Blue Bird - Earnings Call - Q4 2018
December 6, 2018
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the Blue Bird Fiscal twenty eighteen Fourth Quarter Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Mark Binfield, Director of Investor Relations. Please go ahead.
Speaker 1
Thank you, Keith. Welcome to Blue Bird's fiscal fourth quarter and full year twenty eighteen earnings conference call. The audio for our call is webcast live on investors.bluebird.com. You can access the supporting slides by clicking on the Presentations portion of our IR website. Our comments today include forward looking statements that are subject to risks that may cause actual results to be materially different.
Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird's CEO, Bill Horlock and CFO, Phil Dye. They will take some questions. Let's get started.
Phil?
Speaker 2
Okay. Thanks, Mark. Well, good afternoon, everybody, and thank you for joining us today for our fourth quarter and full year earnings call for fiscal twenty eighteen. It's been a very busy year here at Blue Bird and all of a welcome opportunity to take you through our latest quarterly and full year results. So let's start with an overview of those financial results on Slide four.
Our fourth quarter results were strong and I'm very pleased with the progress we've made this year. Our unit sales were the highest in the fourth quarter since 2008 with 3,757 buses sold. That represented a 4% increase over last year and correspondingly, we saw a 6% growth in total net sales, which amounted to $332,000,000 The high growth in net sales versus unit sales reflects a richer product mix and to a lesser extent, the pricing action we took late in the year to address the rapid escalation in commodity prices. Now a feature of our business seasonality and it's worth noting that fourth quarter net sales represented 32% of our full year sales and the second half was a substantial 64% of our full year. Our adjusted EBITDA grew 16% or $4,000,000 over last year to a strong $29,000,000 which is a solid 9% EBITDA margin.
It was also our best fourth quarter result for more than ten years. As Phil Tide will show you later, we achieved this improvement despite escalating steel led commodity prices as we drove fourth quarter cost reductions through our transformational initiatives, which we mentioned in our prior earnings call. Adjusted net income and adjusted diluted earnings per share were both significantly higher than the fourth quarter a year ago, up $12,000,000 or respectively. Zero four On a GAAP basis, both net income and diluted earnings per share also improved from a year ago. So let's now shift to the full year.
All three of our key financial metrics either met or exceeded guidance. Net sales of $1.25 was above the guidance range and the first time in our history that we exceeded $1,000,000,000 in net sales. That's quite a milestone for Blue Bird. At $70,400,000 adjusted EBITDA was within guidance range and $1,500,000 above last year despite the commodity headwinds that hit us in fiscal twenty eighteen. As we saw in the fourth quarter, we were able to offset the full year adverse economic impact of those headwinds through our cost reduction efforts in the second half of the year.
At $40,000,000 adjusted free cash flow beat the high end of guidance by $6,000,000 and remains a strong feature of our business model. Adjusted net income and adjusted diluted earnings per share for the full year were both above last year by $22,000,000 and $0.70 respectively. Now as we look at the underlying strength of the industry and Blue Bird results in general, the outlook is positive. First, based on preliminary RO pulp registration data, about 34,000 new type CMD school buses were bought and registered by customers in fiscal twenty eighteen. Now while we sit down slightly from the 35,200 unit level we saw in fiscal twenty seventeen, which was the second highest industry in thirty years, 34,000 new buses is a strong industry and well above long term trend levels.
In fact, a strong industry outlook strong outlook rather for property values and corresponding property taxes, which are the major funding source of school buses, together with the fact that 150,000 school buses on
Speaker 3
the road today have been
Speaker 2
in service for more than fifteen years, we are confident on the industry outlook remaining around the 35,000 unit mark as we move into 2019. It should also be noted too that only about one third of the 12,000 school districts that own and operate school buses enter the new bus market each year. So there will always be some variability and noise each year in the new bus industry volume. Second, we sold 11,649 buses in fiscal twenty eighteen, an annual growth of 3% outpacing the industry. This is our seventh consecutive year of volume growth and we have solid momentum.
Third, we recorded our highest ever sales mix of alternative fuel powered school bus sales and a substantial 38% of our total bus sales. This compares to a 34% mix last year and our alternative fuel bus sales in total were up 14%. Incidentally, we achieved a record quarterly sales mix in the fourth quarter at a substantial 47% of total sales. Now that's leadership, a real momentum in the fastest growing segment of the business. As a reminder, in alternative fuels, we do count all of our propane, compressed natural gas and gasoline powered buses as all of these are alternatives to diesel, which has been the staple fuel for years.
Now for the last several years, we've seen significant growth in alternative fuel bus sales. And I just mentioned, we have not slowed down this year. We'll cover those sales again a little bit later in the presentation. Fourth point, we're passionate about product and being first to market with vehicles and features that customers want and value. Late in fiscal twenty eighteen, we successfully launched our exclusive all new electric powered Type D bus and delivered several to customers in the fiscal year.
Our Type C electric powered bus will launch early next year and we have a strong pipeline of customer orders that we're pursuing. We also launched our ultra low NOx propane powered bus earlier this year, which at 0.02 grams NOx per brake horsepower hour is 10x cleaner than both the EPA standard and any other brand of propane powered school bus. Also just last week, we received certification from the California Air Resources Board or CABL to begin selling our ultra low NOx compressed natural gas powered Type C school bus. Again, Blue Bird is a first to market and is exclusive to us. And fifth, we took pricing late in fiscal twenty eighteen to cover the escalation in commodity costs led by steel, which has impacted all automotive manufacturers.
And finally, we have a number of transformational actions underway that are improving our cost structure and we saw the favorable impact in fiscal twenty eighteen, particularly in the fourth quarter. Now as we exit fiscal twenty eighteen and move forward in fiscal twenty nineteen, we're confident in delivering profitable growth, bolstered by the impact of our transformational initiatives and the pricing we took to address commodity cost escalation late in fiscal twenty eighteen. I will cover the key fiscal twenty nineteen guidance metrics in more detail later, but I'm pleased to inform you that the adjusted EBITDA range will be 14% to 21% higher than our fiscal twenty eighteen results with our fiscal twenty nineteen adjusted EBITDA guidance of between $80,000,000 to $85,000,000 a substantial gain from fiscal twenty eighteen. Now this is on the path to our stated goal for an adjusted EBITDA margin of at least 10% by 2020. All in all, these are exciting times at Blue Bird.
So let me now review with you our full year 2018 key operating achievements on Slide five. We recall a number of significant achievements in fiscal twenty eighteen and each one will make us more competitive and support our growth going forward. We continue to be the leader in alternative fuel powered school buses. And while our sales grew 14% in this segment in fiscal twenty eighteen, we achieved a very strong 70% market share with many new customers joining the Blue Bird brand for alternative fuels. I mentioned earlier that we have the class leading propane bus from an emission standpoint at a NOx emissions level of 0.02 grams.
We already were the market leader of 0.05 grams NOx at emissions, but the best just got better in fiscal twenty eighteen. This means our propane engine emits just one tenth of the NOx level that our competitors offer and that's real leadership. Although outside fiscal twenty eighteen, just last week, we received the same 0.02 grams NOx certification for our Type C compressed natural gas powered bus. That is five times cleaner than the compressed natural bus that our competitors offer. All this is great news for our customers and even better news for the children who ride our buses and their parents.
So let's move on to zero emission school buses. We are the only nationwide school bus manufacturer today that offers electric powered school buses in Type C and Type D configurations. We've had a great customer response to our more than 20 ride and drives across the country. We are delivering buses now to customers and have a strong pipeline of potential new customer orders. Working with industry experts, our transformational plans to improve margins are on track, driving improvements in quality, cost and efficiencies and capacity.
We achieved significant cost savings and margin growth in the fourth quarter and this initiative is key to delivering continued profitable growth. For the first time in Blue Bird's ninety one year history, buoyed by the 6% net sales growth we saw in fiscal twenty eighteen, we achieved a new milestone of $1,000,000,000 in sales. Now as I mentioned earlier, we also priced to recover the recent tariff related escalation in steel and other material costs. We began to see the impact late in the 2018 and this will fully apply in fiscal twenty nineteen. Construction is well underway for our all new automated paint shop with pilot runs and validation scheduled for early next year.
This is a key initiative to driving efficiency improvements as we go forward. And as mentioned earlier, we met our exceeded guidance in all three metrics that we report against. Most significantly, we reported slightly higher profits than fiscal twenty seventeen despite incurring substantial commodity and freight cost increases. Let's now take a closer look at our second quarter financial results on Slide six. I touched on many of these earlier and Phil Tighe will run through the details later.
So just to summarize, the fiscal twenty eighteen fourth quarter and full year total net sales adjusted EBITDA were up in both periods versus last year. Both bus sales and parts sales were up a strong 6% in the fourth quarter. And for the full year, bus sales were up 3% and part sales grew a little stronger at 4%. Turning now to Slide seven, let's take a closer look at our alternative fuel bus sales performance. As you can see, we achieved a new full year sales record of 4,428 alternative fuel powered school buses, a 14% increase over last year.
As I mentioned earlier, this represents a strong 38% mix of our total bus sales, up from 34% last year. No other school bus manufacturer comes close to this level of mix. And in fact, last year, over three sixty new customers took delivery of their first ever alternative fuel powered Blue Bird bus. This is a strong endorsement of our exclusive alternative fuel buses, the Blue Bird brand and our strong dealer network. We continue to be the leader in the fastest growing school bus segment with our market share running at about 70% and more than 19,000 alternative fuel powered school buses are on the road today powered by Blue Bird.
We offer the widest range of alternative fuel powered buses and the most modern and proven engine in the industry. With our exclusive long term partnership with Ford and Rash Cleantech across all alternative fueled engines, it makes it easy for customers to grow an alternative fuel fleet With the same engine architecture, the same transmission and the same service requirements across all three products, propane, compressed natural gas and gasoline is an easy move for school district or a fleet to operate. Croping is widely recognized having the lowest total cost of ownership in the market and is a great engine, especially our new ultra low NOx propane bus, a one tenth of the NOx emissions output of other manufactured buses and the EPA standard. These nitrogen oxide gases we call NOx emissions contribute to the formation of acid rain and smart. So the best in class level of NOx is another great reason for choosing Blue Bird propane.
In addition, as I mentioned earlier, just last week, we added an ultra low NOx CNG bus to our line, five times cleaner than any of the CNG school bus on the market. Now despite our fiscal twenty eighteen 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 from the VW Clean Air Act settlement fund late this calendar year and beyond. That fund targets the replacement of old diesel buses with new school buses that emit low levels of NOx emissions. Our propane, compressed natural gas and electric powered buses are perfect choices to utilize these funds. So far, 30 states have finalized their plans to deploy the VW settlement funds and the good news is that 40% of their funding in the first year has been set aside for school buses.
That's potentially another strong boost to the industry and we are in a great leadership position to capitalize from these funds. We also saw very strong growth of our gasoline powered bus in fiscal twenty eighteen. It is readily understood by technicians and mechanics who really appreciate the emission simplicity and cold weather stock capability it shares with propane. It also has a lower price point than diesel, so really works well for those customers where acquisition price is a key concern. And gasoline is off to a great start to in fiscal twenty nineteen.
We are taking orders for our all new Type C and Type D electric buses and interest across the country is strong, especially the opportunity to fund from the VW settlement. We began delivering buses in the 2018 and we're very excited by the prospect for our electric bus in fiscal twenty nineteen. As we look forward to next year and beyond, with the broadest range of the cleanest, low enough school buses in the industry, eight times more alternative fuel powered buses on the road than all of our competitors combined and still having less than 15 of school bus customers having tried alternative powered school bus, Blue Bird is in a really strong position. So let me now turn it over to Phil Tighe, who will take you through the financials and I'll be back again later to cover the fiscal twenty nineteen outlook and guidance. Over to you, Phil.
Speaker 3
Thank you, Phil, and good afternoon, everyone. The next few slides are a summary of our financial performance for the full year and also for the 2018. You will find additional information in the appendix that deals with reconciliations between GAAP and non GAAP measures mentioned in this review as well as some important disclaimers that have already been mentioned by Mark Benfield. Detailed material will be available in 10 ks, which will be filed early next week. We encourage you to read the 10 ks and the important disclosures that it contains.
The material we are discussing today is based on close of September 2938 for fiscal 'eighteen and September 3037 for fiscal twenty seventeen. There were no significant changes in our critical accounting policies or in our risk factors versus the previously filed 10 ks. Let's now take a look at the summary of key results for the fourth quarter on Slide nine. Phil's already talked about volume. Fourth quarter was a very good quarter for Blue Bird.
We hit 3,757 units, up 4% versus prior year and importantly, our best fourth quarter in more than ten years. As Phil already said, we achieved a 47% mix of alternative fuel buses in the fourth quarter, up about seven points from the prior year and 47% is our record to date since we started our leadership of the alternative fuel industry. Our net revenue, you can see was $331,600,000 up about $19,000,000 versus the prior year. It was up for both bus and for parts. Both of them were up by about 6% year over year.
The year to year increase for bus was about two thirds driven by volume and the balance was due to a combination of higher average revenues for our buses. The average selling price for our buses in the fourth quarter was just under $84,000 which was about 2% higher than a year ago. We also benefited from the improved mix of the alternative fuel vehicles. And as Phil also mentioned, we had a small percentage of our buses that actually picked up the pricing that we announced in June 2018 to offset the impact of tariffs on steel and cost increases in other commodities. Our gross margin of 12.9% was up about 30 basis points versus a year ago, and I would add that our gross margins improved for both bus and parts.
This result, of course, was despite the material cost increases driven largely by tariffs on steel. Prices of our steel were up over 20% in the fourth quarter versus last year and higher freight costs also up about 20% versus fourth quarter last year due to both fuel and the continuing capacity problem with driver shortages. We did achieve importantly, lower manufacturing costs in the fourth quarter of this year, which helped offset some the economics increases that we talked about. And these improvements in manufacturing have come about as an early indicator of the initiatives that we're undertaking to improve both our efficiencies and capacity in the plant. The three indicators of our bottom line profits, income, adjusted net income and adjusted EBITDA are all favorable versus the prior year.
Adjusted EBITDA importantly at $29,100,000 was about $4,100,000 better than last year, an improvement of 16%. I would add that we've been studying history obviously. This is also our best fourth quarter EBITDA result in about ten years. So that was a pleasing result for us. The EBITDA margin improved to 8.8% for the fourth quarter, up about 80 basis points versus last year.
Net income was also higher at 14.9%, and we achieved a return on sales of 4.4% based on net income. So all in all, a good result for us on a bottom line basis. You can see that diluted earnings per share and adjusted diluted earnings per share for
Speaker 2
the fourth quarter, both of them
Speaker 3
were up substantially. We'll talk a little bit more about earnings per share when we look at the full year. And finally, the last two on this page are cash. Cash was down a touch. It ended the year at $60,300,000 versus 62,600,000.0 in the 2017.
Speaker 2
That was,
Speaker 3
I think, a good result. You've seen the picture of the new paint shop that we're building. So our CapEx spending in the fourth quarter was up by more than $14,000,000 versus the prior year, all based on the spending in the paint shop, and we still managed to come in with cash only down about $2,000,000 year over year. So I think that was a good result by the team. Our debt at $142,000,000 finished slightly better than planned, and there were no borrowings on the revolver.
I would point out that the debt shown is at the September, and it was prior to us drawing 50,000,000 of incremental debt to fund the tender offer. We'll talk about that a little more on a later slide. So if we move to Slide 10, that will take you through the same set of metrics for the full year. Again, you can see the volumes up three percent and as we already mentioned, the best result in more than ten years. It is a good result.
As Phil said, the industry appears to have been a little soft towards the end of fiscal year twenty eighteen, although I would add that RL pulp registrations do tend to take a few months to mature. So I think we might see it creep up a little bit. And it's very clear from our discussions with dealers at some school districts that they are waiting to take advantage of the VW mitigation funds, which are quite important to them and help the school district save a substantial amount of money. Again, alternative fuel represented 38%, which is up 14%. And I'll point out, and Phil's already done a great job of this, but our alternative fuel includes propane with ultra low NOx, gasoline, CNG with ultra low NOx
We are the only OEM to offer this range of alternative fuel vehicles and I think it gives us a strong advantage going forward. One other point I would make is seasonality continues to be a challenge. Our second half sales were 7,500 units, again, a record. Our first half sales were about 4,146 units. You can see the production imbalance, 7,500 units in the second half versus 4,100 in the first half.
That does give us some heartache in terms of overtime and a little bit of stress on our suppliers in terms of ramping up from first half to second half. And I think the team is doing a good job to address that, although it will continue to be a challenge because it's a fact of life of our industry where people want to have their buses in the second half or the start of the new school years. But we are seeing positive results with some of the work we're doing on efficiencies to make sure that the plant can operate with high efficiency and high quality at substantially higher volumes. Our net revenue of $1.025 was a great result. And as mentioned, first time that Blue Bird has hit more than $1,000,000,000 on the net revenue metric.
This was a big achievement for us. That number was up about $34,000,000 and it was really driven by higher bus volume. We had three thirty two more units worth about $27,000,000 That was 80% of the increase. On a full year, our bus average selling price was also up. Our average price ended up at $82,600 up about $400 a unit, which is worth about 5,000,000 And our revenue from sales of parts continued to improve.
We picked up another $2,000,000 on parts, and that's a positive feature for us. As we've previously talked about, we did put a price increase in. That only impacted a small number of units in the fourth quarter due to the length of our ordering cycle and the fact that we have firm pricing for orders placed. We will talk about that a little more. Gross margin of 11.9% was unfortunately down about one point versus a year ago.
And it really was driven by the large increases in tariffs and higher freight costs. And it was also driven by business mix where did accept some relatively low margin business to fill some production gaps in the second half due to a number of school districts delaying their ordering until fiscal year twenty nineteen. I would point out that if you want to take a look at the map, if we took the tariff related and freight cost increases out, our margin would have been at least equal to the fiscal year twenty seventeen margin. So I think that's something to keep in mind as you look at the results. Again, when we look at the bottom line results of net income, adjusted net income and adjusted EBITDA, all of them were positive versus the prior year.
The $70,400,000 of adjusted EBITDA was up $1,500,000 or about 2%, and we've got a bridge where we'll walk you through that. The EBITDA margin of 6.9% was slightly lower than last year. Again, absent the impact of tariffs and freight, that would have been better. And net income was $30,800,000 which represented an improvement of $2,000,000 or almost 7%, return on sales of 3%. Diluted earnings per share, we were pleased with this number at 1.08 per share versus $0.74 in the prior year and adjusted diluted earnings per share came in at $1.77 which was up by 70 percent $0.70 and almost 70% versus the prior year.
There is some information at the back of the presentation on this and there's a more fulsome explanation in the 10 ks. Our weighted average diluted shares outstanding were $28,600,000 at the 2018 and $24,900,000 at the 2017. Net income available to common stockholders was $28,900,000 in 'eighteen and $18,400,000 in 'seventeen. The fiscal year 'seventeen number was impacted by the dividends that we paid to preferred shareholders of $4,300,000 in 2017 and the repurchase of preferred shares of about $6,000,000 also in fiscal year twenty seventeen. Neither of those occurred to the same extent in fiscal year twenty eighteen.
We've already talked about cash. It's and debt, they are the same numbers that we talked about when we looked at the fourth quarter, so I won't belabor that. If we go to Slide 22, you will see a bridge for the fourth quarter walking from $25,000,000 in fiscal year 'seventeen up to $29,000,000 in fiscal year 'eighteen. You will see that bus volume was up about 149 units, parts was up about $500,000 Economics was unfavorable year over year in the fourth quarter by about 8,500,000 primarily steel, which was up 26% and freight up about 21%. And then you see the $11,200,000 which was transformational cost initiatives and efficiencies and operating cost savings.
So that $11,000,000 helped us to more than offset the incremental cost of the economics and achieve an improvement year over year that we've already talked to. We were pleased to see this come in. We've been working hard on the transformational initiatives all year. While the transformational initiative is not all of the $11,000,000 it does represent a fairly substantial portion of the savings. And the good news is that's on about onefour or onethree of our annual volume.
So there is a lot more to come as we look at the full year of next year. If you go to Slide 24, this walks from full year to full year, so $68,900,000 in fiscal year 'seventeen, walking up to $70,400,000 Sorry, I've got the wrong slide number. It's Yes. So Slide 12, apologies for that. Workbooks for full year, 68,900,000.0 up to $70,400,000 Volume and mix was while volume was up by about three thirty units, we did have adverse mix, as I mentioned previously.
Parts improved by about $1,100,000 Material economics, the full year impact for us was about $18,500,000 with and I think there's a few people who will be trying to figure out what the real impact of steel is on Blue Bird. I'll just comment that about just over 50% of everything we buy has some steel content in Anything from a seat frame as a part of the seats to an engine block as a part of an engine will be steel. Obviously, the bigger part of the steel content for us is all the metal that we use to build the body and chassis of the bus. Because remember, our school buses are all steel as a part of the safety protocol for children that it carries. So we have, I think, about 17,000 pounds of steel in the body of the bus, something around that.
And so when we look at economics on steel for the year, we have it anywhere from 1% of the components where steel is a small piece. So we got about a 1% increase on some components to more than 30% increase on raw steel and on some of the commodities with very high steel content. So that drove a lot of the $18,500,000 And then freight was also up by a substantial amount of money, twenty eight percent in the full year, driven by two factors, increased diesel costs and shortage of drivers and trucks. So then you look at the $18,500,000 and we should reflect upon the fact that we had almost or very little pricing to offset that. The pricing that we have taken as of June, we expect to fully reflect this number if it continues to form part of our cost base moving forward.
And then we see the full impact of transformational cost initiatives and other efficiencies of $26,500,000 in the full year. Again, would point out to you that the transformational cost initiatives really only started to come into play in the second half of the year. There was only a small amount of it in the first half. So this is a very encouraging feature for us for the future where we have really, I think, moved the needle on cost structure in Blue Bird to provide us a very solid base for the future guidance that Phil is going to talk about and our long term objectives. Very quickly, I will point out on the next slide, which is 15, the free cash flow, a couple of important 13, is it?
I can't read. That's all right. Sorry, 13. I'm having a bad day with page numbers. Anyway, so free cash flow is on Page 13.
I've had that verified. For the full year, our free cash flow came in at $40,000,000 Our guidance, you might recall, was between 30,000,000 and $34,000,000 So we were very pleased with where it came in at. If you take a look down the list to adjusted free cash flow, every item was favorable year over year with the exception of CapEx, which was up about $23,000,000 and that is basically related to that large paint shop that we're building, which will be a state of the art paint shop and give us great paint on our buses and higher efficiencies and lower cost to boot, which is a pretty good achievement. So as far as we're concerned, the 40,000,000 was a very favorable outcome on adjusted free cash flow. And I'll turn to my last page, and I'll try to get the number right.
It looks like it's Slide number 14. And that is our net debt leverage and liquidity. You can see the net debt was $82,000,000 That's debt net of cash. We had a net leverage ratio of 1.7, and compares very favorably to our covenant of four, and we had liquidity of 153,000,000 at the end of the year. I would point out that the debt that we reflect here does not include the increase to our term loan that we took in October.
So there is another $50,000,000 you will see in debt when we do our first quarter earnings report. Having said that, if you sort of pro form a that in and looked at it, the 1.7 net leverage ratio would end up at about 2.2, and that's still well under
Speaker 1
the four,
Speaker 3
which is our covenant. So we think we're in a pretty good position when it comes to net debt and our requirements for our banks and for liquidity. So with that, I'll turn it over to Phil, who promises he knows all the page numbers that I don't know, and he can wrap up and show you our guidance for the year.
Speaker 2
Okay. Well, Phil. Thanks for that. So let's now focus on the fiscal twenty nineteen outlook and our full year guidance and turn to Slide 16. Just talking about the industry first.
With recent industry trends running at 34,000 to 35,000 units annually, we are at some thirty years highs on the industry, and we do anticipate another strong year in fiscal twenty nineteen. So the industry probably around 35,000 units, that's where we think we're going to be. And we see continued growth in housing prices and property taxes, being a big factor there, along with new funding from the VW settlement fund that we support our position. So I think all in all, don't see this industry turning down. We see it's solid, strong and continuing.
The demand is clearly there. Now our plans for fiscal twenty nineteen focus on key elements of improving gross margin and EBITDA margin from three key areas. First is the impact of the cost recovery pricing that we took in late fourth quarter to address the escalating commodity costs and freight costs that Phil clearly showed you in the bridge earlier. This will have a full annual benefit in fiscal twenty nineteen. Second, the full year impact of the transformational cost reduction initiatives that we implemented in late fiscal twenty eighteen.
And again, I think you clearly saw those. I think on that fourth quarter bridge, you saw the improvements we were making later in the year. Well, that obviously will have a favorable full year effect as we move into 2019. And we're going to continue that initiative too. This is a key thing.
This isn't just a one year and it's all, but we are continuing to do that and run it throughout our organization. And third, the planned facility and process improvements we are making to increase manufacturing efficiencies next year. So all these three factors are all about driving margin improvements, particularly on the gross margin side and down to the bottom line EBITDA margin. Now we set our financial targets for fiscal twenty nineteen to be on the glide path towards our previously communicated EBITDA margin goal of at least 10% by fiscal twenty twenty. So let's turn to Slide 17 to present our fiscal twenty nineteen full year guidance.
So net sales guidance is between $990,000,000 and $1,025,000,000 which will be down anywhere from $35,000,000 to flat versus last year. Now we are being prudent in planning our sales outlook, recognizing that we may have to push out some unit sales as we launch our new paint shop and make other facility and process improvements in the plant. These type of production launch losses are typical for an automotive company undertaking significant facility upgrades and our approach will be clear to minimize that impact as much as possible. I want to stress we're being somewhat prudent in our planning base here and giving that sales number. Adjusted EBITDA guidance is now between 80,000,000 to $85,000,000 a significant 10,000,000 to $15,000,000 or 14% to 21% increase over fiscal twenty eighteen.
We will be exiting fiscal twenty eighteen with significant run rate savings from our cost reduction efforts that are already implemented, which will favorably impact fiscal twenty nineteen and we'll continue to pursue new efficiencies. And adjusted free cash flow is between 24,000,000 to $28,000,000 and continues to be a strong feature of our business model. Now while this is down 12,000,000 to $16,000,000 from our fiscal twenty eighteen results, this is more than explained by the significant capital spending we will incur in 2019 for facility upgrades, particularly our new paid shop visit launches. So in wrapping up, I believe we had a strong fiscal twenty eighteen performance both operationally and financially and we were able to offset the unexpected and rapid rise in commodity costs led by the impact of the steel tariffs. I think I'll also be remiss if I didn't mention some of the shareholder initiatives that we implemented this year, buyback programs and the tender offer late in our fiscal year to drive shareholder value across to our shareholders.
We are exiting fiscal twenty eighteen with significant run rate benefits from cost reductions and cost recovery pricing taken in late fiscal twenty eighteen. And these run rate benefits will help us drive significant profit and margin growth in fiscal twenty nineteen. As I said earlier, adjusted EBITDA projected to be 14% to 21% higher than fiscal twenty eighteen. Now our plans and our guidance both align with this. And we'll continue to update you on our progress each quarter.
Well, that concludes our formal presentation. I'll now pass it back to our moderator, Keith, to begin the Q and A session.
Speaker 0
Thank We'll take our first question from Eric Stine with Craig Hallum. Please go ahead.
Speaker 4
Hi everyone. Thanks for taking the questions.
Speaker 2
Hi Eric. Hi Eric.
Speaker 4
Hi. I mean maybe just starting with alternative fuels and I know that you've been pretty clear about the expectation that because of the VW funding that propane, some volumes pushing into fiscal twenty nineteen, but it's still the gasoline number being, I think, 100 more or so than the propane number for fiscal twenty eighteen, does that do anything to change your view that longer term propane is probably the higher component of the overall mix? Or is that changing a little bit that you think gasoline actually could be the one that could be number one for you?
Speaker 2
Well, I mean, it's a good question, Eric. I mean, they've both done extremely well, obviously, for us. And gasoline probably exceeds our expectations, to be honest. I think there's been quite a bit of a pushback against the complexity of diesel and everyone understands gasoline is pretty easy. What we've been seeing though this year is even some of our guys who first got into gasoline two years ago, who haven't actually tried propane, they've now actually tried propane.
So I think gasoline is actually refining is a good leading tool to getting someone into a less familiar alternative fuel such as propane. But I honestly believe, I think over time, there's no question to me, we're going to see the pressure on NOx emissions, the pressure on total cost of ownership, pumping is the best product. It really is. I think I really truly believe that we've seen it consistently that folks in school districts are waiting to say, look, I've got VW money coming. It's coming late in the year.
Now gasoline, by the way, is not funded by the VW settlement. You can't buy a bus with VW settlement funds for gasoline. You can buy propane, compressed natural gas, you can buy electric, and you can buy the clean diesel. So I do think we've seen it clearly time after time. People say, I'm just going to hold off on my propane because I got some money coming for that, but I'll take a gas bus right now.
So I think I feel very confident about both. And I think over time, you'll see propane, I think, recovering that trend and growing heavily in the next few years.
Speaker 4
Got it. And then in terms of the revenue guide, it sounds like you're given that the industry is near its highs and maybe not in uncharted territory, but pretty strong that you're being conservative. I mean, are you maybe how are you factoring in VW funding into that guide, I mean, knowing that, that funding is going to play out over a number of years?
Speaker 2
Doing at this stage. I am just feeling what you said. I'm being somewhat prudent. I mean we have a pipeline and we track very carefully where the money is out of BW by state. And we go after each one of those, particularly working with our partners at Rausch, Rausch Cleantech on the for the propane and CNG side of the business.
And I think we just we managed the pipeline. I think as we go through the year, we'll keep updating you on where things stand.
Speaker 4
Okay. No, fair enough. And last one for me, just on the EBITDA guide. Maybe just talk about the puts and takes. I mean, it looks like you're guiding to around 8% to 8.5% margin.
Fourth quarter, you just did 8.8%. And you really have had very minimal impact from the price increases. I mean, is that where you've said it, is that based on what you alluded to right at the end of your comments that there is an operational when the paint shop comes on that might impact some volumes and might impact some things operationally? Or is there something else to factor into where you've set it?
Speaker 2
Yes. I think what we've
Speaker 3
done is let's talk about
Speaker 2
that paint shop issue first. You're absolutely right. What we've done is we've been prudent to recognize that you tend to get launch losses. You don't turn a paint shop on and start building 65 buses a day, painting. You started off building two, three or four.
We may have some losses that we can't recover during the fiscal year just because our capacity on our line, we might have we just might be limited. So we've been prudent on that. That's why you see that little downtick there on the sales side. But I think, what was the second part your question? I'm sorry.
What was the second part you asked me? Well,
Speaker 4
just is that the reason? I mean is that the primary reason for it? Or are there other things we should factor in? Because you still haven't really gotten the impact of the price increase.
Speaker 2
Yes. I think that's a market environment thing. I want to make it stick, and we've got it on there on every vehicle now, that pricing. I think, again, still to keep you updated every quarter. I think I want to picture I would actually portray this year 2019 as obviously, our goal is here to improve the margins.
You heard it right. I'd to be at least the mid-eight percent, so I'm such a round out number on the margin, 8.4%, 8.5% on our pathway to 10%. It's very much a the way we put the guidance together, it's very much, I call it, cost led margin improvement plan. Now if we can pick up on the revenue too, and you're right, we've set ourselves some good pricing at end of the year. That will help us as well.
But right now, we're sort of just at this early point of the early juncture of the year when we're just first putting guidance out there, this is in our control. Obviously, we know our cost, we know where our cost base is, and we feel comfortable with putting this guidance out. And as I say, through the year, we'll keep updating you and if it's easy.
Speaker 4
Okay. Thank you very much.
Speaker 5
Okay.
Speaker 0
We'll go next to Matt Kornotta with ROTH Capital Partners.
Speaker 5
Hey guys, thanks. Matt. Matt. Just wanted to clarify the revenue outlook. So industry units look like they're up about 1,000 units for fiscal twenty nineteen.
You're putting through pricing. It sounds like you have customers that potentially use VW settlement money, which I assume would be a positive, but maybe you're not counting on that yet. But the revenue guide is essentially kind of flat to down a touch. I know you alluded to and you just kind of talked about paint shop and potential production inefficiencies. But does that mean that you're just taking less that you're going to turn away bookings this year to be prudent and cautious on the start up?
I mean just clarify that for me.
Speaker 2
Well, what I would try to do is I tend to push them out. So I may we may end up slipping some of those into fiscal twenty twenty is the way to think about it. And the last thing I want to do is tell a customer we're not going to take care of you. Now obviously, I'm also I also want to recognize that we're committed to improving the margins here. And so I mean, when I look at the business deals we've got, if we are going to be somewhat more constrained on capacity because we've got a lower paint shop capability initially.
We're going to be somewhat selective too in the business we've been on, little bit probably a little bit more. But right now, we've seen how it goes. We're on track with our paint shop. We're feeling good about it. And I did use the word prudent in there for a reason, obviously.
It's our first time we put guidance out there. So but we're very mindful of this. I mean I'd rather just minimize any of those launch losses and take that opportunity we can get, Matt. But right now, that's what we choose. We chose to put short this way and just recognize there may be some warrants losses along the way.
Speaker 5
Okay. And then on the EBITDA outlook, I mean, maybe could you guys walk us through I mean, you provided the waterfall charts for the fiscal year twenty eighteen EBITDA walk. But is it possible to sort of get a walk to 2019 based on the midpoint of your 80,000,000 to $85,000,000 in EBITDA guidance for the year?
Speaker 3
Don't Matt, this is Phil. We don't normally do that. I think what we would do is think about providing it on a quarterly basis. On a high level, we will have unless something changes, we will continue to see some escalation of new tariffs coming out of China. So we have to be a bit prudent worrying about that.
We're looking at steel and while it's nudged down a little bit versus the heights that it hit in 2018, it's still substantially above where it was in the 2018. So think we may see a little bit more there. We are starting to see fuel prices down versus the high level they got to in fiscal year twenty eighteen. And yet they're still up a bit. And as you've read undoubtedly OpEx talking about cutting capacity.
So that could lead us to a higher fuel price again. On the trucking industry, we've started to see that there's some easing on the capacity, but we haven't seen it in rate at the present time. So I think all in all, know we've got a lot of good news coming in cost. We are, as Phil said, being fairly prudent on how we measure sales going forward until we see how the paint shop launches and how some of the other things move. So we could be we could have some negative news in there.
And then we're obviously protecting against any other cost increases that come around us.
Speaker 2
Maybe I know in the last guidance, we sort of put a visual out there for 2019. I think we did put our numbers on, we put some bars on it, I think on a bridge that we did. Remember that, we did that. I think what I would characterize a bit like this. If you think about a bridge going from 2018 to 2019, how do I get from 10,000,000 to $15,000,000 up?
If you look at the market, what I call the market, it's the volume and the pricing sort of offset. There might be a little we've got some launch losses, but I'm taking a bit more pricing, they sort of about wash out. That will be neutral. At the same time, you're going to see economics below the chart, right, because we obviously, it's a full year effect of economics to it, the steel impact. The tariffs came on sort of in the mid year.
So now obviously, the futures look pretty good to us. They look better than they are right now, but nevertheless, there probably there is some additional economics we think. But as Phil showed you, our transformational cost reductions that we took, those initiatives that took place were very much second half of the year. So that's going to exceed the economics. That's where we're looking.
Flat on the market factors, negative below the line in economics, but a big bar going up, I guess, on cost reductions, which we're in control of. That's why we feel good about it because we've done a lot. We've already done the vast majority of that stuff. That's already implemented.
Speaker 5
Okay. That's helpful, guys. I mean I was kind of thinking about it in terms of, I guess, you referenced only half a year of sort of transformational cost initiative efficiencies, all that stuff from that $26,500,000 that you got in 2018. So if I just sort of apply roughly that as a plus up to the 70,000,000 on the bridge, then that sort of and I assume flat pricing and economics, then you're still factoring in, I guess, a fair amount of headwind from the material economics is kind of how I was thinking about it. Is Yes. That
a good way to characterize
Speaker 3
It's a good way, Matt. But remember that the big increases in commodity costs also came through in the second half of our fiscal year. So we will see that as well.
Speaker 5
Right. There's still some residual leftover. Okay. And then lastly, just in terms of the free cash flow outlook, could you help us with CapEx? I mean it's down substantially in 2019.
And you referenced some spending initiatives in paint shop and everything, but what exactly is CapEx in your guidance?
Speaker 2
Just one second. I mentioned about CapEx being up in 2019 because that's when we're really going to finish finalize the paint shop. No, I mean, it's again, it's something we don't tend to report to this point in terms of 2019. But it's certainly higher than 2018. So the vast majority of the paint shop spending, we're going to
Speaker 3
see in 2019 versus 2018. So Matt, think about it this way. What we've done thus far is put up the majority of the building for the paint shop. None of the expensive stuff that goes in the building has been paid for yet.
Speaker 5
Got it. Okay, guys. I'll jump back in queue. Thank you.
Speaker 2
Okay, Matt. Yes.
Speaker 0
At this time, we have no further questions in the queue. We do want to give everyone a final opportunity to signal by pressing star one for any questions or comments. We'll take our next question from Chris Moore, CJS Securities.
Speaker 6
Hey guys. Yes, maybe I could just stay on the EBITDA a little bit longer. So the just from a big picture standpoint, the 10% that we're talking about in fiscal twenty twenty, is that are you still looking at that as kind of cost driven versus 2019? Or is there more assumptions in terms of a little bit of revenue leverage that's coming from there? Just trying to understand the timing in 2019, obviously, all of that cost benefit is going to be shown, but trying to understand kind of big picture where the incremental increase could come from?
Speaker 2
Yes, I think, okay, let me take a crack at that Chris. Yes, I mean, when we look at it, because we have a three year plan we put together in 2019 is like the midpoint of our three year plan is where we've looked at 2018, 2019 and 2020. When we look at 2020, the CapEx initiatives, they're going to carry through. We've still got things we are implementing things in 2019 that will have a full year effect in 2020, particularly on the product design side of our business that we're working through right now. We've appointed a leader of that.
Speaker 3
We feel good about that.
Speaker 2
So the transformation initiatives will definitely continue to grow, improve our margin through to 2020. And the other thing is I'm confident that we'll continue to increase our mix of alternative fuel vehicles, which do carry a better margin for us. And we've shown a consistent track record of able to do that. I think we will continue to do that. So those are the two main pieces of it.
And I think that when you look at our product lineup that we've got, I mean, have just such a broad range of especially powertrain offers that no one else has. I feel confident about the opportunity to continue to acquire customers and grow the business. So growing the business, alternative fuel mix and the continued focus on cost reductions. That's our bread and butter, I think, for 2020.
Speaker 6
Got it. And just one maybe I can do this offline. In terms of the share count for that you're looking at for next year after the buyback, etcetera, what's a reasonable number to be looking at?
Speaker 1
Hey Chris, I've got a cash table I can share with you.
Speaker 6
Fair enough. All right. I think that's it. Thanks guys.
Speaker 2
Thanks Chris.
Speaker 0
We'll take our next question from John Sullivan with Holstein Capital Market Management.
Speaker 4
Hi. Just not to belabor the CapEx comments, but I was just curious as to once the paint shop and some of the initiatives are done maybe heading into 2020, what's a more normal level of capital expenditure?
Speaker 2
Maybe 15,000,000 to $20,000,000 a year. Probably about $20,000,000 There are things we want to do. I think when we've been doing the same job, realized there are things we'd like to do to upgrade this plant and keep it going. So I think we're looking maybe peaking at 20%, low point 15%. That's the range.
Speaker 6
Perfect. Thank you.
Speaker 2
Okay.
Speaker 0
At this time, we have no further questions in the queue. I would like to turn the conference back to your speakers for any additional or closing remarks.
Speaker 2
Yes. Thanks, Keith. This is Phil Lawhart again. I want to thank everyone for joining us today on the call. We do appreciate your continued interest in Blue Bird and I think there's some great comments and great questions that we have.
We are focused on profitable growth, and we intend to deliver on our commitments, particularly around the margin improvement area. That's a key growth initiative for us this year and next year. And we're well positioned for growth today, and I believe in the future. So please don't hesitate to contact our Head of Investor Relations, Mark Benfield, should you have any follow-up questions. Thanks again for all of us at Blue Bird,
Speaker 5
and have a
Speaker 2
great day.
Speaker 0
Ladies and gentlemen, this concludes today's conference.
Speaker 2
We
Speaker 0
appreciate your participation.