Blue Bird Corp (BLBD) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Blue Bird Fiscal 2018 Fourth Quarter Earnings Conference Call and Webcast.

Today's conference is being recorded.

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

Please go ahead.

Thanks, Keith.

Welcome to Blue Bird'S Fiscal Fourth Quarter and Full Year 2018 Earnings Conference Call.

The audio for our call is webcast live on investors.blue-bird.com You can access the supporting slides by clicking on the presentations portion of our IR website.

Our comments today include forward-looking statements that are subject to risks that may 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 CEO, Phil Horlock; and CFO, Phil Tighe.

Then, we'll take some questions.

Let's get started.

Phil?

Okay.

Thanks, Mark.

Well, good afternoon, everybody, and thank you for joining us today for our fourth quarter and full year earnings call for fiscal 2018.

It's been a very busy year here at Blue Bird, and all of us love this opportunity to take you through our latest quarterly and full year results.

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

Our fourth quarter results were strong, and I'm very pleased with the progress we've made this year.

Our unit sales were the highest in a fourth quarter since 2008, with 3,757 buses sold.

That represented a 4% increase over last year, and correspondingly, we saw a 6% growth in total net sales, which amounted to $332 million.

The high growth in net sales versus unit sales reflects a richer product mix and to a lesser extent, the pricing action we took late in the year to address the rapid escalation in commodity prices.

Now a feature of this is seasonality, and it's worth noting that fourth quarter net sales represented 32% of our full year sales and the second half with a substantial 64% of our full year.

Our adjusted EBITDA grew 16% or $4 million over last year to a strong $29 million, which is a solid 9% EBITDA margin.

It was also our best fourth quarter result for more than 10 years.

As Phil Tighe will show you later, we achieved this improvement despite escalating steel and commodity prices, as we drove fourth quarter cost reductions through our transformational initiatives, which we mentioned in our prior earnings call.

Adjusted net income and adjusted diluted earnings per share were both significantly higher than the fourth quarter a year ago, up $12 million and $0.40, respectively.

On a GAAP basis, both net income and diluted earnings per share also improved from a year ago.

So let's start here for the full year.

All 3 of our key financial metrics, either met or exceeded guidance.

Net sales of $1,025,000,000 was above the guidance range and the first time in our history that we exceeded $1 billion in net sales.

That's quite a milestone for Blue Bird.

At $70.4 million, adjusted EBITDA was within guidance range of $1.5 million above last year despite the commodity headwinds that hit us in fiscal 2018.

As we saw in the fourth quarter, we were able to offset the full year adverse economic impact of those headwinds through our cost-reduction efforts in the second half of the year.

At $40 million, adjusted free cash flow beat the high end of guidance by $6 million and remains a strong feature of our business model.

Adjusted net income and adjusted diluted earnings per share for the full year were both above last year by $22 (sic) [$13.5] million and $0.70, respectively.

Now we look at the underlying strength of the industry, of Blue Bird results in general.

The outlook is positive.

First, based on preliminary R.L. Polk registration data, about 34,000 new Type C and D school buses were bought and registered by customers in fiscal 2018.

Now why was it down slightly from the 35,000 unit level we saw in fiscal 2017, which was a second highest in industry in 30 years?

34,000 new buses is a strong industry, and well above long-term trend levels.

In fact, with a strong industry outlook, strong outlook rather for property values and corresponding property taxes, which are the major funding sources for school buses, together with the fact that 150,000 school buses on the road today have been in service for more than 15 years.

We are confident on the industry outlook remaining around the 35,000 unit mark as we move into 2019.

It should also be noted too that only about 1/3 of the 12,000 school districts that own and operate school buses enter the new bus market each year, so there will always be some variability and noise each year, and a new bus industry volume.

Second, we sold 11,649 buses in fiscal 2018, an annual growth of 3% outpacing the industry.

This is our seventh consecutive year of volume growth and we have solid momentum.

Third, we recorded our highest ever sales mix of alternative-fuel powered school bus sales at a substantial 38% of our total bus sales.

This compares to the 34% mix last year and our alternative-fuel bus sales in total were up 14%.

Incidentally we achieved a record quarterly sales mix in the fourth quarter at a substantial 47% in total sales.

Now that's leadership, a real momentum in the fastest-growing segment of the business.

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

Now for the last several years, we've seen significant growth in alternative-fuel bus sales, and I just mentioned we have not slowed down this year.

We'll cover those sales again a little bit later in the presentation.

Fourth point, we're passionate about products and being the first to market with vehicles and features that customers want and value.

Late in fiscal 2018, successfully launched our exclusive only electric-powered Type D bus and we delivered several to customers in the fiscal year.

Our Type C electric-powered bus will launch early next year, and we have a strong pipeline of customer orders that we're pursuing.

We also launched our ultra-low NOx propane-powered bus early this year, which upon 0.02 grams NOx for brake horsepower hour is 10x split on both in EPA standard and any other brand of propane-powered school bus.

Also just last week, we received certification on the California Air Resources Board or CARB to begin selling our ultra-low NOx compressed natural gas-powered Type C school bus.

Again, Blue Bird is first to market and is exclusive to us.

And fifth, we took pricing late in fiscal 2018 to cover the escalation in commodity costs led by steel, which has impacted all automotive manufacturers.

And finally, we have a number of transformational actions underway for improving our cost structure, and we saw the favorable impact in fiscal 2018, particularly in the fourth quarter.

Now as we exit fiscal 2018 and move forward into fiscal 2019, we're confident in delivering profitable growth, bolstered by the impact of our transformational initiatives and the pricing we took to address commodity cost escalation late in fiscal 2018.

I will cover the key fiscal 2019 guidance metrics in more detail later, but I'm pleased to inform you that the adjusted EBITDA range will be 14% to 21% higher than our fiscal 2018 results, with our fiscal 2019 adjusted EBITDA guidance between $80 million to $85 million, a substantial gain from fiscal 2018.

Now this is on the path to our stated goal for an adjusted EBITDA margin of at least 10% by 2020.

All in all, these were exciting times at Blue Bird.

So let me now review with you our full year 2018 key operating achievements on Slide 5.

We recorded a number of significant achievements in fiscal 2018, and each one will make us more competitive and support our growth going forward.

We continue to be the undisputed leader of alternative fuel-powered school buses.

And while our sales grew 14% in this segment in fiscal 2018, we achieved a very strong 70% market share with many new customers joining the Blue Bird brand for alternative fuels.

I mentioned earlier that we have a class-leading propane bus from an emission standpoint at NOx emissions level of 0.02 grams.

We already were the market leader at 0.05 grams NOx emissions, but the best just got better in fiscal 2018.

This means, our propane engine emits just 1/10th of the NOx level that our competitors offer and that's real leadership.

Although outside fiscal 2018, just last week, we received the same 0.02 grams NOx certification for our Type C compressed natural gas-powered bus.

That is 5x cleaner than the compressed natural bus that our competitors offer.

All this is great news for our customers and even better news for the children who ride our buses and their parents.

Let's move on to 0 emission school buses.

We are the only nationwide school bus manufacturer today that offers electric-powered school buses in Type C and Type D configurations and we had a great customer response to our more than 20 Ride and Drives across the country.

We are delivering buses now to customers and have a strong pipeline of potential new customer orders.

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

We achieved significant cost savings and margin growth in the fourth quarter, and this initiative is key to delivering continued profitable growth.

For the first time in Blue Bird's 91-year history, buoyed by the 60% net sales growth we saw in fiscal 2018, we achieved a new milestone of $1 billion in sales.

Now as I mentioned earlier, we also priced to recover the recent tariff-related escalation in steel and other material costs.

We began to see the impact late in the fourth quarter fiscal 2018, and this will fully apply in fiscal 2019.

Construction is well underway for our all-new automated paint shop with pilot runs and validations scheduled for early next year.

This is a key initiative to driving efficiency improvements as we go forward.

And as I mentioned earlier, we met or exceeded guidance in all 3 metrics that we report against.

Most significantly, we reported slightly higher profits in fiscal 2017 despite incurring substantial commodity and freight cost increases.

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

So just to summarize, in fiscal 2018 fourth quarter and full year, total net sales adjusted EBITDA were up in both periods versus last year.

Both bus sales and part sales were up to strong 6% in the fourth quarter, and for the full year, bus sales were up 3% and part sales grew a little stronger at 4%.

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

As you can see, we achieved a new full year sales record of 4,428 alternative-fuel powered school buses, a 14% increase over last year.

And as I mentioned earlier, this represents a strong 38% mix of our total bus sales, up from 34% last year.

No other school business manufacturer comes close to this level of mix.

And in fact, last year, over 360 new customers took delivery of their first-ever alternative-fuel powered Blue Bird bus, this is a strong endorsement of our exclusive alternative-fuel buses, the Blue Bird brand and our strong dealer network.

We continue to be the leader in the fastest-growing school business segment with our market share running at about 70% and more than 19,000 alternative-fuel powered school buses are on the road today powered by Blue Bird.

We offer the widest range of alternative-fuel powered buses and the most modern improved 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 draw alternative-fuel fleets with the same engine architecture, the same transmission and the same service requirements across all 3 products: propane, compressed natural gas and gasoline, it's an easy move for school district or a fleet operator.

Company is widely recognized having the lowest total cost of ownership in the market and is a great engine and especially our new ultra-low NOx propane bus, 1/10th of the NOx emissions other manufactured buses and the EPA standard.

These nitrogen oxide gases, we call NOx emissions, contribute to the formation of acid rain and smog.

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

In addition, as I mentioned earlier, just last week, we added an ultra-low NOx CNG bus to our line, 5x cleaner than any of the CNG school bus on the market.

Now despite our fiscal 2018 growth, in the past few months, we have seen some customers electing to push their propane purchases to fiscal 2019 and anticipated receiving funding from the VW Clean Air Act Settlement Funds late in this calendar year and beyond.

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

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

So far, 30 states have finalized their funds to deploy the VW settlement funds, and the good news is that [46%] of their funding in the first year have been set aside for school buses.

That's potentially another strong boost to the industry and we are in a great leadership position to capitalize from these funds.

We also saw very strong growth in our gasoline-powered buses in fiscal 2018.

It is readily understood by technicians and mechanics, who really appreciate the emission simplicity and cold weather start capabilities it shares with propane.

It also has at the lower price point than diesel, so it really works well for those customers, where acquisition price is a key concern, and gasoline is off to a great start too in fiscal 2019.

We are taking the orders for our all-new Type C and Type D electric buses and interest across the country is strong, especially the opportunity to fund from the VW settlement.

We began delivering buses in the fourth quarter of fiscal 2018, and we're very excited by the prospect for our electric bus in fiscal 2019.

As we look forward to next year and beyond, with the broadest range of the 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 having less than 15% of school bus customers having tried an alternative powered school bus, Blue Bird is in a really strong position.

So let me now turn it over to Phil Tighe, who will take you through the financials.

And I'll be back again later to cover the fiscal 2019 outlook and guidance.

Over to you, Phil.

Thank you, Phil, and good afternoon, everyone.

The next few slides are a summary of our financial performance for the full year and also for the fourth quarter fiscal year '18.

And you will find additional information in the appendix that deals with reconciliations between GAAP and non-GAAP measures mentioned in this review as well as some important disclaimers that have already been mentioned by Mark Benfield.

Detailed material will be available in our 10-K, which will be filed early next week.

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

The material we are discussing today is based on close of September 29, 2018 for fiscal '18 and September 30, 2017 for fiscal 2017.

There were no significant changes in our critical accounting policies or in our risk factors versus the previously filed 10-K.

Let's now take a look at the summary of key results for the fourth quarter on Slide 9. Phil's already talked about volume.

Fourth quarter was a very good quarter for Blue Bird.

We hit 3,757 units, up 4% versus prior year, and importantly, our best fourth quarter in more than 10 years.

As Phil already said, we achieved a 47% mix of alternative-fuel buses in the fourth quarter, up about 7 points from the prior year and 47% is our record to date since we started our leadership of the alternative-fuel industry.

Our net revenue you can see was $331.6 million, up about $19 million versus the prior year.

It was up for both bus and for parts.

Both of them were up by about 6% year-over-year.

The year-to-year increase for parts was about 2/3 driven by volume and the balance was due to a combination of higher average revenues.

For our buses, the average selling price for our buses in the fourth quarter was just under $84,000, which was about 2% higher than a year ago.

We also benefited from the improved mix of the alternative-fuel vehicles.

And as Phil also mentioned, we had a small percentage of our buses that actually picked up the pricing that we announced in June 2018 to offset the impact of tariffs on steel and cost increases in other markets.

Our gross margin of 12.9% was up about 30 basis points versus a year ago.

And I would add that, our gross margins improved for both bus and parts.

This result of, of course, was despite the material cost increases driven largely by tariffs on steel.

Prices of our steel were up over 20% in the fourth quarter versus last year and higher freight costs also up about 20% versus fourth quarter last year due to both fuel and the continuing capacity problem with driver shortages.

But we did achieve importantly lower manufacturing cost in the fourth quarter of this year, which helped to offset some of the economics increases that we talked about.

And these improvements in manufacturing have come about as an early indicator of the initiatives that we are undertaking to improve both our efficiencies and capacity in the plan.

The 3 indicators of our bottom line profits, our net income, adjusted net income and adjusted EBITDA are all favorable versus the prior year.

Adjusted EBITDA importantly at $29.1 million was about $4.1 million better than the last year, an improvement of 16%.

I would add that we remain steady in history, obviously.

This is also our best fourth quarter EBITDA result in about 10 years.

So that was a pleasing result for us.

The EBITDA margin improved to 8.8% for the fourth quarter, up about 80 basis points versus last year.

Net income was also higher at $14.9 million, and we achieved a return on sales of 4.4%, that's from net income.

So all in all, a good result for us on a bottom line basis.

You can see that diluted earnings per share and adjusted diluted earnings per share for the fourth quarter both were up substantially.

We'll talk a little bit more about earnings per share when we look at the full year.

And finally, the last 2 on this page are cash.

Cash was down a touch.

It was -- it ended the year at $60.3 million versus $62.6 million in the fourth quarter of fiscal year '17.

That was, I think, a good result.

You've seen the picture of the new paint shop that we're building.

So our CapEx spending in the fourth quarter was up by more than $14 million versus the prior year, all based on the spending in the paint shop, and we still managed to come in with cash only down about $2 million year-over-year.

So I think that was a good result by the team.

Debt at $142 million finished slightly better than planned, and there were no borrowings on the revolver.

I would point out that the debt shown is at the end of September and it was prior to us drawing $50 million of incremental debt to fund the tender offer.

We'll talk about that a little more on later slide.

So if we move to Slide 10, that will take you through the same set of metrics for the full year.

Again, you can see the volumes are up 3%.

And as we already mentioned, the best result in more than 10 years.

It is a good result.

As Phil said, the industry appears to have been a little soft towards the end of fiscal year '18.

Although I would add that R.L. Polk registrations do tend to take a few months to mature.

So I think we might see it creep up a little bit.

And it's very clear from our discussions with dealers and some school districts that they are waiting to take advantage of the VW litigation funds, which are quite important to them and help the school districts save a substantial amount of money.

Again, alternative fuel represented 38%, which is up 14%.

I'd point out and Phil's already done a great job of this, but alternative-fuel includes propane with ultra-low NOx, gasoline, CNG with ultra-low NOx and electric buses.

We are the only OEM to offer this range of alternative-fuel vehicles.

And I think, it gives us a strong advantage going forward.

One other point I would make is seasonality continues to be a challenge.

Our second half sales were 7,500 units.

Again, a record.

Our first half sales were about 4,146 units.

You can see the production in balance 7,500 units in the second half versus 4,100 in the first half.

That does give us some heartache in terms of over time and a little bit of a stress on our suppliers in terms of ramping up from first half to second half.

And I think the team is doing a good job to address that and while it will continue to be a challenge because it's a fact of life of our industry where people want to have their buses in the second half for the start of the new school year.

But what we are seeing positive results from some of the work we are doing on efficiencies to make sure that the plant can operate with high efficiency and high quality at substantially higher volumes.

Our net revenue of $1.25 billion was a great result.

And as mentioned, first time, Blue Bird has hit more than $1 billion on the net revenue metric.

This was big achievement for us.

That number was up about $34 million and it was really driven by higher bus volume, and we had 332 more units worth about $27 million, almost 80% of the increase.

On a full year, our bus average selling price was also up.

Our average price ended up at $82,600, up about $400 a unit, which is worth about $5 million.

And our revenue from the sales of parts continue to improve.

We picked up another $2 million on parts and that's a positive feature for us.

As we've previously talked about, we did put our price increase in, that only impacted the small number of units in the fourth quarter due to the length of our ordering cycle and the fact that we have firm pricing for orders placed.

We will talk about that a little more.

Gross margin of 11.9% was unfortunately down about 1 point versus a year ago.

And it really was driven by the large increases in tariffs and higher freight costs, and it was also driven by a business mix where we did accept some relatively low-margin business to fill some production gaps in the second half due to a number of school districts delaying the ordering until fiscal year '19.

I would point out that if you want to take a look at the math, if we took the tariff related and freight cost increases out, our margin would have been at least equal to the fiscal year '17 margin, so I think that's something to keep in mind as you look at the results.

Again, when we look at the bottom line results of net income, adjusted net income and adjusted EBITDA, all of them were positive versus the prior year.

The $70.4 million of adjusted EBITDA was up $1.5 million or about 2% and we have got a bridge where we'll walk you through that.

The EBITDA margin is 6.9%, was slightly lower than last year.

Again, absent the impact of tariffs and freight, that would have been better.

And net income was $30.8 million, which represented an improvement of $2 million or almost 7% return on sales of 3%.

Diluted earnings per share, we were pleased with this number at $1.08 per share versus $0.74 in the prior year, and adjusted diluted earnings per share came in at $1.77, which was up by $0.70 and almost 70% versus the prior year.

There is some information at the back of the presentation on this and there is a more fulsome explanation in the 10-K.

Our weighted average diluted shares outstanding were $28.6 million at the end of '18 and $24.9 million at the end of '17.

Net income of our common stockholders was $28.9 million in '18 and $18.4 million in '17.

The fiscal year '17 number was impacted by the dividends that we paid to preferred shareholders of $4.3 million in 2017 and the repurchase of preferred shares of about $6 million also in fiscal year '17, neither of those occurred to the same extent in fiscal year '18.

We've already talked about cash.

It's -- and debt by the same numbers that we talked about when we looked at the fourth quarter, so I won't go over that.

If we go to Slide 22 (sic) [Slide 11] , you will see a bridge for the fourth quarter walking from $25 million in fiscal year '17, up to $29 million in fiscal year '18.

You'll see that bus volume was up about 149 units.

Parts was up about $0.5 million.

Economics was unfavorable year-over-year in the fourth quarter by about $8.5 million, primarily steel, which was up 26% and freight up about 21%.

And then you see the $11.2 million, which was transformational cost initiatives and efficiencies and operating cost savings.

So that $11 million helped us to more than offset the incremental cost to the economics and achieve an improvement on year-over-year that we've already talked to.

We were pleased to see this come in.

We've been working hard on the transformational initiatives all year.

While the transformational initiative is not all of the $11 million, it does represent a fairly substantial portion of the savings, and the good news is that on about 1 quarter or 1/3 of our annual volume.

So there is a lot more to come as we look at the full year next year.

If you go to Slide (sic) [Slide 12] . This walks from full year to full year.

So $68.9 million in fiscal year '17 walking up to $70.4 million

That's not slide 24.

Oh, sorry, I've got the wrong slide number.

So Slide 12 -- my apologies for that, walks the full year, $68.9 million up to $70.4 million.

Volume and mix was -- while volume was up by about 330 units, we did have adverse mix as I mentioned previously.

Parts improved by about $1.1 million.

Material economics, the full year impact for us was about $18.5 million, with -- and I think, there's a few people who will be trying to figure out what the real impact of steel is on Blue Bird.

I'll just comment that, that is just over 50% of everything we buy had some steel content in it.

Anything from a seat frame as a part of the seats to engine block as a part of an engine with steel.

Obviously, the bigger part of the steel content for us is all the metal that we use to build the body and chassis of the bus.

Remember, our school buses are all steel as a part of the safety protocol for children that are carried.

So we have, I think, about 17,000 pounds of steel in the body of the bus, something around that.

And so when we look at economics on steel, for the year, we have it anywhere from 1% of the components, where steel was a small piece.

So we got about 1% increase on some components to more than 30% increase on raw steel and on some of the commodities with very high steel content.

So that drove a lot of the $18.5 million and then freight was also up by a substantial amount of money, about 28% in the full year, driven by 2 factors: increased steel costs and a shortage of drivers and trucks.

So then you look at the $18.5 million, and we should reflect upon the fact that we had almost or very little pricing to offset that.

The pricing that we have taken as of June, we expect to fully reflect this number if it continues to form part of that cost base moving forward.

And then, we see the full impact of transformational cost initiatives and other efficiencies of $26.5 million in the full year.

Again, I'd point out to you that the transformational cost initiatives really only started to come into play in the second half of the year.

There was only a small amount of it in the first half.

So this is a very encouraging feature for us for the future, where we have -- we have really, I think moved the needle on cost structure in Blue Bird to provide us a very solid for the future guidance that Phil is going to talk about and our long-term objectives.

Very quickly, I will point out on the next slide, which is 15 (sic) [13], the free cash flow.

A couple of important -- 13 is it?

I can't read.

Sorry, 13.

I'm having a bad day with page numbers.

Anyway, so free cash flow is on Page 13.

I've had that verified.

For the full year, our free cash flow came in at $40 million and guidance, you might recall was between $30 million and $34 million, so we were very pleased with where it came in at.

If you take a look down the list to adjusted free cash flow, every item was favorable year-over-year with the exception of CapEx, which was up about $23 million and that is basically related to that large paint shop that we're building, which will be a state-of-the-art paint shop and give us great, great paint on our buses and higher efficiencies and lower cost to good, which is a pretty good achievement.

So as far as we're concerned, the $40 million was a very favorable outcome on adjusted free cash flow.

And I'll turn to my last page and I'll try to get the number right.

It looks like it's Slide #14.

And that is our net debt leverage and liquidity.

You can see the net debt was $82 million.

That's debt net of cash.

We had a net leverage ratio of 1.7x and that compares very favorably to our covenant of 4x, and we had liquidity of $153 million at the end of the year.

I would point out that the debt that we reflect here does not include the increase to our total loan that we took in October.

So there is another $50 million you will see in debt when we do our first quarter earnings report.

Having said that, if you sort of pro forma that in and looked at the 1.7 net leverage ratio would end up at about 2.2x and that still well under the 4x, which is our covenant.

So we think we're in a pretty good position when it comes to net debt and requirements for our banks and for liquidity.

So with that, I'll turn it over to Phil, who promises he knows all the page numbers that I don't know, and he can wrap up and show you our guidance for the year.

Okay.

Well, thanks, Phil.

Thanks for that.

So let's now focus on the fiscal 2019 outlook and our full year guidance and turn to Slide 16.

Just talking about the industry first.

With recent industry trends running at 34,000 to 35,000 units annually, we are at some 30 years highs on the industry, and we do anticipate another strong year in fiscal year 2019.

The industry is probably around 35,000 units.

That's where we think we're going to be.

And we see continued growth in housing prices and property taxes, being a big factor there.

Along with new funding from the VW settlement fund obviously supports our position.

So I think all in all, we don't see this industry turning down.

We see it solid, strong and continuing.

The demand is clearly there.

Now our plan for fiscal 2019 focused on key elements of improving gross margin and EBITDA margin for 3 key areas.

First, is the impact of the cost recovery pricing that we took in late fourth quarter to address the escalating commodity costs and freight costs that Phil clearly showed you in the bridge earlier.

This will have a full annual benefit in fiscal 2019.

Second, the full year impact of the transformational cost reduction initiatives that we implemented in late fiscal 2018, and again, I think you clearly saw those, particularly on the fourth quarter bridge, you saw the improvements we were making later in the year.

Well, that will obviously will have a favorable full year effect as we move into 2019.

And we're going to continue that initiative too.

This is a key thing.

This isn't just a 1 year, and we sold them.

We're continuing to do that and run it throughout our organization.

And third, the plant facility and process improvements we are making to increase manufacturing efficiencies next year.

So all these 3 factors are all about driving margin improvements, particularly on the gross margin side, down to the bottom line EBITDA margin.

Now we set our financial targets for fiscal 2019 to be on the glide path towards our previously communicated EBITDA margin goal of at least 10% by fiscal 2020.

So let's turn to Slide 17 to present our fiscal 2019 full year guidance.

So net sales guidance of between $990 million and $1,025,000,000, which will be down anywhere from $35 million to flat versus last year.

Now we are being prudent in planning our sales outlook, recognizing that we may have to push out some unit sales as we launch our new paint shop and make [our facility] process improvements in the plant.

These type of production launch losses are typical for an automotive company undertaking significant facility upgrades and our approach will be clear to minimize that impact as much as possible.

I want to stress we're being somewhat prudent in our planning base here and getting that sales number.

Adjusted EBITDA guidance is now between $80 million to $85 million, a significant $10 million to $15 million or 14% to 21% increase over fiscal 2018.

We will be exiting fiscal 2018 with significant run rate savings from our cost-reduction efforts that are already implemented, which will favorably impact fiscal 2019, and we'll continue to pursue new efficiencies.

And adjusted free cash flow is between $24 million to $28 million and continues to be a strong feature of our business model.

Now while this is down $12 million to $16 million from our fiscal 2018 results, this is more than explained by the significant capital spending we will incur in 2019 from facility upgrades, particularly on the paint shop as it launches.

So in wrapping up, I believe we had a strong fiscal 2018 performance, both operationally and financially.

And we were able to offset the unexpected rapid rising commodity costs, led by the impact of the steel tariffs.

I think I'd also be remiss if I didn't mention some of the shareholder initiatives that we implemented this year.

Buyback programs and the tender offer late in this -- late in our fiscal year to drive shareholder value across to our shareholders.

Whereas in fiscal 2018 was significant run rate benefits from cost reductions and cost recovery pricing, taken away from late fiscal 2018 and these run rate benefits will help us drive significant profit and margin growth in fiscal 2019.

As I said earlier, adjusted EBITDA projected to be 14% to 21% higher than fiscal 2018.

Now our plans and our guidance both align with this and we'll continue to update you on our progress each quarter.

Well, that concludes our formal presentation.

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

(Operator Instructions) We'll take our first question from Eric Stine with Craig-Hallum.

I mean, maybe just starting with alternative fuels.

And I know that you've been pretty clear about the expectation that because of the VW funding that propane, some volumes pushing into fiscal '19.

But it still the gasoline number being, I think, 600 more or so than the propane number for fiscal '18.

Does that do anything to change your view that longer-term propane is probably the higher component of the overall mix?

Or is that changing a little bit that you think gasoline actually could be the one that -- could be #1 for you?

Well, I mean, it's a good question.

I mean, they've both done extremely well basically for us and gasoline probably exceeded our expectations to be honest.

I think there's quite a bit of a pushback against the complexity of diesel and everyone understands gasoline is pretty easy.

What we've been seeing though this year is even some of our guys who first got into gasoline 2 years ago, who actually hadn't tried propane, they now are actually trying propane.

So I think gasoline actually we're finding is a good leading tool by getting someone into a less familiar alternative fuel such as propane.

I honestly believe, I think all the time there's no question to me, we're going to see the pressure on NOx emissions, the pressure on total cost of ownership.

Propane is the best product.

It really is.

And I think -- I really truly believe that we've seen it consistently that folks in school districts are waiting to say, "look I've got VW money coming, it's coming later in the year.

And gasoline, by the way is not funded by the VW settlement.

You can't buy a bus with VW settlement funds for gasoline.

You can buy propane, compressed natural gas.

You can buy electric.

You can buy the clean diesel.

So I do think, we've seen it clearly, time after time, people say, "I'm just going to hold off on that propane because I've got some money coming for that so I will take a gas bus right now." So I feel very confident about both, and I think over time, you'll see propane I think recovering that trend and growing heavily in next few years.

Got it.

And then, in terms of the revenue guide, and it sounds like given that the industry is near its high, let's say, and maybe not in uncharted territory, but pretty strong that you're being conservative.

I mean, are you -- maybe how are you factoring in VW funding into that guide?

I mean, knowing that, that funding is going to play out over a number of years?

At this stage is I am just feeling what you said I'm being somewhat prudent.

I mean, we have a pipeline and we track very carefully where the money is of VW by stage.

I mean, we've got each one of those.

We've been working with our partners at ROUSH CleanTech on the -- for all the -- for the propane and CNG side of the business.

And I think we just -- we will manage the pipeline.

I think as we go through the year, we'll keep updating you on where things stand.

Okay.

Phil, fair enough.

And last one from me just on the EBITDA guide.

Maybe just talk about the puts and takes.

I mean, it looks like you're guiding to around 8% to 8.5% margin.

Fourth quarter, you just did 8.8%.

And you've really you've had very minimal impact from the price increases.

I mean, is that where you set it is that based on what you alluded to right at the end of your comments that there is an operational -- when the paint shop comes on, that might impact some volumes and might impact some things operationally?

Or is there something else to factor into where you set it?

Yes.

I think what we've done is -- let's talk about our paint shop issue first.

You're absolutely right.

What we've done is we've been prudent to recognize the intent to get launch losses.

You don't turn a paint shop on and start building 65 buses a day paint.

And you started out building 2 or 3 or 4. I mean, we may have some losses that we can't recover during the fiscal year just because our capacity on our line will might get -- we just might be limited.

So we've been prudent on that.

That's why you see that little downtick there on the sales side.

What I think -- what's the second part of your question, I'm sorry?

What's was the second part you asked me?

Oh, just -- well, just is that the reason?

I mean, is that the primary reason for it?

Or are there other things we should factor in because you still haven't really gotten the impact of the price increase?

Yes.

I think that's a market environment thing.

I wanted to make it stick and we've got it on there on every vehicle now that pricing.

I think, again, we're just going to keep you updated in every quarter.

I think I want to picture -- I would actually portray this year '19 as obviously, our goal is here to improve the margins.

You're really right, I would like to be at least for mid 8% some such around that number on the margin, 8.4%, 8.5% on our pathway to 10%.

It's very much a -- the way we put the guidance together, it's a very much, I call it, cost led -- a cost-led margin improvement plan.

Now if we can pick up on the revenue too, and you're right, we've set ourselves some good pricing at the end of the year, that will help us as well.

But right now, we sort of just additionally pointed the early juncture of the year when we just first putting guidance out there.

This is in our control.

So we know our cost, we know where our cost base is, and we feel comfortable reporting this guidance out.

And as I say, through the year, we'll keep updating you, keep you a little busy.

(Operator Instructions) We'll go next to Matt Koranda with Roth Capital Partners.

Just wanted to clarify the revenue outlook.

So industry units look like they're up about 1,000 units for fiscal '19.

Your purchase pricing, it sounds like your customers that potentially is VW settlement money, which I assume would be a positive, but maybe you're not counting on that yet.

But the revenue guide is essentially kind of flat to down a touch.

I know you alluded to and you just kind of talked about the paint shop and potential production inefficiencies.

But does that mean that you're just taking less and you're going to turn away bookings this year to be prudent and cautious on the start up, I mean, just clarify that for me?

Well, what we're trying to do, as I've said, is push them out [slightly].

But I may -- we may end up slipping some of those into fiscal 2020 is a way to think about it.

And last thing I want to do is tell a customer, "we're not going to take care of you." Now obviously, I'm also -- I also want to recognize that we're committed to improving the margins here.

And so, I mean, when I look at the business deals we got, if we are going to be somewhat more constrained on capacity because we got a lower paint shop capability initially.

We're going to be somewhat selective too in the business we bid on.

A little bit -- probably a little more.

But right now, we're seeing how it goes.

We are on track with our paint shop, we are feeling good about it.

And I did use the word prudent in there for a reason, obviously.

It's not the first time we put guidance at this.

So look, we're very mindful of this.

I mean, I'd rather just minimize any of those launch losses and take every opportunity we can get, Matt.

But right now that's what we choose.

We've chosen to put -- show it this way and just recognize there may be some launch losses along the way.

Okay.

And then, on the EBITDA outlook, I mean, maybe could you guys walk us through -- I mean, you provided the waterfall charts for the fiscal year '18 EBITDA walk, but is it possible to sort of get a walk to '19 based on the midpoint of your $80 million to $85 million in EBITDA guidance for the year?

We don't Matt.

This is Phil.

We don't normally do that.

I think what we'll do is think about providing it on a quarterly basis.

On a high level,though, we will have -- unless something changes, we will continue to see some escalation of new tariffs coming out in China.

So we have to be a bit prudent worrying about that.

We're looking at steel.

Meanwhile, it's down a little bit versus the heights that it hit in 2019.

It's still substantially above where it was in the first half of fiscal year '18.

So we think we may see a little bit more there.

We are starting to see fuel prices down versus the high level they got to in fiscal year '18.

And yet, they're still up a bit.

And as you've read undoubtedly, OPEC is talking about cutting capacity.

So that could lead us to a higher fuel price again.

On the trucking industry, we've started to see that there is some increasing in capacity that we haven't seen it rate at the present time.

So I think all in all, we know we've got a lot of good news coming in cost.

We are, as Phil said, playing still prudent on how we measure sales going forward until we see how the paint shop launches and how some of the other things move.

So we could be -- we could have some negative news in there.

And then we're obviously protecting against any other cost increases that come around those.

Hey, Matt, maybe I know with the last guidance we sort of put a visual out there for '19.

I think, we didn't put any numbers on it, put some bars on, I think, on the bridge that we did, remember that we did that.

I think what I would characterize is a bit like this, if you think about a bridge going from '18 to '19, how do I get from $10 million to $15 million up.

If you look at the market, what I call the market, particularly the volume and the pricing sort of offset, there might be a little -- if we've got some launch losses might take a bit more price initially by washout, that will be neutral.

At the same time, you're going to see economics below the chart because we -- well also there is a full year effect of economics too and the steel impact, the tariffs came on really in the midyear.

So now having said that, the future look pretty good to us.

They were better than they are right now.

But nevertheless, they are probably -- there is some additional economics, we think.

But as Phil showed you, our transformational cost reductions that we took, those initiatives that took place were very much second half of the year.

So that -- we know that's going to exceed the economics, that's the way to look at it, flat on the market practice, negative below the line on economics, with a big bar growing up, I guess, on cost reductions, which we're in control of, and we feel good about it because we've done a lot -- we've already done the vast majority of that stuff, that's already implemented.

Okay.

That's helpful, guys.

I mean, I was kind of thinking about it in terms of -- I guess, you referenced only half a year of sort of transformational cost initiative efficiencies, all that stuff from that $26.5 million that you got.

And so if I just sort of apply roughly that as a plus up to the $70 million and the bridge then that sort of -- and I assume flat pricing and economics, then you're still factoring in I guess, a fair amount of headwind from the material economics, is kind of how I was thinking about it, is that the way to characterize it?

Yes, it's a good way, Matt, but remember that the big increases in commodity costs also came through in the second half of that fiscal year.

So we will see that as well.

Right.

There is still some residual left over?

Okay.

And then lastly, just in terms of the free cash outlook, could you help us with CapEx.

I mean, it's down substantially in '19 and you referenced some spending initiatives in paint shop and everything, but what exactly is CapEx in your guidance?

Hey, just 1 second.

I mentioned about CapEx being up in '19 because that's where we're really going to finish, finalize the paint shop.

We can take that off-line.

No, I mean, again, it's something we don't tend to report at this point as a '19, but it's certainly high than '18.

Though the vast majority of the paint shop spending, we're going to see in '19.

And then think about it this way, what we've done thus far is put up the majority of the building for the paint shop.

Now the expensive stuff that goes into the building has been paid for yet.

At this time, we have no further questions in the queue.

(Operator Instructions) We will take our next question from Chris Moore, CJS Securities.

Yes, maybe I could just stay on the EBITDA a little bit longer.

So the -- just from a big picture standpoint, the 10% that we're talking about in fiscal '20, is that -- are you still looking at that as kind of quest driven versus '19?

Or is there more assumptions in terms of a little bit revenue leverage is coming from there?

Just trying to understand the timing in '19 obviously not all that cost benefits going to be shown, but trying to understand kind of big picture where the -- that incremental increase could come from?

Yes.

I think -- okay, let me take a crack at that Chris.

Yes, I mean, when we look at -- we have a 3-year plan we put together and '19 is like the midpoint of our 3-year plan is where we looked at '18, '19 and '20.

When we look at '20, the transformational initiatives, they're going to carry through.

This sort of things, we are implementing things in '19, that we'll have the full year effect in 2020, particularly on the -- probably through design side of our business that we're working through right now.

We've appointed a leader of that, we feel good about that.

So the transformational initiatives will definitely continue to grow, improve our margin through to 2020.

And the other thing is I'm confident that we'll continue to increase our mix of alternative-fuel vehicles, which do carry a better margin for us.

And we've shown a consistent track record we're able to do.

I think we will continue to do that.

So those are the 2 main pieces of it.

And I think that when you look at our product lineup that we've got, I mean, we have just such a broad range of -- especially the powertrain offers that no one else has.

I feel confident about the opportunity to continue to acquire customers and grow the business.

So growing the business, alternative fuel mix and the continued focus on cost reductions, that's our bread and butter, I think, for 2020.

Got it.

And just one, maybe we can do this off-line.

In terms of share count for -- that you're looking at for next year after the buyback, et cetera.

What's a reasonable number to be looking at?

Chris, I've got [cascade wall] I can share with you after the call.

We'll take our next question from John Sullivan with Olstein Capital Market Management (sic) [Olstein Capital Management].

Just not to belabor the CapEx comments, but I was just curious as to once the paint job and some of the initiatives are done may be heading to 2020 with some more normal level of capital expenditure?

Maybe $15 million to $20 million a year.

Probably about $20 million.

The things we want to do I think what we've been doing in the paint shop, we realized the things I like to do is we will upgrade this plant and keep it going.

So I think we'll look at maybe peak in the $20 million, low point $15 million as a range.

At this time, we have no further questions in the queue.

I would like to turn the conference back to your speakers for any additional or closing remarks.

Yes, thanks, Keith.

This is Phil Horlock, again.

I want to thank everyone for joining us today on the call.

We do appreciate your interest in Blue Bird and I think we had some great comments and great questions that we had.

We are focused on profitable growth, and we intend to deliver on our commitments, particularly around the margin improvement area.

That's the key growth initiative for us this year and next year.

And we're well positioned to grow today and I believe in the future.

So please don't hesitate to contact our Head of Investor Relations, Mark Benfield, should you have any follow-up questions.

Thanks, again, from all of us at Blue Bird, and have a great day.

Ladies and gentlemen, this concludes today's conference.

We appreciate your participation.