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spk07
Greetings. Welcome to REV Group Incorporated Second Quarter 2022 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 Knapp, Vice President of Investor Relations and Corporate Development. Thank you. You may begin.
spk06
All right. Thank you, Sherry. Good morning, and thanks for joining us. Earlier today, we issued our second quarter fiscal 2022 results. A copy of the release is available on our website at investors.revgroup.com. Today's call is being webcast, and a slide presentation, which includes a reconciliation of non-GAAP to GAAP financial measures, is 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've described in our Form 8K filed with the SEC earlier today and other filings that we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All references on this call to a quarter or a year are our fiscal quarter or fiscal year unless otherwise stated. Joining me today on the call are our 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.
spk04
Thank you, Drew, and good morning to everyone joining us on today's call. Today I will provide an overview of the quarter's consolidated performance and then move to commercial, operating, and financial highlights achieved within the quarter. before turning it over to Mark for a detailed segment of financials. Second quarter results reflect continued strong order demand and execution in a challenging supply chain environment that has impacted industrials for the past three quarters. Strong demand for components and materials, combined with lingering labor challenges within our supply base, have restricted the availability of key components such as wiring harnesses, radiators, axles, and others. As a result, our businesses that manufacture purpose-built chassis such as fire apparatus, and municipal transit buses continue to experience throughput challenges and labor inefficiencies related to rework as these components are received. Our upfitting businesses have also experienced inefficiencies as OEM provided chassis receipts declined throughout the quarter. While we experienced improved sequential chassis pool allocations in the first quarter, several OEMs scheduled shutdowns or limited production at their facilities within the second quarter which adversely impacted the fill rate against these allocations. The receipts of chassis are much lower than expected, and what is delivered is almost always of a different mix to what our production schedule required. This impacts our ambulance, school bus, and certain recreation businesses' throughput and efficiencies. Second quarter consolidated net sales of $576 million decreased 11 percent versus $644 million in the second quarter of last year. The decrease was driven by lower sales within the fire and emergency and commercial segments, which is partially offset by increased sales within the recreation segment and price realizations from the actions that we have taken over the past year. Completions in the fire and emergency segment were challenged by shortages of chassis and key components mentioned earlier. The recreation supply chain has remained resilient and the segment continued to deliver strong results and execution with record sales against their record backlog. Consolidated EBITDA of $23.8 million was down $21.7 million versus the $45.5 million of the prior year. Current year results were driven by the recreation segment, which posted a record $28.7 million adjusted EBITDA and a record 11.9% margin performance. This was largely offset by lower sales, labor inefficiencies, and inflationary pressure within fire and emergency and commercial segments. Inefficiencies in the quarter were due to lower unit sales and our decision to maintain the direct labor staffing levels required to complete rework and deliver these essential need vehicles to our customers. Please turn to slide four for highlights of the second quarter. The backlog of each of our segments is at a record level. We continue to experience strong in-market demand for our vehicles. This combined with lower production driven by previously mentioned component and chassis shortages. have resulted in record consolidated backlog of $3.6 billion, an increase of 55% versus the prior year. At our current line rates, backlogs extend into fiscal year 2024 for several of our businesses. In April, we were pleased to debut the first North American-style fully electric fire truck at the Fire Department Instructors Conference. This new electric fire truck allows departments to drive and pump on electric only and delivers the longest electric-only pumping duration in the industry. The show generated new interest from dealers and customers of our E1, Ferrara, KME, and Spartan brands. Attendees were among the first to see and learn about Vector, which is now available in each of these brands. We continue to return cash to our shareholders in the form of dividends and share repurchases. Within the quarter, we deployed $21.5 million towards the repurchase of common shares consistent with our balance use of capital. Exiting the second quarter, our leverage ratio was 2.1 times net debt to trailing 12-month EBITDA, which is near a low end of our target range. Our updated free cash flow guidance of $64 million at the midpoint provides ample opportunity for additional share repurchases, token acquisitions, or debt reduction after accounting for potential dividend payouts in the second half. Please turn to slide five. As you know, the supply chain challenges we referenced in today's earning release and on this call have now existed for several quarters. Entering the second quarter, we believed that our supply chain would improve in the second half of this fiscal year. Within the quarter, we did not experience improved supply chain, and in certain cases, the situation has worsened. We have updated our expectations with the current view that a supply chain recovery has likely been pushed into calendar year 2023. Our supply chain team is in constant contact with our key suppliers, including having our people onsite at suppliers' facilities. I am personally communicating with executive management at our OEM partners regarding the allocation and fulfillment of chassis to meet our production plans. The availability of semiconductors and electronic components have resulted in the OEMs temporary closing a portion of their factories or reducing shifts over the past several months, as they have reported. This has resulted in lower than expected chance of receipts in the second half and planned lower line rates within our ambulance business. These actions will be aligned with appropriate flexing of costs to match reduced production rates. We continue to work to find creative solutions to navigate a shortage of critical parts. We have placed labor into our supply base where necessary. Efforts are ongoing to improve our multisourcing engineering solutions to address sole source components. Within the second quarter, we put boots on the ground and have created a physical presence that keeps suppliers to drive operational intensity needed to fulfill our demand. Last quarter, we discussed pricing strategies that included both forward pricing and repricing a portion of our backlog. We continue both efforts with actions that are designed to align the backlog and new sales with our current and future build costs. Our pricing process includes Continuous review of anticipated foreign inflation aligned with our current production lead times by business and by product type, and we will continue to move to price accordingly to preserve price costs. Finally, the RevDrive business system continues to be deployed across the enterprise. We would have undoubtedly been farther along in this process if the working environment were more stable, more predictable, and consistent with the pre-COVID conditions. Over the past several quarters, we have placed overweighted focus and efforts on tactical actions in managing materials to achieve throughput and sourcing to mitigate input pricing. Despite the near-term disruptions, we remain committed that the strategies of our rail drive business system are correct and will provide long-term value creation that we defined in our Investor Day presentation. I will now turn it over to Mark for details on the second quarter financial performance. Mark?
spk05
Thanks, Rod, and good morning, everyone. Please turn to page six of the slide deck as I move to a review of our segment-level performance. Fire and emergency second quarter segment sales were $245 million, a decrease of 20% compared to the prior year. The decrease in net sales was primarily the result of fewer shipments of fire apparatus in ambulance units, an unfavorable mix of fire apparatus, partially offset by price realization of units in the backlogs. F&E unit starts and completions continue to be impacted by critical part shortages and reduced chassis receipts from our OEM suppliers, resulting in 17% fewer unit shipments in the quarter versus prior year. Within the fire division, sales have been negatively impacted by shortages of key components, including radiators, axles, and wiring harnesses. Within the ambulance division, OEM-provided chassis deliveries have decreased since our last earnings call. In the fourth quarter, our average chassis receipts from a key OEM were 54 per week. During the first quarter, receipts were varied between 12 and 89 chassis and averaged 34 per week. At the time of our last earnings call, we felt the trend of allocations had improved, but indicated the fill rate and timing of receipts was uncertain. Our second quarter chassis receipts averaged just 10 per week, resulting in lower than expected unit starts, completions, and sales. F&E segment adjusted EBITDA loss was $2.2 million in the second quarter of 2022 compared to $21.7 million of EBITDA in the second quarter of 2021. The decrease was primarily a result of lower volume and inefficiencies related to supply chain disruptions and unfavorable mix of fire apparatus and inflationary pressures partially offset by pricing realization. The fire business produced fewer aero units, and availability of parts resulted in a greater mix of commercial versus custom units, resulting in a lower average selling price and profitability. Ambulance production planning remains challenged by uncertainty surrounding chassis receipts. Requests needed to support our production plans have not been fully allocated, and the alternate receipts have not consistently met allocation by number or type. As Rod noted, throughout the second quarter, the F&E segment retained labor to address the significant level of rework associated with erratic component supply and the expectation of improved chassis availability within the ambulance business. At the end of the second quarter, we lacked chassis to run a full production schedule, and beginning in the third quarter, we made the decision to execute furloughs in certain ambulance businesses. The combined impact of the part shortages and chassis constraints on our production throughput as well as related labor and efficiencies, resulting in a 35% year-over-year decremental margin. During the quarter, our KME production facilities in Pennsylvania and Virginia completed their final KME units as planned, and facility disposition is in process. Within the quarter, we received $2 million of cash for the sale of certain assets and are executing the sale of the remaining properties. Unadjusted second quarter results include $8.2 million of charges related to the wind-down of these operations, which includes $7.3 million of restructuring and related charges, as well as $900,000 of accelerated depreciation on buildings and equipment as it reached its final use date. We have completed the first CAMI unit and a new production facility. However, the full ramp of production for CAMI backlog continues to be impacted by supply chain constraints. Total F&E backlog was a record at 1.8 billion, an increase of 63% year-over-year. The increase in backlog results in strong orders for both fire apparatus and ambulance units, as well as price actions taken in the last 12 months. We expect conversion of these orders to sales to remain challenged, and our expectation for supply chain relief that would allow for accelerated top-line growth has been pushed into calendar year 2023. The midpoint of updated guidance anticipates we'll experience lower chassis fill rates than first half run rate with improved fire apparatus sales offsetting the sales decline in ambulance. The net result is that we expect third quarter F&E segment revenue to be approximately flat with the second quarter run rate, followed by a small increase in the fourth quarter. Given the cost actions we are taking to align labor staffing levels to reduce production rate, we expect to convert second half sales at a 30 to 40% incremental margin compared to the first half. This excludes the second half benefit that we expect to realize from the closure of the KME facilities. Turning to slide seven, commercial segment sales were 91 million, a decrease of 8% compared to the prior year period. The decrease was primarily related to lower shipments of municipal transit buses partially offset by increased shipments of terminal trucks and street sweepers and price realization. Municipal transit bus sales declined 55% versus last year, primarily due to shortages of critical parts such as destination signs, exhaust kits, and wiring harnesses that resulted in zero shipments in the month of April. School bus unit sales were approximately flat versus last year, but revenue was impacted by a mix of lower-priced buses sold during a competitive bidding environment in prior year. Within the specialty group, we are encouraged by increased terminal truck and street sweeper production, which benefited from improvement initiatives designed to increase throughput. The business set a one-month record for completed trucks in the quarter, and sweeper production exited the quarter at its highest rate of the year. Commercial segment adjusted EBITDA of $4.4 million decreased 47% versus prior year. The decrease in EBITDA was primarily a result of lower shipments and mix in the transit bus business, unfavorable mix within school buses, inefficiencies related to supply chain disruptions, as well as inflationary pressures, partially offset by increased shipments of terminal trucks and price realization. Commercial segment backlog at the end of the second quarter was a record 531 million, with increased orders experienced across all product categories. The commercial segment outlook anticipates a recovery of municipal transit bus shipments as dual sourcing initiatives take hold, improved profitability of school bus sales, and a continuation of the improved performance within the specialty group. We expect the commercial segment quarterly sales cadence to improve sequentially through the back half at a normalized 15% incremental margin. Turning to slide eight, recreation segment sales of 241 1 million were up 1% versus last year's quarter. Increased sales were primarily a result of increased Class B unit shipments and price realization across all product categories, partially offset by fewer shipments of Class A, Class B, and total products. Despite supply chain challenges, our Class B business continues to streamline operations and achieve record unit production. Lower shipments of Class A and Class C units were primarily related to supply chain constraints, which included shortages of awnings, windows, generators, and chassis. COVID-related absenteeism and similar supply chain constraints result in lower shipments of campers and total units. Recreation segment adjusted EBITDA was 28.7 million, up 4 million versus the prior year. Segment margin 11.9% increased 130 basis points versus the prior year and is a segment record. The increase in adjusted EBITDA was primarily a result of increased shipments of high-margin Class B units, a favorable mix of Class A and Class B units, and price realization, partially offset by inflationary pressures and inefficiencies related to supply chain disruption and labor constraints. Segment backlog of $1.3 billion increased 39 percent versus the prior year and was an eighth consecutive record. Orders continue to be strong across all categories, and dealer inventory for our products remains low. We expect approximately 55% of recreation segment sales to be realized in the second half and margins to remain in the low double digits with robust sales of Class B and Class C units and improved profitability in our total business. Turning to slide nine, net debt as of April 30th was $237 million, including $5.9 million of cash on hand versus 242 million net debt at the end of fiscal first quarter. The decrease in net debt will result in free cash flow generation within the quarter of 27 million, partially offset by share repurchases of 21.5 million, or 1.7 million shares, and an average price of $12.84. Year-to-date cash return to shareholders totals 52.3 million. We also declared a quarterly cash dividend of 5 cents per share payable July 15th to shareholders record on June 30th. At quarter end, the company maintained ample liquidity with approximately 294 million available under the ABL revolving credit facility. Trade working capital on April 30th was 365 million compared to 368 million at the end of fiscal 2021. The decrease was primarily a result of increased accounts payable and customer advances partially offset by increased accounts receivable and inventory. Our third-party chassis inventory, both on balance sheet and within OEM pool, decreased $22 million sequentially. On a year-over-year basis, our overall chassis inventory is down $32 million. Year-to-date cash provided by operating activities was $27.4 million compared to $37.1 million cash provided in the prior year period. The decrease was primarily due to lower net income partially offset by the trade working capital inflow. We spent a total of $4 million on capital expenditures within the quarter. Today, we update full-year guidance to reflect the continuation of supply chain challenges previously discussed. We now expect sales in range of $2.25 to $2.4 billion, a decrease of $100 million at the midpoint. Adjusted EBITDA is expected to be in the range of $100 to $120 million, a decrease of $30 million at the midpoint. We expect net income in the range of $14 to $35 million and adjusted net income in the range of $43 to $62 million. We raised our estimated free cash flow conversion to 120% from 90% at the midpoint with free cash flow in the range of $58 to $70 million. We continue to believe our leverage ratio combined with our EBL liquidity and strong full-year cash conversion positions us for value-accretive capital deployment and opportunistic share repurchases. With that, Operator, we can turn it over for questions.
spk07
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 2 if you would like to remove your question from the queue. And for a participant using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question is from Jerry Rivich with Goldman Sachs. Please proceed.
spk02
Yes, hi. Good morning, everyone. I'm wondering if you folks can talk about with the work that you folks have put in dealing with the supply chain environment now, you know, as you look at what 2023 might look like compared to the exit rate. I know it's too early for guidance, but can you just touch on from a high-level standpoint with the margins improving over the course of this year, what that implies for year-over-year opportunity for EBITDA growth in 23.
spk05
Yeah, I think, Jerry, like you said, we still have uncertainty. You know, obviously, we still have a large range in the back half of the year at 100 to 120. So, like you pointed out, it's still uncertain what's going to transpire here from a supply chain. I mean, obviously, we've talked about the actions we've taken that Rod quoted around having people on the ground and managing it, but at the same time, we are furloughing people, as we discussed. So we still need to see how the chassis supply is going to, the fill rate is going to play out, as well as some of these key components that are working on dual sourcing, as we point out as well, especially around radiators and axles and wire harnesses. So it's really too early to give a 23 look as we exit here.
spk02
Okay. Sounds like a number of moon pieces. And then in terms of the move to furlough employees, you know, obviously we're in a really tight labor environment. Can you just talk about your prospects of bringing those folks back once you're able to address the supply situation, given the labor backdrop?
spk04
Yeah, there was three things we were thinking about, Jerry, when we went through this process. I mean, obviously we talked about it in our fourth quarter, and I know in our first quarter round we were retaining labor for three reasons. One, we had to finish the rework. We have to have a pool of people that can go out and retouch the vehicles that aren't getting finished on the line. The second one is they're just – the customers are obviously anxious to get their vehicles because of the extended lead times. And the third one was the uncertainty around the question you asked around how do you get these folks back? I think we've hit a tipping point here where we flex our costs. We're going to flex our costs aligned to the throughput we can achieve, but we are still going to retain some labor relevant to the amount of rework we've got to do to finish these products. So that touches both the customer issue and it touches the rework issue. But I think that we're going to have to think about the second half ramp that we had and having people for that, plus we're going to have to go find the folks. And right now, with the furloughs, we're extending medical benefits. So we're trying to keep those folks in our team here as much as we can while we await chassis delivery. But we got to the point now where betting on the ramp here is not a good business decision. So that's why we're making the move we have to more closely have our costs reflect the rate that we see being able to build and get throughput.
spk02
That's clear. And the furloughs, what proportion of the labor force is impacted?
spk05
From a percentage, in rough numbers, about 100 people, and it was only a couple facilities within our ambulance division since they're the most hit by the chassis, so it's about 100 people that were furloughed here. And they're 30-day furloughs right now that we're executing.
spk02
Okay. I appreciate the discussion. Thank you.
spk07
Our next question is from May Dalbray with Baird. Please proceed. Hi.
spk01
Thanks for taking the question. Good morning. I guess I'm looking to get a little more color and context from you on the price increase component to the discussion here. It sounds like there's a couple of things happening. It sounds like you've repriced backlog. Maybe you can comment a little bit as to how you're doing that and what segments are impacted here. And then you're also talking about additional price increases that have been put through. So what I'm wondering is what sort of mechanism are you using here? Are these just outright list price increases? Are they surcharges? And can you give us a sense for the magnitude of what we're talking about here in terms of these price increases?
spk04
Yeah, so I'll start and Mark can add in here. We have done selective backlog price increase. You know, first off, RV prices, when they reprice, they reprice on a forward basis. So everything that's in the backlog gets repriced when it's shipped. So that one's kind of self-regulating relative to managing inflationary pressures. The other three businesses are the ones where we've looked at backlog pricing and trying to match looking at our backlog, the maturity of our backlog, and when the unit was put in the backlog relative to inflation. and then working with our dealer and market customers to go attack the cost challenges that we have in our backlog. And we haven't talked about where we're at with that in terms of the magnitude, but we've had a measure of success in recovery against some areas where we had some costing issues. The forward pricing is really all of the above. We're doing surcharges. We're doing list price increases. We've indexed it some on the surcharge side. So We're looking at the best way we can to make sure that we're going to cover the price-cost challenges that everybody's facing right now. So we've been pretty broad in how we've done it. We've tried to be consistent across our businesses, but there are mark-to-market industry-to-industry variations in how we've applied the cost increases. But as I said in the prepared comments, we're looking at it daily. We're looking at forecasting what we think inflation is going to be relative to lead times. and we're making future pricing decisions around making sure that as we do the math around the forward projection of cost versus the build time that we're going to be in a spot where we can mitigate the price-cost challenges that the industries are facing right now.
spk01
And what is your sense of how these price increases are impacting end-user demand here? And I ask because if I'm looking at fire and emergency, you're talking about demand being robust. But implied orders here are the lowest they've been in almost six quarters, and they have been eroding sequentially. So I guess I'm wondering, is this a function of end users reacting to higher prices, or are we simply talking about some of the outstanding demand for this type of product, you know, having been satisfied at this point and demand simply normalizing?
spk04
Yeah, I think when you look at the, you know, when you compare it to probably the more recent quarters, you know, both fire and emergency have had some pretty robust order rates in the last year and a half of really coming out of the back end of the 2020 related to COVID. And so when you think about, for example, on a trailing four-quarter basis in 2020, ambulance orders on an industry basis, I think we're almost... 30% higher than the historical average for the prior many, many years. So there is going to be some normalization, I think, as we move forward on order rates relative to historical norms versus these kind of the funding that's been available plus the pent-up demand. I would expect to see a normalizing. But having said that, our order rates, while they have on a month-to-month basis probably gone down, they're still relatively strong relative to our throughput. as these backlogs continue to build. And I think they're all also, if you go back on a longer view, they're pretty strong relative to historical averages in these industries. So there's no question, I think the point you're making, Meg, around is price at some point going to be an issue? That's just logic, right? That at some point price is going to become more important because the funds that have been made available probably have desensitized on price a bit. But right now, you know, we're trying to, we got to make sure that we price at a level It protects costs, and that's equally challenging when you're looking at lead times being extended because of all these material issues. But we're into the details, into the data to make sure that we're making the right decisions and forward-projecting impacts. And then if a situation comes where we might have challenges, we're going to aggressively go back out to the backlog to make sure that we protect our businesses the best we can.
spk01
That makes sense. Final question for me on that. On RV, I'm curious if you can comment at all about demand in the third quarter, you know, what you might have seen during the month of May. We have heard from some folks who are in the distribution business for RVs that, you know, they're canceling some orders or canceling some of the backlog that they put with OEMs. Have you heard anything of the sort? And, yeah, you know, what's your sense for sustainability of demand there? Thank you.
spk04
So the first thing I would say is that when you look at our, you know, broadly the expansion we've seen here in the last two years in RV, if you look at the data by in-market, it's been largely a total market expansion and C. But we're not, we're underweighted exposure on We have a total business that's kind of a niche business that does very well. It's a premium-type product, and we still continue to see decent demand in that space. Our other businesses, our B business is a niche B business, and our C business is a niche C. The B market continues to grow. We still continue to see orders coming in there in our C business, despite some of the comments you made or saw around the broader RV market. We continue to see order rates healthy there. and our inventories and our dealers are still low. On the A side, you know, A really did not grow throughout this expansion in the market. A continued to decline throughout that expansion, and we've held shares there. Our production rates have dropped a little bit. We've talked openly about managing that business, not to overextend ourselves here because we were watching the demand, the market not growing. We want to make sure we rebuild this thing for peak and trough margins, as we've talked about many, many times. And so that business has become pretty healthy for us, from a financial standpoint. So I think overall, you know, with respect to canceled orders, we've had, I believe, one order cancel. And that's really something that is not related to where we are at a point in time. It's something that we have seen through this channel partner on an ongoing basis. It's more of an annual type thing that we actually have some reshuffling. So it wasn't of a major amount relative to the backlog we have. So it really didn't move the needle at all. So we got low inventory in our dealers still. We're kind of in a niche product that the end markets are still pretty healthy for, and we still see order rates in these surpassing our ability to deliver. So we continue to grow our backlogs. Overall, we recognize that the challenges in RV might be ahead of us here, especially when you think about the macro environment, but we haven't seen it in our numbers yet, and the conversation with the dealers with low inventories continue to support that we can continue to be pretty successful there for some period of time. Understood. Thanks for all the details.
spk07
As a reminder, just star 1 on your telephone keypad if you would like to ask a question. Our next question is from John Joyner with BMO Capital Markets. Please proceed.
spk03
So thank you for taking my question. Just following up on the RV side, and I get, you know, I hear what you mentioned about towables and such, but how do you – think about you and other RV manufacturers in terms of production schedules, right? Because if, okay, so inventories are low for certain products, but if towables, right, on the towable side, they're not low. And as floor plans, you know, begin to fill up, then that would tend to affect other product categories. So do you see that having an effect on your production schedules as well as the overall industry?
spk04
No. When you think about inventory bills in the dealer side, we see it billed, been out by product category. So there's no question that you can just drive down the highway and see the total inventory in dealers has increased And that's why you're seeing some of the accomplishments you're seeing. But our specific product in the total, we have a single exposure in totals, and it's a premium product, and inventories in that space are still low. And generally people come to a dealer to buy that total product. So we continue to see healthy orders there. Our inventories are well below where they need to be to support dealer demand for the products today. So we have a pretty healthy backlog there still. So in the total space specifically, because of our low exposure and because our niche exposure, you know, for a pretty decent period of time, I think we're in a good spot. We don't see, our perspective is we don't see spillover from total inventories, if I understood your question correctly. Inventory growing in total is affecting, A, because generally those dealers can be different that are selling your motorized versus your total. There is segmentation in the dealer base, but also they've got to have, on their lot product to serve the customer that's coming in. Generally, someone comes in to buy an RV, they're coming in to buy a towable versus a motorized. It's a different customer. So they're not coming in just to buy an RV. They're coming in to buy a specific category of RV. So they need to have inventory of the full offering just to serve their base.
spk05
And, John, this is Mark. As well, in the niche market that we're talking about, the Bs and Cs, and somewhat in the A's, we still have a high percentage of what we're producing are already retail sold, so it doesn't need to hit the floor plan requirement, right? So it's going right through the dealer to the end customer. So a significant amount of what we're producing still is, as Rod mentioned, we're not replenishing the dealer inventory. It's going right to the consumer.
spk03
Okay. Got you. Thank you very much. That's helpful. And then maybe just one more. I mean, So you've been restructuring the F&E business for some time, and I understand some heavy lifting items like rationalizing the footprint and such lately, but when do you think you'll get to a point where the F&E business is close to, say, normal run rate operations?
spk04
Well, I honestly believe, if you bridge it out and look at where we're at now versus where we would want to be or even where we were last year at this time, it's a volume, it's largely a throughput and an inefficiency walk. And so if we got the throughput back, if we were able to manage these supply chain challenges that we're faced with and the disruptions are considerable, I believe this business can transition back to where it was last second quarter. pretty as quickly as it went the other direction. That's our belief because I think we've improved our performance despite the challenging environment we're working in. And I think that when we get the stable supply chain, we'll be able to get back on the path of where we were prior to this challenge. The decrementals are up. That's largely because of the headcount we're carrying that we know we, based on throughput, we really don't need right now. But we have made a conscious decision for the reasons I mentioned earlier to maintain that headcount. for rework and whatnot in our business. So I believe that we just got to get a more stable, predictable environment in the supply chain. I think we can get back on the path that we produced last spring and also that we committed to in our investor day, the roadmap that we would get to.
spk03
Okay. Thank you for that. That's helpful. Maybe just one clarification. On the supply chain, And you may have mentioned this, but I get that it hasn't really gotten any better, but are there certain areas where it has actually gotten worse?
spk05
Yeah, so I think the items that we highlighted in my specific script, when you talk about digital displays and the transit side, axles, definitely that's publicly out there with some of the challenges. Wire harnesses, I think if you talk to ourselves and our peers, that's been a significant challenge. as well. So sort of the key components that we highlighted are ones that have gotten worse. There's others that have gotten better, but the majority of the key components that we rely on, especially chassis, as we've highlighted, right, which is significant for our upfitting business, as Rod referred to. So that was sort of, John, our way of saying here's the ones that have gotten significantly worse that are key components for us that we called out.
spk04
Yeah, I think just one comment on the chassis. I did mention this in the prepared comments that You know, we have a chassis filler rate against allocation problem. We went through the math of that in those comments. But the other issue that we're seeing that's really impactful to the business is, you know, when we plan a build, when we do our slotting for production, you know, we're building the body and preparing for the delivery of chassis. So when it comes on board, we can marry those. And right now we're seeing a lot of variation from what we expect to come in versus what's coming in, which means we have built bodies or whatnot for chassis that don't match up. And that creates tremendous inefficiencies in our business when we don't have line of sight to what's actually going to arrive as the OEMs battle all the things that they're battling as well. So it's not just not getting the chassis. We need the right chassis because we're planning and producing for a certain chassis arrival that the mix and the variation on that has been pretty significant, especially in our ambulance business. That's where we see the most of it at. So it's not just good to get a chassis. We've got to get the right chassis or it drives it inefficiencies in a different way in the business.
spk03
Okay. Understood. And thank you for the time. All right. Thanks, John.
spk07
We have reached the end of our question and answer session. I would like to turn the conference back over to Rod for closing comments.
spk04
Okay. Thank you. So I think in closing, you can look at the results, you can look at the commentary that everybody's sharing around supply chain challenges. Those are all real and But over time, as you would be, I'm confident that we'll work through these things. The underlying thing that I'm really positive about and I believe in, I look at the work the team is doing, I look at the work we're building on capabilities around the lean projects that we're working, the lean certifications developed around materials planning and production planning and the APIC certifications that we're launching, the plant work we're doing in terms of closing down facilities and transitioning to new facilities, relaying out lines that are In many of our businesses, in both RV and the commercial side, as well as ambulance, there's a lot of groundwork. The work that we've talked about that we needed to do, we've continued to execute that despite the fact that we're facing pretty significant challenges from the supply chain that's affecting us. I would say that, you know, as I mentioned in the prepared comments, we have not made as much progress in our rev drive implementation than we would have in a stable environment. but we haven't paused. We continue to push forward with the belief that the things that we're doing and the things we've talked about since the beginning of our time looking at this business are still a great opportunity for us, and we just got to be prepared for when the supply chain stabilizes that we're very well positioned to take advantage of that, and we will be. So again, I thank everybody for their attendance today. I do want to thank our employees as they're doing a great job not only delivering for our customers but also doing the extra work that we need to do associated with the things I just commented on. I want to thank them for what they're doing as well. So I appreciate your time, and we'll talk to you here in a few months. Thank you.
spk07
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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