REV Group Inc (REVG) 2021 Q2 法說會逐字稿

Greetings. Welcome to REV Group Second Quarter 2021 Earnings Conference Call. (Operator Instructions)

Please note, this conference is being recorded.

I will now turn the conference over to Drew Konop, Vice President of Investor Relations and Corporate Development. Thank you. You may begin.

All right. Thank you, Sherry. Good morning, and thanks for joining us. Last night, we issued our second quarter fiscal 2021 results. A copy of the release is available on our website at investors.revgroup.com. Today's call is being webcast, and a slide presentation, which includes 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 could cause actual results to differ from those expressed or implied by such forward-looking statements. These risks include among others, matters that we have described in our Form 8-K filed with the SEC last night and other filings that we make with the SEC. We disclaim any obligation to update these forward-looking statements which may not be updated until our next quarterly earnings conference call, if at all. All references on this call to a quarter or a year are our fiscal quarter or fiscal year, unless otherwise stated.

Joining me on the call today are President and CEO, Rod Rushing as well as our CFO, Mark Skonieczny. Please turn now to Slide 3, and I'll turn the call over to Rod.

Thank you, Drew, and good morning to everyone joining us on today's call. I will begin with an overview of the quarter's consolidated performance and then move to commercial, financial and operating highlights achieved within the quarter before turning it over to Mark for detailed segment financials.

We are pleased to report our best second quarter adjusted EBITDA results since our IPO in 2017 on our best-adjusted EBITDA margin performance since our third quarter of fiscal 2018. I would add that we were able to deliver these results while faced with continuing challenges in our supply chain and labor-related constraints. Within the quarter, we successfully mitigated shortages of supplies, such as microchips, chassis, subcomponents and the availability of qualified labor in many of our businesses. Our performance reflects the commitment of our employees to serve our customers and communities while improving their productivity, enabling us to mitigate these impacts and challenges.

Second quarter net sales of $644 million increased 18% over last year's quarter as last year's quarter was impacted by reduced production stemming from the onset of the pandemic. Excluding the divestiture of the 2 shuttle businesses, sales increased 26% organically versus the prior year. The quarter sales were driven by increases in Fire & Emergency and Recreation segments.

Fire & Emergency sales reflects our improved line rates, combined with our available backlog and was in line with our expectations for the quarter. Recreation sales exceeded expectations and benefited from recent dealer signings that yielded market share gains. We also realized the combined benefit of price realization and increased line rate execution. F&E and RV performance enabled us to offset top line softness in the school bus end market and labor constraints in our municipal transit bus that affected our production. The quarter also had a strong order intake to match the sales performance with book-to-bill of 1.5 and we exited the second quarter with a record backlog of $2.3 billion.

Our businesses have continued to improve operational disciplines that are delivering results to the bottom line. Second quarter adjusted EBITDA was $45.5 million and adjusted EBITDA margin of 7.1%. Many of our businesses were able to realize price increases while lowering discounts and allowances mitigating inflationary pressures in our supply chain. We are beginning to see the benefit from the execution of our operational excellence pipeline, particularly within the F&E segment. We are confident that we will realize continued margin improvement within our business segments in the long term, but we continue to face, and we'll have to manage through disruptions in our supply chain. These will present headwinds to our ability to produce and ship units in the balance of the year.

Turning to Slide 4. We had several accomplishments within the quarter that I would like to highlight. First, we recently announced a change to our capital structure from a former term loan A and ABL to a new $550 million 5-year revolver with $100 million accordion feature. The new structure allows us to capitalize on low interest rates and is expected to save the REV Group approximately $5 million per year based on today's interest rate of 2% and our current debt level. We expect it will provide us with the necessary liquidity to pursue our financial objectives, including organic and inorganic investments while also maintaining flexibility to return cash to our shareholders.

Today, we announced the reinstatement of our quarterly dividend. This decision by our Board reflects their confidence in the structural and operational improvements that we have made and the implication of these will have in the long-term financial outlook of the company. Year-to-date cash conversion has improved to 82%. And today, we reiterate our guidance of over 90% free cash flow conversion on adjusted net income. We are no longer on a net debt-to-EBITDA leverage covenant, but we are pleased and well positioned to be exiting the second quarter this year at 2.5x compared to nearly 6x just 1 year ago. This result -- this outcome comes as a result of focused efforts on improving both sides of the equation over the past year.

In our past calls, we have often discussed our operational agenda and our commitment to reduce complexity, improve our efficiencies and address our cost structure, all aimed at improving our performance for our customers and expanding our margins. While we remain fully focused on the opportunities, the operational excellence will yield, we have been equally focused on building commercial capabilities. This quarter was a record for Fire & Emergency segment and order intake. With new highs in both Fire and Ambulance on inbound order tools. Within Fire, our teams have worked hard over the past year to increase throughput, which has improved our cycle times and provide a more competitive delivery and lead time. In Ambulance, we have a record-high backlog as municipalities and commercial contractors continue to invest dollars towards upgrading and enhancing the health and safety of their vehicle fleets.

As schools plan to return to the classroom this fall, our school bus orders began to return to normal seasons -- seasonal norms within the second quarter. We also have similar increases in municipal transit quotes and orders. And we announced 2 large municipality wins within the quarter. First, we are pleased to continue our relationship with Pace Suburban Bus, which provides service to the Chicago suburbs that encompasses 284 municipalities. Pace awarded our transit bus business, ENC, a contract for 44 additional clean-diesel heavy-duty transit buses.

Secondly, ENC won its first order with the San Francisco Municipal Transit Agency for 30 hybrid electric low-floor buses for its municipal railway bus service. These buses dramatically reduce both diesel fuel consumption and CO2 emissions compared to conventional diesel.

Within the specialty group, we received record orders for both terminal trucks and street sweepers as our new management team has aggressively pursued both the renewal and new customer capture awards with large national accounts. And finally, our Recreation segment continues not to only participate in the healthy demand for REV that we are seeing, but we've also seen share gains in our market share. The result is the fourth consecutive record of quarterly orders.

We announced the promotion of Mike Lanciotti as President of our Recreation segment. Mike is a veteran of the RV industry and has been the President and General Manager of Renegade RV since 2008. During his 13 years with Renegade, Mike transformed the Renegade business and successfully led the company through the 2008 economic downturn. One of the most challenging periods and resulted in solidifying Renegade's position as their best-in-class Super C and Premier Class C producer. I will add that Renegade has been one of our highest-performing and most profitable businesses since acquired in 2016. We are confident that Mike will lead our business to profitable growth and build upon our recent success in serving our customers.

Earlier, I touched on our ability to mitigate the supply chain disruptions within the quarter. Our procurement team has worked tirelessly and demonstrated true agility and ingenuity in multiple situations, securing components that enable our businesses to maintain production levels and to continue to serve our customers. Our Chief Supply Officer, Rob Vislosky and his team have remained in continuous contact and actively engaged with top management of our supply chain partners to collaborate and find solutions to the issues that we are facing.

Through relationships and collaborations, we were able to work a global network to source items that were unavailable through our normal channels, enabling us to keep our commitments and achieve our financial objectives. On April 15, we hosted our first Analyst and Investor Day since 2018. This event provided a summary of our business, our markets and our channels and included a review of the changes we have made to our organization and operation over the past year. We introduced several members of our executive team, and we also introduced the REV Drive Business System. The team spoke with the core tenets of value creation within the REV Drive Business System. These include commercial, operational and organizational excellence disciplines that are focused on our purpose of creating value for our stakeholders. We provided several examples of the work being done in each of these areas and specified the financial impact of these efforts.

We also framed our capital allocation philosophy and emphasized that the basis is a strong balance sheet that provides optionality to pursue both organic and inorganic investments as well as to returning cash to our shareholders. Finally, we provided intermediate targets for fiscal year 2023. For those that were unable to join us, I encourage you to view the video that is posted on our YouTube page as well as the slide deck that is posted on our investor website.

The last highlight from the quarter is product innovation, and the electrification within our portfolio. Our goal is to be a recognized leader in electrification of the commercial vehicle fleet. We are focused on categories where we see end market demand that have the necessary technology and partnerships available for development and where there is a path to achieve required returns on investment. Within the quarter, we made several announcements that demonstrate our commitment to reducing carbon emissions and the electrification of our vehicles.

In April, we announced that we extended our exclusive agreement with ZeroRPM to integrate and distribute Idle Mitigation Systems to the Ambulance market until 2024. Later in the month, we announced a co-development agreement between our leader Ambulance brand and lightning e-motors for a zero-emission all-electric ambulance. The new analysts will be based on leaders high-roof transit van designed to be via charged -- via a level 2 AC charging our DC fast charging. Development is progressing well with the prototype being available to customers. We expect initial commercial orders delivery to be available at the end of the calendar year.

Within school bus, we are executing on a backlog of orders of our electric type A buses that have -- we have received -- that we received increased interest in over the quarter. Finally, we are preparing for Altoona track testing of our battery-electric municipal transit bus is expected -- that is expected to begin within the fiscal third quarter. We are committed to the development of electric vehicle technologies within our commercial fleets. We are building our capabilities and partnerships to enable us to lead this transition while the end markets mature, and the economics become accretive.

Now I will turn it over to Mark for details on our second quarter financial performance.

Thanks, Rod, and good morning, everyone. I'd like to begin by addressing some common challenges that have surfaced as the pandemic begins to fade. Almost universally, companies have seen increased demand following a relatively long period of reduced output. Competition for raw materials has contributed to an inflationary environment with high prices for commodities such as metals, lumber and foam. Not only did cost go up, but the availability of many of our required components went down. For instance, recreation markets have seen shortages of small ticket items such as awnings, furniture, generators that can limit the completion of a shippable unit. Shortages of semiconductors have slowed or stopped production of chassis and smaller components, such as diesel exhaust fuel tanks. Fortunately, our financial results demonstrate that within the second quarter, REV was largely able to mitigate the short-term impacts of both inflation and part shortages.

Since arriving, I've been speaking about inefficiencies on the balance sheet, particularly in inventory. Within the quarter, as we executed our plan to reduce and improve the quality of inventory, it benefited both the top and bottom line. First, by locating or substituting stock parts for others that were in short supply, we're able to produce, ship and revenue our vehicles. Second, those stock parts often have been purchased prior to the onset of inflation providing a margin benefit due to a lower cost basis. As we continue to improve our quality of inventory and into the second half, realizing incremental benefits will become more challenging.

In this environment, suppliers have put manufacturers on allocations making alternative sourcing and necessity. Our supply chain team has done an excellent job of locating required parts finding alternatives and mitigating supplier price increase over the past several months. However, entering our third quarter, the environment has remained challenging with increased inflationary pressures and reduced availability and supply for component parts and chassis.

Now please turn to Page 5 of the slide deck as I move to a review of our segment-level performance. Fire & Emergency second quarter segment sales were $308 million, an increase of 6% compared to the prior year. The increase in net sales was primarily the result of increased shipments of fire apparatus and price realization of trucks in the Fire group backlog, partially offset by lower shipments of amylin units versus the prior year. While travel restrictions limited inspection and delivery of fire trucks in last year's quarter, which creates a soft comparison, throughput has improved on our 2 largest businesses, resulting in year-over-year sales improvement. Conversely, last year's quarter included a significant increase in demand for immediate delivery ambulances during the first wave of COVID-19 cases. And we shipped a large number of stock units.

We have had sustained and elevated demand over the past 12 months. However, last year's spike was primarily within our fiscal second quarter and caused a difficult year-over-year comparison for the Ambulance group. After these, segment adjusted EBITDA was $21.7 million in the second quarter 2021 compared to $10.2 million in the second quarter of 2020. The increase was primarily a result of higher sales volumes, price realization within our backlog and productivity improvements, including direct labor efficiencies and lower SG&A costs, partially offset by supply chain disruption and labor constraints in certain geographies.

Despite these challenges, our largest fire plant's productivity continues to show impressive year-over-year margin improvement, with second quarter performance 700 basis points greater than last year. We are also seeing better margin performance at our other fire plants but are working to elevate the consistency and sustainability improvement to match our largest plant operation. There's a similar story within the Ambulance group, where our largest plant has demonstrated significant year-over-year bottom line improvement for the past 3 quarters, helping to lift the Group's bottom line to a 2.5-year high in EBITDA margin.

Total F&E backlog was $1.1 billion, down 1% year-over-year. The decrease in backlog is a result of increased throughput and decreased orders of fire apparatus primarily due to COVID-related market softness in the summer 2020, partially offset by strong orders for Ambulance over the past year. The decrease in fire backlog is a positive result, which demonstrates production efficiencies are taking hold, line rates are increasing, and fire backlog is now to a level that is more competitive from an industry lead time perspective. We believe $1.1 billion of F&E backlog and our current visibility and supply chain will result in high single-digit revenue growth versus last year in the second half of fiscal 2021.

Given the timing of price realization and inventory utilization that helped partially offset inflation in the second quarter and potential supply chain shortages, our supply potential chassis shortages in the second half, we expect the second quarter to be the segment's margin peak for fiscal 2021. However, we do expect continued execution of OpEx projects and throughput improvement to delivery -- deliver healthy year-over-year incremental margins of 20% or more.

Turning to Slide 6. Commercial segment sales of $98 million were down 31% compared to the prior year period. Prior year Commercial segment revenue included approximately $44 million from the shuttle buses that were divested in early May of last year. Excluding divested shuttle bus businesses, sales were relatively flat. Lower sales of school bus are due to market softness and a decline in municipal transit sales related to the timing of a large municipal order that was impacted by labor shortages, led to a reduction in throughput in the quarter. This was partially offset by increased sales of terminal trucks and street sweepers, which were up a combined 124% versus the prior year. These 2 specialty group businesses have benefited from greater capital budgets within their respective end market customers, market share gains and increased penetration of key national accounts.

Commercial segment EBITDA -- adjusted EBITDA of $8.3 million was up 4% versus the prior year. The increase in EBITDA was primarily a result of increased production volumes and resulting profitability in the terminal truck and sweeper businesses, partially offset by lower volumes and a resulting decrease in productivity within the school bus and municipal transit bus businesses. Commercial segment backlog at the end of the second quarter was $303 million which reflects strong order intake within the quarter, including improved orders for school buses and 2 large municipal transit orders that Rod mentioned earlier. Also, our specialty group had record order intake with -- which was up 81% sequentially and 290% year-over-year.

The outlook for the second half for the commercial segment will be influenced by outside factors such as ability to procure chassis for our type A school buses, availability of labor and improvements within the supply chain. Given the segment's recent order strength, we expect top line growth to be in the high single to low double-digit range versus last year. We also expect to see continued momentum and contribution from the specialty group, which is currently dilutive to the segment margin, resulting in second half margins that are anticipated to be similar to the second quarter.

Turning to Slide 7. Recreation segment sales of $238 million were up 109% versus last year's quarter, which was impacted by travel restrictions, limited dealer foot traffic and the suspension of normal production activities. Increased sales versus the prior year were primarily a result of increased unit shipments across all of our categories and lower discounts and allowances. Despite the supply chain and labor shortages, the quarter was a record for unit shipments and revenue at both our Class B and Class C businesses. And Class A and Towables performed at 2-year and 1.5-year unit sale highs, respectively. Recreation segment adjusted EBITDA was $25.1 million, up $26 million versus a loss in the prior year. The increase in EBITDA was primarily the result of increased sales volume, stronger price realization related to price increases and lower discounting lower operating expense and productivity improvements across all businesses despite the disruptions mentioned earlier.

Adjusted EBITDA margin matched fourth quarter 2020's rate of 2.6% or 10.6%. However, this quarter was more balanced with greater contribution from our Class A business, which has improved 210 basis points over the past 2 quarters. We are encouraged by the progress and committed to raising the peak and trough performance of this business in an effort to reduce overall cyclicality of this segment.

Segment backlog increased $818 million year-over-year to $941 million, which was the fourth consecutive quarterly record and the result of strong order intake across all RV categories over the past year. During that time, we have gained retail share in each of our motorized product categories and held share in Towables business. In regard to Towables, this business has historically been in niche markets in terms of price, size and geography.

With the promotion of Mike Lanciotti, as segment President, we expect to expand the addressable market of this business by leveraging our portfolio, manufacturing footprint and channel relationships. End market conditions remain strong, with retail sales exceeding wholesale shipments and dealer inventories that are down on an average of 60% year-over-year with most at or near historic lows for our brands.

Turning to Slide 8. As Rod mentioned, within the quarter, we completed the refinancing of our capital structure with a new 5-year covenant-light ABL. Net debt as of April 30 was $298 million, including $8 million of cash on hand versus $331 million net debt at the end of fiscal 2020. At quarter end, the company maintained ample liquidity with $223 million available under the ABL revolving credit facility. Trade working capital on April 30, 2021, was $449 million compared to $427 million at the end of fiscal 2020. Year-to-date, net cash provided by operating activities with $37.1 million compared to $22 million in the prior year period. Cash generated was primarily related to higher net income, partially offset by an increase in accounts receivable that was consistent with the year-over-year increase in sales. Year-to-date, free cash conversion is 82%. And we have reiterated our full year target of adjusted net income to cash conversion be greater than 90%.

Given the improvements in our financial profile and outlook over the past several quarters, the Board has reinstated our cash dividend to pre-pandemic levels. We intend to maintain a strong balance sheet that is consistent with our stated capital allocation philosophy and believe the new ABL and dividend payment allow the flexibility and cash returning to maximize total shareholder returns.

Turning to Slide 9. Today, we are updating full year 2021 guidance and raising our bottom-line expectations. We continue to expect sales to be in the range of $2.45 billion to $2.6 billion, or 10% year-over-year growth at the midpoint. We raised our adjusted EBITDA guidance to $145 million to $160 million from $125 million to $135 million for an increase of $22.5 million at the midpoint. We are raising net income guidance to a range of $52 million to $68 million from $38 million to $52 million, previously.

Adjusted net income moves to a range of $73 million to $88 million from $56 million to $70 million. And free cash flow is now expected to be between $65 million and $88 million, an increase of $19 million at the midpoint.

With that, I'll turn it back to Rod for closing comments.

Thanks, Mark. We are pleased with the progress we have made in the last year, and the evidence of this progress is demonstrated through our strong start to the year. This reflects the efforts of our leadership team, but most importantly, the work of our talented employees and our manufacturing facilities.

We have continued to impress throughout a very, very difficult year, and I cannot begin to tell you how much we appreciate and respect their efforts. Not simply because that without their efforts, we've not made the progress that we've achieved and the results that we presented today, but more importantly, because they play such an important role as essential workers in providing our first responders with vehicles to serve those most in need as well as the many other purposes that our products provide to the citizens of our nation.

Finally, I would like to take the opportunity to invite all active duty-first responders to our Third Annual REV Group Grand Prix in Elkhart Lake, Wisconsin, from June 17 to June 20. This is the third year we have teamed up with North America to pay tribute to our first responders by offering free entry to the NTT IndyCar series event and the manufacture of Fire & Emergency vehicles, REV Group has always recognized and respected the commitment of our first responders to the safety and welfare of others before their own. This past year, first responders have been relentlessly working on the front lines. So now more than ever, we are delighted that the REV Group Grand Prix provides us a platform to honor and share our appreciation for the dedicated people who place top priority on serving our communities each day.

Thank you again for joining our call today. And operator, we would now like to open up the call for questions.

(Operator Instructions) Our first question is from Jamie Cook with Crédit Suisse.

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

So let's kind of break the question down. If you wouldn't mind, could you repeat the first question, and what -- for each question.

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

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

Yes. It's on RVs. So because of the strong demand environment, are you -- do you have any plans like expand capacity as we look forward? And also, like what you expect for margins for the full year?

Yes. I'll speak to the capacity. We are evaluating all of our facilities and less about kind of the view of historic demand because we've really been focused on the peak and trough of this business to make sure we're focused on improving the margin performance for the eventuality of a slowdown that will come at some point that we don't foresee now. But we're working hard to evaluate breakeven and optimize our margins to have a good peak to trough performance. So part of that, what we've done here is we know we actually picked up some share, and we expect our situation to improve as the market slows relative to other declines we've seen historically.

And so we are evaluating business by business where what that might imply to capacity requirements, not only to meet some of the demand we're seeing now, but more how reflect forward to share position changes, as the market, maybe, contracts in the months or quarters ahead that we don't see now. I'd be honest. We don't see that now. We continue to see incredible demand and margin historically slow -- low inventory levels. But we are keenly focused on making sure that we're operating in a way that keeps us focused on the eventual downturn, so we optimize our margins in that situation. Mark, you might want to comment on the margins for the quarter.

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

And I believe you had one final question as well.

No. This is all covered.

Our next question is from Mig Dobre with Robert W. Baird.

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

Yes. I would say, Mig, as you always say, look at the industry, it's always at mid-single digits, right? We've always said 5 to 8, 6 -- 5 to 7, 6 to 8 sort of business, where, as you know, our other businesses are some of our best-performing, which are double-digit, right? Double-digit margin business. So when we're talking about dilution, we're talking about executing at the industry norm, which we believe is a 6 to 8-type number, 5 to 7 homes, I don't know if you want to thread the needle there on that business. But we continue to see accretion there, as we talked about over the last few quarters, going from a loss over the last couple of years here to actually performing well and executing and absolutely getting benefit from not only operational improvements we're making there, but also the leverage on the volume that we're seeing.

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

Yes. I think just to clarify, Mig, right, it was a $22.5 million feet from midpoint because we're up at $152.5 million versus $130 million in. So when you look at that, obviously, it is a beat from, I guess, your consensus of $31 million or $32 million. But our expectations, again, was the -- throughput was very encouraging, as Rod referred to, in the Recreation segment. So we're able to get a lot more units on our expectations, especially in the Bs and Cs. So they continue to operate at capacity and do things there from that perspective. We did see some improvement in our California operation, which we -- where we're hesitant coming in the quarter, given the labor constraints.

So we're seeing those pickups or they're starting to operate at more their normative level entering Q3. But our largest challenge, we look at the full quarter here is now the availability of chassis, which we pointed out, which that business is heavily reliant on getting chassis especially and not as much in Class A, but in our Bs and Cs, making sure that we have the chasse availability there. So maintaining that throughput will be a challenge in Q3 and Q4, but we obviously look at that from -- on a day-to-day basis from that perspective. So when you think about our full year, there was a reflection of the -- going to your consensus numbers, which were essentially on our expectations of $130 million previously. That $22 million was a reflection of the beat there and then also some upside in Q3 and Q4 from what we originally expected.

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

Yes. So I think, Mig, from that perspective, obviously, the $180 million as the midpoint of the range that we're talking about. I think in Investor Day, we laid out -- and I think we had some feedback there. That effectively, to get to the $180 million, we were having to do things that were in our 4 walls, but we do have additional upside to the extent that we grow higher than market. And then we also performed more on the longer-tail projects like our EV platform that we pulled out.

So at this point, exiting the year, I still think we're intact to deliver near the bottom end of those ranges with extension of margin expansion that we sort of talked about to 30 or 40 basis points that we would expect to see over the next couple of years would get us more to the mid- to top end of that range. So we're still feeling comfortable there. But obviously, as we move through this year and then into next year, we'll be looking at those targets. But right now, we feel comfortable that with that range, the midpoint that was reflective there in the range that give you some opportunity to go above, we feel comfortable that that's sort of where we should stay right now.

Our next question is from Jerry Revich with Goldman Sachs.

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

Yes. I can't -- again, I always say this, but I can't speak in great detail in terms of how it was managed in the past, or the issues that were faced in the past. I think the issues we're facing now are very public related to chassis, and through the chip shortage and the shutdown of the OEMs on the chassis side. So we're managing through that with a close contact with those OEMs. We're benefiting from some inventory positions that we've had to keep our plants operational and keep this intact to where we're going to -- against our guidance. But I would say this operationally. We obviously made some pretty significant changes within our supply chain purchasing organization. It's enabled us to, I think, elevate the kind of discussions and the forward-thinking that we have between our organization and those suppliers, not just chassis, but broadly the mini suppliers that we have to keep our lines running.

Right now, as everyone knows, across the industries and specific to chassis, there's pretty extraordinary situations happening that were happening to administer. And the maturity of the team that we put together in the last 6 months to get in front of that and have conversations to make sure that: one, the allocations that we have are going to be fulfilled, but also that we get a line of sight on plant start-ups and when we get early access to demand. I think that our supply -- I think our team, the maturity that they've had is pretty extraordinary. Actually -- we're actually spending equal amount of time on the efficiencies of those chassis pools to make sure that we optimize what we have, that we don't have chassis that we don't have demand for. I think we're being much higher in the months -- in the quarters and months ahead of us around how we think about what we want to get allocation for and the disciplines we built around making sure that we optimize those inventory levels.

So we have the right chassis at the right time, and we don't have too many set in the pool. Mark can probably comment on that more specifically. But it's more of a forward-thinking, probably across business unit, across segment, thinking about what our needs are related to these commercial chassis. And then forward engagements from our team much more proactively with our supply chain partners to make sure that we're managing that. So we don't have issues where we can't produce product. It becomes a barrier for us and hitting our targets. And right now, like I said, I think we're in a good spot against what we've given guidance for today for not only for the balance of this year to go deliver against those targets, because based on the conversations we're having with our suppliers on that end. But again, it is a very challenging time that everyone is facing in the industry around chassis supply. Mark, if you have anything to add to that?

Jerry, I would just add, as you know, as I've mentioned in the Investor Day, as we talked disciplines, we have now around our inventory management and how we're tracking inventory, which includes chassis and all the components, the manufacturing floors visibility to what inventory they have on hand and when they can start a job and what's there. And like I said in my prepared remarks, our quality is a lot better, but also our manufacturing planning, as Rod referred to, we have a lot more visibility to when we can start our job, what inventory we have on hand. And then likewise, the ops team is working with engineering to understand to the extent we have a part that is missing, is there a substitute that we can go to the customer and actually discuss substituting parts so they can revenue the product and deliver it to them, right? because our customers are dealing with the same thing. They want the product as well.

So as I said in my prepared remarks, we have a dual benefit here of sort of the actions we kicked off last year, where we -- which were unrelated to the shortages. But just making sure we have a good quality of inventory. And as Rod said, on the chassis pool, we're looking for not only getting more chassis, but do we have great chassis in allocating appropriately and addressing them with our customer base. So we feel pretty good all the way through and not only supply chain, but operations all the way to engineering.

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

Yes. I would say we were able to mostly offset, and we were able to offset inflation through savings as well as the price realization. And we've talked about that before. Obviously, the Recreation group is definitely taking price. I think they -- across the industry, we're getting ahead of inflation with the price increases. Our longer backlog businesses, we've been able to offset the inflation through purchasing initiatives that Rob, and his team have kicked off. So we feel pretty good there.

When we talk about inflationary pressures or probably talking in the neighborhood of $5 million that we see in the outward quarters ahead of us that we have to address, our bigger challenge is not the inflation, but just making sure we have the products that in the components, so we can actually revenue our products. If you look at the back half, we probably have about $600 million, $625 million of sales that are dependent on getting chassis to deliver. So that's probably a bigger challenge than it is on the inflationary front and our ability to offset that. So to the extent we have components that we feel pretty good, like Rod said, of delivering our guidance and entering that mid-range that we provided.

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

Yes. It's a lot more complex entering the quarter because as we mentioned. We had -- we fortunately had quite a bit of chassis entering the quarter, and we're still able to batch build in a lot of our locations, as we talked about previously. And then as we exited the quarter, it became harder to actually batch build. So it's more of taking the mix that you actually had within your backlog -- I would say, backlog of sales, but also your backlog of chassis or the chassis that we had available to us. So it became more of -- here's the units we have that we can produce on versus at the beginning of the quarter, it was more of, we have 10 orders for this chassis.

So let's all produce those units all at once here through a line, and we got the efficiencies there. But our visibility now is more of we need to replenish that chassis pool such that we can get to that efficiency level in the back half. But I agree with you, Jerry. We are seeing promising science here, so it's more of a shorter near-term challenge as we manage the mix of our chassis supply. And then we're hoping, just like everyone is at the announcements that have been made by the OEs hold and that we're starting to see those chassis come back online. And we do have the appropriate allocations from them.

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

(Operator Instructions) Our next question is from Joel Tiss with BMO Capital Markets.

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

Yes. Our view of the inventories, I think when you look at probably an average inventory level, across a blended average inventory across all segments, they are about 60% of a normal inventory level right now, which on a forward basis might mean to replenish those back to a historical average. You're looking at 6 to 9 months with the demand fulfillment. I think that's -- those are approximates because you got to get into the detail segment by segment. But on a slowdown, I think you're looking at a considerable lead time to replenish inventories to what might be considered a historical average. That's all I have.

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

Yes. I think -- when I think about price, and I think that's kind of a question about price cost in your backlog and how it's going to flow through. Before we actually told that we were putting a lot of effort of focusing on the health of our backlog relative to how we price and cost into that backlog. So there's a lot of effort around optimizing our cost position. It's standing up a centralized purchasing organization to go after opportunities. Even in an inflationary environment, we see opportunity because of maybe things that we didn't do in the past. But also, as we talked about, we have aggressively pursued price adjustment to our businesses going forward, but also, in some cases, surcharge and prices for backlog-based businesses.

So we're not getting into looking at '22, yet. But certainly, looking at the balance of the year, we're in a good position there to deliver against the guidance we've provided. And I think the actions we're taking, both on a cost basis and a price basis to make sure we're in a position where we have positive price, cost, and we're going to be in good shape there. It's worked every day. And obviously, when inflationary issues are going up fast, you got to be on your toes to take care of that. But our team is fully aligned to manage that, understanding the implications they're not doing. And we're certainly on top of that.

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

Yes. So there's a -- with the business with this much complexity and different end markets, there's -- it's really a business unit by business unit discussion. I think generally, with some exceptions, we're in a top 3 position in almost every single product segment, product category that we have. There are a few exceptions within RV, and that really gets in the subsegments, if you will. We have businesses that are leaders, and we have businesses that at one point, we're a leader that we're focused on getting those back to leadership positions.

Transit is probably a business where I -- you could look at that and say that from a share position, we're not a leader. But I look at that and look at the actions that we're taking is an incredible opportunity for growth for us because our business performance there is just so strong from how we execute and operate and deliver in our customer satisfaction levels. So in that business where we're maybe subscale relative to competitors and subscale relative on share, it's a high-performing business for us that does a very good job executing there. I think that it speaks to a growth opportunity for us. So it's a very detailed question, but Fire & Emergency were clearly in a leadership position. And then RV, it's segment by segment. And then Commercial, we have some variation.

Our type A school bus is a leader in that industry and our sweeper business and 3 wheel as a leader, 4 wheel, we're not a leader. So it breaks down very differently depending on which business you're talking about. But I would say this, we are really focused on execution, operations and are lying on these businesses around the commonality, we can go, scale and get leverage to improve, but we're also really focused on commercial because I think that if we can build a commercial excellence capability here, that we have a great opportunity to grow these businesses above-market growth, both organically and inorganically, to drive growth that will be from our Investor Day presentation, accretive to the outlook that we gave. So we're pretty excited about what's ahead of the spare.

We do have a follow-up question from Mig Dobre with Robert W. Baird.

Yes. I just wanted a little clarification on the Fire business. You talked about strong order growth but I'm wondering if we're looking sort of on an apples-to-apples basis, kind of adjusting for the acquisitions that you made there. And we're kind of comparing demand to, say, pre-COVID levels, can you give us a sense for where order intake or the demand seems to be? And I'm kind of curious, the expectation here was that given the COVID disruption, we could be seeing the fire market maybe a little more disrupted as we think into -- even into 2022. How has your view of demand and of this market changed over the past, call it, 3 to 6 months?

Well, I would say this, Mig, it's a good question. I don't have the data in front of me to kind of have a comparative analysis to carve out performance pre-acquisition. I could talk -- but I can talk specifically to what we're seeing in the market and how we feel our competitive position is relative to market demand. I mean our order intake, the past 5, 6 months has been at record levels, even if you pull out some of the businesses that have been acquired, the business is -- the orders have been really, really strong. And the forward demand that we see, the work we're doing with our channel partners, we see that continuing.

We are going to go through a period of time here where orders may be seasonally trough a bit over the next month or 2. But when we think about market activity and market share and our position, we feel very good about position each of our brands. And then, more importantly, our ability to execute -- our improved ability to execute over the past 12 months, improving lead times and delivery against that backlog. So while we continue to build backlog and reduce lead times, it's a great situation because we're converting much better. But I think that there was some softness, perhaps in our share position going back over the last year, probably pre-entering the fiscal quarter this year. But the last 6 to 7 months, we've seen really positive momentum from an order rate basis.

And I think it's both a market, but also, I think it's a share take back to get us back where we need to be. And I think it's mostly attributed to the commercial excellence work we're doing, being more proactive with our dealer base. But also, honestly, what we've done to improve our performance for our customers in terms of operations. So that's where we're at. But we -- I think we see nothing that would suggest that the fire market is softening. We think it's going to be pretty healthy here going forward based on what we're seeing in our pipelines and conversations with the market.

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

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

So with that, we're going to close. We're hard working on the next quarter, and we really appreciate your attendance and your thoughtful questions today. Thank you.

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