REV Group, Inc. (REVG) Q2 2019 Earnings Call Transcript

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REV Group, Inc. (NYSE: REVG)Q2 2019 Earnings CallJun 6, 2019, 11:00 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the REV Group Second Quarter 2019 Earnings 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, Mr. Drew Konop, Investor Relations for the REV Group. Thank you, you may begin.

Drew Konop -- Investor Relations

Thanks, Melissa. Good morning, and thanks for joining us. Last night, we issued our second quarter 2019 results. The copy of the release is available at our website at investors.revgroup.com. Today's call is being webcast and is accompanied by a slide presentation, which includes reconciliation of non-GAAP to GAAP financial measures that we will use during this call. It is also available at our website.

Please refer now to Slide 2 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 refer 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 will start on Slide 3. Tim?

Tim Sullivan -- President & Chief Executive Officer

Thanks, Drew. Welcome to the team, and thanks everyone for joining us on today's call. The first half performance of 2019 fiscal year was generally in line with our expectations. I'm encouraged to see the strategic actions we took in 2018 to reduce costs, improve product pricing, and operational processes and efficiencies have all translated into organic top line growth and better margins. While we still have work to do, it is encouraging to see we are not only on track to meet our fiscal year expectations, but we have continued to see our backlog grow.

We had four primary positive drivers of our business in the quarter. First, we had top line growth and better sales mix in both our Commercial and Recreation segments. Second, end-market demand remained strong in both F&E and Commercial segments, where we saw double-digit growth in backlog compared to the end of fiscal 2018. Third, and I would call your attention to Slide 4, a very important slide. I'm pleased to say our material lead times have returned to historical levels and our supply chain has stabilized. Lastly, our focus on improving efficiency of cash used in operating activities was lower both year-over-year and sequentially.

In terms of the issues that partially offset our performance in the quarter, we had two primary challenges. We experienced several inefficiencies during the second quarter as we continued to ramp our production capacity in fire apparatus to stay aligned with strong end-market demand. Secondly, the RV market and particularly the Class A market remained soft and detracted from an otherwise strong shipping quarter in our Recreation segment. I'll talk more about these challenges as we're in what we're doing to mitigate them shortly.

Moving to Slide 5, you'll see the positive backlog trends we experienced year-over-year related to strong Commercial and F&E end markets, which helped us maintain and grow very healthy backlog levels. Our strong backlog supports the financial guidance we provided you earlier in the year with the only exception being an adjustment to our GAAP net income assumptions. Dean will walk you through our guidance detail in a few minutes. In addition, given our confidence in our business plan and end markets, we opportunistically repurchased over 495,000 shares of our common stock for a total consideration of $5.3 million in the quarter.

Moving to Slide 6. As we announced last week, we were awarded a new five-year contract with the Fire Department of New York City for approximately 400 Type I Wheeled Coach ambulances. The contract is estimated to be approximately $160 million over the five years, and we expect to start shipping units by mid-fiscal 2020. This award demonstrates our strengths and competitive position in the market and the strong relationships we have with our customers. As you can see on the slide, this new order came after the quarter closed and therefore as additive to the backlog figures we have presented today.

Turning to Slide 7. I'll provide a few high level comments on our operating segments. First in our F&E segment, as already stated, we continue to ramp our fire apparatus operations to meet our growing backlog in the fire apparatus market. We are making significant adjustments to our manufacturing footprint and processes to allow us to ship more units. We are also adding a second shift to two of our three plants. It is relatively easy and quickly to reduce plant capacity, but is much more difficult to increase capacity which requires more floor space, tighter production planning, additional equipment and more trained people. We are steadily increasing our outputs on a weekly basis, but we don't anticipate that we will reach our planned fire truck production cadence until the end of our fiscal year in October.

In our Commercial segment, transit bus deliveries for the LA County contract began to ship as expected, and we also benefited from our deliveries of the New York City Transit Authority contract during the quarter. The LA County order and the strength of our bus backlog should position us well in this segment for the remainder of the year. Additionally, a product mix shift toward school and transit bus has also helped us to drive top line growth. Lastly, order growth in most of the product categories has translated into double-digit backlog growth versus the start of the year in this segment. And therefore, we expect the strong performance in Commercial to continue.

In Recreation, we were able to achieve organic top line growth despite the softening of the overall RV market from peak levels. We believe the outlook for our Class B, Super C and towable brands remains solid for the remainder of this year as we continue to work off some historical backlogs in these three categories, which helped us overcome a softer market for the Class A RV products. It should be noted, however, that based on our strategic decision to reposition our Class A product line, we have also achieved higher profitability with these products. We believe that our current portfolio of products has us well positioned to continue to capture share in the higher-end product categories we serve. Over the long term, we believe that our focus on new product innovation, attractive features and improved price points should enable us to outperform the industry.

To conclude, I remain confident in our ability to return to growth and achieve increased profitability. Second quarter results were in line with our expectations for the most part. And our view of end-market demand and macro conditions remains consistent. Our excellent collection of brands and products makes us the industry leader in essential needs products for commercial and municipal government customers.

Now I'll turn the call over to Dean for a detailed review of our financials.

Dean Nolden -- Chief Financial Officer

Thanks, Tim, and good morning. I will start on Slide 8 with a review of our consolidated second quarter results, followed by the performance of each segment. Consolidated net sales for the second quarter were $615 million versus $609 million in last year's second quarter, which is a 1% organic growth over the prior year. The increase in consolidated net sales was driven by top line growth in Commercial and Recreation segments, partially offset by lower net sales in the Fire & Emergency segment.

Net income for the quarter was $5.6 million or $0.09 per fully diluted share compared to net income of $7.4 million or $0.11 per fully diluted share in the second quarter last year. Adjusted net income in the quarter was $15.2 million or $0.24 per diluted share and was roughly flat compared to adjusted net income and diluted per share results in the prior year period. Adjusted EBITDA was $36.1 million in the quarter compared to $34 million in the prior year second quarter. The 6% increase in consolidated adjusted EBITDA was primarily due to growth and improved earnings in the Commercial and Recreation segments, partially offset by a decrease in earnings in the Fire & Emergency segment. We drove a 30 basis point improvement in our adjusted EBITDA margin year-over-year, which came in at 5.9% for the quarter.

Please turn to Slide 9 to discuss the performance of our segments. Fire & Emergency segment sales decreased by 1.9% to $247 million for the quarter. While ambulance sales were flat, a decrease in deliveries of fire trucks drove the top line decline as we experienced challenges in ramping up production levels to react to strong end-market demand. As we added additional shifts and brought on new employees at two of our five production facilities in the quarter, we completed and shipped fewer units than we initially expected. However, our backlog is firm and we plan to continue to ramp up our production capacity and cadence such that our fire businesses would continue to increase their output as the year progresses.

F&E segment adjusted EBITDA for the quarter was $15.1 million compared to $21.8 million in the second quarter of last year. This decrease in adjusted EBITDA compared to prior year period was due to the decrease in fire truck deliveries caused by inefficiencies as we ramped up production and the residual impact of material and supply chain issues on labor productivity at one ambulance facility. Our operations team has been focused on and continues to work with these specific facilities to increase output in the case of fire trucks and to improve flow and productivity at each facility. We are already experiencing improvements each week, and we expect to benefit from these initiatives in the second half of the year, which has set us up well for 2020.

Backlog in the F&E segment increased 11% to $787 million compared to $708 million at the end of fiscal 2018 and was up 7% sequentially. While our progress toward increased output has been slower than anticipated and impacted the backlog level at the end of Q2, the backlog growth was in excess of our shipment deferrals and therefore, is encouraging as we look into 2020. We expect our efforts to improve production throughput will drive return to sales growth in the second half of the year. We expect profit margins for this segment to improve sequentially, consistent with volume growth, but due to the time required to complete the ramp up of our fire production, we expect margin expansion in F&E year-over-year will be realized in Q4.

Moving to our Commercial segment. Quarterly sales of $170 million were up 8% compared to the prior year period, driven by an increase in bus sales as well as terminal trucks. This was partially offset by the sale of our mobility van business late last year. The increase in bus sales was primarily due to the commencement of our previously announced transit bus contract with LA County and the continued deliveries of the paratransit bus contract with New York City transit. The increase in terminal truck sales reflects strong end-markets and growth of our dealer channel for this business.

Commercial segment adjusted EBITDA for the quarter increased 54% to $14.7 million from $9.5 million in the second quarter last year, driven by strong sales of higher margin school and transit buses as well as terminal trucks. Product mix, in addition to higher volumes and the impact of recent operational improvement initiatives, drove adjusted EBITDA margin 260 basis points higher year-over-year to 8.6%.

The Commercial segment experienced increased demand across nearly all product categories in the quarter as well. Commercial backlog was up over 14% to $436 million compared to $381 million at the end of fiscal 2018 and was up 2% sequentially. As we look forward to the rest of the year, we continue to forecast a strong year within the Commercial segment with year-over-year improvements in sales and earnings expected to continue through the third and fourth quarters. In addition, we are optimistic regarding continued strength of our transit bus business into 2020 given the inbound order rates and existing backlog that is already scheduled to be delivered next year.

Lastly, in our Recreation segment, quarterly sales grew 1% year-over-year to $200 million, primarily due to increases in sales across the majority of the Company's RV brand lineup, partially offset by a decrease in sales of Class A motor homes. Recreation adjusted EBITDA increased 36% for the quarter to $17.3 million. The increase in adjusted EBITDA compared to the prior year period was primarily due to higher volumes in the more profitable Class B and Super C product categories and improved profitability in the towable product line.

Recreation backlog was $169 million compared to $290 million at the end of fiscal 2018. The decrease in backlog is due to softer demand in certain RV end-markets, but relatively in line with our expectations as Class A demand is softening from previous peak level. Despite this end-market softness, 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 over the long term. We also expect our remaining backlogs in Super Cs , Class Bs and towables will allow us to continue to outperform the industry this year. Having said that, we don't expect that the second half of the current year for Recreation segment will be as strong versus its prior comparables as it has been year-to-date as incoming order rates have been lagging shipments in some categories.

The second quarter for REV Group included both ups and downs versus our original expectations, which altogether resulted in a consolidated performance for the quarte that was for the most part in line with expectations, but we could have done better and we will do better. As seen in the results of our F&E segment for Q2, although our F&E sales were relatively flat with the prior year, they could have been higher without the operating efficiencies and we underperformed our potential when it came to our F&E adjusted EBITDA results in dollars and in margin. The issues in F&E during the quarter are isolated. They are known and the remedies are under way and within our control. We fully expect to improve in the second half of this year and most importantly, set us up well for continued growth in 2020.

Turning to Slide 10. We show our capital allocation over the last five quarters. Capital expenditures were $3.1 million in the second quarter compared to $10 million in the second quarter of 2018. We also continue to -- continued to repurchase our stock in the quarter albeit at a lower amounts than in prior quarters. We repurchased 495,000 shares in the quarter at a total cost of $5.3 million averaging $10.70 per share. Taking a step back, I'd like to talk about our capital allocation priorities in the short and the long term. We will always look to maintain a long-term balanced approach to capital allocation. And over the last few quarters, we've made a conscious effort to focus on organic sales growth and improving our operational performance.

As our performance continues to improve, we plan to invest both organically and opportunistically in M&A. We've also seen opportunity in our stock price and plan to take advantage of repurchase -- of our repurchase authorization during the third quarter if the opportunity presents itself. We have about $41 million of authorization remaining under our share repurchase program, and we will remain opportunistic, but measured in our repurchase activities.

Our capital allocation and shareholder return plans require a strong balance sheet. Net debt as of April 30, 2019 was $462 million. During the quarter, in order to improve our current liquidity, we increased the borrowings under our term loan facility from $125 million to $175 million and used the proceeds to repay borrowings under our revolving credit facility. Our net leverage ratio at the end of April 2019 was 3.2 times compared to 3.3 times at the end of the first quarter. As we stated last quarter, this metric should improve significantly going forward for the remainder of the year as we move into the strongest portion of our year and expect both the numerator (ph) and the denominator in the leverage calculation to improve. We continue to expect to reduce our leverage by more than one full turn by the end of this fiscal year versus the prior year-end to under 2 times.

As we mentioned last quarter, we expected to see an increase in net working capital in the second quarter. The increase in working capital was primarily due to the seasonal increase in inventory. However, at the end of the quarter, we did experience higher inventory levels in F&E due to the ramp-up of production and the inefficiencies we referenced earlier in our commentary. We expect this as a short-term impact, and improving working capital turns continue to be a very important area of focus throughout 2019 and beyond. In addition, we have seen $17 million of cash flow benefits year-to-date from our non-operating cash flow initiatives that we expect will total more than $40 million for the full fiscal year.

On Slide 11, we have our full-year guidance metrics for 2019. With the majority of our year ahead of us in terms of sales and earnings, we are reaffirming our prior full-year guidance for fiscal year 2019 revenues of between $2.4 billion to $2.6 billion, adjusted net income of $66 million to $84 million, adjusted EBITDA of $150 million to $170 million, net cash provided by operating activities of $110 million to $130 million and capital expenditures of $25 million to $30 million. Purely based on actual results through the first half of fiscal 2019 in the areas of stock compensation and certain legal settlements, we are adjusting our guidance for GAAP net income for the full year to be in the range of $31 million to $51 million.

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

Tim Sullivan -- President & Chief Executive Officer

Thanks, Dean. I'll close with the Slide 12. I think the headline for this quarter is that we believe that many of our headwinds are behind us, and we are well positioned for improved performance in the second half of the year. Let me list a few of the reasons and the key points where we think this is possible.

First and foremost, the actions we took in 2018 to better position the business are working. Secondly, the new tariff situation that most recently emerged remains generally outside of our business. And we believe we are prepared for any issues that should arise, and we expect the supply chain issues and material availability that have plagued us for over one year now are behind us. Third, the stickiness of our backlog is driven by the high level of customization of our products, coupled with the fundamental demand across most of our end-markets. And last, we remain fully focused on the things within our control, like driving overall profitable growth, improving our working capital turns and driving meaningful free cash flow. Therefore, we continue to believe that fiscal 2019 will see improved revenue growth, margin expansion and improved returns on capital. And everyone here at REV Group remains focused on delivering on those goals.

With that, we will turn the call over to questions.

Questions and Answers:

Operator

Thank you. 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

Hi, good morning everyone. This is Ben Burud on for Jerry.

Tim Sullivan -- President & Chief Executive Officer

Good morning, Ben.

Ben Burud -- Goldman Sachs -- Analyst

Within Fire & Emergency, so ambulance revenues were flat year-over-year in the quarter. Can you just kind of give us an update on where you think we stand in the ambulance demand cycle? And in addition, can you kind of give us the puts and takes for the balance of '19 in ambulance, specifically touching on the deferred shipments from last year that were, I think you mentioned going to impact some of Q2, but also mainly 3Q, 4Q?

Tim Sullivan -- President & Chief Executive Officer

Well, we went into, I think, this fiscal year with probably a little smaller backlog than is normal for us in ambulance and that affected to some extent our Q1 and to a lesser extent, in Q2. But our backlogs are really back to what I would call a more normal level. So we feel strongly about the fact that we can finish the year strong with ambulance. Ambulance is somewhat episodic. It depends on timing from municipalities and in particular on how they spend their money. And these things do have an ebb and flow to them, but we're very positive on the remainder of this year and as we move forward with the backlog that we do have.

Ben Burud -- Goldman Sachs -- Analyst

And then, any comment on the movement of the deferred shipments from fiscal '18 into -- I just wanted to make sure that if there was any impact in 2Q that we capture that. And I know a good amount was supposed to be captured 3Q, 4Q, if I remember correctly.

Dean Nolden -- Chief Financial Officer

Yeah, that's correct. This is Dean, Ben. Yeah. We experienced a little bit of that in Q2, but the most of the deferrals in the catch-up will be in Q3. And in addition to what Tim offered, we announced previously we had a fairly large order for FDNY that kind of bridged the gap between their old contract and the new contract of 76 units and then, that's going to be starting to ship here in the second half of the year; that'll help.

Tim Sullivan -- President & Chief Executive Officer

Yeah. And take a good look at Slide 4. Slide 4 really shows you the delay that we had in things like chassis and material. That really has pushed some of those delayed shipments further into the back half of fiscal '19 and we're in clear catch-up mode now.

Ben Burud -- Goldman Sachs -- Analyst

Understood. And then, from a higher level, just curious if internally have you taken a stab at attempting to adjust for all the headwinds you faced over the last 12 months and maybe arrive at what your normalized EBITDA margins would have been mainly asking in the context of where you think you are on that long-term journey to to a 10% EBITDA margin target

Tim Sullivan -- President & Chief Executive Officer

Yeah, I think obviously, we took a bit of a hit as we moved through the back half of fiscal '18 primarily with the material cost increases, but we're back where literally we were effectively a year ago before all that happened. So we're well into recovery mode on margins. We saw margin improvement in this quarter and that will continue through three and four. And now that we've got our price increases out there to take basically absorb some of the cost increases that we did (inaudible). We're actually in very good shape from a margin standpoint in most of our product lines. The ones that have struggled in the past, we're still working on those, but we are making progress across the board on that journey toward 10% across the board.

Ben Burud -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

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

Themis Davris -- Credit Suisse -- Analyst

Yes, hi, this is actually Themis on for Jamie. I was wondering if we could switch gears a bit and talk about Recreation. On the backlog weakness, you noted a softer Class A market, which does make sense. I was wondering if you have a sense of backlog performance on a year-over-year basis excluding the As?

Tim Sullivan -- President & Chief Executive Officer

Yeah. The market has softened up across the board in all aspects. I think if you look at the reports from the first quarter of calendar '19, virtually every category was off as far as retail sales. We have really strong backlogs in the three areas that we highlighted. But we have -- we are beginning to work those backlogs down. Having said that, we still have several weeks if not months of backlog in the three areas beyond the Class A.

Themis Davris -- Credit Suisse -- Analyst

Understood. And then maybe on the margin side, could you help us with your margin assumptions in the back half of the year given what sounds to be like a weaker top line?

Tim Sullivan -- President & Chief Executive Officer

Margins will improve as we move through Q3, Q4. Again, it's catching up with the price increases that we put in place to absorb the cost increases on material that we got the third and fourth quarter of last year, so margins will be improving.

Dean Nolden -- Chief Financial Officer

And specifically, if you're referencing the Recreation segment, I think the second half in my commentary for Recreation won't be as strong of a year-over-year comp for Recreation as it was year-to-date just because of the reduction in some of the incoming order rates and the impact there.

Themis Davris -- Credit Suisse -- Analyst

Thank you for the color.

Dean Nolden -- Chief Financial Officer

Overall improvement for the Company.

Operator

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

Patrick Wu -- Wells Fargo Securities -- Analyst

Hi, good morning, everyone. This is actually Patrick Wu standing in for Andy Casey. Thanks for taking our questions. Just wanted to get a good sense of how your backlog churn rate is right now versus how it was historically? And I guess if you can provide some color on each of the segment that will be helpful. Are there drastic differences between the segments in terms of the churn rate?

Tim Sullivan -- President & Chief Executive Officer

The backlog is up over history, primarily due the fact that we have not lost any backlog due to cancellations and everything got delayed because of material shortages and chassis shortages. So, if we compare where we're at now to history, we're well above historical backlog levels.

Patrick Wu -- Wells Fargo Securities -- Analyst

Well, I guess I'm just more interested in how quickly you guys are turning your backlog now versus before, I would imagine is slightly slower given some of the inefficiencies.

Tim Sullivan -- President & Chief Executive Officer

No, just the opposite. It's actually accelerating. Now that we have material available and chassis available, the only area where our churn of backlog is not where we want it to be is in our Fire segment. And that's because we're in the throes of doing a major expansion at all three plants to meet the increased demand that we've got in the marketplace. But as far as churning through backlog, it's accelerating as we move through the back half of the year.

Patrick Wu -- Wells Fargo Securities -- Analyst

Okay, fair enough. It also looks on one of your slides the lead time for pumps has climbed a little bit. I guess just what kind of actions are you guys taking there to ensure that it doesn't delay, I guess some of your shipments in the second half? And did you add any inventory in that category here in first couple of quarters to ensure no future unexpected disruptions from that?

Tim Sullivan -- President & Chief Executive Officer

Yeah. When we have something like that, that happens, we do a couple of things. First of all, we obviously try to build some inventory around that particular product. Secondarily, we explore alternatives that to make sure that we're covering our basis to the best we can, which is what we did as we moved through last year. So we can pretty well mitigate those types of things. And that one is not hurting us too bad right now, but it's certainly in our watch list.

Patrick Wu -- Wells Fargo Securities -- Analyst

Okay, thank you.

Operator

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

Chad Dillard -- Deutsche Bank -- Analyst

All right. Good morning, everyone.

Dean Nolden -- Chief Financial Officer

Good morning.

Tim Sullivan -- President & Chief Executive Officer

Good morning.

Chad Dillard -- Deutsche Bank -- Analyst

So just a question for you guys on dealer inventory levels on RV side, can you just talk about where you expect them to be exiting the year and then also your plans to produce relative to the retail demand?

Tim Sullivan -- President & Chief Executive Officer

Yeah, I think the retails are moving down. I mean, there is sales happening, but the dealers really aren't replenishing to the levels historically that they have in the past, primarily due to the softening in the retail market. So, everything is going to slow down. The good news is, is that we have some good backlogs in three of our four classes of RV. We continue to ship on those backlogs. But the market has softened. Retails are down, which means that wholesale orders will also be down commensurate with those retails.

Chad Dillard -- Deutsche Bank -- Analyst

And then switching over to Fire & Emergency, you mentioned there is $160 million award announcement. Just trying to understand what the cadence is between, I guess I believe there's a, I guess, five-year order period or delivery period? Just want to understand like what the cadence was on that?

Tim Sullivan -- President & Chief Executive Officer

Yeah, those are important orders and that's the reason why we actually put press releases out. That order will be about 80 to 90 ambulances a year for the City of New York over the next five years. And that's important because that gives our plants a nice base load. Same thing with LA County. We announced that one because that's been a great base load for us beginning here in the second quarter. Those base loads just really help us from an efficiency standpoint. So they're critically important. That's why we do announce them.

Chad Dillard -- Deutsche Bank -- Analyst

Great. Thanks. I'll pass it along.

Operator

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

Peter Ziel -- Robert W. Baird -- Analyst

Hi, good morning. This is Mr. Peter Ziel on for Mig Dobre. I was wondering on -- in Fire & Emergency, the backlog (technical difficulty) Hello?

Dean Nolden -- Chief Financial Officer

Yes, we are here.

Tim Sullivan -- President & Chief Executive Officer

We can hear you.

Peter Ziel -- Robert W. Baird -- Analyst

Sorry. So the backlog there is relative to if we look at fiscal '18 and fiscal '17, and just kind of how we're thinking about this second half sales, it's quite a bit higher than past years. Obviously, some of that is due to these inefficiencies that you've mentioned. So I'm just curious if you guys have an idea of, I guess, in relative terms what's kind of the good backlog build from the end user demand growth versus what part of that is coming from the inefficiencies and the inability to convert on backlog.

Tim Sullivan -- President & Chief Executive Officer

Yeah. Let me answer the first part first. Because you have to really take them separately. Ambulance, as I talked to the other question kind of ebbs and flows, but it's steady. It's been a very steady market for us here quite frankly after pent-up demand was addressed here over the last couple of years. The mix kind of changes around a little bit, but as you recall 60% of ambulance business is contractors; 40% are municipalities. But it's good, steady and very reliable backlog.

What we're seeing in Fire is different. The demand in Fire is increasing. If you recall, we have not really been at historical levels for demand on fire apparatus for the last three or four years. We're lagging probably the last average 15 to 20-year demand. We're seeing that now. That's why we're expanding our plants. That's why our lead times are out significantly and this is across the board in the industry, all of the people that makes fire apparatus have very long lead times right now because demand is up, and it wasn't -- we anticipated that. We just didn't know how it was going to come and when it was going to come, but demand is up and that's why we're making some investments in our plants to increase demand. As we make those investments and as we grow our plant capability, we are able to maintain shipment levels that are to plan, but they will be increasing over time just because the demand is up.

Peter Ziel -- Robert W. Baird -- Analyst

Thank you. And then follow up shifting to Recreation and I think one of the prior questions kind of touched on this into Dean's comment on some of the softening in 2H given backlog in orders, but still outperforming the industry. That leaves a pretty wide gap just given that I look at like the last nine months, you guys have been relatively flat versus the industry being down around 20%. So, even in some order of magnitude, can you give us some indication kind of -- what kind of decline you would expect relative to mid-teens, 20% declines we're seeing for the industry and also shipping?

Tim Sullivan -- President & Chief Executive Officer

Yeah, we actually -- as you correctly said, we're effectively outperforming some of our competitors and that's primarily due to what we do sell. The products that we sell tend to be on the high end and they tend to be a little niche so to speak. And we believe that as we move forward through the market even as the market is softening, we expect to be outperforming the general market from that standpoint. And then -- go ahead.

Dean Nolden -- Chief Financial Officer

Yeah, if you look at the forecast for the market to be down double-digits in 2019 versus prior year will be -- hopefully, we think will be flat to low-single-digits for us down year-over-year because of the strong backlogs.

Tim Sullivan -- President & Chief Executive Officer

Yeah. As are going to be challenged. As are just not performing at the level that any of us expected. But again, we like how we are positioned. We are positioned our product line to the high end, and it's the more profitable end of the Class A RV market. So in summary, you've got it correct. The market softened, but we're weathering the storm, I think, better than most.

Peter Ziel -- Robert W. Baird -- Analyst

All right. I appreciate it. I'll leave it there.

Operator

Thank you. (Operator Instructions) Our next question comes from line of Joel Tiss with BMO Capital Markets. Please proceed with your question.

Joel Tiss -- BMO Capital Markets -- Analyst

Hi, guys how's it going.

Tim Sullivan -- President & Chief Executive Officer

Good morning, Joel.

Joel Tiss -- BMO Capital Markets -- Analyst

I wonder if you could talk a little bit about the pricing trends on some of your new backlog. Is it implying better profitability out -- further out than where you are now?

Tim Sullivan -- President & Chief Executive Officer

Yeah, for sure. We reacted strongly to the cost increases that we got last year and not knowing how we would be affected as we move through Q3, Q4 and then in Q1. We've stayed well ahead of any potential cost increases that we would get on material. The good news is that the cost increases really slowed down quite a bit to the point that we're well ahead of those cost increases. So, we like where we're at. We like we are positioned on pricing as we move into Q3, Q4.

Joel Tiss -- BMO Capital Markets -- Analyst

Okay. And Dean, do you have any free cash flow estimate for us for 2019?

Dean Nolden -- Chief Financial Officer

Yeah, we gave some some pieces, but we've said between $110 million and $130 million of cash from operations, $25 million-ish of CapEx and about $40 million of other items that are -- we are generating non-operating cash flow from, so between those three items, that should be on free cash flow.

Joel Tiss -- BMO Capital Markets -- Analyst

And I wonder if you can frame for us a little bit the run rate for 2020 for the fire business. I'm not asking for an official forecast, but just how do we think about the run rate once you fully ramp up? Is it kind of 10% higher or is it -- can you just give us a little ballpark there? Thank you.

Tim Sullivan -- President & Chief Executive Officer

Let me give it to you this way because that would kind of fall into more guidance. But if you look at fire apparatus and you go back far enough, the run rate -- the annual run rate was around 5,000 units a year. Last decade, it ballooned to 6,000 units per year because the municipalities were federally funded with funds that they've never seen before as a result of 911. That meant that as we rolled into this decade, we really fell down to a run rate just at 4,000 and slightly above 4,000. We're seeing the market now starting to creep back toward that 5,000 level and we're running more at a level of around 4,500 units. So you can kind of do the math, Joel. That's -- we got a ramp to those percentages, not just us but across the industry to meet the demand that we're seeing as we move into 2020.

Joel Tiss -- BMO Capital Markets -- Analyst

All right. That's great. Thank you very much.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Sullivan for any final comments.

Tim Sullivan -- President & Chief Executive Officer

Well, thanks again for joining us. I guess, I said the headline for Q1 was we've seen the bottom. The headline for Q2 is we're back on our feet and we're beginning to jog. I guess the headline that we're trying to explain for Q3, Q4 is now we're going into a run and we're getting back to more normal levels of production and more normal levels in line with the guidance that we gave you earlier in the year. So we feel good about the position that we're in. We feel really happy about the fact that our lead times are back down to where they should be. And that should help us respond to the market and the demands that are strong and continue to work off our backlogs.

Again thanks for joining us. We'll be talking to you again in the first week of September.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 42 minutes

Call participants:

Drew Konop -- Investor Relations

Tim Sullivan -- President & Chief Executive Officer

Dean Nolden -- Chief Financial Officer

Ben Burud -- Goldman Sachs -- Analyst

Themis Davris -- Credit Suisse -- Analyst

Patrick Wu -- Wells Fargo Securities -- Analyst

Chad Dillard -- Deutsche Bank -- Analyst

Peter Ziel -- Robert W. Baird -- Analyst

Joel Tiss -- BMO Capital Markets -- Analyst

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