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REV Group, Inc. (NYSE:REVG)
Q2 2020 Earnings Call
Jun 8, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the REV Group, Inc. Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. It is now my pleasure to introduce your host, Drew Konop, Vice President, Investor Relations. Thank you. You may begin.

Drew Konop -- Vice President, Investor Relations

Good morning and thanks for joining us. This morning, we issued our second quarter fiscal 2020 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 also 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 this morning and other filings 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, our President and CEO, Rod Rushing, as well as our CFO, Dean Nolden. Please turn to Slide 3, and I'll turn the call over to Rod.

Rod Rushing -- Chief Executive Officer

Thank you, Drew. Good morning everyone and thank you for taking the time to join today's call. Here in my short time with the REV Group and this being my first call, I thought I'd begin with a few opening comments. During my process of working with the Board and consideration of joining the REV Group, I learned the great work this Company does in support of our nation's first responders in the communities that we all live in.

Given the events that transpired of my onboarding and since that time, I've come to see firsthand response of our employees. As segments of the REV Group are broadly designated as essential business -- businesses, many of our employees continue to work during the COVID pandemic to deliver equipment to first responders in our communities. I quickly recognized the sense of pride and purpose that are in the employees and the businesses that are part of the REV Group. In further efforts, I'd like to take this opportunity to publicly thank them for their contributions.

As I considered the role, I was encouraged with the engagement support of the Board. We are aligning the goals that we set out to achieve. I do not and I will not pretend [Phonetic] to have all the answers after only 60 days. But I will offer you a little bit about my initial impressions and thoughts. Over the past several weeks, I've conducted business reviews with each of our business segments and business units to familiarize myself, and to establish a baseline of our current situation, again [Phonetic] understanding and insight of our execution capabilities, recurrent operating model and many products and channels strategies.

Despite limitations to travel, I've been able to tour about half of our facilities. These efforts have confirmed the opportunity I saw from the outside that there is solid value creation opportunity for our shareholders at the REV Group. Today, I have more enthusiasm for the road ahead than I did when I first accepted the role. I've seen enough to validate the opportunity within our businesses to improve our performance as we endeavor to become a top quartile industrial performer. There is much work that needs to be done, but we will improve our core execution capabilities and drive simplification across this business, creating value for our shareholders.

Our commercial operations will be focused on demand creation, beginning with market backed, voice of customer approach that will help us understand the need of our customers regarding our products, the brands and our services. When we have this market back to understanding, we will be positioned to effectively provide the required differentiation in our brands, opening up the opportunities for product platforming that can improve our channel performance through development of our channel partners and new channel acquisition.

We also see significant opportunity in our upfront processes to improve the quality and efficiency of our work. This includes processes that establish our pricing, and the build configurations for our demand fulfillment. On the demand fulfillment front, we have opportunity within the walls of our facilities to execute better. We currently do not have uniform manufacturing practices across all of our businesses; practices that focus every day on driving our complexity in ways to improving our throughput.

This presents real potential for margin expansion within our businesses. There have been discussions in the past with the REV Production System. The concept behind this was solid improvement, and much good work has been done to build this framework to deploy throughout our businesses.

Having said that, there is still much work to further develop the operational methods within the REV Production System and then fully implement these capabilities across our enterprise. Inside our portfolio of businesses, there are real example of the excellent operational performance. These practices have been embraced by a handful of our top-performing businesses and the results reflect this. But regrettably, many businesses had not yet done this. Further the way we think about the REV Production System will evolve going forward.

Much of the opportunity exists in upfront commercial processes that affect our operations. For that reason, going forward we will change our approach from the REV Production System to the REV Business Systems to fully address the opportunity that exists across our entire value chain. Our expectation is that all businesses will execute to the standard of the REV Business System, this will take time and discipline, but this will happen. Regarding our use of capital, we will continue to evaluate and optimize our portfolio. We will define our core and optimize toward that end, with businesses we believe we can move to double-digit earning potential. We also have real potential to reduce complexity through product platforming as we invest in new product offerings, lowering design cost and leveraging our supply chain.

Identifying the brand requirements for differentiation are key to our product platforming strategies. We will build design capabilities around design for manufacturing, and make buy analysis to simplify, what we put on our plant floors that will greatly improve our operations. We will make investments that aligned to our financial criteria of cash return investments. So that's a quick summary of my initial thoughts. Moving on to Q2, we had a challenging quarter. The COVID really -- disruption of the underlying core execution impacted our results. We are not alone in this, impacts of the pandemic. The other execution did not meet our expectations within the quarter.

I'm going to hand this over to Dean now and let him fill you on the details of our second quarter financial performance.

Dean Nolden -- Chief Financial Officer

Thanks, Rod and good morning. Starting with Slide 4, I would like to review our consolidated second quarter results and then move to the segment level performance. Consolidated net sales for the second quarter were $547.0 million, down 11% compared to the second quarter of last year. Included in net sales were approximately $60 million from our recent acquisition of Spartan Emergency Response and $40 million from our shuttle bus businesses divested after the quarter's end.

The year-over-year decrease in consolidated net sales was the result of lower sales in the Commercial and Recreation segments, partially offset by higher sales in the Fire & Emergency segment. Adjusted EBITDA in the second quarter of 2020 was $7.6 million compared to $36.1 million in the second quarter of 2019. This decrease in adjusted EBITDA during the quarter was driven by lower profitability in all three segments, largely the result of production and delivery disruptions from the impact of the COVID-19 pandemic.

Lower corporate spending served as a partial offset to these lower operating results. Please now turn to Page 5 of our slide deck, as I move to review of the performance of our segments. Fire & Emergency total segment second quarter sales increased by 17% compared to last year to $289 million. As I mentioned, this includes approximately $60 million from sales -- of sales from recently acquired Spartan Emergency Response.

Organic sales decreased 9% as the number of fire trucks shipped by legacy businesses was lower this quarter. Fewer truck shipments was largely due to inefficiencies caused by absenteeism at two plants near larger urban COVID hotspots. In addition, it was more difficult to get final inspections and deliveries completed in the quarter due to customer travel restrictions.

Despite our efforts to accommodate with virtual interactions, we were unable to ship as many fire trucks and ambulances as were completed within the quarter. North American Ambulance sales were approximately flat year-over-year. Increased demand from large municipalities was partially offset by a decrease in contractor deliveries. Lower ambulance contractor demand was due to a decrease in non-emergency transport demand.

F&E segment adjusted EBITDA was $10.2 million in the second quarter 2020 compared to $15.1 million in the second quarter last year. This decrease was primarily from the impact of the previously mentioned absenteeism and delivery disruptions. These difficulties had the largest decremental margin impact on our Company performance within the quarter. Partially offsetting these items in the quarter were the positive contributions from Spartan and our Ocala fire facility, which experienced sequential and year-over-year performance improvement.

Spartan's second quarter results were in line with our expectations and the integration is currently on schedule and tracking according to our acquisition business case. Total F&E backlog was $1.1 billion, up 41% year-over-year. This includes backlog acquired from Spartan and reflects strong ambulance order in-take year-to-date. Legacy fire truck backlog was down in select geographies on the West Coast and in the Northeast as certain municipalities take a wait and see approach to their budgets pending federal stimulus proposals.

That said, order intake tends to be seasonal, and it's worth noting that we have experienced strong fire order flow after the end of the second quarter compared to prior months and the prior year. To-date, we have not had any F&E segment backlog cancellations and we continue to manage fire truck throughput with a target of balancing predictability and customer satisfaction through attainment of a nine-month to 12-month backlog duration.

Our outlook for F&E will continue to be impacted by outside forces, such as chassis availability by way of chassis OEM, manufacturing decisions within Ambulance and customer travel practices that could push final acceptance, delivery in revenue recognition to the right. There is also uncertainty around the impact of the pandemic driven economic slowdown on state and municipal budgets that could hinder incoming order rates for ambulances as the year progresses, and for all F&E vehicles, as we enter into fiscal 2021.

Turning now to Slide 6, Commercial segment quarterly sales of $143 million were down 16% compared to the prior year period. Reported Commercial segment revenue included approximately $40 million from the shuttle bus businesses divested just after the quarter close. Although, it is a smaller part of the consolidated portfolio, our specialty division was the largest contributor to the decline of sales within the Commercial segment.

Sales to specialty end markets were down over 50% as demand from ports declined in the face of tariffs, and more recently the pandemic, and rental customers decreased their capital spending activities. Additionally, school bus production was suspended for two weeks within the quarter, as we experienced some supply chain issues and a slower seasonal uptick in school bus order rates.

Commercial segment adjusted EBITDA of $8.0 million was down 46% versus the prior year. Previously mentioned headwinds of seasonality, soft demand in school bus, supply challenges, and labor availability impacted the profit in the Commercial segment businesses. In addition, at our transit bus business, although we shipped more units in the second quarter of this year, the current quarter sales mix shifted toward less content units under the same multi-year municipal contract.

Commercial segment backlog at the end of the second quarter was $413 million, down 5% year-over-year. This reflects the delay of the normal seasonal school bus order rates, and continued delivery of municipal transit buses under a larger long-term contract. In addition, the specialty division portion of the commercial backlog decreased due to end-market headwinds.

On a positive note, as a part of the shuttle bus divestiture, we were given existing Type A school bus backlog from the buyer, which will start to transition to our school bus business in the third quarter and was not included in our reported second quarter backlog. We expect this will provide additional school bus production volume in the third quarter and future orders will be included in our backlog, as they come to fruition later this year and over the longer-term.

Regarding the outlook for the Commercial segment, orders for Type A school buses are pending school districts decisions regarding their fiscal budgets and plans for schools to reconvene in the fall. This business will be ready to ramp up production to meet demand as needed when customers return to their normal ordering patterns. Today, we have had no bus backlog cancellations.

In order to help with the estimation of Commercial segment revenues going forward, please note that total revenue for the divested shuttle bus businesses was approximately $200 million over the last 12 months and these businesses were most recently operating at a low single digit adjusted EBITDA margin. Turning to Slide 7, Recreation segment sales of $114 million were down 43% versus last year. As we previously announced, RV production were shut down during the second quarter anywhere from three weeks to six weeks depending on the location of the business and status of order backlog or work in process at the time that the stay-at-home orders were put in place.

Typically, our second quarter is a strong selling quarter for the Recreation segment. Entering the recent quarter, including the first two weeks of March, we were tracking to our plan and felt very good about our dealer inventory levels, new product offerings and recent dealer development wins. Starting in mid-March, COVID related shutdowns took place and as a result, segment sales ended up coming in approximately 40% below our plan for the quarter. The largest impacts to the segment's revenue decline were from the businesses that were shut down the longest; our Class A and towables businesses.

Recreation adjusted EBITDA was a loss of $1 million for the quarter -- second quarter, despite taking aggressive actions to take cost out during the shutdowns, including temporary layoffs and furloughs. We made a conscious effort to minimize the impact of this disruption on our employees by continuing to pay all employees' healthcare costs during the shutdowns, which also impacted our bottom line.

Some cost reductions also resulted in permanent cost takeouts such as the segment has now lowered its breakeven point exiting the crisis. Segment backlog decreased 27% year-over-year to $123 million. This decline resulted from lower dealer order rates because of decreased foot traffic and retail sales caused by stay-at-home orders. In addition, we were experiencing lower non-motorized RV order rates pre-COVID, as the strong 2019 backlog was largely delivered and being right-sized by the dealer channel.

We now expect trailer and camper orders to be more closely aligned with retail sales going forward this year. Early indications in our third quarter are that the RV end market that -- are that the RV end market is emerging briskly from the COVID-19 pandemic. Orders and dealer feedback have been consistent with recent positive industry reports of pent-up demand and the potential for new RV buyers entering the market. All RV businesses have now resumed production and we expect to ramp our schedules in a manner that is consistent with wholesale and retail demand, but also dependent on OE chassis availability through the remainder of the year.

Net cash generated by operating activities for the first half of 2020 was $22 million compared to a net use of cash of $39 million in the prior year period. This significant year-over-year improvement is due to better net working capital management and the result of liquidity management initiatives during the temporary production shutdowns in March and April.

Second quarter cash from operations was also bolstered by net positive cash generated by Spartan. Net debt as of April 30, 2020 was $421 million including $21 million of cash on hand versus $373 million at the end of fiscal 2019. We had a very comfortable $215 million of availability under our ABL revolving credit facility at the end of the quarter. Subsequent to the quarter, on May 8th, the shuttle bus divestiture generated an additional $49 million of cash at closing and we anticipate approximately $5 million more cash from this transaction later this year.

Cash received at closing was used to pay down debt and future cash receipts will also be used to reduce outstanding debt at the time they are received. Net working capital on April 30th was $429 million approximately $30 million lower than the prior year period. Net working capital at the end of the second quarter was positively impacted by the reclass of approximately $29 million of shuttle bus working capital to assets held for sale, but also includes $46 million related to Spartan.

We continue to emphasize and focus on working capital efficiency across the enterprise, and our cash and liquidity efforts demonstrated this focus in the second quarter and year-to-date. As previously disclosed, our term loan agreement was amended prior to the end of the second quarter. As a result of this amendment, our net leverage covenant was replaced by a fixed charge coverage ratio covenant through and including the end of our current fiscal year.

A minimum fixed charge ratio of 1.25 times is required through October 31st, 2020, after which a maximum net leverage covenant is reinstated effective with the end of our first quarter of fiscal 2021, starting at 5.25 times. Included in this amendment was the provision for the pro forma addition of a fixed level of Spartan synergies to adjusted EBITDA at specified amounts according to detailed forecasts provided to our Bank group.

Under the revised agreement, we are precluded from stock buybacks through the remainder of the life of the agreement, which runs until April 2022. In addition, we are unable to pay common stock dividends to equity shareholders until our net leverage ratio is reduced to under 3.5 times if we choose to do so. We currently expect satisfactory covenant compliance through the end of fiscal 2020, and at least through the first half of fiscal 2021. We have suspended our formal financial guidance and we do not intend to reinstitute new guidance at least through the end of our current fiscal year.

This is due to uncertainties still existing within our end markets, and the inabilities to predict possible continued impacts of the pandemic shutdowns and stay-at-home orders across the nation. Before I turn the call back to Rod, I would like to just add one of many improvements that is being implemented and will become part of our business system and management culture going forward.

This execution focused, and data-driven improvement will be the introduction of a relevant and specific cash return on investment hurdle rate that will guide our decision-making for short and long-term initiatives. This is something that we have used, but not formalized or consistently applied across our enterprise in the past. I believe this will be a significant component to reinforcing and maintaining a fact-based and shareholder value linked decision making process. Rod?

Rod Rushing -- Chief Executive Officer

Thanks, Dean. So we have much work to do as we move forward. We have a near-term action plan that will address core areas of non-performance and structural costs. Our operational intensity will increase and the REV Business System will become fundamental to our execution. These processes of commercial and operational excellence will be developed, deployed, implemented and inspected throughout each of our business units.

In addition to this work, a top priority of mine is to shape our culture. We're still a relatively new Company made up with many cultures, all unique and all valued. We will continue to develop a culture of integrity, diversity and inclusion, where people know they are valued, that their efforts are appreciated and rewarded. Many of our businesses have strong and successful entrepreneurial spirit, which we want to embrace and retain. But to reach our potential, we need to balance this with the implementation of capabilities that drive consistency in our business on our journey toward moving toward an operating Company.

We will build our operational culture around a few key areas. Our leadership will be aligned around operational intensity, that is data driven, fact-based and decisive, moving with urgency and accountability. We have great people committed to quality of our products and brands and hold the greatest of pride in serving our first responders and our communities. We'll use that same sense of purpose in developing the culture to execute and serve our shareholders. As I've said in the beginning, there is significant opportunity to create value at REV. It will not be built overnight, but it starts with me and the execution -- and the executive leadership team.

Operator, we would now like to open up the call for questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.

Stephen Volkmann -- Jefferies -- Analyst

Hi. Good morning, guys.

Rod Rushing -- Chief Executive Officer

Good morning.

Stephen Volkmann -- Jefferies -- Analyst

So, Rod since this is your first call, welcome. But I thought I might ask a couple of sort of big picture questions if I might. Now that you've been there a bit and done some of your reviews, I guess, we hear -- on this side have been hearing about REV Group and lean manufacturing and various things that have been tried over the past few quarters. And obviously, the results were not, I guess what we wanted them to be. So I guess my first question is, what do you think you bring that's different, that sort of can jump start this? And, I have a quick follow-up to that. Thanks.

Rod Rushing -- Chief Executive Officer

Well, I think the first thing I would say, and this is just based on my observations is that I think the execution of -- you used the word lean as an example of many things that we can do to improve performance. But the execution of lean was not consistent to the business. We do have examples within our portfolio of businesses that do this very, very well, but it's not broad enough to I think to see an impact at the bottom line.

So I still believe fundamentally that in this example, lean is something that we can gain great benefit and is broadly utilized across our portfolio, which it is not today. I think, specific to me, because you asked, what do I think, I bring. I mean, my expertise and what I have is a great ability to execute and follow through. Plans are great, putting IVs on paper, what you think needs to be done are great, but what really matters is the cadence and the rhythm and the accountability you place around getting things done quickly. And that's kind of my story line is that we figure out what we got to go do and we execute it, and we follow through on how that's performing.

So that sense of urgency, that sense of commitment to do what we say is really important to me. And then, and that's kind of what I'm going to bring -- make sure that we -- we do it for our shareholders.

Stephen Volkmann -- Jefferies -- Analyst

So do you think that's a question of personnel or incentives or what's the secret sauce to get folks kind of growing in the right direction?

Rod Rushing -- Chief Executive Officer

You know, I'm a big believer that you've got to have operating cadence and rhythm. You got to have defined expectations, you have follow throughs, you got to establish targets and measure them. You got to measure gap to targets. So there is a resiliency [Technical Issues] and a sense of urgency that you put in the business with follow through, relentless follow up. Certainly incentives, aligning incentives to management performance are important. And the one thing is having the right people in the right seats with commitment to do the things that you lay before you that you're going to get done is critically important as well. So all the things you mentioned are important, but I still go back to -- you know, talk is one thing, execution is another and execution is the key to getting things done and in creating value. So that's paramount in what we're going to get done going forward.

Stephen Volkmann -- Jefferies -- Analyst

Okay, great. And then the quick follow-up, in your prepared remarks, you said something to the effect of some business have double-digit margin opportunities. I mean, I've gotten that quite right, we're talking fast, but can you just expand on that a little bit? I mean are there businesses that don't, and that maybe, you're looking at potential divestitures or -- any kind of numerical bookends you can put around what you think the opportunity is somewhere down the road would be great.

Rod Rushing -- Chief Executive Officer

Yeah, I think, Stephen, the comment you were referring to is, I made a comment about, as we look at our portfolio and we think about once we demonstrate great operational capabilities that are -- what we have today, as we look forward,we'll look at business that are close to our core that we believe they have the potential for double-digit earnings as we think about being more acquisitive in the road ahead.

Certainly today, if you look at our portfolio, businesses that are double digit, we have businesses that are not. We'll continue to evaluate that portfolio against what we think to be core and things we don't think we have the potential to be the rightful owner to and we'll make decisions accordingly. So, yeah, that's kind of, I think critical as to no one business as you want in your portfolio in terms of what's core and then they're looking at your ability to execute and deliver a double-digit earning potential in those businesses over time.

Stephen Volkmann -- Jefferies -- Analyst

Okay, thank you very much.

Operator

Thank you. Our next question comes from the line of Mig Dobre with Baird. Please proceed with your question.

Mig Dobre -- Robert W. Baird -- Analyst

Yes, thank you. Good morning. And, Rod welcome to the calls. Maybe sticking with the same line of questioning as Steve, I'm wondering from your perspective as you look at the Company's portfolio and you think about the footprint here, obviously REV Group has been an amalgamation of multiple acquisitions over a long period of time. What do you think the principal levers in terms of improving the business line. Is it -- I understand lean, but should we also be thinking footprint should we be thinking product simplification, any of these other items in your mind at this point?

Rod Rushing -- Chief Executive Officer

Yeah, I think that, if you look -- I'd answer that question with a couple of different lenses on it. One would be, if you look at the current, your current product offering, you look at your footprint, your current operations. There is, and I've only walked, as I mentioned in my previous comments, about half plants, but there is tremendous opportunity to be more efficient and more effective than what we do.

If you look at the flows of our plants, if you look at material presentation, you look at our make-buy analysis, how we make or we buy, the complexity we bring the plant forward. So, I believe there is significant opportunity to free up space and be more efficient in how we flow our plants and to decide what we do and what we don't do. I think, there's great opportunity inside purchasing to improve our purchasing leverage. It's our biggest piece of our cost structure. So we'll be looking at that area as to figure how we can be more effective there and drive value.

And you mentioned designs, we're an amalgamation of a bunch of small companies today. And when you look across our portfolio, we do everything in a little bit in silos. I think there is opportunity and value to be unleashed and thinking about how you look across your businesses and think about product platforming, always being keen on end markets and the differentiation required to add value, but being more efficient in how you plan that differentiation so you can platform your products and drive more commonality in your designs, which improves purchasing leverage, improves -- reduces complexity, it does many, many things that takes that those details off your plan forward that allows you to then look at your footprint.

It's a highly variable cost business, I think footprint is always something that you look at in terms of opportunities, but in terms of our cost structure, that's probably not the largest lever. It's more design cost and efficiencies and purchasing leverage. I think that where the opportunity is. And just one other comment. The opportunities, when you do platforming around what you're going to make and what you're going to buy and design for manufacturing are really, really critical, can unleash a lot of value too.

So those -- building those capabilities into our operating system are going to be critical going forward to get it to shareholder value that we think, it's trapped up inside the business.

Mig Dobre -- Robert W. Baird -- Analyst

I see. Then I guess my follow up, in the slides and in your comments you certainly highlighted the COVID-19 impact on the labor force, absenteeism and inefficiencies that you had in the quarter. As we're moving into June, can you give us an update as to where you might be in that regard? How close are you to what you would consider normal operations? And can you also comment maybe as to what you're seeing in the supply chain? I'm particularly interested in what's happening with chassis and chassis availability. Thank you.

Dean Nolden -- Chief Financial Officer

Hey, Mig. This is Dean Nolden. I'll answer that question and if Rod wants to give any color afterwards, he can do that. I'd first start with the people. In the absenteeism, I think absenteeism was a meaningful impact to our second quarter in a couple of our locations that are near our large urban centers. And where we weren't shut down because we are an essential business, it was less predictable obviously. So that in fact impacted primarily the Fire & Emergency segment.

Otherwise, the people from the standpoint of furloughs and temporary layoffs and recreation, also took place -- but obviously, much more predictable. Since some of the stay at home orders have been lifted and since late May. We have now restarted all of our businesses, all of our business is operating under -- I guess, I would say post-COVID production rates. To take into consideration, working capital management and not getting ahead of ourselves, but also making sure that we are addressing the end market demand that we see coming forward and still with some uncertainty to it.

So from a people perspective, a lot of the issues we ran into are, for the most part kind of behind us, but somewhat lingering in a couple of places, but not a big issue in Q3, so far. From a supply perspective, we had a number of suppliers, obviously they're also closed down because of COVID in the second quarter. For the most part, all of our suppliers are back up and running. And the biggest issue we are watching and looking at is, obviously as always our chassis suppliers, our large OEMs. All of them are also back up and running for the most part, and came back when they intended to come back, but there have been some fits and starts that you hear in the news in terms of some of the larger plants. So nothing is an issue.

Currently, we're working more on a kind of just in time chassis availability today, but don't foresee any issues, but that's one thing we're watching to make sure that doesn't trip us up going forward. Otherwise, the supply chain is doing OK and -- and we don't see large issues right now.

Mig Dobre -- Robert W. Baird -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Courtney Yakavonis with Morgan Stanley. Please proceed with your question.

Courtney Yakavonis -- Morgan Stanley. -- Analyst

Hi, thanks for the question, guys. Rod, can you -- I think Steve asked this a little bit earlier, but -- about the portfolio. But I think historically, Rod has talked about, Class A, RV has been one of those segments that might not be able to get to double-digit margins. Just curious, especially given the current environment, where you're starting to see that backlog accelerate? What your thoughts on that business has been in some of the repositioning that's happened on the Class A side?

Rod Rushing -- Chief Executive Officer

Well, I think broadly, we will always, we're going to continue to review the portfolio for that core, non-core piece. And as I mentioned before, the earnings potential, what we believe we can get the right to get to double digit is really, really important. I would say that the work that's been done in that business in the last year, and a year and a half has dramatically improved its performance. We do see the efforts that's been put in place there through our leader, Bill Reed has done is doing a nice job in positioning that business for improvement.

And certainly, and we look at the demand, it's coming at this post-COVID, there is great demand placed on that business in terms of new production demand. So, we're seeing some short cycle improvement and we're seeing demands. So those are all good things. And not to make a comment about intentions, I would just say that, you have to look beyond short cycle improvement in markets to understand what you should be the owner and what you shouldn't be the owner and I think we're going to continue to look not only at that business, but all of our business to say and this is a process we have to go through as a team with me as a new leader and with the Board around what is core and what's not core. And certainly in the RV businesses as many other businesses will be part of that discussion, but we do see improvement in the performance of the business. We do see improvement in demand, but we also are mindful of that the cyclical nature of that business. That market will return back to historical norms regardless that peaks on the post-COVID environment or not. So we're going to be mindful of that going forward.

Courtney Yakavonis -- Morgan Stanley. -- Analyst

Okay. Great, thanks. And then, Dean, you mentioned that you guys haven't really seen many cancellations on the F&E side, I think you did talk about school bus orders not materializing. Can you just remind us how big is school bus as a percent of commercial, and also if you can just kind of quantify how big municipals are within each segment, and which you kind of view at most risks based on some of your comments earlier on the call?

Dean Nolden -- Chief Financial Officer

Yeah, I won't get down into an individual kind of school bus versus other product types within the Commercial segment. But I can say broadly, given the commentary we made about the size of the shuttle bus business that we divested that, now the Commercial segment is still two divisions, the bus division and specialty division. And bus represents about 75% of that segment, which includes school bus and transit buses now. So, those are the two bus businesses in that segment. So, hopefully that helps.

For municipal state exposure standpoint, I think as you look at the segments broadly going from top to bottom F&E, other than the contractor business in the ambulance side which is indirectly state municipal or otherwise, that's pretty much dependent and benefits from municipal state and other governmental agencies, tax-based revenues. As you look at commercial now with bus at 75%, bus -- school bus is pretty much municipal budgets and tax-based revenue, but transit bus has a little bit of a mix. Some municipalities, but then they had some schools and airports and things of that nature.

Specialty, which is 25% of commercial, that's really not municipal based. Obviously, it's ports, it's logistics, and it's the rental houses for transportation and highways for example. And then obviously recreation which doesn't have any exposure related to state municipal. Hopefully that helps.

Courtney Yakavonis -- Morgan Stanley. -- Analyst

Yeah. That's helpful. And sorry, just to comment on cancellations, aside from the inspection issues, you guys have had on the Fire side, have there been any delays or kind of push outs of orders that you were expecting to fulfill earlier in the year, that are either getting pushed out to later into 2021?

Dean Nolden -- Chief Financial Officer

No delays or push outs, actually customers want their fire truck faster, right? And so we are working with our customers to make sure we satisfy their needs as best as we can and that's our intention too. Our intention is to slow -- to shorten the duration of our backlog to be even more responsive to our customers and their needs for their equipment. So, no cancellations or delays, they actually want them faster.

Courtney Yakavonis -- Morgan Stanley. -- Analyst

Okay. And then just lastly on the non-motorized backlog for RV. You mentioned that you expect it to be fairly consistent with retail sales for the rest of the year. Can you just comment, I acknowledge, it's pretty tough at this point, but what your expectation is for how retail sales will recover within RV at this point?

Dean Nolden -- Chief Financial Officer

You know, I think retail sales is the one part of the RV business as we look forward and plan it, it's a little bit less predictable right now. I mean, obviously we've had a great couple of weeks or months post pandemic that the anecdotes from the industry or that retail sales are doing quite well compared to prior periods. Well, we got to look at wholesale and retail demand and I think as it relates to retail demand -- it's kind of a wait and see, as the summer progresses if trends continue, obviously we'll take advantage of that in our wholesale shipments and flow through to the dealers to the end users. But right now, I think it's a little early for us to be planning on continued robustness from a retail perspective until we see a little bit more data.

Courtney Yakavonis -- Morgan Stanley. -- Analyst

Okay. Thank you.

Operator

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

Jamie Cook -- Credit Suisse -- Analyst

Hi. Good morning and welcome. I guess my first question, can you talk about any incremental opportunities you see on the SG&A side for the Company to take out costs, how efficient you are? My second question is just -- as you look at the investment that was under the prior leadership, I mean, do you think there is opportunities or a need for you guys to invest more in your product lines? And then last question for you, Dean, any help at all on just how you're sort of thinking about cash flow in the back half of the year? Thank you.

Dean Nolden -- Chief Financial Officer

Let me start this. I'll take the last question first on the cash flow side, I think we're going to continue to manage aggressively for positive cash flow and debt reduction as the year progresses, not resting on our laurels post-COVID. If we look at the second half of the year, it's typically our strongest cash flow portion of the year. I think, this year will be no different, but maybe a little muted, because as you can imagine, we are ramping up again post-COVID in some areas from a working capital perspective. And we're trying to do that judiciously in and at the right pace. But I think in the second half our working capital, cash from working capital will be about flat.

I think, most of our cash flow in the second half will be earnings related. I think, our capex will be pretty consistent with the first half of the year, and then there's couple of things we're going to still be focused on with regard to non-operating kind of cash flow opportunities. We had a couple of that we talked about previously in land or excess land sales that is still progressing albeit slower, because of the stay-at-home orders. So we expect some cash from that activity in the second half and we've been taking advantage of the opportunities afforded to us with the CARES Act for the Company to carry back some NOLs.

So we're going to also receive some cash tax refunds in the second half. So, all that -- all that together will again I think provide a positive cash from operations and free cash flow for the remainder of the year such that, ex the Spartan transaction, we will be positive for the whole year on a free cash flow basis.

Rod Rushing -- Chief Executive Officer

Okay. And this is Rod, excuse me. So I think, the first question you asked was about structural costs, SG&A, and when you walk in a business, one of the first thing you look at is how does the business operate, how are decisions made. And we're certainly going to take time and look at our operating model. And how we make decisions around, how we run the business. So where things set when you think about things like shared services and decision right, how you look at engineering product management commercial activities. Top to bottom, how is the organization structured, and how does it run.

That's all going to be on table here in the next 60 days to 90 days of coming since the decisions around, how we want to run this business as clearly for the operating system that we're going to deploy going forward. The belief is in that there will be structural cost opportunities that emerge from that discussion, that I think once you understand how you want to run the business and how you want to make decisions about where things sit, that you will see different ways of looking at the business and opportunities will emerge from that. So that's a yes.

The second piece is around, I think you asked about product investments and how we're thinking about use of capital. I talked a little bit about that in the prepared comments, but I think largely we'll start with going -- we're going to do some work market back to understand the customer and the segments and the channels and whatnot. But I -- my first pass look would be that there are opportunities in terms of when you think about product investments. And I mentioned this as well in the upfront section around opportunities to do product platforming. And if market back, understanding the value of brands, the strength of those brands, the differentiation, the value props of those brands and bring those -- bring that differentiation to the table.

But under the standpoint of looking across your businesses around, where is the opportunity to commonize and reduce complexity and simplify your operation. So you take only the required complexity you're planning for and it leads into all other types of decisions, too. So, I do think, there is opportunity to look at our, how we make investments. And I think as we go forward, we'll think about product investments, maybe slightly differently than what -- than in the past. The part of that's just the natural cycle that we've had I think a lot of acquisitions and good acquisitions that I think will -- now that they're on the table. We could think about the business differently, that we have the opportunity to do that.

Jamie Cook -- Credit Suisse -- Analyst

I'm sorry, Rod. And just a follow up, could you talk about a lot of opportunity that you have, understanding you've only been at the firm about 60 days or so. But do you have a timeline for when you will sort of have more concrete plans and be able to quantify what the impact is, like financial targets, like a timeframe for when you'll come back to the Street and sort of put more meat around the different items you're talking about or margin in [Speech Overlap] like by year-end or...

Rod Rushing -- Chief Executive Officer

Yeah. Subject to forward-statements, I think we'll -- setting aside the fact we're not giving guidance right now, we're going to work [Phonetic] the process here in the next three to six months, that is going to yield us an operating methodology of the business, which from that we'll establish targets. And then as we go forward, and we move back into what we're doing forward base statements around guidance then we'll disclose those. But that's part of the process to size the prize or what you want to do and how you want to operate and organize around doing it for sure, we're going to be doing that.

Jamie Cook -- Credit Suisse -- Analyst

Thank you very much, and welcome aboard.

Rod Rushing -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Jerry Revich of Goldman Sachs. Please proceed with your question.

Jerry Revich -- Goldman Sachs -- Analyst

Hi, good morning, everyone. And Rod, welcome.

Rod Rushing -- Chief Executive Officer

Thank you, Jerry.

Jerry Revich -- Goldman Sachs -- Analyst

Rod, I'm wondering, if you can talk about the fire business in particular where the team has been working to improve throughput. What's your assessment of the manufacturing process there? How quickly can you move to reduce the variability option, as I understand that, that's been the key issue in terms of the amount of mass [Phonetic] customization there, in particular behind the operating challenges? Can you just expand on how quickly we can get the process humming if you will and your assessment there?

Rod Rushing -- Chief Executive Officer

Yeah, there's work going on in each part of the business right now, and it's really inside the walls of those plants to understand how can we improve throughput and take out complexity in all the things you look at and walk [Phonetic] on a plant material flow. And so each plant, each business has its own unique set of opportunities and challenges that we're solving. And I think, when you think about improving those businesses, you think about it in steps, first, doing what you do today, leaning out those processes and simplifying things, value streaming is an example around getting your throughput up.

And that's going on each of the businesses today. That would -- you should -- it won't be the full benefit of all the things you would do over time, as you talk about make buy analysis and designing for manufacturing and product platforming. There's a long cycle opportunity here to continue to drive value in these businesses, but the short term opportunity I think in the three to six months basis, we should be able to start seeing benefit in each of these businesses as we make the changes.

Some of the businesses are more mature and further along in those processes than others, but each has its own problem to solve. If our businesses are ones I have toward, I've got -- I got a couple spots left to see, but I have seen some of our larger facilities and it's a great opportunity for us to go in and apply some principles to get benefit. But it's going to take a while to address the opportunities that are on the plan for us. And before we address that, it's a longer cycle opportunity.

Jerry Revich -- Goldman Sachs -- Analyst

Right. And in terms of, as you folks think about the portfolio as it stands now. Are we nearing the end of the portfolio culling process? Was the shuttle bus transaction the last sizable one? Or are there a few things that you and the Board are still evaluating as a possible divestiture candidates that are meaningful?

Rod Rushing -- Chief Executive Officer

No, I don't that you -- you're always looking at your portfolio for opportunities to improve. But I would say, biased short-term, our focus is on operational intensity and how we improve the underlying performance of our business. That's first and foremost in the minds of leadership team right now. They're always looking for the opportunity that you'll evaluate as they come forward. You have an obligation to do that. But I think, if I were to suggest where our minds are at right now, it's around making things perform, and then addressing situation the opportunity that presents themselves to improve our portfolio.

Jerry Revich -- Goldman Sachs -- Analyst

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Andy Casey with Wells Fargo Securities. Please proceed with your question.

Andy Casey -- Wells Fargo Securities. -- Analyst

Thank you. Good morning and welcome Rod.

Rod Rushing -- Chief Executive Officer

Thanks, Andy.

Andy Casey -- Wells Fargo Securities. -- Analyst

I guess a question directed at you Rod, so sorry. I understand it's early to quantify the financial targets, but when you are talking about transforming the REV Group into a top quartile industrial performance, can you kind of give us some guidance on what metrics you may be looking at?

Rod Rushing -- Chief Executive Officer

Yeah, I think it's a -- obviously, you look at the performance of -- we talked about our cash return investment as being a driver. So, you think about the numerator and denominator there of what that is and that's your earnings and you think about your networking capital, you think about the operational and assets intensity of businesses.

But you're always looking for efficiently getting more out of your assets base and better returns. The returns piece is easy. It's hard to do, but it's easy to talk about. It's getting your business more profitable and continuing to grow at or above market rates, doing a better job of cost configuration and to get products on the floor you can build for the cost at a price you sold.

All that speaks into operational discipline, but margin rates, EBIT, your quality of operations, you're not doing rework. There's all kinds of operational metrics that fall through from that numerator and denominator that we're going to focus on. So you translate from financial metrics on the right, all the way down to operational metrics on the left that drive that capability to perform on your balance sheet and on your income statement.

Andy Casey -- Wells Fargo Securities. -- Analyst

Okay, thank you. And then for the team, I guess, could you discuss any investments that are required to transition that to the REV Business System from the Rev Production System, are we talking like ERP systems or is it something else?

Dean Nolden -- Chief Financial Officer

Yeah. Hey, Andy this is Dean. I think from the standpoint of investments, I think, over the longer term as we mature, there probably are some investments in people and capabilities that aren't within our four walls today that a mature top quartile company would have inherent in the business within the business. So, I think that's one thing. We don't have any large ERP kind of investments that we need to make that may be more of the overarching kind of data warehouse, data lake types of things where you can take multiple ERPs and bring all the information together in one place.

And that's a much smaller kind of dollar value investments. Still a lot of work to do, but less from a capital perspective. So I think the investments aren't huge. So, I wouldn't call that a headwind, I would call it actually a net positive. Now, if you look at, as Rod said, our cash return on investment and the hurdle rates we're putting in place, we're going to make sure that those things bring back more than they than we spend. So, they have a payback that's effective and proper for a top quartile company, so.

Rod Rushing -- Chief Executive Officer

So I'll just add a little color to that. I agree with what Dean said. You don't broadly need to look at ERPs as part of this discussion. I mean, I do think things like customer data for driving working capital opportunity to thinking about opportunities for shared service operations, vendor data. All part of this data like discussion being talked about. Those are all critical. You think about mechanisms for tracking operational improvements, so continuous improvement tracking, purchase price tracking, VAV, value engineering tracking systems where you can operationalize and get good data and accountability around target setting.

Those are pretty -- from an investor standpoint, those cost of systems or stand up are pretty normal, but they're very, very important for getting visibility, transparency on tracking and target setting, which is all part of the operational kind of discipline that we need to build in the business. So, there are things we need to stand up, but they're not at the scale and nature of ERPs to actualize what we got to go do to get our business systems operational.

Andy Casey -- Wells Fargo Securities. -- Analyst

Okay. Thank you very much.

Rod Rushing -- Chief Executive Officer

Thanks.

Operator

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the call back over to Rod Rushing for any closing remarks.

Rod Rushing -- Chief Executive Officer

Thank you. So, as you probably gathered from the conversation, we have a lot of work to do in our business operationally. But there is great potential here for this business to create shareholder value. It's a lot of hard work, and we'll continue to keep you updated on our progress. But it's a visible plan that I can see, we just got to get ourselves lined around it and operational on it.

I do want to thank again our employees. We've gone through a very challenging time as a country and as a business, as all businesses have. And without the great work and efforts of our employees, we couldn't have continued to execute for our customers and also done what we needed to do to make it through this difficult time. So, I want to again thank them for that. And in closing, I just want to thank all of you for being so kind to me on my initial call. I look forward to road ahead and I'm very excited about being here and really excited about what I think can get done. So, I appreciate it. I look forward to talking to you all again very soon. Thank you.

Operator

[Operator Closing Remarks].

Duration: 57 minutes

Call participants:

Drew Konop -- Vice President, Investor Relations

Rod Rushing -- Chief Executive Officer

Dean Nolden -- Chief Financial Officer

Stephen Volkmann -- Jefferies -- Analyst

Mig Dobre -- Robert W. Baird -- Analyst

Courtney Yakavonis -- Morgan Stanley. -- Analyst

Jamie Cook -- Credit Suisse -- Analyst

Jerry Revich -- Goldman Sachs -- Analyst

Andy Casey -- Wells Fargo Securities. -- Analyst

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