REV Group, Inc.

Greetings. Welcome to REV Group second 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. Please note this conference is being recorded. I will now turn the conference over to Drew Knopf, Vice President of Investor Relations and Corporate Development. Thank you. You may begin.

All right. Thank you, Sherry. Good morning, and thanks for joining us. Last night, we issued our second quarter fiscal 2021 results. A copy of the release is available on our website at investors.revgroup.com. Today's call is being webcast, and a slide presentation, which includes the 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 the SEC last night and other filings that we make with the SEC. We display many obligations to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All references on this call to a quarter or a year are a 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 Skanechny. Please turn now to slide three and I'll turn the call over to Rod.

Thank you, Drew, and good morning to everyone joining us on today's call. I will begin with an overview of the quarter's consolidated performance and then move to commercial, financial, and operating highlights achieved within the quarter before turning it over to Mark for detailed segment financials. We are pleased to report our best second quarter adjusted EBDA results since our IPO in 2017 and our best adjusted EBDA margin performance since our third quarter of fiscal 2018. I would add that we were able to deliver these results while faced with continuing challenges in our supply chain and labor-related constraints. Within the quarter, we successfully mitigated shortages of supplies such as microchips, chassis, subcomponents, and the availability of qualified labor in many of our businesses. Our performance reflects the commitment of our employees to serve our customers and communities while improving their productivity, enabling us to mitigate these impacts and challenges. Second quarter net sales of $644 million increased 18% over last year's quarter, as last year's quarter was impacted by reduced production stemming from the onset of the pandemic. Excluding the divestiture of the two shuttle businesses, sales increased 26% organically versus the prior year. The quarter sales were driven by increases in fire and emergency and recreation segments. Fire and emergency sales reflects our improved line rates combined with our available backlog and was in line with our expectations for the quarter. Recreation sales exceeded expectations and benefited from recent dealer signings that yielded market share gains. We also realized the combined benefit of price realization and increased line rate execution. F&E and RV performance enabled us to offset top line softness in the school bus end market and labor constraints in our municipal transit bus that affected our production. The quarter also had a strong order intake to match the sales performance with book to bill of 1.5, and we exited the second quarter with a record backlog of $2.3 billion. Our businesses have continued to improve operational disciplines that are delivering results to the bottom line. Second quarter adjusted EBITDA was $45.5 million and adjusted EBITDA margin of 7.1%. Many of our businesses were able to realize price increases while lowering discounts and allowances, mitigating inflationary pressures in our supply chain. We are beginning to see the benefit from the execution of our operational excellence pipeline, particularly within the F&E segment. We are confident that we will realize continued margin improvement within our business segments in the long term, but we continue to face and will have to manage through disruptions in our supply chain. These will present headwinds to our ability to produce and ship units in the balance of the year. Turning to slide four, we had several accomplishments within the quarter that I would like to highlight. First, we recently announced a change to our capital structure from a former term loan A and ABL to a new $550 million five-year revolver with a $100 million accordion feature. The new structure allows us to capitalize on low interest rates and is expected to save the REV Group approximately $5 million per year based on today's interest rate of 2% and our current debt level. We expect it will provide us with the necessary liquidity to pursue our financial objectives including organic and inorganic investments, while also maintaining flexibility to return cash to our shareholders. Today, we announced the reinstatement of our quarterly dividend. This decision by our board reflects their confidence in the structural and operational improvements that we have made, and the implication that these will have in the long-term financial outlook of the company. Year-to-date cash conversion has improved to 82%, and today we reiterate our guidance of over 90% free cash flow conversion on adjusted net income. We are no longer on a net debt to EBITDA leverage covenant, but we are pleased and well positioned to be exiting the second quarter this year at 2.5 times compared to nearly six times just one year ago. This outcome comes as a result of focused efforts on approving both sides of the equation over the past year. In our past calls, we have often discussed our operational agenda and our commitment to reduce complexity, improve our efficiencies, and address our cost structure, all aimed at improving our performance for our customers and expanding our margins. While we remain fully focused on the opportunities that operational excellence will yield, we have been equally focused on building commercial capabilities. This quarter was a record for fire and emergency segment and order intake. with new highs in both fire and ambulance groups on inbound order tolls. Within fire, our teams have worked hard over the past year to increase throughput, which has improved our cycle times and provided a more competitive delivery lead time. In ambulance, we have a record high backlog as municipalities and commercial contractors continue to invest dollars towards upgrading and enhancing the health and safety of their vehicle fleets. As schools plan to return to the classroom this fall, our school bus orders began to return to normal seasons, seasonal norms within the second quarter. We also similar increases in municipal transit quotes and orders, and we announced two large municipality wins within the quarter. First, we are pleased to continue our relationship with Pace Suburban Bus, which provides service to the Chicago suburbs that encompasses 284 municipalities. Pace awarded our transit bus business, ENC, a contract for 44 additional clean diesel heavy duty transit buses. Secondly, E&C won its first order with the San Francisco Municipal Transit Agency for 30 hybrid electric low floor buses for its municipal railway bus service. These buses dramatically reduced both diesel fuel consumption and CO2 emissions compared to conventional diesel. Within the specialty group, we received record orders for both terminal trucks and street sweepers as our new management team has aggressively pursued both the renewal and new customer capture awards with large national accounts. And finally, our recreation segment continues not to only participate in the healthy demand for RVs that we are seeing, but we have also seen share gains in our market share. The result is the fourth consecutive record of quarterly orders. We announced the promotion of Mike Lanciotti as president of our recreation segment. Mike is a veteran of the RV industry and has been the president and general manager of Renegade RV since 2008. During his 13 years with Renegade, Mike transformed the Renegade business and successfully led the company through the 2008 economic downturn, one of the most challenging periods and resulted in solidifying Renegade's position as the best-in-class Super C and premier Class C producer. I will add that Renegade has been one of our highest performing and most profitable businesses since acquired in 2016. We are confident that Mike will lead our business to profitable growth and build upon our recent success in serving our customers. Earlier, I touched on our ability to mitigate the supply chain disruptions within the quarter. Our procurement team has worked tirelessly and demonstrated true agility and ingenuity in multiple situations, securing components that enable our businesses to maintain production levels and to continue to serve our customers. Our Chief Supply Officer, Rob Beslowski, and his team have remained in continuous contact and actively engaged with top management of our supply chain partners to collaborate and find solutions to the issues that we are facing. Through relationships and collaborations, we were able to work a global network to source items that were unavailable through our normal channels, enabling us to keep our commitments and achieve our financial objectives. On April 15th, we hosted our first Analyst and Investor Day since 2018. This event provided a summary of our business, our markets, and our channels included a review of the changes we have made to our organization and operation over the past year. We introduced several members of our executive team, and we also introduced the REV Drive business system. The team spoke of the core tenets of value creation within the REV Drive business system. These include commercial, operational, and organizational excellence disciplines that are focused on our purpose of creating value for our stakeholders. We provided several examples of the work being done in each of these areas and specified the financial impact of these efforts. We also framed our capital allocation philosophy and emphasized that the basis is a strong balance sheet that provides optionality to pursue both organic and inorganic investments, as well as to return cash to our shareholders. Finally, we provided intermediate targets for fiscal year 2023. For those that were unable to join us, I encourage you to view the video that is posted on our YouTube page, as well as the slide deck that is posted on our investor website. The last highlight from the quarter is product innovation and the electrification within our portfolio. Our goal is to be a recognized leader in electrification of the commercial vehicle fleet. We are focused on categories where we see in-market demand that have the necessary technology and partnerships available for development and where there is a path to achieve required returns on investment. Within the quarter, we made several announcements to demonstrate our commitment to reducing carbon emissions and the electrification of our vehicles. In April, we announced that we extended our exclusive agreement with Zero RPM to integrate and distribute item mitigation systems to the AMETS market until 2024. Later in the month, we announced a co-development agreement between our leader ambulance brand and Lightning eMotors for a zero-emission, all-electric ambulance. The new ambulance will be based on the year's high-roof transit van and designed to be charged via a level two AC charging or DC fast charging. Development is progressing well with the prototype being available to customers. We expect initial commercial orders delivery to be available at the end of the calendar year. Within school bus, we are executing a backlog of orders of our electric type A buses that we received increased interest in over the quarter. Finally, we are preparing for Altoona track testing of our battery electric municipal transit bus that is expected to begin within the fiscal third quarter. We are committed to the development of electric vehicle technologies within our commercial fleets. We are building our capabilities and partnerships to enable us to lead this transition while the end markets mature and the economics become accretive. Now I will turn it over to Mark for details on our second quarter financial performance.

Thanks, Rod, and good morning, everyone. I'd like to begin by addressing some common challenges that have surfaced as the pandemic begins to fade. Almost universally, companies have seen increased demand following a relatively long period of reduced output. Competition for raw materials has contributed to an inflationary environment with high prices for commodities such as metals, lumber, and foam. Not only did costs go up, but the availability of many of our required components went down. For instance, recreation markets have seen shortages of small ticket items such as awnings, furniture, or generators that can limit the completion of a shippable unit. Shortages of semiconductors have slowed or stopped production of chassis and smaller components such as diesel exhaust fuel tanks. Fortunately, our financial results demonstrate that within the second quarter, REV was largely able to mitigate the short-term impacts of both inflation and park shortages. Since arriving, I've been speaking about inefficiencies on the balance sheet, particularly in inventory. Within the quarter, as we executed our plan to reduce and improve the quality of inventory, it benefited both the top and bottom line. First, by locating or substituting stock parts for others that were in short supply, we were able to produce, ship, and revenue our vehicles. Second, those stock parts often have been purchased prior to the onset of inflation, providing a margin benefit due to the lower cost basis. As we continue to improve our quality of inventory and enter the second half, realizing incremental benefits will become more challenging. In this environment, suppliers have put manufacturers on allocations, making alternative sourcing a necessity. Our supply chain team has done an excellent job of locating required parts, finding alternatives, and mitigating supplier price increase over the past several months. However, entering our third quarter, the environment has remained challenging with increased inflationary pressures and reduced availability and supply for component parts and chassis. Now please turn to page five of the slide deck as I move to review of our segment level performance. Barrier and emergency second quarter segment sales were $308 million, an increase of 6% compared to the prior year. The increase in net sales was primarily the result of increased shipments of fire apparatus and price realization of trucks in the fire group backlog, partially offset by lower shipments of ambulance units versus the prior year. While travel restrictions limited inspection and delivery of fire trucks in last year's quarter, which creates a soft comparison, throughput has improved on our two largest businesses, resulting in year-over-year sales improvement. Conversely, last year's quarter included a significant increase in demand for immediate delivery ambulances during the first wave of COVID-19 cases, and we shipped a large number of stock units. We have had sustained and elevated demand over the past 12 months. However, last year's spike was primarily within our fiscal second quarter and caused a difficult year-over-year comparison for the ambulance group. F&E segment adjusted EBITDA was $21.7 million in the second quarter of 2021 compared to $10.2 million in the second quarter of 2020. The increase was primarily a result of higher sales volumes, price realization within our backlog, and productivity improvements including direct labor efficiencies and lower SG&A costs partially offset by supply chain disruption and labor constraints in certain geographies. Despite these challenges, our largest fire plants productivity continues to show impressive year-over-year margin improvement, with second quarter performance 700 basis points greater than last year. We are also seeing better margin performance at our other fire plants, but are working to elevate the consistency and sustainability improvement to match our largest plant operation. There's a similar story within the ambulance group where our largest plant has demonstrated significant year-over-year bottom line improvement for the past three quarters, helping to lift the group's bottom line to a two and a half year high in EBITDA margin. Total F&E backlog was $1.1 billion, down 1% year over year. The decrease in backlog is a result of increased throughput and decreased orders of fire apparatus, primarily due to COVID-related market softness in the summer of 2020, partially offset by strong orders for ambulance over the past year. The decrease of fire backlog is a positive result, which demonstrates production efficiencies are taking hold, line rates are increasing, and fire backlog is now to a level that is more competitive from industry lead time perspective. We believe $1.1 billion of F&E backlog in our current visibility and supply chain will result in high single-digit revenue growth versus last year in the second half of fiscal 2021. Given the timing of price realization and inventory utilization that helped partially offset inflation in the second quarter and potential chassis shortages in the second half, we expect the second quarter to be the segment's margin peak for fiscal 2021. However, we do expect continued execution of OPEX projects and throughput improvements to deliver healthy year-over-year incremental margins of 20% or more. Turning to slide six, commercial segment sales of 98 million were down 31% compared to prior year period. Prior year commercial segment revenue included approximately 44 million from the shuttle buses that were divested in early May of last year. Excluding divested shuttle bus businesses, sales were relatively flat. Lower sales of school buses due to market softness and a decline in municipal transit sales related to the timing of a large municipal order that was impacted by labor shortages led to a reduction in throughput in the quarter. This was partially offset by increased sales of terminal trucks and street sweepers, which were up a combined 124% versus the prior year. These two specialty group businesses have benefited from greater capital budgets within their respective end market customers, market share gains, and increased penetration of key national accounts. Commercial segment adjusted EBITDA of $8.3 million was up 4% versus the prior year. The increase in EBITDA was primarily a result of increased production volumes and resulting profitability in the terminal truck and sweeper businesses, partially offset by lower volumes and a resulting decrease in productivity within the school bus and municipal transit bus businesses. Commercial segment backlog at the end of the second quarter was $303 million. which reflects strong order intake within the quarter, including improved orders for school buses and two large municipal transit orders that Rod mentioned earlier. Also, our specialty group had record order intake, which was up 81% sequentially and 290% year-over-year. The outlook for the second half for the commercial segment will be influenced by outside factors, such as ability to procure chassis for our Type A school buses, availability of labor and improvements within the supply chain. Given the segment's recent order strength, we expect top line growth to be in the high single to low double digit range versus last year. We also expect to see continued momentum and contribution from the specialty group, which is currently diluted to the segment margin, resulting in second half margins that are anticipated to be similar to the second quarter. Turning to slide seven. Recreation segment sales of $238 million were up 109% versus last year's quarter, which was impacted by travel restrictions, limited dealer foot traffic, and the suspension of normal production activities. Increased sales versus the prior year were primarily a result of increased unit shipments across all of our categories and lower discounts and allowances. Despite the supply chain and labor shortages, the quarter was a record for unit shipments and revenue at both our Class B and Class E businesses, and Class A and TOBLs performed at two-year and one-and-a-half-year unit sale highs, respectively. Recreation segment adjusted EBITDA was $25.1 million, up $26 million versus a loss in the prior year. The increase in EBITDA was primarily the result of increased sales volume, stronger price realization related to price increases, and lower discounting, lower operating expense, and productivity improvements across all businesses, despite the disruptions mentioned earlier. Adjusted EBITDA margin matched fourth quarter 2020's rate of 10.6%. However, this quarter was more balanced with greater contribution from our Class A business which has improved 210 basis points over the past two quarters. We are encouraged by the progress and committed to raising the peak and trough performance of this business in an effort to reduce overall cyclicality of this segment. Segment backlog increased $818 million year-over-year to $941 million, which was the fourth consecutive quarterly record and a result of strong order intake across all RV categories over the past year. During that time, we have gained retail share in each of our motorized product categories and held share in the towables business. In regards to towables, this business has historically been in niche markets in terms of price, size, and geography. With the promotion of Mike Lanciotti as segment president, we expect to expand the addressable market of this business by leveraging our portfolio, manufacturing footprint, and channel relationships. End market conditions remain strong with retail sales exceeding wholesale shipments and dealer inventories that are down an average of 60% year-over-year with most at or near historic lows for our brands. Turning to slide 8, as Rob mentioned, within the quarter, we completed the refinancing of our capital structure with a new five-year covenant light ABL. Net debt as of April 30th was $298 million, including $8 million of cash on hand versus $331 million net debt at the end of fiscal 2020. At quarter end, the company maintained ample liquidity with $223 million available under the ABL revolving credit facility. Trade working capital on April 30, 2021 was $449 million compared to $427 million at the end of fiscal 2020. Year-to-date net cash provided by operating activities was $37.1 million compared to $22 million in the prior year period. Cash generated was primarily related to higher net income partially offset by an increase in accounts receivable that was consistent with a year-over-year increase in sales. Year-to-date free cash conversion is 82%, and we have reiterated our full-year target of adjusted net income to cash conversion be greater than 90%. Given the improvements in our financial profile and outlook over the past several quarters, the Board has reinstated our cash dividend to pre-pandemic levels. We intend to maintain a strong balance sheet that is consistent with our stated capital allocation philosophy and believe the new ABL and dividend payment allow the flexibility and cash return to maximize total shareholder returns. Turning to slide 9, today we are updating full year 2021 guidance and raising our bottom line expectation. We continue to expect sales to be in the range of 2.45 to 2.6 billion or 10% year-over-year growth at the midpoint. We raise our adjusted EBITDA guidance to $145 to $160 million from $125 to $135 million for an increase of $22.5 million at the midpoint. We are raising net income guidance to a range of $52 to $68 million from $38 to $52 million previously. Adjusted net income moves to a range of $73 to $88 million from $56 to $70 million. And free cash flow is not expected to be between $65 and $88 million, an increase of $19 million at the midpoint. With that, I'll turn it back to Rob for closing comments.

Thanks, Mark. We are pleased with the progress we have made in the last year, and the evidence of this progress is demonstrated through our strong start to the year. This reflects the efforts of our leadership team, but most importantly, the work of our talent employees in our manufacturing facilities. We have continued to impress throughout a very, very difficult year. And I cannot begin to tell you how much we appreciate and respect their efforts, not simply because without their efforts, we would not have made the progress that we've achieved and the results that we presented today, but more importantly, because they play such an important role as essential workers in providing our first responders with vehicles to serve those most in need, as well as the many other purposes that our products provide to the citizens of our nation. Finally, I would like to take the opportunity to invite all active duty first responders to our third annual REV Group Grand Prix in Elkhart Lake, Wisconsin from June 17th to June 20th. This is the third year we have teamed up with Road America to pay tribute to our first responders by offering free entry to the NTT IndyCar Series event. As a manufacturer of fire and emergency vehicles, REV Group has always recognized and respected the commitment of our first responders to the safety and welfare of others before their own. This past year, first responders have been relentlessly working on the front lines. So now more than ever, we are delighted that the REV Group Grand Prix provides us a platform to honor and share our appreciation for the dedicated people who place top priority on serving our communities each day. Thank you again for joining our call today. And operator, we would now like to open up the call for questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Jamie Cook with Credit Suisse. Please proceed.

Hi, this is Chigusa Kotoko on for Jamie. Our first question is on the orders. They were strong across segments, but are you seeing customers wanting to place orders early for 2022 because of concerns on the supply chain? And if so, in which segments are you seeing them and how would you approach pricing on those orders? And then a follow-up is on RVs. The demand environment is very strong and you have been gaining market share, but do you have any plans to expand capacity as we look forward? And then on the margin front, if you could provide an updated expectation for the full year, that would be great. Thank you.

So let's kind of break the question down. If you wouldn't mind, could you repeat the first question? And we'll go through each question.

Yeah, so for the orders, we were just wondering if you're seeing customers wanting to place orders early for 2022 because of concerns on the supply chain.

I don't think we've seen much messaging of orders coming in early because of supply chain. I think there might perhaps be some of that. An RV just related to getting in line for the extraordinary demand that we're seeing. There has been, you know, obviously always you see orders move around when you announce price increases to the channel. So there's been some of that, but that's kind of quarter to quarter more than current to a year period. So I don't, I think probably in RV there's people ordering to get in line to reserve positions to replenish backlog or inventories. but I don't think we're seeing broad movements related specifically to supply chain issues that we're experiencing. And your second question, please.

Yes, it's on RVs. So because of the strong demand environment, do you have any plans to expand capacity as we look forward and also what you expect from margins for the full year?

Yeah, I'll speak to the... We are evaluating all of our facilities and less about the view of historic demand because we've really been focused on the peak and trough of this business to make sure we're focused on improving the margin performance for eventuality of a slowdown that will come at some point that we don't foresee now, but we're working hard to evaluate break even and optimize our margins to have a good peak to trough performance. So part of that with what we've done here is we know we actually picked up some share, and we expect our situation to improve as the market slows relative to other declines we've seen historically. And so we are evaluating business by business what that might imply to capacity requirements, not only to meet some of the demand we're seeing now, but more how it reflects forward to share position changes as the market maybe contracts in the months or quarters ahead. that we don't see now. I'll be honest, we don't see that now. We continue to see incredible demand and margin historically low inventory levels. But we are keenly focused on making sure that we're operating in a way that keeps us focused on the eventual downturn so we optimize our margins in that situation. And Mark, you might want to comment on the margins for the .

And the outlook, as I mentioned in my prepared remarks, You know, with the mix of Class A picking up in the second half, we'd still expect to be in the high single digits in the second half and then for the full year. So, you know, a little bit of drop from Q2, but ultimately in the high single digits, which is consistent with our previous guidance there as well. So we feel pretty good about there. But as you know, Class A is diluted to the profile of the business. So as volumes pick up there and we're able to get more throughput there, it'll be dilutive. in Q3 and Q4, but ultimately will be in that high single digits for the year.

And I believe you had one final question as well.

Oh, no, this is all covered. Thank you so much.

Okay, thank you. All right, thank you.

Our next question is from with Robert W. Baird. Please proceed.

Yeah, good morning, everyone. I also have several questions, but I think I'm going to break mine up up front. So to follow up on this Class A discussion here, can you maybe remind us what the margin differential is relative to segment average? And I'm sort of curious how you think about the margin potential of this business going forward, finally starting to see some momentum in a Class A market. How are you planning for this business over the next, call it, 12, 24 months?

Yeah, I would say, Meg, as you always say, you know, look at the industry, it's always that mid single digits, right? We've always said five to eight, five to seven, six to eight sort of business, whereas, as you know, our other businesses are, some of our best performing, which are double-digit, right? Double-digit margin businesses. So when we're talking about dilution, we're talking about executing at the industry norm, which we believe is a six to eight type of number, five to seven, however you want to thread the needle there on that business. But we continue to see accretion there, as we talked about over the last few quarters, going from a loss over the last couple of years here to actually performing well in executing and actually getting benefits from not only operational improvements we're making there, but also leverage on the volume that we're seeing.

Okay. And then maybe if we kind of look at your guidance, you know, you've increased your EBITDA midpoint by $12.5 million. I'm just sort of trying to understand how the quarter itself and what you've seen in the quarter has kind of shaped your view of the year here. I recognize that you're not providing quarterly guidance, but obviously you've had good performance relative to what we were forecasting and where consensus was. Trying to understand how the quarter played out relative to your expectations, and if essentially this guidance raises primarily a factor of the quarter itself, or if there are other moving pieces as we think about the back half of the year, again, relative to your initial expectations that we need to be aware of.

Yeah, I think just to clarify, Big, right, it was 22.5 feet from midpoint because we're up at 152.5 versus 130, so when you look at that, Obviously, it is a beat from, I guess, your consensus of 31 or 32 million. But our expectations, again, with the throughput was very encouraging, as Rob referred to, in the recreation segment. So we're able to get a lot more units than our expectations, especially in the Bs and Cs. So they continue to operate at capacity and do things there from that perspective. We did see some improvement in our California operation, which we that were hesitant coming into quarter given the labor constraints. So we're seeing those pickups or, you know, they're starting to operate at more of their normative level entering Q3. But our largest challenge when we look at the full quarter here is now the availability of chassis, which we pointed out, which that business is heavily reliant on getting chassis, especially in not as much in Class A, but in our Bs and Cs, making sure that we have the chassis availability there. maintaining that throughput will be a challenge in Q3 and Q4, but we obviously looked at it on a day-to-day basis from that perspective. So when you think about our full year, you know, reflection of the, you know, going to your consensus numbers, which were essentially on our expectations of 130 previously, that 22 million was a reflection of the beat there, and then also some upside in Q3 and Q4 from what we originally expected.

Okay. And then maybe last question for me is when we're kind of looking at your fiscal 23 targets in the light of the updated guidance here for fiscal 21, I'm curious if you think at this point we should adjust our expectations a little bit for the achievement of those fiscal 23 targets. I mean, at least to me it seems like we could be seeing 23 done in 22. Can you maybe comment on that? And, you know, at what point in the year should we be expecting some maybe adjustments or tweaks to that 23 target guidance? Thank you.

Yeah, so I think, Migg, from that perspective, you know, obviously the 180 was a midpoint of the range that we're talking about. I think in investor day, we laid out, you know, and I think we had some feedback there, you know, that effectively to get to the 180, we were having to do things that were within our four walls, but we do have additional upside to the extent that we grow higher than market, and then we also perform more on the longer-tail projects like our VAB and platforming that we pulled out. So at this point, you know exiting the year i still think we're intact to deliver near the bottom end of those ranges with the extension of margin expansion that we sort of talked about the 30 or 40 basis points that we would expect to see over the next couple of years would get us more to the mid to top end of that range. So we're still feeling comfortable there. But obviously, as we move through this year and then into next year, we'll be looking at those targets. But right now, we feel comfortable that, you know, with that range, the midpoint that was reflected there and the range that gives you some opportunity to go above, we feel comfortable that that's sort of where we should stay right now.

Okay, thank you.

Our next question is from Jerry Rivich with Goldman Sachs. Please proceed.

Yes, hi. Good morning, everyone, and congratulations on the strong performance.

Thanks, Jerry.

Thank you. Can we just revisit the discussion we had at the analyst day about your approach to the supply chain, you know, under the prior management team during a period of chassis shortages? There were significant cost overruns and, you know, really significant shortages flowing through. the factories and obviously you folks are managing much better in this shortage environment. Can you just frame for us with the benefit of this quarter in the books and compare and contrast the different approach to the procurement because obviously the results in a pretty similar environment are pretty meaningfully different here?

Yeah, I can't – I always say this, but I Can't speak in great detail in terms of how it was managed in the past or the issues that were faced in the past. I mean, the issues we're facing now are very public related to chassis through the chip shortage and the shutdown of the OEMs on the chassis side. So we're managing through that with close contact with those OEMs. We're benefiting from some inventory positions that we've had to keep our plants operational and keep us on tact aware. where we're going to against our guidance. But I would say this operationally, you know, we obviously made some pretty significant changes within our supply chain purchasing organization. It's enabled us to, I think, elevate the kind of discussions and the forward thinking that we have between our organization and those suppliers, not just chassis, but broadly the many suppliers that we have to keep our lines running. Right now, as everyone knows across the industries and specific to chassis, there's pretty extraordinary situations happening that we're having to manage through, and the maturity of the team that we put together in the last six months to get in front of that and have conversations to make sure that, one, the allocations that we have are going to be fulfilled, but also that we get a line of sight on plant startups and we get early access to demand. I think that our supply, I think our team, the maturity that they've had is pretty extraordinary. Actually, we're actually spending equal amount of time on the efficiencies of those chassis pools to make sure that that we optimize what we have, that we don't have chassis that we don't have demand for. I think we're being much tighter in the months, in the quarters and months ahead of us around how we think about what we want to get allocation for and the disciplines we build around making sure that we optimize those inventory levels so we have the right chassis at the right time and we don't have too many set in the pool. Mark can probably comment on that more specifically, but it's more of a forward thinking, probably across business unit, cross-segment thinking about what our needs are related to these commercial chassis and then forward engagement from our team much more proactively with our supply chain partners to make sure that we're managing that so we don't have issues where we can't produce product. It becomes a barrier for us in hitting our targets. And right now, like I said, I think we're in a good spot against what we've given guidance for today for not only for the balance of this year to go deliver against those targets based on the the conversations we're having with our suppliers on that end. But again, it is a very challenging time that everyone's facing in the industry around chassis supply.

Mark, do you have anything to add to that? Yeah, Jerry, I would just add, as I mentioned the investor day as we talked, the disciplines we have now around our inventory management and how we're tracking inventory, which includes chassis and all the components, the manufacturing floors, visibility to what inventory they have on hand, and when they can start a job and what's there. And like I said in my prepared remarks, our quality is a lot better, but also our manufacturing planning, as Rod referred to, we have a lot more visibility to when we can start a job, what inventory we have on hand. And then likewise, the ops team is working with engineering to understand to the extent we have a part that is missing is there a substitute that we can go to the customer and actually discuss substituting parts so they can revenue the product and deliver it to them right because our customers are dealing with the same thing they want the product as as well so You know, as I said, we have a dual benefit here of sort of the actions we kicked off last year, which were unrelated to the shortages, but just making sure we have a good quality of inventory. And as Rod said, on the chassis pool, we're looking for not only getting more chassis, but do we have the right chassis and allocating them properly and addressing them with our customer base. So we feel pretty good all the way through, not only supply chain, but operations all the way to engineering.

Thank you. And then, you know, on price cost, based on the qualitative comments, it sounds like price cost was a year-over-year tailwind in the quarter. Can you just confirm and maybe quantify that for us? And can you talk about what does your guidance anticipate for the year-over-year price cost in the back half of the year?

Yeah, I would say we were able to mostly offset, and we were able to offset inflation through savings as well as the price realization. We've talked about that before. Obviously, the recreation group is definitely taking price. I think they, across the industry, were getting ahead of inflation with the price increases. Our longer backlog businesses, we've been able to offset the inflation through purchasing initiatives that Rob and his team have kicked off, so we feel pretty good there. You know, when we talk about inflationary pressures, we're probably talking in the neighborhood of $5 million that we see in the outward quarters as a head of us that we have to address. Our bigger challenge is not the inflation, but just making sure we have the products that and the components so we can actually revenue our products. If you look at the back half, we probably have about 600, 625 million of sales that are dependent on getting chassis to deliver. So that's probably a bigger challenge than it is on the inflationary front and our ability to offset that. So to the extent we have components, we feel pretty good, like Rod said, delivering our guidance and entering that mid-range that we provided.

And, you know, there's optimism about the chip shortage potentially alleviating heading into year end. When you folks look at the supply chain challenges that you're managing in the back half of the year, what's the relative complexity compared to the quarter we just went through? How do you see that dynamic playing out?

Yes, it's a lot more complex entering the quarters because as we mentioned, we fortunately had quite a bit of chassis entering the quarter and we're still able to batch build in a lot of our locations as we talked about previously. And then as we exited the quarter, it became harder to actually batch build so it was more of taking the mix that you actually had within your your back what I would say backlog of sales but also your backlog of chassis or the chassis that we had available to us so it became more of here's the units we have that we can produce on versus at the beginning of the quarter it was more of You know, we have 10 orders for this chassis, so let's all produce those units all at once here through a line, and we've got the efficiencies there. But our visibility now is more of we need to replenish that chassis pool such that we can get to that efficiency level in the back half. But I agree with you, Jerry. We are seeing promising signs here, so it's more of a short or near term. challenge as we manage the mix of our chassis supply. And then we're hoping, just like everyone is, that the announcements that have been made by the OEs hold and that we're starting to see those chassis come back online. And we do have the appropriate allocations from them.

Yeah, I just want to make one comment. We've worked, obviously, as I mentioned earlier, very closely with the OEMs around the chassis. And as long as the OEMs launch and approximate their dates of of ramp, then we're going to be in a good position for the balance of the fiscal year. And we're working closely with them and have no indication that that won't happen. And so we feel pretty solid about where we are. But it's something we have to manage every single day, and we're doing that.

I appreciate the discussion. Thank you. Thanks, Terry.

As a reminder to Star 1 on your telephone keypad, if you would like to ask a question, Our next question is from Joel Tis with BMO Capital Markets. Please proceed.

Hey, guys. How's it going?

Good. Thank you, Joel.

Can you talk a little bit about sort of the industry inventories and the recreation industry just to give us a sense of where we are, how much needs to be rebuilt?

Yeah. Our view of the inventory is I think when you look at probably an average inventory level across a blended average inventory across all segments, They're about 60% of a normal inventory level right now, which on a forward basis might mean to replenish those back to a historical average. You're looking at six to nine months worth of demand fulfillment. I think those are approximates because you've got to get into the details segment by segment. But on a slowdown, I think you're looking at a considerable lead time to replenish inventories to what might be considered a historical average. That's all I did.

Can you give us any sense of how you're thinking about the margins of your backlog? Is it highly dependent on sort of all these fires you're fighting and better productivity in the factories and chips and chassis and everything? Or is there a little better certainty? I mean, you don't have to share with us the answer, but just sort of internally, you feel a little more confident about what's in the backlog in terms of pricing and margins?

Yeah, I think when I think about price, and I think that's kind of a question about price, cost, and your backlog and how it's going to flow through. Before the exit of COVID, we were putting a lot of effort focusing on the health of our backlog relative to how we price and cost into that backlog. So there's a lot of effort around optimizing our cost position, standing up a centralized purchasing organization to go after opportunities. Even in an inflationary environment, we see opportunity. because of maybe things that we didn't do in the past. But also, as we've talked about, we have aggressively pursued price adjustment to our businesses going forward, but also in some cases surcharges in prices for backlog-based businesses. So we're not getting into looking at 22 yet, but certainly looking at the balance of year, we're in a good position there to deliver against the guidance we've provided. And I think the actions we're taking both on a cost basis and a price basis to make sure we're in a position where we have positive price cost, we're going to be in good shape there. It's work every day, and obviously when inflationary issues are going up fast, you've got to be on your toes to take care of that, but our team is fully aligned to manage that and understand the implications of not doing it, and we're certainly on top of that.

And then my main question is, you know, we're talking a lot about sort of, you know, your execution, operational excellence, fighting some of the fires that are out there currently. different franchises that you guys have kind of inherited. Can we just take a minute and go through some of those franchises and where you feel like you're the leader? Like, it seems like fire and ambulance, you're kind of clearly the leader, but some of the other areas may be a little harder for us on the outside to decipher your competitive positioning. Thank you, and then I'm done.

Yeah, thank you. So there's a, with a business with this much complexity and different end markets. It's really a business unit by business unit discussion. I think generally, with some exceptions, we're in a top three position in almost every single product segment, product category that we have. There are a few exceptions with an RV, and that really gets into sub-segments, if you will. We have businesses that are leaders, and we have businesses that at one point were a leader that were focused on getting those back to leadership positions. Trans is probably a business where you could look at that and say that from a share position, we're not a leader, but I look at that and look at the actions that we're taking as an incredible opportunity for growth for us because our business performance there is just so strong from how we execute and operate and deliver at our customer satisfaction level. So in that business where we're maybe subscale relative to competitors and subscale relative on share, It's a high-performing business for us that does a very good job executing that I think that it speaks to a growth opportunity for us. So it's a very detailed question. But fire and emergency, we're clearly in a leadership position. And then RV, it's segment by segment. And then commercial, we have some variation. Our type A school bus is a leader in that industry. And our sweeper business in three-wheel is a leader. Four-wheel, we're not a leader. It breaks down very differently depending on which business you're talking about, but I would say this. We are really focused on execution operations and aligning these businesses around the commonality. We can go scale and get leverage to improve, but we're also really focused on commercial because I think that if we can build a commercial excellence capability here, that we have a great opportunity to grow these businesses above market growth, both organically and inorganically. to drive growth that will be from our Investor Day presentation accreted to the outlook that we gave. So we're pretty excited about what's ahead of us there.

That's great. Thank you so much.

And we do have a follow-up question from Ming Dalbury with Robert W. Baird. Please proceed.

Yes. Thanks for taking a follow-up. I just wanted a little clarification on the fire business. You talked about strong order growth, but I'm wondering if we're looking sort of on an apples-to-apples basis, kind of adjusting for the acquisition that you made there, and we're kind of comparing demand to, say, pre-COVID levels, can you give us a sense for where order intake, where demand seems to be, And I'm kind of curious, you know, the expectation here was that given a COVID disruption, we could be seeing the fire market maybe a little more disrupted as we think into even into 2022. How has your view of demand and of this market changed over the past, call it, three to six months?

Well, I would say this, Meg, it's a good question. I don't have the data in front of me to kind of have a comparative analysis to carve out performance pre-acquisition. But I can talk specifically to what we're seeing in the market and how we feel our competitive position is relative to market demand. I mean, our order intake the past five, six months has been at record levels. Even if you pull out some of the businesses that have been acquired, the orders have been really, really strong. The forward demand that we see, the work we're doing with our channel partners, we see that continuing. We are going to go through a period of time here where orders may be seasonally trough a bit over the next month or two, but when we think about market activity and market share and our position, we feel very good about the position of each of our brands, and then more importantly, our ability to execute, our improved ability to execute over the past 12 months and improving lead times and delivery against that backlog. So while we continue to build backlog and reduce lead time, it's a great situation because we're converting much better. But I think that there was some softness perhaps in our share position going back over the last year, probably pre-entering the fiscal quarter this year. But the last six to seven months, we've seen really positive momentum from an order rate basis And I think it's a market, but also I think it's a share take back to get us back where we need to be. And I think it's mostly attributed to the commercial excellence work we're doing, being more proactive with our dealer base, but also honestly what we've done to improve our performance for our customers in terms of operations. So that's where we're at. But I think we see nothing that would suggest that the fire market is softening. We think it's going to be pretty healthy here going forward based on what we're seeing in our pipelines and conversations with the market.

Appreciate the call. Thank you.

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

Thank everyone for joining and also thank you for the very thoughtful questions. Obviously, in closing, in a recap, we're We're very pleased with the progress we've made over the last year when you think about coming through a very difficult, challenging time of a transformation and a turnaround in the context of a global pandemic and being able to put the results on the paper that we put on it in terms of maintaining revenues and margin expansion. And again, we've asked a lot of this team to think differently and to do things differently. And our employees have just done a great job responding. Our manufacturing facilities have continued to work hard and do what we've asked and do things differently, and we couldn't be more appreciative of what they've done. So with that, we're going to close. We're hard working on the next quarter, and we really appreciate your attendance and your thoughtful questions today. Thank you.

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