Blue Bird Corporation
Q2 2018 Earnings Call Transcript

Published: 13 Aug 2018

[Operator:]

Good day, and welcome to the Blue Bird Corporation Fiscal 2018 Third Quarter Earnings Conference Call and Webcast. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mark Benfield, Director of Investor Relations. Please go ahead, sir.

[Mark Benfield:]

Thank you, Yolanda. Welcome to Blue Bird's Fiscal third quarter 2018 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. 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 President and CEO, Phil Horlock and CFO, Phil Tighe. Then we will take some questions. Phil?

[Phil Horlock:]

Well, thanks, Mark. So good afternoon, everyone for joining us and thanks for calling in today for our third quarter earnings call for fiscal 2018. We welcome this opportunity to share our latest quarterly results with you. So let's start with an overview of our financial performance on slide four. Let me begin with a comment on the industry outlook. We still expect new bus sales to be flat to slightly high than last year and should again exceed 35,000 new buses. This is strong demand and would be the second highest school bus industry since 1985. This is a good industry to be in right now. So at Blue Bird we achieved strong sales results in the third quarter with almost 3750 buses sold which is only about a 100 units below last year’s record sales for the third quarter looking back over a decade, so a very stronger unit sales quarter for us. Additionally, it represents a substantial 53% increase over this year’s second quarter unit sales. So for the first nine months of the year unit sales are up a little over 2% from last year. Importantly, in the third quarter almost 20% of our end customers were new to the Blue Bird brand representing about 30% of our total sales. That’s a really strong endorsement of our products and dealers with gasoline and diesel powered buses leading the way in conquest business. At $340 million third quarter net sales revenue was 6% below last year’s level, reflecting a lower volume of mixture and as I just mentioned led by higher gasoline and diesel bus mix this year plus a little lower than the average. At $23.7 million third quarter adjusted EBITDA was $9.2 million below last year. Now we mentioned on our prior earnings call that we were experiencing significant headwinds in commodity costs, led by escalating fuel prices related to the tariffs imposed by our government which were not anticipated earlier in the year. As you are no doubt aware, other automotive manufacturing industries have been similarly impacted by higher steel prices, which together with higher freight cost primarily explain our lower third quarter profits compared with last year. It’s important to note however that we’ve taken specific action to offset this issue going forward, and I will discuss the specifics of this just a little later. Adjusted net income and adjusted diluted earnings per share were both high than the same period a year ago and on a GAAP basis both net income and diluted earnings per share also improved from a year ago. Adjusted free cash flow for the quarter was strong at $36 million which is $22 million higher than the same period last year. Looking ahead, our production schedule is now full through fiscal 2018 so we have a solid line of sight to our fourth quarter sales and margin and our backlog of firm orders of fiscal 2019 is up over 50% from this time last year. We are predicting double-digit growth once again in alternative-fuel powered bus sales with record sales that make it nearly 40% of our total unit sales. That’s up from the prior record of 34% last year another strong year for the industry’s best selling alternative-fuel powered school bus. As a reminder, in alternative-fuels we count all of our propane, compressed natural gas, gasoline and our all new electric powered buses, as all of these are alternatives of diesel which has been a staple fuel for years. Now for the last several years, we’ve been achieving significant growth in alternative-fuel bus sales and as I just discussed we have not slowed down this year. I mentioned earlier, that we have taken specific action to address the unexpected and sudden steel price escalation that’s impacted the third quarter. So let me cover these now. First, we increased prices in all of our bus models in June to cover the higher cost of steel. Now there’s a lag before this take effect – full effect however, as our order backlog is price protected and of course the new business which represents our pipeline for future orders are guaranteed for 90 days. So our ability to offset this third quarter steel cost increases within the quarter was limited. Consequently the impact of our cost recovery pricing action will be seen until late in the fourth quarter and of course will apply fully to fiscal 2019. Second, as we’ve communicated previously we are well underway on the transmission initiatives we kicked off in the first quarter, which are also accelerating our margin growth. While we’ve made significant progress on reducing procurement costs, we will see these margin improvements taking hold in the fourth quarter. Importantly, fiscal 2019 will benefit substantially from the full year flow through of these actions. I will touch on this again later in the outlook section of the presentation. As a result of the sudden adverse impact of economics on third quarter earnings, we are lowering our full year guidance, and we do expect to restore profitability and margins in the fourth quarter and beyond as we see the improvements in our pricing and cost reduction actions taking effect. Let me now review our year-to-date key operating achievements on slide five. We recorded a number of significant achievements and each one will make us more competitive and support our profitable growth going forward. I’m excited to report that we recently have achieved EPA and CARB certification of our class leading propane bus at NOx emissions level of 0.2 grams per brake horsepower hour. We already were the market leader of 0.5 grams NOx emissions but the just got better. This means our propane engine emits just one tenth of the NOx levels that our competitors offer. And that’s great news for our customers but even the children who ride our buses and for their parents. So with the broadest range of low emission vehicles in the market, including our zero emissions type C and type D electric powered bus, we continue to be the undisputed leader in the fastest growing segment of the business. Speaking of electric buses, our first production new electric bus rolled up its line last week and deliveries will commence this quarter. As a reminder, we are the only nationwide school bus manufacture today that offers electric public school buses in Type C & Type D configurations and we’ve got a great customer response to our more than 20 ride and drives across the country, great feedback from our customers. Construction is well underway for our all new automated paintshop with pilot runs and validation scheduled for this fall. This is a key initiative for efficiency improvements next year. As I mentioned earlier, we priced to recover the recent tariff relation escalation of steel cost prices and this will take hold late in the fourth quarter and fully apply in fiscal 2019. Looking at the orders, our fiscal 2018 bookings and total order backlog which includes fiscal 2019 orders are up 4% from a year ago which is a strong position to be in against a relatively flat industry outlook. And our fourth quarter production slots are now full with non-cancellable orders. Importantly, our alternative fuel bus delivers for fiscal 2018 and backlog are up 16% from the same time last year. That’s another substantial growth in alternative fuel for Blue Bird and we anticipate that nearly 40% of our bus sales this year were powered by alternative fueled engines Just a few years ago that was less than 5%. It shows what a way we have come; we're almost 40% being non-diesel engines the Blue Bird sells. Working with industry experts, our transformational plans to improve margins are on track driving improvements in quality, cost and efficiencies and capacity. We expect significant cost savings and margin growth in the fourth quarter and beyond supporting our plan for continued margin growth towards our 10% EBITDA margin objective. We are reducing full year guidance of the outcome of our third quarter results and the impact of a sudden escalation of steel prices and other commodities. Despite these headwinds however, we expect to recover in the fourth quarter fiscal 2018 adjusted EBITDA guidance is slightly higher than last year’s results. So now let’s take a closer look at our second quarter financial results on slide six. I touched on many of these financial results earlier and Phil Tighe will run through these in detail later on. So just to summarize the third quarter, total net sales and adjusted EBITDA were down as we’re about a 100 units lower than the record third quarter volume of last year and we had higher mix of gasoline and diesel powered Type C buses. And of course steel economics hit us hard in the third quarter with ability to offset the cost impact within the quarter. Part sales were up a strong 9% in the third quarter as we added new parts to our product range and we saw increased sales throughout our franchise dealer channel. Through the first nine months of the year, total net sales were up $15.4 million while adjusted EBITDA was down by $4.4 million, more than explained by the third quarter decline. Turning now to slide seven, let’s take a close look at our alternative-fuel bus sales performance. As the chart on the left shows we are on our way to achieving a new full year sales record of around 4,500 alternative-fuel powered school buses that’s a 16% increase over last year. As I mentioned earlier, we expect the mix of these buses of nearly 40% of our total sales up from 34% last year. We continue to be the clear leader in the fastest growing school bus segment with our market share now running at about 80% and certainly are all running in some parts of the country. We now have more than 17,000 alternative-fuel powered school buses on the road and with less than 15% of school districts still haven’t purchased not even purchased an alternative fuel powered bus we are well positioned for future growth. We offer the widest range of alternative fuel powered buses on the most modern and proven engine in the industry with our exclusive long term partnership with Ford and ROUSH CleanTech across all alternative fueled engines, it makes it easy for customers to grow with alternative fuel fleet with Blue Bird. With the same engine architecture, transformation and service requirements across all three products, propane, compressed natural gas and gasoline it’s an easy move for school districts or a fleet operator. Propane is widely recognized as having a lowest total cost of ownership in the market and is a green engine. Our latest EPA and CARB certification for emitting nitrogen oxides or NOx submissions at 0.2 grams for brake horse power hour is one tenth of other manufacturer’s buses. I want to repeat that, that is one tenth of the other manufacturer emissions level. These gas have contributed to the formation of acid rain and smug. So the best in class level of NOx is another great reason for choosing Blue Bird propane. Now despite our growth, in the past few months we have seen some customers elected to push their propane purchases to fiscal 2019 in anticipation of receiving funding from the VW, Clean Air Act Settlement Fund late this calendar year. That fund targets the replacement of all diesel buses with new school buses that emit low levels of NOx submissions. Our Propane compressed natural gas, electric powered buses are perfect choices to utilize these funds, no one is in a position we are to capitalize or neutralizing them. Our gasoline engine is readily understood by technicians and mechanics who really appreciate the machine simplicity and cold weather start capability it shares with propane. It also has a low price point in diesel so it really works for those customers where acquisition price is a key concern and sales running extremely strong this year. We are taking orders for our all new Type C and Type D electric buses with deliveries beginning this quarter. As we look forward to next year and beyond with the broadest range of the cleanest low NOx school buses in the industry eight times more alternative fuel powered buses on the road than all of our competitors combined and still less than 15% of customers having tried an alternative fuel powered school bus, Blue Bird is in a very strong position. Let me now turn it over to Phil Tighe who will take you through the financials, then I’ll be back later to cover the fiscal 2018 outlook and guidance and a first look at fiscal 2019. Over to you, Phil.

[Phil Tighe:]

Thank you, Phil. Good afternoon everyone. The next few slides are a summary of our financial performance for the third quarter. Phil has already hit some of the highlights for you and we’ll spend a little bit of time with some data. Additional information is available in the appendix and deals with reconciliations between GAAP and non-GAAP measures as well as important disclaimers. Detailed material is available in our 10-Q which has been filed. We encourage you to read the 10-Q and the important disclosures that it contains. The material we are discussing today is based on the close as of June 30, 2018 for the 2018 fiscal year and July 1, 2017 for fiscal year 2017. I would point out there are no changes in our critical policies in the period and risk factors are unchanged from the previously filed 10-K. Let's now take a low at a summary of results shown on slide nine. This slide summarizes our actual results for the third quarter and the same period of 2017. We also included second quarter of fiscal year 2018 results, as we believe there are some important points about that you can draw from that and the importance of seasonality in that business and to highlight progress in some key areas. Looking at volume for the third quarter, Phil has already talked about this, 3746 units was about a 100 units down versus the record volume achieved in 2017. We've talked previously about the highly seasonal nature of the school bus business and the fact that generally production and sales in the first half is less than 40% of the full year, so you can see the growth in volume from second quarter to third quarter of over 1300 units. We expect volumes in the fourth quarter will be similar to the level achieved in the third and higher than the fourth quarter period last year. Alternative fuel vehicles, as Phil mentioned, accounted for about 35% of our third quarter volume and we're looking at about 40% alternative fuel for the full year. We also – I think we're very happy to be announcing that we will be making delivery of that first electric buses in the fourth quarter. Net revenue as mentioned on the prior slide its down by about $18 million [ph] or 6%, the revenue decline is really is attribute to two factors; one is the lower volume which is a substantial part of decline. The other is per unit revenue decline which is partly is primarily due to changes in the mix of products sold. We had a very strong quarter with gasoline buses which is their lowest price in the market and a great bus for people who are very acquisition price minded and we also we're very strong in Type C diesel bus market in the third quarter and that also contributed to lower average revenue. So, gross margin is another thing I would like to point to. It was 11.8% for the quarter. It was down about 1.7 points below last year. But importantly it was up by almost two points versus the second quarter where we hit 10%. So you could see we are improving in the second quarter – in the third quarter versus second and we'll see further improvement in the fourth quarter. Commodity costs, as Phil has talked about were the majority of reasons for the reduction in margin. Our cold roll steel prices and that's the majority of the steel we buy is cold roll, were up about 27% versus second half of the prior year. While we are beginning to see some reduction in the long term outlook, steel continues to be a major factor in our profits for the balance of 2018. In addition to commodity cost, we continue to experience high inbound freight costs, something that we discussed in our prior two reports. The higher freight costs are due to diesel which is up substantially and a shortage of drivers. Freight costs in total are up about 29% compared to the same time last year. Material and freight economics combined deteriorated for Blue Bird's margin by almost two points in the third quarter. Absent this impact, our margin ratio would've been about the same as last year. As Phil has discussed we are working on a broad range of actions to reduce our production cost than improve ongoing margins. These plans are unchanged, we're sticking with them and they are starting to deliver what we had predicted they would. And you'll see some impact coming in the fourth quarter and a significant improvement in fiscal year 2019. In late June, again we implemented pricing to help offset the cost increases that we had experienced, but we will not see a major contribution of that pricing through our profits until fiscal year 2019 as Phil explained due to where the prices are locked in for firm orders in advance of production. As previously discussed the initially benefits from our operational transformation initiative provided a small offset to margin reductions in the first half. We continue to make progress in third quarter and we expect the initiative to have a more substantial impact on margins in fourth quarter and beyond. Net income, I think we've already covered but it is at $21.9 million, that was about $1.9 million better than last year despite the lower EBITDA and adjusted dilutive earnings per share at $0.91 was up by $0.21 versus last year. Our favorable tax treatments were the primary driver in the net income result offsetting the reductions in the gross profit driven by lower volumes and higher costs. We'll talk about the adjusted EBITDA margin on the slide. Debt and cash, always important, we closed the quarter with $41.9 million of cash. This was down by $8 million versus prior year and that was more than accounted for by CapEx spending in the relevant period to support upgrades to our production facility you've heard previously that we are putting a new paint shop in and doing other things in the plant. Debt was reduced by $7 million in the period, so really the change in net debt was about $1 million for the quarter. And please note the large increase in cash between the second quarter of 2018 and the third quarter of 2018, again pointing out to the seasonalities that we experience in this business. If we can go to the next slide, this is a bridge that works from third quarter of fiscal year 2017 to the same period in fiscal year 2018 on an adjusted EBITDA basis, you can see the deterioration of about $9 million compared to last year and the two big items that caused that, bus volume and mix obviously was down due to the 100 less units and also the higher mix of some Type C diesel buses. Gross profit was also down by about $6 million and this all attributes all to higher material cost and freight. So rapid [Indiscernible] really major concerns in the third quarter for us. We're taking aggressive actions to offset as much as the impact of higher cost as we can in the balance of the year although it is clear the full off -- that the full offset cannot be achieved in 2019. On the next slide, slide 11 is a brief graphic of what's happened with steel and with freight, you can see hot roll is actually up about 55%, cold roll up about 27% and then freight around 29%. I would point out that the – it appears that hot roll maybe starting – we may start to see some downward turns, the 12 months forward prices for domestic Midwest hot roll steel is showing a reduction of about $150 of ton about 12 months. This is a promising indictor, although there's still a lot of uncertainty and I don’t think we can actually bank on that at the moment. So again I'll just summarize that we're taking really three significant actions. As Phil mentioned, we've already implemented pricing in June. We will see small impact of that in the fourth quarter, but it will substantially impact this in fiscal year 2019. We are also working at whatever levers we can pull to resource to lower cost areas of suppliers and taking other actions to generally improve that cost structure and obviously we are full steam ahead on our transformational initiative program and considering some expansion to its scope at present time. With respect to freight, we are working with our logistics suppliers to identify less expensive options, although it will difficult to offset the magnitude of this increase without a reduction in fuel prices or more capacity being added to key routes. On the next slide which is slide 12, we talk to an outlook for the fourth quarter 2017 to the fourth quarter of 2018. This is not something that we typically provide in our calls, but we thought for obvious reasons given that we've only got three months to go, it was something that it would useful, but please don't read this as an indication that we're committing to regularly update on one quarter at projections. As you can see project the fourth quarter will be around $7 million better than last year. Volume and parts will be up and mix does not seem to be problem for us. I would remind you that right now we have total visibility to bookings and backlog for the balance of this year, so we have a fairly firm hand on that. You can see the impact of economics; it continues to hit us recently hard in the fourth quarter. We're looking at about $7 million year-over-year. And finally you see that we have a large number called All Other that a lot of cost initiatives that we've been taking to reduce cost to maintain profits at a bit about last year and also obviously it does include the fourth quarter outlook for our transformational initiative which is starting to take serious hold. I guess important if you took out the economics of the unexpected part of the economics, our fourth quarter would be looking much closer to $40 million and $30 million which would have been a great result for Blue Bird. I'll move now to the next slide which is slide 13, which is free cash flow. We had a strong quarter for free cash flow at $31.5 million for free cash flow and $35.7 million for adjusted free cash flow. The lower adjusted EBITDA and higher CapEx were more than offset by favorable trade working capital and other expenses. Our strength in cash generation continues to allow us to support the substantial changes we're making to achieve our long-term profits targets and create even greater value for our shareholders. The final slide for me is one that looks at net debt liquidity and leverage. Net debt at the end of the third quarter stood at $103.9 million including $41.9 million of cash. This is about $33 million better than the result at the end of the second quarter. The net leverage ratio of 1.9 was substantially below the required level of 3.75. Liquidity stood at a 110 million, 31.6 million better than the end of the second quarter and then there was no drawings on the revolver. So thank you for your attention. I will now turn you back to Phil, who will talk about our outlook for the balance of 2018.

[Phil Tighe:]

Okay. Well, thanks Phil. So let's now focus on the outlook and our full year guidance. Let's turn to slide 16. As I did mentioned at the start of the presentation today, we do anticipate another stronger industry, about 35,000 units or slightly higher. So again this is 30-year [ph] high business we're operating in right now. So we feel really good about where we are. That said, we expect Blue Bird sales growth to be in the 3% range just little bit above the industry growth. So that's a strong position as well to be in. Second half adjusted EBITDA margins will be better than the first half but lower than expected in the third quarter. We are forecasting margin recovery in the fourth quarter, Phil showed you bridge from cost recovery pricing which is late in that quarter and cost reductions that we talked about. Now our focus on fiscal 2018 is on transforming our business structure to a series of cost efficiency, quality, capacity and product actions, really this is our multiyear sort of upgrade here we're doing, but very much focus this year and early next on transforming our operations. We had set a goal this year, as you know, 8% of adjusted EBITDA margin up from 7% last year. While the impact to be escalating prices that we talked about, another commodities that's through the third quarter and what we'll see also in the fourth, that is account for about one point of full year EBITDA margin. And so we expect now to be around 7% again for the full year. So, again, we're really [Indiscernible] you that if you look through the unanticipated steel economics we saw along with some other commodity increases they don't happen, would have been about 8% EBITDA margin for the full year. So again that's the one reason we're down and looking at 7% again. However, importantly as we exit the year, the actions we have taken on pricing and cost reduction position us extremely well to grow the margins next year and towards the desire range of 10% to 12% EBITDA margin in the coming years. And finally as you know we try to create shareholder value. As I'm sure you're all aware we initiated two in fact stock repurchase programs this past year, while I'm pleased to announced that our Board of Directors has approved the $50 million tender offer to repurchase shares at a premium to market. We expect to initiate this tender offer in mid-September and we'll release further details at that time. So let's now turn into fiscal 2018 guidance on slide 17. First, we've lowered our net sales guidance to between $1.10 billion to $1.20 billion, about $20 million less of a raise that we have previously. Our adjusted EBITDA guidance is now between $70 million to $72 million that’s a slight increase of a fiscal 2017 results despite the significant commodity headwinds we saw in the second half, but it is down from our prior guidance of $80 million to $85 million. Adjusted free cash flow is now between $30 million to $34 million reflecting a low profit outlook. Adjusted free cash flow as Phil mentioned, continues to be a strong feature of our business model representing 40% to 50% of adjusted EBITDA despite plant facility upgrade investments we're making in fiscal 2018. Now the slide shows our forecast for fourth quarter consistent with our revise guidance and Phil showed in the bridge between 2018 and 2017. I think the point I want to make here is volume and profit outlook is for a record fourth quarters we've looked back over past decade as we expect to recover from the profit short fall we saw in the third quarter. As you know, we're taking pricing actions, we're taking cost recovery actions and they are already planned and already initiated actually in the fourth quarter. So let's now take an initial look at fiscal 2019 on slide 18. As we look to 2019 outlook, we expect high gross profit margins and overall profitability in fiscal 2019 from three key areas. First, the impact of the cost recovery pricing that we took in lat fourth quarter. This will have a full annual effect and significant annual affect in fiscal 2019. Second, the full year impact of the transformational cost reduction initiatives that we implemented in late fiscal 2018. The following slide will depict the significance of this, and I'll cover that in just a second or two. And third, the planned facility and process improvements we are making to increase manufacturing efficiency this year will help drive margin improvement in 2019. We expect financial target for fiscal 2019 to be on the glide part towards our previously communicated EBITDA margin goal of 10% plus by fiscal 2020. And we'll provide fiscal 2019 guidance at our next earnings call in December. So let's now turn to slide 19, to begin to see how our transformational cost reduction should impact fiscal 2019. It’s a fairly simple slide but I think you can see it we will be existing fiscal 2018 with significant run rate savings from actions that we've already taken in 2018 to reduce our costs. In fact, as we look at the run rate effect to those actions, its about twice the level of savings we saw in 2018. So this is a significant margin improvement as we look at 2019 and we'll provide more details of these savings when we discuss fiscal 2019 guidance in December. But again we still are well-positioned to capitalize and the good work we've done this year that will flow through to next year. So let me now wrap up the presentation on slide 20. First, its clear that fiscal 2018 third quarter profits was significantly impacted by the sudden escalation in steel prices and those little ability to recover that within the third quarter itself. However we've taken specific actions to address the impact of higher economics and we expect results and margins to be restored in the fourth quarter. You saw that analysis when Phil showed you in the bridge earlier. We also have many operational positive including our leadership in alternative fuel powered school buses, transformational initiatives underway and on track and our strong free cash flow which is a feature of our business model. We are well-positioned for profitable growth in fiscal 2019 as a benefit from the run rate of the actions we took late in fiscal 2018 and we are committed to profitable growth and our EBITDA margin goal of 10% plus by 2020 and we expect our fiscal 2019 guidance to support this objective and finally we're pleased to announce as we did earlier another shareholder value initiative a $50 million share repurchase tender offer that we expect to launch by mid September providing shareholder with a premium to market price. I will continue to update you on our progress each quarter on these and other initiatives. That includes our formal presentation. I now pass it back to our moderator Yolanda to begin the Q&A session. Thank you. [Operator Instructions]. Our first question will come from Matt Koranda with Roth Capital. Please go ahead.

[Matt Koranda:]

Hey guys good afternoon. I just wanted to get a sense for the timing of the price increases that you mentioned. I think he said June was sort of the first price increases they put through but could you give a little bit more detail in terms of sort of the magnitude and I guess the vehicle those took was it in the form of surcharges; just a little more color in terms of how that transpired.

[Phil Horlock:]

Yes. I mean well we don't want to talk about specifics on the, we want to talk about pricing specifically on a per unit basis but needless to say it was pretty significant. I think where you look at the steel price Matt that fell short on the bridge you can get the impression a pretty significant amount but we in June we put that through with all of our dealers, all of our customers we put through a surcharge to account for that. So we literally took all of our prices for every single vehicle we've got we put under standard surcharge across all of our products. As I mentioned earlier we do have this timeline because we have to recognize we are in a big business. We have bids out there the ballot for 90 days, school [indiscernible] to go to boards to get them approved. It takes time. So we honor those commitments and similarly backlog of orders which are several months out in the future are price protective. So the real impact of that there's about a three month timeline basically before we see that impact and I look that's relate to the fourth quarter but like I said we've talked to all of our dealers about it, they understand it and it's in our pricing model right now and it's on our full price for the dealers.

[Matt Koranda:]

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

[Phil Horlock:]

Matt generally material comes in let's say two weeks prior to our bus being built. Steel may come in a little earlier than that because we actually do our fabrication for the raw steel that we buy. So you could look at that potentially coming in two to three weeks in advance of the actual vendor-supplied commodity. Some might be more than a month for the raw steel. We do try and take advantage of the market and do some some pre-buys where we can on steel. That will be largely a factor of the price that we can get from our major suppliers and a point in time. Probably the further step we ever go on those deals at the moment is about six months.

[Matt Koranda:]

Okay got it. I guess what I'm trying to get at is sort of it seem like maybe you guys had the visibility into the steel price increases earlier this year. I mean if you look at the commodity indices you can kind of see it picking up even late last year and earlier this year so I'm just a little confused as to sort of why it was surprising to you guys in June or was it just a factor of like you had to wait with – you had a bunch of bids out there that sort of rolled out toward the end of last year and you had to wait for those to expire before you could put pricing through?

[Phil Horlock:]

Yes. That's really the point. I mean I guess two different factors right the surprise was the rapid run up in the steel price versus spots and that was driven when all of the domestic steel producers increase their prices this year and it happened fairly close to the announcement of tariffs. So you draw your own conclusions on that one. The pricing issue for us is a little different. Once we saw where steel was going we we took our time to understand exactly what we thought the long-term cost increase was going to be because this was not something where we wanted to go out initially and then make more adjustments to prices subsequently and add a lot of confusion into the industry. So once we understood where we thought steel was settling out we made the decision in June and we actually went through a round of meetings with all of our dealers prior to announcing it to make sure that they understood what was coming and how to deal with it. So that took us a little bit of time but I think what we've done is we've put a price increase out there which will largely cover us versus where we see steel and stand us in good stead for the future. Of course, that's assuming that there's no other major dislocation in steel going forward. As I said we are seeing a bit of a downward trend in the future, the 12-month future. I just don't know whether that's real or just noise at the moment.

[Phil Tighe:]

I think as I mentioned before I'm sure you've seen this other industries I mean automotive or GM of all talked about steel price increases and also the benefits some of our dealers you actually carry other product lines besides our school buses. They may sell agricultural, specialist equipment, RVs, fire trucks all of those guys have all got the same impact and they're all pressing on price increases. So it's not something unusual this we've done in the past and we have to do it now. It's appropriate thing to do because by the way we have previously done as a surcharge before as well taken out same technique.

[Matt Koranda:]

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

[Phil Horlock:]

I don't really – my line of site is exactly what all the other competitors are doing with the dealer body or the customers are really are there end customers it's difficult. I don't really – I can't really get into that, and what they're doing I don't know. I will tell you though most of our business 95% of our business is through deal with our dealers. We sell buses to our dealers. We pass the surcharge onto our dealers and our dealers in turn deal with the end customer; that's their role. So they have the job and of going out and selling the value they give and the products we have we're very strong about and passing on as they can feel appropriate. I would say that looking at where backlog is right now where orders are right now I'd say we're certainly continue to do what we've always been doing. I've been holding our own and we're – it was the right thing to do we felt and so we have dealers have accepted it.

[Matt Koranda:]

Okay. Last one for me if we look at the adjusted EBITDA that you guys provided thanks for that on Slide 12 the Q4 one just wanted to get a sense I mean it looks like the 11 million in sort of positives in the all other category I mean could you break that out just in terms of I mean it's most of that pricing and I'm just trying to get a sense for the other sort of immediate levers you guys actually have.

[Phil Horlock:]

Very little of that. Matt very little if any of that will be pricing. We just want to say too much in the pricing. This is fundamentally a mixture of various cost reduction activity and it's the – you think about the progression of our transformational initiative and I think we talked about this before there was a little bit in the first half not too much and we always knew that it was really going to hit a stride towards the end of the year in the fourth quarter as we work through inventory and the new the new agreements with many of our suppliers came into place. So that's where we see a large part of the cost increase coming from. However, given that we saw the gap between where pricing would take effect and the cost increases we did take other actions in reducing spending in a lot of other areas.

[Matt Koranda:]

Thanks. I'll jump back in queue. Thanks.

[Phil Horlock:]

Thanks Matt.

[Operator:]

Thank you. Our next question will come from Eric Stein with Craig-Hallum. Please go ahead.

[Eric Stein:]

Hi everyone. So maybe we can just dig into you mentioned 20% of your sales and I'm not sure if it was for the quarter or for the year-to-date but that 20% of your sales were to new customers and I'm just curious commentary on how much of that is alternative fuels given your big head start and propane and gasoline and that you've got the only electric bus in the market.

[Phil Horlock:]

Yes. That's a good question I mean let me give a little background on this stuff I mean I think I've said before we run sort of a lumpy business, right. Customer orders come in differently every year. They don't always come at the same time of the year and so you go out to new deals are looking for business where they can do business and trying to find where they can play to our strengths which is their strengths obviously and so when we look at that was for the quarter so we're just talking exactly on the quarter in question that these are sales to end customer. So we know w have got into customers hands through our dealer network. So when I said it was about 20% customers who are new to Blue Bird a big chunk of those were gasoline less – we actually we grew in -- we grew in gasoline, we're in propane, we grew in diesel in terms of the total impact of new customers come in the majority you'd say were a sort of in the gasoline and diesel area and to a lesser extent in propane. I think I've touched on propane a little bit too I wanted to make that point that we have seen in the last four or five months stakes are getting aware of the VW monies coming available. Propane is very-very high on that agenda for utilizing those funds. So they are pushing it up and say well I don't wait till I get the VW money because that's expert for me and I'll instead it know deal with my fleet with the gasoline and diesel products. Although it's been an excellent year for propane but I'd say some of the conquests that we saw on the third was largely gasoline and diesel and to a lesser extent propane.

[Eric Stein:]

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

[Phil Horlock:]

Well, I think the fact that we're getting some finally some line-of-sight here on the VW funding availability. I do think we're in a good position. I would say the gasoline though I mentioned gasoline product is not included in the VW funding. So we've been looking at our propane and our compressed natural gas electric buses as really being the key vehicles we have to put into that but I certainly think that yes it's a great opportunity for us and we get a lot – we have a very active team here working with our dealers, working with the state and the school district, states – they have entities who actually go and put this money out there, and decide on the plan and we have been working with them very closely and telling our stories. So I do think we're excited about this as we enter fiscal ‘19 for particularly for propane. And the other electric [indiscernible] actually.

[Eric Stein:]

Got it.

[Phil Horlock:]

Okay.

[Eric Stein:]

Maybe last one for me just on the operational initiatives. I know Phil mentioned that potentially you expand the scope of that and I don't know if you can share anything there? I know the paint shop was a big one and that'll have a really big impact when that comes on in early 19 but I mean are there any – would you say those additional things in scope are more broad-based in little steps or are there any other large steps similar to the paint job for instance?

[Phil Horlock:]

Nothing the size of the paint job Eric. We're looking at some areas of the plant where we can significantly improve efficiency and workflow. We're also taking a hard look at some redesign initiatives of the existing bus which may pay a lot of dividends going forward. So these are things that we have kicked off to and we won't see a whole lot until later in fiscal year 19 from these but the team's fairly excited about it.

[Eric Stein:]

Got it. Thanks a lot.

[Phil Horlock:]

Okay thank you.

[Operator:]

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

[Chris Moore:]

Yes. Thanks guys. Maybe just a little bit on the tax benefit. Can you just talk to detail a little bit on that?

[Phil Horlock:]

I think Chris when you get a chance that we cover it in quite a lot of detail in the 10-Q you because it is fairly technical. There are a range of actions. One of the large ones was we did have an uncertain provision in a balance sheet and working with our auditors and tax consultants we've been advised that we could release that so that that's a fairly large part of the reduction. So it's really a one-timer but we took the bad news for it a couple of years ago and now we're ready to let it go.

[Chris Moore:]

Got it. Okay. The 11 million that you had talked about in terms of the some of those all other initiatives. Some is transformational, some is a little bit of pricing. I guess what I'm trying to understand is how much of that reduction spending is kind of one-time things that you're just kind of tightening the belt short-term to lower the cost structure?

[Phil Horlock:]

Small part of that. I mean the way I look at it actually Chris if you [indiscernible] is if you go and take a look at Slide 19 that Phil presented which on purpose didn't include any numbers exactly.

[Chris Moore:]

Exactly that was my next question. Go ahead.

[Phil Horlock:]

But if you're especially good which I'm not you can see there's a fairly large jump in the size of that box going into fiscal year 19. So what I would suggest is that all of the stuff we're doing we're getting only a portion of the benefit of it in the fourth quarter of fiscal year 18, and you should expect to see a rather large contribution in fiscal year 19.

[Phil Tighe:]

Yes. I mean absolutely I mean just you asked about I mean Phil is right. I mean only a small portion of these demands you saw in the 11 million was what I call one timer but a little bit in there for the price we made that very clear late in the year with September. So that's really pushed by now to date after the June period. So the bulk of that is stuff that we believe is sustainable and we've got that. We've got this cost out of the business and we've got a terrific team working on this hard all year. That's why we call it transformational and then we get a full run year full effect of that and into next year and we got as you mentioned earlier we talked with earlier we have other initiatives we're trying to do to increase efficiencies that will bolt on to that next year as well in the plan. So we're really excited by the ‘19 outlook. I mean this one it's all coming together now the end of this year that we can launch have a really good ramp up into ‘19.

[Chris Moore:]

Got it. Alright guys appreciate it. Let me jump back in line.

[Operator:]

Thank you. [Operator Instructions]. We'll go next to Mike Michael Baudendistel with Stifel. Please go ahead.

[Mike Baudendistel:]

Thank you. I'm just wanted to ask you on your EBITDA margin comments and it sounds like you're expecting somewhere in the neighborhood of 9% adjusted EBITDA margin in the next year and maybe am I right about the and that sounds like that the 8% if you adjust it for the input cost and you're expecting 200 basis points at least in the next two years I mean is there any reason to think there's going to be more or less progress made in 19 versus 20 on that?

[Phil Tighe:]

Yes. You know Mike that's a bit fair model here before I give the guidance it's always a little difficulty to do that and we're not ready to drop it on because we are still working 2019 budget but it certainly it's fair to say with 8% adjusted this year with the actions we've taken we certainly would look to be I'm going to tell you right now be somewhere north of 8% to get to a 10% obviously by 2020. So you have to wait a little bit on that but I think what you do you're in the right direction put it out where. I think what you're thinking is good Mike.

[Mike Baudendistel:]

Okay and then related to that the range of 10 to 12 by 2020 I mean what would the difference be between 10 and 12? it's a pretty reasonably wide range.

[Phil Horlock:]

I think I say 10 to 12 more is our long term. I think we say 10% plus by 2020 I mean we don't want to get to 2020 and stop. We want to keep going. I mean it's not like we've done it, we are great. We are whole. I think we just want to say 10% plus is our bogey for 2020 and in obviously what a couple years away from 2020 and beyond that we want to keep growing and certainly the next level will be how to get from 10 to 12 longer-term.

[Mike Baudendistel:]

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

[Phil Horlock:]

No. really we haven't seen that I mean I think it's been a good solid year here for everybody. Our industry has gone really well for us and –

[Phil Tighe:]

I think Phil mentioned based on the forward order outlook [indiscernible] we haven't seen any drop-off -- well we haven't seen anywhere where would lost the bid.

[Phil Horlock:]

No.

[Mike Baudendistel:]

Got it. It's good. and I also want to ask you on the freight costs can you give us a ballpark figure of how much your annual freight spend is just so that we can sort of put that in perspective.

[Phil Horlock:]

This is inbound freight Mike. And typically it's running in excessive $12 million a year something like that.

[Mike Baudendistel:]

Okay. Got it and then just last one from me I mean sort of the four drafts deal has been such a competitive [indiscernible] for you I mean it is the relationship with your partner on electric is that a similar exclusive relationship or what access do your competitors have to your partner there?

[Phil Horlock:]

No we're exclusive with our partners on that one in fact I don't even saw recently what I'm excited about is EDI use our technology partner in this event that we have you know they've been acquired by Cummins. So now Cummins owns EDI and I've already met with Cummins a last week to talk about that and we're really excited about our partnership because it gives us strengthen and the backbone of Cummins technology. They've got and it's it's a great move but yeah we have an exclusive on that product for period of time, yes.

[Mike Baudendistel:]

Sounds good. Thanks very much.

[Phil Horlock:]

Thank you.

[Operator:]

Thank you. Our next question comes from Scott Blumenthal with Emerald Advisers. Please go ahead.

[Scott Blumenthal:]

Good afternoon gentlemen. Thank you for taking my question.

[Phil Horlock:]

Hi Scott.

[Scott Blumenthal:]

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

[Phil Horlock:]

No I think – yes I mean I think the third quarter was I think before was it was a richer mix definitely of gasoline and diesel. We were actually I'd say quite surprised by the amount of gasoline resolved is terrific. We just [indiscernible] a lower revenue. So we saw it was prudent as we look specially they look out now we have only got – if we got line of sight to the fourth quarter we're getting pretty close to the yearend which looks prudent to narrow our guidance. So we drop $20 million off the top and so the average came down but we're still we kept the low point we just narrowed it down but it was largely due to as you saw when you look at year-over-year you could see sort of the impact we saw on the revenue in the third quarter. So it was prudent to do that. Fourth quarter I think is more about typical quarter. It's going to be strong. I think the propane in the fourth quarter is good. It looks really good for us. The mix looks strong and I think it'll be – that's the pretty good revenue quarter but we just find it was prudent to take the fall year range down a little bit narrow it down.

[Scott Blumenthal:]

Okay fair enough. And you did mention that we saw recently saw or this week saw the first electric bus roll off the line and that you may deliver – even deliver some of those in the fourth quarter. Do you expect to deliver a couple of those a handful or –

[Phil Horlock:]

Yes. We will deliver several in the fourth quarter. I mean several is not several hundred but we will delivery several and yes that was the first one that was a nice event for us and we've got more lined up and the customers are [indiscernible] all California-based. I mean they have got some ground support for [indiscernible] and we are excited about it and so is our partner out there in California.

[Scott Blumenthal:]

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

[Phil Horlock:]

Yes I think that's a good way to look at it. I mean obviously have they bought the buses prior to the tariff change and the steel prices going up that will be fine too but I do think it's a great point you're raised. I mean it's good for us I think that we've got the pricing on now [indiscernible] in the system and a little bit of price we will move from when we access the VW funds. I got to say I feel really I mean I do I just want to stress I mean I made it a point on the call I feel really good about the product range we've got for that VW money. We have the best partners on propane by a mile with ROUSH CleanTech and Ford I mean terrific partner. We have been with those guys since 2012. We're in great position I just think now the electric and the cloud and the power of commons behind EDI we are in great shape on that product too. So I think we're in a really good position. We like where we are right now and so do our dealers.

[Scott Blumenthal:]

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

[Phil Horlock:]

I think we'll start to see some of it coming out free in the minimal amount November/December. It looks like it's mainly second quarter of next year probably when I sort of see the orders coming through and then it's just all through the year because they've got -- people get this money and they can apply it over several years. So you can take two or three years to use the money, use it faster and it looks like all these guys who are organizing the funds are a little smaller than we expected to decide how they're going to utilize it. Everybody is doing it differently; some are giving discounts against prices, some of them are paying for an entire bus it all varies differently by vehicle line. The great thing is the real metric for what determines how – which grants are available is the level of emissions of vehicle [indiscernible] that's why I made a big point on our [indiscernible] level now on propane and well we obviously are on that and electric and zero emissions are in good shape but I think we'll start to see later the end of the calendar year. So maybe a few in November/ December we will get some interest I think but it'll pick up really in the start of the next calendar year and then start of 19, January 19 onward.

[Scott Blumenthal:]

Okay. We are talking about orders for those not deliveries for those.

[Phil Horlock:]

Yes we are talking about orders. Yes.

[Scott Blumenthal:]

Okay and just one clarification I think in his comments Phil Tighe said that the full offset of steel prices will not be achieved in 2019. I think he meant 18? Is that correct.

[Phil Tighe:]

I think I mean 18 Scott.

[Scott Blumenthal:]

I think you mean 18 too. Thank you.

[Phil Tighe:]

Thanks for picking that up and letting me clarify it.

[Scott Blumenthal:]

Okay. Thank you.

[Phil Horlock:]

Okay. Thanks Scott.

[Operator:]

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

[Phil Horlock:]

Well thank Yolanda and thanks to all of you joining us on the call today. We appreciate your continued interest in Blue Bird. I hope you realize that was we are focused on profitable growth we intend to deliver on our commitments. I do believe we are well positioned for growth today and into the future. Please do not hesitate to contact our Head of Investor Relations Mark Benfield should you have any follow-up questions and once again thanks from all of us at Blue Bird and have a great day.

[Operator:]

Again that will conclude today's conference. Thank you all for joining. You may now disconnect.