Blue Bird Corp (BLBD) 2019 Q1 法說會逐字稿

Good day, and welcome to the Blue Bird Fiscal 2019 First Quarter Earnings Conference Call and Webcast.

Today's conference is being recorded.

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

Please go ahead, sir.

Thank you, Becky, and welcome to Blue Bird's fiscal 2019 first quarter 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 web page.

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 will take some questions.

Let's get started.

Phil?

Okay.

Well, thanks, Mark.

Well, good afternoon, everyone, and thanks for joining us today for our first quarter earnings call for fiscal 2019.

We welcome this opportunity to share our latest quarterly results with you, so let's get started with an overview of those financial results on Slide 4.

As we have previously explained, the school bus industry is extremely seasonal, and the first quarter is always the softest quarter of the year, with unit sales typically representing no more than 15% of the full year volume.

It is also our expectation that fiscal 2019, and so I'm pleased to report that our financial results were strong, coming in slightly above last year's levels.

We sold 1,600 buses in the first quarter.

And while this was 105 units below last year, it was our third highest first quarter volume in the past 10 years.

Importantly, the shortfall versus a year ago is more than explained by 120 fewer sales to 1 customer, the government, our general services and administration as they're known.

This is simply timing of deliveries.

And through the course of the year, we expect the GSA to order their usual volume of buses from us.

Net sales of $155 million were about $8 million below last year, more than explained by the lull of government sales I've just discussed.

It's important to note, however, that when we look at school bus sales only, which represented 96% of our first quarter volume this year, revenue per unit is up by about $2,500 per unit or 3% from last year.

This reflects the pricing action we took late last year to address the rapid tariff-led escalation in steel and other commodity prices.

That's a great result for us in the first quarter.

At $7.2 million, adjusted EBITDA was about $100,000 higher than the year ago.

As Phil Tighe will show you later, we achieved a slight profit improvement despite significantly higher steel-led commodity prices and lower volume than in the first quarter last year.

Now you'll recall that we have substantially lower steel cost from the early part of our fiscal 2018 and a significant escalation began in the second half of last year and we do remain at those elevated levels today.

As I mentioned, Phil will cover more of this a little later.

Our pricing action, together with the cost reductions from our transformational initiatives that started in the second half of fiscal 2018, drove our profit improvement.

As we have mentioned in prior earnings calls, our transformational initiatives are the cornerstone of our profit growth plans and we saw the favorable impact to the first quarter of this year.

Adjusted net income and adjusted diluted earnings per share were both higher than the first quarter a year ago, up $1.3 million and $0.09, respectively.

On a GAAP basis, both net income and diluted earnings per share also improved from a year ago by $6.6 million and $0.31, respectively.

Our adjusted free cash flow for the first quarter was $57 million negative, reflecting the seasonality of our business as we grew inventory through the quarter from a very low level at the end of fiscal 2018 in September, and we also have the impact of higher account spending for our all-new paint facility.

Add these typical account seasonal business, cash flow will turn positive as we move through the year.

As we look at the underlying strength of the industry on Blue Bird's results, we remain upbeat about the business fundamentals.

With a strong (inaudible) with our property values and corresponding property taxes, which are the major funding source 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 to run the 35,000 unit mark in 2019.

In fact, that's a near record, again, for our industry size over the past 30 years.

We did see yet another first quarter record sales mix for alternative fuel-powered school bus sales, up 34% of our total bus sales.

This compares with a mix of 31% last year.

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

For the last several years, we've seen significant growth in alternative fuel bus sales.

As I just mentioned, we have not slowed down this year.

Now we'll cover alternative fuel performance in more detail a little later.

But we are passionate about product and being first to market vehicles and features that customers want and value.

In fiscal 2018, we launched 2 new exclusive products.

Our all-new 0 emissions electric powered Type D bus and our ultralow NOx propane-powered bus, which, by the way, a 0.02 grams of NOx for break horsepower hour is 10x cleaner than the EPA standard and any other brand appropriate level school buses on the road.

Additionally, our Type C electric-powered bus will launch later this year and I can tell you that we have a very strong pipeline of customer orders for both electric and propane buses that we're pursuing.

And as I mentioned earlier, we did see the profit impact of both our pricing and structural cost reduction actions in the first quarter and we expect to see additional favorable benefits throughout the year.

Our transformational initiatives are well underway and on track, helping to lowering our cost structure, driving plant efficiencies and product quality, increasing capacity and bringing major product and future upgrades to the market in the coming months and years.

All in all, I'm very pleased with our first quarter results, and particularly the specific catches we took to offset both higher commodity costs and lower volume compared with last year.

Our results were in line with our expectations and they support our full year guidance.

And I should mention these results are on the path to our stated goal for an adjusted EBITDA margin of at least 10% by 2020.

Let me now review our full year 2019 key operating achievements, I should say, our first quarter 2019 key operating achievements on Slide 5.

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

We launched our transformational plans to improve margins last year, and they're on track, driving improvements in quality, cost and efficiencies and capacity.

We achieved significant structural cost saves in the first quarter of 2019 and this initiative is key to delivering continued profitable growth.

Construction is well underway for our all-new fully automated paint shop with robotic equipment now on-site and pilot runs of validation schedule over the next few months.

This is a key initiative to drive efficiency and quality improvements across our Blue Bird product line.

We increased first quarter school bus revenue per unit by about $2,500 or 3% for the pricing action we took in late fiscal 2018.

While, at the same time, winning business with a significant number of customers that are new to the Blue Bird brand.

In fact, 15% of our customers in the first quarter were conquest accounts.

That's a great result.

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

And as of Monday this week, our year-to-date sales confirm order backlog of these buses, representing a very strong 42% mix of the total.

That compares with a 30% mix of the same time last year.

Furthermore, the total number of alternative fuel buses sold in our firm order backlog is up 25% from a year ago.

Now that's leadership and a real momentum in the fastest-growing segment of the school bus market.

Remaining on topic of alternative fuels, we are seeing very strong interest in our latest product.

Our all-new 0-emission electric powered Type D school bus, which is powered by a common electric drivetrain following their acquisition of Californian-based EDI.

We have now ported over 100 units and you will hear from me later, many of these are now turning into firm orders.

And finally, based off of this quarter performance and outlook for the balance of the year, we are reaffirming full year guidance for all the metrics on which we report.

I'll cover this in more detail towards the end of the call.

It's clear to say that we continue to advance the business on multiple fronts and we're focused on profitable growth.

So let's now take a closer look at our second quarter financial results on Slide 6.

I took so many of these financial results earlier, and Phil Tighe will run through the details a little later.

But just to summarize the first quarter.

Total net sales were down about $8 million from last year, more than explained by 120 fewer sales of buses to the GSA.

This is simply a delivery timing issue, not indicative at all of any change in full year order plans.

In fact, we continue to be the preferred bus supplier to the general services administration.

Part sales for the first quarter were up $1.3 million from last year, representing a strong 9% growth as we successfully introduce new products to our customer base and tailored-incentive programs to our entire dealer network.

It's been a really good first quarter for the parts business.

Despite lower volume and the impact of higher steel-led commodity prices, adjusted EBITDA of $7.2 million was slightly higher than a year ago.

So that's into Slide 7. Let's take a closer look at our alternative fuel bus sales performance.

In the first quarter, we grew sales of alternative fuel-powered school buses by 4% and achieved a record mix, for the first quarter, at 34% of total sales.

But as we move from the softest volume quarter of the year, however, we've seen a significant surge in orders.

As of Monday this week, we had 1,860 units booked, are in our firm order backlog.

That reflects a very strong 25% increase over the same time last year.

As I did mention earlier, alternative fuel school buses represent a 40% mix of all buses booked are in our firm order backlog today.

So it's clear we are slowing down in this segment.

No other school bus manufacturer comes close to this mix level of alternative fuels.

In the first quarter, more than 50 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 dealer network.

So far, 30 states have finalized their plans for deploying the VW settlement firms.

And the good news is about 40% of their funding in the first year has been directed towards school buses.

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

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 various alternative fuel engines, it makes it easy for our customers to grow their alternative fuel fleet with the same engine architecture, same transmission and same 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.

Now propane is widely recognized as having the lowest total cost of ownership in the market and is a green engine, especially our new ultralow NOx propane bus, which is certified at 1/10th of the NOx emissions output of other manufactured buses and the EPA standard.

These nitrous oxide gases contribute to the formation of acid rain and smog and are a contributor to asthma in children.

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

In fact, you can have it all with Blue Bird propane.

Lowest operating cost and the lowest emissions of any internal combustion engine in the school bus.

Always a great news for our school districts and fleet operators, but it's even better news for children riding our buses and their parents.

I mentioned earlier we reported business for more than 100 electric buses across 14 states.

What I can tell you now is that more than [50] (inaudible) of those quotes have turned into firm orders, and we expect certainly more to follow.

Interest across the country is strong, especially the opportunity to fund from the VW settlement.

And we're also seeing other unique state funds increasing in frequency as they look to electric buses as a way of our future.

We began delivering buses in the fourth quarter of fiscal 2018 and we're excited about the prospects of fiscal 2019 and beyond as we work closely with our exclusive electric drivetrain provider, Cummins.

We are seeing continued strong growth of our gasoline powered bus in fiscal 2019.

And further understood by technicians and mechanics who truly appreciate the emission simplicity and call it a stark capability it shares with propane.

It's also at a lower price point than diesel.

So it really works for those customers where our position price is a key concern.

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

With forecast sales of fiscal 2019 in excess of 4,650 units, we are planning another record sales year for Blue Bird alternative fueled-powered school buses.

We'll keep you updated on our progress obviously through the year.

So I'm going to have to go back to Phil Tighe -- I should say, turn it over to Phil Tighe who will take us through the financials.

I'll be back 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 first quarter of fiscal year 2019.

And there's additional information in the appendix that deals with reconciliations between GAAP and non-GAAP measures mentioned in this review, as well as important disclaimers already mentioned by Mark.

A detailed material will be available in our 10-Q, and that will be filed early tomorrow morning.

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

Material we are discussing today is based on the close of December 29, 2018, for the first quarter and fiscal year '19 and December 30, 2017, for the first quarter and fiscal year (inaudible).

There were several new accounting pronouncements conducted in the first quarter of fiscal '19 we may have discussed in the footnote in the 10-Q.

The announcements included revenues, leases, pension, hedges, cash flow and the internal use of software.

There were no changes to risk factors from the previously published 10-K.

So now, we'll take a look at some of the key financial results on Slide #9.

Now Phil's already talked about the volume which was 1,600 -- about 100 units lower than last year.

As previously noted, this level was unplanned and all of the reduction was due to the (inaudible) delivery in government service agreements.

We ourselves are trying to build the usual number of government deals that we (inaudible).

I would point out that at 1,600 units the result was about (inaudible) [higher than the average first quarter sales up in the quarter].

So we have already an improved level.

So Phil has already mentioned the first quarter, the alternative setup.

Fuel sales at 34% [owned], up about 3 points from the prior year, including electric buses that Blue Bird has started delivering.

Net revenue almost down by $7.6 million.

It was really (inaudible).

About $9 million of the decline was due to the volume of the buses, the government units (inaudible) large rerented buses with [hiring at least].

Tax was mentioned it was up $1.3 million or about 9% year-over-year and our parts seem to be doing an excellent job of growing the business.

So you can think about the decline in part sales being due to the 105 lower units and due to the fact that the decline was made up of higher revenue Type D (inaudible) buses.

We did have a higher revenue per unit on our school buses, as Phil mentioned.

That was up about 3% year-over-year.

And then that really indicated that the pricing that we announced late last fiscal year actually probably was sticky.

So we're very pleased with that.

Gross margin was about 40 basis points lower than the year ago at 4.3%.

This was despite higher average revenue on school buses.

And was really attributable to a onetime action of (inaudible) first quarter of '18, where we had lower cost, we lowered our variable cost line basically due to a system change that was occurring in the process of that -- of the cost was (inaudible) Q3, the fourth quarter of fiscal year '17.

If we continue onto net.

Net income, our net loss, net loss was $1.2 million, a substantial improvement of $6.6 million under the -- over the prior year.

You can think about the net income as largely due to the transformation initiatives.

We also had some lower tax, but we also paid about $1 million more in interest costs, a partial offset to that and that interest cost was party due to the higher debt that we we'll talk about in a minute.

Adjusted net income was, again, better than last year at about 1.3 positive.

So it was up by $1.6 million, and that was likely driven by lower levels of -- that slightly driven by the adjustment for our ongoing initiatives that I discussed previously, products and transportation.

We talked a little about adjusted EBITDA and we work up to a bridge on the next slide, so I won't spend any time on that.

And the final one was the EBITDA margin.

We were pleased there at 4.7% that was up about 30 basis points versus last year.

So improvements up there.

Diluted earnings per share at a loss of $0.05, was $0.31 better than prior year.

And adjusted diluted earnings per share at $0.05 positive was about $0.09 better than the prior year.

Our cash at $18.8 million was down about $4.4 million compared to last year.

This result was about in line with where we thought we would end up if we are going through the CapEx spend on the paint shop and first quarter had higher than normal CapEx due to that as well as there were some activities in trade working capital that probably caused us to spend a little more cash.

Debt at $209.9 million, feedstock, about $60 million versus the prior year, in part, that was due to the incremental loan that we spoke of 50 million in -- I think it was October of 2018 as part of the tender offer.

We also had some borrowing on the revolver.

We will continue to probably have in the next few months as we get through the higher levels of CapEx spending.

Net debt, it would really be explained -- the change in net debt if you look at the difference with cash and debt, change in net debt can really be explained by the stock repurchase program we did last year, that was the 1 exercise, that $56 million, and then the higher CapEx.

So I think we understand what these issues are as they are within [FY '19].

So let's go to the bridge.

So bridge is, on Slide #10, you see the impact of the bus volume and product mix was about $1.4 million.

We had favorable news from parts worth about $300,000.

So the 2 big columns on the bridge, we have Economics and Other.

So basically, the economics is due to the fact that in the first quarter of fiscal year '18, we were still enjoying relatively lower steel prices on the tariffs were still months away and we had some attractive buy process at that time.

So now, in the first quarter of '19, of course, we've got a very different scenario, steel prices as a result of tariffs and opportunities and a few other commodities.

And also, as I said, we have a low cost recorded in fiscal year '17 in one of our variable cost (inaudible) and that's normalizing this year.

On the transformational initiatives side, I think this is the one where we are really pleased.

About $6.5 million comes in, in this area.

Again, this is the result of the work we've been doing to reduce the cost of everything we purchase on -- until we improve on our (inaudible) efficiencies and on an ongoing basis, we will see more positive results coming out of that when we commence the operation of the paint shop and (inaudible) our activities.

So that was strong result for us we did at the time to get the foreseeable program and other activities generate (inaudible) [involved during this period].

We turn to the cash flow on Slide 11, quickly.

You can see we were 56.6 million negative on our adjusted free cash flow basis.

Really 2 issues there.

First, is the higher CapEx as we continued to complete the construction and the installation of the paint shop.

The second is in trade working capital.

The trade working capital, I have to say, this is at the time of year when we do start to see an increase in trade working capital normally.

We think of stuff to build up inventory as we come out of the big selling season in September of the year, and we start to build inventory getting ready for the higher sales (inaudible) out of the first quarter into the second.

So we do see some of that.

This year is exacerbated by the fact that we are fueling a buildup of inventory to support a major product change that will be coming.

So we have to stockpile some pretty expensive items and we expect to have that stockpile for some periods.

Although, I think, as we get through the year, this issue with the higher inventories will be put behind us.

If we go to Slide 12, which is net debt leverage.

You can see we have total debt of $209 million, that includes the incremental $50 million that we borrowed cash (inaudible) about $191 million of net debt.

For those of you who follow us closely, you will also note that we did increase our revolver capacity last year from $75 million to $100 million, really to provide an insurance policy against any unexpected drains on [passing].

And we did know that we had some stockpile that we have to do.

I can guarantee you, was not going to get anywhere near $75 million in that area.

So -- but we got approved to cover ourselves a little there.

We do now, as you see, have a net leverage ratio of 2.8, still substantially below the 4 that will probably didn't have in this space, and our liquidity has -- is at $92 million that we believe is a good level for us coming out of the first quarter of the fiscal year.

So with that, I will turn you back to Phil, and he'll talk about -- looking forward to my guidance and then, I'm sure, we'll have some questions.

Okay.

Well, thanks, Phil.

So let's now focus on the fiscal 2019 outlook for the year and our full year guidance.

So let's turn to Slide 14.

With recent industry running at between 34,000 to 35,000 units annually, we are on a 30-year high and we do anticipate another strong year in fiscal 2019 with industry again around 35,000 units.

As we look at the reasons for that, continued growth in housing prices and property taxes, customer desire to replace their aging buses with 150,000 of them older than 15 years, along with the boost of new funding ahead from the VW settlement also for acquisition for a very strong industry once again in 2019.

Now our plans for fiscal 2019 focus on gross margin and EBITDA margin improvement from 3 key areas.

First, the impact of the cost recovery pricing that took effect in late fourth quarter of last year.

This will have a full annual effect in fiscal 2019 and we saw the benefit of that in the first quarter.

Second, the full year impact, the transformational cost reductions implemented in the second half of fiscal 2018 and the continuation of this initiative.

And once again, we saw the favorable impact in the first quarter of 2019.

And third, the planned facility and process improvements that we are making, it is still ahead of us, to increase manufacturing efficiencies and improve quality.

They'll be able to take hold in 2019 literally here and obviously will benefit us substantially moving forward.

But of course, I will be remiss if I didn't mention our class leading products because they're also a contributor.

With Blue Bird strongly established as the undisputed leader in alternative fuel-powered bus sales and our sight set on yet another record sale year in the segment, we are well positioned to drive profitable growth through our product strength.

That is a key initiative that we've worked on the last several years, and I think you'll all agree here, we've been pretty successful on it.

So we're going to keep moving in that space, no question.

So our financial targets for fiscal 2019 are only (inaudible) previously communicated EBITDA margin goal of at least 10% by fiscal 2020.

So now let's turn to Slide 15 to review our fiscal 2019 full year guidance.

Based on our strong fiscal first quarter 2019 results and the outlook for the remainder of the year, we are reaffirming guidance of all 3 reported metrics.

Net sales guidance of between $990 million to $1,025,000,000.

As mentioned in our prior earnings call, 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 facility and make other facility and process improvements in the plant.

Now these type of production losses are typical for an automotive company undertaking significant plant upgrades, and our approach will be to minimize them as much as possible.

But I want to assure you, we'll be looking for every opportunity to maximize sales throughout the year or provide updates as necessary.

Adjusted EBITDA guidance is between $80 million to $85 million, a significant $10 million to $15 million increase over fiscal 2018 as we focus on driving down costs, increasing unit revenue and improving EBITDA margin.

An adjusted free cash flow guidance of between $24 million and $28 million.

Now adjusted free cash flow continues to be a strong feature of our business model and typically represents more than 50% of our adjusted EBITDA.

However, as you know, our fiscal 2019 guidance for adjusted free cash flow is being impacted by the unique capital expenditures required to complete construction of our all-new automated paint facility.

So we are wrapping up.

We had a strong fiscal quarter performance both operationally and financially.

On our prior earnings call, we explained how we exited fiscal 2018 with significant run rate benefits from structural cost reductions and cost recovery pricing taken in late fiscal 2018.

While we saw the impact of these benefits, clearly, in the first quarter compared with last year, as we were able to offset rapid rising commodity costs led by the impact of the steel tariffs and lower unit sales, these run rate benefits will help us drive significant profit and margin growth in fiscal 2019 with adjusted EBITDA higher than our targets [yet to beat], 14% to 21%.

I should repeat that: 14% to 21% higher than in fiscal 2018.

And our plans and our guidance support this.

We'll continue to update you on progress each quarter.

Well, that concludes our formal presentation.

I'm going to now pass it back to our moderator, Vicky, to begin the Q&A session.

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

I just wanted to start off with the paint booth startup and how things are proceeding there.

I know you guys mentioned, I think, earlier in the year, you'd be doing some test runs and validation.

Do you feel like everything is on track for completion by the high season?

And what are the remaining hurdles that you need to get over before feeling comfortable with scaling that -- the booth?

Well, there's some equipment to install in the booth.

And so booth is a very -- an understatement.

It's more like a unique plant itself, it looks like, when you see it.

So there's still some construction work to do, but we're on target, really, for end of April.

We have a date in March, specific day, but pretty much toward the end of April, job 1, when we sort of start to run our first units through it.

Prior to that date, we're making sure that all the safety standards are met, the equipment is ready, the initial requirements are met, all the things you have to do to complete certification.

But we've been looking for, as we look toward the end of April, we'll start up with a slow ramp and progressively increase that through the year.

And don't expect that, through the course of this year, we'll be anywhere near every single bus running completely through the paint shop.

If we do that, it'll be a complete home run.

But we'll be -- certainly, that will be our target as we start the next fiscal year.

In October, it would be fully operational with every bus goes through that paint shop.

But -- and our goal is to ramp it up progressively through the year and learn how this works, make sure it's efficient.

Those are what we want.

And I guess, obviously, a question that you raised, first of all, we believe we're on track, yes.

Okay, great.

Yes, I mean, the reason I ask is because you guys mentioned there's some conservatism, I guess, factored into your top line guidance for fiscal '19, and the large, sort of the bulk of that conservativism seems based around the launch of the paint facility.

So I was trying to get a sense for, I guess, when you think you'll have the visibility into how that's running so that you -- that it would give you confidence to sort of change to the top line guidance, I guess.

So it's sounds like April or later at the very least.

Is that fair to say?

Yes.

Look, I think, Matt, I think it's first, a fair question.

I think we'll give you an update at the end of the second quarter.

I think, obviously, we'll know by then that'll be -- we should be in a place -- we'll certainly have started production.

But I think the reality -- the real reality check will be the end of the third quarter because we'll have the 4 weeks or so, full 3 months or so under our belt.

We'll know where things stand and how it's going.

But -- so I think there'll be an interim check next quarter and then the real full year outlook check at the end of the third.

Okay.

And then it seemed like working capital was a bit larger of a drag on cash than I would have anticipated during the quarter.

I think you guys mentioned a little bit higher inventory the quarter that you built.

Could you give a little more color on sort of the product change that you're dealing with for the -- with the inventory build?

It would be helpful.

Yes, I just want to mention, I'll let -- Phil will -- can take this as well.

But I just wanted to mention, we talked about the fact this is the inventory build through a quarter.

And one thing we have to look at, too, is where you're starting from.

We did a great job in controlling the inventory at the end of last year.

And actually, we finished with an inventory at the end of fiscal 2018 that was about $20 million lower than it was at the end of '17.

So now you're building from a lower inventory level.

You're not necessarily building a much higher endpoint, but you've got a bigger growth plan to work.

So we benefited obviously in 2018 from that fact.

We did shed the inventory down, which we like to do at the end of the year, did a great job at it.

But now we have this build from a lower base.

Actually, it's really good news, but it doesn't look like it, whenever you look at these charts.

But was really -- it was a good-news performance.

And I think, on the product side, we're -- we don't like to announce what our product plans are because if we're doing something that's significant, I want to hit that mark at the right time.

But just suffice to say, over the next 18 months or so, we're going to have some significant product changes coming in and you'll see those, and we'll fill you in at the right time, but we are having to build some inventory to handle that changeover for us.

Okay, great.

And then just last one, I guess, for me.

In terms of the order activity, it looks like great news on the alt fuels front with a significant percentage of your new orders represented by that.

Basically, have you been seeing some of the, I guess, districts that were pushing decisions from back in December out into this year?

Is that what's coming through and driving the strength in alt fuels with some of the VW settlement money that they're seeing?

I'd say we're starting to see it.

It's -- I wouldn't say it's a flood of stuff coming through the VW money yet.

It's more of a trickle.

But we've certainly seen states that are now releasing that money, and we're doing very well in those.

I think Louisiana was one of the first ones.

And we capitalized on that very well with our propane products.

So I think that's still ahead of us, actually, a lot of the VW money.

I think we're just now entering that season.

Once you get out of the first quarter, the soft market, just delivered all your school buses for the year.

It is slow, we all know that.

Now things around the January, February time frame, that's when the orders start to really pick up and the interest comes and the "activity" increases.

And I just think we have been successful in marketing our product strengths and what we believe is great for the industry, which is our alternative-fuel-powered products.

So it's a case of being able to do what we've been doing every year.

I mean, we also had a pretty good last year.

I did know we're up this year.

It came from a very -- over another record level last year when there was no VW money.

So I think, we're just -- again, we're out there, we worked this hard, we work our strengths hard, and the VW money is a little boost for us, a little bit of that.

But I think this is more like normal business right now that we've benefited from.

(Operator Instructions) We'll go next to Eric Stine with Craig-Hallum.

So maybe just, first, just a high-level question on alt fuels.

You mentioned that about 15% penetration of the overall market today and up from sub-10% a couple of years ago.

I haven't asked you this in a while, but any updated thoughts on where you think that ultimately goes?

And I mean, obviously, that's going to play out over a number of years, but where you think that, that can go with the offering that you and others have in the market?

Yes.

Well, I don't know about the little guys.

I can talk to myself and ourselves.

I mean, we're -- obviously, we ended up last year, full year at 38% mix of alternatives to diesel, is the way I look at it.

I think, Eric, you talked about pretty big numbers, over 50%.

I think 50% is our next hurdle we'd look at.

And that, to me, is on the horizon.

I look at everything we're doing with electric power, the loan outs values of our propane products, all the things we're doing continuously.

And diesel gets, every time we get a regulatory change, diesel gets tougher and tougher and more expensive.

And I think it's -- I think 50% is certainly something we'd look at in the next few years.

I'm not going to tell you which year is in mind, but we could see -- we're bullish about continued growth in our mix year after year.

Some of the products we've got too, we feel very good about it.

Right, absolutely.

Okay, and maybe just turning to, again, another market question.

But I know that it's often cited about 150,000 buses out there that are, what, 15 years or older.

And I'm just curious, I mean, do you see any regulatory triggers out there or any characteristics like, I know you just launched the stability control system and the backup camera has been standard on your buses.

I mean, are there any things out there that you see kind of speeds that upgrade cycle?

Or is this something that's -- it's out there, there is a hope that is going to rectify itself but unclear if it ever happens?

There isn't a lot of, what I'd call, significant product regulatory change that we have that's been mandated yet in the years ahead as we look.

I mean, you mentioned 2 there.

We volunteered that, actually.

Those 2 things you mentioned, we volunteered to put those on our products.

We think it's right for safety.

And we've been doing all of that alternative -- we've had the -- those products as options for several years, and we thought it was the right time to standardize them.

I think the one thing that we always get a lot of comments and -- is around seat belts.

We don't put seat belts in every bus.

We offer seat belts.

We can put lap belts, 3-point seat belts.

We've got a great seat system, an all-new seat we introduced at just about a year ago, which we can -- which can accommodate even converting later on in cycle to a fully seat belt bus with limited cost.

I think that's one that gets the most discussion, but it's like anything else.

When you've only got a new industry of 35,000 units but you've got a park of probably 90,000 units, it's difficult to sort of accelerate things very quickly.

It's difficult to retrofit to an entire park inside there.

I think the best thing, I think, about replacing the cycle, the VW money.

No question, there's a lot of money there.

It is all about getting those 20-year old buses off the road.

I mean, because we're not talking over 50, there's a lot over 20 years of age.

And those are targeted at getting all the emissions.

The old diesel buses where you see the black flume come out the back, we want to get rid of those.

So I think that's probably the best catalyst, I would say.

And it'll be spent over, I expect, the next 3 years, probably 3 to 4 years, to utilize that money.

So this -- and that's still ahead of us.

So that should be a good boost, I think, to try and get rid of some of those buses, oldest buses, off the road.

But regulatory-wise, I don't really see anything is going to be a boost for the industry.

Okay.

That's helpful.

And then last one for me, and I might have missed this in Phil's comments, but the paint shop, I know it's a key piece to you getting to that 10%-plus EBITDA mark for fiscal '20.

And I know it's going to come and it'll be phased in throughout the second half.

But have you ever quantified or could you quantify maybe the margin pickup that you expect from the paint shop?

I'm not sure we want to quantify that yet, Eric.

It's -- let's put it this way, we're investing a large amount of money in the paint shop, and we expect to get quite an attractive payback on that money in the shortest possible time.

So it's substantial.

We'll go next to Mike Baudendistel with Stifel.

Just maybe a little bit similar to that last question, I mean, just going from what you have -- just have for guidance for 2019, about 8% EBITDA margin going to 10% by 2020.

Sort of, if you can put these maybe items in the buckets of what's the order of magnitude of the largest things that are going to get you 200 basis points from '19 to '20?

So look, I think you can think about it this way: the major work that we've been doing on reducing cost [to own and to refuel, to build] the bus is clearly, I think, the central [mark] of our movement to (inaudible) bus.

That -- we're still delivering that, so that all that we're doing this year, in that area.

So -- and quite frankly, we've done some reorganizations in the company so this is not any longer going to be a one-part thing.

It's something that we're putting into the culture of this company in terms of very aggressive cost of this organization.

So I think that's the single largest piece.

Then in order of priority, I think the paint shop is clearly going to drive significant efficiency and quality improvements.

And then, after that, we -- you've heard the discussion with where we think alternative fuels will go.

We do think the market is going to continue to grow for alternative fuels.

And quite frankly, we think we will make better margins on alternative fuels through the future.

So that will contribute.

And then the final piece, really, is a collection of things that we're doing within our total manufacturing area to grow efficiencies in areas other than the paint shop.

We are putting a lot in there.

We mentioned that we're doing some stockpiling for new product.

There are product initiatives coming as well which we think will grow.

So we've got a pretty good shopping bag of things that are going to deliver this 2-point margin improvement.

And again, a lot of it is based purely on structural cost changes within the company and then a higher mix of alternative fuels.

Phil, you want to go ahead?

That's a fair assessment.

I think I would -- I think when you look at net , you look at what we're doing in this, we were talking a lot about structural cost change.

And what we did last year, we talked about the pricing.

So ahead of us, we have the paint shop.

And as Phil mentioned, we haven't really got into this much, but we added a lot of other things in the plant.

We're going to every one of workspace and look at efficiencies, what it could do better, how it could be more efficient, how we can drive out waste.

It's just a -- it's a process we're going through, and we think that'll have a lot of benefits for us in next year and beyond.

And as Phil said, this isn't just a onetime project.

Continuously attacking cost, attacking waste, getting back in business is something we're driving through the entire Blue Bird system and culture.

It'd be like it becomes a cultural thing.

I think we're confident.

We have a plan.

We have a track.

And I think the results we've achieved so far that we saw in the fourth quarter of last year, you saw some of that come on the cost side of this first quarter.

I assure you, the impact this can have.

And I'm often asked what up are you on here, because a baseball game, I'd probably say we're in about the fourth inning of a baseball game right now, so we've got some ways to go.

Got it.

That's helpful.

Not an official game.

The other question I have is just -- you mentioned that there's about 15% of the conquest accounts in the quarter.

What's a more typical percentage?

And I guess, the implication there is that you're taking some shares.

I'm just wondering if you have any updated market share targets?

Yes.

I think, probably, it's probably more like around -- well, actually, you look at conquest -- I mean, there's 2 ways of looking at it: one is traditional conquest with diesel and one is with alternative fuels.

And I think, certainly, if you're above 10% conquest, especially, earlier in the year, as early in the year as we are -- remember, this is a soft quarter.

There isn't a lot out there, right, we have to go in and find this business.

When you're getting 10% at this time of the year, that's pretty good.

So we've been at 15%, I think, we certainly like that, and we know exactly where it is.

And these are obviously new to Blue Bird.

So that's our goal.

So 10% plus is good.

15%, I think, is very good.

Okay.

And just -- are you having difficulty with just employee turnover or staffing?

I mean, that's something that I've heard from other OEMs, that have trouble with that.

Oh, it is definitely a tighter labor market than it used to be, no question, I think.

And certainly, where we are in the middle of Georgia, we've seen an influx of other businesses coming here.

Cummins has a good work -- great work ethic here.

And we have a good set of employees.

But we work that all the time.

We've been there a long time in this area we're in.

We're the staple company to like in Fort Valley, Georgia.

So we have quite a pipeline that we access when we need new employees, but it's something you've got to watch.

I think you're right, Eric, it's tightened up.

But we have a process by which we go after it aggressively, many ways too.

We know all the -- we look at everything from the salary side to the hourly employee side.

All the universities, we've got affiliation with around here.

There'd be a lot of the employees, they know us very well.

Internships, they become full-time hires.

But on the hourly base, like I said, we have a -- we're constantly -- actually, we have a process where we're constantly looking to test that pipeline and make sure there's availability, but it is tightening.

I think, right now, we feel, basically, strong about where we are.

And we'll go next to Chris Moore with CJS Securities.

Maybe -- so the ASP in Q1 was up $2,500.

Just trying to get a feel for if you think that's just -- it's going to flow through for the rest of the year.

Obviously, I don't know when the pricing hit in fiscal '18.

I'm assuming that a portion of the buses were at those higher levels in Q4.

But is it fair to think of kind of Q2 and Q3 matching that same type of increase on an ASP basis?

Chris, this is Phil.

The pricing increase really hit very late in the year, in the fiscal year, I'd say.

So not a lot of buses got the price increase purely because of the cycle that we go through when the -- how prices have firmed up.

When an order is placed, and an order is anywhere from 8 to 10 weeks out from when we actually sell the bus.

So there wasn't a lot of room to move when we announced the pricing.

So not too many buses got it in the fiscal year '18.

It's our firm expectation that we will continue to get that revenue.

We are, obviously, prepared for situations to change, but given the way we look at the market and the model, we are comfortable that we will continue to generate higher revenues and improve this year.

Got it.

Can you maybe just remind me, I think you did say at the end of last year the mix between propane and gas buses in '18, I'm just trying to get a feel for whether you expect that to change much in '19?

Chris, I'll give that to you offline.

Got you.

It was solid.

Pretty close.

We had a great year in gasoline.

And I think it was around about sort of 50-50.

Yes, very pleasant.

Now very close to 50-50.

Any reason to think that will change materially either way this year?

Well, I think one thing is the -- we talked a little bit about this VW money.

Now gasoline can't access the VW money.

Propane can, CNG can and electric can.

So obviously, and I remember talking about it a lot in fiscal '18 that we saw delays in folks ordering propane because they knew they got the VW money coming.

So they may have said, "I'm going to try a gas engine." So I do think the VW money coming with us this year being accessed, and we're seeing that now, actually, we're seeing it very strongly in the first few months of this year, shows, I think, the propane is very much on the up and up.

So -- but they're both doing well.

By the way, last year, I guess, it was something like about -- it was probably like a 46%, 54%: 46% gasoline, 54% propane between the 2.

Got it.

That helps.

No, 46% propane, 54% on gasoline.

46% propane or gas?

46% propane.

Propane.

Got it.

Okay.

Helpful.

Let's just assume that you have to build a few less buses than you could have sold because of the initiatives going on.

A couple of things, do you have any ability to kind of cherry-pick in terms of buses or customers that are more profitable?

And two, are those sales gone?

Or can you potentially carry some of those over into fiscal '20?

Let me take the second question first.

I'll take that.

First of all, I did -- we have shown an ability that we can carry them over.

I mean, you might end up -- if [you've got to keep someone waiting] for a little while longer than they'd like to, you might have to help them get there a little bit, other than take a bus to school stuff.

But you could do it.

I mean, that's about relationships, and those are guys who really want your product.

I mean, and we've seen that.

It does happen from time to time.

And I think we feel we can manage that.

So I don't think, when I talk about pushing sales out, we hope to capture those in the long run and it might just go beyond the school start, is the way we think of it.

Your first question about can you cherry-pick.

Obviously, we bid on business.

We bid.

It's the bid business we're in.

Not all prices are the same.

Not all specs of vehicles are the same.

States are different.

They have different funding abilities, different spec of the vehicles and so on and so forth.

So we are mindful of where we spend our production money, so to speak.

Yes, we do look at that.

We look at that very carefully and where we want to go on -- go after business more aggressively than other places.

So we can, to a certain extent, do that, but, hey, we want to sell school buses.

Basically, that's the bottom line.

But we can be a little selective when we need to be.

At this time we have no further questions in queue.

So I'll hand the call back over to Phil Horlock with any additional or closing remarks.

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

We do appreciate your continued interest in Blue Bird.

And as I hope you can see by our first quarter results and outlook for the year, we are focused on profitable growth and intend to deliver on our commitments.

And I believe we're well positioned for growth today and in the future.

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

Thanks, again, from all of us at Blue Bird.

Have a great day.

That does conclude today's conference.

We thank you for your participation.