Blue Bird - Earnings Call - Q4 2019
December 11, 2019
Transcript
Speaker 0
Good day and welcome to Blue Bird's Fiscal Fourth Quarter and Full Year Earnings Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Mr. Mark Binfield, Executive Director of Profitability and Investor Relations. Please go ahead, sir.
Speaker 1
Thank you, Derek. Welcome to Blue Bird's fiscal fourth quarter
Speaker 2
and full year twenty nineteen earnings conference call. The audio for our call is webcast live on blue-bird.com under the investor relations tab. You can access the supporting slides on our website by clicking on the presentations box on the IR landing page. Our comments today include forward looking statements that are subject to risks that could cause actual results to be materially different.
Speaker 1
Those risks include, among others, matters
Speaker 2
we have noted in our latest earnings release and filings with SEC. Blue disclaims any obligation to update the information in this call.
Speaker 1
Good afternoon. You'll hear from Blue Bird's
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president and CEO, Bill Warlock, and CFO, Bill Tighe. Then we'll take some questions.
Speaker 1
Phil? Well, thanks, Mark. Well, good afternoon, everybody, and thank you for joining us today for our fourth quarter and our full year earnings call for fiscal twenty nineteen. We've made great progress this year at Blue Bird, and we strive to improve both overall profitability and margins. We always welcome something to share our latest quarterly and full year results with you.
So let's start with an overview of those financial results on slide four. As the first headline says, we had a really strong fourth quarter. In fact, it was the highest in more than ten years with adjusted EBITDA of about $33,000,000. That was $4,000,000 higher than a year ago, representing a 15% year over year increase. Importantly, this is our fifth consecutive quarter where profits increased over the prior year despite higher commodity costs.
Before proceeding further, and as I mentioned on our prior earnings call, let me set the strategy strategy that we are pursuing. Throughout this and future earnings calls, you will hear a recurring theme of how we are driving our overall profit and margin improvement through three key initiatives. First, the bus pricing that we took in late fiscal twenty eighteen to address the escalation in tariff led commodity costs resulted in a significant increase in an average bus selling price in fiscal twenty nineteen. Importantly, we plan to we plan to price each year to recover economic increases and did so again in July. Second, cost reductions that we're achieving through our transformational initiatives.
We saw the results in the 2018, but we continue to generate further cost savings in every quarter of fiscal twenty nineteen and intend to do so going forward. And third, continued leadership and growth in alternative fuels. Increasing our mix of alternative fuel powered buses as a percentage of total sales is key to profit growth as we got a superior selling price and gross margin compared to conventional fueled buses. Our growth in this segment continues to outpace the overall market by a long way, as you will hear later. Now all three of these actions significantly improved our results over fiscal twenty eighteen and are cornerstones of our plan to increase gross profit and EBITDA margins.
So back to our fourth quarter results. We improved profitability despite selling 31 fewer buses than last year. Although at three thousand seven twenty six unit sales, it was our second highest fourth quarter volume in the past ten years. Now while volume was slightly down from a year ago, fourth quarter net sales revenue of 344,000,000 was 4% higher than last year. Increased sales revenue mainly reflects the favorable impact of our bus pricing actions that I just mentioned and the richer mix of higher priced alternative fuel powered buses.
In fact, our average bus selling price was about $3,500 per unit higher than in the fourth quarter last year. Again, a strong 4% increase in our average bus price. Turning to the full year, we announced publicly in mid November that we achieved or exceeded guidance on the three metrics on which we report. First, full year adjusted EBITDA of about $82,000,000 was within guidance at a strong 11,400,000.0 or 16% higher than a year ago. In fact, I'm pleased to report that this was our best full year result for more than ten years.
And importantly, our adjusted EBITDA margin grew by 1.2 points to 8%. Second, net sales revenue of $1,019,000,000 was above the midpoint of guidance. Now while this is the only was only slightly lower than debt sales a year ago, $6,000,000 lower, in fact, it is worth noting that we sold about 600 fewer buses in fiscal twenty nineteen. This was a deliberate strategy on our part to reduce lower margin sales for dealer stocks and to forego lower margin business that we won last year, particularly in the 2018. The end result was that despite selling 600 fewer buses in fiscal twenty nineteen, net sales revenue was essentially flat as we grew average bus selling price by about $4,000 a unit or 5% over fiscal twenty eighteen.
Again, the key drivers being the bus pricing we implemented along with a much richer richest, sales mix of higher priced alternative fuel power buses throughout fiscal twenty nineteen. Adjusted free cash flow of about $36,000,000 was approximately $7,000,000 above the high end of guidance. Adjusted net income for the full year of $44,000,000 and adjusted diluted earnings per share of a dollar 61¢ was down $7,000,000 and 4¢ respectively from a year ago. It's important to note, however, that this decline is more than explained by the nonrecurrence of one time tax benefits in fiscal twenty eighteen. Paul Ty will provide more explanation of this later.
As we look at the underlying trends of the industry and Blue Bird results, we remain very upbeat about the business fundamentals. Based on Arnold Arnold Polk School Bus registrations, the preliminary industry for fiscal twenty nineteen is holding firm at around 34,000 units, and it has done for the past couple of years. That's a near record level over the past thirty years and compares favorably with the average over that same period of time of 31,000 school buses. With a strong outlook for property values and corresponding property taxes, which are the major funding source for school buses, together with the fact that a 190,000 school buses on the road today have been in service for more than fifteen years and school to enrollment is increasing, we are confident that the industry outlook remains around this level for the foreseeable future. We saw yet another record sales mix this year for alternative fuel powered school buses.
At a strong 48% mix of our total unit sales, this was 10 points higher than last year's then record of 38% mix of sales. In fact, our fourth quarter quarter mix was the highest ever for any quarter at Blue Bird as it has as a I mean, a very impressive 55% of our total unit sales. Believe the industry by a long way in alternative fuel powered school buses. That's for sure. As a reminder, in alternative fuels, we count all of our propane, compressed natural gas, electric, and gasoline powered buses as all of these are alternatives to diesel, which has been the staple fuel for years.
For the past several years, we've been achieving significant growth in alternative fuel bus sales. And as I just mentioned, we have not slowed down this year. We'll cover alternative fuel performance in more detail a little later. As I commented earlier, we are seeing the impact of both our annual pricing and structural cost reduction actions as evidenced by a strong increase in our gross profit margin of 1.2 points over last year. All in all, I'm very pleased with our fourth quarter full year results.
We increased our gross profit margin through pricing, cost reductions, and a richer mix of alternative fuel vehicles. And we expect continued gross margin improvement from these actions as we move forward to fiscal twenty twenty. All of this translated into the same 1.2 points of growth in our adjusted EBITDA margin. I will cover the fiscal twenty twenty guidance metrics in more detail later, but I am pleased to inform you that the midpoint ray of range for adjusted EBITDA for fiscal twenty twenty will be 12% above fiscal twenty nineteen at $92,500,000. Importantly, we are on the path to our stated goal for an adjusted EBITDA margin run rate of at least 10% by the end of fiscal twenty twenty.
Let me now review our key operating achievements on slide five. We recorded a number of significant achievements in the fourth quarter and full year, which will make us more competitive and support our profitable growth plans going forward. Our transformational initiatives to increase margins are on track, driving improvements in quality, cost and efficiencies, and capacity. We are seeing those results now as evidenced by our gross profit margin increases in the past five quarters, and there is much more to come. Our all new automated paint shop is fully operational, and every bus is now being painted in that facility.
The painted buses look great, and we're beginning to see the quality and efficiency benefits that we expected. As I will show you later, this is an important initiative to drive efficiency improvements throughout the plant. As I've covered earlier, we increased our full year school bus selling price significantly by about $4,000 a unit, representing a 5% increase for the year. This reflected the impact of pricing we took in late fiscal twenty eighteen and to a lesser extent, the 2% pricing which have been all vehicles and options in July 2019 to cover escalating commodity costs, together with the increased mix of higher priced alternative fuel buses. Our adjusted EBITDA margin increased by 1.2 points for the full year.
We achieved higher margins in every quarter of the year compared to fiscal twenty eighteen. I believe that is a strong indicator of how a consistent and effective strategy can deliver consistent improvement. As I mentioned earlier, we continue to be the undisputed leader in alternative fuel powered school buses with an impressive 48% mix of total unit sales in fiscal twenty nineteen compared with 38% in fiscal twenty eighteen. Furthermore, our alternative fuel bus sales grew by 21% from a year ago. When you consider that despite a flat school bus industry compared with a year ago, we achieved 21% growth in specific segments with products that are to us, that indicates the strength we have in alternative fuels.
Simply put, that's leadership and real momentum in the fastest growing segment of the school bus market. For many of us, we have alternative fuels. We continue to see strong and growing interest in our latest product, our all new zero emission electric power school bus, which is powered by a Cummins electric drivetrain. We delivered 56 buses in fiscal twenty nineteen and have delivered our firm orders in our backlog for a further 70 buses so far in early fiscal twenty twenty. We anticipate seeing many more orders for the year based on the court activity we are dealing with today.
Needless to say, with the widest range of electric powered school buses on the market today covering type a, type c, and type d configurations. We are very excited about this opportunity. And finally, we are announcing guidance for fiscal twenty twenty that reflects continued growth in sales and profits as we continue to deploy our three focus initiatives to drive higher growth, margin, and EBITDA margin. Namely, annual pricing to recover economics, structural cost reductions, and increased mix of alternative fuels. It's fair to say that we continue to adapt the business on multiple fronts, and we are heavily and focused on profitable growth.
Let's now take a look a little closer look, rather, at our third quarter results on the financial results of slide six. I touched on many of these financial results earlier, and full time we'll run through in detail later. So just to summarize the fourth quarter, bus sales, parts sales, and just be with Dell were a whole whole higher than a year ago. The end result was the highest fourth quarter profit for more than ten years. On a full year basis, bus sales were down about 1%, parts sales were up about 7%, and adjusted EBITDA was 15% higher than a year ago, also representing the highest full year profit for more than ten years.
So turning to slide seven, let's take a closer look at our alternative fuel bus sales performance.
Speaker 2
At 5,343
Speaker 1
unit sales, we sold a record number of alternative fuel powered school buses for the year, reflecting a 21% increase over fiscal twenty eighteen, which is also the prior record. As I mentioned earlier, alternative fuel bus sales represented 48% of our total sales. In fact,
Speaker 2
through the second half of
Speaker 1
the year, alternative fuel bus sales surpassed fuel sales at a 54% mix. And again, as I mentioned previously, that includes a 55% mix in the fourth quarter, which is the highest mix we've ever achieved in any quarter in this segment of the business. Now the driving force behind this significant growth is our class leading propane powered pro propane powered school bus, where unit sales grew by a very substantial 41% over fiscal twenty eighteen. That is even more impressive when considering this is the eighth year that we've offered this propane product, which is exclusive to Blue Bird from our partners at Ford and Raj CleanTech. The end result is that we hold more than 80% market share in this growing segment with over 16,000 buses on the road today.
So it's clear we are slowing down in this segment of the industry. In fact, no other school bus manufacturer comes close to our alternative fuel sales mix or market share. You might find it interesting to know that just three years ago in 2016, our alternative fuel sales mix was 26%. So we've doubled this mid this level in just a three year period. So back to this year, more than 150 new customers will have taken delivery of the first ever alternative fuel powered Blue Bird bus.
This is a strong endorsement of our exclusive alternative, exclusive alternative fuel buses that we provide, the Blue Bird brand, and our exclusive dealer network. I previously covered the fact that we now have about the electric bus orders in hand for delivery in fiscal twenty twenty, and we expect more to follow with all the customer interest we are seeing for the newest addition for alternative fuel lineup. Looking forward, the vast majority of the VW mitigation funding is still ahead of us and should support a strong industry over the next three years or so, with many states earmarking specific funds for school bus purchases. We are really pleased with the success we have had so far for the funds that have been issued. In addition, all of our electric powered buses are qualified to participate in the California Energy Commission's grant funding, which should enable school districts to purchase around 206 230 electric buses over the next two years.
We are well positioned to deal with that opportunity. With the widest range of alternative fuel powered buses, the most modern and proven engine in the industry, which is exclusive to Blue Bird through our partnership with Sport and Rounds CleanTech, and our leadership position in low NOx emissions, we are well positioned to capitalize on the VW funding and other growth opportunities going forward. In fact, it should be recognized that reduction in NOx gases is the major criteria in funding through the VW settlement. To this point, our ultra low NOx propane bus is certified at one tenth of the NOx emissions output of other manufacturers' buses and the EPA standard. Plus, our propane bus is widely recognized as having the lowest operating cost of any other school bus.
So with Blueprint propane, you can have it all. The lowest operating cost and the lowest nox emissions of any internal combustion engine in a school bus. A growing number of customers understand understand this, and as you saw,
Speaker 3
our sales are up.
Speaker 1
We're also seeing continued strong growth of our gasoline powered bus in fiscal twenty nineteen. It's readily understood by technicians and mechanics who appreciate the emission simplicity and cold weather start capability that it shares in sister product, our propane bus. It also has a low price point than diesel, so it really works for those customers where acquisition price is a key concern. In summary, we are proud of our strong leadership position alternative fuels and the significant growth and market share that we're achieving. And with less than 15% of school districts having purchased an alternative fuel powered school bus, we have plenty of runway ahead for continued growth.
Let's take a closer look at how we're driving cost reductions throughout Blue Bird. Turning to slide eight. This is a new slide we are showing to illustrate the progression of our transformational initiatives over the past two years and into fiscal twenty twenty. Importantly, you can see this is a cumulative approach where additional processing tools are being added as we strive to drive down total cost. In fiscal twenty eighteen, our initial focus on reducing post material costs and services through a combination of initiatives, including new commercial agreements with suppliers and resourcing with minimal product design change.
We work exclusively with alternative, accelerometer, automotive experts ensure best practices and process were applied, and we delivered results. In fact, you might recall that we recorded savings of over $20,000,000 from this initiative in fiscal twenty eighteen. Now we continue to pursue these initiatives in fiscal twenty nineteen and began to add design changes to our process to reduce cost without compromising quality. In this second phase, we also focused heavily on the build, launch, testing, and validation of our all new robotic paint facility, which also necessitated plans arrangements to optimize our process. As Phil will show you later, we continue we continue to achieve further significant savings in fiscal twenty nineteen from these actions.
As we now enter fiscal twenty twenty, phase three now supplements in all new processes by driving down the cost of production, ultimately, fully operational robotic paint facility and from focused plant productivity initiatives. Our new automated paint facility provides the opportunity to reduce rework with increased first time run capability, to reduce labor and material costs through robotic application of paint, to achieve savings in warranty expense, and to deliver higher straight time capacity. Importantly, with the new paint facility attached to the exterior of our present assembly building, we are freeing up space within the plant to allow more efficient line rearrangements of tax and stations and the addition of several stations for more efficient operations and improved quality control. We have deployed industrial engineering resources to optimize in station workflow in the newly arranged production line. We're applying engineering resources to focus on design for manufacturing capability, targeted to reducing production costs and improving quality of rework, and we are confident of achieving significant efficiencies.
And in fact, many more efficiency actions are planned over the next few years in this area. This systemic and cumulative approach to driving down total costs over multiple years is key to achieving high gross profit and EBITDA margins. We will continue to share our results with you in our quarterly earnings calls. Let me now turn it over to Phil Tighe, who will take you through the financials, and I'll be back later to cover the fiscal twenty twenty outlook and guidance. Over to you, Phil.
Speaker 3
Well, thank you, Phil, and good afternoon, everyone. The next few slides are a summary of our financial performance for the fourth quarter and the full year 2019. The material we're discussing today is based on the close of September 2839, and September 2938. The detailed material will be provided in our 10 ks. That will be filed tomorrow.
We encourage all of you to read the 10 ks and the important disclosures that it contains. In addition, the appendix attached to today's presentation deals with reconciliations between GAAP and non GAAP measures mentioned in this review, as well as important disclaimers that Mark Benfield has already talked to. Similar to our third quarter review, we have no new accounting pronouncements adopted in the fourth quarter, although as we have previously mentioned, we did adopt a number of new standards in the first quarter, and they are discussed in detail on footnote two in the 10 k, which, as I said, will be available tomorrow. There were minor changes to you will note minor changes to some of the risk factors from the previously published 10 k. These are really just trying to keep the risk factors up to date with the latest conditions.
Finally, I would suggest that we had a very important audit in fiscal year nineteen. This was the first time that we did a a fully integrated audit, controls based, and we had come through with an unqualified audit. So I think this was an important achievement for Blue Bird with its first, controls based fully integrated audit. So now if we move to Slide number 10, this is a summary of the fourth quarter. You can see fourth quarter for fiscal twenty nineteen and fiscal twenty eighteen and a better worse.
Some
Speaker 1
of
Speaker 3
this much of this Phil's already touched upon, so I'll I'll try to skip through it without getting into too much repetition. But you you do see the the volume. Phil talked about it. The second highest result in ten years. I would point out that our average volume over the ten years is about just under 3,000 units.
So the fiscal 'nineteen volume was actually 25% higher than the ten year average. I think this is an important fact to keep in mind, the high level of volume that we get in fourth quarters. Our net revenue, again, by $11,900,000 or about 3.6%. And you saw previously the breakout of that between bus and parts with both bus and parts contributing to the improvement in the fourth quarter. Interestingly, the bus revenue per unit you see below that is well up.
It's up by $3,500 or just over 4%. And so, really, when you look at the increase in net revenue, the the higher bus revenue per unit, plays the major role in in in achieving that increase because as we pointed out, our volumes were down by about 30 units versus last year. Again, our revenue per unit is high due to pricing actions taken in 2018 and 2019 to offset the impact of inflation, including commodity costs. It's also up because of a higher mix of alternative fuel vehicles, and Phil Phil has mentioned that. And also, I would suggest a very successful program that we've implemented to improve the revenue that we that we make on each bus sale.
This has been the focus of a lot of attention over the last two years by our sales team. Gross margin at 13.6% is about 70 basis points better than a year ago. This is really the the result of both the higher average revenue and the impact of the cost reductions from our transformational cost initiative. We'll talk a little bit more about that when we get to the bridge. In the fourth quarter, I'll point out that we had a net income of $11,600,000 That was about $3,300,000 lower than the prior year, and this was driven largely by higher interest expenses and higher taxes.
On an adjusted basis, our net income came in at $20,000,000 which was about equal to the prior year. We've already touched on the adjusted EBITDA at $33,400,000 is up almost 15%, and we'll go through that on a bridge in a slide after the next. EBITDA margin improved to 9.7% for the fourth quarter versus 8.8% last year, an improvement of 94 basis points. And we have improved the margin in each quarter in the last year and also on a quarter by quarter basis on a year over year. Diluted earnings per share was down as a result of the lower net income.
Adjusted diluted earnings per share at $0.74 was about $0.04 higher than the same period last year. Finally, would point out our cash ended at $71,000,000 up by almost $11,000,000 compared to last year. The end of the fourth quarter is traditionally the high point of our cash, and it's very much to do with the seasonality of our business. Just a little interesting factoid for you, The $326,000,000 of net revenue that we achieved in the fourth quarter was about 90% of the total net revenue we achieved in the first half of the year. Again, this is a very seasonal business.
Finally, debt was a 183,000,000. That was up about 41,000,000, and that was almost all due to or it was it was more than due all due to the debt that we raised in October 2018 to fund the tender offer. So if we move now to slide number 11, this is a look at the same metrics, the same layout and metrics for the full year versus the prior one, which was fourth quarter. You can see there, volumes were down about 600 or so units versus the prior year. Although, again, the result for the full year was about the third highest in the past ten years, and again, substantially higher than the average for the ten ten years, around 18% higher.
Our net revenue was down by about 6,000,000 or six tenths of a percent. Net revenue for bus in total was down by $10,500,000 or 1.1%, while parts was up by $4,400,000 or 7.1%. I should stop here and mention parts. They are consistently improving revenue on a year over year basis, And I took a look at it since 2016, parts have increased their revenue by 20%, and we see further opportunities ahead with some of the new products that they are introducing. Per unit for bus, you can see, was up by almost $4,000 Again, it's the same conditions that drove the higher revenues in the 2019.
The mix of pricing to offset inflation and commodities, as well as higher mix of alternative fuels, and a very focused effort on revenue generation on all of our deals. Our gross margin at 13.1% was about a 120 basis points better than a year ago, and and again, for the same reasons, higher revenues and the very successful transformation cost initiatives. Net income of $24,300,000 was a deterioration of 6.5 versus the prior year, and that more than accounted for by taxes. You might recall that in 2018, in fact, I think it was in the 2018, we had a large tax credit due to the release of a provision, and so taxes more than account for the reduction in the net income year over year as we had no such large credit in 2019. I would point out also that on an adjusted basis, net income was $43,500,000 Adjusted
Speaker 1
EBITDA, we'll
Speaker 3
talk about when we get to the bridge, but 81.8 with very strong performance for Blue Bird and particularly pleasing given the fact that we had lower volume than the prior year. The margin improved by 120 basis points, again, a solid performance, I believe, for fiscal year twenty nineteen. Earnings per share were down, again, really as a result in the full year of the the change in tax. In fiscal nineteen, for those of you who who when you read through the 10 k, our effective tax rate was, I believe, about 26%. So so you see, we we paid pretty much normal taxes in fiscal year nineteen, and and we had our credit in in fiscal eighteen.
Adjusted diluted earnings per share at a dollar 61 compared to a dollar 77 last year. Cash and debt, are the same numbers from the fourth quarter. So if we move to Slide 13, which is the fourth quarter bridge, some takeaways there. You can see the impact of both the pricing actions and the transformational initiatives, adding $8,000,000 of profit in the fourth quarter. So pricing actions of $5,000,000 is actually net of all economics and tariff changes that received in fiscal year twenty nineteen.
So coming out with positive profit contribution was
Speaker 1
a good
Speaker 3
achievement. And of course, dollars 3,000,000 for the transformational initiatives for the new activities in the fourth quarter was very powerful. We have a negative there for $3,300,000 It's called manufacturing launch and OpEx here. It's really a combination of manufacturing inefficiencies and some supplier issues that we that we struggled with. The manufacturing inefficiencies were largely due to some of the inefficiencies we we faced in the plant as we were going through the launch of the paint shop.
There there was fairly significant changes to the plant going on. We were also doing a number of other things in the plant that will improve our ongoing efficiencies, but they caused us to work a lot of overtime and have some level of inefficiency in the fourth quarter. Also, of the seasonality, a number of our suppliers, including some of the new ones that we brought in under our transformational initiative program, really struggled with the ramp up in the volume in the fourth quarter. We were forced to do some emergency sourcing to keep production going, and we were forced into some premium freight costs. That contributed.
I think it's important to note that we will get out of that type of spending as now the paint shop's on board and progressively in 'twenty, the other initiatives in the plant will take hold. Assuming that by the 2020, we don't have that sort of activity, that's an additional point of margin that you would see there, remembering that total revenue was in the $300,000,000 range. So we move on to Slide 14, which is the same book, the bridge for the full year. And so again, I think some key takeaways from this slide. The two big numbers that contributed to the incremental profits were, again, pricing net of economics of $9,000,000.
This was a very good result for us. I'll remind you, particularly many of you who have been following this for some time, that the that the the general consensus in the school bus industry was that you can't price for anything other than major regulatory changes. I think we have found that working with our dealers and with our customers, they understand that costs go up, and so therefore, prices go up. And I think this is a positive step forward to us in maintaining margins and improving margins going forward. The transformational initiatives of $18,000,000, again, this was a good result for us.
I think Phil mentioned that we made $20,000,000 through this in 2018. So in two years, we've contributed close to $40,000,000 through the transformational initiatives. And this is an ongoing program. We're very excited about where it's gonna take us in the future. I wouldn't commit that we'll get the same level of savings, but we will continue to get positive savings going forward, and it has reduced our cost structure in total, which which is very pleasing.
You'll see the full year cost of the inefficiencies and and some of the some of the seasonal costs that I mentioned on the prior page, we we had about 10,000,000 in total. Again, very important number to look at. If if the challenge is in front of the Blue Bird team to make this go away, it will add at least it will add a point to our bottom line margin, and that's a very important factor in us moving towards the margin that we've been talking about of 10 plus percent going forward. We move on to the next slide, which is the free cash flow. Again, 35,500,000.0 of adjusted free cash flow in fiscal twenty nineteen.
This was about $4,700,000 lower than 2018, but significantly higher than the midpoint of the guidance that we issued for 2019. I believe it's about 10,000,000 higher than the midpoint. The improved result is more than accounted for by I'm sorry. The result is more than accounted for by higher trade working capital that was up a bit in the full year versus a reduction last year by higher CapEx, which we had been talking about and we expected as we were continuing to build the paint shop and by higher cash taxes. And they combined to offset the improvement resulting from higher EBITDA profits.
I'd point out that free cash flow was 20,000,000, and this was 4,000,000 better than the prior year. I I think, you know, importantly, it it it it was a good result for us to get the adjusted free cash flow of 35, when we were going through the period of of building and launching the new paint shop. So that that was a pleasing result to us. Finally, my last slide is is on net debt leverage and liquidity. And you can see our debt and year end cash, so our net debt was $112,000,000 Our net leverage ratio was 2.1, still comparing very favorably to our covenant of 3.75, And our liquidity at year end was $164,000,000 which was a very strong result for the company.
So with that, I'll turn you back to Phil Horlock, who'll talk more about the outlook for 2020 and our position on guidance. Over to you, Phil.
Speaker 1
Okay. Thanks, Phil. So let's turn to Slide 17 and take a look first at our 2020 outlook. As the headline says, our outlook reflects the continuation of our margin growth plan that we've been implementing over the last couple of years. Now with the school bus industry running at about 34,000 units a year over the past two years, which are, I should remind you again, thirty year highs, we do anticipate another strong year in fiscal twenty twenty with industry just around the same level.
As we've consistently stated, our plans for continued profit growth focus on achieving significant gross margin and EBITDA margin improvement in three key areas: first, annual cost recovery pricing. We priced in late fiscal twenty eighteen and again in July 2019 when we took a 2% price increase on all vehicles and options. The latter will have a full annual revenue impact in fiscal twenty twenty that will be closely favorable. Second, continued transformational cost reductions. I explained earlier the various areas we're addressing as we expanded our processes, tools and our focus.
We saw a significant payroll profit impact in both fiscal twenty eighteen and fiscal twenty nineteen, and we expect significant benefits again in fiscal twenty twenty and beyond. Manufacturing efficiencies and quality improvements will be a key added area of focus in 2020 and beyond. And third, as we have been doing for several years, we're looking to pursue growth to maintain our leadership position in alternative fuels, which command a superior margin and higher customer loyalty, which is always good for business. Our financial targets for fiscal twenty twenty are on a glide path towards our previously communicated EBITDA margin goal of a run rate of at least 10% by the end of fiscal twenty twenty. And we do expect the 2020 to be around that level or higher.
So let's take a look at what all this means for 2020 guidance. Turning to Slide 18. Net sales guidance is between £1,020,000,000 to £1,050,000,000 which would be 2,000,000 to $32,000,000 higher than fiscal twenty nineteen. Just to reinforce the point, this is not a plan entirely based on growing volume,
Speaker 2
but rather a prudent
Speaker 1
margin focused approach to drive higher profits and cash flow. Adjusted EBITDA guidance is now between 90,000,000 and $95,000,000 a significant 8,000,000 to $13,000,000 or an 11% to 18% increase over fiscal twenty nineteen. As a reminder, we're in a very seasonal business, as Phil mentioned, with typically twothree of our sales occurring in the second half of the fiscal year. That said, we expect fiscal twenty twenty to follow a similar pattern with the vast majority of our profits and the improvement of fiscal twenty nineteen being earned in the second half of the year. Adjusted free cash flow is between 30,000,000 to $35,000,000 and continues to be a strong feature of our business model.
While this is slightly down from our fiscal twenty nineteen results, this is more than explained by unique spending to support planned upgrades that we'll continue to do and design changes that drive high productivity in 2019 and beyond. So in wrapping up, we had a strong fiscal twenty nineteen performance, both operationally and financially, and achieved our exceeded guidance on all metrics on which we report. Our guidance for fiscal twenty twenty reflects significant profit and margin growth over fiscal twenty nineteen and is supported by the continuing of continuation of the strategy and plans we've put in place over the past two years. That concludes our formal presentation, and I'll now pass it back to our moderator, Derek, to begin the Q and A session.
Speaker 3
Thank you,
Speaker 0
We will first go to Justin Clare with Roth Capital Partners. Please go ahead.
Speaker 4
Hi, everyone. Thanks for taking my questions.
Speaker 1
Hi, Justin. Hi, Justin. First off, I guess I
Speaker 4
wanted to ask you about your expectations for unit sales and then revenue per unit in fiscal 'twenty. Based on the guidance, it looks like we could see modest growth in both. So I was wondering if I could just get a little bit more detail there. Are you expecting, I guess, a smaller price increase in 2020 than what we saw in 2019?
Speaker 1
First of all, we don't actually issue guidance metric for volume, Justin. We don't do that. It gives you the three things we mentioned. We do the sales, we give profits and we give adjusted free cash flow. But I think when we look at the market, we're going look at what the inflation has been, what economics in general and various industries have been.
And right about the same time frame, probably July time, we look at some action in 2020 on pricing. That will be it, all depending on what the economics is that we're seeing out there in the industry. We'll make it industry based, but especially the way we look at this. When I talked before about the growth in sales, you can see it goes from a fairly moderate number to probably about 3% over fiscal twenty nineteen. And I think I mentioned that we're trying to just tell you that we are banking on a big volume surge.
If we see opportunities, we're going to go after them, but we aren't banking on that. Rather, we want to keep working those three angles: higher revenue per unit drives better margins reducing costs drives better margins and then finally, increased mix of alternative fuels, which also improves better margins. And I should remind you that we've come a long way in our business over the last several years, And we have roughly about onethree of the market. That's our market share as we track it. So we're in a good position.
But if there's the opportunities, we're going take them.
Speaker 4
Okay. Great. And then so you mentioned the alternative fuel mix. Can you talk a bit more about that and how you see it evolving in 2020? Q4 was the highest level you ever reached for the company.
Can you see the alternative fuel mix continue to increase next year?
Speaker 1
I think it should naturally because I think we've got a lot of momentum going right now. We've got the VW funds ahead of us. We've got a remarkable growth in propane. I'm very pleased with that. And I think we've certainly, our products are the best in the market by a mile.
That's why we're recognized for that. You look at fuel economy, look at cost of ownership, we're the best in that. And so obviously, we've electric vehicles, too, that we're the only one of the major manufacturers presently to offer that vehicle. So yes, again, we're not ready to put a mixed number on that. I mean I don't think you asked me a year ago, would we have grown 10 points of mix in that entity?
Fully said, that's at the lower reach. But, heck, the last half of the year, we were over 50%. And that's for the first time ever was alternative fuels overtook diesel in sales. So, you know, we're we're pretty bullish on the outlook, but we're just not I I wouldn't wanna put a number on that right now.
Speaker 4
Okay. Could you speak a little bit about where you are seeing strength within your different alternative fuel offerings from gasoline to propane, electric vehicles? Are you seeing more demand or greater growth in demand for one area versus another?
Speaker 1
I'd say well, certainly, 2019, we saw a tremendous surge in propane. But you still saw, I think, pretty close. The total sales of gasoline and propane were very similar. But you have to recognize that VW mitigation funds that are available don't include gasoline. You can include your clean diesel.
You can include propane, CNG and electric. So gasoline doesn't really get to look account benefit from those funds. Probably has explained a little bit why we had a significant surge in 2019. Now of course, those funds were only $150,000,000 into a $600,000,000 allocation for our school bus industry. So I would think we can still expect to see propane doing very well, but I wouldn't discount gasoline.
Gasoline is a plant is an easy pump for someone who's worried about new technology. Believe it or not, do have customers out there who think propane is a new technology, and we have to educate and train and give them demo buses. Gasoline, though, is a really easy solution, right? Everyone drives gasoline cars. Technology is simple.
It's convenient to buy the fuel. Technicians love it. So I think I guess what I'm telling you is I think we'll see continued growth in both really going forward. I mean, I think there's a recognition those products are just great for our school bus industry. Now electric vehicles, I wouldn't discount that either, but I think it's always going to be the case for electric vehicles with the price of them.
It's whether the grants are available. California has been obviously the leader in state grant support. In fact, the VW mitigation funds provide, again, funding for that. But of course, you can buy a lot more propane buses than you can buy electric buses with the same amount of money. So what we're seeing is people trying electric because there are funds available.
I we're going to see growth in all of that, and I'm just pleased we're in a good position to be there to capitalize on it.
Speaker 0
Thank you. We'll next move to Eric Stine with Craig Hallum. Please go ahead.
Speaker 5
Yes. Hello. It's Aaron Spahala on for Eric. Thanks for taking the questions.
Speaker 2
Hey, Aaron.
Speaker 5
Maybe first for us, on that Volkswagen funding, it sounds like we're still early in that process and that that's an important part as you kind of go after some of these conquest accounts. Can you just kind of talk a little bit about how you see that rolling out in fiscal 'twenty and the next couple of years? And then I did see on the slide, kind of talked about $600,000,000 And I thought in the past, that was maybe closer to $3,000,000,000 Just maybe can you give us some color there?
Speaker 1
Yes. Well, the $3,000,000,000 the $2,900,000,000 covers the entire gamut of transportation. So you're into transit buses, you're into school buses, you're into port authorities, you're into forklift trucks, you're into everything. Now when we say $600,000,000 what are we going do? That's specifically carved out for school buses.
That's a guarantee. There's a lot of activity within the balance that hasn't been carved out for anything yet. It's still going to be sorted out. But the specific amount for school buses is $600,000,000 I think it's a good sign. I don't think there's any other industry, as I recall, within that $2,900,000,000 settlement that actually had such a big carve out.
So there's still some work to do to decide where is that money going to go exactly. Dollars 150,000,000 has sort of taken about eighteen months, I'd say, to get there. I think the pace will pick up. But the interesting thing is with that money, Aaron, you've got ten years to spend it and a minimum of three years to actually spend it. So somewhere between three and ten years, that funding will last.
So I think we may have seen a quick surge when the money became available. Something similar may happen next year. It might tail off a little bit. But I think we're in a pretty good position. And I will say that within that 150,000,000 that went so far, we had a really nice share of it, particularly with our propane products.
We've got a nice chunk of that allocated to Blue Bird products.
Speaker 5
All right. Thanks for the color. And then maybe on the free cash flow guidance, down a little bit year over year at the midpoint. Can you just kind of talk about some of the moving parts there? Is CapEx are you targeting like a similar amount here in fiscal 'twenty?
And is there any kind of working capital items there? And then maybe just your broad thoughts on capital allocation since it is obviously still a really strong free cash flow number.
Speaker 1
Yes. Well, on the again, we don't give tens to give details within it, I'll give you an example. On the capital expenditures, as we move into what we call design changes to try and drive productivity improvement, you're into that buying new tools, modifying tools. That's expensive. That does take cash.
It takes money. The things we're doing at the plant, well, we did a lot of station modification, rearrangements. That's real hard investment money you've got to spend. Now we're doing nothing, obviously, like like a paint shop spending that we did over the last couple of years. There's a little bit of residual money left on that, but we'll hit 2020 as well as we commissioned the bus as we commissioned that plan early in 2020, and we and we had to do some work on that.
So so I think, you know, when we look into overall, the reason we're spending a little less cash flow is because we are investing in initiatives that will drive profitability. We're making sure that what we spend will increase profitability going forward for us. That's the whole point.
Speaker 5
All right. And then maybe last for us. I know you obviously don't guide by the quarter, but just since we're almost through the first quarter, understand the seasonality there. But I mean, are you kind of looking for an increase year over year from a volume or revenue standpoint? And I would assume that some of these initiatives as we kind of get you mentioned the paint shop being at full production here.
I mean would you expect slightly better profitability year over year?
Speaker 2
Well,
Speaker 1
for the full year, absolutely. But when you look at the first quarter, we launched that we actually launched that late in October. In fact, we took an extended shutdown in October to be able to do that. We did a lot of plant we took a during that shutdown period, we did a lot of plant rearrangements. As such, we actually delayed coming back into production compared with a year ago.
So and, you know, when you look at that first quarter, which brought it up till December, you've got Thanksgiving holidays. You've got extended plant shutdown. We've got the Christmas holidays. We shut down again there. There's a limited number of workdays.
So what I'm telling you is that while we we feel very good about the full year, we obviously probably got a guidance out there. I think it's true to say there might be a little bit less volume to plot in the first quarter because we took an extended shutdown to ensure that when that paint shop was up and running, it was running day one in painting buses. So there's a little less capacity available for us in the first quarter than we had last year. But obviously, we'll catch that up, no problem. It's not that we've lost sales.
We catch all that up back in the second and third and fourth quarters.
Speaker 5
Right. Okay. Understood. Thanks for all the good color, and congrats on the quarter.
Speaker 1
Thanks, Harry. Thank you.
Speaker 0
Thank you. We have no additional questions in the queue at this time. Thank you. And it does appear we have no further questions at this time. I'd like to turn the conference back over to Mr.
Phil Horlock for any additional or closing remarks.
Speaker 1
Okay. Thanks, Derek, and thanks to all of joining us on the call today. We do appreciate your continuous interest in Blue Bird. And I hope you can see by our fiscal twenty nineteen results and our outlook for next year that we are entirely focused on total profit growth and margin growth, and we intend to deliver on our commitments. We're well positioned for growth today and in the future.
So please don't hesitate to contact our Head of Profitability and Investor Relations, Bob Benfield, should you have any follow-up questions. Thanks again from all of us here at Blue Bird, and have a great evening.
Speaker 0
Thank you. And once again, that does conclude today's call. Again, we thank you for your participation. You may now disconnect.