Blue Bird - Earnings Call - Q3 2018

Transcript

Speaker 0

Good day, everyone, and welcome to the Blue Bird Corporation Fiscal twenty eighteen Third Quarter Earnings Conference Call and Webcast. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mark Bedfield, Director of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Yolanda. Welcome to Blue Bird's fiscal third quarter twenty eighteen earnings conference call. The audio for our call is webcast live on blue-brib.com under the Investor Relations tab. You can access the supporting slides on our website by clicking on the Presentations box on the IR landing page. Our comments today include forward looking statements that are subject to risks that could cause actual results to be materially different.

Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Bluebird's President and CEO, Phil Horlock and CFO, Phil Tighe. Then we'll take some questions.

Speaker 2

Phil? Well, thanks, Mark. Good afternoon, everyone, for joining us, and thanks for calling in today for the third quarter earnings call for fiscal two thousand eighteen. I wanted to talk to you to share our latest quarter results with you, so let's start with an overview of our financial results on slide four. Let me begin with a comment on the industry outlook.

We still expect new bus sales to be flat to slightly higher than last year and should again exceed 35,000 new buses. This is strong demand and was the second highest school bus in this since 1985, This is heading into the being right now. Plus, the Blue Bird, we achieved strong sales results in the third quarter with almost 3,750 buses sold, which is only about a 100 units from last year's record sales for the third quarter looking back over a decade. So a very strong unit sales quarter for us. Additionally, it represented a substantial 53% increase over this year's second quarter unit sales.

So for the first nine months of the year, unit sales are up a little over 2% from last year. Importantly, in the third quarter, almost 20% of our end customers were new to the Blue Bird brand, representing about 30 of our total sales. That's a really strong endorsement of our products and dealers, gas leader diesel powered buses leading the way in conquest business. At $340,000,000, third quarter net sales revenue was 6% below last year's level, reflecting a lower volume and mix change I just mentioned, led by higher gasoline and diesel bus mix this year, possibly lower than the average. At 23,700,000.0, third quarter adjusted EBITDA was $9,200,000 below last year.

Now we mentioned on our prior earnings call that we were experiencing significant headwinds in commodity costs, but by escalating steel prices related to the tariffs imposed by our government, which were not anticipated earlier in the year. As you are no doubt aware, other automotive manufacturing industries have been similarly impacted by higher steel prices, which, together with higher freight costs, then I'll explain our lower third quarter profits compared with last year. It's important to note, however, that we've taken specific action to offset this issue going forward. I will discuss the specific specifics of this just a little later. Adjusted net income and adjusted diluted earnings per share were both higher than the same period a year ago.

So on a GAAP basis, both net income and diluted earnings per share also improved from a year ago. Adjusted free cash flow for the quarter was strong at $36,000,000, which is $22,000,000 higher than the same period last year. Looking ahead, our production schedule is now full for fiscal twenty eighteen, so we have a solid line of sight to our fourth quarter sales and margins, and our backlog of term orders for fiscal twenty nineteen is up over 50% from this time last year. We are projecting double digit growth once again in alternative fuel powered bus sales with a record sales mix of nearly 40% of our total unit sales. That's up for the prior record of 34% last year, another strong year for the industry's best selling alternative fuel powered school bus.

As a reminder, in alternative fuels, we can't all of our propane, compressed natural gas, gasoline, and our own new electric powered buses. As all of these are alternatives for diesel, which has been a staple fuel for years. Now for the last several years, we've been achieving significant growth in alternative fuel bus sales. And as I just discussed, we have not slowed down this year. I mentioned earlier, we have taken specific action to address the unexpected and sudden steel price escalation that's impacted us in the quarter.

So let me cover these now. First, we increased prices on all of our bus models in June to cover the higher cost of steel. Now there's a lag before this takes effect full effect, however, as our order backlog is price protected. And, of course, the new business, which represent our pipeline for future orders, are guaranteed for ninety days. So our ability to offset the third quarter steel cost increases within the quarter was limited.

Consequently, the impact of our cost recovery pricing action won't be seen until late in the fourth quarter and, of course, will apply fully in fiscal twenty nineteen. Second, as communicated previously, we are well underway on the transformational initiatives we kicked off in the first quarter, which are focused on accelerating our margin growth. While we've made significant progress on reducing procurement costs, we will see these margin improvements taking hold in the fourth quarter. Importantly, fiscal twenty nineteen will benefit substantially from the full year flow through of these actions. I will touch on this again later in the outlook section of the presentation.

As a result of the sudden adverse impact of economics on third quarter earnings, we are lowering our full year guidance. But we do expect to restore profitability and margins in the fourth quarter and beyond as we see the improvements from our pricing and cost reduction actions taking effect. Let me now review our year to date key operating achievements on slide five. We recorded a number of significant achievements that Nissan will make us more competitive and support our profitable growth going forward. I'm excited to report that we recently achieved EPA and CARB certification of our class leading propane bus at a NOx emissions level of point zero two grams per brake horsepower hour.

We already were the market leader at point zero five grams NOx emissions, so the best just got better. This means our propane engine emits just one tenth of the NOx level that our competitors offer, and that's great news for our customers, but even better news for the children who ride our buses and for their parents. So with the broadest range of low emissions vehicles in the market, including our zero emissions type c and type d electric powered bus, we continue to be the undisputed leader in the fastest growing segment of the business. Speaking of electric buses, our production type d electric bus rolled off the line last week and delivered gross rent this quarter. As a reminder, we're the only nationwide school bus manufacturer today that offers electric powered school buses in type c and type d configurations.

We've had a great customer response to our more than 20 ride and drive across the country. Great feedback from our customers. Construction is well underway for our all new automated paint shop with pilot runs and validation scheduled for this fall. This is a key initiative for efficiency improvements next year. As I mentioned earlier, we're trying to recover the recent tariff related escalated steel cost prices, and this will take hold waiting in the fourth quarter and fully apply in fiscal twenty nineteen.

Turning to orders. Our fiscal twenty eighteen bookings and total order backlog backlog, sorry, which includes fiscal twenty nineteen orders, are up 4% from a year ago, which is a strong position to be in against a relatively flat industry outlook. And our fourth quarter production slots are now full with noncancelable orders. Importantly, our alternative fuel bus delivered for fiscal twenty eighteen and backlog are up 16% from the same time last year. That's another substantial growth in alternative fuels for Blue Bird.

And we anticipate that nearly 40% of our bus sales this year will be powered by alternative fueled engines. Just a few years ago, that was less than 5%, which shows what a way we've come with almost 40% now in non diesel engines that Blue Bird sells. Looking at industry experts, our transformational plans to improve margins are on track, driving improvements in quality, cost and efficiencies, and capacity. We expect significant cost savings and margin growth in the fourth quarter and beyond, supporting our plan to continue margin growth towards our 10% EBITDA margin objective. We are reducing full year guidance as an outcome of our third quarter results and the impact of a sudden escalation of steel prices and other commodities.

Despite these headwinds, however, our expected further recovery in the fourth quarter, fiscal adjusted, fiscal twenty eight adjusted EBITDA guidance is slightly higher than last year's results. So now let's take a closer look at our second quarter financial results on slide six. I touched on many of these financial results earlier, and so Tyler will run through these in detail later on. But just to summarize the third quarter, total net sales and adjusted EBITDA were down as we're about a 100 units lower than the record third quarter volume of last year, and we had a higher mix of gasoline and diesel powered type c buses. And, of course, steel economics hit us hard in the third quarter with little ability to offset the cost impact within the quarter.

Part sales were up a strong 9% in the third quarter as we added new parts to our product range, and we saw increased sales through our our franchise dealer channel. For the first nine months of the year, total net sales were up $15,400,000 while adjusted EBITDA was down by $4,400,000 more than explained by the third quarter decline. Turning now to slide seven. Let's take a closer look at our alternative fuel bus sales performance. As the chart on the left shows, we are well on our way to achieving a new full year sales record of around 4,500 alternative fuel powered school buses.

That's a 16% increase over last year. As I mentioned earlier, we expect the mix of these buses to be nearly 40% of our total sales, up from 34% last year. We continue to be the clear leader in the fastest growing school bus segment with our market share now running at about 80% and certainly all of that in some parts of the country. We now have more than 17,000 alternative fuel powered school buses on the road. And with less than 15% of school districts still having purchased not having purchased an alternative fuel powered bus, we are well positioned for future growth.

We offer the widest range of alternative fuel powered buses on the most modern and proven engine in the industry. With our exclusive long term partnership with Ford and Ranch CleanTech across all alternative fueled engines, it makes it easy for customers to drill their alternative fuel fleet with Blue Bird. With the same engine architecture, transmission, and service requirements across all three products, propane, compressed natural gas, and gasoline is an easy move for school district or a fleet operator. Propane is widely recognized as having the lowest total cost of ownership in the market and is a green engine. Our latest EPA and power certification for remitting nitrogen oxides or NOx emissions at point zero two grams of break off power hour is one tenth of other manufacturers' buses.

I wanna repeat that. That is one tenth of the other manufacturers' emission per level. You've got to distribute to the formation of acid rain and smog. So the best in class level of knots is another great reason for choosing Blue Bird Culture. Now despite our growth, in the past few months, we have seen some customers elected to push their propane purchases to fiscal twenty nineteen in anticipation of receiving funding for the VW Queen Air Act settlement fund late this calendar year.

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, electric powered buses are perfect choices to utilize these funds. No one is in the position we are to capitalize on using on utilizing them. Our gasoline engine is readily understood by technicians and mechanics to really appreciate the emission simplicity and quality of scale capability it shares with propane. It also has a lower price point in diesel, so it really works for those customers where acquisition price is a key concern, and sales are on extremely strong this year.

We are taking orders for our all new type c and type g electric buses for deliveries beginning this quarter. As we look forward to next year and beyond, with the broadest range of the cleanest, blowing up school buses in the in the industry, eight times more alternative fuel powered buses on the road than all of our competitors combined, and still less than 15% of customers have tried an alternative fuel powered school bus, Blue Bird is in a very strong position. Let me now turn it over to Phil Tighe, who'll take you through the financials, and I'll be back later to cover the fiscal twenty eight twenty eighteen outlook and guidance and a first look at fiscal twenty nineteen. Over to you, Phil. Thank you, Phil.

Good afternoon, everyone. The next few slides are a summary of our financial performance from the third quarter. Phil has already hit some of the highlights for you, and we'll spend a little bit of time with some details. Additional information is available in the appendix, details of reconciliations between GAAP and non GAAP measures as well as important disclaimers. Detailed material is available in our 10 Q, which has been filed.

We encourage you to read the 10 Q and the important disclosures that it contains. The material we're discussing today is based on the close as of 06/30/2019 for the eighteen fiscal year and 07/01/2017 for fiscal year seventeen. I would point out there are no significant changes in our personal accounting policies in the period, and risk factors are unchanged from the previously filed 10 ks. Let's now take a look at a summary of results shown on Slide nine. This slide summarizes our actual results for the first quarter and the same period of 02/2017.

We also included 2018 results. So we believe there are some important points that you can draw from that and the importance of seasonality in our business and to highlight progress in key areas. Looking at volume for the third quarter, Phil has already completed 3,746 units with about a 100 units down versus the record volume achieved in 02/2017. And we've talked previously about the highly seasonal nature of the spin bus business and the fact that generally production and sales in the first half is less than 40% of the full year. So you can see the growth in volume from second quarter to third quarter of over of over 1,300 units.

We expect volumes in the fourth quarter will be similar to the level achieved in the third and higher than the fourth quarter period last year. Alternative fuel vehicles, as Phil mentioned, accounted for about 35% of our third quarter volume, and we're looking at about 40% alternative fuel for the full year. We also actually very happy to be announcing that we will be making delivery of our first electric buses in the fourth quarter. Net revenue, as mentioned on the prior slide, is down by about 80,000,000 or 6%. The revenue decline is really attributable to factors.

One is lower volume, which is a substantial part of the decline. The other is per unit revenue decline, which is partly primarily due to changes in the mix of products sold. We had a very strong quarter with gasoline buses, which is our lowest price in the market and is a great cost for people who are very acquisition price minded. And we also were very strong in the five speed diesel bus market in the first quarter, and and that also contributed to a lower average revenue. So gross margin is another thing I would like to talk to.

It was 11.8% this quarter. It was down about 1.7 points below last year. But importantly, it was up by almost two points versus the second quarter where we we did 10%. So you can see we are we are improving in the in the second quarter in the first quarter versus second, and and we'll see further improvement in the fourth quarter. The commodity costs has as Phil has talked about, were the majority of the reasons for the reduction in margin.

Our coal gold steel prices, and that's the majority of the steel we buy is coal gold. We're up about 27% versus second half of the prior year. While we are beginning to see some reduction in the long term outlook, that still continues to be a major factor in our profits for the balance of 02/2019. In addition to commodity costs, we continue to experience higher inbound freight costs, something that we discussed in our prior two reports. The higher freight costs is due to diesel, which is up substantially, and a shortage of drivers.

Freight costs in total are up about 29% compared to the same time last year. Material and freight economics combined deteriorated Blue Bird's margin by almost two points in the first quarter. Absent this impact, the margin ratio is about the same as last year. As Phil has discussed, we're working on a broad range of actions to reduce our production costs and improve ongoing margins. These plans are unchanged.

We're sticking with them, and they are starting to deliver what we had predicted they would. And you'll see some impact coming in the fourth quarter and a significant improvement in fiscal year 'nineteen. In late June, again, we implemented pricing to help offset the cost increases that we had we had experienced, but but we will not see a a major contribution of that pricing through our profits until fiscal year 'nineteen, as Phil explained, due to the way the prices are locked in for firm orders in advance of production. As previously discussed, the initial benefits from our operational transformation initiative provided a small offset to margin reductions in the first half. We continue to make progress in third quarter, and we expect the initiatives to have a more substantial impact on margins in fourth quarter and beyond.

Net income, I think we've already covered, but it's 21,900,000.0. That was about 1,900,000.0 better than last year despite the despite the lower EBITDA. And adjusted diluted earnings per share at 91¢ was up by 21¢ versus last year. Favorable tax treatments was primary driver in the net income result, offsetting the reduction in gross profit driven by lower volumes and higher costs. I will talk about the adjusted EBITDA margin on the next slide.

Tangible cash, always important. We closed the quarter with $41,900,000 of cash. This was down by $8,000,000 versus prior year, and that was more than accounted for by CapEx spending in the relevant period to support upgrades to our production facility. You've heard previously that we are putting new paint shop in the in the plan. Debt was reduced by $7,000,000 in the period.

So really, the change in net debt was about $1,000,000 for the quarter. And please note that the large increase in cash between the second quarter of 'eighteen and the first quarter of again, pulling out the seasonality that we experienced in this business. If we could go to the next slide, this is a bridge that walks from third quarter of fiscal year 'seventeen to the same period in fiscal year 'eighteen on an adjusted EBITDA basis. You can see the deterioration of about $9,000,000 compared to last year. And the two big items that caused that, bus volume and mix, obviously, was down due to due to the 100 less units and also the the higher mix of type c diesel buses.

Gross profit was also down by about $6,000,000 and this is all attributable to higher material costs and freight. Rapid increase in the material and freight economics in the third quarter We're really responsible for us not achieving a substantially better result. As you can see, there were no other really major concerns in the third quarter for We're taking aggressive actions to offset as much of the impact of acquired costs as we can in the balance of the year, although it is to get a full off better full offset profit achieved in 2019. On the next slide, slide 11, is a brief graphic of of what happened with steel and with freight. And you can see, hot rolled is actually up about 55%, cold rolled up about 27, and then freight around 29.

I would point out that it it appears that hot rolled may may be may be starting we may start to see some some some downward turns. The twelve month forward prices suggest Midwest hot rolled steel is showing a reduction of about a 150 a ton about twelve months out. This is a promising indicator, although there's still a lot of uncertainty, and I I don't think we can actually bank on that at the moment. So, again, I'll just summarize it. We're we're taking really three significant actions.

As as Phil mentioned, we've we've already implemented pricing on in June. We we will see a small impact of that in the fourth quarter, but it will substantially impact in in fiscal year nineteen. We are also working at whatever levers we can pull to resource lower cost areas of suppliers and taking other actions to to generally improve our cost structure. And, obviously, we are full steam ahead on our transformational initiative program and and considering some expansions to its scope at the time. With respect to freight, we are working with our logistics suppliers to identify less expensive options, although it will be difficult to offset the magnitude of this increase without a reduction in fuel prices or more capacity being added to key routes.

On the next slide, which is Slide 12, we talk we we talk to an outlook for the fourth quarter seventeen to the '18. This is not something that we typically provide in our calls, but we thought for for obvious reasons, given that we've only got three months to go, it was something that would be useful. But please don't read this as an indication that we're committing to to regularly update on on quarter out projections. As you can see, we project the first quarter will be around $7,000,000 better than last year. Volume and parts will be up and mix does not seem to be the problem for us.

I would remind you that right now, we we have total visibility to our bookings and and our backlog for the balance of this year. So so we have a fairly firm plan on that. You can see the impact of economics. It it it continues to hit us reasonably hard in the fourth quarter. We're looking at that 7,000,000 year over year.

And and finally, you you see that we have a large number called all other. That that is a lot of cost efficiencies that we've been taking to to reduce costs and maintain profits at least at a bit above last year. And and also, obviously, does include the fourth quarter outlook for our transformational initiative, which is starting to take serious hold. I guess, importantly, if you took out the economics or the the unexpected part of the economics, our fourth quarter would be looking much closer to $40,000,000 than $30,000,000 which would have been a great result for the quarter. I'll move now to the next slide, which is Slide 13, which is free cash flow.

We had a strong quarter for free cash flow at 31,500,000.0 for free cash flow and 35,700,000.0 for adjusted free cash flow. The lower adjusted EBITDA and higher CapEx were more than offset by favorable trade working capital and other expenses. Our strength in our cash generation continues to allow us to support the substantial changes we're making to achieve our long term profit targets and create even greater value for our shareholders. The final slide for me is one that looks at net debt, liquidity and leverage. Net debt at the end of the third quarter stood at a $103,900,000, including $41,900,000 of cash.

This is about $33,000,000 better than the results at the end of the second quarter. Net leverage ratio of 1.9, depreciation is below the required level of 3.75. Liquidity stood at $110000000.31600000.0 dollars better than the end of the second quarter, and then towards no drawing from the revolver. So thank you for your attention. I will now turn you back to Phil, who will talk about our outlook for balance of 02/2019.

Okay. Well, thanks, Phil. So let's now talk on the outlook in our full year guidance. Let's turn to slide 16. As I did mention at the start of this presentation today, we do anticipate another strong industry, about 35,000 units or slightly higher.

So, again, this is this is thirty year high business property right now, so we feel really good about where we are. Now that said, we expect Blue Bird sales growth to be in the 3% range, just a little bit above the industry growth, so that's a strong position as well to be in. Second half, adjusted EBITDA margins will be better than the first half, but lower than expected in the third quarter. We are forecasting margin recovery in the fourth quarter, as Paul showed you on the bridge, from cost recovery pricing, which is late in that quarter, and the cost reductions that we talked about. Our focus on fiscal twenty eighteen is on transforming our business structure through a series of cost efficiency, quality, capacity, and product actions.

Really, this is a multiyear sort of upgrade here we're doing, but very much focused this year and early next year on transforming our our operations. We have set a goal this year, as you know, of an 8% adjusted EBITDA margin, up from 7% last year. Well, the impact of the escalating steel prices that we talked about and other commodities in the second half, that's through the third quarter and what we'll see also in the fourth, that is accounted about one point of full year EBITDA margin. And so we expect now to be around 7% again for the full year. So, again, we're really targeted.

If you look at the speed of the unanticipated steel economics we saw along with some other commodity increases, how they don't happen, we'd have been about an 8% EBITDA margin for the full year. So, again, that's one reason we're down and looking at 7% again. However, importantly, as we exit the year, the actions we have taken on pricing and cost reduction, the position is position us extremely well to grow the margins next year and towards the desired range of 10 to 12% EBITDA margin in the coming years. And finally, as you know, we strive to create shareholder value. As I'm sure you're all aware, we initiated two, in fact, stock repurchase programs this past year.

Well, I'm pleased to announce that our board of directors have approved a $50,000,000 tender offer to repurchase shares shares at a premium to market. We expect to initiate this tender offer in mid September, and we'll release further details at that time. So let's now turn to fiscal twenty eighteen guidance on slide 17. First, we have narrowed our net sales guidance to between $1,100,000,000 to $1,220,000,000 about $20,000,000 less of the range that we had previously. Our adjusted EBITDA guidance is now between 70 to $72,000,000.

That's a slight increase over fiscal twenty seventeen results despite the significant commodity headwinds which we saw in the second half, but it was down from our prior guidance of eighty to eighty five million dollars. Adjusted free cash flow is now between 30 to 30 between 30 to $34,000,000, reflecting a lower profit outlook. Adjusted free cash flow, as Phil mentioned, continues to be a strong feature of our business model, representing 40% to 50% of adjusted EBITDA despite the planned full of the upgrade investments we're making in fiscal twenty eighteen. Now the slide shows our forecast for the fourth quarter, consistent with our revised guidance and and Phil showed you the bridge between 2018 and 02/2017. I think the important point I want to make here is the volume and profit outlook is for a record fourth quarter as we look back over the past decade, and we expect to recover from the profit shortfall we saw in the third quarter.

As you know, we're taking pricing actions, we're taking cost recovery actions under already planned and already initiated actually in the fourth quarter. So let's now take an initial look at fiscal twenty nineteen on slide 18. As we look to our 2019 outlook, we have higher gross profit margins and overall profitability in fiscal twenty nineteen from three key areas. First, the impact of the cost recovery pricing that we took in late fourth quarter. This was a full annual effect, a significant annual effect in fiscal twenty nineteen.

Second, our full year impact of the transformational cost reduction initiatives that we implemented in late fiscal twenty eighteen. The following slide will depict the significance of this, and I'll cover that in just a second or two. And third, the plant facility and process improvements we are making to increase manufacturing efficiency this year will help drive margin improvement in 2019. We expect financial targets for fiscal twenty nineteen to be on the glide path towards our previously communicated EBITDA margin goal of 10% plus by fiscal twenty twenty. I will provide fiscal twenty nineteen guidance at our next earnings call in December.

Let's turn to slide 19 to begin to see how our transformational cost reduction should impact fiscal twenty nineteen. It's a fairly simple slide, but I think you can see that we will be exiting fiscal twenty eighteen with significant run rate savings from actions that we've already taken in 2018 to reduce our cost. In fact, the as we look at the run rate effect of those actions, it's about twice the level of savings we saw in 2018. So this is a significant margin improvement as we as we look to 2019. I would provide more details of these savings when we discuss fiscal twenty nineteen guidance in December.

But again, we still are well positioned to capitalize on the good work we've done this year and then it will flow through to next year. So let me now wrap up the presentation on slide 20. First, to clear the fiscal twenty eighteen third quarter profits are significantly impacted by the sudden escalation in steel prices, and there's little ability to recover that within the third quarter itself. However, we've taken specific actions to address the impact of higher economics, and we expect results and margins to be restored in the first in the fourth quarter. You feel you feel that analysis when Phil showed in the bridge earlier.

We also have many operational positives, including our leadership and alternative school powered school buses. Transformation initiatives underway and on track, and our strong free cash flow, which is a feature of our business model. We are well positioned to to to for profitable growth in fiscal twenty nineteen as we benefit from the run rate of the actions we took late in fiscal twenty eighteen. And we are committed to profitable growth and our EBITDA marketing goal of 10% plus by 2020, and we expect our fiscal twenty nineteen guidance to support this objective. And finally, we're pleased to announce, as we did earlier, another shareholder value initiative, a $50,000,000 share repurchase tender offer to expect to launch by mid September, providing shareholders with a premium to market price.

And we'll continue to update you on our progress each quarter on these and other initiatives. That includes our formal presentation. I'll now pass it back to our moderator, Yolanda, to begin the q and a session.

Speaker 0

Thank you. If you would like to signal for a question at this time, please do so by pressing star one on your telephone keypad. If you are using a speaker phone today, please ensure that your mute function has been turned off to allow your signal Our first question will come from Matt Miranda with Roth Capital. Please go ahead.

Speaker 3

Yes. Good afternoon. Just wanted to get a sense for the timing of the price increases that you mentioned. I think you said June was sort of the first price increases that you put through. But could you give a little bit more detail in terms of sort of the magnitude and the, I guess, the vehicle that took, was it in the form of surcharges?

Just a little bit of color in terms of how that transpired.

Speaker 2

Yeah. I mean, well, we don't we don't wanna talk about specific on that. We don't wanna talk about pricing specific on a unit basis. But we will say it was quite significant. I think when you look at the the steel price, math that a little short on the bridge.

You can get you get the impression of pretty significant demand. But we in June, we put that through with all of our dealers, all of our customers. We put through a surcharge to account for that. So we literally took all of our prices for every single vehicle we've got, which are on standard for the charge across all of our products. As I mentioned earlier, we have this timeline because, you know, we have to recognize we're in a big business.

We have bids out there. We've got it for ninety days. You know? Obviously, we go to boards to get them approved. It takes time.

So we honor those commitments. And similarly, our flow of orders, which are, you know, several months out in the future are all price protected. So the real impact of that is about a three month time lag basis before we see that impact, and that will translate to the fourth quarter. But like I said, we've talked to all of our dealers about it. They understand it, and it's in our pricing it's in our pricing model right now, and it's on our and I'll put prices to the dealers.

Speaker 3

Okay. And then just a sense for, I guess, when could you help us with how much steel flows through your P and L? So I mean, I'm assuming I think we've had this discussion before, but I just can't recall the top of my head. How far ahead are you buying steel? So you buy steel today, it goes into a lot at what point in time?

Speaker 2

Well, Matt, generally, our our material comes in, let's say, two weeks prior to us being built. Steel may come in a little earlier than that because we actually do our fabrication for the raw steel that we buy. So, you know, you could look at that potentially coming in two to three weeks in advance of the actual the actual vendor supply commodities, but maybe more of the month for the raw steel. We we do try and take advantage of the market and do some some pre buys where we can on steel. That that will be largely a factor price a factor of prices that we can get from our major suppliers at a point in time.

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

Speaker 3

Okay. Got it. I guess what I'm trying to get at is sort of it seemed like maybe you guys have the visibility into the steel price increases earlier this year. I mean, if you look at the commodity indices, you can kind of see it picking up even late last year and early this year. So I'm just a little confused as to sort of why it was surprising to you guys in June?

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

Speaker 2

Yes. That's really the point. I mean, the I I just two different factors. Right? The surprise was the the rapid run up in the steel price, right, versus versus spots.

And, you know, that was driven when all of the domestic steel producers increased the prices this year. And, you know, it happened fairly close to the announcement of tariffs, so like, you draw draw your own conclusions on that one. The the pricing issue for us is a little different. You know, once once we saw the deal was going, we we there were we we took our time to understand exactly what we thought the the long term cost increase was going to be because this was not something where we wanted to go out initially and then make make more adjustments to prices subsequently and add a lot of confusion into the industry. So once we understood where we thought steel was settling out, we we made the decision in June, and we we we actually went through a round of meetings with all of our dealers prior to announcing it to make sure that they understood what was coming and how to deal with it.

So that took us a little bit of time, but I think what we've done is we've put a price increase out there, which which will largely cover us versus versus where we see steel and stand us in good shape for the future. Of course, that's assuming that there's no other major dislocation in steel going forward. As I as I said, we are we are seeing a bit of a downward trend in the in the in the future, the twelve month future. I just don't know whether that's real or just noise at the moment. So just add one thing, Matt.

I think that was really I could add one thing, Matt. I mentioned before, I'm sure you've seen this in other industries. I mean, automotive or GM have also introduced steel price increases. And also the benefit, some of our dealers do actually carry other product lines besides our school buses. They may sell agricultural, specialist equipment, RVs, fire trucks.

All of those guys have all got the same impact, and they're all passing on price increases. So it wasn't it's not something unusual risk we've done in the past, we have to do it now. It's a corporate thing to do. I'm just gonna have, by the way, do this Okay. We've prefilled with the surcharge before as well, taking that same the same technique.

Speaker 3

Got it. And then just maybe you could talk a little bit about the competitive environment and and sort of I mean, does this impact you guys competitively in any way when you're going out for some of the competitive bid processes or other competitors sort of following suit? How how should we think about that?

Speaker 2

You know, I don't really my line of sight is exactly how we're gonna compare doing with the deal of audio, the customers, other end customers, etcetera. I I don't really I I can't really get into that and what they're doing. I don't know. I will tell you, though, most of our business, 95% of our business is through dealing with our dealers. We sell buses to our dealers.

We pass the surge on to our dealers, and then our dealers, in turn, deal with the end customer. That's their role. So, you know, they have the job then of going out and selling the value they give and the products we have, which we're strong about, and passing on as they can feel appropriate. I would say that, you know, looking at where our backlog is right now, where our orders are right now, I'd say we're, you know, we're we're certainly pleased to do what we've always been doing. That's in holding our own.

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

Speaker 3

Okay. Last one for me. If we look at the adjusted EBITDA walk that you guys provided, thanks for that, on Slide 12, the Q4 one. Just wanted to get a sense. I mean, it looks like the $11,000,000 in sort of positives in the all other category.

I mean, could you break that out just in terms of I mean, is most of that pricing and I'm just trying to get sense for the other sort of immediate levers that you guys

Speaker 2

already have. Very little of that would not the other one. That's very little, if any, of that will be pricing. We just wanna save too much in in the pricing too. This is this is fundamentally a mixture of various cost reduction actions we've taken.

And it's it's the it's the it's the, you know, as you think about the progression of that transformational initiative, and I think we talked about this before, there was a little bit in the first half, not too much. And and we always knew that it was really gonna gonna hit its stride towards the end of the year in the fourth quarter as we work through inventory and the new the new agreements with many of our suppliers came in twice. So that's that's where we see a large part of of the cost increase coming from. However, given that we saw the gap between where pricing would take effect and and the cost increases, we did take other actions in reducing spending to a lot of other areas.

Speaker 3

Alright, guys. I'll I'll jump back in queue. Thanks.

Speaker 2

Thanks, Matthew.

Speaker 0

Will come from Eric Stine with Craig Hallum. So

Speaker 4

maybe we could just dig into you mentioned 20% of your sales, and I'm not sure if it was for the quarter or for the year to date. But the 20% of your sales is to new customers, and I'm just curious, commentary on how much of that is alternative fuel given your big bed start in propane and gasoline and that

Speaker 2

you've definitely elected to the market? Yeah. That's a good question. I mean, let me get a little little background on this stuff. I mean, I think I've said before, we we are in sort of a, you know, a lumpy business.

Right? Customer orders come in differently every year. They don't know what's coming the same time of the year. And so you, you know, you go out and you you'd able to look into business where they can do business and trying to find where they where they can play to our strengths, which is best strengths, obviously. And so when we look at that, which is the quarter, so we just saw exactly on the quarter in question.

But these are sales to end customers, and we know we've got into customers' hands through our dealer network. So when I said it was about 20% customers were new to Blue Bird, a big chunk of those were gasoline. Less actually, grew in other things. We grew gasoline, we grew propane, we grew diesel. In terms of total impact of new customers coming, the majority of the year, you'd say, sort of in the gasoline and diesel area and to a lesser extent in propane.

I think I touched on propane a little bit too. I wanted to make that point that we have seen in the last four or five months, states are getting aware that the VW money is coming available. Propane is very, very high on that agenda for utilizing those funds. So they're pushing it off and say, well, I'll have to wait till I get the VW money because that's extra for me. And I always said, they'll deal with my fleet for the for the gasoline and diesel products.

Although, it's probably an excellent year for propane, but I'd say, certainly, the confidence that we saw in the third was largely gasoline and diesel, to a lesser extent, propane.

Speaker 4

Got it. And that's, I guess, a good segue to my next question, the VFG funding and the push out there. I mean, impressive that 40% of your mix this fiscal year anticipated to be alternative fuels. I mean, curious, any thoughts on how much that number will be limited by the fact that people are pushing out propane buys?

Speaker 2

Well, I think I think the fact now, we're getting some comments on line of sight here on the on the VW funding availability. I do think we're in a good position. I would say the gasoline, I was mentioned Smith mentioned gasoline product is not included in the GW funding. So, you know, we we we've been looking at our propane and our compressor gas electric buses as really being the key vehicle we have put into that. And I certainly think that, yeah, it's a it's a great opportunity for us, and we're gonna we we have a very active team here working with our dealers, working with the the state and the school district.

I think the state of the the the company they have entities who actually go and put this money out there, decide on the plan, and we've been working with them very closely and telling our story. So I do think we're we're excited about this at the end of fiscal nineteen for a particular propane. I mean, I know it's Got it. Got

Speaker 4

Maybe last one for me, just on the operational initiatives. I know Phil mentioned potentially you expand the scope of that, and I don't know if you can share anything here. I know the team shop was a big one, and that'll have a really big impact when that comes on in early 'nineteen. I mean, there any would you say those additional things in scope are more broad based and little steps? Or are there any other large steps similar to the paint shop, for instance?

Speaker 2

Nothing to size as a paint shop, Eric. We're we're looking at some some areas of the pipe where we can significantly improve efficiency and and workflow. We're also taking a hard look at some redesign initiatives of the existing bus, which might pay a lot of dividends going forward. So these are things that we we have kicked off to to today, and we won't see a whole lot until, you know, later in fiscal year nineteen from me. So but that seems fairly exciting to get it.

Got it. Thanks a lot. K. Thank you.

Speaker 0

Thank you. Our next question will come from Chris Moore with CJS Securities. Please go ahead.

Speaker 1

Yeah. Thanks, guys.

Speaker 2

Maybe just a little bit on

Speaker 1

the tax benefit. Can you just talk talk to a detailed little bit on that?

Speaker 2

I think, Chris, when you get a chance, we covered in quite a lot of detail in 10 q because it is fairly technical. We there there are a range of range of actions. One of the large ones was we did have a an uncertain provision in our balance sheet and working with working with our auditors and tax consultants completed by so we could release that. So that's that's a fairly large part of the of the reduction. So that's really it's really a one timer, but we've had these for a couple of years ago, and now we're we're getting the way it's got.

Speaker 1

Got it. Okay. The $11,000,000 that

Speaker 2

you had talked about in terms

Speaker 1

of the, you know, some of those all other initiatives, it it some is transformational, some is a little bit of pricing. I guess what I'm trying to understand is how much of that reduction spending is kind of onetime things that you just kind of tightening felt short term to lower the cost structure?

Speaker 5

Small part of that.

Speaker 2

I mean, the the the way I look at it actually, Chris, is is is you wanna is if you don't take a look at slide 19 that Paul presented, which on purpose, didn't include any numbers. Exactly. That was my next question. Go ahead. And if and if if you're if you're especially good, you're going not.

You you can say there's a fairly large jump in the size of that box down in the fiscal year nineteen. So what what I would suggest is that, you know, all of the stuff we're doing, right, we're getting only a portion of the benefit of it in in the '18. And and you you you should expect to see a rather large contribution in fiscal year nineteen. Yeah. I mean, I'm sure I mean, just it's a you you asked about I mean, I think it was right.

I mean, only small portion of these demands you saw on the 11,000,000 was what I call one time. There's a little bit in there for the price, and we made that break. And it's late in the year with September. So that's really pushed by now to date after the June period. So the bulk of that is is stuff that we believe is is sustainable, and we know we've got that.

We've got those cost out of the business, and we've got a terrific team working on this, hard all year. That's what we call it transformational. And how we get the full run year, fully fixed with that, and into next year. And we got a lot and as as you mentioned earlier, we we talked about earlier, we have other initiatives we're trying to do to increase efficiencies that will bolt on for that next year as well in the plan. So I'm really we're really excited about the '19 outlook.

I mean, this is a it's all coming together now at the end of this year, so we can launch on a really good ramp up into '19. Got it. Alright. I appreciate it.

Speaker 1

Let me jump back in line.

Speaker 0

Thank you. And as a reminder, that's star one to signal for a question at this time. We'll go next to Mike Zareczuko with Stifel. Please go ahead.

Speaker 1

I just wanted to ask you on your EBITDA margin comments, and it sounds like you're expecting somewhere in the neighborhood of 9% adjusted EBITDA And maybe am I right about the ad? I mean it sounds like you have 8% if you adjust it for the input costs and you're expecting actually 200 basis points of fees in the next two years. I mean is there any reason to think there's going to be more or less progress made in 'nineteen versus 'twenty on that?

Speaker 2

You you know, Mike, we have to put our model here before I give you guidance. It's always a little difficult for to do that, and we're not ready to to drop it on because we we're still working on our 2019 budget. But, certainly, it's fair to say that 8% adjusted this year with the actions we've taken, we certainly look to be yeah. I'm gonna tell you right now, be somewhere north of 8% to get to a 10%, obviously, by 2020. So Mhmm.

You have to wait a little bit on that, but I think it's I think what you're doing you're in the right direction to put that way. Think that's what you're thinking is good. Okay.

Speaker 1

And then related to that, the range of 10 to 12 by 2020. What what was the difference between ten and and twelve? It's a pretty, you know, reasonably wide range.

Speaker 2

I think I'd say 10 to 12 more is our long term. I think we said 10% plus by 2020. I mean, we don't we we don't wanna get to twenty twenty and stop. We're gonna keep going. I mean, it's not like we've done it.

We're great. We've we're home. I think we're just trying to say 10% plus is our goal for 2020. And that's only obviously we're a couple of years away from 2020. And beyond that, we wanna keep growing.

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

Speaker 1

Got it. That makes sense. And just wanted to ask you, you you would see an increase in in the in the prices. Has there been any elasticity with customers, you know, buying fewer buses at all to, you know, make up for that? There's only so much budgeted.

Speaker 2

No. I really really haven't seen that. I mean, I think it's been a kind of good solid year here for everybody. Our industry's done really well for us. And I think Phil mentioned that based on the forward order outlook, Mike, we haven't seen any drop off.

I I well, we haven't seen anywhere where we've lost the bid.

Speaker 1

Yep. Got it. Got it. And I also wanna ask you on the on the freight cost. Can you give us a ballpark figure of how

Speaker 4

much your your annual freight spend is if we

Speaker 1

can sort of get in in perspective?

Speaker 2

First, this is this is inbound freight, Mike, and and and, typically, it's running it's running in excess of $12,000,000 a year, something like that.

Speaker 1

Okay. Yep. Got it. And then just, you know, last one for me. I mean, the so the Ford Bronco has been such a competitive advantage for you.

I mean, is is the relationship with your partner on electric, is that a similar exclusive relationship? Or or what access do your your competitor tabs to are you partnered there?

Speaker 2

No. We're we're exclusive with with our partners on that one. In fact, I don't even saw it recently. What I'm excited about is EDI is our technology partner in this vendor we have. No.

This is acquired by Cummins. So now Cummins owns EDI, and I and I've already met with Cummins last week to talk about that. And we're really excited about that partnership because it gives us strength in the backbone of Cummins technology they've got, and it's a it's a it's a great move. But, yeah, we have an exclusive on that product for a period of time. Yes.

Speaker 4

Sounds good. Thanks very much.

Speaker 2

Thank you.

Speaker 0

Thank you. Your next question will come from Scott Wimsall with Emerald Advisers. Please go ahead.

Speaker 5

Good afternoon, gentlemen. Thank you for taking my question.

Speaker 1

Thanks, Scott. Hello?

Speaker 5

Hello? And either so could answer this. I think you explained the steel issue pretty well, but you also lowered your top line sales guide a little bit and mentioned that at least in Q3, there was a little higher mix of gas and diesel, which have a lower price point. I was wondering if the lowering of the guide is because of what came in Q3. And since you have pretty good visibility into Q4 that you may be seeing the same thing in Q4?

Speaker 2

No. Think yes, I mean, I think the third quarter was a I mentioned before, was a was a richer mix of gasoline and diesel. We were actually, I'd say, quite surprised by the the amount of gasoline we sold is terrific. It's just command a lower revenue. So, you know, we decided to do it.

If we look especially when we look out now, we've only got we got line of sight to the fourth quarter. We're getting pretty close to the year end. We started to prove to narrow our guidance, so we dropped $20,000,000 off the top end. So the average came down, but we're still you know, we kept a low point. We just narrowed it down.

But it lot but it was largely due to as you saw when you look at year over year, you could see the the sort of impact we saw on the revenue in the third quarter. It's prudent to do that. Fourth quarter, I think, is more of a difficult quarter. It's it's gonna be strong. I think the propane in the fourth quarter is is is good.

It looks really good for us. The mix looks strong, and I think it'll be a pretty good revenue quarter, but we just have it proven to take the full year range down a little bit. Now we can.

Speaker 5

Okay. Fair enough. And you did mention that we saw recently saw or this week saw the First Electric Plus roll off the line and that you may deliver, you can deliver some of those in the fourth quarter. Do you expect to deliver a couple of those, a handful?

Speaker 2

Yes. We'll deliver several in the fourth quarter. I mean, several, if not several 100. Deliver several. And, yeah, that was the first one.

That was a nice event for us, and we've got more lined up. And the customers are which are California based. And there's some we have grant support for those, and we're excited about it. And so is our partner out here in California. Yep.

Speaker 5

Okay. That's great. Fair enough. And, you know, you talked a little bit about the VW push out, which is pushing customers into 2019, and I suspect that that would also be pushing customers then into 2019 pricing. So is it possible that you may actually derive a benefit from the fact that those are getting pushed out and then those customers are then going to end up booking orders at actually higher price due to your price increases?

Speaker 2

Yes. You know, I think that's a good way to look at it. I mean, obviously, having bought the buses prior to the tariff change and the fuel prices going up, it would probably be fine too. But I do think it's a great point you raised. I mean, it's one of the things that we've got the pricing on now, it's out there in the system and a little bit of price to wheel loose on the on the sort of when we access the VW funds.

I just say, feel really I mean, I do I just wanna stress. I mean, I made it this point on the call. I feel really good about the product range we've got for that VW money. We have the best partners on propane via mile, large, large, clean, tech and forward. I mean, terrific job.

We've seen those guys since 2012. We're in great position. And I just think now the electric and the clouds and the power have come in behind EDI. We're in great shape on that product too. So I think we're in a really, really good position.

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

Speaker 5

And you said that you had pretty decent visibility into some of that money. When do you really expect some kind of the bulk of that to start to impact your orders?

Speaker 2

I think we'll start to see some of it coming up free in the November a minimal amount November, December. It looks like it's mainly second quarter of next year probably almost gonna see the orders coming through. And then it should fall through the year because the doc there are people get this money and they can apply it over several years. So you can take two to three years to use the money, use it faster. And it looks like the the the all the these guys who are organizing the funds have been a little slower than we expected to decide how they're gonna utilize it.

Everybody's safe doing it differently. Some are giving discounts against prices. Some of them are paying for an entire bus. It all varies differently by vehicle line. The great thing is, the real metric for what give what determines how which grants are available is the NOx level of emissions of vehicle emits.

That's why I made a big point of our our NOx level now on propane and where we obviously are on that and electric and zero emissions are in good shape. But I think we'll start to see later this later the end of the calendar year. So maybe a few in November, December, we'll get some interest. Think it's not it'll pick up really in the start of the next, by the calendar year, nineteenth, January 19 onward.

Speaker 4

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

Speaker 2

We're talking about orders. Yeah. Yeah.

Speaker 0

Yeah. Okay.

Speaker 5

And just one clarification. I think in his comments, Phil, he said that the full offset of steel prices will not be achieved in 2019. I think he meant 'eighteen. Is that correct?

Speaker 2

I think I did '19. Hello.

Speaker 5

I think you meant '18 too. Thank

Speaker 2

you. Thanks for picking that up and letting me clarify it. Okay. Thank you.

Speaker 0

You. Will conclude our question and answer session for today. I would now like to turn the conference back over to Phil Horlock for any additional or closing remarks.

Speaker 2

Well, thank you, Yolanda, and thanks to all of joining us on the call today. We appreciate your continued interest in Blue Bird. Hope you realize that where we are, we're focused on profitable growth, and we intend to deliver on our commitments. Do believe we're well positioned to grow today and and into the future. Please do not hesitate to contact our head of investor relations, Mark Bensfield, if have any follow-up questions.

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

Speaker 0

Again, that will

Speaker 2

conclude

Speaker 0

today's