REV Group, Inc. (REVG) Q2 2022 Earnings Call Transcript

REV Group, Inc. (REVG 1.46%)
Q2 2022 Earnings Call
Jun 07, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the REV Group, Incorporated second quarter 2022 earnings conference call. [Operator instructions] I will now turn the conference over to Drew Konop, vice president of investor relations and corporate development. Thank you.

You may begin.

Drew Konop -- Investor Relations

All right, thank you, Cherry. Good morning, and thanks for joining us. Earlier today we issued our second quarter fiscal 2022 results. A copy of the release is available on our website at investors.revgroup.com.

Today's call is being webcast, and a slide presentation which includes a reconciliation of non-GAAP to GAAP financial measures is available on our website. Please refer now to Slide 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've described in our Form 8-K filed with the SEC earlier today, and other filings that we make with the SEC.

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

Rod Rushing -- Chief Executive Officer

Thank you, Drew, and good morning to everyone joining us on today's call. Today I will provide an overview of the quarter's consolidated performance and then move to commercial operating and financial highlights achieved within the quarter before turning it over to Mark for a detailed segment financials. Second quarter results reflect continued strong order demand and execution in a challenging supply chain environment that has impacted industrials for the past three quarters. Strong demand for components and materials, combined with lingering labor challenges within our supply base have restricted the availability of key components such as wiring harnesses, radiators, axles and others.

As a result, our businesses that manufacture purpose-built chassis, such as fire apparatus and municipal transit buses, continue to experience throughput challenges and labor inefficiencies related to rework as these components are received. Our outfitting businesses have also experienced inefficiencies as OEM-provided chassis receipts declined throughout the quarter. While we experienced improved sequential chassis pool allocations in the first quarter, several OEM scheduled shutdowns or limited production at their facilities within the second quarter which adversely impacted the fill rate against these allocations. The receipts of chassis are much lower than expected.

And what is delivered is almost always of a different mix to what our production schedule required. This impacts our ambulance, school bus and certain recreation businesses throughput and efficiencies. Second quarter consolidated net sales of $576 million decreased 11% percent versus $644 million in the second quarter of last year. The decrease was driven by lower sales within the fire and emergency and commercial segments, which is partially offset by increased sales within the recreation segment, and price realizations from the actions that we have taken over the past year.

Completions in the fire and emergency segment were challenged by shortages of chassis and key components mentioned earlier. The recreation supply chain has remained resilient, and the segment continued to deliver strong results and execution with record sales against their record backlog. Consolidated EBITDA of $23.8 million was down $21.7 million versus the $45.5 million of the prior year. Current year results were driven by the recreation segment, which posted a record $28.7 million of adjusted EBIDA and a record 11.9% margin performance.

This was largely offset by lower sales, labor inefficiencies and inflationary pressure within fire and emergency and commercial segments. Inefficiencies in the quarter were due to lower unit sales and our decision to maintain the direct labor staffing levels required to complete rework and deliver these essential-need vehicles to our customers. Please turn to Slide 4 for highlights of the second quarter. The backlog of each of our segments is at a record level.

We continue to experience strong in-market demand for our vehicles. This combined with lower production driven by previously mentioned component and chassis shortages have resulted in record consolidated backlog of $3.6 billion, an increase of 55% versus the prior year. At our current line rates, backlogs extend into fiscal year 2024 for several of our businesses. In April, we were pleased to debut the first North American-style fully electric fire truck at the Fire Department Instructors Conference.

This new electric fire truck allows departments to drive and pump on electric-only and delivers the longest electric-only pumping duration in the industry. The show generated new interest from dealers and customers of our E-ONE, Ferrara, KME and Spartan brands. Attendees were among the first to see and learn about Vector, which is now available in each of these brands. We continue to return cash to our shareholders in the form of dividends and share repurchases.

Within the quarter we deployed $21.5 million toward the repurchase of common shares, consistent with our balanced use of capital. Exiting the second quarter, our leverage ratio was 2.1 times net debt to trailing 12-month EBITDA which is near our low end of our target range. Our updated free cash flow guidance of $64 million at the midpoint provides ample opportunity for additional share repurchases, tuck-in acquisitions or debt reduction after accounting for potential dividend payouts in the second half. Please turn to Slide 5.

As you know, the supply chain challenges we referenced in today's earning release and on this call have now existed for several quarters. Entering the second quarter, we believe that our supply chain would improve in the second half of this fiscal year. Within the quarter we did not experience improved supply chain, and in certain cases the situation has worsened. We have updated our expectations with the current view that a supply chain recovery has likely been pushed into calendar year 2023.

Our supply chain team is in constant contact with our key suppliers, including having our people on site at suppliers' facilities. I am personally communicating with executive management at our OEM partners regarding the allocation and fulfillment of chassis to meet our production plans. The availability of semiconductors and electronic components have resulted in the OEM's temporary closing a portion of their factories or reducing shifts over the past several months as they have reported. This has resulted in lower-than-expected chassis receipts in the second half and planned lower line rates within our ambulance business.

These actions will be aligned with appropriate flexing of cost to match reduced production rates. We continue to work, define creative solutions to navigate a shortage of critical parts. We have placed labor into our supply base where necessary. Efforts are ongoing to improve our multi-sourcing engineering solutions to address sole-source components.

Within the second quarter, we put boots on the ground and have created a physical presence at key suppliers to drive operational intensity needed to fulfill our demand. Last quarter, we discussed pricing strategies, included both forward pricing and repricing a portion of our backlog. We continue both efforts with actions that are designed to align the backlog in new sales with our current and future build costs. Our pricing process includes continuous review of anticipated forward-inflation aligned with our current production lead times, supply business and by product type.

And we will continue to move to price accordingly to preserve price cost. Finally, the REV Drive business system continues to be deployed across the enterprise. We would've undoubtedly been farther along in this process if the working environment were more stable, more predictable and consistent with the pre-COVID conditions. Over the past several quarters, we have placed over-weighted focus and efforts on tactical actions in managing materials to achieve throughput and sourcing to mitigate input pricing.

Despite the near-term disruptions, we remain committed that the strategies of our REV Drive business system are correct and will provide long-term value creation that we defined in our investor day presentation. I will now turn it over to Mark for details on the second quarter financial performance. Mark?

Mark Skonieczny -- Chief Financial Officer

Thanks, Rod, and good morning, everyone. Please turn to Page 6 of the slide deck as I move to the review of our segment-level performance. Fire and emergency second quarter segment sales were $245 million, a decrease of 20% compared to the prior year. The decrease in net sales was primarily the result of fewer shipments of fire apparatus and ambulance units, an unfavorable mix of fire apparatus, partially offset by price realization of units in the backlog.

F&E unit's starts and completions continue to be impacted by critical part shortages and reduced chassis receipts from our OEM suppliers, resulting in 17% fewer unit shipments in the quarter versus prior year. Within the fire division, sales have been negatively impacted by shortages of key components, including radiators, axles and wiring harnesses. Within the ambulance division, OEM-provided chassis deliveries have decreased since our last earnings call. In the fourth quarter, our average chassis receipts from a key OEM were 54 per week.

During the first quarter, receipts were varied between 12 and 89 chassis, an average 34 per week. At the time of our last earnings call, we felt the trend of allocation has improved, but indicated the fill rate and timing of receipts was uncertain. Our second quarter chassis receipts average just 10 per week, resulting in lower-than-expected unit starts, completions and sales. F&E segment-adjusted EBITDA loss was $2.2 million in the second quarter 2022 compared to $21.7 million of EBITDA in the second quarter of 2021.

The decrease was primarily the result of lower volume and inefficiencies related to supply chain disruptions, an unfavorable mix of fire apparatus and inflationary pressures, partially offset by pricing realization. The Fire business produced fewer aero units, and availability of parts resulted in a greater mix of commercial versus custom units resulting in a lower average selling price and profitability. Ambulance production planning remains challenged by uncertainty surrounding chassis receipts. Requests needed to support our production plans have not been fully allocated, and the ultimate receipts have not consistently met allocation by number or type.

As Rod noted, throughout the second quarter the F&E segment retained labor to address the significant level of rework associated with erratic component supply and the expectation of improved chassis availability within the ambulance business. At the end of the second quarter, we lacked chassis to run a full production schedule. And beginning in the third quarter we made the decision to execute furloughs in certainly ambulance businesses. The combined impact of the parts shortages and chassis constraints on our production throughput, as well as related labor inefficiencies resulted in a 35% year-over-year detrimental margin.

During the quarter, our KME production facilities in Pennsylvania, Virginia completed their final KME units as planned, and facility disposition is in process. Within the quarter we received $2 million of cash for the sale of certain assets, and are executing the sale of the remaining properties. Unadjusted second quarter results include $8.2 million of charges related to the wind down of these operations, which includes $7.3 million of restructuring and related charges, as well as $900,000 of accelerated depreciation on buildings and equipment as it reached its final use date. We have completed the first KME unit in a new production facility.

However, the full ramp of production for KME backlog continues to be impacted by supply chain constraints. Total F&E backlog was a record at $1.8 billion, an increase of 63% year over year. The increase in backlog results in strong orders for both fire apparatus and ambulance units, as well as price actions taken in the last 12 months. We expect conversion of these orders to sales to remain challenged.

And our expectation for supply chain relief that would allow for accelerated top-line growth has been pushed into calendar year 2023. The midpoint of updated guidance anticipates we will experience lower chassis fill rates than first half run rate with improved fire apparatus sales offsetting the sales decline in ambulance. The net result is that we expect third quarter F&E segment revenue to be approximately flat with the second quarter run rate followed by a small increase in the fourth quarter. Given the cost actions we are taking to align labor staffing levels to reduce production rates, we expect to convert second half sales at a 30% to 40% incremental margin compared to the first half.

This excludes the second half benefit that we expect to realize from the closure of the KME facilities. Turning to Slide 7. Commercial segment sales were $91 million, a decrease of 8% compared to the prior-year period. The decrease was primarily related to lower shipments of municipal transit buses, partially offset by increased shipments of terminal trucks and street sweepers and price realization.

Municipal transit bus sales declined 55% versus last year primarily due to shortages of critical parts such as destination signs, exhaust kits and wiring harnesses that resulted in zero shipments in the month of April. School bus unit sales were approximately flat versus last year, but revenue was impacted by a mix of lower-priced buses sold during a competitive bidding environment in prior year. Within the specialty group we are encouraged by increased terminal truck and street sweeper production which benefited from improvement initiatives designed to increase throughput. The business set a one month record for completed trucks in the quarter.

And sweeper production exited the quarter as highest rate of the year. Commercial segment adjusted EBITDA of $4.4 million decreased 47% versus the prior year. The decrease in EBITDA was primarily a result of lower shipments and mix in the transit bus business, unfavorable mix within school buses, inefficiencies related to supply chain disruptions as well as inflationary pressures, partially offset by increased shipments of terminal trucks and price realization. Commercial segment backlog at the end of the second quarter was a record $531 million with increased orders experienced across all product categories.

The commercial segment outlook anticipates a recovery of municipal transit bus shipments as dual sourcing initiatives take hold, improved profitability of school bus sales, and a continuation of the improved performance within the specialty group. We expect the commercial segment quarterly sales cadence to improve sequentially through the back half at a normalized 15% incremental margin. Turning to Slide 8. recreation segments sales of $241 million were up 1% versus last year's quarter.

Increased sales are primarily the result of increased Class B unit shipments and price realization across all product categories, partially offset by fewer shipments of class A, Class C and towable products. Despite supply chain challenges, our Class B business continues to streamline operations and achieved record unit production. Lower shipments of Class A and Class C units were primarily related to supply chain constraints which included shortages of awnings, windows, generators and chassis. COVID-related absenteeism and similar supply chain constraints resulted in lower shipments of campers and towable units.

recreation segment adjusted EBITDA was $28.7 million, up $4 million versus the prior year. Segment margin of 11.9% increased 130 basis points versus the prior year and as a segment record. The increase in adjusted EBITDA was primarily the result of increased shipments of high-margin Class B units, a favorable mix of Class A and Class C units and price realization, partially offset by inflationary pressures and inefficiencies related to supply chain disruption and labor constraints. Segment backlog of $1.3 billion increased 39% versus the prior year and was the eighth consecutive record.

Orders continue to be strong across all categories, and dealer inventory for our products remains low. We expect approximately 55% of recreation segment sales to be realized in second half and margins to remain in the low double digits with robust sales of Class B and Class C units and improved profitability in our towable business. Turning to Slide 9, net debt as of April 30 was $237 million, including $5.9 million of the cash on hand versus $242 million net debt at the end of fiscal first quarter. The decrease in net debt was a result of free cash flow generation within the quarter of $27 million, partially offset by share repurchases of $21.5 million or 1.7 million shares and an average price of $12.84.

Year-to-date cash returned to shareholders totaled $52.3 million. We also declared a quarterly cash dividend of $0.05 per share payable July 15 to shareholders record on June 30. At quarter end, the company maintained ample liquidity with approximately $294 million available under the ABL revolving credit facility. Trade working capital on April 30, was $365 million compared to $368 million at the end of fiscal 2021.

The decrease was primarily the result of increased accounts payable and customer advances, partially offset by increased accounts receivable and inventory. Our third party chassis inventory both on balance sheet and within OEM pools decreased $22 million sequentially. On a year-over-year basis, our overall chassis inventory is down $32 million. Year-to-date cash provided by operating activities was $27.4 million compared to $37.1 million cash provided in the prior-year period.

The decrease was primarily due to lower net income, partially offset by the trade working capital inflow. We spent a total of $4 million on capital expenditures within the quarter. Today, we update full year guidance to reflect the continuation of supply chain challenges previously discussed. We now expect sales in the range of $2.25 billion to $2.4 billion, a decrease of $100 million at the midpoint.

Adjusted EBITDA is expected to be in the range of $100 million to $120 million, a decrease of $30 million at the midpoint. We expect net income in the range of $14 million to $35 million and adjusted net income in the range of $43 million to $62 million. We raised our estimated free cash flow conversion to 120% from 90% at the midpoint with free cash flow in the range of $58 million to $70 million. We continue to believe our leverage ratio combined with our ABL liquidity and strong full year cash conversion positions us for value-accretive capital deployment and opportunistic share repurchases.

With that, operator, we can turn it over for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question is from Jerry Revich with Goldman Sachs. Please proceed.

Jerry Revich -- Goldman Sachs -- Analyst

Yes. Hi. Good morning, everyone. I'm wondering if you folks can talk about with the work that you folks have put in dealing with the supply chain environment now as you look at what 2023 might look like compared to the exit rate.

I know it's too early for guidance, but can you just touch on, from a high-level standpoint with the margins improving over the course of this year what that implies for year-over-year opportunity for EBITDA growth in '23?

Mark Skonieczny -- Chief Financial Officer

Yeah, I think, Jerry, like you said, we still have uncertainty. Obviously, we still have a large range in the back half of the year, $100 million to $120 million. So, like you pointed out, it's still uncertain what's going to transpire here from a supply chain. I mean, obviously we've talked about the actions we've taken that Rod quoted around having people on the ground and managing it.

But at the same time, we are furloughing people as we discuss. So we still need to see how the chassis supply is going to -- the fill rate is going to play out, as well as some of these key components that work in on dual sourcing as we point out as well, especially around radiators and axles and wire harnesses.

Rod Rushing -- Chief Executive Officer

So it's really too early to give a '23 look as we exit here.

Jerry Revich -- Goldman Sachs -- Analyst

OK, sounds like a number of moving pieces. And then, in terms of the move to furlough employees, obviously we're in a really tight labor environment. Can you just talk about your prospects of bringing those folks back once you're able to address the supply situation given the labor backdrop?

Rod Rushing -- Chief Executive Officer

Yeah, there were three things we were thinking about, Jerry, when we went through this process. I mean, obviously we talked about it in our fourth quarter. And I know in our first quarter we were retaining labor for three reasons. One, we had to finish the rework.

We have to have a pool of people that can go out and retouch the vehicles that aren't getting finished on the line. The second one is they're just -- the customers are obviously anxious to get their vehicles because of the extended lead times. And the third one was the uncertainty around the question you asked around how do you get these folks back. I think we've hit a tipping point here where we flex our costs, we're going to flex our costs aligned to the throughput we can achieve, but we are still going to retain some labor relative to the amount of rework we've got to do to finish these products.

So that touches both the customer issue and it touches the rework issue. But I think that we're going to have to think about the ramp, the second half ramp that we had, having people for that, plus we're going to have to go find the folks. And we're -- right now with the furloughs we're extending medical benefits. So we're trying to keep those folks in our team here as much as we can while we await chassis delivery.

But we got to the point now where betting on the ramp here is not a good business decision. So that's why we're making the move we have to more closely have our costs reflect the rate that we see to be able to build and get throughput.

Jerry Revich -- Goldman Sachs -- Analyst

That's clear. And the furloughs, what proportion of the labor force is impacted?

Mark Skonieczny -- Chief Financial Officer

So on percentages, in rough number, it's about 100 people, and it was only a couple of facilities within our ambulance division since they're the most hit by the chassis. So it's about 100 people that were furloughed here. And they're 30-day furloughs right now they're executing.

Jerry Revich -- Goldman Sachs -- Analyst

OK. I appreciate the discussion. Thank you.

Operator

Our next question is from Mig Dobre with Baird. Please proceed.

Mig Dobre -- Robert W. Baird and Company -- Analyst

Thanks for taking the question. Good morning. I guess, I'm looking to get a little more color and context from you on the price increase component to the discussion here. It sounds like there's a couple of things happening.

It sounds like you've repriced backlog. Maybe you can comment a little bit as to how you're doing that and what segments are impacted here. And then you're also talking about additional price increases that have been put through. So what I'm wondering is what sort of mechanism are you using here? Are these just outright list price increases? Are they surcharges? And can you give us a sense for the magnitude of what we're talking about here in terms of these price increases?

Rod Rushing -- Chief Executive Officer

Yeah, so I'll start and Mark can add in here. We have done selective backlog price increase. First off, RV prices, when they repriced they repriced on a forward basis. So everything that's in the backlog gets repriced when it's shipped.

So that one's kind of self-regulating relative to managing inflationary pressures. The other three businesses are the ones where we've looked at backlog pricing and trying to match looking at our backlog, the maturity of our backlog and when the unit was put in the backlog relative to inflation and then working with our dealer and market customers to go attack the cost challenges that we have in our backlog. And we've been -- we haven't talked about where we're at with that in terms of the magnitude that we've been -- had a major success in recovery against some areas where we had some costing issues. The forward pricing is really all of the above.

We're doing surcharges. We're doing list price increases. We've indexed some on the surcharge side. So we're looking at the best way we can to make sure that we're going to cover the price cost challenges that everybody is facing right now.

So we've been pretty broad in how we've done it. We've tried to be consistent across our businesses, but there are mark-to-market industry-to-industry variations in how we've applied the cost increases. But as I said in the prepared comments, we're looking at it daily. We're looking at forward-casting what we think inflation is going to be relative to lead times, and we're making future pricing decisions around making sure that as we do the math around the forward projection of cost versus the build time that we're going to be in a spot where we can be -- mitigate the price cost challenges that the industries are facing right now.

Mig Dobre -- Robert W. Baird and Company -- Analyst

And what is your sense of how these price increases are impacting end-user demand here? And I ask because if I'm looking at fire and emergency, you're talking about demand being robust, but implied orders here are the lowest they've been in almost six quarters, and they have been eroding sequentially. So, I guess, I'm wondering, is this a function of end users reacting to higher prices? Or are we simply talking about some of the outstanding demand for this type of product, having been satisfied at this point and demand simply normalizing?

Rod Rushing -- Chief Executive Officer

Yeah, I think when you look at the -- when you compare it to probably the more recent quarters, both fire and emergency have had some pretty robust order rates in the last year and a half of really coming out of the back end of the 2020 related to COVID. And so when you think about -- for example, on a trailing four quarter basis in 2020, ambulance orders on an industry base I think were almost 30% higher than the historical average for the prior many, many years. So there is going to be some normalization, I think, as we move forward on order rates relative to the historical norms versus these kind of the funding that's been available plus the pent up demand. I would expect to see it normalizing.

But having said that, our order rates, while they have on a month-to-month basis probably gone down, they're still relatively strong relative to our throughput as these backlogs continue to build. And I think they're all -- also if you go back on a longer view they're pretty strong relative to historical averages in these industries. So there's no question. I think the point you're making around is price at some point going to be an issue.

That's just the logic, right, that at some point price is going to become more important because the funds that have been made available probably have desensitized on price a bit. But right now we're trying to -- we got to make sure that we price at a level that protects costs, and that's equally challenging when you're looking at lead times being extended because of all these material issues, but we're into the details, into the data to make sure that we're making the right decisions and forward-projecting impacts. And then if situation comes where you might have challenges, we're going to aggressively go back after the backlog to make sure that we protect our businesses the best we can.

Mig Dobre -- Robert W. Baird and Company -- Analyst

No, that makes sense. Final question for me on on RV. I'm curious if you can comment at all about demand in the third quarter, what you might have seen during the month of May. We have heard from some folks who are in the distribution business for RVs that they're canceling some orders or canceling some of the backlog that they put with OEMs.

Have you heard anything of the sort? And yeah, what's your sense for sustainability of demand there? Thank you.

Rod Rushing -- Chief Executive Officer

So the first thing I would say is that when you look at our -- broadly, the expansion we've seen here in the last two years in RV, if you look at the data by end-market, it's been largely a towable market expansion in that and C. We're underweighted exposure on towables. We have a towable business that's kind of a niche business. It does very well.

It's a premium-type product. And we still can see -- continue to see decent demand in that space. Our other businesses, our B business is a niche B business, and our C business is a niche C. The B market continues to grow.

We still continue to see orders coming in there in our C business despite some of the comments you made or saw around the broader RV market. We continue to see order rates healthy there and our inventories at our dealers are still low. On the A side, A really did not grow throughout this expansion in the market. A continued to decline throughout that expansion.

And we've held shares there. Our production rates have dropped a little bit. We talked openly about managing that business, not to overextend ourselves here because we were watching the demand in the market not growing. We wanted to make sure we were building the same for peak and trough margins as we've talked about many, many times.

And so that business has become pretty healthy for us from a financial standpoint. So I think, overall, with respect to canceled orders, we've had I believe one order cancelled, and that's really something that is not related to where we are at a point in time. It's something that we have seen through this channel partner on an ongoing basis. It's more of an annual type thing that we actually have some reshuffling.

And it wasn't of a major amount relative to the backlog we have. So it really didn't move the needle at all. So we have -- we got low inventory in our dealer still. We're kind of in a niche product, the end markets are still pretty healthy for, and we still see order rates in these surpassing our ability to deliver.

So we continue to grow our backlog. So overall, we recognize the challenges in RV might be ahead of us here, especially when you think about the macro environment, but we haven't seen it in our numbers yet. And the conversation with the dealers with low inventories continue to support that we can continue to be pretty successful there for some period of time.

Mig Dobre -- Robert W. Baird and Company -- Analyst

Understood. Thanks for all the detail.

Rod Rushing -- Chief Executive Officer

Yeah.

Operator

[Operator instructions] Our next question is from John Joyner with BMO Capital Markets. Please proceed.

John Joyner -- BMO Capital Markets -- Analyst

So thank you for taking my question. Just following up on the RV side. And I get -- I heard what you mentioned about towables and such, but, I guess, how do you think about you and other RV manufacturers in terms of production schedules, right? Because if -- OK, so inventories are low for certain products, but if towables, right, on the towable side, they're not low. And as floor plans begin to fill up, then that would tend to affect other product categories.

So do you see that having an effect on your production schedules as well as the overall industry? 

Rod Rushing -- Chief Executive Officer

No, I would -- when you think about inventory builds in the dealer side, we see it build -- been out by product category. So there's no question that you can just drive down the highway and see the towable inventory in dealers has increased. And that's a -- that's why you're seeing some of the comments that you're seeing. But our specific product in the towable, we have a single exposure in towables, and it's a premium product.

And inventories in that space are still low. And generally, people come to a dealer to buy that towable product. So it's not our -- we continue to see healthy orders there. Our inventories are well below where they need to be to support dealer demand for the products today.

And we have a pretty healthy backlog there still. So in the towable space specifically, because of our low exposure and because our niche exposure for a pretty decent period of time I think we're in a good spot. We don't see -- our perspective is we don't see spillover from towable inventories, if I understood your collection correctly. Inventory growing in towables is affecting, a, because generally those dealers can be different that are selling your motorized versus your towables.

There is segmentation in the dealer base, but also they've got to have on their lot product to serve the customer that's coming in. Someone is not -- generally someone comes in to buy an RV, they're going to -- they're coming in to buy a towable versus a motorized. It's a different customer. So they're not coming in just to buy an RV, they're coming in to buy a specific category of RV.

So they need to have inventory of the full offering just to serve their base.

Mark Skonieczny -- Chief Financial Officer

And John, this is Mark. As well in the niche markets that we're talking about, the Bs and Cs and somewhat in the As, we still have a high percentage of what we're producing are already retail sold, so it definitely hit the floor plan requirements, right? So it's going right through the dealer to the end customer. So a significant amount of what we're producing still is, as Rod mentioned, we're not replenishing the dealer inventory, it's going right to the consumer.

John Joyner -- BMO Capital Markets -- Analyst

OK. Got you. Thank you very much. That's helpful.

And then maybe just one more. I mean, so you've been restructuring the F&E business for some time. And I understand some heavy lifting items like rationalizing the footprint and such lately. But when you think -- I guess, when do you think you'll get to a point where the F&E business is close to, say, normal run rate operations?

Rod Rushing -- Chief Executive Officer

Well, I honestly believe if you look at -- if you bridge it out and look at where we're right now versus where we would want to be or even where we were last year at this time, it's a volume. It's largely a throughput and an inefficiency walk. And so if we got the throughput back, if we were able to manage these supply chain challenges that we're faced with and the disruptions are considerable, I believe this business can transition back to where it was last second quarter pretty -- as quickly as it went the other direction. That's our belief because I think we've improved our performance despite the challenging environment we're working in.

And I think that when we get the stable supply chain, we'll be able to get back on the path of where we were prior to this challenge. The decrementals are up. That's largely because of the headcount we're carrying that we know we -- based on throughput, we really don't need right now. But we have made a conscious decision for the reasons I mentioned earlier to maintain that head count for rework and whatnot in our business.

So I believe that we just got to get a more stable, predictable environment in the supply chain. And I think we can convert it back to get back on the path that we produced last spring and also that we committed to in our investor day, the road map that we would get to.

John Joyner -- BMO Capital Markets -- Analyst

OK. Sorry. Thank you for that. That's helpful.

And maybe just one clarification. On the supply chain, and you may have mentioned this, but, I guess, that it hasn't really gotten any better, but are there certain areas where it has actually gotten worse?

Rod Rushing -- Chief Executive Officer

Yeah, so I think the items that we highlighted in my specific script when you talk about digital displays in the transit side, axles is definitely, and that's publicly out there with some of the challenges. The wire harnesses, I think if you talk to ourselves and our peers, that's been a significant challenge as well. So the sort of the key components that we highlighted are the ones that have gotten worse. There's others that have gotten better, but majority, the key components that we rely on, especially chassis as we've highlighted, right, which is significant for our upfitting business as Rod referred to.

So that was started on our way of saying, here's the ones that have got significant worse than our key components for us that we called out.

Mark Skonieczny -- Chief Financial Officer

Yeah, I think just one comment on the chassis. And I did mention this in the prepared comments that we have a chassie fill rate against allocation problem. We went through the math of that in those comments. But the other issue that we're seeing that's really impactful to the business is when we plan a build, when we do our slotting for production, we're building a body and preparing for the delivery of the chassis.

So when it comes onboard we can marry those. And right now we're seeing a lot of variation from what we expect to come in versus what's coming in, which means we have built bodies or whatnot for chassis that don't match up. And that creates tremendous inefficiencies in our business when we don't have line of sight to what's actually going to arrive as the OEMs battle all the things that they're battling as well. So it's not just not getting the chassis, we need the right chassis because we're planning and producing for a certain chassis arrival that the mix and the variation on that has been pretty significant, especially in our ambulance business.

That's where we see the most of it. So it's not just good to get a chassis, we got to get the right chassis or it drives inefficiencies in a different way in the business.

John Joyner -- BMO Capital Markets -- Analyst

OK, understood. And thank you for the time.

Rod Rushing -- Chief Executive Officer

Sure. Thanks.

Operator

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

Rod Rushing -- Chief Executive Officer

OK, thank you. So I think in closing, we -- you can look at the results, you can look at the commentary that everybody is sharing around supply chain challenges. Those are all real. And -- but over time, as you would be, I'm confident that we'll work through these things.

The underlying thing that I'm really positive about and I believe, and I look at the work the team is doing, I look at the work we're building on capabilities around the lean projects that we're working, the lean certification developed around materials planning and production planning and the APIC certifications that we're launching. The plant work we're doing in terms of closing down facilities and transitioning to new facilities, relaying out lines in our -- in many of our businesses in both RV and the commercial side as well as ambulance. There's a lot of groundwork, the work that we've talked about that we needed to do we've continued to execute that despite the fact that we're facing pretty significant challenges from the supply chain that's affecting us. I would say that, as I mentioned in the prepared comments, we have not made as much progress in our REV Drive limitation than we would have in a stable environment, but we haven't paused.

We continue to push forward with the belief that the things that we're doing and the things we've talked about since the beginning of our time looking at this business are still a great opportunity for us and we just got to be prepared for when the supply chain stabilizes that we're very well-positioned to take advantage of that, and we will be. So again, I thank everybody for their attendance today. I do want to thank our employees as they're doing a great job, not only delivering for our customers but also doing the extra work that we need to do, associated with the things I just commented on. I want to thank them for what they're doing as well.

So I appreciate your time, and we'll talk to you here in a few months. Thank you.

Operator

[Operator signoff]

Duration: 42 minutes

Call participants:

Drew Konop -- Investor Relations

Rod Rushing -- Chief Executive Officer

Mark Skonieczny -- Chief Financial Officer

Jerry Revich -- Goldman Sachs -- Analyst

Mig Dobre -- Robert W. Baird and Company -- Analyst

John Joyner -- BMO Capital Markets -- Analyst

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