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REV Group, Inc. (NYSE: REVG) Fourth Quarter 2021 Earnings Conference Call, December 15, 2021, 10:00 AM Eastern Time
Good morning, and welcome to the REV Group Incorporated 2021 fourth quarter earnings conference call. [Operator Instructions] Please note that this conference call is being recorded. I now want to transfer the meeting to your host, Mr. Drew Konop.
thank you. You can start.
Drew Konop-Investor Relations
OK. Thanks, Rob. Good morning, thank you for joining us. Earlier today, we released the fourth quarter and full year results for fiscal 2021.
A copy of this version is available on our website Investors.revgroup.com. Today’s conference call is being webcast live, and a slide presentation is available on our website, which includes reconciliation of non-GAAP and GAAP financial measures. Now please refer to slide 2 of the presentation. Our comments and answers will include forward-looking statements that may cause actual results to differ from those expressed or implied by such forward-looking statements.
These risks include the matters described in the Form 8-K that we filed with the SEC earlier today and other documents we filed with the SEC. We do not undertake any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if any. Unless otherwise stated, all references in this conference call refer to quarterly or annual or fiscal quarter or fiscal year. Joining me in the conference call today are our President and CEO Rod Rushing; and our Chief Financial Officer Mark Skonieczny.
Please turn to slide 3 now, and I will turn the call to Rod.
Rod Rushing - Chief Executive Officer
Thank you, Drew, and good morning, for joining us on today's conference call. This morning, I will outline this year’s commercial, operational and strategic achievements, including financial highlights for the year, and then introduce our fourth quarter comprehensive results. Then I will pass it to Mark for detailed departmental financial data. At the beginning of this year, we officially launched the REV Drive business system, clarifying our commitment to creating excellent business, operational and organizational capabilities and creating value for our stakeholders.
Throughout the year, we have made significant progress in capacity building in these areas. Today's full-year performance reflects these efforts. The combination of our business actions and demand improvement has allowed us to exit the 2021 fiscal year with a record backlog of US$3.1 billion. In the past year, our sales team has strengthened our customer relationships.
We optimized the brand and distributor channels while taking necessary and necessary pricing measures. Therefore, we have achieved market share growth in many businesses this year. In February, we will host REV’s first annual accelerator award event, which will recognize our best-performing distributors in fiscal 2021. This is an annual event, we recognize and celebrate the outstanding performance of our top distributor partners, and encourage participation in healthy competition next year's event.
In the past 18 months, the municipal budget has been supported by multiple rounds of stimulus measures. This includes funding for health and safety programs that directly benefit our fire and emergency departments. Within our Firepower Group, we are still waiting-about the industry data for the whole year, but the data in the first half of the year shows that we have achieved market share growth, and order bookings in the second half of the year are very strong. Our team of analysts reported its eighth consecutive quarter of backlog records.
Since the promulgation of the Care Act in 2020, industry demand has been increasing. We estimate that the North American ambulance market may grow by 30% compared to the historical average at the time of the 2021 fiscal year report. We have invested in industry advocacy, working with third-party resources and government officials to clarify the language in the federal bill, to learn more clearly stating that municipalities can fund analyst purchases. We believe that our business sector is expected to benefit from the recently passed bipartisan infrastructure bill, which approved $550 million in new spending.
The bill includes funding for the electrification of buses, supporting electric vehicle charging infrastructure, and calling for modernization of airports, transportation, and ports. We estimate that more than 70 billion U.S. dollars of these funds are allocated to markets including our vehicles. Although A-type school bus customers are slower to adopt electric power systems than large diesel C- and D-type buses, we have experienced an increase in A-type quotations and sales activities. In the offer, we announced the expansion of our partnership with Lightning e-motors, including our A-type school buses, and promised to deliver more than 100 electric buses in the next two years.
We expect the public transportation market to be the main beneficiary of the US$70 billion in the Infrastructure Act. Our E&C transit business provides services to municipalities, universities and airports. We recently launched pure electric buses for this market segment to enable us to compete with what we believe is the growing demand for pure electric buses, and I will discuss this in detail in my prepared comments. In the professional group, our capacity terminal trucks are essential for moving and transporting containers from the crowded ports we see today and the distribution system of the entire country.
Due to the nature of its operations, terminal trucks are the main candidates for electrification, and the infrastructure will allocate US$17 billion for the modernization of ports and waterways. We produced the first North American hydrogen fuel cell electric hybrid truck, including two trucks currently serving the Port of Long Beach. In addition, our cooperation with the historical Yale Group to develop all-electric terminal trucks and hydrogen fuel cell terminal trucks is also progressing smoothly. We expect to launch some large retail customers in the first half of 2022.
Our operating environment in 2021 is unstable and challenging. After the end of 2020, our end market is still recovering from the headwinds of demand related to COVID-19. School buses have not yet returned to school, airport travel is restricted, and public transportation expenditures are still facing challenges. With the progress of the first half of fiscal year 2021, we have seen steady improvement in demand, stability in our supply chain, and steady improvement in our revenue and bottom line.
In demonstrating that the REV Drive plan is in place, we released a record first-half results. In the third quarter, the global supply chain deteriorated, and the REV business units began to allocate parts. Perhaps the most important thing is the trickle-down effect associated with semiconductors and its impact on our OEM chassis partners, and their ability to deliver at previously promised or even historical levels. In addition, all components that rely on chips are facing challenges, such as diesel exhaust fuel tanks and other electronic products.
The impact has become more widespread, including other components that do not rely on chips, such as axles, generators, wiring harnesses, seats, and windows. It has become very difficult to predict which components will be in short supply, and this situation still exists today. Under the leadership of our supply chain officer Rob Vislosky, we have significantly improved our procurement and supply chain capabilities in the past year. His team has been committed to diversifying the supply chain and speeding up strategies to alleviate the shortages we encountered in the past year.
Therefore, we are able to produce parts and chassis that were not available in the past. We have also added overseas third-party storage services, added electronic auctions for online bidding, and dual-source partial exposure of our previous only source. In a highly inflationary environment, these measures have the dual benefits of filling the supply gap and reducing costs. Our procurement and pricing actions have allowed us to maintain positive price costs throughout the year, but the impact of material shortages on our throughput far offset the additional productivity gains we achieved during the year.
Despite these challenges, we have released year-on-year adjusted EBITDA margin improvements in every quarter of the year. Compared with last year, we have improved our profit margin by 290 basis points in total. Not only did we convert sales into revenue, but we also converted these revenues into cash. The annual free cash flow conversion rate was 174%. The quality of earnings allows us to repay US$129 million in net debt in fiscal 2021, putting us in a strong financial position.
The total liquidity under the ABL line of credit is now $290 million, which provides great flexibility and opportunities for our strategic agenda. We gave an in-depth introduction to the concept of capital allocation at the Investor Day in April. It involves allocating capital for inorganic activities, returning cash to shareholders in the form of dividends, and stock repurchases, and maintaining appropriate leverage. Go to slide 4.
I want to talk about our organic investment in the business in 2021. In April 2021, we launched the REV Drive business system and are committed to building the required capabilities. Earlier, I discussed our supply chain and procurement work since Rob Vislosky joined us in December last year. We have also been investing in our employees to develop our continuous improvement and lean capabilities.
Since January 2021, we have trained nearly 12% of our 7,000 employees on the principles of waste reduction and lean thinking through formal classrooms and work plans. We have standardized our processes and used technology to improve reports to gain greater visibility in the center. Today, we are actively tracking more than 700 projects aimed at eliminating waste and inefficiency in order to create value. We will continue to invest to improve the capabilities of our employees, the number of certification implementers will continue to grow, and the continuous improvement mentality will become part of our culture.
In the fourth quarter, we announced the appointment of Eric Sandstrom as senior vice president of engineering and technology. This new role is critical to achieving our operational value engineering goals. In addition, Eric will focus on the design process and engineering capabilities to provide product platforming and innovation required for immediate and long-term product simplification. He will also lead our technological advancements in vehicle electrification and vehicle data and analysis.
Prior to joining the REV Group, Eric was the global chief engineer of General Motors’ electric propulsion system and assigned a team to be responsible for the development of all-electric Hummer SUT and SUV propulsion systems. He started his career at BorgWarner and has held a progressive leadership role for 20 years, focusing on global product strategy and engineering project management in the automotive industry. I am very happy that Eric has joined our team and look forward to his impact on improving our business performance and innovation. We have recently issued several announcements regarding product electrification.
In November, our E&C municipal bus business debuted its all-electric buses at the APTA Expo. This is what I mentioned in the comments earlier. The bus is built on a proven access platform that has more than 20 years of trusted performance and is the industry's first battery electric bus with a 100% zero-corrosion steel structure. After the Altoona attraction test is completed, the bus will be eligible for federal funds provided to the municipality, which has recently been increased in the Infrastructure Act.
We also announced a firm order for the first North American-style all-electric fire truck named Vector, and Mesa, Arizona ordered Vector from one of our authorized E1 dealers. But all-electric fire trucks are also suitable for all brands-all brands are REV Group. The customizable Vector has the longest electric pump duration in the industry, allowing four hoses to be used for up to four hours after a single charge. It includes superior battery storage, providing safer, lower center of gravity and regenerative braking.
We have been actively quoting this unit and we are very happy to have a plan to showcase it at the FDIC exhibition this spring. Earlier this week, we announced several agreements that expand the prospects for the electrification of ambulances in North America and overseas. These agreements include an order for five ambulances from American Medical Response, the largest private medical transportation company in the United States. The first batch of AMR vehicles is expected to be completed in April 2022 and will be delivered to five communities in California.
AMR holds the option to purchase 25 additional electric ambulances under this agreement. Next, Qatar's leading non-profit healthcare provider Hamad Medical is conducting operational trials of the most advanced zero-emission battery electric type II ambulance. Finally, our REVO business announced that its contract with the General Services Administration has been modified to include zero-emission battery electric ambulances. GSA is the only source of non-tactical vehicles purchased by U.S. federal government agencies.
The agencies that have access to this contract include the Department of Defense, the Department of Energy, the Veterans Health Administration, the National Park Service, and the Indian Health Service. The timing of adding zero-emission ambulances to the GSA contract coincides with the recently passed Federal Infrastructure Act, which contains major investments in support of electric vehicles. Go to slide 5. Consolidated net sales in the fourth quarter fell by 4.3% compared to the same period last year.
The main reason for the decrease was the decline in F&E sales related to chassis and supply chain constraints, partially offset by increased sales in the commercial and entertainment sectors. Adjusted EBITDA increased by $3.1 million or 80 basis points. The increase was mainly due to the increase in sales in the entertainment sector and the decrease in corporate expenses, partially offset by the decrease in the contribution of F&E and the commercial sector. Despite the revenue challenges encountered in the quarter, our overall departmental performance maintained a 17% decline compared to the fourth quarter of 2020.
I will now hand it over to Mark to learn more about our financial performance for the fourth quarter. mark?
Mark Skonieczny - Chief Financial Officer
Thank you, Rod, and good morning everyone. When I begin to review our fourth quarter department and full year consolidated results, please turn to page 6 of the slide. Sales of the fire and emergency segment in the fourth quarter were US$277 million, a year-on-year decrease of 16%. The decrease in net sales was mainly due to the decrease in shipments of firefighting equipment and ambulances, which was partially offset by the realization of the price of trucks shipped this quarter.
The supply chain headwinds we pointed out in the third quarter did not improve, and in some cases they deteriorated during the fourth quarter. You may remember that when we entered this quarter, more than 100 vehicles were trapped and were being processed due to lack of parts and components needed to complete the vehicles. Since we have obtained the required components throughout the quarter, the factory needs to withdraw labor from the regular production line to rework and complete these units before delivery. Therefore, the continuous load of rework leads to lower production line rate, lower completion rate and the past two Quarterly sales fell. In addition to the shortage of parts and other materials, due to changes in production schedules and plant closures, our understanding of OEM partners’ chassis supply is still much shorter than usual.
In this quarter, compared with the third quarter, we missed fewer vehicle starts due to chassis shortages, but we need to reduce the production line speed and vehicle mix to match the chassis availability. In our ambulance team, we continue to produce more combinations of higher content modular units, which require more man-hours to complete than trucks. This resulted in the sales of ambulance units being lower than when we received more mixed trucks. Within the Fire Group, demand-Hurricane Ida did not cause much damage to our Houghton plant, but the reduction in production days and changes in delivery schedules caused approximately 7 million net sales to be shifted out of the fourth quarter.
Switch to EBITDA. The adjusted EBITDA of the F&E department in the fourth quarter of 2021 was 10.1 million, compared with 14.8 million in the same period last year. The adjusted EBITDA margin was 3.6%, a decrease of 90 basis points compared with the same period last year. The main reasons for the decrease were supply chain disruptions and labor inefficiencies, sales declines related to Hurricane Ida, and sales expense rebates related to large trade shows not held in 2020, partially offset by our backlog of price realization and favorable combination The aforementioned higher content ambulance unit.
Due to the commercial activities that promote price realization and the supply chain team’s efforts to reduce costs, the department again reduced the impact of inflation in the fourth quarter and kept price costs positive. These actions, as well as the productivity measures implemented in the past year, have limited the segment's profit decline to 9% and lower sales of 52 million. At the beginning of the fourth quarter, we announced the transfer of KME fire protection equipment production from locations in Neskahonen, Pennsylvania and Roanoke, Virginia to other REV fire team facilities. We will not make this decision lightly.
Since the acquisition in 2016, the business has been striving to achieve profitability, and finding ways to continue to be profitable is the focus of our initial strategic portfolio in 2020. In the past two years, the combined losses of these factories were approximately US$3 million per quarter despite multiple efforts to improve profitability through structured plans using internal and external resources. Ultimately, the decision to transfer KME production to other facilities will advance the firefighting team’s platform strategy and take a step forward in using the Spartan chassis business acquired in 2020 to develop a manufacturing center of excellence, reducing complexity and improving the overall efficiency of the firefighting team . Our commitment is to preserve the KME tradition and continue to provide our customers and dealer partners with their expectations of the KME brand.
The shift of production locations allows us to make better use of the capabilities of the entire network to improve quality and shorten delivery times. We expect that until the transition is expected to be completed in April 2022, the shutdown and completion of trucks will still be a headwind. This move allows us to rationalize approximately one-third of the fire brigade’s manufacturing footprint. The total F&E backlog was 1.5 billion, a year-on-year increase of 55%.
The increase in the backlog of orders was due to strong orders in the past year, and orders for firefighting equipment and ambulances hit a record high this quarter. Compared with the same period last year, firefighting orders increased by 137%, while ambulance orders increased by 59% compared to last year's strong quarter. As Rod mentioned, the municipal budget remains strong and is supported by another stimulus package this quarter. This level of demand shows that our vehicles are very important to the health and safety of the local community.
Turn to slide 7. Sales of the commercial sector were 95 million, an increase of 3.8% over the previous year. This increase was mainly due to increased sales of municipal buses, terminal trucks and street sweepers, partially offset by a decline in school bus sales, which was due to the temporary suspension of production due to limited supply of chassis. The five-week shutdown and subsequent slowdown in production led to a decline in sales of approximately 12 million vehicles in the fourth quarter, a 51% year-on-year decline.
Sales of municipal buses increased by 13% compared to the previous year, including the production of a large municipal order, which is expected to be completed in the first fiscal quarter of 2022. The momentum of our professional business continued, with sales increasing by 98% year-on-year in terminal trucks and 152% for street sweepers. This has led to a mixed shift, with professional group sales accounting for 29% of sales in the commercial sector this year, compared to 19% in 2020. The adjusted EBITDA of the commercial sector was 5.7 million, a decrease of 11% from the previous year.
The main reason for the decrease in EBITDA was the decrease in school bus production, which was partially offset by the increase in the production of municipal buses, terminal trucks and street sweepers. The suspension of production of Type A school buses resulted in an unabsorbed manufacturing cost of approximately US$2.5 million. The availability of current school bus chassis allows our operations to run at lower prices. Therefore, we do not expect to incur the same level of unabsorbed costs as we experienced in the fourth quarter and recently, but we have not yet resumed full production.
Regarding the chassis allocation of our OEM partners, the current allocation process allows for less planning visibility than previous periods. Previously, we could plan production for up to six months, but today's visibility is as short as 30 days. Under the new leadership, our municipal bus business achieved a two-year high adjusted EBITDA margin and worked hard to complete its backlog of large municipal orders, which are expected to be completed in the first quarter. This may result in mixing units with lower prices, but we believe that recent profit margins will continue to improve.
The professional group continued to show year-on-year improvement in performance, benefiting from the increase in sales favorable portfolio and responsive pricing actions. The profit margin of the professional group has reached a two-year high, which is attractive to this segment-and after being lower than the group average of the previous seven quarters, this segment has grown in this quarter. The backlog of the commercial sector at the end of the fourth quarter was 395 million, reflecting strong orders for school buses, terminal trucks, and street sweepers. Due to weak demand due to school closures in 2020 and earlier this year, pent-up demand for Type A school buses has increased to record levels.
Usually, we expect about three to four months of school bus backlog. But today, we have achieved nearly a year of sales under the limited line rate of the chassis. The backlog of the professional group increased by 408% year-on-year, reaching a record level for the third time in a row. Due to strong orders and quotations from our customers in warehousing, distribution and port operations, the demand for terminal trucks remains strong.
Go to slide 8. Sales of our entertainment department were 218 million, an increase of 12% over the same period last year. The increase in sales compared with the previous year was mainly due to the increase in unit shipments of B and C products, the increase in the combination of A units, and the increase in pricing and reductions in discounts for all sub-categories. Partially offset the lower units related to the supply chain and labor shortages in our Class A and towable locations.
For example, due to the increase in positive COVID-19 tests and safety protocols, our A-level staff turnover rate is approximately 15%. Many of our suppliers are facing similar situations, exacerbating supply chain shortages. As a result, our entertainment business had to perform offline work on 70% to 95% of units during the quarter, depending on the location. However, despite the challenges, the adjusted EBITDA of the entertainment sector was 21.7 million, an increase of 1.2 million from the previous year.
The increase in EBITDA was mainly due to stronger price realization, lower discounts, quantity leverage, and favorable combinations were partially offset by material inflation, increased freight surcharges, and labor inefficiencies caused by rework and absenteeism as I mentioned. We continue to generate mid-level EBITDA margins in our Class B and Class C businesses. By 2021, these companies have been able to manage their own way through the tightness of the chassis and supply chain, and run close to capacity, thereby generating a considerable return on investment. Although the unplanned interest rate was mentioned earlier, the profit margin of Type A business increased by 230 basis points year-on-year and 30 basis points month-on-month.
As we continue the value stream and increase the throughput of this business, we are confident in achieving our profitability goals. In terms of the segment backlog, the segment backlog was 1.2 billion, an increase of 129% over the previous year, the sixth consecutive record. Although the number of products is less than the showroom, the end market conditions are still strong, with retail sales in several categories exceeding wholesale shipments. Compared with historical levels, dealer inventory has now fallen by an average of 70% to 80%, and the acceptance of our brand has never been stronger.
During the quarter, we received a number of new awards, which convinced us that our business will continue to enjoy strong demand. The fleet with Frontier and Renegade Explorer was named the best new model of the year RV Pro. Frontier also won the Midwest Ford Passage and Patriot Annual B-Class RV Business Top RV Debut Award from REV News Magazine. Go to slide 9.
Compared with the 2020 fiscal year, the full-year consolidated net sales increased by 4.5%. This increase was mainly due to increased sales in the F&E and entertainment sectors, partially offset by the decline in the commercial sector. The increase in F&E sales was mainly due to an increase in unit shipments in the first half of the fiscal year before the supply chain and chassis shortages began, and sales related to the Spartan acquisition increased by one quarter year-on-year. The growth in sales for the leisure sector throughout the year was due to the increase in demand and throughput that led to record sales in the leisure sector and the weakness in the previous year related to COVID-19.
The decline in sales in the commercial sector was mainly due to the previous year's sales of the shuttle bus business. The discontinuation of the Collins school bus business was partially offset by the increase in sales of the professional group. For the full year, adjusted EBITDA increased by 74 million or 110% year-on-year. The increase in EBITDA was mainly due to the improved performance of the F&E and entertainment sectors, partially offset by the decline in the contribution of the commercial sector. During the update of the guidance in the second quarter, we noticed the potential unfavorable factors of the disruption of the supply of chassis and parts and the increase in inflationary pressures in the second half of the year.
Chassis and parts supply restrictions limited our revenue in the second half of the year, but we were able to offset inflation through additional pricing and cost actions to maintain positive prices/costs throughout the year. Although we faced challenges in the second half of the year, we achieved 72% incremental profits based on the median revenue growth for the full year of fiscal 2021. Turning to slide 10. The trade working capital on October 31, 2021 was 368 million, a decrease of 59 million from the 427 million at the end of fiscal year 2020.
The main reason for the decrease is that we have adopted various measures in the past year to promote the improvement of accounts receivable collection, extension of accounts payable period, inventory ordering and management, and expansion of customer deposit plans. The cash generated from operating activities for the whole year was 158 million, an increase of 103 million over the previous year. The reason was the increase in net income and the improvement in trade working capital that I mentioned earlier. We spent US$11 million on capital expenditures in the fourth quarter, and spent a total of US$25 million throughout the year, resulting in a full-year free cash flow of US$134 million and a cash conversion rate of 174%. During the quarter, we deducted US$6 million in non-cash expenses from net income for the planned withdrawal of investment in Chinese joint ventures, as well as US$4 million in restructuring-related costs and the transition of real estate impairment related to the KME plant.
It is expected that after the successful completion of the China transaction, we will withdraw from the international business in China and Brazil, reduce organizational complexity, and generate more than 6.5 million cash. As of October 31, net debt was US$202 million, including 13 million in cash on hand. In the fourth quarter, we reduced debt by 39 million, and the debt reduction for the whole year decreased by 129 million from the net debt balance of 331 million at the end of fiscal year 2020. In the fourth quarter, we repurchased 3.9 million shares of our stock. Existing share repurchase authorization, and return a total of 10.5 million cash to shareholders in fiscal 2021.
We declared a cash dividend of US$0.05 per share, which was paid on January 14 to shareholders of record on December 31. As Rod said, at the end of the quarter, the company had about 290 million available funds under the ABL revolving credit line to maintain sufficient liquidity. Our net debt to EBITDA leverage ratio was 1.4 times, which was far lower than our required 2 to 2 Times the target range, and half times. The improved balance sheet, sufficient liquidity, and the remaining US$146 million in the existing stock repurchase authorization provide flexibility for continuous capital allocation activities aimed at increasing shareholder value. Go to slide 11.
Today, we provide full-year revenue and profit guidance, which reflects a series of uncertainties surrounding chassis availability and parts supply, the labor market, and our expectations of increased inflationary pressures in fiscal year 2022. Today's highest guideline is 2.3 to 2.55 billion, which is basically flat at the midpoint. As I mentioned in my individual market segment reviews, due to the limited supply of chassis and components, the line rates of many of our businesses have been reduced in the past two quarters. The mid-point sales of approximately 1.2 billion are dependent on the chassis of the new car.
The midpoint of $2.4 billion in revenue takes into account the normal seasonality in the first quarter and the supply chain pressure we experienced in the fourth quarter. This pressure will continue into the first half of fiscal year 2022 and then ease in the second half of the year. The adjusted EBITDA guidance for the whole year is 125 to 155 million, which is roughly the same as the midpoint of our 2021 fiscal year performance. As I mentioned earlier, we experienced increased inflationary pressures in the second half of FY21. Our outlook for 2022 assumes that the real inflation rate will be nearly twice that of 2021.
We have also made structural adjustments to wages in certain areas to attract and retain qualified labor, which constitutes a gradual resistance to our normal annual performance growth. These expected unfavorable factors will offset most of the planned productivity and procurement savings driven by REV and expected to be delivered in FY22. However, coupled with the commercial actions we have taken, we do expect prices/costs to remain positive in FY2022. In view of seasonality-the weakest quarter of the season, we expect the first quarter to achieve a quarter-on-quarter improvement in profitability through revenue and profitability. The second quarter.
At the midpoint, supply chain relief expects revenue to flow more freely in the second half of the year, and we expect continuous profit margins to improve further in the third and fourth quarters. We also plan to benefit from the production transformation of the KME brand in the second half of the F&E department. We expect the cash conversion rate to exceed 90% and the free cash flow to be between 5.8 and 80 million. The adjusted net profit is expected to be 6.4-89 million, and the net profit is 4.5-73 million.
The adjusted net income does include an additional RMB 70 to 10 million in restructuring costs related to KME's production transition. The annual capital expenditure is estimated to be between 30 million and 35 million, including investment in fire protection facilities produced by KME and growth capital expenditures for our other businesses. Maintenance capital expenditures are maintained in the range of 15-20 million per year. Our growth projects have internal return on investment and internal rate of return targets, which must be reached before approval. We remain committed to all aspects of our capital deployment strategy, including clear leverage targets, organic investments, mergers and acquisitions, dividends and stock repurchases.
With this, I will hand it over to Rod to end the review.
Rod Rushing - Chief Executive Officer
Thank you, Mark. We are excited about the operational improvements we have demonstrated in fiscal 2021 and the progress we have made in building capabilities that provide pathways to our long-term goals. The end market demand remains strong. We are optimistic that the supply chain headwinds will ease in the second half of fiscal year 2022, which will increase throughput instead of our record backlog.
Finally, I want to thank our team members again for their hard work and contributions this year. Without their efforts, we will not be able to make the progress we have made, and we will continue to invest to ensure that they continue to put us in a position of victory and progress. I want to thank you again for joining our conference call today. With this, operator, I now want to open it for questions.
thank you. [Operator Instructions] Our first question comes from Jerry Levich of Goldman Sachs. Please continue with your question.
Jerry Revich-Goldman Sachs-Analyst
Yes. Hi. Good morning everybody.
Rod Rushing - Chief Executive Officer
Jerry Revich-Goldman Sachs-Analyst
Can you talk about the supply chain metrics you are tracking and the number of components you are seeing that are in short supply today compared to three months ago? If you can help us understand the heat map, if you want, in terms of the number of problem components we are tracking now, and based on the information you are hearing from the supply base, any thoughts on this mitigation measure?
Rod Rushing - Chief Executive Officer
Yes. So I just-this is Rhodes. I will repeat what Mark said. I think what we are seeing now is the same type of challenge and the same type of challenge that you have raised compared to three months ago. I mentioned many of the component-level types of challenges we face.
Therefore, the first is the chassis. Our vision for planning is much shorter, and the delivery of promises is much more than in the past. So the initial idea is a challenge for us, Jerry, in terms of chassis, because we are considering a 30-day pointing cycle instead of a 6-month planning cycle, which puts pressure on our business. Then, once you start the case, the components I mentioned in the prepared comments will be different. We are actively managing it with our purchasing team.
But we have seen in the RV business that we are touching 75% to 90%, depending on the business you are engaged in, at least twice to complete. It is not a continuous flow, which is what you would like to see in these businesses. So it is still a problem. However, we do believe that, as we said in the second half of the comments, based on what we get from suppliers, we think we will stabilize.
To ensure that this happens, there is still work to be done. But we do believe that in the second half of this year, we will be in a better position at the component level. The chassis is obviously something that we actively cooperate with original equipment manufacturers, because it is indeed an improved partnership. We also have work to do there, because we have to gain this visibility after 30 days.
When you look at the 30-day window, it is difficult to plan for production.
Jerry Revich-Goldman Sachs-Analyst
Taking a step back, you have been focused on driving continuous operational improvement and strengthening procurement capabilities. Can you talk about what we have learned from the post-COVID experience and how this will affect the way you think about structuring procurement and other processes based on what we have learned in today’s challenging environment?
Rod Rushing - Chief Executive Officer
Well, I think in my opinion, in many ways, it proves the skill set we have to develop in this company, and the abilities we talked about on the first day are very, very important. In the first half of this year, we began to see the benefits of the work we did to the revenue. When we encounter supply problems, yes, you start to gain efficiency and throughput. You have to decide whether I will reduce my number to my line rate.
When I meet customers who need products, I must be able to complete those idle units. So I think we mentioned in the third quarter review that our current throughput may be a bit surplus, because we have a lot of rework related to finished products that lack components. So I think that without the work we have done in Lean and CI and our reduction in the number of employees will lead to worse results, but in fact we have improved, and we are still in the early stages of the process based on our value The location, I think we can get rid of it. It allows us to offset and maintain a certain level, and to maintain a certain level of attainment to the point we put forward based on the guidance we have said.
So I'm very happy that we did it, because if we didn't do it, our condition would be worse. But now, this is a battle, because your line rate does not match your number, because you need to rework, you just need to strike a balance. However, we must strike a balance between the need to complete the product and the need to deliver it to the customer within a reasonable time frame, and the economics of revenue. In this environment, this means you may carry more people than you need.
Jerry Revich-Goldman Sachs-Analyst
Row. Finally, how do you think about your long-term profit goals? Obviously, we will need to increase the run rate of '22. Any recent ideas about drastically reducing rework in 2023 sound like these goals need to happen? But Rod, if you don't mind, maybe you can expand?
Mark Skonieczny - Chief Financial Officer
Yes, this is Mark, Jerry. When we see the second half of the year or into the second half of the year and our expected growth in the fourth quarter, as Rodriguez said, because we have proven the exit in the second quarter of this year, our ability to do this will get From an EBITDA point of view, we can maintain the fourth quarter operating rate, which will be generated within the range of US$160 million to US$200 million in April. Therefore, we believe that if we get everything and we have proven that if we have the supply chain needed in the workforce, we can achieve these goals through our second quarter results. Therefore, we believe that exiting the fourth quarter will provide a runway to achieve these 23 goals.
Jerry Revich-Goldman Sachs-Analyst
Mark Skonieczny - Chief Financial Officer
[Operator Instructions] Our next question comes from Mig Dobre and Robert W. Baird. Please continue with your question.
Mig Dobre - Robert W. Baird and Company - Analyst
Thanks, guys, and happy holidays everyone.
Mark Skonieczny - Chief Financial Officer
Rod Rushing - Chief Executive Officer
I think I want to clarify your comment or the framework you use when talking about prices/costs. Can you specify your thoughts-when you are talking about whether your prices/costs are positive, what kind of costs are you considering?
Mark Skonieczny - Chief Financial Officer
Yes. Therefore, we discussed the factors that we consider in normal inflation projects, such as Merit, as I mentioned in the prepared comment, we are talking about component price increases, so component inflation and we have to contribute to the market Anything done-labor rate adjustments, is offset by pricing and our purchasing savings. Therefore, we expect that our CI savings, our operating savings will offset any normal growth in operations, as long as Merit increases, general insurance, etc., and our pricing strategy and our purchase savings can offset inflationary pressures.
Mig Dobre - Robert W. Baird and Company - Analyst
right. Because when I am listening to your prepared comments, I think you are saying that the price/cost in the fourth quarter is positive. Of course, you are talking about fire. I am not sure if this is also the case for the other two parts.
You are talking about positive prices/costs in 2022, although material cost inflation will be twice what you saw in 21, and labor costs will also increase. So I want to make sure that we are all clear here that you said you can pay for all these costs. If so, it means, how did you do it? How flexible is your pricing? What kind of price increases are we talking about to offset the kind of headwinds you describe?
Mark Skonieczny - Chief Financial Officer
Yes. So MiG, as we discussed before, we have been raising prices throughout the year to ensure that our backlog and longer backlogs of business contain inflation assumptions, and it is really solving the backlog that is happening now, but we have been able to To offset some of the inflationary pressures by buying savings. It does vary by market segment. Therefore, in the entertainment field, just like our competitors, suppliers pass on the increased value chain to our distributors and ultimately to consumers.
Therefore, you can think of it as being completely protected by inflation, so this is a pass-through. In our commercial business, we have completed some surcharges and re-pricing in our backlog to make up for this. So we effectively reprice our backlog. Then in the case of longer backlogs of ambulances and fire trucks, we increased the surcharge for ambulances.
Then in the fire protection business, we have been very effective. We have been working very hard with our supply base to ensure that we will not accept that much increase because we have a backlog and a longer backlog in that industry. So we are working with our supply base, knowing that if we increase, we cannot pass it on to our customers because we have contracts. So this is one of the things we must manage.
Mig Dobre - Robert W. Baird and Company - Analyst
I think this supports my last question here. If this is the case, then the situation you just described here, why don’t we look for higher profit margins in FY22, because I think there are many projects that are very financially irrelevant." 21. I mean the hurricane is definitely It seems to be something that I hope will not happen again. There may be other similar projects in these market segments.
Is there some kind of conservatism? Or is it just frankly, it's just that operating the supply chain has become more challenging, and you are able to build this guide in some way with less visibility?
Mark Skonieczny - Chief Financial Officer
That's right. That's right. So this is really a reflection of our Q. If not-if you look at our scope of guidance, what we did in the fourth quarter, we see that components like Rod talked about there face greater challenges.
So in fact we will not get the throughput and efficiency that we have. Therefore, we will still face challenges in the first and second quarters. When you look at our performance in the second quarter of this year and our ability to achieve 45 million, or when you look at the fourth quarter of 31 years, our annual performance will not change significantly. Exit rate in the fourth quarter. So this is the challenge we are dealing with.
Then suppose this goes back to the run rate in the third and fourth quarters. Therefore, as Rod pointed out, our efficiency is getting lower and lower in terms of our ability to obtain throughput and efficiency improvements, just like in the entertainment field and other fields. So we are dealing with this problem, just around the uncertainty of component supply and our ability to complete the unit in time.
Mig Dobre - Robert W. Baird and Company - Analyst
Our next question comes from Joel Tiss from BMO. Please continue with your question.
Joel Tiss - BMO Capital Markets - Analyst
Hello everyone. how's it going?
Rod Rushing - Chief Executive Officer
Joel Tiss - BMO Capital Markets - Analyst
I think we have worked very hard to beat the price cost. Any-can you talk about electric vehicle products and whether they are designed to have higher profit margins or higher gross profit margins or higher incremental profit margins than your existing product line? And, do you need to launch a hybrid product line to bridge the gap between your current cosmetics and batteries?
Rod Rushing - Chief Executive Officer
So first of all, many of them are prototype builds of unit construction, even though we received a large number of orders, as I listed in our review. When you consider the long-term contribution margin and the margin you get from more components, we obviously want a better margin. But I think that over time, this will work according to the cost basis and supply chain and value creation. You might argue that the profit margins used to change the power system in the insurance company market will not change the profit margin opportunities in the end market. Once things are stable and mature and competition is in place, things will recover.
But I think there is an opportunity for early entrants to reset these value equations and get better profit margins. The question is how long you can hold on over time. Your second question about hybrid vehicles. Broadly speaking, people have a lot of interest-mainly around all-electric options and fuel cells in certain areas.
But the fire truck we launched is actually fully electric. There is a DC motor on it. It has DC regeneration, but it does have a backup generator because it is an emergency vehicle. So it can charge the fuel cell, if we need it, if it exceeds, if it is close to full charge, the battery will charge.
So I don't-it's not like a mixed saying, it may be the way you think. But on some of these emergency vehicles, there may be other options to keep them active and back up to charge the fuel cell. But that fire truck is an all-electric car, and its transmission system [inaudible] is all electric, and we have a backup generator. So yes.
But in general, what we are seeing now is an interest in all-electric. We-most of our efforts are actually joint development with customers. We are not working behind the scenes and thinking about what we want. We are trying to match applications for use cases and work with customers to adapt designs that meet their needs, and we can apply them to a wider range of markets.
So when we sell it instead of getting a prototype and then talking about it, it is ready for business. We have an electric car that no one really wants.
Joel Tiss - BMO Capital Markets - Analyst
Rod Rushing - Chief Executive Officer
Then just focus on 2022. Given the seasonal interruption, can you give us an idea of the situation below the break-even point in the first quarter? Maybe it's a small part of the first half and second half of the earnings? thank you.
Mark Skonieczny - Chief Financial Officer
sure. So in the first half, in the second half, at the midpoint, it may be more like our traditional 40-60. The range we are talking about here is 40-60, but not the break-even point. Obviously, we will be profitable in the first quarter. So I hope you didn't see this from our comments here, Joel.
Again, it is seasonal, if you look at it-so we expect normal seasonality from Q4 to Q1, but not close to breakeven or losing positions.
Joel Tiss - BMO Capital Markets - Analyst
Row. perfect. Thank you very much for your clarification. I will give it to others.
Mark Skonieczny - Chief Financial Officer
Our next question comes from Jamie Cook of Credit Suisse. Please continue with your question.
Jamie Cook-Credit Suisse-Analyst
Hi. Good morning, I think I just want you to elaborate on some of the market share growth you mentioned during fires and emergencies. What is driving the market share? Is it a product? Is it more usable? Although it sounds like everyone has usability issues. Which regions are unique to our products, and what do you think is the sustainability of these market share growth? Can you quantify them?
Rod Rushing - Chief Executive Officer
I will start with the last question. My expectations are not as sustainable as we will continue to increase market share because of the investments we will make and the work we do around our brands and factories and the proven quality. Once we solve these material issues, the final throughput. In these businesses, it is very important to have industry-leading delivery times.
We-my point of view and the message I sent to our team is that I know we are facing challenges now, but it is really important to have the best cost quality delivery and best delivery time in these industries. We are not there yet. We have a chance. In terms of driving factors, one of the things, I am very grateful to Anoop and Kent, our two business leaders, the close relationship with customers and the cooperation with distributors, which simplified our brand and simplified our distributors. Footprint.
[Inaudible] A lot of work has been done to solve some of the brand channel problems we encountered. I think this has brought new enthusiasm to our dealer group. I went to our dealer consultant and I got feedback. So I think our dealer base has new energy to sell products, because there are fewer conflicts in the space, and specification writing is very important. But again, I think the contact with our distributors and our active participation in these transactions and get the right configuration, the right cost and writing specifications, your active activities to shape demand and cooperate with customers, it will position you well Sell.
So I think this is a lot of business activities that we have improved in our business. I also believe that we have a good message. We have had a lot of communication with channel partners around us. We have been engaged in this work for a long time.
We will make better progress. We want to invest. I think that the electric vehicles we talked about today are moving forward, moving towards the long-term development of the market, and becoming one of the early adopters and leaders in these fields. It sends good news to our dealers that we are manufacturing-serving them, And provide them with products that can win victory. This generates energy, and our dealers hope to win.
So I just think that we are more active in managing channel activities than in the past, which has brought us benefits in the short term. So—obviously—that's why you get your share, but the market is now very easy to accept. I think we have good demand in all these markets. Maybe the terminal bus is a slightly slower market, but all other markets have responded very, very well to the recovery.
Jamie Cook-Credit Suisse-Analyst
Row. Is there any way to quantify the growth in market share or anything you can buy?
Rod Rushing - Chief Executive Officer
Yes. I don't have this data in front of me, but it-maybe in the private part, we can talk about it.
Mark Skonieczny - Chief Financial Officer
Yes. In private meetings, we might. Jamie, some of them are a bit lagging behind. And to get the whole year, we need to wait until the first quarter, but we can certainly talk about the trend in the first half of the year, but this is not something we usually disclose.
Jamie Cook-Credit Suisse-Analyst
We have reached the end of the question and answer session. I want to forward the call to Rod Rushing to end the comment.
Rod Rushing - Chief Executive Officer
Thank you again. I thank everyone who joined today. Obviously, we are very satisfied with the year that we just closed. You always want to do better, but I think everything shows that we-the progress we have made in the past 18 months allows us to respond well to the challenges our leadership team and business face.
And I am very excited about next year. We have work to do, but we are walking very well here. Thank you again for joining and looking forward to the one-on-one meeting. thank you.
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
Joel Tiss - BMO Capital Markets - Analyst
Jamie Cook-Credit Suisse-Analyst
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