REV Group - Earnings Call - Q4 2018
December 20, 2018
Transcript
Speaker 0
Greetings and welcome to the REV Group Fourth Quarter and Full Year twenty eighteen Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sandy Bugbee, Vice President, Treasurer and Investor Relations.
Thank you. You may begin.
Speaker 1
Thank you, Christine. Good morning and thanks for joining us. Last night, we issued our fourth quarter twenty eighteen results. A copy of the release is available on our website at investors.revgroup.com. Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of non GAAP to GAAP financial measures that we will use during this call.
It is also available on our website. Please refer now to Slide two of that presentation. Our remarks and answers will include forward looking statements within the meaning of the Private Securities Litigation Reform Act. These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward looking statements. These risks include, among others, matters that we have described in our Form eight ks filed with the SEC last night and other filings we make with the SEC.
We disclaim any obligation to update these forward looking statements, which may be updated until 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 to our fiscal quarter or fiscal year unless otherwise stated. Joining me on the call today are our President and CEO, Tim Sullivan as well as our CFO, Dean Nolden. I will now turn the call over to Tim.
Speaker 2
Thank you, Sandy, and thanks everyone for joining us on today's call. To say that fiscal twenty eighteen was a challenge would be
Speaker 3
an
Speaker 2
understatement. Quite frankly, anything that could go wrong did go wrong and then some. It was particularly frustrating since many of the issues were out of our control. Detroit manufacturing shutting down for three weeks due to a fire at a key supplier was only one of the many highly unusual situations. We responded as quickly as possible to everything that came our way.
We reacted quickly to the dramatic supplier price increases in the second quarter and then supply chain and material availability challenges that continue into our 2019. Slide four of today's presentation depicts some details regarding the extended lead times of certain product groups due to the compounding effect of the numerous tariffs as they were instituted. You can't build what you don't have and you can't ship what you can't build. We've had to continually adapt to the ever changing material lead times. Slide four also shows the challenges around chassis availability.
As you can see, only Ford has returned to what would be considered normal lead times. We are effectively managing through allocations by some chassis suppliers, but delays in Mercedes Benz chassis in particular will continue to negatively impact our shipments in Q1 twenty nineteen. We expect chassis availability to continue improving through the 2019, but other material availability issues are likely to persist. A significant amount of small parts that we use in our vehicles have historically been sourced from China. The Trump tariffs set on eight eighteen categories of goods imported from China has indirectly put pressure on our traditional U.
S. Suppliers who are being asked to substitute thousands of parts, which have transitioned to China. As you can imagine, these challenges have been difficult to predict and our average lead times have increased significantly on many products as a result. We are exploring and opportunities to source products from new suppliers and we're also implementing strategies to improve manufacturing output, including additional shifts in some of our facilities and other improvements in manufacturing processes. As a reminder, on last quarter's call, we had indicated that material and chassis issues had resulted in deferrals of approximately 120,000,000 in revenue into 2019, split about evenly between ambulance, commercial buses and specialty vehicles.
We experienced meaningful labor inefficiencies in our Fire segment during Q4 due to new hires, compensation adjustments, roster changes as well as changes in our overtime policies. Accordingly, approximately $40,000,000 in fire truck shipments will move into fiscal twenty nineteen bringing our total deferred shipments from 2018 to 2019 to approximately $160,000,000 I always say never squander a good crisis and this one has been no exception. As our shipping performance slowed due to a lack of chassis and material, we were able to review our operations to find areas of waste and significantly reduce our corporate overhead expenses. This will make us a better company moving forward. During the fourth quarter, we experienced year over year backlog growth in each of our operating segments, including that the underlying demand for our products remains very strong.
Moreover, we experienced no cancellations for any orders in our backlog, confirming the stickiness of our numerous customer relationships, which significantly improves our chances to affect meaningful recovery in fiscal twenty nineteen. Despite the ongoing challenges, we began to see improvements in the pace of delayed shipments through the 2018 and we expect supply chain and material availability challenges to begin normalizing during the first half of next year. In essence, we have adapted to the new normal and we have learned to manage expectations and schedule our manufacturing accordingly. We are optimistic that our ability to ship will improve progressively as we move through the year. Slide 13 in our presentation provides guidance as to how we expect our shipments and therefore our earnings to progress as we move through the year compared to how we performed in 2017 and 2018.
As we head into the New Year, we're focused on driving margin expansion within our Fire and Emergency segment through operating efficiencies, increased production capacity and continued organic growth. All of our fire brands have growing backlogs and both KME and Ferrara are improving margins, which should drive segment profitability higher long term. In our commercial segment, the LA County contract will serve as a strong base for our transit bus business beginning in 2019. Based on growing backlogs, we're also anticipating higher production and profitability for school bus, shuttle bus and terminal trucks as we progress through the year. In recreation, our acquisitions of Lance, Renegade and Midwest all continue to perform very well with meaningful backlogs and the reposition of our Class A product line has been designed to help us reach our adjusted EBITDA margin target of 10%.
In addition to our focus on driving growth, we are placing a high priority on cash generation. We have revised our incentive compensation programs to align with this important objective. As noted in yesterday's earnings release, we have identified a series of assets that we believe could generate approximately $40,000,000 in cash through divestiture in the near to medium term time horizon, recorded a $36,500,000 non cash impairment charge related to these actions to pave the way for this cash generation to occur. We have communicated several times that if we don't believe we can achieve a 10% EBITDA margin for a particular product line that we will take action. That is the case with our Revability product line.
We just signed a definitive agreement to sell our Revability product line yesterday. We expect this transaction to close this week. We have many reasons to feel confident about our ability to return to growth in fiscal twenty nineteen, including the benefits of our recently implemented price increases, cost reductions, restructuring initiatives and managing to the new normal in our supply chain. We have an excellent collection of brands and products and our status as the industry leader in high end luxury vehicles and critical products for commercial, municipal, government customers should enable us to create compelling long term value for our shareholders. Speaking of increasing shareholder value, REV Group delivered approximately $66,100,000,000 in direct returns to shareholders 2018 through share repurchases and dividends.
And we remain committed to driving strong returns to shareholders in fiscal twenty nineteen with a renewed focus on cash generation and return on invested capital. Now I'll turn the call over to Dean for a detailed view of the financials.
Speaker 3
Thanks, Tim, and good morning. Starting with Slide five, I will review our consolidated fourth quarter results and segment level performance. For the sake of time, I'll not specifically be addressing full year results on today's call, but we've provided full year slides for both consolidated and segment level performance in the appendix of today's presentation. As Tim discussed, during the fourth quarter, we continued to experience ongoing headwinds from the supply chain inefficiencies that were created in the wake of the recent implementation of tariffs between The U. S.
And other countries and a number of other one time impacts also contributed to lower year over year profitability. Consolidated net sales for the fourth quarter were $660,000,000 down 3.5% compared to the fourth quarter of last year. This decline was driven by lower Fire and Emergency segment sales due to missed shipments of both ambulances and fire products during the quarter, partially offset by sales growth in Commercial and Recreation segments. Excluding the benefit of the Lance acquisition in the quarter, consolidated net sales were 8.3% lower than the prior year period. GAAP net loss for the quarter was 22,000,000 or $0.35 per diluted share, which was driven lower due to a onetime non cash impairment charge of $35,600,000 that we recognized during the quarter.
This charge was due to the adjustment of the net realizable value of certain businesses, product lines and assets to their estimated divestiture cash value as well as the impairment of certain information system assets. Fourth quarter adjusted net income decreased from $29,300,000 to $17,600,000 or $0.28 per diluted share. This decrease in adjusted net income was driven by the lower operating results and higher interest expense. Starting on Page six of our slide deck, I'll move now to a review of the performance of each of our segments. Fire and Emergency segment sales decreased by 21% to two fifty one million dollars for the fourth quarter.
The primary drivers of this decline were first, the anticipated impacts of continued chassis supply challenges resulting in lower shipments of ambulances. Plus in addition, we experienced temporary labor inefficiencies at two of our fire division plants, which caused us to miss valuable production slots for approximately 80 fire trucks, representing approximately $40,000,000 in sales value. In our current environment for the fire division, where we have backlogs extending out one year or more, when we miss a window of production opportunity like we did, we have to increase capacity and ramp up production going forward to catch up on deliveries, or else the backlog and the revenue stream just shift to the right. In this case, we expect to recover most of our missed shipments in 2019 with new production slots and increased capacity. The Fire division is increasing its production capacity through facilities and production flow improvements, but also most importantly through an increase in labor in some cases, the additional work shifts.
Based on the schedule for the implementation of these capacity enhancing initiatives, we expect to see our output catch up beginning in the second quarter. As a reminder, all our prior acquisitions in this segment became organic in the 2018. F and E segment adjusted EBITDA for the quarter was $18,500,000 compared to $39,400,000 in the fourth quarter of last year. The decrease in adjusted EBITDA was due to the decline in net sales and reduction in gross profit margin resulting from the lower shipments of fire trucks and ambulances in the quarter, but was also impacted by the temporary and resolved labor inefficiencies in the Fire division, which are estimated to have cost the segment approximately $6,000,000 in production inefficiencies and direct project costs during the quarter. These negative impacts were partially offset by lower selling, general and administrative expenses in the segment.
F and E segment adjusted EBITDA margin was 500 basis points lower compared to the prior year quarter as a result of these items. Despite the short term challenges we are experiencing in this segment, we expect our leadership positions in F and E, our backlogs and strong distribution partnerships to support a return to sales growth and margin expansion in fiscal twenty nineteen and over the long term. Both fire and ambulance markets are essential products for municipalities and should continue experiencing the benefits of positive macro trends, including urbanization and aging population. Backlog in this segment increased 20% to $7.00 $8,000,000 compared to the end of fiscal twenty seventeen and was up 17% sequentially. As shown on Slide seven in our Commercial segment, quarterly sales were up 3.4% compared to the prior year period, driven by an increase in the number of shuttle bus and specialty vehicle units sold compared to the prior year.
In addition, our Collins subsidiary began to ship the first buses under its contract with New York in the quarter. This quarter over quarter increase in sales for the segment was realized despite the ongoing chassis availability and material shortages experienced in the quarter by our shuttle bus and specialty divisions. Commercial adjusted EBITDA declined to 9,600,000.0 from $14,800,000 in the prior year quarter with the decrease primarily attributable to the continued supply chain challenges, which impacted timing of shipments and unfavorable product mix as a result of lower transit bus shipments and higher volumes of shuttle bus units. Adjusted EBITDA margin of 5.3% was down 300 basis points in the quarter as a result of these items. Commercial backlog at the end of the fourth quarter was up 4% to $381,000,000 compared to the 2017 and was down 9% sequentially, which is seasonally consistent with prior years.
Despite ongoing complications of commercial chassis availability, we believe the fundamentals of our markets are solid. Are expecting much stronger performance in the commercial segment in 2019 given our backlog visibility and expected return to relative normalcy in the supply chains. Specifically, we expect greater sales volumes of both transit buses and commercial school buses next year, which should provide a significant tailwind for both sales and profitability in this segment given their strong margin characteristics. Turning to Slide eight. Our bright spot for the quarter was our Recreation segment.
Quarterly sales in the Recreation segment grew 25% year over year to $235,000,000 driven by strong performance of our Class B and Class C products as well as the benefit of our acquisition of Lance. Even excluding the impact of Lance, Recreation segment net sales increased by $14,000,000 or 7% compared to the prior year period. Recreation adjusted EBITDA increased 51% for the quarter to $21,800,000 The increase was due to continued increases in profitability at our Class B, Class C and Gold Shield businesses in addition to the dollar and margin benefit from the acquisition of Lance. On an organic basis, excluding Lance, Recreation adjusted EBITDA for the fourth quarter increased fifteen percent and sixty basis points compared to the 2017. Segment backlog increased 100% to $291,000,000 versus the end of fiscal twenty seventeen and was up 15% sequentially compared to the third quarter.
We believe our leadership position in the high end luxury channels of the recreation market should enable us to outperform the industry longer term and we've also been encouraged with supportive feedback from customers regarding our recent efforts to realign our Class A product. We believe our distribution channel is healthy with capacity for additional units. We feel confident about this business heading into the next buying season early next calendar year. Now please turn to Slide nine, where we provided a bridge from midpoint of last quarter's fiscal year twenty eighteen adjusted EBITDA guidance to our actual performance. You can see based on this waterfall chart that the issue of the temporary labor inefficiencies in fire, which caused production cost inefficiencies and mixed production slots were the largest impacts to us in the quarter and were obviously not anticipated or expected as we guided towards our full year expectation.
Nothing can be viewed in a vacuum, but absent this issue, which is behind us, we would have realized a full year adjusted EBITDA result much closer to our original expectations. Our RV acquisitions over the past few years continue to pay dividends and provide lift in our profitability, whereas the material and chassis supply chain challenges continue to impact our businesses through fiscal year and into the 2019. Slide 10 provides a review of recent trends in working capital. As we expected, we saw a seasonal sequential decrease in net working capital in the fourth quarter, primarily due to the decrease in inventory levels from the normal seasonal high we experienced during the third quarter. But this working capital reduction was not as significant as in prior years.
The increase in working capital versus prior year quarter was partially due to the acquisition of Lance, but more significantly was due to the indirect impact on work in process inventory from the chassis availability and the extension of material lead times. Improving working capital and inventory turns will be an important area of focus for us next year and due to specific initiatives in our operations as well as the improvement in our supply chain efficiencies, we are forecasting that we will generate cash from working capital in fiscal twenty nineteen and we will make progress toward a more meaningful long term opportunity to permanently reduce working capital requirements over the next few years. We expect this will generate meaningful amount of debt reduction and even better liquidity. Net debt at October 3138 was $410,000,000 with $137,000,000 of availability under our ABL revolving credit facility. Our net leverage ratio at the end of the fiscal year twenty eighteen was 2.8 times.
This increase in debt year over year was a result of our working capital position at the end of the year as I previously discussed, but also because of our acquisition of Lance and capital expenditure investments plus our buyback of $53,000,000 worth of our own stock during fiscal twenty nineteen. As Tim mentioned earlier, and we are laser focused on this, we expect to improve the strength of our balance sheet over the coming year, not only by cash from operations, but also by generating cash through specific initiatives, including the divestitures of certain businesses, product lines or other non performing assets, which we've now classified as held for sale and have an active program to monetize during fiscal twenty nineteen, wherein we expect to generate approximately $40,000,000 of additional cash for debt reduction. We recorded a $36,000,000 non cash impairment charge, partially to adjust for the fair value of these assets during the fourth quarter as we implement our liquidation plans. We expect to use cash proceeds to reduce debt, but we should note that given expectations for continued supply chain challenges in the business during the 2019, we anticipate an increase in our leverage ratio through the end of the first quarter.
We have historically said that we would prefer to stay below 2.5 times leverage, but we feel comfortable being above that level at present and into the first quarter given the transitory impact of the supply chain inefficiencies we're experiencing. And we expect to reduce leverage by more than one full turn by the 2019. On Slide 11, we show our capital allocation over the last five quarters. Capital expenditures were $8,700,000 in the fourth quarter compared to $4,100,000 in the 2017. Company repurchased a total of 519,000 of its common shares for $7,800,000 during the fourth quarter at an average repurchase price of $14.96 a share.
As Tim mentioned, we repurchased approximately 3,200,000.0 shares during fiscal twenty eighteen for total consideration of $53,000,000 representing an average purchase price of $16.47 per share. In addition to shares repurchased, we distributed $12,800,000 to shareholders in the form of dividends, bringing total cash returned in fiscal twenty eighteen to approximately $66,000,000 Now turn to Slide please turn to Slide 12 for a review of our outlook for fiscal twenty nineteen. We are estimating net sales for fiscal twenty nineteen in the range of 2,400,000,000 to $2,600,000,000 representing a 5% year over year growth at the midpoint. Net income is estimated to be $43,000,000 to $63,000,000 representing a significant increase year over year due to the impairment and restructuring done in fiscal twenty eighteen. We anticipate adjusted EBITDA to be in the range of $150,000,000 to $170,000,000 representing an 8% year over year growth at the midpoint.
We are planning on 25,000,000 to $30,000,000 in capital expenditures and net cash from operations of 110,000,000 to $130,000,000 This guidance for cash from operations is new for REV and is a testament to our focus and commitment to improving cash generation. Cash and cash generation is now a component of our management incentive plan for fiscal twenty nineteen. And this forecast represents an increase of over $120,000,000 of cash from operations compared to the current to fiscal twenty eighteen. Our forecast for interest expense is estimated to be in the range of 29,000,000 to $31,000,000 due to the impact of floating rate increases and our effective tax rate should settle into a post tax reform range of 25% to 27%. Implied in the totality of our guidance for fiscal twenty nineteen is also a meaningful improvement in our return on invested capital metric.
Absent the impacts of any potential future acquisition activity, we are targeting approximately $100,000,000 reduction during fiscal twenty nineteen, which would reduce our leverage ratio, as I said earlier, by one turn by year end. We expect the strength of our financial performance to be weighted toward the back half of the fiscal year in line with historical trends. And given the ongoing challenges we expect to persist in the first quarter, we expect lower Q1 performance in 2019 as compared to the prior year quarter. Lastly, I would be remiss if I didn't recognize and mention the fact that REV Group completed year one of its Sarbanes Oxley compliance journey in fiscal twenty eighteen. And as you can see in our Form 10 ks filed yesterday afternoon, REV received a clean opinion on internal controls from our independent public accounting firm for the year.
This was no small challenge or accomplishment for our younger public company. This was not just a success with regards to compliance, but much more importantly, it is essential to becoming a stronger company by integrating strong internal controls and oversight over our businesses as we grow. This makes us better as a company and we're thankful to our teams for their dedication and commitment to our success in this area. With that, I turn the call back to Tim for some closing comments.
Speaker 2
Thanks, Dean. In closing, while fiscal twenty eighteen was challenging, fundamental demand across our end markets remained strong. Most of our product lines are continuing to show a high level of order activity and we have many reasons to believe that we've entered fiscal twenty nineteen poised for improved revenue growth and margins. Our supply chain challenges are being effectively managed and hopefully many of the short term issues will soon be behind us. We will have the full benefit of price increases and restructuring initiatives implemented in 2018 as we progress to 2019.
We have a growing backlog, a leaner product portfolio and improving productivity and manufacturing efficiency and we expect to generate a meaningful level of cash in fiscal twenty nineteen. We are very grateful for the continued dedication and support of our employees, customers, partners and shareholders and we're looking forward successful year together in fiscal twenty nineteen. Operator, we'd now like to open it up to questions.
Speaker 0
Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Speaker 4
Hi, good morning. I guess a couple of questions on the outlook for 2019. First, just given the backlog growth that you've had and the deferral of revenues from 2018 to 2019, I would have thought your top line growth would have been higher. So can you talk to how much of it is being impacted by sort of the supplier issues that you guys spoke about or your own internal issues? And then my next question, I would have also thought the EBITDA guide would have been better as I think of 2019 versus 2018.
So can you talk us through the big puts and takes, how much we're assuming for savings, price cost, what the disposal of the $40,000,000 how much that impacts the EBITDA as well as labor efficiencies or mix? If you could just help us through that. Thank you.
Speaker 2
Yes. Well, me address at least the perspective on how we set guidance, Jamie. I think clearly we were surprised by our lack of performance in the fourth quarter based on the fact that we couldn't get the chassis, we couldn't get the material. So as I've made the statement in my comments, we're trying to measure expectations to make sure that we can manage through the situation we're in. I think we understand very well now the lead times that we're dealing with, chassis availability, but we also don't want to be surprised.
So are our projections somewhat conservative? I think they're realistic based on the modeling that we've done for both revenue and earnings. And Dean, you may want to comment on the $40,000,000 Yes.
Speaker 3
So from the standpoint of the deferrals or delays in missed production slots, primarily missed production slots was the Fire Division. As Tim said, that was $160,000,000 in revenue pushed into 2019. Dollars 40,000,000 of that is Fire. And we don't expect to be able to start recouping $40,000,000.80000000 or so trucks until into the second quarter or the end of the second quarter. And the key there is, we have a full backlog at full capacity with one shift primarily.
And in order to start to catch up on that delay, we need to add capacity. And we're in process of doing that now at our facilities so that we can start to catch up on those trucks in the 2019 and going forward. On the ambulances and the buses, which is $120,000,000 we should start to see that later in the end of Q1 through Q3. Maybe Jamie, stepping back to some of the big ticket items for next year. We talked about the restructuring charges we took in the 2018 benefiting us to the tune of $20,000,000 year over year annually in cost reductions.
We will see that next year. We saw $10,000,000 of it in the second half of this year. We're going to see the other $10,000,000 incremental next year. Our price cost equation should be positive based upon our estimates, generating maybe approximately 100 basis points of gross margin next year, price versus cost. We will have some headwinds from labor inflation expectations, other labor other inflationary expectations for overhead, etcetera.
And we have some incentive comp headwinds next year where we expect to pay that next year, but haven't paid it this year.
Speaker 1
Okay.
Speaker 4
Sorry. Just one follow-up question. Just strategically, obviously, you announced assets this morning. So sort of what else is on the table? And then, Tim, as I'm just thinking about the strategy relative to when you guys IPO ed, it was to be a consolidator in the space, like how do I balance that with the view that there's does that strategy still work with balancing that with there's more divestitures potentially on the table?
Thanks.
Speaker 2
Well, we're going to keep what we think we can drive forward and we're going to, I guess, jettison the assets that we don't think are going to provide us that type of return. I'll give you an example. We're selling our Alvarado RTC for approximately $12,000,000 facility has not provided us the return that we want and the return that we projected and it's on the block and that'll be $12,000,000 to the good. As far as our path going forward, we continue to we plan to continue to consolidate within our industries. We're going to be very prudent though what we do acquire and it's not we haven't left the playing field.
We still have at least three or four potential targets that we review on a regular basis, but we are going to be very discerning in what we do invest in. It's about making money and we got to make sure we're making money. If we've made a misstep, going to self correct that, especially in this market that we're in right now.
Speaker 4
Okay. Thank you. I'll get back in queue.
Speaker 0
Our next question comes from the line of Charlie Brady with SunTrust. Please proceed with your question.
Speaker 5
Hey, thanks. Good morning. Just on RV side of the business, you mentioned a little bit in your prepared remarks on the kind of the inventory level within the dealers. But could you expand upon that as to what the dealer inventory level looks like right now as it sounds like the industry data itself is a little bit soft over the past couple of months?
Speaker 2
Yes. The retail market has been off. And accordingly, wholesale market has followed that. We're not we're getting, I think some pretty positive feedback from our dealers. Think they're being cautious.
I think there was an oversupply into the industry. It was rocking forward at double digit growth. And I think it started to slow. And I think with that slowing of the retail market, people have already pulled back on the wholesale side. People are still cautiously optimistic.
We're going into our buying season here in January and that's going to be the telltale sign, but dealers have been running down their inventories. Having said that, our Bs, Cs and towables still have between nine and twelve month backlogs. So those three product groups, we are continuing to ship to dealers based on the backlog. There have not been any cancellations that continue to take that product. The As have been a little bit soft, the last actually the last year and that we think is going to continue until we see some meaningful retail activity as we get into the buying season here in January.
So I think probably a little bit of oversupply as the market was starting to cool off. People have taken action to slow ordering down. And I think we're all very anxious to see how the buying season kicks off here in the next couple of weeks.
Speaker 5
Thanks. And then just switching on the fire side, your commentary about having trying to get the catch up on the pushed out trucks, having to add extra shifts, extra labor. I'm just wondering from a margin perspective on that segment, as you ramp up these essentially cost to try and catch up on that revenue, should we expect sort of at least a near term or maybe a couple of quarter dip in the margin of that business until it evens out with the production levels?
Speaker 2
Yes, good observation. I think that's exactly right, Charlie. We have done a couple of things. We have improved our healthcare costs or healthcare benefits, I should say, which obviously has had a somewhat of a decrease or an increase in our costs. We've actually improved our hourly rates to make sure we're attracting good talent.
I think the good news is we're putting a back shift on in Ocala. We had a job fair last week. We had 200 people show up for the job fair and we filled that shift. We wouldn't have been able to do that unless we improved quite frankly our hourly rate and our healthcare benefits. So there will be a little bit of pressure on margins here in the near term, but nothing meaningful.
And we're not talking significant reductions in margin, but it is going to have some cost increases that we think are completely appropriate. And actions we had to take, I think, I'll tell you the other thing that we've done and it's actually had a big positive impact is we've run our fire businesses with mandatory overtime for the last three years and it's because the backlog has been high. We've been working people really hard. The interesting thing is when we took mandatory overtime off and put it as voluntary overtime, we haven't seen a decrease in overtime. It's been flat, but people are choosing versus us dictating to them.
And that's had a very, very positive effect on our labor in our Fire segment too. So I think our productivity is going to be a nice bump up. Costs will be a little bit higher, but we think that it will be more than offset with hopefully the efficiencies we're going get as we move into fiscal twenty nineteen.
Speaker 3
Great. Thank you.
Speaker 0
Our next question comes from the line of Mig Dobre with Robert W. Baird. Please proceed with your question.
Speaker 6
Yes. Thank you. Good morning, everyone. I'm still scratching my head a little bit on your EBITDA guidance and maybe Dean or Tim, you can help me with this. But you're essentially at the midpoint guiding for an additional $12,000,000 of EBITDA.
You mentioned you're expecting $10,000,000 of incremental savings. You're talking about price cost contributing 100 bps. So that's what north of $20,000,000 I do know that there were a number of issues that you've had in fiscal twenty eighteen. Some of them you called them in the fourth quarter to the tune of $12,000,000 bucks, right? I think through Q1 through Q3, you had something like $18,000,000 worth of chassis related headwinds.
I guess I'm looking for some help, the buckets, if you would, as to how we're getting to $12,000,000 Where are the drags that are still lasting into fiscal twenty nineteen? Thanks.
Speaker 3
Hi, Mig. Good morning. Yes, I mean, I would say those numbers that you threw out are fairly accurate. One thing is sitting here, we don't want to be sitting here again next year with deferrals and delays, unexpected items that explained away. So we're estimating that there's going to be some of those things that might continue.
We're going to work our tails off to not let those things continue. But we're working towards making sure that we don't surprise the downside. So I think that's one thing to take into consideration. And these material and supply chain issues aren't completely behind us and the tariffs inflationary pressures are still kind of out there in the public sector with a noise lot today. And so you can't predict that.
So I think those things, couple of those things.
Speaker 2
It's not we're not in an environment yet, Mig, without surprises. We were moving into our LA contract and only to find that we couldn't get windows. And we lost some shipments in the month of November and those are stretched into December. We think we'll catch up in January. These are the types of surprises that come at us every single day.
And until the market really settles down to the point that we feel we got consistent material supply and consistent chassis supply, we're going to be cautious. And it really gets down to that. I think you've done the math right. Those are all potential big pluses for us as we go through there. But for every plus, there seems to always be a negative that hits us and we're being cautious.
Speaker 6
Well, appreciate that. But if you're saying that my math is fairly correct, then what we're talking about here is a pretty sizable hole or drag, if you would, that you have from a myriad of costs that you're essentially assuming into fiscal twenty nineteen. And I guess what I'm trying to figure out is how much of this will be an ongoing issue, like for instance, labor inflation and healthcare costs, those are not going to go away. They're just part of how we operate versus things that can eventually work themselves out, right? And then additionally, what is it that gives you more confidence in or visibility into this chassis issue than what you've had, say, three months or six months ago?
Because this is not a new issue, you've been struggling with it throughout the second half of twenty eighteen? Thanks.
Speaker 2
Well, the chassis, so let me start from the back and work forward. On the chassis side, the reason we're actually performing a little bit better, I think as we move through the year is we've been able to shift people on to Ford chassis. I'll give you an example. We can't get Dodge chassis, still can. We've been able to effectively move our customers off of Dodge on to Ford.
The one customer base that is a little bit difficult to move off of those Mercedes Benz. When they want Mercedes Benz, they want Mercedes Benz. And we're just struggling to get those chassis right now and for a number of reasons. And we don't see some light at the end of the tunnel until we get well into the second quarter on that. I think if you look at the in the chart that we did on we did it because we think it's factual.
This thing doesn't self correct quickly. It's we thought, okay, we're going to be able to muscle through the fourth quarter, we'll be fine as we get into fiscal twenty nineteen. You can see what we see in the first quarter. A year over year comparison looks bad because it is bad. We're not going to be even close to where we were in 2017 and 2018 in a really down quarter even with a lot of carryover from 2018 as far as backlog.
I think as we progress through the year and the surprises on the material side settle down to the point that we're comfortable, we'll take another look at guidance. We've got a lot of levers that we can pull and things that we think we can improve. We've laid them all out there. And for every positive, we hope there's not a negative to pull us down, but it's conservative. We'll obviously revisit it every quarter and keep you advised on how we're progressing through our plan.
Speaker 6
I appreciate it. One last step, if I may. Just trying to understand how you're thinking at segment level on revenue. You're talking about catching up on $40,000,000 in Fire and Emergency. That's good.
You're talking about starting to ship on the LA bus order in commercial. So that's going to give you some growth. It seems to me like your guidance implies your RV business being down. Am I right about that? How are you thinking about it?
Speaker 2
No. RV is not going to be down. RV is going to be up because of the backlog that we've got. And the good news I think is on the BCs and towables, we had significant cost increases on those back in the second quarter, But the material is flowing fairly well in the RV industry right now, primarily due to the fact that a lot of the RV manufacturers have had their backlog shrink, which means that material availability in RV is probably some of our best availability. There's not the demand that there was six months ago.
So that's pretty good. I think we think we'll grow RV. The backlogs are great. Across the board, our issues by and large nothing to do with backlog. We got more work that we're faced with right now, which is absolutely the most positive thing we've got going for us.
It's just a matter of getting the material and then executing on getting the things to the plant. And we'll get there, but RV will grow this year.
Speaker 6
All right. Thank you.
Speaker 0
Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Speaker 7
Good morning, everyone. This is Ben Brute on for Jerry.
Speaker 3
Good morning.
Speaker 7
Tim, in the fire truck business, can you just elaborate on which facilities drove the shortfall? And where do daily production rates stand today compared to maybe June or July? The concern is that when we've seen production issues like this in the fire truck industry in the past, that they've ultimately taken years to resolve. Can you kind of help us maybe quantify the ultimate risk that that's the case here?
Speaker 2
The two plants that really had the most issues were our KME plant in Esquahone, Pennsylvania, which is KME and E1 in Ocala, Florida. E1 by far has the biggest backlog and that's the plant that we put the back shift on and we just put that on. But we'll work through and I think we're looking at a significant increase in units out of all three of our plants, but in particular Ocala this year, which has the biggest backlog. Good news is, we got a backlog doesn't go away. We just have to whittle it down and get it down.
We've got a fourteen month backlog in Ocala right now, which is too much. And with this back shift, we'll know certainly as we work through our first quarter, what our opportunities are to make those shipments. But we're optimistic. We're not pessimistic that we can't hit our shipments and actually whittle that backlog down a little bit.
Speaker 7
All right. And then you called out fire and emergency price increases in the release. Can you please give us an idea to the magnitude and timing of any set increases, how much you expect will stick and what, if any other actions you've seen competitors take?
Speaker 2
Well, we've had price increases across the board. Everything's engaged in price increases, including RV and commercial. And we've done that obviously to react to the significant price increases we've got in the second quarter, which was a huge spike and the ongoing material cost increases. They haven't been nearly to the magnitude they were in the second quarter in Q3 and Q4, but we have seen increases. And I think the good news is we believe that with the price increases that we put out there immediately back in the second quarter and what we put out there in the third and fourth quarter that we're ahead of the cost increases that we're getting with material.
It's not good enough just to run with the material cost increases, you got to get ahead of them as well. So the price increases have been across the board and we think that we've been able to keep we've got ourselves positioned well now, we think to stay ahead of it.
Speaker 7
So just to clarify, so or is it fair to say that the 100 bps price cost tailwind next year that there's more risk on the cost side than there is on the pricing side?
Speaker 2
Yes, that's a fair statement.
Speaker 7
Got it. Thank you.
Speaker 0
Our next question comes from the line of Andy Casey with Wells Fargo. Please proceed with your question.
Speaker 8
Thanks a lot. Good morning, everybody. Good morning. I'd just like to ask a few questions around operating cash flow. First, a clarification, does the 110,000,000 $130,000,000 guide and thanks for providing that by the way, does that include any gain on asset sale or is most of the improvement versus this year mainly a swing to positive working capital contribution versus the 115,000,000 consumption during 2018?
Speaker 3
Andy, that includes both. It's not a gain per se. It's just the cash from the total cash from the opportunities as well as generating positive cash from working capital and then earnings. But it's the GAAP line item net cash from operations.
Speaker 8
Okay. So that I'm sorry, Deane, that would include the $40,000,000 anticipated cash Yes,
Speaker 3
it does.
Speaker 8
Okay. And then the comments about Q1 leverage going up a little bit, that implies OCF is going to probably going to be negative. I'm just wondering how negative. Should we expect it to be above or beneath what you did in Q1 twenty eighteen?
Speaker 3
Yes. Say, OC meaning operating cash flow in the first quarter?
Speaker 8
Yes.
Speaker 3
Yes. I think we're going to generate some cash from some of those initiatives, a small amount. We're going to start to generate that in the first quarter, but it will still be a typical seasonal use of cash in the first quarter.
Speaker 8
Okay, thanks. And then the question comes about, you're starting to divest underperforming assets. You got the ABL there. Could you discuss whether the current ABL restricts and puts any restrictions on which assets or the dollar value of assets you could sell?
Speaker 3
No, it doesn't put a restriction like that on it. We need to use the cash for debt reduction or reinvest it in the business, but that's only restriction.
Speaker 8
Okay. All right. Thank you very much.
Speaker 0
Our next question comes from the line of Joel Tiss with BMO. Please proceed with your question.
Speaker 6
Hey guys, how is it going?
Speaker 2
Wonderful, wonderful Joel. So just two questions. I wondered, one is just a quick cleanup, if you can give us some idea of the revenue impact just to model for 2019 from the divestments. Is it similar to the proceeds?
Speaker 3
Yes. The one we called out in the press release of the mobility van business is $40,000,000 in revenue approximately. The Alvarado property that Jim talked about is lower than that. I mean, that's not really significant. So the Revability brand sales will be the biggest impact.
Speaker 2
Okay. And then on the fire business, can just one more question there. Like are your competitors having the same issues with the of the chassis unavailability? I know your production issues are probably just you guys. And I'm trying to think about the any potential impact on market share as we look further down the road?
Thank you. Yes. We've got actually no chassis issues on Fire because all of us in Fire make our own chassis with the exception of obviously, we do build on some commercial chassis, but it's a small percentage of what we do. So no, I think yes, I mean, we're going to be kind of even up with our competitors across the board. I think all of us have some nice backlog.
I think the readjustment on our labor side in the fourth quarter is going to timing wasn't the best, but I really am happy about where we put ourselves from a labor And I think we'll be able to compete very effectively in the marketplace. All of us have been at least the large fire apparatus manufacturers have been doing fine. We all have big backlogs and we're all taking a little bit of share from more of the smaller regional players here this year. So I think that's just going to continue, Joel.
I think we're in good shape actually.
Speaker 9
All right, great. Thank you very much.
Speaker 0
Our next question is a follow-up question from Charlie Brady with SunTrust. Please proceed with your question.
Speaker 5
Hey, thanks. Just back on the backlog, obviously, very high backlogs. But from a cost standpoint, that flow through is on a pretty good lag, right? I mean, you're not going back and able to reprice whatever is in your backlog right now. So the flow through on a cost increases, I would think would be later in the fiscal year going into fiscal twenty twenty before you start realizing a lot of that or am I mistaken?
Speaker 2
No, it's mostly in the second half. But just keep in mind too, some contracts do have some adjustment provisions in them. They're not all locked and loaded and we're hung out to dry. I think we are able to affect surcharges on some of those contracts. We actually think the backlog is a pretty high quality backlog that we have right now.
We think some of the backlog we had when we got the big spikes in the second quarter that we had to ship out third and fourth quarter, those were not necessarily quality backlogs. And we got kind of hung up to drive with those really, really vicious high increases that we got in the second quarter. But we're in good shape now. We like the quality in our backlog and we think we'll be able to cover costs as we move forward.
Speaker 3
Okay. Thanks. Appreciate it.
Speaker 0
Our next question comes from the line of Steve Volkmann with Jefferies. Please proceed with your question.
Speaker 9
Hi, good morning guys. I just had a couple of quick things. Obviously, one of the problems we've had this year is the market just does not like surprises. And I know you're saying the 1Q will be down versus last year, but it's a big range. So I guess I'm just trying to see if there's any further guidance, Deane.
I mean, you be profitable on an EPS basis in the 1Q? Or can you give us some kind of bookend, so we don't just do this again in ninety days?
Speaker 3
No, don't think we want to give quarterly guidance, Steve. I think but last year, we're at $21,000,000 EBITDA. We're going be below that. I really don't want to get into quarterly guidance too much.
Speaker 2
No, I think Steve, I think that the real issue is, it's all relative, right? You can kind of see what happened in Q4. Q4 is very similar to what we're looking at in Q1. And we don't see really any recovery until And the reason we feel pretty confident about Q2 is we've got the material already coming in. Unless we've got it in hands, it's hard for us to really commit to numbers that we think we've got.
But we're not we're about halfway through Q1. I've already mentioned one of the surprises that we had on transit buses and the surprises keep coming. So it's really hard to give you some solid guidance. We just know for fact right now and we're trying to just give everyone a heads up, it's going to be below last year. We know that for sure.
Speaker 9
Okay. And Tim, the surprise you just alluded to was the windows?
Speaker 2
Yes. And that's just one of obviously several things that we deal with on a daily basis. But our sourcing team has actually done a tremendous job really kind of expediting a lot of things and we're working it's kind of a tough situation, right? We want to manage cash, but we got to get the material in here. The more we get the material in here in advance, we feel confident that we can get the shipments out.
So we got opposing strategies there, but I think we're managing through that. I think we probably modeled this thing about 100 different ways. And I think we feel pretty confident that as we move through this year now and staying ahead of the material gain with the backlogs we've got that we can get back on top of it.
Speaker 9
Okay. And then I just had kind of a bigger picture question. And it feels like you guys have had a few, I don't know how to describe them kind of adventures maybe. Obviously, sort of what you're doing in China, what you're doing in Brazil, I'm thinking of the Coach business, those feel sort of non core to me and this seems like kind of an environment where you really should be all hands focused on the core business and improving these things. So is there an issue where either management time or attention has been sort of siphoned off on some of these other things?
Are there additional activities that you could curtail that would help you to focus on the core business going forward? I'm just trying to think about how many balls you have in the air at one time.
Speaker 2
You're very observant, Steve. Everything's on the table. Obviously, revability is gone because it was taking a lot of our time to focus to try to make that profitable. That's an interesting sale because it's a salemerger. We've taken an equity position in VMI.
VMI is owned by private equity. This now creates a situation where our product line becomes part of VMIs who competes with only one other player in mobility van of meaningful size and that's BraunAbility, which obviously creates a very good competitive dynamic in the marketplace. We're out of it as far as producing product daily, but we're still in it because we have an equity position in BMI going forward. I raised that because there's a lot of different ways to do and deal with things. Everything's on the table.
If we don't think it's a core business and we do think it's distracting us, it will be divested, it will be gone. And you named a few things that we have to take a look at as we move through 2019 here. We want to continue to consolidate and our core businesses still have some ability or we have some ability to consolidate some of our core businesses. So we'll be looking more towards those things.
Speaker 6
Okay. Thank you.
Speaker 0
Thank you. We have reached the end of the question and answer session. Mr. Sullivan, I would now like to turn the floor back over to you for closing comments.
Speaker 2
Well, thanks again for everyone joining us today. Obviously, tough times at REV Group, but it's temporary. It's short term. The fact that we have the backlogs that we have, the fact that our markets are strong. If you're running a business, a manufacturing business, those things are golden.
Backlog is a wonderful thing. And the fact that, that backlog is solid and it's none of it's going away, gives us all the opportunity in the world to just progress forward, put our head down and make sure that we do everything we can to execute on our plans that we have in place. Again, short term issues like this are easily overcome. The main thing though I do want to say, and this is something that we've been growing so fast in the last couple of years without a lot of headwinds that it's time now for us to really move to the next level of management expertise and that's to manage cash as we move through 2019. I think obviously it's part and parcel to any business that you run.
And this gives us an opportunity to really make sure that we pull things together as a management team. We hunker down. I can tell you that probably in the last three months, this management team has worked harder coming up with plans to execute when we have all these outside forces. We're getting very, very good and we're going to be very good as we come out the backside of these short term issues that we're dealing with right now. So thanks again for joining us.
We'll talk to you again at the end of the first quarter. And obviously, we'll have a much brighter idea or at least clearer picture of what fiscal twenty nineteen will bring us. Happy holidays, everyone.
Speaker 0
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.