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REV Group, Inc.  (NYSE:REVG)
Q1 2019 Earnings Conference Call
March 07, 2019, 11:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Greetings and welcome to REV Group's First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Sandy Bugbee, Vice President, Treasurer and Investor Relations.

Sandy Bugbee -- Vice President, Treasurer and Investor Relations

Thanks, Dana. Good morning and thanks for joining us. Last night, we issued our first quarter 2019 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 8-K 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 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 and for those following along with the presentation, we will start on slide three.

Tim Sullivan -- Chief Executive Officer and Director

Thank you, Sandy, and thanks everyone for joining us on today's call. I think the headline for the first quarter should be, we've seen the bottom and we're on the way back. The plan we outlined for you in the fourth quarter is playing out as expected and I'm pleased to say we are on track to meet our full year plan. Our plan for the quarter was to bring our supply chain in sync with our production. This meant slowing production rates in several of our plants. While we continue to work through longer lead times, particularly in certain lower volume chassis categories, we have seen incremental improvement.

The first quarter was a resetting period for our operations and production cadence and I'm pleased with the progress we have made addressing the factors within our control. Order growth translated into a record backlog level, which rose to $1.4 billion in the quarter. This is an encouraging sign that the end market demand for our products remains healthy. Our customers have been working with us, while we settle the last remaining supply chain issues that impacted us last year and into the first quarter.

Revenue visibility is good for the remainder of the year in many of our key product categories. Our Commercial and Recreation segments drove top line expansion in the quarter, but the Fire & Emergency segment was still hampered by supply chain and labor inefficiencies, which lingered into the early part of the first quarter. These coupled with the inefficiencies caused by a voluntary slowdown of production led to higher costs during our seasonally slowest quarter. In our F&E segment, we are being very proactive managing our operations and continue to see strengthened backlog. We recently implemented a second shift in two of our production facilities, intended to increase fire truck deliveries in subsequent quarters. Another exciting news, we were awarded a five-year contract during the quarter with the City of Chicago for E-ONE fire apparatus, including pumpers, aerials and platforms. The contract is estimated to replace roughly 140 units approximating $106 million over the next five years.

In addition, subsequent to the end of the quarter, we were awarded an order by the Fire Department of New York for 76 Wheeled Coach ambulances under our existing five-year contract. These contracts with the cities of Chicago and New York are a testament to our strength and position in the market and relationships we have with our customers. I believe we are largely through our F&E segment headwinds from last year and we expect these headwinds to be behind us by the end of the second quarter.

In our Commercial segment, we benefited from the delivery of buses to the New York City Transit Authority in the quarter and transit bus deliveries for the LA County contract will begin shipping during the second quarter, which we will serve -- which will serve as a strong base for the segment for the remainder of the year. We are seeing increased levels of bid activity for municipalities and contractors, evidenced by the higher sequential backlog in this segment, which should relate into continued growth in the segment.

In Recreation, our acquisitions continue to perform very well and the most recent of these Lance is no exception. The repositioning of our Class A product line is progressing nicely. We also achieved higher sales in our Super C and Class B RVs in the quarter over the prior year and we benefited from a full quarter of Lance towable and camper sales. Despite the softness seen recently in the RV market, the Class B market remains very strong and the Super C and towable markets remain healthy.

With our current portfolio of products, I believe we are well positioned to capture the strengths of the current market. Over the long-term, we continue to believe our focus on new product introductions with attractive features and price points should enable us to outperform the industry. I remain confident in our ability to return to growth and increase profitability in fiscal year 2019. I believe the major issues have been addressed and we have aligned ourselves appropriately. We believe we will continue to see the benefits of our previously implemented price increases, cost reductions and restructuring initiatives. We are committed to driving strong returns to shareholders in fiscal 2019, with a renewed focus on working capital management, cash generation and a return on invested capital.

Now, I will turn the call over to Dean for a detailed review of the financials.

Dean Nolden -- Chief Financial Officer

Thanks, Tim, and good morning. I'll start on slide five with a review of our consolidated first quarter results, followed by the performance of each segment. We previously communicated that our first quarter of 2019 would be below last year. And as Tim mentioned, our first quarter results were in line with our expectations. We are encouraged by the stickiness of our backlog and appreciate our customers' cooperation with adjustments to our delivery schedules. We experienced strong order growth across many of our product categories during the quarter, many of which are our highest margin businesses and continue to have confidence in our full year outlook.

Consolidated net sales for the first quarter were $519 million, up 1% compared to the first quarter of last year. The increase in consolidated net sales was driven by continued top line growth in both the Commercial and Recreation segments, which was partially offset by lower net sales in the Fire & Emergency segment. Excluding the impact of the Lance acquisition, consolidated net sales were modestly lower than the prior year period, driven by the resetting of production cadence to align with our supply chain lead times.

Net loss for the quarter was $14.6 million or $0.23 per fully diluted share compared to net income of $9.4 million or $0.14 per fully diluted share in the first quarter last year. Adjusted net loss in the quarter was $2.9 million or $0.05 per fully diluted share compared to $9.8 million or $0.15 per diluted share in the prior year.

Adjusted EBITDA was $12.3 million in the quarter compared to $21.3 million in the prior year first quarter. The decline in net income, adjusted net income and adjusted EBITDA during the quarter was driven by lower profitability within the Fire & Emergency segment, partially offset by improved profitability in both the Commercial and Recreation segments.

As expected, our price-cost relationship continued to be a headwind during the first quarter. We did begin to realize positive price versus cost in certain product categories, given their shorter backlogs and others will begin to turn positive as the year continues. Thus, we believe this positive trend will continue through the second quarter and that our previously implemented pricing actions will ultimately provide a tailwind against the cost increases that we're -- that they were targeted to address in the second half of the fiscal year.

Please turn to page six to discuss the performance of our segments. Fire & Emergency sales decreased by 5.2% to $204 million for the first quarter. The decrease in F&E sales was due to the residual effects of supply chain challenges and production inefficiencies from last year that we worked through during the first quarter. We purposefully slowed our manufacturing rates to allow for chassis and material lead times to catch up with production. And our fire operations made significant progress, recovering from the labor inefficiencies that impacted productivity late last year.

The increased lead times and chassis supply issues created temporary air pockets of downtime, preventing us from realizing the full productive capacity of our labor force, which overburdened ongoing costs of production. However, we've been unwilling to reduce our labor force, given our record backlog and the increase in production capacity and rates that this backlog gives us the opportunity to take advantage of. Thus, we maintained the conviction that these transitory headwinds will subside and that we will emerge in the second quarter and second half of the year in a position to return to peak productivity and deliver on these opportunities.

F&E segment adjusted EBITDA for the quarter was $8.4 million compared to $18.2 million in the first quarter of last year. The decrease was driven by lower sales volumes and the residual impact of higher labor and material costs. These negative impacts were partially offset by the progress we saw in our manufacturing operations toward the end of the quarter. We believe our sales volumes in this segment will improve going forward due to the aforementioned actions to increase our production capacities in fire.

Backlog in the Fire & Emergency segment increased 4.3% to $738 million compared to $708 million at the end of fiscal 2018 and was up 19% year-over-year. Our team has made good progress in the first quarter on many fronts, both commercial and operational, despite the challenges that remain from the previous quarter. We expect our leadership positions across the F&E markets as well as our strong distribution partnerships to drive a return to sales growth and margin expansion starting in the second quarter and most pronounced in the second half of the year.

As shown on slide seven in our Commercial segment, quarterly sales were up 6% compared to the prior year period, driven by an increase in the number of buses and terminal trucks sold. The increase in bus sales was due to the shipments under our previously announced paratransit bus contract with the City of New York. Commercial segment adjusted EBITDA for the quarter increased 5 -- to $5 million from $4.5 million in the prior year first quarter, driven by the higher bus and terminal truck sales volumes. Adjusted EBITDA margin of 3.6% was up 20 basis points in the quarter as a result of the higher volume, more profitable sales mix and the benefit of pricing actions in this segment overtaking material cost increases in the quarter.

We were able to achieve stronger performance in the Commercial segment as a result of demand across nearly all product categories. Commercial backlog was up 12% to $428 million compared to $381 million at the end of fiscal 2018 and it was up 27% year-over-year. As we look forward to the rest of the year, we continue to forecast a strong year within the Commercial segment, as transit bus shipments related to our LA County contract begin to ship in the second quarter, which should provide a tailwind for both sales and profitability in the segment throughout the rest of the year.

Turning to slide eight, quarterly sales in the Recreation segment grew 5% year-over-year to $176 million, primarily due to higher sales of our Super C and Class B RVs as well as the full quarter of Lance towable and camper sales. Excluding the impact of Lance, segment net sales decreased by $8 million compared to the prior year period, which was a function of both the realignment of our product offering and softer demand in the Class A RV category. Recreation adjusted EBITDA increased 12% for the quarter to $9.1 million. The expansion in profitability was due to higher sales volumes in the categories with higher margins and the benefit from the Lance acquisition.

Our acquisitions in this segment continued to perform up to and above our acquisition business cases and are evidence of how we can create meaningful incremental value through commercial, operational and purchasing synergies for the right growth opportunities. Recreation backlog was $225 million compared to $291 million at the end of fiscal 2018. The decrease in Recreation backlog is due to softer demand in certain RV end markets.

Although, we have recently seen the RV market soften in some categories, we continue to believe our leadership in the higher end and certain niche products within the recreation market should enable us to outperform the industry this year. We are confident that our first class brands, new product introductions and ongoing performance improvements in this segment will continue to support growth through the remainder of fiscal year 2019.

Now, please turn to slide nine, where we've provided a review of recent trends in working capital. As we expected, we saw an increase in net working capital in the first quarter. The increase in working capital was primarily due to the normal seasonal increase in inventory compared to the prior year end. But an important metric for the quarter was also the reduction in cash used from operating activities over the prior year first quarter.

As we communicated at the end of last year, efficient working capital management and improved cash flow is a key element to our 2019 strategy. Although, inventory was up over the prior quarter, the magnitude of the normal seasonal build was smaller than the comparable period in the prior year, such that, in addition to the results of other improvements, our free cash flow improved by $41 million in the first quarter compared to the prior year first quarter.

Improving working capital returns will continue to be an important area of focus throughout 2019. In addition, the benefit from our non-operating cash flow initiatives that we expect will total more than $40 million for the year should benefit cash flow starting in the second quarter. As an example, we completed the sale of our Alvarado RTC in February for approximately $11 million.

Net debt as of January 31, 2018 was $458 million with $86 million of availability under our ABL revolving credit facility. Our net leverage ratio at the end of January 2019 were 3.3 times driven by lower trailing 12-month adjusted EBITDA from the first quarter. This metric will improve or should improve significantly going forward for the remainder of the year, as we expect both the numerator and the denominator to the leverage calculation to improve and we still expect to reduce leverage by more than one full turn by the end of fiscal year 2019.

On slide 10, we show our capital allocation over the last five quarters. Capital expenditures were $6.3 million in the first quarter compared to $13.6 million in the first quarter last year.

And on slide 11, we are reaffirming the details of our financial expectations for the full year 2019. As we mentioned last quarter, we expect softer performance -- we expected softer performance in the first quarter as compared to the prior year, given the residual challenges we faced. However, we believe the improvement in our financial performance is expected to materialize starting in the second quarter and accelerate in the back half of the fiscal year.

With that, I'll turn the call back to Tim for some closing comments.

Tim Sullivan -- Chief Executive Officer and Director

Thanks, Dean. In closing, this quarter's results were what we anticipated and positions us to achieve our full year expectations. We believe fundamental demand across our end markets remain strong and the large majority of our product lines are continuing to show a high level of order activity. We have many reasons to believe that fiscal 2019 will see improved revenue growth and margin expansion and everyone here at REV Group remains focused on delivering on those most goals. We are very grateful for the continued dedication and support of our employees, customers, partners and shareholders. We're all looking forward to a successful year together in fiscal 2019.

Operator, we'd like to open up the call to questions.

Questions and Answers:

Operator

At this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.

Ben Burud -- Goldman Sachs -- Analyst

Hey. Good morning, everyone. This is Ben Burud on for Jerry.

Tim Sullivan -- Chief Executive Officer and Director

Hey, Ben.

Ben Burud -- Goldman Sachs -- Analyst

Good morning. In Fire & Emergency, you mentioned the labor productivity improved in the quarter. Can you quantify that for us? How do labor hours per unit in the quarter compare to last year, to last quarter as well and when do you expect to return to full productivity?

Tim Sullivan -- Chief Executive Officer and Director

Yeah. The -- let me be as simple and straightforward as I can be. When we slowed down the production at our F&E plants to allow the supply chain to catch up, we did not lay off any employees. Employees in manufacturing as you know are difficult to get and so we carried higher levels of employment, unproductive employment through the fourth quarter and into the first month here in the second quarter. That obviously relates to significant costs and labor inefficiencies. As the supply chain now has caught up to our production capabilities, we are ramping those production levels as we move through Q2 and then obviously through the end of the fiscal year. But that type of approach certainly hurt us from a margin standpoint because we're carrying effectively redundant employment through the quarter.

Ben Burud -- Goldman Sachs -- Analyst

Got it. And just to clarify, so you'll be reaching full productivity in the coming quarters, like definitely this fiscal year or...?

Tim Sullivan -- Chief Executive Officer and Director

Yeah, yeah. No, toward the end of the second quarter. And one thing I probably should have mentioned too, and this was strategically critical for us. We actually -- I mentioned adding a second shift to two of our fire plants. That's not free adding those shifts and have them be unproductive actually exasperated the amount of labor inefficiencies we had in the quarter. But as we approach the end of Q2, we'll be at full steam.

Ben Burud -- Goldman Sachs -- Analyst

Understood. And turning to RV, can you update us on dealer inventory levels in terms of units, specifically, for your products? Where do they stand today? And can you put that into context for us in terms of -- compared to peak and trough as well?

Tim Sullivan -- Chief Executive Officer and Director

Yeah. It's -- the dealer lots are fairly full for a couple of reasons. I think first of all, there has been a general slowing in the industry. Like last year, we've had some really bad weather here during the latter part of January and through February. That does not bode well for retail sales for RV. So dealer lots are up a little bit, which means that our dealers are going to be very cautious, especially when they see kind of a flat year going forward. Again, you got to look at the various product groupings. Class B's are very strong, towables are very strong, at least in our area, which we are in the higher end of towables. Super C's are strong. Some of the higher end C's are strong. A's are actually off from previous year and that's just because some of the softness we're seeing on the A market, but we've actually seen that now for a couple of years. As just have not been at that level of sales that we had previously. But I think overall, the industry is predicting growth, albeit fairly low to mid single-digits for the year. But a lot of that's going to come in those areas that I mentioned, B's, Super C's, high end C's and high end towables.

Ben Burud -- Goldman Sachs -- Analyst

And just the last part of the question. Inventory levels versus peak and trough, can you give us some context there? It sounds like it's much closer to peak levels of dealer inventories based on those comments.

Tim Sullivan -- Chief Executive Officer and Director

Not really. I think what's happened is the dealers have been a lot more discerning in what they put on their lots. They're running lower inventories and they did during peak. So we think that's encouraging actually. I think the fact that they've allowed their inventories to bleed down to a lower level than what they had in their peak means that when sales do kick in, we'll get the wholesale sales for those retail lots. So inventories are actually -- people are being very careful and very conservative with where they have their levels right now on the retail lots.

Ben Burud -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

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

Themis Davris -- Credit Suisse -- Analyst

Hi. This is actually Themis on for Jamie. My first question is, could you help us in terms of what you're assuming in your guide for first half versus second half of the year for both sales and adjusted EBITDA?

Dean Nolden -- Chief Financial Officer

Yeah. Yeah, good morning. So from an adjusted EBITDA perspective, it's going to be an interesting year because of some of the things we have going for us in terms of the slowdown in the first quarter as well as the price cost benefits we're going to get in the second half of the year that we talked about. In addition to some of the larger contracts that are going to start delivering, like the LA County contract and the recently awarded FDNY ambulance units. So we expect that the first half EBITDA will be around 30% of the full year and that's slightly below previous years because of the first quarter. But if you recall last year, our fourth quarter was weak. So this is what we're going to make it up considerably from a comps perspective. The sales cadence should be relatively consistent with prior years.

Themis Davris -- Credit Suisse -- Analyst

Got it. Thank you, Dean. And then my follow-up just on the deferred revenues that we were discussing as of last quarter. I think last time, we were talking about $160 million with half of that in Fire & Emergency and the remaining balance in Commercial. Could you just update us on these figures and has there been any catch up as of Q1?

Dean Nolden -- Chief Financial Officer

Yeah. Well, it was $160 million. And just for reference, it was $40 million in fire and $120 million in ambulance and bus relatively -- split relatively evenly between ambulance and bus. And what we said, which is holding consistent and true is that we're not going to see the fire catch up in the fire side of the business until Q2 and all the way through Q4. So none of the catch up of the fire deferrals was achieved in the first quarter. For ambulances and buses, we said late first quarter through the third quarter would be when we would see that rebound and we saw some of that rebound in January, but we'll see it more so in the second and the third quarter.

Themis Davris -- Credit Suisse -- Analyst

Got it. Thank you.

Operator

Our next question comes from the line of Steve Volkmann with Jefferies. Please proceed with your question.

Steve Volkmann -- Jefferies -- Analyst

Good morning. To me, I feel like I should still find somebody to speak for me though.

Tim Sullivan -- Chief Executive Officer and Director

Good morning, Steve.

Steve Volkmann -- Jefferies -- Analyst

I'm going to just ask a little bit about some of the wins you guys have had recently. And I'm curious about how we should think about the cadence of revenue sort of ramping up. So for the LA bus contract, for the Chicago fire, for the New York City ambulances, just how do we sort of think about the cadence of ramp up of revenues in those projects?

Tim Sullivan -- Chief Executive Officer and Director

I think -- yeah, good question. I think the -- on the ambulance side for FDNY, they want those as soon as they can get them. So that will be something that we're going to be looking at for Q3-4. On the fire for Chicago, you can, I guess, in broad terms kind of divide that number of $106 million by 5, but that's not how it usually works. There is really pent-up demand in Chicago because this contract has been delayed due to funding issues for a couple of years. They're going to want trucks as quickly as they can get them. So that contract is going be front-end loaded, which means that we got to tackle those on to the end of our current 12-month backlog. You start seeing Chicago fire then next year about this time, but then that will be a really great tailwind for fiscal 2020 and 2021 because that will be more front-end loaded. LA, the same thing. It's -- these transit buses take a while for the prototypes to be approved. To give you an example, I'm sure our guys in the ground in California can tell us, but -- precisely what the number is. But there's been well over a 100 changes to the spec as we prototype those buses and that's delayed their entry into the marketplace again. Now that the spec has been locked and we've got the production ready to go, they're going to want that front-end loaded as much as possible. So good strong tailwinds for Q3, Q4 on that contract and then certainly into 2020. So I gave you a lot of information there, but what typically happens on these municipal orders, they get delayed because of various reasons. And then as you can imagine, they want them right now. So we're going to ship those as quickly as we can and that's why we did report those because those are important information as you look at what Q3, Q4 looks like for us from a visibility standpoint.

Steve Volkmann -- Jefferies -- Analyst

Okay, great. And then maybe just a quick follow-up on RV then, if I could. Dean, what was the organic growth in RV in the fourth quarter ex-Lance?

Dean Nolden -- Chief Financial Officer

At Lance or just for the RV? (Multiple Speakers) It was down about 4%, $8 million.

Steve Volkmann -- Jefferies -- Analyst

Okay. And it seems like, I don't cover a lot of the other guys, but it seems like a lot of the other guys had some much more negative numbers than that. I don't know, is there something happening with market share or is it just a different mix do you think?

Tim Sullivan -- Chief Executive Officer and Director

It's a different mix, Steve. I think if you look at where we're positioned, we're positioned kind of on the high-end A's now. But the mix that we've got is popular. They've got obviously a much broader mix and typically you would think that that's the law of averages, right, that when they take a hit, it's going to be smaller. But most of what we are building today is still very, very popular, the Class B's, the Super C's, the high end towables. Thor reported yesterday and they took a fairly significant reduction in shipments. So we're pretty happy where we're at. I think the softness remains in the A's, but we also, just so that everyone knows this too, I don't think we've talked about this yet. We actually reduced the production rates on A's for fiscal 2019 by 20%, just anticipating a little bit softer market in the A's. On the other categories, we're ramping up as fast as we can on B's, Super C's and towables because those are really very, very strong right now.

Steve Volkmann -- Jefferies -- Analyst

Are you willing to sort of ballpark the percentage of each of those that is in your revenue stream?

Dean Nolden -- Chief Financial Officer

We do, we have said that the Class A's represent about 45% of -- and going down a little bit, trending downwards because of the market of the total for the segment.

Tim Sullivan -- Chief Executive Officer and Director

Right. It will drop probably down to 35%, 36% as we move forward and that's by design.

Steve Volkmann -- Jefferies -- Analyst

Okay, thank you.

Operator

Our next question comes from the line of Charles Brady with SunTrust. Please proceed with your question.

Charles Brady -- SunTrust -- Analyst

Hi, good morning, guys.

Dean Nolden -- Chief Financial Officer

Good morning.

Charles Brady -- SunTrust -- Analyst

I'm just wondering on the Class A's with respect to that prior question. As that trends down from 45-ish to 35-ish, what's the impact on margin? Is there a significant margin differential between the A, B's and C's for you guys?

Tim Sullivan -- Chief Executive Officer and Director

There is. The Class A's, we're obviously on the high end which means high margin, but we think it's going to be relatively balanced with the high end towables that we do, the high end B'S and the Super C's. Those are all really good margin units as well. So if we can ramp those as we back down on the A's, the trick is to try to balance that whole thing going forward and then try not to lose too much on the EBITDA line.

Charles Brady -- SunTrust -- Analyst

Great. And on the Lance business, can you break out the growth rate on the Lance's sales and orders in the quarter?

Tim Sullivan -- Chief Executive Officer and Director

I don't think we have that.

Dean Nolden -- Chief Financial Officer

I don't think we want to break it down by individual category like that, but...

Tim Sullivan -- Chief Executive Officer and Director

Sure we could Dean, we just don't have that.

Dean Nolden -- Chief Financial Officer

But I would say that the overall Lance, Renegade and Midwest, all have seen double-digit increases in revenue year-over-year when we've incorporated them into our distribution channels and our quarter-over-quarter, year-over-year. So that's probably a pretty good direction for you.

Charles Brady -- SunTrust -- Analyst

Okay. No, that's helpful. Thanks. I just want to back to your comment about the price cost being your headwind now and it's going to be a tailwind into the second half of the year. Can you just maybe give a little more color on kind of what kind of tailwind you're expecting and is that for the full second half or is that sort of exiting the second half of the year in the '20?

Tim Sullivan -- Chief Executive Officer and Director

I'll give -- you give a shot too, but I think, no. I think what's happened is, two things have happened here in the last, I'll say, six months. I think I mentioned on the last call that cost increases started to temper somewhat in our fourth and first quarters. So that's been stabilized to the point that we actually think with some of our alternative sourcing that we've done that that will be a nice tailwind as we move to the second half of the year. And let me give you a couple of examples. We got caught out a little bit in Q3 and 4 because we were single sourcing on a few things that hurt us in the quarter. Our sourcing team have expanded the universe and been able to get cost reductions and/or flat costs with their sourcing efforts here in the last six months. So we're teed up very nicely now as we move through the second half of fiscal '19 that our costs are clearly in check. The price increases we put in back last summer are now in effect and those are starting to roll into our backlogs and our shipments in the second half of the year. So you add all that up, we're pretty bullish on that ratio as we move into the second half of the year, which gives us some pretty good confidence on our guidance.

Charles Brady -- SunTrust -- Analyst

Right, right. And just one last one for me just on the Fire & Emergency business. Just so I understand and make sure we're straight on this. So you guys were obviously running labor inefficiencies because the chassis hadn't caught up. You are now caught up, which is why you've got this extra capacity and that's going to steadily improve through Q2 and certainly second half then you're at full production. But that's the reason for adding the additional labor costs because you finally have caught up from the supply chain side of it?

Tim Sullivan -- Chief Executive Officer and Director

That's correct. We felt -- it was a kind of a tough bullet to bite in the quarter when we knew we're going to have some costing issues, but we wanted to make sure that as we moved into the second quarter that we had a full head of steam from a labor standpoint as the supply chain caught up. So that -- the numbers of units that we can ship in the second half will be better than what we've ever had and certainly better than the second half of last year.

Charles Brady -- SunTrust -- Analyst

Great. Thank you.

Operator

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

Mig Dobre -- Robert W. Baird -- Analyst

Yes, good morning, everyone. Just going back to RV, I thought I heard you, Tim, say that you expect growth in this business on a top line through 2019. I want to be clear that I didn't mishear that.

Tim Sullivan -- Chief Executive Officer and Director

No, you didn't. On certain categories though, Mig, not on the A's. The A's will be fairly flattish if not a little bit negative. But on everything else, we actually think we will get some increase.

Mig Dobre -- Robert W. Baird -- Analyst

I see. I mean, essentially, that implies on a core basis because I think Lance is cycling through. You're expecting your business to at least grow modestly all-in on a core basis for the remaining three quarters, right?

Tim Sullivan -- Chief Executive Officer and Director

Correct.

Mig Dobre -- Robert W. Baird -- Analyst

Okay. So where I'm struggling a little bit is juxtaposing that comment versus the bookings that you had in Q1. By my math, the implied bookings here were down over 60%. And I understand that it was a really tough comp from the prior year. But can you maybe give us some color as to what gives you comfort that in-spite of what appears to be a pretty slow start from a bookings standpoint, you're actually going to be able to grow the business?

Tim Sullivan -- Chief Executive Officer and Director

Yeah. Well, we rolled into the first quarter with already 12 months of backlog at Lance, nine months of backlog at Renegade, and only six months at Midwest, and the only reason we have a six-month backlog versus a nine-month backlog is we don't put anything in backlog at Midwest until we have our hands on the vans, the sprinter vans. So that is actually a deflated kind of backlog number. We actually have another three months that we want to load into backlog and we have certainty on vans. So we rolled into the quarter off of the end of last year with very healthy backlogs in those three segments.

Mig Dobre -- Robert W. Baird -- Analyst

I mean, I appreciate that, Tim. But I mean, the way the math works, you essentially have to do a little bit better than $200 million of revenue per quarter for the remaining three quarters. Your backlog is only $225 million. So obviously, the orders have to come through in order for you to be able to make these numbers and that's kind of what I'm struggling with. I mean, I recognize that you have backlog, but essentially orders and demand have to get better here than what we have seen in Q1. And I'm wondering, how much of this, going back to an initial question on inventories earlier, was the impact of destocking in terms of what we've seen here and what's your visibility that demand can sequentially actually get a little bit better?

Tim Sullivan -- Chief Executive Officer and Director

Our demand hasn't stopped and we've had really a very weak quarter for a lot of reasons. Obviously, it's a weak quarter anyway for RV sales December-January. The early part of January are usually pretty weak and we've had a weak February. As I mentioned, weather has really hurt RV sales. We're optimistic that even if we're flat now on some of the bookings or even a little bit less, the math does work. So it doesn't stop, but it's -- we feel pretty good about the categories that we think we can grow.

Mig Dobre -- Robert W. Baird -- Analyst

I see. If I switch over to Fire & Emergency, I want to make sure that I kind of have my numbers straight here on EBITDA. From what I remember, there was roughly $6 million of EBITDA that was deferred from '18 to '19. As I understood it, you're going to be able to convert on that in fiscal '19. So I mean, technically that should put us north of $90 million on EBITDA. How do you think about what's embedded in your guidance for the full year here versus this $90 million? I'm presuming there's something incremental on top of that, but I want to make sure I understand that.

Dean Nolden -- Chief Financial Officer

I think you got the numbers directionally correct, Mig, $6 million EBITDA is the amount related to the deferral of units that we said we're going to start to realize later in the second quarter, but mostly in the second half. So that is in our implied guidance for the full year. And the strength in some of the recent -- including the FDNY ambulance order also helps us feel confident about our ability to achieve kind of the directional numbers you outlined in terms of EBITDA for the segment.

Mig Dobre -- Robert W. Baird -- Analyst

But I mean, baked into your guidance, you're talking something north of $90 million, right? I mean, is it like $95 million? I mean, this is a pretty big swing factor here with -- I mean, this is your biggest business.

Dean Nolden -- Chief Financial Officer

Yeah. I mean, I think -- if you think about comparables too from last year, we had a very rough fourth quarter in this segment. So the comparables will be very good. Easy comps, I would say, in the fourth quarter. So we're confident with what we expect and what's embedded in our guidance as you've alluded to.

Mig Dobre -- Robert W. Baird -- Analyst

Okay. Lastly on Commercial, once again going back to this whole EBITDA discussion. It looks like everything is working out quite nicely in this segment and we might be in a position to see quite a big EBITDA swing on a year-over-year basis, '19 versus '18. How do you think about that? What's embedded in the guidance?

Tim Sullivan -- Chief Executive Officer and Director

Well, for certain, I think if you remember last year, we lost that big school bus contract in the first quarter. We did not get the follow on from Chicago. And those two things coupled with the shuttle bus business where we always have a little bit of a problem generating enough margin, it was a tough year. This year, because of everything now hitting on all eight cylinders again, our transit bus, school bus and even our shuttle bus business is doing -- is going to do better this year. And our capacity terminal trucks have got a record backlog. So year-over-year, the simple comp that we have and the bus count we have is commercial and it's going to beat last year handily.

Mig Dobre -- Robert W. Baird -- Analyst

Right. Well, I guess, I'm just wondering in terms of your capacity to be able to convert on this backlog and how much of this actually gets converted this year in '19, right? I mean, you gave us some clarity on the LA bus deliveries as to what's incremental '19 versus '18. I'm just wondering with, say, for instance, the really strong orders that you had in Q1, how much of that converts this year versus what gets maybe pushed out into '20?

Tim Sullivan -- Chief Executive Officer and Director

Well, on school bus, almost all of it. On E&C, we have to ramp up to meet the LA demand and we've got other business that we have on top of LA that we're still shipping, that's the foothills contract that we got as well. In capacity terminal trucks, we're ramping that production. Our backlog is the highest it's ever been. So it's a matter of really executing on getting our production ramped up in its units per week and we didn't -- keep in mind, we struggled through -- we did not lay anyone off in the back half of last year or the first quarter. We kept our labor because it was critically important to -- we knew we'd be in a situation when our supply chain would catch back up with the backlogs being strong, once the supply chain catched up -- caught up, we felt we could hit it. So we're going to attack the backlog as strong as we can here in the second half.

Mig Dobre -- Robert W. Baird -- Analyst

All right. Appreciate it. Thank you.

Operator

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

Andy Casey -- Wells Fargo Securities -- Analyst

Thanks a lot. Good morning.

Tim Sullivan -- Chief Executive Officer and Director

Good Morning.

Andy Casey -- Wells Fargo Securities -- Analyst

Good morning. I was wondering -- I've got a few questions mostly on cash flow. Can you update us on your anticipated disposals? I think at one point, you were talking about $40 million of benefit. Did you realize any cash inflow for that during the quarter? Part of the reason I'm asking the question is in the appendix it looks like it took down your forecast for losses from assets held for sale. And I'm just wondering, A, did you realize any cash inflow in the quarter and then what really drove that change in forecasts for assets held for sale?

Dean Nolden -- Chief Financial Officer

Sure. So most of our cash opportunities above the -- for the $40 million and above opportunities are going to start to hit in the second quarter. So we had a little bit of it in the first quarter. Like we said in the -- I said in the prepared remarks, we monetized one business in February after the end of the quarter for about $11 million. That was assumed in the $40 million plus. So -- and we took, as you remember in the fourth quarter, impairment charges in anticipation of our cash flow opportunities initiatives. And so as we look at what we expect from a gain versus loss standpoint and we updated our guidance, we expect to get better returns than we previously had expected on some of these projects.

Tim Sullivan -- Chief Executive Officer and Director

And you need to keep in mind too, we've had to build inventory. If it's been available, we've taken it, just for the fear that we may not get it. So our inventory levels are at all time highs and that will all bleed down through the back half of the year as we ramp production. So cash generation off of inventory reductions is going to be pretty large as we move through the year here. So our target is big, but these one-time events are fine, they're good, but the real cash generator is going to be bleeding down this inventory as we move through the year.

Andy Casey -- Wells Fargo Securities -- Analyst

Okay. Thanks for that. Tim, you answered the second question, just to get a little more fine point on it. Is it -- is the inventory benefit really fourth quarter weighted or is it spread between the last couple of quarters?

Dean Nolden -- Chief Financial Officer

Third and fourth, I mean, mostly in the fourth. I think we'll do a decent job again in the second quarter, managing efficiently the seasonal strength of our year from inventory and working capital perspective as it compares to prior year. But what Tim talked about in terms of cash generation from working capital, it will be third and fourth quarter.

Tim Sullivan -- Chief Executive Officer and Director

Yeah, directly tied to revenue. You can actually map it right into the revenue that we're going to run in the third and fourth quarter.

Andy Casey -- Wells Fargo Securities -- Analyst

Okay. Thank you. And then this is kind of a little bit definition, a little bit picky. But the adjusted EBITDA guidance, pretty consistent with what you had last quarter for 2019. But in appendix, the unadjusted EBITDA went down by $3 million, $3.5 million, consistent net income, but the add backs were a little bit different, decreased D&A interest expense and tax expense, all kind of went down. What drove the reduction in those line items?

Dean Nolden -- Chief Financial Officer

We have to take a look at how we fared in the first quarter with actual expenses compared to those forecasts and we have to adjust based upon what happened in the first quarter. In addition, in the first quarter, you saw an additional impairment charge related to one of our divestitures that kind of cleaned that up. That will reduce net income, but -- as add back for adjusted net income. So there's a number of moving pieces of actual results in the first quarter that we have to align to to make sure that we don't repeat a roll forward that looks unusual because we're already outside the balance of the total year.

Andy Casey -- Wells Fargo Securities -- Analyst

Okay. Thanks. And was that also the case with the stock-based compensation expense it went down a little, was that just timing?

Dean Nolden -- Chief Financial Officer

Yeah. Just as we fine-tune our expectations as the year progresses, yeah, that's just timing and fine-tuning.

Andy Casey -- Wells Fargo Securities -- Analyst

Okay. Thank you very much.

Operator

Our next question comes from the line of Chad Dillard with Deutsche Bank. Please proceed with your question.

Chad Dillard -- Deutsche Bank -- Analyst

Hi. Good morning, everyone.

Dean Nolden -- Chief Financial Officer

Good morning.

Chad Dillard -- Deutsche Bank -- Analyst

So if I look at what's needed to hit your guidance for the rest of the year, it implies about a 22% incremental EBITDA margin, which is I think a pretty strong snap-back, and if I'm following correctly from the call, it sounds like the cadence is gradually better in the second quarter and probably a stronger second half. So I was just hoping you could walk me through some of the puts and takes there. I mean, is the case that like price will be significantly better than cost? Is there like a mix benefit? Just trying to understand the bridge there.

Dean Nolden -- Chief Financial Officer

Yeah. Maybe starting with this second quarter, I think like you said, it's going to ramp up in terms of the incremental EBITDA margins quarter-over-quarter through the end of the year. In the second quarter, we're probably still going to be slightly negative from a cost versus price comparison and trending better, but still slightly negative. Also, as we start to deliver on some of these larger projects, specifically LA County, that will ramp up as the quarter proceeds and therefore we'll see more benefit as we exit the second quarter. Same for Fire, as we work through our backlog and we become more efficient on our second shift in our capacity improvements, those will also start to improve toward the end of the second quarter to get to full run rates in the third and the fourth quarter. And if you remember, our price benefits on Fire versus cost pretty much start in the second half because we implemented a lot of our price increases in the April time frame last year with almost 12-month backlogs, those price increases we implemented will start to benefit the results in the third and the fourth quarter, and they haven't yet. So those are the kind of things, plus just the overall absorption of the facilities on the increased output also helps in those quarters.

Chad Dillard -- Deutsche Bank -- Analyst

That's helpful. And then just switching over to the inventory. Can you give a little bit more color on REV Group's inventory build? Which segments contributed the most? And then on the dealer side, I mean, how should we think about how long it'll take for dealer inventory to reach normalized levels? And I guess, like what would be your view on retail demand for 2019?

Tim Sullivan -- Chief Executive Officer and Director

On the overall inventory for the Company, obviously, the biggest inventory increases have been in things like Fire & Emergency, where we've really slowed down production and that's where the inventory really built significantly. Less so on RV, where we're shipping product. I mean, we're working off of good backlogs. As far as the retail on the RV side, this sounds a little crazy. But boy, if we can get three months of good weather here, especially in the spring buying season, things can turn on a dime in this industry just as quickly as it can really come to a really slowing effect with bad weather. People have to be out there touching the product to buy it and they don't like to do that in snow storms and tornadoes and thunderstorms. So a little bit of luck with the weather here in the next three months, those retail lots will start to go down quite a bit. I -- the industry is pretty good about predicting. They do a lot of work on where they see the demand and they're projecting mid single-digit type growth this year, low to mid single-digit growth. And I think that's going to happen. If that happens, those retail lots will -- that inventory will shrink and will replenish it.

Chad Dillard -- Deutsche Bank -- Analyst

Great. Thank you.

Operator

Our next question comes from the line of Joel Pearce with BMO Capital Markets. Please proceed with your question.

Joel Tiss -- BMO Capital Markets -- Analyst

Hey guys. How is it going?

Tim Sullivan -- Chief Executive Officer and Director

Good, Joe.

Joel Tiss -- BMO Capital Markets -- Analyst

That's good. Have you guys talked at all about the pricing and the sort of the implied margins in the backlog? Is it a little bit better than where you are now or is most of the improvement in profitability going to come more from the manufacturing efficiency side?

Tim Sullivan -- Chief Executive Officer and Director

No, a big part of it's pricing, Joe. I mean, we got hit so hard with those cost increases so quick back at the beginning of the summer time, it took us a while to recover from that. And actually, a lot of that -- those price increases are already out there taking a positive effect on our bottom line. It's less so, obviously where we had the big backlogs and we couldn't react to the big backlogs. But even those are starting to take effect now. So pricing is one of the big things. Obviously, we get these plants up and running at their capacities again, which we will hear beginning toward the end of the second quarter. That's also going to create some margin opportunity and incremental margin to get these plants chugging along again. But -- so as the price increases are kicking in, getting the plants up and running again at full speed, those are all going to really drive some good bottom line.

Joel Tiss -- BMO Capital Markets -- Analyst

And then there hasn't really been any talk about your part strategy. Can you just give us a little update on where you are on that and how it's going and what the outlook may be further out like 2020, 2021?

Tim Sullivan -- Chief Executive Officer and Director

Yeah, it's growing. Our plan this year is an 11% growth year-over-year. It -- I think I've mentioned this on previous calls, it's been slower than what I had thought when I first got in these industries here. But the paradigms of purchasing have been well established long before I arrived and we're breaking those down step-by-step. So last year, we were 10% growth, this year 11% growth. I'd like to get that up in the higher teens as we move into 2020, 2021. I think that's not only possible, it's probable. I think we know what we have to do to grow it. It's a journey, to say the least, it's a journey, but we're making headway.

Joel Tiss -- BMO Capital Markets -- Analyst

And just the last question. It seems that you guys have been doing a lot of work on the Company more kind of big picture, but the EBITDA margins are still relatively low across the whole Company. Is there -- is that something structural that -- that's just the way the industry is or are there things that you guys can do to really jump those numbers to double and triple them over the next, whatever, decade or however long it takes?

Tim Sullivan -- Chief Executive Officer and Director

Yeah. Well, we had a nice head of steam built up before the train wreck, right, last year and that kind of reset everything and it really attacked our margins. Our margins, it's kind of like hitting a speed bump, right. You got to reaccelerate after you've hit the speed bump and that's exactly what we're doing. It's been really the -- really large cost increases that we've had. It's been the fact that we've been carrying a lot of excess labor. Those are all things that are really beating up the EBITDA and our EBITDA margins. That will recover and we continue to push forward. And I think over time, we will continue to strive toward our original goals that we stated just two years ago. So we're optimistic. It's been a tough six to nine months, but we've pushed the reset button, we're moving forward, we'll get those margins up.

Joel Tiss -- BMO Capital Markets -- Analyst

All right. Thank you very much.

Operator

Our next question comes from the line of Charles Brady with SunTrust. Please proceed with your question.

Charles Brady -- SunTrust -- Analyst

Hey, thanks. Just one more from me. On these large contracts, the LA, Chicago, FDNY, are there price escalators that are built into that? So if raw materials do go back up again, you're kind of covered on that? And I'm also wondering on the other side of that, are there any kind of penalty clauses that if production gets -- something happens, you don't deliver on a certain schedule, you guys can get dinged on that?

Tim Sullivan -- Chief Executive Officer and Director

The answer to both your questions are, yes. Yeah, we have price escalators in there based on material cost indices and increases. And I think we talked about this mid-year last year. The indices have never been higher. I've never seen PPI in the categories that we work in exceed 5%. I mean, they're usually like minuscule 1%, 2%. So we are protected pretty well. We feel that we've got everything priced right. And then as we go forward, that, we'll be able to do well from a margin standpoint. Yeah. And we got to deliver. We don't deliver, there's penalties. So we got it on both sides. I think the interesting thing and I -- earlier in the call, we were talking about the cadence of some of these big contracts. We like to get them out faster, if we can. Obviously, we're working off of a cost basis that is very predictable in that instance and that helps a lot. And typically, we can do that, which means that the big contracts are good. They're good contracts to have, they're good base loads to have. And if we execute the way we know we can, we'll hit our margin marks.

Charles Brady -- SunTrust -- Analyst

Okay. And that kind of goes to my next question on these large contracts, I know -- I'm just not going to disclose the margin on a contract basis. But I'm wondering, in broad terms relative to sort of the -- a segment margin perspective, as this work rolls into the revenue stream from a margin perspective, is it dilutive to the segment margin or is it same or a little bit better?

Dean Nolden -- Chief Financial Officer

Yeah, it's at least the same and in many times better. These contracts are good contracts with opportunity to produce efficiencies, operational excellence initiatives to drive costs down as we deliver on those things. So for all these larger contracts, these are very good margin contracts at -- about the same as the rest of business.

Tim Sullivan -- Chief Executive Officer and Director

Well, plus they give you the opportunity for incremental margin and you can load these things through a good pace, which is typically the case. You get that incremental margin that you wouldn't get on onesie, twosie type business.

Charles Brady -- SunTrust -- Analyst

Got it. Thanks.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Tim Sullivan for closing remarks.

Tim Sullivan -- Chief Executive Officer and Director

Well, thanks again everyone for joining us today. The last two quarters have been very difficult and a real struggle as you can well imagine with the turmoil that we've had to navigate through here the last two quarters. I can say, with a great deal of confidence that we feel very good about our plan for the year, now that we've gotten through the trough, like I said I think with my opening statement, we've seen the bottom and we did see the bottom and it's behind us. We feel a lot more certain on our costs, we feel a lot more certain on our pricing kicking in and I can tell you the Management Team here at REV has been nothing short of fantastic, putting in a plan operationally, it's actually slow production and still keep the fires burning. The worst is behind us. We feel really good about '19 and we feel even better about 2020. There's nothing I don't think that anyone can throw at us now that we haven't seen and we haven't dealt with, that we cannot manage through and I could not say that two quarters ago.

So thanks for joining us. We look forward to a very successful 2019. And we'll talk to you again in June.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Duration: 60 minutes

Call participants:

Sandy Bugbee -- Vice President, Treasurer and Investor Relations

Tim Sullivan -- Chief Executive Officer and Director

Dean Nolden -- Chief Financial Officer

Ben Burud -- Goldman Sachs -- Analyst

Themis Davris -- Credit Suisse -- Analyst

Steve Volkmann -- Jefferies -- Analyst

Charles Brady -- SunTrust -- Analyst

Mig Dobre -- Robert W. Baird -- Analyst

Andy Casey -- Wells Fargo Securities -- Analyst

Chad Dillard -- Deutsche Bank -- Analyst

Joel Tiss -- BMO Capital Markets -- Analyst

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