REV Group, Inc. (NYSE:REVG) Q2 2023 Earnings Call Transcript

REV Group, Inc. (NYSE:REVG) Q2 2023 Earnings Call Transcript June 8, 2023

REV Group, Inc. beats earnings expectations. Reported EPS is $0.35, expectations were $0.18.

Operator: Greetings. Welcome to Rev Group Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I’ll now turn the conference over to Drew Konop, for opening remarks.

Drew Konop: Good morning, and thanks for joining us. Earlier today, we issued our second quarter fiscal 2023 results. A copy of the release is available on our website at investors.revgroup.com. Today’s call is being webcast and a slide presentation, which includes a reconciliation of non-GAAP to GAAP financial measures is available on our website. Please refer now to Slide 2 of that presentation. Our remarks and answers will include forward-looking statements, which are subject to risks that can cause actual results to differ from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we’ve described in our Form 8-K filed with the SEC earlier today and other filings that we make with the SEC.

We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. All references on this call to a quarter or year are to our fiscal quarter or fiscal year, unless otherwise stated. Joining me on the call today is our President and CEO, Mark Skonieczny. Please turn now to Slide 3, I will turn the call over to Mark.

Mark Skonieczny: Thank you, Drew, and good morning, everyone joining us on today’s call. I’m pleased to be speaking to you today as CEO and would like to publicly thank the Board for providing me the opportunity to lead this company. Most importantly, I would like to recognize the efforts of our various business unit leaders and the people that come to work every day, making vehicles that make a difference in our daily lives. Over the past quarter, I continued my visits to our various manufacturing locations, meeting with local leadership and their staff, developing site-specific path forward to advance our strategic imperatives around product simplification and lean process capabilities. We have now successfully developed road maps with clear objectives in reaching throughput goals at several locations.

These detailed road maps are focused on resource planning, both internal and external, factory and production line configurations and upfront process capabilities across sales, engineering, purchasing and material management. The objectives and processes are aligned with the REV Drive business system tenants designed to deliver continuous improvement. This morning, I will provide an overview of our consolidated second quarter performance as well as detailed segment financials. Before I comment on the quarterly results, I would like to provide several highlights that occurred within our businesses during the quarter. Late last year, we announced that ENC, our municipal transit business released its next-generation hydrogen fuel cell and battery electric buses branded Axess EVO.

Since the launch, we have enjoyed robust bidding for both battery electric and hydrogen fuel cell models. Prior to the quarter, we announced the first order of 4 battery electric buses from the Dallas-Fort Worth Airport. Within the quarter, we announced the first order for EVO hydrogen fuel cell buses with 3 units going to the Genesee Rochester Regional Transportation Authority. ENC’s hydrogen fuel cell bus delivers an industry-leading range up to 400 miles and refuels in just 12 to 20 minutes. The Axess EVO fuel cell, which is only water as a byproduct will help the transportation authority work towards its goal of transitioning to a zero-emission fleet by 2035. They received funding for the buses through the Federal Transit Administration low and no emission program.

ENC was recently named as an FDA grant partner by a total of 12 transit agencies located throughout the U.S., streamlining the process to receive additional orders to be qualified for federal funding. Continued availability of FDA funding combined with community’s desire to improve their environments have resulted in a robust pipeline of new opportunities. Subsequent to the quarter, we announced an order for 19 fuel cell buses from the California public transit provider Foothill Transit who serves Southern California, San Gabriel and Pomona Valley, including Pasadena and Downtown Los Angeles. Foothill currently operates a fleet of 359 buses with a commitment to operate 100% zero-emission bus fleet. As a relatively small market share participant in a large public transportation market, we believe opportunities like this in the transition from internal combustion engines to new technologies will allow ENC the opportunity to be a disruptor and gain market share.

The mentioned contract wins will not only contribute to unit growth for ENC, but also top line revenue growth as the average selling price of zero-emission units can be up to two times that of an internal combustion engine. As we have previously discussed, our battery electric and hydrogen fuel cell platform has over 90% commonality and therefore, we also expect to gain additional manufacturing efficiencies from this plant as production ramps. Our Type A School bus business, Collins, is also participating in increased demand for battery electric transportation solutions. Within the quarter, its bidding pipeline for EV buses growing [ph] the hundreds of units and have active orders for 60 EV buses. In addition to providing a solution that converts traditional gas engines to electric, we recently announced the first site a bus an electric powertrain provided directly by a major OEM.

In collaboration with Ford, Collins began taking orders from the new E-Transit T350-low-4 single rear-wheel cutaway in May. Within the Specialty Group, we had 2 EV debuts from our capacity terminal truck business. The first was the launch of its new zero emissions hydrogen fuel cell electric terminal truck as the Technology and Maintenance Council in February. Its long-duration operating time, heavy loan capacity and quick refueling cycle have been well received. In May, capacity [ph] also debuted its new zero-emission lithium-ion-powered terminal truck in the Advanced Clean Transportation Expo. The EV terminal truck is powered by Hyster-Yale electric powertrain and available with an option of 130 kilowatt or a 260 kilowatt lithium-ion battery.

The truck is expected to operate the length of a normal shift before recharging is needed while delivering consistent power and maximizing uptime. The battery can be recharged in as short as 1 hour. Across the REV EV portfolio, bidding is active for both electric and fuel cell products as end users remain uncertain about the infrastructure, load requirements and use case for each technology. With these launches, we now offer both fuel cell and battery electric solutions for terminal trucks and transit buses, providing our customers maximum flexibility. I am pleased that today, we will be discussing results that include momentum of increased starts and completions across the F&E segment, including both the ambulance and fire groups. As you know, we faced keytone – shortages across many of our businesses throughout fiscal 2022.

Due to the complexity, customization and a large number of SKUs required in fire apparatus, the fire group was particularly impacted by shortages. Over the past 1.5 years, the starting [ph] teams have worked to qualify an increasing number of alternative sources, which limited the number of key component shortages within the quarter to isolated events. Material handling across our fire plants is improving with greater alignment between production planning, procurement and the presentation of materials aside of specific vehicles. To further mitigate potential shortages to keep the line moving, the fire businesses have enhanced dedicated response teams with pickers assigned to retrieve parts missing from production cells. Communication across functions is improving with management activities focused on daily accountability.

To help ensure that this accountability continues, I made a change of leadership and organizational structure in the fire group. Within the quarter, Mike Virnig assumed the role of President, REV Fire Group, overseeing all brands. Mike has been the Vice President of Global Sales and Marketing of REVs since 2018. Under his tenure, our backlog for fire apparatus has tripled, growing by over $1 billion. Like a deep relationship with our dealers and direct customers across all REV Fire brands, understand functionality and distinction of our product offerings and our capabilities and has a unique perspective on the importance of our parts and service business having owned a service center in the past. He’s been integral in our voice of customer feedback and led various programs to eliminate product complexity while enhancing and standardizing our portfolio.

Prior to joining the REV [ph] he served as Vice President sales at Spartan Emergency Response and he has prior management and ownership experience in other fire and specialty vehicle businesses. I was with Mike at the recent FDIC International Show, a leading Firepart [ph] conference, and the response to Mike’s promotion was overwhelmingly positive. In addition to this change, I have added Andy Thompson to the team as Rev Fire Group Chief Operating Officer. This is a new position dedicated to managing manufacturing operations across all fire brands. Andy joined REV in 2021 as VP of Operations across the enterprise, bringing the extensive experience in manufacturing operations, supply chain and Lean Six Sigma. Most recently, he was deployed as interim VP GM of the hold and fire facility, where he helped increase plant efficiencies and throughput by implementing many of the actions that I mentioned earlier, resulting in a 2-year high in quarterly shipments at the Holman facility.

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Under his leadership, the plant has leveraged all production slots and reduced or eliminated gaps, realigned the [indiscernible] lines to reduce bottlenecks constraints, launch several projects aimed at reducing production hours per value stream and set the intermediate agenda for improved profitability. I look forward to working with Mike and Andy to drive continued improvement in overall fire performance. Within the ambulance group, quarterly shipments reached a 2-year high and net sales reached a 3-year high as the division benefited from an improved supply chain and key plans to maintain higher direct labor headcount levels. On the last earnings call, we noted that with increased chassis supply, our ability to achieve or exceed the year production plan relied on the ability to effectively hire, train and retain new workers.

Within the quarter, we were successful in increasing the group’s headcount and lowering year-over-year turnover at each of the ambulance plants. I am confident that the group will experience improved productivity as new workers are onboarded and begin cross-training. Finally, we experienced an anticipated normalization of recreation segment backlog within the quarter. The industry backdrop remains challenged with retail sales in the fiscal quarter reported to be down in the low 20% range year-over-year. Many dealers have worked to reduce 2022 model year inventory and are expected to maintain a disciplined approach toward overall inventory levels given the current interest rate and economic environment. We have been flatly working with our dealer group with respect to age backlog.

This resulted in a reduction in orders primarily for towable and camper [ph] units at our East and West facilities and to lesser degree cancellations within the Class A business, which maintains a 6-month backlog. We continue to expect a portion of these orders will replace with 2024 mile year orders within the Class B and Class C categories, backlog remains in the 9-month range. These results are in line with the full year outlook provided in December in the first quarter update provided in March. Now turning to our second quarter results on Slide 4. Consolidated net sales of $681 million increased $105 million or 18% versus second quarter last year. The increase was driven by higher shipments and sales across all segments. Prior & emergency segment sales reflect higher sales in both the fire and ambulance groups.

Increased fire group sales were primarily a result of an improved supply chain resulting from dual sourcing initiatives as well as improved overall component supply environment in addition to productivity initiatives aimed at increasing throughput. Increased Ambulance Group sales were related to improved chassis supply, labor market and retention improvements mentioned earlier and price realization. Record commercial segment sales benefited from an improved supply chain, which enabled completion of units previously trapped in working product rents and price realization. Recreation net sales increased versus the prior year as productivity initiatives to hold in our West Coast Home [ph] plant, while segment pricing remained positive net at discount.

Consolidated adjusted EBITDA of $41.9 million increased $18.1 million or 76% versus the prior year, with increased contribution from all segments. Higher contribution from the F&E segment includes improved results in both the fire and ambulance groups. Commercial segment EBITDA was related to improved profitability in school bus and specialty businesses, partially offset by a declining in new municipal transit business. Recreation momentum continued within the quarter with increased volumes and price realization bump discounting, the net result of greater profitability across all segments was the 7-quarter high in adjusted EBITDA dollars and EBITDA margin. Please turn to Page 5 of the slide deck as I move to a review of our second quarter segment results.

Fire & Emergency second quarter segment sales were $283 million, an increase of 16% compared to the prior year. The increase in net sales was primarily due to increased shipments of fire apparatuses and ambulance units, a favorable mix of higher content ambulance units and price realization, partially offset by an unfavorable mix of lower content fire apparatus. Within the Fire Group throughput improved sequentially and year-over-year to reach a 6-quarter high in shipments and revenue. This includes improved performance at our two largest plants as well as increased shipments from our Holden’s facility that were up 70% year-over-year and 39% sequentially. With supply chain headwinds subsiding all plants have had greater success filling production slots with a more robust cleared build process.

A milestone for recoveries in the Fire Group will be reaching the revenue run rate achieved in the second and third quarter of fiscal ’21 prior to supply chain and labor market challenges. Within the quarter alone, we’ve recovered half of the definite [ph] between that period and the low point of revenue experienced in the first quarter in this fiscal year. We are focused on maintaining a cadence of new starts that are required to close the gap and position the group for additional improvement. We are encouraged that within the quarter, Fire Group started exceeded completions by 6%, demonstrating its momentum. As I mentioned earlier, ambulance [ph] group unit shipments reached a 2-year high, up 6% year-on-year, with revenue reaching a 3-year high.

Higher revenue was primarily related to increased shipments, higher content vehicles and price realization. As we have noted on past calls, the recent inflationary environment has required a disciplined forward pricing strategy across all businesses. Due to lower complexity and higher production volumes, the ambulance group started producing units that are in the early rounds of new price tiers enacted over the past 18 months. We are encouraged by the through point improvement we experienced in all locations within the group and the momentum that will carry into the second half of the year. F&E segment adjusted EBITDA was $9.6 million in the second quarter of 2023 compared to an adjusted EBITDA loss of $2.2 million in the second quarter of 2022.

The increase was primarily a result of higher volume, manufacturing efficiencies and improved price realization, partially offset by inflationary pressures. Fire Group profitability improved 550 basis points versus the prior year and 520 basis points sequentially, this was primarily due to higher sales volume and manufacturing efficiencies related to an improved supply chain environment and initiatives enacted to improve productivity. Ambulance group profitability improved 450 basis points year-over-year and 300 basis points sequentially. This was primarily a result of higher sales volumes, favorable mix, price realization and manufacturing efficiencies. Record F&E backlog was $2.9 billion, an increase of 60% year-over-year. The increase in backlog was a result of continued strength in unit orders in both the fire and ambulance groups and pricing actions over the past 12 months.

The Fire Group experienced greater conversion of close to firm orders within the quarter, while ambulance demand remained strong, resulting in individual records from backlog in both supplier and ambulance groups. For the remainder of the year, we expect the F&E segment to post sequential revenue and margin improvement with approximately 75% of segment earnings generated in the second half. Turning to Slide 6. Commercial segment sales of $142 million was an increase of 56% compared to the prior year. The increase was due to higher sales across all product categories and price realization, improved material availability allow completion of school buses, terminal trucks and street sweepers that have been trapped in inventory. Dual sourcing and improved chassis supply have allowed unit shipments of school buses to reach a 7-quarter high.

Like ambulance, school buses have less complexity and the faster production cadence that allowed us to experience new pricing tiers more quickly than many other businesses. We have also started to ship more EV units, which carry a higher average selling price. The combined result is a 3.5-year high in school bus sales. Unit shipments of terminal trucks and street sweepers increased 28% and 50%, respectively, as the Specialty Group implemented productivity actions designed to increase throughput. Within the municipal transit business, we continue to experience shortages of wiring harnesses and other components creating line rate inefficiencies and a significant amount of out-of-station work and rework, which limited unit shipments within the second quarter and is expected to continue through the third quarter. Commercial segment adjusted EBITDA of $10.7 million increased 143% versus the prior year.

The increase in EBITDA was primarily the result of higher shipments and improved profitability within the school bus, terminal trucks and street sweeper businesses, partially offset by manufacturing inefficiencies within the Transit Bus business. Record profitability for school buses is primarily a result of higher shipments and efficiencies gained from greater material availability, including chassis and price realization, partially offset by inflationary pressures. Profitability of terminal trucks and street sweepers benefited from higher shipments related to actions implemented over the past year to improve throughput, receipt of key components that allow completion with units and price realization. Municipal transit bus completions continue to be limited by shortages of critical components that resulted fewer than expected completions and trap [ph] labor that weighed on profitability.

Commercial segment backlog was $501 million at the end of the second quarter, a decrease of 6% versus the prior year. The decrease in backlog is primarily a result of increased throughput and the normalization of orders for terminal trucks and street sweepers, partially offset by record backlog for school buses, which includes strong second quarter orders as well as price actions enacted over the past 12 months. In the third quarter, we expect Commercial segment sales and margins to be constrained by supply chain challenges that are limiting completion of municipal transit buses. The benefit we experienced in this quarter by completing partially completed with units in the school bus and specialty business will also diminish in the second half of the year.

We expect lower segment sales and margin in the third quarter with improved shipments and an improved mix of municipal transit buses that benefit the segment’s revenue and margin profile in the fourth quarter. This will likely result in second half adjusted EBITDA being approximately the same as the first half of the fiscal year. As I mentioned earlier, we are encouraged by increased bidding for zero-emission school buses and transit buses and feel this provides opportunity in fiscal 2024 and beyond. Turning to Slide 7. Recreation segment sales of $257 million were up 6% versus last year’s quarter. Increased sales versus the prior year were primarily a result of increased shipments of Class A, Class C [indiscernible] units and pricing actions, net of discounts in certain categories.

Partially offsetting the increase were lower sales of Class B units related to supply chain and irregular dealer inventory related to the fourth quarter OEM recall that results in a large number of industry shipments early in the year. Shipments of travel trailers and campers improved sequentially and unit starts increased 35% throughout the quarter as the new able [ph] management team implemented productivity initiatives designed to increase throughput. As a result, unit shipments and net sales of non-motorized units increased 29% and 51% respectively versus the prior year. Recreation segment adjusted EBITDA of $29.1 million was an increase of 1% versus the prior year. The increase in EBITDA was primarily the result of price realization, net of discounting in certain businesses and volume leverage, partially offset by material inflation and an unfavorable mix of gas units and greater contribution from the non-motorized categories.

While towable units and campers are currently dilutive to the segment margin, the business increased adjusted EBITDA margin 690 basis points versus the prior year. Segment backlog of $495 million decreased 62% versus the prior year and 50% sequentially. This was anticipated and in line with guidance provided during the last earnings call for segment backlog to normalize in the 4 to 6-month range. The decrease is primarily due to continued production against backlog and cancellation of aged orders, primarily non-motorized and class 8 categories. We expect a portion of these cancellations to be replaced with upcoming by-year [ph] orders, Class B and Class C backlog remains in the 9- to 12-month range. The outlook for full year Recreation segment revenue remains in the range of flat to down low single digits.

Margins have likely peaked in the second quarter with an expectation for lower production volume in certain categories and additional discounting in the second half. We are focused on flexing costs when necessary to protect profitability and we’ll continue our work to claw back a portion of recent inflationary pressures. The full year segment adjusted EBITDA margin expectation remains in the high single-digit to 10% range. The combined result of strong first half shipments, lower production rates and potential discounting second half is expected to result in approximately 45% of full year adjusted EBITDA being generated in the second half. Turning to Slide 8. Year-to-date, cash from operating activities totaled $8.2 million. Trade working capital on April 30, 2023, was $363.3 million, an increase of $15.5 million compared to $347.8 million at the end of fiscal 2022.

The increase was primarily a result of increased health receivables and inventories, partially offset by an increase in health payable and customer advances. Inventory increased $92 million versus the prior year period when it was more difficult to procure chassis, parts and raw materials. Over the intermediate [ph] term, we believe there’s an opportunity for meaningful inventory reduction as we gain confidence in the stability of the supply chain and chassis supply. We spent $6.8 million of capital expenditures within the second quarter, resulting in free cash flow of $8.3 million. Net debt as of April 30 was $221 million, including $9 million of cash on hand. We declared a quarterly cash dividend of $0.05 per share payable July 14 to shareholders of record on June 30.

The Board approved a new share repurchase authorization of up to $175 million with flexibility to buy common stock in the open market and prevailing market prices or through block trades over the next 2 years. The new program replaces the prior $150 million authorization approved in September 2021, of which we purchased approximately $74 million of REV common shares. At the end of the quarter, the company maintained ample liquidity with approximately $306 million available under the ABL revolving credit facility, and our net debt-to-EBITDA leverage ratio was 1.8 times , below our stated target range of 2 to 2.5 times. Turning to Slide 9. Today, we are raising our full year outlook for net sales, adjusted EBITDA, adjusted net income and free cash flow.

The outlook for revenue is now in the range of $2.45 billion to $2.55 billion, an increase of $100 million at the midpoint. The range of adjusted EBITDA has been raised to $120 million to $135 million, an increase of $7.5 million at the midpoint. Guidance for adjusted net income is down in the range of $48 million to $62 million, and we continue to expect cash conversion to be 90% or greater with free cash flow in the range of $43 million to $56 million. Thank you again for joining us on today’s call. And operator, we’d now like to open the call up for questions.

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Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question is from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.

Jerry Revich: Hi, good morning, everyone. And Mark, congratulations again. I wanted to see if we could just start the conversation in fire & emergency, where it’s nice to see the strong progress on the starts. Can you just talk about where we are seeing higher price backlog starting to flow through? What’s that cadence look like over the next couple of quarters compared to the strong performance we saw in the second quarter?

Mark Skonieczny: Yes. As we – actually, Q2, as I said in my prepared remarks, we’re seeing good price realization within ambulance given the fact that they’re eating into the tiers quicker. Fire still has a significant longer backlog. So we’re continuing to do that, but we are very myopic on knowing each vehicle and what the price tier is that is. So we do have a daily cadence where we look at price tiers and have full visibility to that. So we’d expect to see progression as we move through our backlog and are able to see that visibility. So we feel very encouraged. And when we look at the outlook, it’s reflective of that vehicle by vehicle buildup for F&E with ambulance being ahead of the curve with the throughput improvements we’ve seen.

And then fire just beginning, as we’ve talked about the throughput we saw in Q2 and then as we progress through the remainder of the year, we’ll start eating into more of those older units and getting into new price tiers as we move along.

Jerry Revich: And if we were to look at what’s being booked today and the pricing tier that’s coming in that would that get you on a run rate basis whenever we do get to produce that to the targeted 8% margin range?

Mark Skonieczny: For sure, yes, for sure.

Jerry Revich: Okay. Super. And then can we shift gears and talk about RV really strong execution from the team in that part of the business. Can you talk about given the shifts in backlogs for the industry? How are you folks thinking about what production rates might look like a couple of quarters out? I know a lot of moving pieces out there, but would love to get your views. And at the same time, from a margin standpoint, how are you thinking about your through-cycle margin performance if we do get to the point where we’re cutting production?

Mark Skonieczny: Yes. So we still feel good about where we’re at from an overall recreation perspective being at the high single digits to 10% EBITDA margin. So Jerry, when you look at our mix, and obviously, we’ve talked about this over the last year or so or 2 years about our mix of being heavily motorized and we continue to see strength in the B and C categories. If you look at our inventory across the whole portfolio, we’re still down 25%, our dealer inventory from where we were pre-COVID. So we have not normalized even from an inventory level. We’re still seeing a significant amount of retail sold units in that B and C category. So as our dealers, as you’ve heard from our competitors, are dealing with challenged financing in their floor plan that they have available, given the fact that they have a lot of towable units on their lots we’re able to do a lot from a retail sold perspective where it’s just to pass through that dealer and our units continue to sell through what we see quicker than the industry norm from the perspective.

So we still believe we have the right products in place. We did obviously Class A member participated in the uptick that we saw. So we continue to see a mix shift there of more of gas units versus high-end diesel. So we are seeing a mix impact. But from a productivity perspective, we are looking at managing the production flow there, but we still feel comfortable with that 9% to 10% range exiting the year.

Jerry Revich: Super. Thank you.

Operator: Our next question is from the line of Mig Dobre with Baird. Please proceed with your question.

Mig Dobre: Good morning. I want to follow up on Jerry’s question, just last question here. If I look at your implied guidance or recreation in the back half of the year, you’re still looking north of $220 million of quarterly revenue. And I’m curious if you are of the view that there is another sort of step down that we need to consider as we look into fiscal ’24 or if you’re comfortable with the notion that this revenue run rate is sustained, I ask, obviously, because the backlog is looking different than it did even a quarter ago. And at least for me, it’s a little bit harder to pinpoint exactly what the underlying level of demand currently is?

Mark Skonieczny: Yes. We obviously don’t want to get into 2024 guidance at this point, but we tried to include that in our prepared remarks. When you look at our B and C businesses, which are what we talked about, our higher-margin businesses, we still have a 6- to 9-month backlog in those businesses. So we still have a strong backlog in those units. So when we look at the back half of the year, we feel very comfortable in those categories. And in our Class A business, we still have in excess of 6 months, and we have the production. It’s more about a mix where we’re seeing the consumer go down into more gas units versus the high-end diesels and we talk about gas, those margins are 50% of what a high-end diesel would – would produce.

And obviously, the hours from a production perspective are less given the complexity is lower as well. So we are flexing our costs within that business. And so we feel good that we’re going to be able to flex with the units shipped there. But of course, we’ll have – we’ll have to maintain different production cadence than we did at the beginning of the year. And then on the towable side, we’re seeing what everyone else is seeing, but still, we still have not normalized our inventory in that lance [ph] product, as you know, is more of a niche product within the whole towables business. So we still have quite a heavy following there. And we did introduce as we’ve announced our Indura [ph] off-road product within the quarter, which was well received as well.

So we’re seeing some uptick from the acceptance of that product as well.

Mig Dobre: Understood. Maybe going back to Fire & Emergency. And maybe even more broadly onto your guidance. You raised your sales guidance by $100 million. I’m assuming it’s primarily driven by Fire & Emergency, but I’d love some confirmation there. Then the second question here would be very high level of backlog, right, almost $2.9 billion. And I’m sort of curious as to how you think about this backlog. Is this backlog stickier, for instance, and what we have seen in RV, what’s the risk of cancellations? And when you’re kind of talking to customers, how are they dealing with what appears to be very, very extended lead times at this point?

Mark Skonieczny: Yes. So I would say from a lead time perspective, we are quoting lead times at the same level or even within some of our competitors within the space. So we feel very good about the lead times, but it is important. I’ve had a lot of calls and discussions and meetings with our customers. The most important thing that we have on our agenda right now is to increase throughput and get the units to our dealers as well as our customers, and we understand it, especially in the F&E space and from a public providing these vehicles to the public. So from that side, they are stickier. So when you – we’ve talked about this before, these are in the majority of the fire business, we haven’t experienced cancellations in pet because they are sticky when the municipalities get the budget and they go through the budgetary schedule, and that money is earmarked.

And as you can see in our balance sheet, we do get deposits on those units. So that money is allocated to those units. So we feel good about that. And then ambulance, we continue to see strong demand there. And so — and those are sticky as well. So we feel real good about that. We would not have a retraction like we did in recreation, which is more a consumer-based model versus municipality-driven segment, NFE [ph]

Mig Dobre: Understood. And my final question, can you frame maybe where you are in terms of capacity in FNE – if the supply chain finally normalizes to call it, pre-COVID levels, how much more capacity do you have? Can you continue to grow? Or will you be contemplating some sort of capacity additions as you look maybe beyond just your guidance here into ’24 and beyond. Thank you.

Mark Skonieczny: Yes. It’s really to prom and we’ve talked about this before. We do have inherent inefficiencies that we’ve talked about over the last 2 years and the productivity improvements in the cycle that we’ve been on gets us to where we feel comfortable, and it’s really by a business unit by perspective. So you’d have to go individually by those. We have some that are operating efficiency versus some that are in the high 90s. So it’s really — but a lot of our factories run on a single shift, not affecting ship. So we have inherently built in there if we have labor availability that we could actually double our capacity in our current footprint by just adding a second shift. We do supplement with Fridays and over time, a lot of our ships are 4 tons.

So we have the ability even to flex up on a full Friday shift if we needed to. So we’re really working first to improve our production capacity and our cadence before we start thinking about expanding that, but we have that available in our current footprint to more than double where we’re at right now.

Mig Dobre: Okay, very helpful. Thank you.

Operator: Our next question is from the line of Jamie Cook with Credit Suisse. Please proceed with your question

Jamie Cook: Hi, good morning. And congrats, Mark. I guess just longer-term strategic question, just as you’re now officially the new CEO, any observations, thoughts on your 2021 Analyst Day and the financial targets that you laid out. Is that still the right way to think about things? And also the sort of the right portfolio that is in place for the company. And then follow-up, just the $175 million new share authorization, just thoughts on that sort of cadence and maybe perhaps what you see versus what you think the market is missing? Thank you.

Mark Skonieczny: Yes, sure. So I think overall, from an overall long term, those are 2023 goals that we set out, and we still feel comfortable in what we provide in 2021 and the strategic imperatives that are driving those margins. We have reached those in recreation this year. So we feel good about the progress there. FNE we look at how we’re going to exit the year and what we’re feeling about there, the momentum and the pricing that we put into the market, we believe, like I talked about earlier in the earlier question, that we’ll get to those long-term goals. So we feel very good about that and the cadence around purchasing and the overall initiatives around continuous improvement. Those are still tenants within the [indiscernible] system.

So as I talked about last earnings call, nothing has really changed from an overall long-term strategic imperative and what we’re driving on a day-to-day basis to deliver on those. So I think those are well intact without the supply chain challenges that we had over the last 18 months, we probably would have been at those rates. So it’s really a delay in achieving those. And when you look at the overall target, we probably put in more price than what we anticipated in the initial targets. So it gives us some – some optimism that those are very achievable targets that we set out. And from a portfolio perspective, like I’ve always said and even in my CFO role, we always assess what business is and will deliver the return that we expect. Right now, we are comfortable with what we have in our portfolio, but we’re always open to looking at other things, either tangentially or within tuck-ins.

But right now, our capital allocation, as we talked about last period is just to drive down debt, pay down the interest, the higher bearing interest that we’re experiencing now and work that way with opportunistic. When you talked about the share repurchase, that was going to expire here in September. So just making sure that we have the flexibility before our next board call and able to do that. And obviously, we believe that there’s a lot of growth potential in our stock price. So we do want to be opportunistic to use that with the free cash flow generation that we’re doing here. So the extent we’re exceeding or seeing where we are from a cash flow, we will be opportunistic on — from a capital market perspective.

Jamie Cook: Okay. Thank you.

Operator: Our next question is come from the line of John Joyner with BMO Capital Markets. Please proceed with your question.

John Joyner: Hi, good morning. Thank you. And I’ll take congratulations to Mark as well. So just maybe piggybacking on Jamie’s question on capital allocation. I know there’s this Class A chassis that’s out there, I mean, would that be at all towards the upper end of any priorities around inorganic additions? Or is there any kind of read through in terms of like how you view that business as it relates to not adding that asset?

Mark Skonieczny: Yes. No amount right now, I think we’re comfortable with the partners we have. So – and we’ve always said that this isn’t going to be an internal. We’re trying to pick the right partners to be our suppliers. So that’s really a strategy we’re continuing to do here from a chassis perspective, we’re not looking at building our own case. We get that a lot of questions we do in our fire business, but that’s one of the things we still have strong relationships with our partners, and we feel comfortable in the space we’re currently in.

John Joyner: Okay. Thank you. And then in the – your release and prepared remarks like most other industrial companies, you talked about supply chain getting better along with some kind of greater labor efficiencies. But have any supply-related issues lately cropped off in the past few weeks? I mean — and I asked this question because we’ve heard that some on-highway markets may have experienced recent issues. I mean I want to say a few weeks, I’m talking about intern areas.

Mark Skonieczny: Yes, we do have also we are not immune to those being in the category and industrial side. So we deal with those on a day-to-day basis. I can say that the — our supply chain team has done very well. Remember, we are in a unique situation where we said that we have been under performing from a purchasing perspective, and we’ve done a lot of work from a dual sourcing perspective that would come to fruition here in the first calendar quarter, ’23, and those are now – we’re well ahead where we thought we would be from a dual sourcing or alternative sourcing space. So we are seeing some momentum just from improving our internal health here and expanding our supply base. But also, as I said in my closing remarks, we are not — we are not waiving the checker flag here.

We know that there’s things that pop up from a day to day, and we need to be nimble and be managed through those with our partners. So that’s what I would say there. So there’s always these one-offs that we have to deal with on a day-to-day basis.

John Joyner: Okay. Got it. And then maybe one more if I could. When you think about these kind of alternative fuel technologies such as hydrogen fuel cells, among others, — when do you think these — I mean, maybe when do you think these will receive kind of critical mass? I mean — and what has the feedback been the reliability how has that been and kind of the capability on, say, real-world usage versus a test environment on these products?

Mark Skonieczny: Yes. Again, we’re still — we’re starting to kick those off. So I would say, real world. We obviously — there’s people in the space right now that have vehicles out there that are touting the capabilities of these units. First units at our ENC facility I quoted are just starting to be going down to production, but we have had, obviously, demo units that have been working several hundred thousands of miles. So we feel very comfortable in our solutions. And we’re in the – like I said in my closed remarks, it’s really going to be customer choice on do they go to a full battery electric or fuel cell. And we’re just giving we have the capability to provide both. So right now, we’re trying to be flexible. So we meet our customer needs.

But I would say we still are seeing the early days of what the full take rate is going to be on a go-forward basis, but we are seeing higher bidding activity like we talked about. So the ability to have funding to pay for this primally has also helped us.

John Joyner: Okay. Excellent. Thank you so much for the time.

Mark Skonieczny: Thank you.

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

Mike Shlisky: Good morning and thanks for thank for taking the questions. A little granular, but I wanted to ask about capacity and some of the products there going electric. In certain states, like California, we’re going to start to see – it sounds like you actually can’t order a truck at nonelectric in the capacities segments. So I’m curious if you could just tell us a little bit about whether you prepared for a ramp-up in your facility to make more AVs starting in 2024?

Mark Skonieczny: Yes. Sure. For sure, Mike. And an I was just out there last month through and I both were out there last month. And at capacity, we do have a dedicated facility there that is doing the development of both hydrogen fuel cell and electric. So we are conscious of that. We do have the hyper [ph] product that is starting to go into use case, maybe carrying out to John’s earlier point, we did have a beta test or what you would say, use case development within some major customers. So we feel very comfortable there and our ability to ramp there and the team, what they’ve done on the IC side, we’re very confident that if it was to convert to all electric that we see the same sort of momentum there. So we have a very seasoned team and a team that’s very capable with the throughput we’ve seen on the IC side that would carry over to the EV and hydrogen fuel cell side. So we feel very comfortable from that perspective.

Mike Shlisky: I’m curious, just a follow-up there, Mark, on it a somewhat fragmented market. I’m curious whether you could tell us whether there’s some players in the market are not going to have hydrogen or battery options going forward? And is there a reasonable market share gain opportunity, call it, 2024 or 2025 for that brand?

Mark Skonieczny: For sure. Yes. I think you’ll see some substitutions at that point. Obviously, I think it will all carry on with – we will probably participate to be able to pick up market share. But at the same time, when you look at our ability to produce those EVs, I think it will be there and it will just be a matter of what the overall industry is from a take rate given the port activity and whatnot that these – in this product or the industry they serve.

Mike Shlisky: Got it. Got it. And then just switching over to FNE real quick. It sounds like obviously agents having higher content helped during the quarter content per vehicle. But then it sounds like on the fire side, content was not in – could you give us just a little bit of thoughts on – like the rest of this year and the first part of next fiscal year, whether content is going to be a tailwind for you? Or as your new COO, kind of gets a better hold of the business, whether you’ll be taking content out, trying to get more product out the door? What’s the content outlook, I guess, and how that might have tenethealt12 months or so?

Mark Skonieczny: Yes, maybe not touching on 24 right now, but when we look at the content, when we talk about content there, on the fire side, we’re talking about higher complex aerial units versus, say, commercial pumpers. And so the our differential is significant there. So our ability to deliver more units. And again, we’re looking at a mix equation here. So what we’re talking about fire is more around these commercial units versus a custom pumper or an aerial unit. So that’s why we talk about low content for fire content. So if you look at Q2, we had more commercial type units going through. And then the ambulance side, it’s really more of a reflection of the chassis mix we have now and our ability to produce more modular units, which we call them versus bands, which are built like on a transit band unit.

So we’re able to have more high-content modular units within ambulance. And we are able now with our chassis supply to mix in more units based on a mix that is more favorable to the production environment versus over the last year where we were just having to build on whatever chassis we received from the OEMs. So we’re not able to plan better, which has given us an improved mix profile, more of what we’ve historically seen and is benefiting now from the throughput initiatives that we’ve put in place.

Mike Shlisky: Very interesting. I appreciate that. I’ll pass it along. Thank you.

Mark Skonieczny: Thank you.

Operator: Thank you. At this time, we’ve reached the end of the question-and-answer session. Now I’ll turn the call back over to Mark Skonieczny for closing remarks.

Mark Skonieczny: Thank you, operator. And again, I would like to thank everyone again for joining us on today’s call. I have been encouraged by the planned visits that I have conducted over the past 4 months and look forward to continuing to collaborate with the local teams as we build on the momentum created in the first half of the year. There’s been notable progress engagement at a local level toward the REV drive initiatives that we detailed at our Investor Day 2 years ago. And one of the key – one of our rather key values to think like an owner, and I’ve been challenging our leadership team to enable all of our employees to do so at the local level. So again, I’d like to thank all of our employees for their hard work and results they achieved in the second quarter, and I look forward to speaking with all of you again with our third quarter results. Thank you.

Operator: This will conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.+