscal years.

Turning to Slide 11. I will provide more detail on an individual segment basis before proceeding to the balance sheet and a refreshed capital allocation framework. Over 90% of the Specialty Vehicle segment revenue and earnings are expected to be delivered by Fire & Emergency products over the next 3 years. REV Group is a market-leading manufacturer of fire chassis, fire apparatus and ambulances, serving as a trusted supplier for municipalities and emergency response organizations across North America.

With a large installed base, the segment benefits from a steady, reliable replacement demand cycle driven by the need to maintain up-to-date, safe and effective emergency vehicles. The replacement cycle for vehicles is typically 5 to 7 years for ambulances, 14 to 16 years for fire trucks and 20 to 30 years for aerial ladder trucks, ensuring consistent replacement demand over time.

The demand for these products is primarily backed by stable funding sources, including municipal tax receipts and federal stimulus support, which reinforced the resilience of our customer base and provides REV reliable and consistent revenue stream. Turning to Slide 12. I'll provide some color behind our 3-year revenue targets for the Specialty Vehicles segment. Over the next 3 years, we anticipate steady revenue growth across the segment, supported by a combination of robust backlogs and the realization of a strategic pricing actions already taken.

The fire business, which has a 2.5- to 3-year overall backlog is projected to provide low single-digit volume growth plus mid-single-digit price realization annually through fiscal 2027. Meanwhile, the ambulance business with a 2-year overall backlog is positioned for similar growth in units and price realization. Finally, the segment's terminal trucks and street sweepers are targeted to begin a return to mid-cycle demand from its current trough, driving substantial 30% revenue growth for these businesses over the 3-year period.

Please turn to Slide 13. The low single-digit unit volume growth in fire and emergency that I mentioned is expected to result from opportunities to incrementally increase throughput within the existing footprint. We plan to continue OpEx programs, aimed at streamlining production while supplementing our primary workforce with additional team members dedicated to areas such as paint and fabrication that offer opportunities to accelerate throughput. We expect that these volume increases will convert at what we consider a normalized contribution margin of 15%.

Compounding the impact of these increases over the next 3 years, we anticipate that unit volume growth will add 100 basis points to the segment margin by fiscal 2027. Next, in response to rising input costs in the post-pandemic period, we implemented strategic pricing actions. By closely monitoring raw material and labor trends, we were able to make timely and data-driven decisions to offset inflationary pressures.

Much of the price related to the 2022 and 2023 fiscal year actions remains in our backlog and will continue to be realized over the next 3 years. Combined with aggressive sourcing activity, including input cost clawback actions and VA/VE, we expect our net price cost profile will add 300 to 400 basis points to the segment's bottom line by 2027.

Finally, earlier, Mark discussed several operational improvement programs being deployed across the enterprise. These strategic initiatives aim to drive sustainable margin improvement while maintaining the high quality of our vehicles and integrity of our brands. By reducing complexity, enhancing operational efficiency and fostering a culture of continuous improvement, our businesses are positioned to optimize cost, improve profitability and ensure long-term competitiveness. A robust pipeline of lean projects, the commonization of design and the standardization of products that are expected to reduce cost will result in an additional 100 to 200 basis points of targeted segment margins.

Turning to Slide 14. I would like to provide some additional perspective on the long-term opportunity and sustainability of sales and earnings within the Specialty Vehicle segment. As you can see on the slide and as we discussed earlier, the demand environment from 2020 to 2023 drove across the industry above trend orders for fire apparatus and emergency vehicles that resulted in growing backlogs and concluded with REV's fire and emergency businesses exiting fiscal 2024 with an overall 2- to 3-year backlog, which is 2x to 4x the backlog we had prepandemic depending on brand and model.

We believe that orders for new equipment have started to normalize and are starting to return to long-term trend levels, which will likely result in the backlog also normalizing over the next few years. However, to emphasize the strength of the backlog and the visibility it provides to our 3-year production plan, if industry demand were to be below historical levels for the next 3 years, the current backlog would provide visibility for increased sales and earnings growth through fiscal 2027 while maintaining a plus 1-year backlog as we exited fiscal 2027.

Over the long term, the segment's financial performance is expected to continue to be supported by ongoing replacement of a large, installed fleet; healthy, normalized backlog; and ongoing operational initiatives that will continue to benefit margins. If this scenario were to play out, we would anticipate entering fiscal 2028 under a steady state of industry demand that offers GDP plus sales growth with an opportunity for growth above market to commercial excellence efforts targeted as share gains and innovation.

Additionally, we believe that after fiscal 2027, disciplined cost management and operational improvements can provide a foundation for annual margin expansion of approximately 30 to 50 basis points, providing ongoing opportunity for healthy shareholder returns. To summarize, we believe that when the industry emerges from this period of above trend demand, the Specialty Vehicles segment's long-term earnings outlook remains bright.

Turning to Slide 15. Our recreational vehicle segment is known for producing RVs under several, well-recognized and trusted brands. You may note on the slide that the profile of product categories in the recreational vehicle segment is different than the overall RV industry. While industry shipments have typically been comprised of close to 90% towables, our segment produces predominantly motorized units, which account for over 95% of the segment sales and earnings in fiscal 2024.

Among our brands, Class C units lead in popularity in sales with 42% of total RV segment sales, benefiting from the Renegade brand reputation, the secular consumer shift to this category as more buyers seek an ideal mix of size, safety, comfort and durability. Our line of iconic brands in the classic Class A motorhomes follow with 33% of total sales, offering larger luxurious options for extended travel while the more compact Class B sprinter van units cater to consumers seeking a more nimble and efficient RV experience and comprise 21% of the RV segment revenues.

The remainder of the segment is composed of Lance Towable units and campers, which, although a smaller part of our segment lineup represent the largest product category in the overall RV industry. The mix of RV offerings within our portfolio enabled the segment to appeal to diverse consumer preferences and meet the demands of a broad market and dealer base. Turning to Slide 16. The RV industry is inherently cyclical, with demand often influenced by broader economic conditions such as consumer confidence, interest rates and fuel costs.

Our business is no different and the segment's profitability typically follows these cycles closely. To understand the performance of the segment across the different industry demand cycles, we have charted its performance over the past 7 years here on this slide. In times of economic expansion, relatively low interest rates and strong consumer spending, the Recreational Vehicles segment experiences higher sales volume and greater profitability.

Conversely, economic slowdowns, rising interest rates and reduced discretionary spending typically result in lower demand affecting sales and profitability. You can see from this chart that sales and profitability have tended to follow a relatively linear path through the cycles. Beginning in the fourth quarter of fiscal 2023, the RV industry and our segment have faced a notable decline in sales after experiencing a surge in demand during the pandemic years when heightened interest in outdoor travel drove record sales.

The drop has been attributed to rising interest rates, inflationary pressures and tighter consumer budgets, which have impacted discretionary spending on large purchases like RVs. Dealer inventory levels have also adjusted as dealers reduce inventories and manufacturers scale back production to match softer demand, creating a more cautious market environment. Over the intermediate term, RV industry experts view the market outlook optimistically, with demand expected to gradually stabilize as economic conditions approve. A moderate recovery is anticipated as interest rates potentially ease and consumer confidence strengthens.

To manage these market fluctuations, we will continue to adjust production levels and manage inventory in response to demand changes aiming to maintain margin stability. Additionally, we remain focused on improving operational efficiencies and controlling costs during slower periods positioning this segment for profitability as demand rebounds in the next market up cycle. In the near term, our fiscal 2025 outlook anticipates a market environment similar to the second half of fiscal 2024. From the intermediate term, our outlook and today's targets contemplate the segment will participate in an industry that trends toward mid-cycle demand by fiscal 2027.

Please turn to Slide 17. We adhere to a disciplined capital allocation philosophy that prioritizes long-term value creation, operational resilience and shareholder returns. This approach guides every investment decision ensuring that we deploy capital strategically to maximize our returns on investment while maintaining financial strength. We prioritize reinvesting in core areas that drive growth and competitive advantage such as product innovation, operational efficiency and targeted expansion within high potential markets.

As we look at organic growth opportunities, we will continue to explore upgrades and advancements in manufacturing technology to deliver product innovation, growth and cost reductions while remaining focused on simplification and standardization. Alongside these internal investments, we are committed to maintaining a balanced capital structure. We believe that a net debt ratio of 1.5x to 2.5x is appropriate for a company with REV's characteristics, but this is a ratio that we would target over time, not immediately.

Furthermore, we believe that we have the flexibility to increase debt opportunistically for the right accretive acquisition. As a part of our commitment to delivering shareholder value, we aim to consistently return capital to shareholders through dividends and share repurchases. As Mark highlighted, we returned over $300 million of cash to shareholders in the form of special and regular cash dividends and share repurchases in fiscal 2024 alone.

And today, we announced that the Board has approved a 20% increase to our quarterly dividend and replace the existing share repurchase program with an authorization for a new $250 million repurchase program, which expires in 24 months and provides management flexibility to manage the capital structure effectively. While returning capital to shareholders through dividends and share repurchases is a key part of our capital allocation strategy, we also believe that for long-term growth, a contributor to our overall growth strategy will likely include acquisitions.

When evaluating potential acquisitions, we will apply a set of rigorous criteria designed to ensure any new investment aligns with our strategic vision, financial goals and commitment to long-term value creation. First and foremost, we prioritize opportunities that strengthen our core businesses or leverage our existing capabilities, acquisitions that can provide access to attractive markets, particularly those with favorable macroeconomic trends and demand drivers are also key considerations as they support both current and future revenue growth.

Ultimately, our disciplined capital allocation framework will allow us to remain agile, competitive and well positioned to capitalize on growth opportunities while safeguarding the company's financial health providing consistent, sustainable value to shareholders. With that, please turn to Slide 18, and I will turn it back to Mark for closing thoughts.

[Mark Skonieczny, executive]

Thank you, Amy. In summary, we are proud of the work accomplished by the team and believe REV Group is well positioned for continued success, leveraging powerful macro tailwinds. As a market leader with a large installed fleet, we expect to continue to benefit from consistent replacement demand supported by a robust dealer network and strong customer relationships that reinforce our leadership positions. The targets we laid out today show our commitment to achieving strong profitability boosted by operational efficiencies and a disciplined approach to working capital management.

Our $4.5 billion backlog is attractive among industrial manufacturers, is largely backed by municipal tax receipts and offers significant value accretion opportunity, providing a pathway for growth and margin expansion over the next several years. With a strong return on invested capital and flexible balance sheet, we look to accelerate our growth strategy and leverage the financial and operational foundations that we are building.

Additionally, a disciplined capital allocation approach will allow us the flexibility to enhance shareholder value by returning excess capital when appropriate. Together, these attributes create a strong foundation for long-term and sustained growth, profitability and market leadership in the years ahead. We appreciate your interest and participation in the call today.

And with that, I'll turn it back to the operator for questions.

[Operator]

[Operator Instructions] And your first question today will come from Mig Dobre with Baird.

[Mircea Dobre, analyst]

Mark and Amy, congratulations to you and the REV Group team. I guess, where I would like to start, Mark, is to get some of your thoughts on where the company is from an operating standpoint. I remember when we were having a similar conversation 3 years ago, you really talked a lot about simplification, you talked a lot about some of the in-plant operating improvements and the heavy lifting that sort of had to be done. The way I interpret your presentation today is you're essentially saying that what had to be done, the heavy lifting is basically behind you and now you're switching to a more normalized operating environment. If I'm wrong about that, please correct me, tell us what's still left to be done. And the follow-up to this is if you're now in a more normalized kind of operating mode, is it fair to say that you are to the point that you can pivot towards M&A a little more aggressively than we've been able to do in the past?

[Mark Skonieczny, executive]

Yes. I think, Mig, we ended the year right where we expected, and I've been consistent in saying we still have work to do on the Fire side. And I've been saying that's more of end of Q2 of '25. And to be clear, we go to work every day, looking for opportunities across our whole enterprise, as we said in the prepared remarks. So there's opportunities in all of our facilities, we're never stopping looking for efficiency.

So I don't think we'll ever get to a stabilization phase like you're talking about because they're always inquisitive and making sure that we're addressing inefficiencies as best as we can. But I still think we're on that journey where by the end of Q2 Fire will be where Ambulance currently is, which I think is consistent. So we're executing to that plan. And so I would say, it's still going where we expected and the plan is executing as we thought.

[Mircea Dobre, analyst]

And on the bandwidth question for M&A, is this something that you're contemplating still 1 to 2 years down the line? Or is this something that in your mind can be a little more imminent than that?

[Mark Skonieczny, executive]

Well, obviously, we have the flexibility given the share repurchase that we put up on our capital allocation strategy. We continue to look for opportunities. So if the right opportunity came to our -- to us, we'd look at that. So we're constantly looking. I think in the past, I've said we're going to delay hunting. We are looking for opportunities. There just hasn't been anything currently that has crossed my desk that we're interested in. But ultimately, if something came up tomorrow, those are things we'd be looking at. So I think we have optionality given our debt level and our availability.

[Mircea Dobre, analyst]

Yes, that part is understood. What does the right opportunity look like? And I'm not just talking about the financial profile here, although maybe it would be helpful to understand how you think about that. I'm thinking more in terms of fit because when I'm looking at ambulance, when I'm looking at fire, it seems like from what I can tell, the opportunity there is pretty limited given the concentration in the industry at this point. So what would you be considering potentially adding to the portfolio?

[Mark Skonieczny, executive]

Yes. I think something that would fit into the specialty vehicle space. So we've often talked about it would be something [indiscernible] utilities, sort of those nature of opportunities that build on a chassis -- build bodies on the chassis. Some of the things that are in right in our wheelhouse would fit into, some of the things that we would benefit from the simplification efforts we put into our operations where we could buy something and get synergies by some of the things that we've gone through in our existing businesses. So it would be something tangential in the specialty vehicle. I don't think right now we'd be looking outside of a specialty vehicle space and enter a new arena.

[Mircea Dobre, analyst]

That's helpful. And maybe last question, and I'll get back in the queue. When you look at your existing portfolio, you've obviously done quite a bit of surgery in '24, do you see additional room to adjust to divest or do anything else there?

[Mark Skonieczny, executive]

Yes. We constantly look at it. I think we've proven that we did that with the bus businesses, we're constantly assessing our portfolio. So if there are opportunities and for the right value and it creates shareholder value, we look at other opportunities as well. So we're constantly looking at it. Every day, we come to work saying, we have to earn our right to be within the portfolio, and that's sort of what we march to every day.

[Operator]

And your next question today will come from Mike Shlisky with D.A. Davidson.

[Michael Shlisky, analyst]

The very strong book-to-bill recreation certainly looked good in the quarter, and it sounds like the [ additions ] there may be kind of hitting the bottom. But with order trends, like you noted, it's a little bit surprising that you're assuming a flat year and not at least a little bit of growth here in '25 in the Recreation business. Can you give us a couple of just kind of puts and takes as to kind of what you're seeing in that business for '25 given. The orders that you've already seen so far, why we would not see growth there? Or maybe it's just that December is the wrong time to start talking about growth, and we'll see how it goes in the spring...

[Mark Skonieczny, executive]

Yes, we tend to be saying this every quarter, but it's really going to be reliant on what we see in Tampa -- at the Tampa show, which is a large consumer show. So we are seeing orders, but dealers are still hesitant to release the orders for production. So we talk to our dealers on a monthly basis and ask which units are going to come out of backlog. Obviously, we have an uptick in normally in the November, December as people stock for the Tampa show and then we'll see more releases.

And I think that's consistent with RVIA, we is just saying more in the spring, which would be in our second quarter, which I said we've highlighted that in the prepared remarks, it's really a second half story because the first quarter, as you know, is our second quarter. So we'll start seeing in the spring consistent with what RVIA is saying and some of our competitors as well in the space. .

[Michael Shlisky, analyst]

Okay. Super. And also, look, the other things you've outlined here looks very solid here. Can you comment on some of the risks that you're just keeping in mind as you go forward over the next couple of years. One that came into my mind was the impact of tariffs. I wasn't sure if fire vehicles were exempt from tariff impacts or are less impacted than, let's say, automobiles or other kinds of trucks. Just some thoughts though about what you are watching to make sure that you can follow through on all these projections here. .

[Amy Campbell, executive]

Yes. I mean, I would say, if we look at the risks over the next few years, Mike, certainly, inflation that could come from a number of things, some type of global disruption, something that would disrupt supply chains globally or domestically, access to labor all have would have impacts. I think we've shown that we can get through those. We've done a lot over the last few years to improve the robustness of our supply chain versus where we were back, say, in 2022. We've multi-sourced over 100 different our top components to make that supply chain more resilient in case there would be any disruptions to it.

But I would say, broadly, if you look at our Tier 1 suppliers, less than 2% of our commodities of our supply base is outside of the U.S. And so while I can create challenges, I think, broadly speaking, we're fairly well protected from those but wouldn't step back from -- I think that is a potential risk to the -- to any outlook we put out as we disclosed in our 10-K.

[Michael Shlisky, analyst]

Okay. Great. I wanted to follow up also on one of the mixed questions. If I got your comments right, Mark, are you trying to express when you talk about M&A candidates and what your plan is for M&A, that's the business system that you've kind of implemented over the last year or 2 at REV Group is one that you could maybe find an outside company and implement the same business system and improve a more challenged candidate? Or are you trying to buy someone that's kind of already an up and running smoothly and doesn't need to kind of help. I guess I kind of get a sense for how confident you are in your [indiscernible] business plan and what that might mean for an acquired company? Or is it just not going to be necessary?

[Mark Skonieczny, executive]

Yes. Yes, I think there will be incremental synergies. So we've talked about if the right opportunity came up -- we're not going to buy broken business by any means, but we're looking for accretive opportunities, which may include some of the synergy capture that we have, but I think we're well positioned now across our footprint as well to integrate new companies, but also to add on incrementals in the organization that we've stood up has that mindset of simplification, driving efficiencies, which could, I think, incrementally improve the synergy capture opportunity on a potential acquisition. We've always kept that in mind. It just wasn't internal, but are going to be a company that can stand up an M&A target at any time and seamlessly bring those into our fold.

[Michael Shlisky, analyst]

Okay. Okay. Maybe one last quick one for me. I'll pass it along. During the quarter, did your facilities in Northern Florida experience any hurricane impacts or other issues from weather? Or was that not a factor?

[Mark Skonieczny, executive]

It wasn't significant. We had a couple of down days, but we're able to make them up through the weekend. As you know, we run [ 410 ]. So we were very conscious of that and make sure that people were safe and we're able to stay at home in a couple of days that were warnings, but ultimately, we did not incur any facility damage or thankfully, no people were impacted personally from that. So we felt good from that perspective.

[Operator]

Your next question today will come from Angel Castillo with Morgan Stanley.

[Angel Castillo Malpica, analyst]

Just wanted to start out maybe on the free cash flow front, the guidance, and I understand that it's greater than $350 million. But I guess when you compare that to what's kind of implied on an EBITDA basis, it seems to show kind of conversion that's below, what I guess, I would have expected or what you've kind of done historically. So can you just talk about maybe as you think about EBITDA and margins continue to expand, why your free cash flow wouldn't expand at a similar clip?

And maybe what the kind of puts and takes and bridge there would be?

[Amy Campbell, executive]

Yes. I would say where we've gotten to -- so where we've gotten to in the management of net working capital, Angel, we've started to see we had a buildup of customer deposits. Those are starting to decline which is negatively impacting net working capital. And over the next 3 years, I think we'll optimize where inventory reductions are, and so we'll see less cash flow come from inventory reductions as we get towards the end of that 2027 time period. So I think we've largely targeted about 50% adjusted EBITDA to free cash flow conversion. What we said is greater than $350 million, it's not too far off of that guidance.

[Angel Castillo Malpica, analyst]

Got it. So that 50% is kind of what you'd view as normalized once we get past this period.

[Amy Campbell, executive]

Correct. And yes. And it's what's in 2025 as well, yes.

[Angel Castillo Malpica, analyst]

Okay. Okay. Perfect. That's helpful. And then maybe just to kind of build off of that, and I apologize. You've just given us fiscal year '25 [ through ] '27 targets, but I was hoping to talk a little bit longer term. You noted that we're seeing clearly a lot of benefit right now to F&E side and the Specialty front from whether it's [ IJ ] or a number of other kind of government stimulus plus replacement cycles. So as you get to the normalization of your backlog and, call it, fiscal year 2028 and beyond, can you just remind us from a historical standpoint, what does that look like once the replacement cycle is over? Is there typically a bit of a lull, you would kind of expect to pause? Or it sounds like from your slides, you'd expect maybe a continued steady growth from there. But just given the strong clip and the strong kind of orders that we've seen, would there be an anticipation of a bit of a slowdown before we get to kind of a normalized type of volumes, margins? Like what is kind of [indiscernible] what's the [ mid-cycle ] for specialty?

[Amy Campbell, executive]

Yes, what we tried to convey there is as we get through these next 3 years and see backlog start to normalize at 1 to 1.5 years, which would even be a little bit above what I would say, prepandemic levels, we would expect top line sales to grow from that point on at GDP plus, we would certainly target to drive market share gains with that. And then we think with that and the ability to continue to drive productivity improvements, we could get 30 to 50 bps of EBITDA margin enhancement year-on-year. So really, I think what I would say there is to get to [ 1 and 1.5 years ] of backlog in that scenario, which is really just to be a scenario to play out, that would have orders over the next couple of years would have to be below trend level for the backlog to come down. If the backlog stayed at trend levels, we would be still at 2 to 3 years of backlog in 2028. And so that scenario, to say, if we saw below trend for the next couple of years, which we don't know kind of what the next few years will play out for us in terms of orders, we'd still be in 3 years with 1 to 1.5 years worth of backlog and then growing at kind of a GDP plus rate from there. We would not expect a lull and that's kind of the message we're trying to get across in that slide we showed today.

[Angel Castillo Malpica, analyst]

And maybe just to kind of fine-tune that, I guess, is that what you've seen historically? Or as you think about kind of the -- that normalization, again, just kind of from a GDP plus, just given the replacement cycle being so long in nature, [ pumpers ] kind of 14, 16 years. I just want to understand like, is that then what the age of vehicles and historically, what you've seen in terms of normalizing to that kind of GDP plus?

[Amy Campbell, executive]

Yes. I mean I think there's if you go back 20 years, I don't know if there's a normal period we could exactly duplicate what we experienced over the last couple of years, but it would be aligned, I think, broadly speaking of what demand over the last 20 years would show.

[Angel Castillo Malpica, analyst]

Got it. And then maybe just 1 last 1 for me. The fiscal year '25 EBITDA range, it seems to be wider than normal, the $190 million to $220 million. Can you just help us understand the 2 bookends like what is kind of contemplated at the $190 million level versus the $220 million across 2 segments?

[Amy Campbell, executive]

Yes, I'd have to go back and see if that is wider. But certainly, there's always there's always a range there. I'd say on the top end, do we see recreation recover more quickly than we've built in the guide and then the forecast, are we able to claw back any inflationary pressures we know that we have in 2025, able to get some additional productivity improvements beyond what we've built into the guide. So there is some additional -- an additional throughput as well. We continue to drive throughput improvements, kind of going back to Mick's question. We've got low single digits, but we'll certainly be doing whatever we can to continue to drive throughput increases and lower delivery times. And then I would say on the low end would be probably largely just any shocks to the supply chain unexpected inflation, any unexpected weaker demand, especially for recreation and what we've built in.

[Operator]

And your next question today will come from Jerry Revich with Goldman Sachs.

Moving on, and our next question today will come from Mig Dobre with Baird.

[Mircea Dobre, analyst]

Just 2 quick ones for me. On the Specialty Vehicles margin bridge that you've given us on Slide 13, the 300 to 400 basis points of price cost, do you view that as permanent. So the 14% to 16% margin in fiscal '27 is that a structurally higher margin? And I guess the way I'd like to ask the question, the 300 to 400 bps of price cost, is that just a function of kind of a onetime benefit that you currently have in the backlog just because of how unusual maybe like the pricing environment has been over the past couple of years? Or do you think that's structurally sustainable longer term? .

[Amy Campbell, executive]

Well, I would say that we think the 14% to 16% is structurally sustainable over the long term. And what we guided was we believe as we exit 2027, there's additional 30 to 50 bps annually to grow at the consolidated margin level from there, but also at the specialty vehicle margin level, I would say. So that is a structurally higher margin that we exit 2027 at, yes. And that 300, 400 bps, right? That's a function of both the pricing that we have in the backlog, and we largely know what that pricing benefit is offset by our inflationary assumption, which is 2.5% to 3% a year over the next 3 years. .

[Mircea Dobre, analyst]

Helpful. And lastly, on the buyback authorization, how do you -- or rather, what's the approach here in terms of how you deploy this capital? Are you sort of being programmatic just kind of being consistently in the market? Or is this more of a function of being opportunistic depending on what the stock does and so on. .

[Amy Campbell, executive]

Yes. I think the buyback gives management a lot of flexibility for how we're in the market buying back shares. And I'm not going to give you specifics of what our plans are there. But we certainly, as we talked about, expect to deliver over $350 million of free cash flow over the next 3 years; the next 2 years, the Board has authorized $250 million share buyback. We can use some of our balance sheet flexibility to do that. And we can accelerate or slow that share buyback based on what makes sense and based on other capital allocation priorities that may come up. .

[Operator]

Seeing no further questions, this will conclude our question-and-answer session as well as conference call. Thank you for attending today's presentation. You may now disconnect your lines, and have a great day.