Blue Bird Corporation
Q1 2019 Earnings Call Transcript

Published: 7 Feb 2019

[Operator:]

Good day, and welcome to the Blue Bird Fiscal 2019 First Quarter Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Mark Benfield, Director of Investor Relations. Please go ahead, sir.

[Mark Benfield:]

Thank you, Becky, and welcome to Blue Bird's fiscal 2019 first quarter earnings conference call. The audio for our call is webcast live on investors.blue-bird.com. You can access the supporting slides by clicking on the Presentations portion of our IR webpage. Our comments today include forward-looking statements that are subject to risks that may cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird's CEO, Phil Horlock; and CFO, Phil Tighe, then we will take some questions. Let's get started. Phil?

[Philip Horlock:]

Okay. Well, thanks, Mark. Well, good afternoon, everyone and thanks for joining us today for our first quarter earnings call for fiscal 2019. We welcome this opportunity to share our latest quarterly results with you, so let's get started with an overview of those financial results on Slide 4. As we have previously explained, the school bus industry is extremely seasonal, and the first quarter is always the softest quarter of the year, with unit sales typically representing no more than 15% of the full year volume. It is also our expectation that fiscal 2019, and so I'm pleased report that our financial report were strong, coming in slightly above last year's levels. We sold 1,600 buses in the first quarter. And while this was 105 units below last year, it was our third highest first quarter volume in the past 10 years. Importantly, the shortfall versus a year ago is more than explained by 120 fewer sales to 1 customer, the government, our general services and administration as they're known. This is simply timing of deliveries. And through the course of the year, we expect the GSA to order the usual number of buses from us. Net sales of $155 million were about $8 million below last year, more than explained by the lull of government sales I've just discussed. It's important to note, however, that when we look at school bus sales only, which represented 96% of our first quarter volume this year, revenue per unit is up by about $2,500 per unit or 3% from last year. This reflects the pricing action we took late last year to address the rapid tariff escalation in steel and other commodity prices. That's a great result for us in the first quarter. At $7.2 million, adjusted EBITDA was about $100,000 higher than the year ago. As Phil Tighe will show you later, we achieved a slight profit improvement despite significantly higher steel-led commodity prices and lower volume than in the first quarter last year. Now you'll recall that we have substantially lower steel cost from the early part of our fiscal 2018 and a significant escalation began in the second half of last year and we do remain at these elevated levels today. As I mentioned, Phil will cover more of this a little later. Our pricing action, together with the cost reductions from our transformational initiatives that started in the second half of fiscal 2018, drove our profit improvement. As we have mentioned in prior earnings calls, our transformational initiatives are the cornerstone of our profit growth plans and we saw the favorable impact to the first quarter of this year. Adjusted net income and adjusted diluted earnings per share were both higher than the first quarter a year ago, up $1.3 million and $0.09, respectively. On a GAAP basis, both net income and diluted earnings per share also improved from a year ago by $6.6 million and $0.31, respectively. Our adjusted free cash flow for the first quarter was $57 million negative, reflecting the seasonality of our business as we grew inventory through the quarter from a very low level at the end of fiscal 2018 in September, and we also have the impact of higher account spending for our all-new paying facility. Add these typical account seasonal business, cash flow will turn positive as we move through the year. As we look at the underlying strength of the industry on Blue Bird's results, we remain upbeat about the business fundamentals. With a strong outlook for property values and corresponding property taxes, which are the major funding source for school buses, together with the fact that 150,000 school buses on the road today have been in service for more than 15 years, we are confident on the industry outlook remaining to ramp to 35,000 unit mark in 2019. In fact, that's a new record, again, for industry size over the past 30 years. We did see yet another first quarter record sales mix for alternative fuel-powered school bus sales, up 34% of our total bus sales. This compares with a mix of 31% last year. As a reminder, in alternative fuels, we all of our propane, compressed natural gas, electric and gas-link powered buses as all of these are alternatives to diesel, which has been the staple fuel for years. For the last several years, we have seen significant growth in our alternative fuel bus sales. And I just mentioned, we have not slowed down this year. We will cover authentic fuel performance in more detail a little later. But we are passionate about product and being first to market vehicles and features that customers want and value. In fiscal 2018, we launched two new exclusive products. Our all-new zero emissions electric powered Type D bus and our ultralow NOx propane-powered bus, which, by the way, a 0.02 grams of NOx for break horsepower power is 10x cleaner than the EPA standard and any other brand appropriate school buses on the road. Additionally, our Type C electric powered bus will launch later this year and I can tell you that we have a very strong pipeline of customer on us both electric and propane buses in what we presume. And as I mentioned earlier, we did see the profit impact of both our pricing and structural cost reduction actions in the first quarter and we expect to see addition favorable benefits throughout the year. Additionally [ph] initiatives are well underway and on track, helping to lowering our cost structure, driving plant efficiencies and then product quality, increasing capacity and bringing major project in the market in the coming months and years. All in all, I'm very pleased with our fiscal results, and particularly the specific catches we talk to offset both higher commodity costs and lower volume prefect last year. Our results were in line with our expectations and they support our full year guidance. And I should mention these results were on the path to our stated goal for adjusted EBITDA margin of at least 10% by 2020. Let me now review our full year 2019 key operating achievements, I should say, our first quarter 2019 key operating achievements on Slide 5. We'll recall that a number of significant achievements in the first quarter, and each one will make us more competitive and support our growth going forward. We launched our transformational plans to improve margins last year, and they are on track, driving improvements in quality, cost and efficiencies and capacity. We achieved significant structural cost saves in the first quarter of 2019 and this initiative is key to delivering continued profitable growth. Construction is well underway for our all-new fully automated paint shop which are revolving equipment now on-site and pilot runs a validation schedule over the next few months. This is a key initiative to driving efficiency and quality improvements across our Blue Bird product line. We increased first quarter school bus revenue per unit by about $2,500 or 3% for the pricing action we took in late fiscal 2018. While at the same time, winning business with a significant number of customers that are new to the Blue Bird brand. In fact, 15% of our customers in the first quarter were from Western camps. That's a great result. We continue to be the leader in the field our school buses. And as of Monday this week, our year-to-date sales confirmed all the battle of these buses, represented a very strong 42% mix of the total. That compares with our 30% mix of the same time last year. Furthermore, the total number of alternative fuel buses sold and our backlog is up 25% from the year ago. That's leadership and real momentum in the fastest-growing segment of the school bus market. Alternative fuels, we are seeing very strong interest in our latest product. Our all-new 0 electric Type D school bus which is powered by a common electric drivetrain and the acquisition of California and base EDI. We have now ported over 100 units and you will hear from me later, many of these are now turning into full orders. And finally, based off of this quarter. And outlook for the balance of the year, we are reaffirming our guidance for all the metrics which we report. I'll cover this in more detail towards the end of the call. It is clear to say that we continue to advance the business on multiple fronts and we are focused on profitable growth. So let's take a closer look at our second quarter financial results on Slide 6. I took some of these financial results earlier, and Phil Tighe will run through the details a little later. But just to summarize the first quarter. Total net sales was down about $8 million from last year, more than explained by 120 fuel sales of buses on GSA. This is simply a delivery packing issue, not indicative at all of a change for full year plans. In fact, we continue to be the preferred plus of General services administration. Pop sales for the First quarter up $1.3 million from last year, representing a strong 9% growth. We have successfully introduce new products to our customer base and tailored-incentive programs to our entire dealer network. It's been a really good first quarter for the parts business. Despite lower volume and the impact of higher steel-led commodity prices, adjusted EBITDA of $7.2 million was slightly higher than the year ago. So let's turn to Slide 7. Let's take a closer look at our alternative fuel bus sales performance. In the first quarter, we grew sales of alternative fuel private school buses by 4% and achieved a record mix, for the first quarter, at 34% of total sales. Mark as we move from the softness volume water of the year, however, we have seen a significant surge in orders. As of Monday this week, we had 1,860 units booked, are in our firm order backlog. That reflects a very strong 25% increase over the same time last year. As I mentioned, earlier, alternative fuel school buses represent a 40% mix of our buses booked on our firm back up today. So it's clear we are slowing down on the second. No other school business manufacturer comes close to this mix of alternative fuels. In first quarter, more than 50 new customers took delivery of their first-ever alternative fuel powered Blue Bird bus. This is a strong endorsement of our exclusive alternative-fuel buses, the Blue Bird brand and our dealer network. So far, 30 states have finalized their plans for deploying the VW settlement firms. And the good news is about 40% of their funding in the first year has been directed towards school buses. That's potentially another strong boost for the industry and we're in a great leadership position to capitalize on these funds. We offer the widest range of alternative fuel buses in the most modern and proven engine industry. With our exclusive long-term partnership with ROUSH CleanTech which is a very good alternative fuel engines, it makes it easy for our customers to grow alternative with the same engine architecture, the same transmission and same service requirements across all three products

[Phil Tighe:]

Thank you, Phil, and good afternoon, everyone. The next few slides are a summary of our financial performance for the first quarter of fiscal year 2019. There is additional information in the appendix of [indiscernible] GAAP and non-GAAP measures in this review. As well as important disclaimers already mentioned by Mark, a detailed material will be available in our 10-Q and that will be filed early tomorrow morning. We encourage you to read the 10-Q with the full disclosures in place. Materials that we are discussing today is based on the close of December 29, 2018 or for the first quarter of fiscal 2019. There were several new accounting pronouncements enacted in the first quarter fiscal '19 we may have discussed in the footnote in 10-Q. The announcements included revenue, leases, pension, you just, cash flow in the internal use of software. Changes to risk factors from the third fiscal quarter [ph] published in 10-K so now will take a look at some of the key financial results on Slide #9. Phil's ready talked about the volume which was 1,600 units lower than last year. As previously noted, this level was unplanned and all of the reduction was due to the delivery in government service units. We are still planning to build the usual government deals that we [indiscernible]. I would point out that in 1600 units the results in [indiscernible] higher than the average first quarter sales up in the quarter. We have already and improve level, so Phil has already mentioned that first quarter, approximately 34% owned, up about 3.25 million including electric buses at Blue Bird delivery. Net revenue almost down by $7.6 million, it was really as planned, about $9 million of the decline was due to the volume reductions, the government units were all [indiscernible] with high revenues. Tax, we've mentioned is up by $0.43 million or about 9% year-over-year and are [indiscernible] doing an excellent job growing the business. So you can think about the decline in bus sales being due to the 100 priced lower units and due to the decline was made up of higher revenue Type C buses. We did have higher revenue per unit on school buses, as Phil mentioned. That was up in about 3% year-over-year and then as Phil indicated that the pricing that we announced late last fiscal year actually [indiscernible]. So we are very pleased with that. Pricing was about 40 basis points lower than the year ago and 4.3%. This was despite higher average revenue of school buses. And was really attributable to a onetime action of first quarter of '18, where we had lower cost, we lowered our variable cost line basically due to a system change that was occurring as a cost probably in fourth quarter of fiscal year '17. If we continue onto next net income, our net loss -- the net loss was $1.2 million, substantially lower than $6.6 million under the -- over the prior year. You can think about the income as largely due to the transformation initiatives. We also had some lower tax, but we also paid about $1 million more in interest costs, partially offset to that and that is flat due to the higher debt [ph] that we will talk about in a minute. Adjusted net income was, again, better than last year at about 1.3 positive. So it is up by $1.3 million, and that’s likely driven by lower levels of -- that's slightly driven by the adjustment of ongoing initiatives that I discussed previously about products in first place. We talked a little about adjusted EBIT dollar and I would look to be gently next slide. We will have any comment on that. And the final one was the margin, we were pleased there at 4.7 at the top of that 35 basis point versus last year. So improvements of diluted earnings per share was a loss of $0.05, $0.31 better than prior year. And adjusted diluted earnings per share at $0.05 positive was at $0.09 better than the prior year. Our cash at $18.8 million was down about $4.4 million compared to last year. This result was about in line with where we thought we would end up if we are going through the CapEx spend on the paint shop and the first quarter higher than normal CapEx due to that/the recent activities, and the capital budgets that a little more tax. Again, 209 of feedstock, about $40 million versus the prior year, in fact, due to incremental mode. We spoke of, I think, we saw 500 in '19. We also had some borrowing on the revolver. We will continue probably in the next few months as we get to firepower CapEx maybe. Net debt, it would really be explained -- the change in net debt is a little bit the difference actually change in net debt can really be explained by stock repurchase program we did last year, net was a 1 exercise that $56 million, and then a higher CapEx. So I think we understand what these issues are within FY '19. So let's get to the bridge. So bridge is, on Slide 10, you'd see the impact of the bus volume and product mix, was about $1.4 million. We had favourable news from parts that’s $300,000. So the two big problems on the bridge, we had economics and power [ph]. So basically, the economics is due to the fact that first quarter of fiscal year '18, we were still enjoying relatively lower steel prices on these tariffs were still months away and we had some attractive high prices at that time. So now, in the first quarter of '19 of course a very different scenario, steel prices as a result of tariffs and opportunities and few other commodities and also as I said we had a low cost recorded in fiscal year '17. One of that variable cost and that's normalizing in this year. On the transformational initiatives side, I think, this is the one that we are really pleased about about $6.5 million, here in this area. Again, this is the result of the work we are doing to reduce costs of everything. Repurchase on -- we improved on, at time, efficiencies and on an ongoing basis tomorrow to see more positive results coming out of that when we miss the operation paint shop and other opportunities. So that was a strong results for FY '19 because of the foreseeable program and other activities generally activities involved during this period. We turn to the cash flow on Slide 11, quickly. You can see we were 56.6 million negative on our adjusted free cash flow versus. Really two issues there, first is the higher CapEx as we continued to increase the instruction and installation in paint shops. The second is working capital, the working capital, I have to say, this is at the time we do start to see an increase in trade working capital normally. We think of that stuff to build up inventory as we come out of the peak selling season in September of the year, and we start to build it before we are getting ready for higher sales out this quarter into the second. So this is sort of that. This year is excited by the fact that we are fueling a buildup of inventory to support a major product change that will be coming. So we have to stop by some pre-expect [indiscernible] and we expect to have that stockpile some for some periods although, I think -- some we will get through the year. This issue will be the higher inventories working by this year. We go to Slide 12 which is net debt leverage, see if we have total debt of $209 million, adding close to $50 million will be barreled cash about $100.1 million of net debt. For those of you who follow us closely, you will also know that we get increased our revolver capacity last year from 75 million to 102 million to really to provide insurance policy against any unexpected [indiscernible] and we didn't know we have a stockpile we have to guarantee is not going to get any [indiscernible] in that area, but we kind of put to cover us a little there. We do now, as you see, debt to net leverage ratio of 2.8, still substantially below the 4% that will probably didn't have in this space, and that liquidity is that $2 9million that we believe a good level for us, looks 400 and above for the full year. So with that, I will turn you back to Phil, and he'll -- looking forward to guidance and there and I'm sure we'll have some questions.

[Philip Horlock:]

Okay. Well, thanks, Phil. So let's now focus on the fiscal '19 outlook for the year and our full year guidance. So let's turn to Slide 14. We're recently running at between 34% to 35% units anally, we're on the 30th high and would like to submit another strong year in fiscal 2019 with industry again around 35,000 units. I want to get regions of that continued growth in price and opportunity taxes, customer decided to replace their aging buses with 150,000 or 150 years, along with the new funding ahead from the VW settlement also for acquisition for a very strong industry once again in 2019 pub fiscal 2019 focused on gross margin and EBITDA margin improvement from 3 key areas. First, the impact of the cost recovery pricing that impacted late fourth quarter of last year. This will have a full run rate effect of first quarter '19 and we saw the benefit of that in the fiscal. Second, the full year impact, the transformational cost initiatives implemented in second half of 2018 and the continuation of this initiative. And once again, we saw the favorable impact in the first quarter of 2019. And third, the planned facility and process improvements that we are making, it is still ahead of us, together efficiencies and improve quality. We'll be able to decode in 2019 literally here and there benefit substantially moving forward. But, of course, I would be remiss if I didn't mention our class leading products. Because those are also contributors. With Blue Bird strong reestablishes the undisputed leader in alternative fuel-powered bus sales and our site set another record year in the second we are in position to drive profitable growth for our products France. That's a keeper initiative that we have done in the last several years and I think you'd all agree we have been pretty successful at it. So we're going to keep moving in that space, no question. Problem of our financial forecast for fiscal 2019 are only can you provide path previously communicated margin goal of at least 10% by fiscal 2020. So now let's turn to Slide 15 to review our fiscal 2019 full year guidance. Based on our strong fiscal first quarter 2019 results and the outlook for the remainder of the year, we are reaffirming guidance of all 3 reported metrics. Net sales guidance is between $990 million to $1,025,000,000. As mentioned in our prior earnings call, were being approved, recognizing that we may have to push out some unit sales as we launch our new pay facility and other facility of positive improvements in the plant. Now I think it's time for production losses are typical for an automotive company under saving significant plant upgrades and our approach will be to minimize them as much as possible. But I want to assure you, we were looking for every opportunity to maximize sales throughout the year or provide updates as necessary. Adjusted EBITDA guidance is between $80 million to $85 million, a significant $10 million to $50 million increase over fiscal 2018 as you focus on driving down costs, increasing unit revenue and improving EBITDA margin. On adjusted free cash flow guidance of between $24 million and $28 million. Now adjusted free cash flow continues to be a strong feature of our business model and typically represents more than 50% of our adjusted EBITDA, however, as you know, our fiscal 2019 guidance for adjusted free cash flow is being impacted by the unique capital expenditures required to complete construction of our all-new automated facility. So we are wrapping up. We had a strong fiscal. Both operationally and financially. On our prior rent this call, explain how we exited fiscal 2018 with a significant run rate benefits from structural cost reductions and cost recovery pricing taking in late fiscal 2018. Where we saw the impact of these benefits, clearly the first quarter compared to last year as we were able to offset rapid rising commodity costs led by the impact of the steel tariffs and lower unit sales. Base run rate benefits will help us drive significant profit and margin growth in fiscal 2019 with adjusted EBITDA yet to be 13% to 21%, I should repeat that, 14% to 21% higher than in fiscal 2018. And our plans and our guidance support this. Don't begin the progress each quarter. So that concludes our formal presentation. I'm going to hand it back to our moderator, Vicky so, to let's begin that the Q&A.

[Operator:]

[Operator Instructions]. We'll go first to Matt Koranda with Roth Capital.

[Matthew Koranda:]

Just wanted to start off with the paint business startups and how things are proceeding there. I know you guys mentioned, I think, earlier in the year, you're going to be doing test runs and validations. Do you feel like everything is on track for completion by the high season? And what are the remaining hurdles that you need to get up before comfortable scaling that business?

[Philip Horlock:]

Some equipment to install in a booth. The way understand this a unique plan consultant it looks like when she. Construction work to do but we are on target really for end of April. We have a date in March, specific day, but pretty much every good job prior to that date, will make it [indiscernible] which is all the safety standards are met, the equipment is ready, the initial requirements are met, all the things you have to do to complete certification. But we've been looking for, as we look toward the end of April, we'll stack up this slow ramp and progressively increasing that throughout the year. I don't expect that through the course of this year will be anywhere near every single was running completely through the paint shop. We'll do that with a complete home run. But we are certain that we will target as we start the next fiscal year in October will be fully operational every business goals within the paint shop. Progressively for the year and make sure it's a vision. Those are what we want. And I guess, obviously, question that you raise was, first of all, we believe long track.

[Matthew Koranda:]

Okay, great. The reason I ask is because you guys mentioned there's some conservatism, I guess, you factored into your guidance for fiscal 2019 and large sort of bulk of that conservativism seems based around the launch of the pain facility. So I was trying to get a sense for, I guess, when you think you have the visibility into how their training so that would give you confidence to sort of change to the top line guidance, I guess. So it's not like April or leader at the very least, is that fair to say?

[Philip Horlock:]

Yes. Look, I think back, it is a quick question. Will give an update on one of the second quarter. I think obviously we'll know by then there we should be studying production but I think the real [indiscernible] will be the end of the third quarter. Because 4 weeks or so -- three months or so under our belt we know things how things are it will be next quarter and then the real full year outlook at the end of the third.

[Matthew Koranda:]

Okay. And then it seemed like working capital was a bit larger of a drag on cash and then they would have anticipated during the quarter. I think you guys mentioned a little bit higher inventory quarter that you build. Can you give acquisition more color on sort of the product change that you're dealing with together with the inventory build, it will be helpful.

[Philip Horlock:]

I just want to mention, Phil can take this as well but I just want to mention, plutocracy about the fact this is the inventory build through the quarter. One thing we have to look at to is where they're stocking from. We did a great job in controlling the inventory than the last year, and actually finished with an inventory at the end of fiscal 2018 that was actually $20 million lower but it was at the end of '17. So now you're building from a lower inventory level. You're not necessarily building on much higher endpoint that you have a bigger growth funds plans I had. So we benefited obviously in 19 2018 from the fact we didn't share the inventory how much we wanted at the end of the year. Did a great job lower base. It is actually a relatedness but it was really good news performance. I think on the product side, we don't like to announce what our product plans are because we are doing something this significant. I want to hit that at the right time, but just suffice to say, over the next 18 months-or-so, we are going to have some significant product changes coming in and you'll see those, and we'll fill you in at the right time but we are having to fill some inventory to handle that changeover for us.

[Matthew Koranda:]

Okay, great. And just last one for me, I guess, order activity it looks like great news on the fuels fund with a significant percentage of your new orders represented by that. Basically, have you been seeing some of the, I guess, districts that were pushing decisions from back at December out into this year. Is that what's coming through in driving the strength in oil fuels with some of the VW settlement money that they're seeing?

[Philip Horlock:]

I'd say we're starting to see it. I wouldn't say so it's a flood of stuff coming from the VW money, it's more of a trickle. But we have certainly seen some dates were doing well, [indiscernible] one of the first ones. We capitalize on that very well with our propane products. So I think that's still ahead of us, actually. A lot of VW money. We are entering that season, the first quarter of a soft market, your school buses for the U.S. is low, we all know that. Thanks, around January, February timeframe, that's where the orders start to really pick up and the interest comes, and the quote activity increases. I just think we have been successful in marketing our product strategy and what we believe is good for the industry which is our alternative fuel product. It is a thing that we do what we've been doing every year. Pretty good last year, I didn't know we're up this year, in terms of another record level last year, when there was no VW money. So I think, which is again, we are out there, we worked this hard, we worked of a stress card and I think it reminds us of the boost a little bit of that normal business right now that we benefited from.

[Operator:]

[Operator Instructions]. We'll go next to Eric Stine with Craig-Hallum.

[Eric Stine:]

So maybe just, first just a high-level question on old fuels. You mentioned that about 15% penetration of the overall market to the end up from some 10% a couple of years ago. I haven't asked you this in a while but any updated thoughts on where you'd think that ultimately goes? I mean, obviously, that's going to play out over a number of years, but where you think that can go with the offering that you and others have in the market?

[Philip Horlock:]

Yes. I don't know if I can provide a little guide, talk to myself, ourselves. I mean, we ended up last year, full year at 38% mix of alternative to diesel this is the way that are located. I think you talked about pretty big numbers, over 50%. I think 50% is the next hurdle we look at. That, to me, is on the horizon. I look at everything we do with electric power the loanups values of our propane products, all the things we do continuously, diesel gas, every time you have a regulatory change, diesel gas is tougher and tougher and more expensive. And I think 50% is certainly something we'd look at in the next few years. I'm not going to tell you which year is in mind, but we are bullish about continued growth in our mix year after year, so with the products we've got, we feel very good about it.

[Eric Stine:]

Right, absolutely. Okay, maybe just turning to, again another market question. But I know that it's often cited about 150,000 buses out there that are what, 15 years or older. And I'm just curious, I mean, do you see any regulatory triggers out there or any characteristics like, I know you just launched the stability control system and the backup camera has been standard in their buses. I mean, are there other things out there that you see the end of speeds that upgrade cycle? Or is this something that is out there, there is a hope that is going to rectify itself but unclear if it ever happens?

[Philip Horlock:]

There isn't a lot of eco-significant product regulatory change we have that has been mandated in the years we have. I mentioned we volunteered that. Those 2 things you mentioned, we volunteered to building our products, we think it is right for safety. Without those products as options for several years, I know it is at the right time to standardize them. I think the other thing that we get a lot of comments is around seatbelts. We go for seatbelts in every bus. We offer seatbelts. We can put a lock belt, 3-point seatbelts. Would get a great seat system, and all of you just introduced a year ago which can accommodate even converting late in the cycle to a fully seat belt bus to a low cost. That's one that gets the most discussion, but it's like anything else. When you've only got 35,000 units, where you got a part of probably 90,000 units, it's difficult to sort of accelerate things very quickly. It's difficult to retrofit to an 5% there. I think the best thing I think about replacing the cycle, the VW money, there's no question. There's a lot of money there. It is all about getting those -- 20-year old buses on the road. I mean, because when I talk about 50, over 20 years of age. And all the emissions, the old diesel buses where you see the black flu come out the back, we want to get rid of those. The best capitalist I would say. I expect the next 3 years, about 3 to 4 years to utilize that money. So that should be a good boost I think to trying to get results, buses sold. Regulatory wise, I don't see there is going to be a boost for the industry.

[Eric Stine:]

Okay. That's helpful. And then last one for me, and I might have missed this in Phil's comments, but the paint shop, I know it's a key piece that you're getting to that 10%-plus EBITDA mark for fiscal '20. I know it's going to come and be phased in throughout the second half, but have you ever quantified or could you quantify maybe the margin pick up that you expect from the paint shop?

[Phil Tighe:]

I'm not sure we want to quantify that, Eric. Let's put it this way, we're investing a large amount of money in the paint shop and we expect to get probably an attractive payback on that money in the shortest possible time. So it's insubstantial.

[Operator:]

We'll go next to Mike Baudendistel with Stifel.

[Michael Baudendistel:]

Just maybe a little bit some of the last question, I mean, going from what you have a guidance for 2018 about 8% EBITDA margin going to 10% by 2020. So if you can put us maybe ice in the buckets what's order of magnitude, the largest things that are going to get you to 200 basis points from '19 to '20?

[Phil Tighe:]

So look, I think you can think of that this way. The major work of what we have been doing on emerging cost fuel to build the bus. It's clearly going to be single largest movement to build bus [ph]. We're still delivering that. All that we're doing this year in that area and quite frankly, we have done some reorganization in the company so this is not any longer going to be a one part thing. It is something that we're putting into the culture of this company, tends to be very aggressive cost focus organization. So I think that's the single largest piece. Then in order of priority, I think paint shop is really going to drive significant efficiency and quality improvements and then, after that, you heard the discussion with where we think alternative fuels will go. We do think the market is going to continue to grow for alternative fuels. And quite frankly, we think we will make better margins on alternative fuels. So that will contribute and then the final piece really is a collection of things that we're doing with the total manufacturing area to grow efficiencies in areas other than paint shop. We are putting a lot in this. We mentioned that we're doing some stockpiling for new products. There are product initiatives coming in from [indiscernible]. So we've got a frequent shopping bag of things that are going to deliver this 2 point margin improvement. And again, a lot of it is based purely on structural cost changes within the company. And then a higher mix of alternative fuels.

[Philip Horlock:]

That's a fair assessment. I think when you look at alternative fuel, we covered a lot of this, you can imagine last year, we talked about pricing. So ahead of us, we have the paint shop. And as Phil mentioned, we haven't really got into this much, but we have a lot of things on the plant. Because efficiency is going to do better, be more efficient, driver of these. It is a process we're going through and we think we have a lot of benefits, partners in next year and beyond. And as Phil said, this isn't just a onetime project. Continuously attacking cost, attacking ways, getting business is something we're driving through the entire Blue Bird system and culture, it becomes a cultural thing. I think we're confident. We have a plan, we have a track, and I think the results we achieved so far that we saw in the fourth quarter, you saw on the cost side this first quarter. I can show you the impact this could have and I am often asked the close I probably say we're in about the fourth inning of a baseball game right now, so we've got some ways to go.

[Michael Baudendistel:]

Got it. Another question I have is as you mentioned, there's about 15% of the calculus accounts in the quarter, what's a more typical percentage? And I guess, the implication there is you're taking some shares. I'm just wondering if you have any updated market share targets?

[Philip Horlock:]

Yes. I think probably, it is right around, well, actually, you look at Conquest, there's 2 ways to look at it, one is traditional conquest with diesel and one is alternative fuels. I think certainly you're above 10% conquest, especially, earlier in the year. But this is a soft quarter. There is a lot out there and we have to go and find this business. You're getting 10% at this time of the year, that's pretty good. So we've been at 15% I think, we certainly like that and we know exactly where it is and so that's our goal, so 10% was in good. 15% I think is very good.

[Michael Baudendistel:]

Okay. You're having difficulty with the employee turnover or staffing. I mean, that's something that is different from other OEMs. The trouble with that.

[Philip Horlock:]

It is definitely tied to the labor market than it used to be. No question. So really we are in the middle of Georgia, was an influx of business coming in here. There has been great working here and we have a good set of employees. We work all the time, we have been at that time. We are staple company in Georgia. We have a quite a pipeline that we access when we need new employees but it is something that you got to watch. I think you're right, Eric, it's tightened up. But we have a process by which we go after aggressively. Many ways we're not only looking at from the salary side to the hourly employee side. Diversity with that of the affiliation around here with a lot of employees, they know us very well. Internships, they become full-time hires. Put on the hourly base, like I said, we are constantly, actually, we have a process where we're constantly looking to test that pipeline and make sure there's availability but it is tightening. I think right now, we feel strong about where we are.

[Operator:]

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

[Christopher Moore:]

So the ASP in Q1 was up $2,500. Just trying to get a feel for if you think that's just going to flow through to the rest of the year? Obviously, I don't know when the pricing hit in fiscal '18, I'm assuming that a portion of the buses were at those higher levels in Q4, but is it fair to think of kind of Q2 and Q3 matching that same type of increase on an ASP basis?

[Philip Horlock:]

Chris, this is Phil. The pricing, Chris, really hit very late in the year, in the fiscal year, I'd say. So not a lot about this. No, purely because of the cycle that we go through prices have firmed up. When the order is placed and an order is anywhere from 8 to 10 weeks out from when we actually sell the business so there wasn't a lot of room to move the price. Not too many buses got in the fiscal year 2018. It's our firm expectation that they we will continue to get that revenue. We are, obviously, situations have changed but given the way we look at the market and the model, we are comfortable with what we will generate higher revenues than previous.

[Christopher Moore:]

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

[Phil Tighe:]

Chris, I'll give that to you offline.

[Philip Horlock:]

It was pretty close. We have a great year in gasoline. I think it was about 50-50.

[Christopher Moore:]

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

[Philip Horlock:]

Well, I think one thing is we will talk about this VW money. The gasoline taxes the VW money, propane can, CNG can and electric can. So obviously, I'm not talking about it in fiscal '19. We saw delays in folks ordering propane because they are using up their VW money. Many of them are going to try gas engine. I do think that VW money coming with us this year being accessed and we're seeing that now, actually lacing it very strongly in the first few months of this year shows I think that propane is very much on the upper now. So but they're both doing well. By the way, last year, I guess, it was something like that it was probably like a 46%, 54%, 46% gasoline, 54% propane between the two.

[Christopher Moore:]

Got it. It helps. 46% propane or gas?

[Philip Horlock:]

Propane.

[Christopher Moore:]

Got it. Okay. Helpful. Let's just assume that you have to build a few less buses than you could have sold because of the initiatives going on. A couple of things, do you have any ability to kind of cherry pick in terms of buses or customers that are more profitable? And two, are those sales gone? Or can you potentially carry some of those over into fiscal '20?

[Philip Horlock:]

Let me pick the second question first. I'll take that. Yes, we have shown an ability we can carry them over. I mean, you might end up, if you can't keep someone awake for a little while, longer than they like to you might have to help them get there a little bit. Think of school stuff. That's about relationships and those are guys who really want the product. I mean, we've seen that. It just happens from time-to-time. I don't think we feel we can manage that. I don't think that's when I talk about pushing sales out, we hope to capture those in the long run and it might just go beyond the school start the way we think of it. Your first question about can you cherry pick? Obviously, we've been on business, it's a big business we're in. Not all prices are the same, not all specs of vehicles are the same, states are different funding abilities, different [indiscernible]. So we are mindful of where we spend our production money, so to speak. We do look at that. We look at that very carefully and where we want to go in and go out business. We are committed a certain extent do that, but you want to sell school buses. basically that's the bottom line. We can't be a little selective where we need to be.

[Operator:]

At this time we have no further questions in queue. So I'll hand the call back over to Phil Horlock for any additional or closing remarks.

[Philip Horlock:]

Well, thank you, Vicky, and thanks to all of you for joining us today on this call. We do appreciate your continued interest in Blue Bird. And as I hope you can see by our first quarter results and outlook for the year, we are focused on profitable growth and intend to deliver on our commitments. And I believe are well positioned to grow today and in the future. Please don't hesitate to contact the Head of Investor Relations, Mark Benfield, should you have any follow-up questions. Thanks, again, from all of at Blue Bird, have a great day.

[Operator:]

That does conclude today's conference. We thank you for your participation.