REV Group Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 8, 2023

There are 8 speakers on the call.

Operator

Welcome to REV Group Second Quarter 2023 Earnings Conference Call. At this time, all participants will be in listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I'll now turn the conference over to Drew Conop for opening remarks.

Speaker 1

Good morning and thanks for joining us. Earlier today, we issued our Q2 fiscal 2023 results. A copy of the release is available on our website at .reppgroup.com. Today's call is being webcast and a slide presentation, which includes a reconciliation of non GAAP The GAAP financial measures is available on our website. Please refer now to Slide 2 of that presentation.

Speaker 1

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 ks 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 Skogenstein.

Speaker 1

Please turn now to slide 3. I will turn the call over to Mark.

Speaker 2

Thank you, Drew, and good morning to everyone joining us on today's call. I am pleased to be speaking to you today as CEO I 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 by 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 roadmaps with Clear objectives in reaching throughput goals at several locations.

Speaker 2

These detailed roadmaps 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 RevDrive Business System tenants 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 Within our businesses during the quarter. Late last year, we announced that E and C, our municipal transit business, Release this next generation hydrogen fuel cell and battery electric buses branded Access EVO. Since the launch, we have enjoyed robust bidding for both battery electric and hydrogen fuel cell models.

Speaker 2

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 delivers an industry leading range up to 400 miles and refuels in just 12 to 20 minutes. The Access EVO fuel cell, Only water as a byproduct will help the transportation authority work toward its goal of transitioning to a 0 emissions fleet By 2,035, they received funding for the buses through the Federal Transit Administration Low and Low Emission Program. EMC was recently named as an FTA 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.

Speaker 2

Continued availability of FTA funding combined with Communities' desire to improve their environments have resulted in a robust pipeline and new opportunities. To the quarter, we announced an order for 19 fuel cell buses from the California public transit provider Foothill Transit Who serve Southern California, San Gabriel and Pomona Valleys, including Pasadena and Downtown Los Angeles. Foothill currently operates a fleet of 3 59 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 Transition from internal combustion engines to new technologies will allow E and C the opportunity to be a disruptor and gain market share. The mentioned contract wins will not only contribute to unit growth for E and C, but also top line revenue growth as the average selling price of 0 emission units can be up to 2 times that of an internal combustion engine.

Speaker 2

As we have previously discussed, Our battery electric and hydrogen fuel cell platform has over 90% commonality and therefore we also expect EV Buses drove 100 of units and has active orders for 60 EV Buses. In addition to providing a solution that converts Traditional gas engines to electric, we recently announced the 1st Type A bus on electric powertrain provided directly by a major OEM. In collaboration with Ford, Allen began taking orders on the new E Transit T350 low floor single rear wheel cutaway in May. Within Specialty Group, we had 2 EV debuts from our capacity terminal truck business. The first was the launch This new 0 emission hydrogen fuel cell electric terminal truck at the Technology and Maintenance Council in February.

Speaker 2

Its long duration operating time, heavy load capacity and quick refueling cycle have been well received. In May, capacity also debuted its new 0 emission lithium ion powered terminal truck at 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 2 60 kilowatt Lithium ion battery. The truck is expected to operate the length of a normal shift before recharging as needed, while delivering consistent power And maximizing uptime. The battery can be recharged in as short as 1 hour.

Speaker 2

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'm pleased that today we will be discussing results that include momentum of increased starts and completions across the F and E Segment, including both the Ambulance and Fire Groups. As you know, we face key component shortages across many of our businesses throughout fiscal 2022. Due to the complexity, customization and large number of SKUs required in fire apparatus, the fire group was particularly impacted by shortages.

Speaker 2

Over the past year and a half, the sourcing teams have worked to qualify an increasing number of alternative sources, which limited the number of key Production planning, procurement and a presentation of materials assigned to specific vehicles. To further mitigate potential 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,

Speaker 1

I made a

Speaker 2

change of leadership and organizational structure in the fire group. Within the quarter, Mike Berning assumed the role of President, RevFire Group overseeing all brands. Mike has been the Vice President of Global Sales and marketing at Rev since 2018. Under his tenure, our backlog for fire apparatus has tripled, growing by over $1,000,000,000 Mike has deep relationships with our dealers and direct customers across all RevPAR brands, understand functionality and distinction of our product and their capabilities and has a unique perspective on the importance of our parts and service business having owned the 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.

Speaker 2

Prior to joining REV, he served as Vice President of Sales and Spartan Emergency Response and he has prior management and ownership I was with Mike at the recent FDIC International Show, a leading firefighter conference And the response to Mike's promotion was overwhelmingly positive. In addition to this change, I've added Andy Thompson to the team as RevFire Group Chief Operating Officer. This is a new position dedicated to managing manufacturing operations across all fire brands. Andy joined Grauvs in 2021 as VP of Operations across the enterprise, bringing his extensive and manufacturing operations, supply chain and Lean 6 Sigma. Most recently, he was deployed as Interim VP GM of the Holden Fire Facility, where we 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 Olden facility.

Speaker 2

Under his leadership, the plant has leveraged all production slots And reduced or eliminated gas, realigned the assembly lines to reduce bottleneck constraints, launched 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, formerly 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 plants maintained higher direct labor headcount levels. On the last earnings call, we noted that with increased Chesapeake's plight, 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 increasing the group's headcount and lowering year over year turnover at each of the ambulance plants.

Speaker 2

I am confident that the group will experience improved productivity as new workers are onboarded and begin cross training. Finally, we experienced the anticipated normalization of Recreation segment backlog within the quarter. The industry backdrop remains challenged Retail sales in the fiscal quarter reported to be down in the low 20% range year over year. Many dealers have worked to reduce 2020 model your inventory and are expected to maintain a disciplined approach toward overall inventory levels given the current interest rate and economic environments. We have been proactively working with our dealers through with respect to aged backlog.

Speaker 2

This resulted in a reduction in orders primarily for towable and camper units at our Lance 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 be placed with 2024 model 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 and the first quarter Now turning to our 2nd quarter results on Slide 4. Consolidated net sales of $681,000,000 Increased $105,000,000 or 18 percent versus the Q2 last year.

Speaker 2

The increase was driven by higher shipments and sales across all segments. Fire and Emergency segment sales reflect higher sales in both the fire and ambulance groups. Increased fire group sales were primarily resulting in 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 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 work and progress and price realization.

Speaker 2

Recreation net sales increased versus the prior year as productivity initiatives took hold at our West Coast total plant, while segment pricing remained positive and added discounts. Consolidated adjusted EBITDA of $41,900,000 increased $18,100,000 or 76% versus the prior year With increased contribution from all segments, higher contribution from the F and E segment includes improved results in both the Fire and Ambulance Groups. Commercial segment EBITDA was related to improved profitability in the school bus and specialty businesses, partially offset by buying in municipal transit business. Recreation momentum continued within the quarter with increased volumes and price realization above discounting. The net result of greater profitability across all segments was a 7 quarter high in adjusted EBITDA dollars and EBITDA margin.

Speaker 2

Please turn to Page 5 of the slide deck as I move to a review of our Q2 segment results. Fire and Emergency 2nd quarter segment sales were $283,000,000 an increase of 16% compared to the prior year. The increase in net sales was primarily due to increased shipments of fire apparatus and ambulance units, a favorable mix of higher content Ambulance 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 2 largest plants as well as increased shipments from our Holman's facility that were up 70% year over year and 39% sequentially.

Speaker 2

With supply chain headwind subsiding, all plants have had greater success filling production slots A milestone for recoveries in the fire group will be reaching the revenue run rate achieved in 2nd and Q3 fiscal 2021 prior to supply chain and labor market challenges. Within the quarter alone, we recovered half of the deficit between that period And the low points of revenue experienced in the Q1 of this fiscal year, we are focused on maintaining a cadence of new starts are required to close the gap and position the group for additional improvement. We are encouraged that within the quarter, Bayer Group starts exceeded completions by 6% demonstrating its momentum. As I mentioned earlier, Ambulance Group unit shipments reached a 2 year high, up 6 Year on year with revenue reaching a 3 year high. Higher revenue is primarily related to increased shipments, higher content vehicles and price realization.

Speaker 2

As we have noted on past calls, the recent inflationary environment has required 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 throughput improvement we experienced in all locations within the group and the momentum it will carry into the second half of the year. F and E segment adjusted EBITDA was $9,600,000 in the Q2 of 2023 compared to an adjusted EBITDA loss of 2 point $2,000,000 in the Q2 of 2022. The increase was primarily a result of higher volume, manufacturing efficiencies and improved price realization, Partially offset by inflationary pressures.

Speaker 2

Warrior Group profitability improved 5.50 basis points versus the prior year And 5 20 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. Amlan's Group profitability improved 4.50 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 and E backlog was 2,900,000,000 60% year over year.

Speaker 2

The increase in backlog was a result of continued strength of 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 the fire and ambulance groups. For remainder of the year, we expect the F and E segment to post Sequential revenue and margin improvement were approximately 75% of segment earnings generated in the second half. Turning to Slide 6, commercial segment sales of $142,000,000 was an increase of 56% compared to the prior year. The increase was due to higher sales across all product categories and price realization.

Speaker 2

Improved material availability allowed completion of school buses, terminal Truck 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 had less complexity and a 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, The combined result was a 3.5 year high in school bus sales. Unit shipments of terminal trucks and street Within the municipal transit business, we continue to experience shortages of wiring harnesses and other components creating line rate inefficiencies and significant amount of out of station work and rework, which limited unit shipments within the Q2 and is expected to continue through the Q3.

Speaker 2

Commercial segment adjusted EBITDA of $10,700,000 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 free sweepers benefited from higher shipments related to actions implemented over the past year to improve throughput, Receipt of key components that allow completion of WIP units and price realization. Municipal transit bus completions continue to be limited by shortages of Credit components that resulted in fewer than expected completions and trapped labor that weighed on profitability.

Speaker 2

Commercial segment backlog was $501,000,000 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 a 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 Q3, we expect commercial segment sales and margin 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 WIP 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 3rd quarter with improved shipments and an improved mix of municipal transit buses that benefit the segment's revenue and margin in the Q4.

Speaker 2

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 0 emission school buses and transit buses and feel this provides opportunity in fiscal 2024 and beyond. Turning to Slide 7, Recreation segment sales of $257,000,000 were up 6 versus last year's quarter. Increased sales versus the prior year were primarily results of increased shipments Class A, Class C Automotive and camper units and pricing actions net of discounts in certain categories, partially offsetting the increase were lower sales of Class B units related to Slide chain and irregular dealer inventory related to the Q4 OEM recall that resulted in large number of industry shipments earlier in the year. Shipments of travel trailers and campers improved sequentially and unit starts increased 35% Throughout the quarter, as a new local management team implemented productivity initiatives designed to increase throughput.

Speaker 2

As a result, unit shipments and net sales of non motorized units increased 29% 51% respectively versus the prior year. Recreation segment adjusted EBITDA of $29,100,000 was an increase of 1% versus the prior year. The increase in EBITDA was primarily the result of price realization, net of discounting 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 6 90 basis points versus the prior year. Segment backlog of $495,000,000 decreased 62% versus the prior year and 50% sequentially.

Speaker 2

This was anticipated in line with guidance Provided during last earnings call for segment backlog to normalize in the 4 to 6 month range. The decrease is primarily due to continued production against back to be replaced with upcoming model year orders. Class B and Class B backlog remains in the 9 to 12 months 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 2nd 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.

Speaker 2

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 in the second half is expected to result in approximately 45% of full year EBITDA being generated in the second half. Turning to Slide 8. Year to date cash from operating activities totaled 8 $200,000 Trade working capital on April 30, 2023 were $363,300,000 an increase of $15,500,000 compared to $347,800,000 at the end of fiscal 2022. The increase was primarily a result of increased When it was more difficult to procure chassis, parts and raw materials.

Speaker 2

Over the intermediate term, we believe there is an opportunity for meaningful inventory reduction $8,000,000 on capital expenditures within the 2nd quarter, resulting in free cash flow of $8,300,000 Net debt as As of April 30, it was $221,000,000 including $9,000,000 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 $175,000,000 with flexibility to buy common stock in the open market at prevailing market prices or through block trades over the next 2 years. The new program replaces the prior $150,000,000 authorization approved in September 2021, We purchased approximately $74,000,000 of rev common shares. At the end of the quarter, the company maintained ample liquidity Approximately $306,000,000 available under the ABL revolving credit facility and our net debt to EBITDA leverage ratio is 1.8 times Below our stated target range of 2 to 2.5 times.

Speaker 2

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 $2,450,000,000 to $250,000,000 an increase of $100,000,000 at the midpoint. The range of adjusted EBITDA has been raised to $120,000,000 to $135,000,000 an increase of $7,500,000 at the midpoint. Guidance for adjusted net income is now in the range of $48,000,000 to $62,000,000 and we continue to expect cash We will now begin the question and answer session.

Speaker 2

Thank you again for joining us on today's call. And operator, we'd now like to open that call up for questions.

Operator

Thank you. We will now be conducting a question and answer a confirmation tone will indicate your line is in the question Thank you. And our first question is from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.

Speaker 3

Hi. Good morning, everyone. And Mark, congratulations again. I wanted to see if we could just start the conversation in Fire and Emergency where it's nice to see the strong progress on the starts. Can you just talk about Where we are on 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 Q2?

Speaker 2

Yes. As we Actually, the 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 it 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.

Speaker 2

So we feel very encouraged and When we look at the outlook, it's reflective of that vehicle by vehicle buildup for F and E with ambulance being ahead of the curve with the throughput improvements we've seen. And then, fire just beginning as we talked about the throughput we saw in Q2 and

Speaker 1

then as we progress through

Speaker 2

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.

Speaker 3

And if we were to look at what's being booked Today and the pricing period 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?

Speaker 2

For sure. Yes, for sure.

Speaker 3

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 Quarter is out. I know a lot of moving pieces out there, but would love to get your views.

Speaker 3

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?

Speaker 2

Yes. So we still feel good about where we're at from an overall recreation perspective being at a high single digits to a ten percent EBITDA margin. So Jerry, when you look at our mix and obviously, we've talked about this over the last year or so, 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 5th 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 Challenge financing and their floor plans that they have available given the fact that they have a lot of towable units on their lots.

Speaker 2

We're able to do a lot From a retail sold perspective, we're just a 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 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. 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.

Speaker 3

Super. Thank you.

Operator

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

Speaker 4

Good morning, Mark. Hi. I want to follow-up on Jerry's question, this last question here. If I look at Your implied guidance for recreation in the back half year, you're still looking north of $20,000,000 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 2024 or if you're Comfortable with the notion that this revenue run rate is sustained.

Speaker 4

I asked, 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.

Speaker 2

Yes. We actually 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 When 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, when we look at the back half of the year, we feel very comfortable in those categories. And then our Class Business, we still have in excess of 6 months and we have the production.

Speaker 2

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're talking about gas, those margins are 50 percent of what a high end diesel would produce and obviously the hours from a production perspective are less Given the complexity of 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 to maintain different production cadence than we did at the beginning of the year. And then on the Towables side, we're seeing what everyone else is seeing, but still we still have not normalized our inventory in that Lance product. As you know, it's more of a niche product within the whole Towables business.

Speaker 2

So, we still have quite a heavy following there. And we did As we've announced our Enduro 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

Speaker 4

well. Understood. Maybe going back to Fire and Emergency, maybe even more broadly on Your guidance, you raised your sales guidance by $100,000,000 I'm assuming it's primarily driven by Fire and Emergency, but I'd love some confirmation there. And you know the okay. Then the second question here would be Very high level of backlog, right, almost $2,900,000,000 And I'm sort of curious as to how you think about this backlog.

Speaker 4

Is this backlog stickier, for instance, than 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?

Speaker 2

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 can get the units to our dealers as well as our customers.

Speaker 2

And we understand that, especially in the F and E space and from a public Providing the 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 the past 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.

Speaker 2

So we feel good about that. And then ambulance, we continue to see Strong demand there. And so we 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 consumer based model versus municipality driven Segment, Dezafani.

Speaker 4

Understood. Then my final question, Can you frame maybe where you are in terms of capacity in F and E? 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 at into 2024 and beyond?

Speaker 4

Thank you.

Speaker 2

Yes. It's really true problem and we've talked about this 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 a business unit perspective. So you'd have to go individually by those. We have some that are We have some that are operating at 70% 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 a second shift.

Speaker 2

So we have inherently built in there. If we have labor Okay. Availability that we could actually double our capacity in our current footprint by just adding a second shift. We do Supplement with Fridays and overtime, a lot of our shifts are 410s. So, we have the ability even to flex up on a full Friday shift If we needed to.

Speaker 2

So, we're really working first to improve our production capacity and our cadence before we start thinking about We have that available in our current footprint to more than double where we're at right now.

Speaker 4

Okay, very helpful. Thank you.

Operator

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

Speaker 5

Hi, good morning and congrats, Mark. I guess, just longer term strategic question, just as you're now 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, is this sort of the right portfolio That is in place for the company. And then follow-up just the $175,000,000 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.

Speaker 2

Yes, sure. So I think overall from a Overall, long term or 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. Afternoon, 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 I talked about earlier in the earlier question that we'll get to the 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 Red Drive business system.

Speaker 2

So as I talked about last earnings call, nothing has We've 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 targets, we probably put in more price than what we anticipated in those initial targets.

Speaker 2

So it gives us Some optimism that those are very achievable targets that we set out. And From a portfolio perspective, like I've always said, even in my CFO role, we always assess what businesses and will they deliver the Return that we expect right now, we are uncomfortable 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 When you talk about share repurchase, that was going to expire here in September. So, just making sure that we had the flexibility before our next board call and able 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 to the extent we're exceeding or seeing where we are from a cash flow, we will be opportunistic on from a capital Market perspective.

Speaker 5

Okay. Thank you.

Speaker 4

Yes. Thank you, Jamie.

Operator

Our next questions come from the line of John Joyner with BMO Capital Markets. Please proceed with your questions.

Speaker 6

Hi, good morning. Thank you. And I'll say 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.

Speaker 6

I mean, would that be at all 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

Speaker 2

Yes, no, not right now. I think we're comfortable with the partners we have. So, and we've always said that this is In 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 chassis. We get to have a lot of questions we do in our fire business, But that's one of the things we still have strong relationships with our OEM partners and we feel comfortable in the space we're currently in.

Speaker 6

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 up in the past few weeks? I mean, and I ask this question because we've heard that some on highway markets May have experienced recent issues.

Speaker 6

I mean, when I say a few weeks, I'm talking about like Yes, we do. In certain areas.

Speaker 2

Yes, we do have those. So we are not immune to those being in the category on the industrial side. So we deal with those on day to day basis. I can say that the our supply chain team has done very well. And remember, we are in a unique situation where we said that we have been under Performing in a performance 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 1st calendar quarter of 2023 and those are now we're well ahead where we thought we would be from Dual sourcing, alternative sourcing space.

Speaker 2

So, we are seeing some momentum just from improving our internal house here and expanding our supply base. But also, as I said in my opening remarks, we are not waving the checkered flag We know that there's things that pop up from a day to day and we need to be nimble and be able to manage through those with our partners. 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.

Speaker 6

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?

Speaker 6

I mean and what has the feedback been, the reliability? How has that been in kind of the capability on say real world usage versus a test environment on these products? Yes.

Speaker 2

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 E and C facility I quoted are just starting to be going down to production, but we have And obviously, demo units have been working several 100,000 of miles. So we feel very comfortable in our solutions. And We're in the like I said in my quarter 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.

Speaker 2

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 heightened bidding Like we talked about, so the ability to have funding to pay for this federally has also helped us.

Speaker 6

Okay, excellent. Thank you so much for the time.

Speaker 4

Thank you.

Operator

Our next question comes from the line of Mike Slusky with D. A. Davidson. Please proceed with your question.

Speaker 7

Good morning and thank you for taking my question. 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 that's not electric In capacities segments, so I'm curious if you could just tell us a little bit about whether you're prepared for a ramp up in your facility To make more EVs talking in 2024?

Speaker 2

Yes, sure. For sure, Mike. And I was just out there last month. Drew and I both were out there last And at capacity, we do have a dedicated facility there that is doing the development of both the hydrogen fuel cell and electric. So, we are Conscious of that, we do have the HyperYale product that is starting to go into use case, maybe carrying on to John's Earlier point, we did have beta tests or what you would say use case development within some major customers.

Speaker 2

So we feel very comfortable there in our ability to ramp there And the team, what they've done on the ICE side, we're very confident that if it was to convert to all electric that we'd 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 ice side that would carry over to the EV And hydrogen fuel cell side. So we feel very comfortable from that perspective.

Speaker 7

I'm curious just to follow-up there, Mark, on It's 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?

Speaker 2

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 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 that 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 serves the industry they serve.

Speaker 7

Got it. Got it. And just shifting over to F and E real quick. It sounds like in At least, the angle is having higher content helped you in the quarter, content per vehicle.

Speaker 6

But then it sounds like

Speaker 7

on the fireside, content was not a tailwind. Could Could you give us just a little bit of thoughts going like the rest of this year and the 1st part of next fiscal year, whether content is going to be a tailwind for you? Or as your new COO It 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 affect

Speaker 6

your outlook in the call it 12 months or so?

Speaker 2

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 Hey, commercial chat, commercial pumpers and so the hour differential is significant there. So our ability to deliver More units and again, we're looking at a mix equation here. So, when we're talking about flyer, it's more around these commercial units versus A custom pumper or a chassis or an aerial unit. So that's what we talk about low content versus higher content. So if you look at Q2, we had more Commercial type units going through and on 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 that versus band, which are built like on a transit band unit.

Speaker 2

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 out whatever chassis we received from the OEM. So we're now able to plan better, which has Giving 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.

Speaker 7

Very interesting. I appreciate that. I'll pass it along. Thank you.

Speaker 1

Yes. 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 Skineski for closing remarks.

Speaker 2

Thank you, operator. And again, I would like to thank everyone again for joining us on today's call. I've been encouraged by the plant business that I've 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 and engagement at local level toward the RevDrive initiatives that we detailed at our Investor Day 2 years ago. And one of One of our rev's key values is 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.

Speaker 2

So again, I'd like to thank all of our employees for the hard work and results they achieved in the Q2. And I look forward to speaking with all of you again with our Q3 results. Thank you.

Operator

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Remove Ads
Powered by Quartr
Earnings Conference Call
REV Group Q2 2023
00:00 / 00:00
Remove Ads