Blue Bird Corp (BLBD) 2018 Q3 法說會逐字稿

Good day, everyone, and welcome to the Blue Bird Corporation Fiscal 2018 Third Quarter Earnings Conference Call and Webcast.

Today's conference is being recorded.

And at this time, I'd like to turn the conference over to Mark Benfield, Director of Investor Relations.

Please go ahead, sir.

Thank you, Yolanda.

Welcome to Blue Bird's Fiscal Third Quarter 2018 Earnings Conference Call.

The audio for our call is webcast live on blue-bird.com under the Investor Relations tab.

You can access the supporting slides on our website by clicking on the presentations box on the IR landing page.

Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different.

Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC.

Blue Bird disclaims any obligation to update the information in this call.

This afternoon, you will hear from Blue Bird's President and CEO, Phil Horlock; and CFO, Phil Tighe.

Then we'll take some questions.

Phil?

Well, thanks, Mark.

So good afternoon, everyone, for joining us, and thanks for calling in today for our third quarter earnings call for fiscal 2018.

We welcome this opportunity to share our latest quarter results with you.

So let's start with an overview of our financial results on Slide 4.

Let me begin with a comment on the industry outlook.

We still expect new bus sales to be flat to slightly higher than last year and should again exceed 35,000 new buses.

This is strong demand, and would be the second-highest school bus industry since 1985.

This is a good industry to be in right now.

So at Blue Bird, we achieved strong sales results in the third quarter with almost 3,750 buses sold, which is only about 100 units below last year's record sales for a third quarter looking back over a decade.

So a very strong unit sales quarter for us.

Additionally, it represents a substantial 53% increase over this year's second quarter unit sales.

So for the first 9 months of the year, unit sales are up a little over 2% from last year.

Importantly, in the third quarter, almost 20% of our end customers were new to the Blue Bird brand, representing about 30% of our total sales.

That's a really strong endorsement of our products and dealers with gasoline and diesel-powered buses leading the way in conquest business.

At $340 million, third quarter net sales revenue was 6% below last year's level, reflecting a lower volume and mix changes, I just mentioned, led by higher gasoline and diesel bus mix this year, priced little lower than the average.

At $23.7 million, third quarter adjusted EBITDA was $9.2 million below last year.

Now we mentioned in our prior earnings call that we were experiencing significant headwinds in commodity costs, led by escalating steel prices related to the tariffs imposed by our government, which were not anticipated earlier in the year.

As you are no doubt aware, other automotive manufacturing industries have been similarly impacted by higher steel prices, which together with higher freight costs will explain our lower third quarter profits compared with last year.

It's important to note, however, that we've taken specific action to offset this issue going forward, and I'll discuss the specifics of this just a little later.

Adjusted net income and adjusted diluted earnings per share were both higher than the same period a year ago, and on a GAAP basis, both net income and diluted earnings per share also improved from a year ago.

Adjusted free cash flow for the quarter was strong at $36 million, which is $22 million higher than the same period last year.

Looking ahead, our production schedule is now full through fiscal 2018, so we have a solid line of sight to our fourth quarter sales and margins and our backlog of firm orders of fiscal 2019 is up over 50% from this time last year.

We're projecting double-digit growth once again in alternative fuel powered bus sales with a record sales mix at nearly 40% of our total unit sales.

That's up from the prior record of 34% last year and another strong year for the industry's best-selling alternative fuel powered school bus.

As a reminder, in alternative fuels we count all of our propane, compressed natural gas, gasoline and our all new electric powered buses, as all of these are alternatives to diesel, which has been the staple fuel for years.

Now for the last several years, we've been achieving significant growth in alternative fuel bus sales, and as I just discussed, we've not slowed down this year.

I mentioned earlier that we've taken specific action to address the unexpected and sudden steel price escalation that impacted the third quarter.

So let me cover these now.

First, we increased prices on all of our bus models in June to cover the higher cost of steel.

Now there is a lag before this takes effect -- full effect, however, as our order backlog is price protected and quotes for new business, which represent our pipeline for future orders are guaranteed for 90 days.

So our ability to offset this third quarter steel cost increases within the quarter was limited.

Consequently, the impact of our cost recovery pricing action won't be seen until late in the fourth quarter, and of course, will apply fully to fiscal 2019.

Second, as I communicated previously, we're well underway on the transformational initiatives we kicked off in the first quarter, which are focused on accelerating our margin growth.

While we made significant progress on reducing procurement costs, we will see these margin improvements taking hold in the fourth quarter.

Importantly, fiscal 2019 will benefit substantially for the full year flow-through of these actions.

I'll touch on this again later in the outlook section of the presentation.

As a result of the sudden adverse impact of economics on third quarter earnings, we are lowering our full year guidance.

But we do expect to restore profitability and margins in the fourth quarter and beyond as we see the improvements from our pricing and cost reduction actions taking effect.

Let me now review our year-to-date key operating achievements on Slide 5. We recorded a number of significant achievements and each one will make us more competitive and support our profitable growth going forward.

I'm excited to report that we recently have achieved EPA and CARB certification of our class leading propane bus at a NOx emissions level of 0.2 grams per brake horsepower hour.

We already were the market leader at 0.5 grams NOx emissions, but the best just got better.

This means our propane engine emits just 1/10 of the NOx level that our competitors offer.

And that's great news for our customers, but even better news for the children who ride our buses and for their parents.

So with the broadest range of low emissions vehicles in the market, including our 0 emissions Type C and Type D electric-powered bus, we continue to be the undisputed leader in the fastest-growing segment of the business.

Speaking of electric buses, our first production Type D electric bus rolled up its line last week and delivers will commence this quarter.

As a reminder, we're only the nationwide school bus manufacturer today that offers electric-powered school buses in Type C and Type D configurations.

And we've had a great customer response to our more than 20 ride and drives across the country, great feedback from our customers.

Construction is well underway for our all-new automated paint shop with pilot runs and validations scheduled for this fall.

This is a key initiative for efficiency improvements next year.

As I mentioned earlier, we price to recover the recent tariff related escalation of steel cost prices, and this will take hold late in the fourth quarter and fully apply in fiscal 2019.

Looking at orders.

Our fiscal 2018 bookings and total order backlog, which includes fiscal 2019 orders, are up 4% from a year ago, which is a strong position to be in against a relatively flat industry outlook.

And our fourth quarter production slots are now full with noncancelable orders.

Importantly, our alternative fuel bus delivers for fiscal 2018 and backlog are up 16% from the same time last year.

That's another substantial growth in alternative fuels for Blue Bird, and we anticipate that nearly 40% of our bus sales this year will be powered by alternative fuel engines.

Just a few years ago that was less than 5%.

It shows what a way we have come, we're almost 40% now in nondiesel engines that Blue Bird sells.

Working with industry experts our transformational plans to improve margins are on track, driving improvements in quality, cost and efficiencies and capacity.

We expect significant cost savings and margin growth in the fourth quarter and beyond supporting our plan for continued margin growth towards our 10% EBITDA margin, our objective.

We are reducing full year guidance as an outcome of our third quarter results and the impact of the sudden escalation of steel prices and other commodities.

Despite these headwinds, however, with expected profit recovery in the fourth quarter, fiscal adjusted -- fiscal 2018 adjusted EBITDA guidance is slightly higher than last year's results.

So now let's take a closer look at our second quarter financial results on Slide 6. I touched on many of these financial results earlier and Phil Tighe will run through these in detail later on.

So just to summarize the third quarter, total net sales on adjusted EBITDA were down as we were about 100 units lower than the record third quarter volume of last year, and we had a higher mix of gasoline and diesel powered Type C buses.

And of course, steel economics hit us hard in the third quarter with little ability to offset the cost impact within the quarter.

Part sales were up a strong 9% in the third quarter as we added new parts to our product range, and we saw increased sales through our franchise dealer channel.

Through the first 9 months of the year, total net sales were up $15.4 million, while adjusted EBITDA was down by $4.4 million, more than explained by the third quarter decline.

Turning now to Slide 7. Let's take a closer look at our alternative fuel bus sales performance.

As the chart to the left shows, we're well on our way to achieving a new full year sales record of around 4,500 alternative fuel powered school buses.

That's a 16% increase over last year.

As I mentioned earlier, we expect the mix of these buses to be nearly 40% of our total sales, up from 34% last year.

We continue to be the clear leader in the fastest-growing school bus segment with our market share now running at about 80% and certainly over that in some parts of the country.

We now have more than 17,000 alternative fuel powered school buses on the road and with less than 15% of school districts still haven't purchased -- not having purchased an alternative fuel powered bus, we're well positioned for future growth.

We offer the widest range of alternative fuel powered buses and the most modern and proven engine in the industry.

With our exclusive long-term partnership with Ford and ROUSH CleanTech across all alternative fuel engines, it makes it easy for customers to grow alternative fuel fleet with Blue Bird.

With the same engine architecture, transmission and service requirements, across all 3 products, propane, compressed natural gas and gasoline, it's an easy move for a school district or a fleet operator.

Propane is widely recognized as having the lowest total cost of ownership in the market and is a green engine.

Our latest EPA and CARB certification for emitting nitrogen oxide or NOx emissions at 0.2 grams for brake horsepower hour is 1/10th of other manufacturers' buses.

I want to repeat that, that is 1/10th of the other manufacturers' emission level.

These gases contribute to the formation of acid rain and smog.

So the best-in-class level of NOx is another great reason for choosing Blue Bird propane.

Now despite our growth, in the past few months we've seen some customers elected to push their propane purchases to fiscal 2019 in anticipation of receiving funding for the VW Clean Air Act Settlement fund later this calendar year.

That fund targets the replacement of all diesel buses with new school buses that emit low levels of NOx emissions.

Our propane, compressed natural gas, electric powered buses are perfect choices to utilize these funds.

No one is in the position we are to capitalize on utilizing them.

Our gasoline engine is readily understood by technicians and mechanics who really appreciate the machine simplicity and cold weather start capability it shares with propane.

It also has a low price point than diesel, so it really works for those customers where acquisition price is a key concern and sales are extremely strong this year.

We're taking orders for our all new Type C and Type D electric buses with deliveries beginning this quarter.

As we look forward to next year and beyond, with the broadest range of cleanest low NOx school buses in the industry, 8x more alternative fuel powered buses on the road than all of our competitors combined and still less than 15% of customers having tried an alternative fuel powered school bus, Blue Bird is in very strong position.

Let me now turn it over to Phil Tighe, who will take us through the financials, then I'll be back later to cover the fiscal 2018 outlook and guidance and a first look at fiscal 2019.

Over to you, Phil.

Thank you, Phil.

Good afternoon, everyone.

The next few slides are a summary of our financial performance for the third quarter.

Phil has already hit some of the highlights for you, and we'll spend a little bit of time with some detail.

Additional information is available in the appendix and deals with reconciliations between GAAP and non-GAAP measures as well as important disclaimers.

Detailed material is available in our 10-Q, which has been filed.

We encourage you to read the 10-Q and the important disclosures that it contains.

The material we're discussing today is based on the close as of June 30, 2018, for the '18 fiscal year and July 1, 2017, for fiscal year '17.

I would point out there are no significant changes in our critical accounting policies in the period.

And risk factors are unchanged from the previously filed 10-K.

And let's now take a look at our summary of results shown on Slide 9. This slide summarizes our actual results for the third quarter and the same period of 2017.

We also included second quarter of fiscal year 2018 results as we believe there are some important points about that you can draw from that and the importance of seasonality in our business and to highlight progress in some key areas.

Looking at volume for the third quarter, Phil has already talked about this, 3,746 units, about 100 units down versus the record volume achieved in 2017.

We've talked previously about the highly seasonal nature of the school bus business and the fact that generally production and sales in the first half is less than 40% of the full year, so you can see the growth in volume from second quarter to third quarter of over 1,300 units.

We expect volumes in the fourth quarter will be similar to the level achieved in the third and higher than the fourth quarter period last year.

Alternative fuel vehicles, as Phil mentioned, accounted for about 35% of our third quarter volume, and we're looking at about 40% alternative fuel for the full year.

We also -- I think we're very happy to be announcing that we'll be making delivery of our first electric buses in the fourth quarter.

Net revenue, as mentioned on the prior slide, is down by about $18 million or 6%.

The revenue decline is really attributable to 2 factors.

One is the lower volume, which is a substantial part of the decline.

The other is unit revenue decline, which is partly -- primarily due to changes in the mix of products sold.

We had a very strong quarter with gasoline buses, which is our lowest-priced bus in the market and a great bus for people who are very acquisition price minded.

And we also were very strong in the Type C diesel bus market in the third quarter and that also contributed to lower average revenue.

So gross margin is another thing I would like to point to.

It was 11.8% for the quarter, it was down about 1.7 points below last year, but importantly, it was up by almost 2 points versus the second quarter where we hit 10%.

So you could see we are improving in the second quarter -- in the third quarter versus second, and we'll see further improvement in the fourth quarter.

Commodity costs, as Phil has talked about were the majority of the reasons for the reduction in margin.

Our cold-rolled steel prices and that's the majority of the steel we buy, is cold-rolled, were up about 27% versus second half of the prior year.

While we are beginning to see some reduction in the long-term outlook, still continues to be a major factor in our profits for the balance of 2018.

In addition to commodity costs, we continue to experience higher inbound freight costs, something that we discussed in our prior 2 reports.

The higher freight costs are due to diesel, which is up substantially and the shortage of drivers.

Freight costs in total are up about 29% compared to the same time last year.

Material and freight economics combined deteriorated Blue Bird's margin by almost 2 points in the third quarter.

Absent this impact, our margin ratio would've been about the same as last year.

As previously -- as Phil has discussed, we're working on a broad range of actions to reduce our production cost and improve ongoing margins.

These plans are unchanged.

We're sticking with them, and they're starting to deliver what we had predicted they would.

And you'll see some impact coming in the fourth quarter and a significant improvement in fiscal year '19.

In late June, again, we implemented pricing to help offset the cost increases that we had experienced, but we will not see a major contribution of that pricing to our profits until fiscal year '19 as Phil explained due to the way that prices are locked in for firm orders in advance of production.

As previously discussed, the initial benefits from our operational transformation initiative provided a small offset to margin reductions in the first half.

We continue to make progress in third quarter, and we expect the initiative to have a more substantial impact on margins in the fourth quarter and beyond.

Net income, I think, we've already covered, but it is at $21.9 million that was about $1.9 million better than last year despite the lower EBITDA and adjusted diluted earnings per share at $0.91 was up by $0.21 versus last year.

Favorable tax treatment was the primary driver in the net income result, offsetting the reduction in gross profit, driven by lower volumes and higher costs.

We'll talk about the adjusted EBITDA margin on the next slide.

Debt and cash always important.

We closed the quarter with $41.9 million of cash.

This was down by $8 million versus prior year and that was more than accounted for by CapEx spending in the relevant period to support upgrades to our production facility.

You've heard previously that we are putting a new paint shop in and doing other things in the plant.

Debt was reduced by $7 million in the period.

So really the change in net debt was about $1 million for the quarter.

And please note the large increase in cash between the second quarter of '18 and the third quarter of '18 again pointing out to the seasonality that we experienced in this business.

If we can go to the next slide.

This is a bridge that walks from third quarter of fiscal year '17 to the same period in fiscal year '18 on an adjusted EBITDA basis.

You can see the deterioration of about $9 million compared to last year and the 2 big items that caused that, bus volume and mix obviously was down due to the 100 less units and also the higher mix of Type C diesel buses.

Gross profit was also down by about $6 million and this is all attributable to higher material costs and freight.

The rapid increase in the material and freight economics in the third quarter were really responsible for us not achieving a substantially better result.

As you could see, there were no other really major concerns in the third quarter for us.

We're taking aggressive actions to offset as much of the impact of higher costs as we can in the balance of the year although it is clear that a full offset cannot be achieved in 2019 (sic) [2018].

On the next slide, Slide 11, is a brief graphic of what's happened with steel and with freight.

You can see hot-roll is actually up about 55%, cold-rolled up about 27% and then freight around 29%.

I would point out that it appears that hot-roll -- maybe -- we may start to see some downward turns, the 12-month forward prices for domestic Midwest hot-rolled steel is showing a reduction of about $150 a ton about 12 months out.

This is a promising indicator although there is still a lot of uncertainty.

And I don't think we can actually bank on that at the moment.

So again I would just summarize that we're taking really 3 significant actions.

As Phil mentioned, we've already implemented pricing in June.

We will see a small impact of that in the fourth quarter, but it will substantially impact us in fiscal year '19.

We're also working at whatever levers we can pull to resource to lower cost areas or suppliers and taking other actions to generally improve that cost structure.

And obviously, we are full steam ahead on our transformational initiative program and considering some expansions to its scope at the present time.

With respect to freight, we're working with our logistics suppliers to identify less expensive options, although it will be difficult to offset the magnitude of this increase without a reduction in fuel prices or more capacity being added to key routes.

On the next slide, which is Slide 12, we talk to an outlook for the fourth quarter '17 to the fourth quarter of '18.

This is not something that we typically provide in our calls, but we thought for obvious reasons given that we've only got 3 months to go, it was something that would be useful.

But please don't read this as an indication that we're committing to regularly update on 1 quarter out projections.

As you can see, we project the fourth quarter will be around $7 million better than last year.

Volume and parts will be up and mix does not seem to be a problem for us.

I would remind you that right now, we have total visibility to our bookings and backlog for the balance of this year.

So we have a fairly firm hand on that.

You can see the impact of economics.

It continues to hit us reasonably hard in the fourth quarter.

We're looking at about $7 million year-over-year.

And finally, you see that we have a large number called All Other that is a lot of cost initiatives that we've been taking to reduce costs and maintain profits, at least at a bit above last year, and also obviously, it does include the fourth quarter outlook for our transformational initiative, which is starting to take serious hold.

I guess, importantly, if you took out the economics or the unexpected part of the economics, our fourth quarter would be looking much closer to $40 million than $30 million, which would have been a great result for Blue Bird.

I'll move now to the next slide, which is Slide 13, which is free cash flow.

We had a strong quarter for free cash flow at $31.5 million for free cash flow and $35.7 million for adjusted free cash flow.

The lower adjusted EBITDA and higher CapEx were more than offset by favorable trade working capital and other expenses.

Our strength in cash generation continues to allow us to support the substantial changes we're making to achieve our long-term profit targets and create even greater value for our shareholders.

The final slide for me is one that looks at net debt, liquidity and leverage.

Net debt at the end of the third quarter stood at $103.9 million, including $41.9 million of cash.

This is about $33 million better than the results at the end of the second quarter.

The net leverage ratio of 1.9 was substantially below the required level of 3.75.

Liquidity stood at $110 million, $31.6 million better than the end of the second quarter and then there was no drawing on the revolver.

So thank you for your attention.

I'll now turn you back to Phil, who will talk about our outlook for the balance of 2018.

Okay, well, thanks Phil.

So let's now focus on the outlook and our full year guidance.

Let's turn to Slide 16.

As I did mention at the start of the presentation today, we do anticipate another strong industry, about 35,000 units or slightly higher.

So again this is a 30 year high business we're operating in right now.

So we feel really good about where we are.

That said, we expect Blue Bird sales growth to be in the 3% range, just little bit above the industry growth.

So that's a strong position as well to be in.

Second half adjusted EBITDA margins will be better than the first half, but lower than expected in the third quarter.

We are forecasting margin recovery in the fourth quarter, as Phil showed you on the bridge, from cost recovery pricing, which is late in that quarter and the cost reductions that we talked about.

Now our focus on fiscal 2018 is on transforming our business structure through a series of cost efficiency, quality, capacity and product actions.

Really, this is a multiyear sort of upgrade here we're doing, but very much focused this year and early next year on transforming our operations.

We had set a goal this year, as you know with 8% adjusted EBITDA margin, up from 7% last year.

Well the impact of the escalating steel prices that we talked about and other commodities in the second half that's through the third quarter and what we will see also in the fourth that is accounted for about 1 point of full year EBITDA margin.

And so we expect now to be around 7% again for the full year.

So again we're really telling you that if you look through the unanticipated steel economics we saw along with some other commodity increases, had they not happen, would have been about an 8% EBITDA margin for the full year.

So again that's one reason we're down and looking at 7% again.

However, importantly, as we exit the year, the actions we have taken on pricing and cost reduction position us extremely well to grow the margins next year and towards a desired range of 10% to 12% EBITDA margin in the coming years.

And finally, as you know, we strive to create shareholder value.

And I'm sure, you're all aware we initiated 2 in fact stock repurchase programs this past year.

While I'm pleased to announce that our Board of Directors has approved a $50 million tender offer to repurchase shares at a premium to market, we expect to initiate this tender offer in mid-September and we'll release further details at that time.

So let's now turn to fiscal 2018 guidance on Slide 17.

First, we've narrowed our net sales guidance to between $1,010,000,000 to a $1,020,000,000, about $20 million less of a raise than we had previously.

Our adjusted EBITDA guidance is now between $70 million to $72 million.

That's a slight increase over fiscal 2017 results despite the significant commodity headwinds, which we saw in the second half, but is down from our prior guidance of $80 million to $85 million.

Adjusted free cash flow is now between $30 million to $34 million, reflecting a lower profit outlook.

Adjusted free cash flow, as Phil mentioned, continues to be a strong feature of our business model, representing 40% to 50% of adjusted EBITDA despite the plant facility upgrade investments we're making in fiscal 2018.

Now the slide shows our forecast for the fourth quarter, consistent with our revised guidance, and Phil showed you the bridge between 2018 and 2017.

I think the important point I want to make here is that volume and profit outlook is for a record fourth quarter as we look back over the past decade, as we expect to recover from the profit shortfall we saw in the third quarter.

As you know, we're taking pricing actions, we're taking cost recovery actions and they are already planned and already initiated actually in the fourth quarter.

So let's now take an initial look at fiscal 2019 on Slide 18.

As we look to 2019 outlook, we expect higher gross profit margins and overall profitability in fiscal 2019 from 3 key areas.

First, the impact of the cost recovery pricing that we took in late fourth quarter.

This will have a full annual effect and significant annual effect in fiscal 2019.

Second, the full year impact of the transformational cost-reduction initiatives that we implemented in late fiscal 2018.

The following slide will depict the significance of this, and I'll cover that in just a second or two.

And third, the planned facility and process improvements we are making to increase manufacturing efficiency this year will help drive margin improvement in 2019.

We expect financial targets for fiscal 2019 to be on the glide path towards our previously communicated EBITDA margin goal of 10%-plus by fiscal 2020.

And we'll provide fiscal 2019 guidance at our next earnings call in December.

So let's now turn to Slide 19 to begin to see how our transformational cost reduction should impact fiscal 2019.

It's a fairly simple slide, but I think you can see that we will be exiting fiscal 2018 with significant run rate savings from actions that we've already taken in 2018 to reduce our costs.

In fact, as we look at the run rate effect of those actions, there's about twice the level of savings we saw in 2018.

So this is a significant margin improvement as we look to 2019, and we'll provide more details on these savings when we discuss 2019 guidance in December.

But again, we feel we're well-positioned to capitalize on the good work we've done this year that will follow through to next year.

So let me now wrap up the presentation on Slide 20.

First, it's clear that fiscal 2018 third quarter profits were significantly impacted by the sudden escalation in steel prices.

And there was little ability to recover that within the third quarter itself.

However, we've taken specific actions to address the impact of higher economics, and we expect results and margins to be restored in the fourth quarter.

And you saw that analysis when Phil showed you the bridge earlier.

We also have many operational positives, including our leadership in alternative fuel-powered school buses, transformational initiatives underway and on track and our strong free cash flow, which is a feature of our business model.

We are well-positioned to -- for profitable growth in fiscal 2019 as we benefit from the run rate of the actions we took late in fiscal 2018.

And we are committed to profitable growth and our EBITDA margin goal of 10%-plus by 2020, and we expect our fiscal 2019 guidance to support this objective.

And finally, we're pleased to announce, as we did earlier, another shareholder value initiative of $50 million share repurchase tender offer that we expect to launch by mid-September, providing shareholders with a premium to market price.

And we'll continue to update you on our progress each quarter on these and other initiatives.

That concludes our formal presentation.

I'll now pass it back to our moderator, Yolanda, to begin the Q&A session.

(Operator Instructions) Our first question will come from Matt Koranda with Roth Capital.

Just wanted to get a sense for the timing of the price increases you mentioned.

I think you said June was sort of the first price increases that you put through, but could you give a little bit more detail in terms of sort of the magnitude and, I guess, the vehicle those took, was it in the form of surcharges?

Just a little more color in terms of how that transpired?

Yes.

I mean, well, we don't want to talk about specifics on that, we don't really talk about pricing specific on a per unit basis, but needless to say, it was pretty significant.

I think, when you look at the steel price there, Matt, that fell short on the bridge, you can get the impression of pretty significant demand.

But in June, we pulled that through with all of our dealers, all of our customers, we put through a surcharge to account for that.

So we literally took all of our prices for every single deal that we've got, we put on a standard surcharge across all of our products.

As I've mentioned earlier, we do have this time lag because we have to recognize we're on in a big business, we have bids out there that are valid for 90 days, school district go to boards to get them approved.

It takes time.

So we honor those commitments.

And similarly, backlog of orders, which are several months out in the future are all price protected.

So the real impact of that, there's about a 3 months’ time lag, basically, before we see that impact, and that's late in the fourth quarter.

But like I said, we talk to all of our leaders about it, they understand it and it's in our pricing model right now and it's on our full price to the dealers.

Okay.

And then, just a sense for, I guess, when -- could you help us with how steel flows through your P&L.?

So I mean, I'm assuming, I think, we've had this discussion before but I just can't recall at the top of my head, how far ahead are you buying steel?

So you buy steel today and it goes into a bus at what point in time?

Matt, generally, material comes in, let's say, 2 weeks prior to a bus being built.

Steel may come in a little earlier than that because we actually do fabrication for the raw steel that we buy.

So you could look at that potentially coming in 2 to 3 weeks in advance of the actual vendor supplied commodities, that may be more than a month for the raw steel.

We do try and take advantage of the market and do some prebuys where we can on steel.

That will be largely a factor of price -- a factor of the prices that we can get from major suppliers at a point in time.

Probably, the furthest out we ever go on those deals at the moment is about 6 months.

Okay.

Got it.

I guess, what I'm trying to get at is sort of it seemed like maybe you guys had the visibility into the steel price increases earlier this year.

I mean, if you look at the commodity indices, you can kind of see it ticking up even late last year and early this year.

So I'm just a little confused as to sort of why it was surprising to you guys in June?

Or was it just a factor of like you had to wait -- you had a bunch of bids out there that sort of rolled out toward the end of last year and you had to wait for those to expire before you could put pricing through?

Yes.

That's really the point.

I mean, I guess, 2 different factors, right?

The surprise was the rapid run up in the steel price, right, versus spots.

And that was driven when all of the domestic steel producers increased their prices this year.

And it happened fairly close to the announcement of tariffs.

So let you draw your own conclusions on that one.

The pricing issue for us is a little different.

Once we saw where steel was going, we -- there was -- we took our time to understand exactly what we thought the long-term cost increase was going to be because this was not something where we wanted to go out initially and then make more adjustments to prices subsequently and add a lot of confusion into the industry.

So once we understood where we thought steel was settling out, we made the decision in June and we actually went through a round of meetings with all of our dealers prior to announcing it to make sure that they understood what was coming and how to deal with it.

So that took us a little bit of time, but I think what we've done is put a price increase out there, which will largely cover us versus where we see steel and stay in a good state for the future.

Of course, that's assuming that there's no other major dislocation in steel going forward.

As I said, we are seeing a bit of a downward trend in the future, the 12 month future.

I just don't know whether that's real or just noise at the moment.

If I could just add one thing, Matt.

I think I'll -- if I could add one thing, Matt.

I mentioned before, I'm sure you've seen this in other industries, I mean, automotive, Ford, GM have all talked about steel price increases.

And also the benefit, some of our dealers do actually carry other product lines besides our school buses.

They may sell agricultural, specialist equipment, RVs, firetrucks.

All of those guys have all got the same impact and they're all passing on price increases.

So it's not something unusual, this, we've done it in the past and we have to do it now.

It's appropriate thing to do.

And by the way, we've previously done it as a surcharge before as well, taking that same technique.

Got it.

And then, just maybe if you could talk a little bit about the competitive environment and sort of -- I mean, does this impact you guys competitively in any way when you're going out for some of the competitive bid processes or other competitors sort of following suit?

How should we think about that?

I don't really -- my line of sight is exactly what the other competitors are doing with their dealer body or the customers are really -- their end customers.

I don't really -- I can't really get into that, and what they're doing, I don't know.

I will tell, though, most of our business, 95% of our business is through -- with our dealers.

We sell buses to our dealers.

We pass the surge onto our dealers, and then our dealers in turn deal with the end customer.

That's their role.

So they have the job then of going out and selling the value they give and the products we have, which we're very strong about and passing on as they can feel appropriate.

I would say that looking at where our backlog is right now, where our orders are right now, I'd say we're certainly continuing to do what we've always been doing, that's holding our own.

And we're -- it was the right thing to do, we felt, and certainly, our dealers have accepted it.

Okay.

Last one for me.

If we look at the adjusted EBITDA walk that you guys provided, thanks for that, on Slide 12, the Q4.

One, just wanted to get a sense, I mean, it looks like the $11 million in sort of positives in the all other category, I mean, could you break that out just in terms of -- I mean, is most of that pricing, I'm just trying to get a sense for the other sort of immediate levers that you guys actually have...

Very little of that -- Matt, very little of, if any of that would be pricing.

We just want to see too much in the pricing.

This is fundamentally a mixture of various cost reduction activities we've taken.

And it's the -- as you think about the progression of our transformational initiative, and I think we've talked about this before, there was a little bit in the first half, not too much, and we always knew that it was really going to hit its stride towards the end of the year in the fourth quarter as we work through inventory and the new agreements with many of our suppliers came into place.

So that's where we see a large part of the cost increase coming from.

However, given that we saw the gap between where pricing would take effect and the cost increases, we did take other actions in reducing spending in a lot of other areas.

Our next question will come from Eric Stine with Craig-Hallum.

So maybe we could just dig into -- you mentioned 20% of your sales, and I'm not sure if it was for the quarter or for the year-to-date, but the 20% of your sales were to new customers, and I'm just curious, commentary on how much of that is alternative fuels given your big head start in propane and gasoline and that you've got the only electric bus in the market.

Yes, it's a good question.

I mean, let me give a little background on this stuff.

I mean, I think, I've said before, we are sort of a lumpy business, right?

Customer orders come in differently every year, they don't always come in at the same time of the year.

And so you go out and your dealers are looking for business, where they can do business and trying to find where they can play to our strengths, which is their strengths, obviously.

And so when we look at -- that was for the quarter.

So we're just talking exactly on the quarter in question, but these are sales to end customers, so we know when these got into customers' hands through our dealer network.

So when I said it was about 20% of customers were new to Blue Bird, a big chunk of those were gasoline.

We actually grew in everything, we grew gasoline, we grew propane, we grew diesel.

In terms of total impact of new customers come in, the majority, you'd say, were in the gasoline and diesel area and to a lesser extent in propane.

I think I touched on propane a little bit, too.

I wanted to make that point that we had seen in the last 4, 5 months, states are getting aware that there was VW money is coming available.

Propane is very, very high on that agenda for utilizing those funds.

So they're pushing out and say, well, I might as well wait until I get VW money because that's extra for me, and I'll instead deal with my fleet with the gasoline and diesel products, although, this will have been an excellent year for propane, but I'd say, still the conquest though we saw in the third was largely gasoline and diesel and to a lesser extent propane.

Got it.

And that's, I guess, a good segue to my next question, the VW funding and the pushout there.

I mean, impressive that 40% of your mix this fiscal year anticipated to be alternative fuels.

I mean, just curious, any thoughts on how much that number will be limited by the fact that people are pushing out propane buys?

Well, I think, the fact now, we're getting some -- finally some line of sight here on the VW funding availability.

I do think we're in a good position.

I would say, the gasoline, though, I was mentioning -- it's worth mentioning, the gasoline product is not included in the VW funding.

So we're looking at our propane and our compressed natural gas and electric buses as really being the key vehicles we have to put into that.

But I certainly think that, yes, it's a great opportunity for us.

And we get a lot of -- we have a very active team here, working with our dealers, working with the state and the school district, the states with their -- they have entities who actually go and put this money out there, decide on the plan, and we've been working with them very closely on telling our story.

So I do think we're excited about this as we enter fiscal '19, particularly for propane and on electric buses actually.

Maybe last one for me, just on the operational initiatives.

I know Phil mentioned that, potentially, you expand the scope of that, and I don't know if you can share anything there.

I know the paint shop was a big one and that will have a really big impact when that comes on in early '19.

But I mean, are there any -- would you say those additional things in scope are more broad-based in little steps or are there any other large steps similar to the paint shop, for instance?

Nothing the size of the paint shop, Eric.

We're looking at some areas of the plant where we can significantly improve efficiency and workflow.

We're also taking a hard look at some redesign initiatives of the existing bus, which might pay a lot of dividends going forward.

So these are things that we have kicked off to -- and we won't see a whole lot until later in fiscal year '19 from these, but the team is fairly excited about it.

Our next question will come from Chris Moore with CJS Securities.

Maybe just little on the tax benefit, can you just talk to the detail a little bit on that?

I think, Chris, when you get a chance, we cover it in quite a lot of detail in 10-Q because it is fairly technical.

There are a range of actions.

One of the large ones was we did have a uncertain provision in our balance sheet and working with our auditors and tax consultants.

We've been advised that we could release that.

So that's a fairly large part of the reduction.

So that's really -- it's really a one-timer, but we took the bad news for it a couple of years ago, and now we're ready to let it go.

Got it.

Okay.

The $11 million that you talked about in terms of the -- some of those all other initiatives, some is transformational, some is a little bit of pricing.

I guess, what I'm trying to understand is how much of that reduction in spending is kind of one-time things that you're just kind of tightening the belt short-term to lower the cost structure?

Small part of that.

I mean, the way I look at it actually, Chris, if you want to, is -- if you go and take a look at Slide 19 that Phil presented, which on purpose didn't include any numbers...

Exactly.

That was my next question.

Go ahead.

But if you're spatially good, which I'm not, you can see there's a fairly large jump in the size of that box going into fiscal year '19.

So what I would suggest is that, all of the stuff we're doing, right, we're getting only a portion of the benefit of it in the fourth quarter of fiscal year '18.

And you should expect to see a rather large contribution in fiscal year '19.

Yes.

I mean, you asked about -- I mean, I think, Phil is right.

I mean, only a small portion of these -- the amount you saw, the $11 million was what I call one-timer.

There's a little bit in there for the pricing.

We made that very clear it's late in the year with September.

So that's really pushed back 90 days after the June period.

So the bulk of that is stuff that we believe is sustainable, and we've got that, we've got those costs out of the business and we've got a terrific team working on this hard all year.

That's why we call it transformational.

And now we get the full run year -- full effect of that into next year.

And we -- and as you mentioned earlier -- we talked about earlier, we have other initiatives we're trying to do to increase efficiencies that will bolt onto that next year as well in the plan.

So I'm really -- we're really excited about the '19 outlook.

I mean, this is why it's all coming together now at the end of this year, that we can launch and have a really good ramp up into '19.

(Operator Instructions) At this time, we'll go next to Mike Baudendistel with Stifel.

I just wanted to ask you on your EBITDA margin comments, and it sounds like you're expecting somewhere in the neighborhood of 9% adjusted EBITDA margin the next year, and maybe, am I right about that?

I mean, it sounds like you have 8% if you adjusted for the input costs and you're expecting 200 basis points at least in the next 2 years.

I mean, is there any reason to think there's going to be more or less progress made in '19 versus '20 on that?

Mike, (inaudible) model here before I give the guidance is always a difficult for me to do that, and we're not ready to drop that on because we're still working on our 2019 budget.

But certainly, it's fair to say with 8% adjusted this year with the actions we've taken, we certainly would look to be -- I'm going to tell you right now, be somewhere north of 8% to get a 10%, obviously, by 2020.

So you've got to wait a little bit on that.

I think what you're doing -- you're in the right direction, put it that way.

I think what you're thinking is good.

Okay.

And then, related to that, the range of 10% to 12% by 2020.

I mean, what would the difference be between 10% and 12%?

It's a pretty reasonably wide range.

I think I'd say 10% to 12% more is our long term.

I think we'd say 10%-plus by 2020.

I mean, we don't want to get to 2020 and stop.

We're going to keep going.

I mean, it's not like we've done it, we're great.

We're whole.

I think we just want to say 10%-plus is our bogey for 2020.

And that's only -- obviously, we're a couple of years away from 2020.

And beyond that, we want to keep growing.

And certainly, the next level will be how do we get from 10% to 12% longer term.

Got it.

That makes sense.

And just wanted to ask you, with the increase in the prices, has there been any elasticity with customers buying fewer buses at all to make up for that, if there's only so much budgeted?

No.

We haven't seen that.

I mean, I think, it's been a good solid year here for everybody.

Our industry has gone really well for us and...

I think Phil mentioned that based on the forward order outlook, Mike, we haven't seen any drop-off.

We haven't seen anywhere where we've lost a bid.

Got it.

That's good.

And also wanted to ask you, on the freight costs, can you give us a ballpark figure of how much your annual freight spend is, just so we can sort of put that in perspective?

This is inbound freight, Mike, and typically, it's running in excess of $12 million a year, something like that.

Okay.

Got it.

And then, just last one for me.

I mean, sort of the Ford, ROUSH deal has been such a competitive advantage for you.

I mean, is the relationship with your partner on electric, is that a similar exclusive relationship?

Or what access do your competitors have to your partner there?

No, we're exclusive with our partners on that one.

In fact, I don't know if you saw recently, what I'm excited about is EDI who is our technology partner in this event that we have, they've been acquired by Cummins.

So now Cummins owns EDI, and I've already met with Cummins last week to talk about that, and we're really excited about that partnership because it gives us strength and the backbone of Cummins technology they've got and it's a great move.

Yes, we have an exclusive on that product for a period of time, yes.

Our next question will come from Scott Blumenthal with Emerald Advisors.

Phil, and either Phil could answer this, I think you explained the steel issue pretty well, but you also lowered your top line sales guide a little bit, and mentioned that at least in Q3, there was a little higher mix of gas and diesel, which have a lower price point.

I was wondering if the lowering of the guide is because of what came in Q3, and since you have pretty good visibility into Q4, that you may be seeing the same thing in Q4?

No.

I think, yes, I mean, I think the third quarter was, I mentioned before, was a richer mix definitely of gasoline and diesel.

We were actually, I'd say, quite surprised by the amount of gasoline we sold, it's terrific.

We just command a lower revenue.

So we'd say it was prudent as we look -- especially when we look out now and we only got -- we got line of sight to the fourth quarter.

We're getting pretty close to the year-end.

We thought it was prudent in our guidance.

So we dropped $20 million at the top end.

So the average came down, but we still -- we kept the low point, we just narrowed it down.

But it was largely due to -- as you saw, when you look at year-over-year, you could see the -- sort of the impact we saw in the revenue in the third quarter.

So it was prudent to do that.

Fourth quarter, I think, is more of a typical quarter.

It's going to be strong.

I think the propane in the fourth quarter is good.

It looks really good for us, the mix look strong, and I think it will be a pretty good revenue quarter, but we just thought it was prudent to take the full year range down a little bit, narrow it down.

Okay.

Fair enough.

And you did mention that we saw -- recently saw or this week saw the first electric bus roll off the line and that you may deliver -- even deliver some of those in the fourth quarter.

Do you expect to deliver a couple of those?

A handful or?

Oh, yes, we'll deliver several in the fourth quarter.

I mean, several is not several hundred, but we'll deliver several.

And yes, that was the first one.

It was a nice event for us and we've got more lined up.

And the customers are virtually all California-based.

I mean, we've got some big ground support for those, and we're excited about it, and so is our partner out there in California.

Okay.

That's great.

Fair enough.

And you talked a little bit about the VW pushout, which is pushing customers into 2019, and I suspect that, that would also be pushing customers then into 2019 pricing.

So is it possible that you may actually derive a benefit from the fact that those are getting pushed out and then those customers are then going to end up booking orders at a higher price due to your price increases?

Yes.

I think that's a good way to look at it.

I mean, obviously, had they built the buses prior to the tariff change, the steel prices going up, that would have been fine, too.

But I do think it's a great point you raised.

I mean, it's good for us, I think, that we've got the pricing on now.

It's out there in the system, and a little bit of price we'll move from when we access the VW funds.

I've got to say, I feel really -- I mean, I do -- I just want to stress, I mean, I made a point on the call, I feel really good about the product range we've got for that VW money.

We have the best partners on propane by a mile with ROUSH, ROUSH, CleanTech and Ford.

I mean, terrific partner.

We've been with those guys since 2012.

We're in great position.

And I just think now the electric and the clout and the power of Cummins behind EDI, we're in great shape on that product, too.

So I think we're in a really, really good position.

We like where we are right now, and so do our dealers.

And you said you had pretty decent visibility into some of that money.

When do you really expect some kind of the bulk of that to start to impact your orders?

I think we'll start to see some of it coming up free in the November -- minimal amount November, December.

Looks like it's mainly second quarter of next year probably when we sort of see the orders come in.

Then it's just all through the year because they've got -- the people get this money and they can apply it over several years.

So you can take 2, 3 years to use the money, use it faster, and it looks like the -- all these guys who are organizing the funds have been a little slower than expected to decide how they're going to utilize it.

Every state is doing it differently, some are giving discounts against prices, some of them are paying for an entire bus.

It all varies differently by vehicle line.

The great thing is the real metric for what determines how -- which grants are available is the NOx level of emissions the vehicle emits.

That's why I made a big point in talking about our NOx level now on propane and where we obviously are on that, and electric and 0 emissions are in good shape.

But I think we'll start to see later this -- later the end of calendar year, so maybe a few in November, December, we'll get some interest, I think.

But it'll pick up really in the start of the next calendar year, start of '19, January '19 onward.

Okay.

And we are talking about orders for those, not deliveries for those?

Yes.

We're talking about orders, yes.

Okay.

And just one clarification.

I think, in his comments, Phil Tighe said that the full offset of steel prices will not be achieved in 2019.

I think he meant '18.

Is that correct?

I think I meant '18, Scott.

I think you meant '18, too.

Thank you.

Thanks for taking that up and letting me clarify it.

That will conclude our question-and-answer session for today.

I would now like to turn the conference back over to Phil Horlock for any additional or closing remarks.

Well, thank you, Yolanda, and thanks to all of you for joining us on the call today.

We appreciate continued interest in Blue Bird.

I hope you realize that we're focused on profitable growth and we intend to deliver on our commitments, do believe we're well-positioned for growth today and into the future.

Please do not hesitate to contact our Head of Investor Relations, Mark Benfield, if you have any follow-up questions.

And once again, thanks from all of us at Blue Bird, and have a great day.

Again, that will conclude today's conference.

Thank you all for joining.

You may now disconnect.