Blue Bird Corporation (BLBD) Q4 2018 Earnings Conference Call Transcript

Blue Bird Corporation (BLBD -4.97%)
Q4 2018 Earnings Conference Call
Dec. 6, 2018 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Blue Bird fiscal 2018 fourth quarter earnings conference call and webcast. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Mark Benfield, director of investor relations.

Please go ahead.

Mark Benfield -- Director of Investor Relations

Thanks, Keith. Welcome to Blue Bird's fiscal fourth-quarter and full-year 2018 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 website. Our comments today include forward-looking statements that are subject to risks that may cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC.

Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird's CEO Phil Horlock and CFO Phil Tighe. And then we'll take some questions. Let's start. Phil?

Phil Horlock -- Chief Executive Officer

OK. Thanks, Mark. Well, good afternoon, everybody, and thank you for joining us today for our fourth-quarter and full-year earnings call for fiscal 2018. It's been a very busy year here at Blue Bird and I'd love this opportunity to take you through our latest quarterly and full-year results.

So let's start with an overview of those financial results on Slide 4. Our fourth-quarter results were strong, and I'm very pleased with the progress we've made this year. Our unit sales were the highest in a fourth quarter since 2008, with 3,757 buses sold. That represented a 4% increase over last year and correspondingly, we saw a 6% growth in total net sales, which amounted to $332 million. The high growth in net sales versus unit sales reflects a richer product mix and to a lesser extent, the pricing action we took later in the year to address the rapid escalation in commodity prices. Now a picture of business seasonality.

And it's worth noting that fourth-quarter net sales represented 32% of our full-year sales and the second half, with a substantial 64% of our full year. Our adjusted EBITDA grew 16% or $4 million over last year to a strong $29 million, which is a solid 9% EBITDA margin. It was also our best fourth-quarter result for more than 10 years. As Phil Tighe will show you later, we achieved this improvement despite escalating steel and commodity prices, as we drove fourth-quarter cost reductions through our transformational initiatives, which we mentioned in our prior earnings call. Adjusted net income and adjusted diluted earnings per share were both significantly higher than the fourth quarter a year ago, up $12 million and $0.40, respectively.

On a GAAP basis, both net income and diluted earnings per share also improved from a year ago. So let's start here for the full year. All three of our key financial metrics, either met or exceeded guidance. Net sales of $1.025 billion was above the guidance range and the first time in our history that we exceeded $1 billion in net sales.

That's quite a milestone for Blue Bird. At $70.4 million, adjusted EBITDA was within guidance range of $1.5 million above last year despite the commodity headwinds that hit us in fiscal 2018. As we saw in the fourth quarter, we were able to offset the full-year adverse economic impact of those headwinds through our cost-reduction efforts in the second half of the year. At $40 million, adjusted free cash flow beat the high end of guidance by $6 million and remains a strong feature of our business model.

Adjusted net income, adjusted diluted earnings per share for the full year were both above last year by $22 million and $0.70, respectively. Now if you look at the underlying trends with the industry, our Blue Bird results in general, the outlook is positive. First, based on preliminary R.L. Polk registration data, about 34,000 new Type C and D school buses were bought and registered by customers in fiscal 2018. Now while this is down slightly from the 35,000 unit level we saw in fiscal 2017, which was the second highest industry in 30 years, 34,000 new buses is a strong industry, and well above long-term trend levels.

In fact, with a strong industry outlook -- strong outlook rather for property values and corresponding property taxes, which are the major funding sources for school buses, together with the fact that hundred thousands school buses on the road today have been in service for more than 15 years. We are confident on the industry outlook remaining around the 35,000 unit mark as we move into 2019. It should also be noted too that only about one third of the 12,000 school districts that own and operate school buses enter the new bus market each year, so there will always be some variability and noise each year and a new bus industry volume. Second, we sold 11,649 buses in fiscal 2018, an annual growth of 3%, outpacing the industry. This is our seventh consecutive year of volume growth and we have solid momentum. Third, we recorded our highest ever sales mix of alternative-fuel powered school bus sales and a substantial 38% of our total bus sales.

This compares to the 34% mix last year and our alternative-fuel bus sales in total were up 14%. Incidentally we achieved a record quarterly sales mix in the fourth quarter at a substantial 47% of total sales. Now that's leadership, a real momentum in the fastest-growing segment of the business. As a reminder, in alternative fuels, we do count all of our propane, compressed natural gas and gasoline-powered buses as all of these alternatives to diesel, which has been the staple fuel for years.

Now for the last several years, we've seen significant growth in alternative-fuel bus sales, and I just mentioned we have not slowed down this year. We'll cover those sales again a little bit later in the presentation. Fourth point, we're passionate about product and being the first to market with vehicles and features that customers want and value. Late in fiscal 2018, successfully launched our exclusive only electric-powered Type D bus and we delivered several to customers in the fiscal year. Our Type C electric-powered bus will launch early next year, and we have a strong pipeline of customer orders that we're pursuing. We also launched our ultra-low NOx propane-powered bus early this year, which upon 0.02 grams NOx for brake horsepower hour is 10 times split on the both the EPA standard and any other brand of propane-powered school bus.

Also just last week, we received certification on the California Air Resources Board or CARB to begin selling our ultra-low NOx compressed natural gas powered Type C school bus. Again, Blue Bird is first to market and it's exclusive to us. And fifth, we took pricing late in fiscal 2018 to cover the escalation in commodity costs, led by steel, which has impacted all automotive manufacturers. And finally, we have a number of transformational actions under way for improving our cost structure, and we saw the favorable impact in fiscal 2018, particularly in the fourth quarter. Now as we exit fiscal 2018 and move forward into fiscal 2019, we're confident in delivering profitable growth, bolstered by the impact of our transformational initiatives and the pricing we took to address commodity cost escalation, late in fiscal 2018. I will cover the key fiscal 2019 guidance metrics in more detail later, but I'm pleased to inform you that the adjusted EBITDA range will be 14% to 21% higher than our fiscal 2018 results, with our fiscal 2019 adjusted EBITDA guidance between $80 million to $85 million, a substantial gain from fiscal 2018. Now this is on the path to our stated goal for an adjusted EBITDA margin of at least 10% by 2020. All in all, these are exciting times at Blue Bird. So let me now review with you our full-year 2018 key operating achievements on Slide 5. We recorded a number of significant achievements in fiscal 2018, and each one will make us more competitive and support our growth, going forward.

We continue to be the undisputed leader of alternative-fuel-powered school buses. And while our sales grew 14% in this segment in fiscal 2018, we achieved a very strong 70% market share, with many new customers joining the Blue Bird brand for alternative fuels. I mentioned earlier that we have a class-leading propane bus from an emission standpoint at a NOx emissions level of 0.02 grams. We already were the market leader at 0.05 grams NOx of emissions, but the best just got better in fiscal 2018. This means, our propane engine emits just 1/10 of the NOx level that our competitors offer and that's real leadership.

Although outside fiscal 2018, just last week, we received the same 0.02 grams NOx certification for our Type C compressed natural gas powered bus. That is five times cleaner than the compressed natural bus that our competitors offer. All this is great news for our customers and even better news for the children that ride our buses and their parents. So let's move on to zero-emission school buses. We are the only nationwide school bus manufacturer today that offers electric-powered school buses in Type C and Type D configurations and we've had a great customer response to our more than 20 Ride and Drives across the country.

We are delivering buses now to customers and have a strong pipeline of potential new customer orders. Working with industry experts, our transformational plans to improve margins are on track, driving improvements in quality, cost and efficiencies and capacity. We achieved significant cost savings and margin growth in the fourth quarter, and this initiative is key to delivering continued profitable growth. For the first time in Blue Bird's 91-year history, buoyed by the 6% net sales growth we saw in fiscal 2018, we achieved a new milestone of $1 billion in sales. Now as I mentioned earlier, we also priced to recover the recent tariff-related escalation in steel and other material costs.

We began to see the impact late in the fourth quarter of fiscal 2018, and this will fully apply in fiscal 2019. Construction is well under way for our all-new automated paint shop with pilot runs and validations scheduled for early next year. This is a key initiative to driving efficiency improvements as we go forward. And as I mentioned earlier, we met or exceeded guidance in all three metrics that we report against.

Most significantly, we reported slightly higher profits than fiscal 2017 despite incurring substantial commodity and freight-cost increases. Let's now take a closer look at our second quarter financial results on Slide 6. I touched on many of these earlier and Phil Tighe will run through the details later. So just to summarize, in fiscal 2018 fourth quarter and full year, total net sales adjusted EBITDA were up in both periods versus last year. Both bus sales and parts sales were up a strong 6% in the fourth quarter and for the full year, bus sales were up 3% and parts sales grew a little stronger at 4%. Turning now to Slide 7.

Let's take a closer look at our alternative-fuel bus sales performance. As you can see, we achieved a new full-year sales record of 4,428 alternative-fuel powered school buses, a 14% increase over last year. And as I mentioned earlier, this represents a strong 38% mix of our total bus sales, up from 34% last year. No other school bus manufacturer comes close to this level of mix.

And in fact, last year, all the 360 new customers took delivery of their first-ever alternative-fuel powered Blue Bird bus. This is a strong endorsement of our exclusive alternative-fuel buses, the Blue Bird brand and our strong dealer network. We continue to be the leader in the fastest-growing school-bus segment with our market share running at about 70% and more than 19,000 alternative-fuel powered school buses are on the road today powered by Blue Bird. We offer the widest range of alternative-fuel powered buses and the most modern and proven engine in the industry. With our exclusive long-term partnership with Ford and ROUSH CleanTech across all alternative-fuel engines, it makes it easier for customers to grow an alternative-fuel fleet with the same engine architecture, the same transmission and the same service requirements across all three products: propane, compressed natural gas and gasoline, it's an easy move for school district or a fleet operator. Propane is widely recognized having the lowest total cost of ownership in the market and is a green engine especially our new ultra-low NOx propane bus, at 1/10 of the NOx emissions output of other manufactured buses and the EPA standard.

These nitrogen oxide gases, we call NOx emissions, contribute to the formation of acid rain and smog. So the best-in-class level of NOx is another great reason for choosing Blue Bird propane. In addition, as I mentioned earlier, just last week, we added an ultra-low NOx CNG bus to our line, five times cleaner than any of the CNG school bus on the market. Now despite our fiscal 2018 growth, in the past few months, we have seen some customers electing to push their propane purchases to fiscal 2019 and anticipated receiving funding from the VW Clean Air Act Settlement Funds late in this calendar year and beyond. That fund targets the replacements of old diesel buses with new school buses that emit low levels of NOx emissions.

Our propane, compressed natural gas and electric-powered buses are perfect choices to utilize these funds. So far, 30 states have finalized their plans to deploy the VW settlement funds and the good news is that 40% of their funding in the first year have been set aside to school buses. That's potentially another strong boost to the industry and we are in a great leadership position to capitalize from these funds. We also saw very strong growth in our gasoline-powered buses in fiscal 2018. It is readily understood by technicians and mechanics, who really appreciate the emission simplicity and cold weather start capabilities it shares with propane.

It's also at the lower price point than diesel, so really works well those customers, where acquisition price is a key concern, and gasoline is off to a great start too in fiscal 2019. We are taking orders for our all-new Type C and Type D electric buses and interest across the country is strong, especially the opportunity to fund from the VW settlement. We began delivering buses in the fourth quarter of fiscal 2018, and we're very excited by the prospect for our electric bus in fiscal 2019. As we look forward to next year and beyond, with the broadest range of the cleanest, low-NOx school buses within the industry, eight times more alternative-fuel powered buses on the road than all of our competitors combined and still having less than 15% of school bus customers having tried an alternative powered school bus, Blue Bird is in a really strong position. So let me now turn it over to Phil Tighe, who will take you through the financials. And I'll be back again later to cover the fiscal 2019 outlook and guidance.

Over to you, Phil.

Phil Tighe -- Chief Financial Officer

Thank you, Phil, and good afternoon, everyone. The next few slides are a summary of our financial performance for the full year and also for the fourth quarter fiscal-year '18. And you will find additional information in the appendix that deals with the reconciliations between GAAP and non-GAAP measures mentioned in this review as well as some important disclaimers that have already been mentioned by Mark Benfield. Detailed material will be available in our 10-K, which will be filed early next week. We encourage you to read the 10-K and the important disclosures that it contains.

The material we are discussing today is based on close of September 29, 2018 for fiscal '18 and September 30, 2017 for fiscal 2017. There were no significant changes in our critical accounting policies or in our risk factors versus the previously filed 10-K. Let's now take a look at the summary of key results for the fourth quarter on Slide 9. Phil's already talked about volume. Fourth quarter was a very good quarter for Blue Bird.

We hit 3,757 units, up 4% versus prior year, and importantly, our best fourth quarter in more than 10 years. As Phil already said, we achieved a 47% mix of alternative-fuel buses in the fourth quarter, up about seven points from the prior year and 47% is our record to date since we started our leadership of the alternative-fuel industry. Our net revenue you can see was $331.6 million, up about $19 million versus the prior year. It was up for both bus and for parts. Both of them were up by about 6% year over year.

The year-to-year increase for parts was about 2/3 driven by volume and the balance was due to a combination of higher average revenues for our buses. The average selling price for our buses in the fourth quarter was just under $84,000, which was about 2% higher than a year ago. We also benefited from the improved mix of the alternative-fuel vehicles. And as Phil also mentioned, we had a small percentage of our buses that actually picked up the pricing that we announced in June of 2018 to offset the impact of tariffs on steel and cost increases in our commodities. Our gross margin at 12.9% was up about 30 basis points versus a year ago.

And I would add that our gross margins improved for both bus and parts. This result, of course, was despite the material cost increases, driven largely by tariffs on steel. Prices of our steel were up over 20% in the fourth quarter versus last year and higher freight costs also up about 20% versus fourth quarter last year due to both fuel and the continuing capacity problem with driver shortages. We did achieve importantly lower manufacturing cost in the fourth quarter of this year, which helped offset some of the economics increases that we talked about. And these improvements in manufacturing have come about as an early indicator of the initiatives that we're undertaking to improve both our efficiencies and capacity in the plan. The three indicators of our bottom-line profits, net income, adjusted net income and adjusted EBITDA are all favorable versus the prior year.

Adjusted EBITDA importantly at $29.1 million was about $4.1 million better than the last year, an improvement of 16%. I would add that we made study in history, obviously. This is also our best fourth-quarter EBITDA result in about 10 years. So that was a pleasing result for us.

The EBITDA margin improved to 8.8% for the fourth quarter, up about 80 basis points versus last year. Net income was also higher at $14.9 million, and we achieved a return on sales of 4.4%, from net income. So all in all, a good result for us on a bottom-line basis. You can see that diluted earnings per share and adjusted diluted earnings per share for the fourth quarter both were up substantially. We'll talk a little bit more about earnings per share when we look at the full year. And finally, the last two on this page are cash.

Cash was down a touch. It was -- it ended the year at $60.3 million versus $62.6 million in the fourth quarter of fiscal-year '17. That was, I think, a good result. You've seen the picture of the new paint shop that we're building.

So our CAPEX spending in the fourth quarter was up by more than $14 million versus the prior year, all based on the spending in the paint shop, and we still managed to come in with cash only down about $2 million year over year. So I think, that was a good result by the team. Debt at $142 million finished slightly better than planned and there were no borrowings on the revolver. I would point out that the debt shown is at the end of September and was prior to us drawing $50 million of incremental debt to fund the tender offer.

And we'll talk about that a little more on a later slide. So if we move to Slide 10, that will take you through the same set of metrics for the full year. Again, you can see the volumes, up 3%. And as we already mentioned, the best result in more than 10 years. It is a good result.

As Phil said, the industry appears to have been a little soft toward the end of fiscal-year '18. Although I would add that R.L. Polk registrations do tend to take a few months to mature. So I think we might see it creep up a little bit.

And it's very clear from our discussions with dealers and some school districts that they are waiting to take advantage of the VW mitigation funds, which are quite important to them and help the school districts save a substantial amount of money. Again, alternative fuel represented 38%, which is up 14%. And I'll point out and Phil's already done a great job at this, but alternative-fuel includes propane with ultra-low NOx, gasoline, CNG with ultra-low NOx and electric buses. We are the only OEM to offer this range of alternative-fuel vehicles. And I think, it gives us a strong advantage going forward. One other point I would make is seasonality continues to be a challenge.

Our second half sales were 7,500 units. Again, a record. Our first-half sales were about 4,146 units. You can see the production in balance 7,500 units in the second half versus 4,100 in the first half.

That does give us some headache in terms of overtime and a little bit of a stress on our suppliers in terms of ramping up from first half to second half. And I think the team is doing a good job to address that although it will continue to be a challenge, because it's a fact of life of our industry, where people want to have new buses in the second half for the start of the new school year. But what we are seeing positive results from some of the work we're doing on efficiencies to make sure that the plant can operate with high efficiency and high quality at substantially higher volumes. Our net revenue of $1.025 billion was a great result. And as mentioned, the first time Blue Bird has hit more than $1 billion on the net-revenue metric.

This was a big achievement for us. That number was up about $34 million and it was really driven by higher bus volume. We had 332 more units worth about $27 million, that was 80% of the increase. On a full year, our bus average selling price was also up.

Our average price ended up at $82,600, up about $400 a unit, which is worth about $5 million. And our revenue from the sales of parts continue to improve. We picked up another $2 million on parts and that's a positive feature for us. As we've previously talked about, we did put our price increase in, that only impacted the small number of units in the fourth quarter due to the length of our ordering cycle and the fact that we have firm pricing for orders placed. We will talk about that a little more. Gross margin of 11.9% was unfortunately down about one point versus a year ago.

And it really was driven by the large increases in tariffs and higher freight costs, and it was also driven by business mix, where we did accept some relatively low-margin business to fill some production gaps in the second half due to a number of school districts delaying their ordering until fiscal-year '19. I would point out that if you want to take a look at the math, if we took the tariff-related and freight-cost increases out, our margin would have been at least equal to the fiscal-year '17 margin, so I think, that's something to keep in mind as you look at the results. Again, when we look at the bottom-line results of net income, adjusted net income and adjusted EBITDA, all of them were positive versus the prior year. The $70.4 million of adjusted EBITDA was up $1.5 million or about 2% and we've got a bridge, we'll walk through that. The EBITDA margin of 6.9%, was slightly lower than last year.

Again, absent the impact of tariffs and freight, that would have been better. And net income was $30.8 million, which represented an improvement of $2 million or almost 7% return on sales of 3%. Diluted earnings per share, we were pleased with this number at $1.08 per share versus $0.74 in the prior year, and adjusted diluted earnings per share came in at $1.77, which was up by $0.70 and almost 70% versus the prior year. There is some information at the back of the presentation on this and there is a more fulsome explanation in the 10-K. Our weighted average diluted shares outstanding were $28.6 million at the end of '18 and $24.9 million at the end of '17. Net income of our common stockholders was $28.9 million in '18 and $18.4 million in '17.

The fiscal-year '17 number was impacted by the dividends that we paid to preferred shareholders of $4.3 million in 2017 and the repurchase of preferred shares of about $6 million also in fiscal-year '17, neither of those occurred to the same extent in fiscal-year '18. We've already talked about cash. And that via the same numbers that we talked about when we looked at the fourth quarter, so I won't go on with that. If we go to Slide 22, you will see a bridge for the fourth quarter walking through $25 million in fiscal-year '17 up to $29 million in fiscal-year '18. You will see that bus volume was up about 149 units.

Parts was up about $0.5 million. Economics was unfavorable year over year in the fourth quarter by about $8.5 million, primarily steel, which was up 26% and freight up about 21%. And then you see the $11.2 million, which was transformational cost initiatives and efficiencies and operating cost savings. So that $11 million helped us to more than offset the incremental cost for the economics and achieve an improvement year over year that we've already talked to. We were pleased to see this come in.

We've been working hard on the transformational initiatives whole year. While the transformational initiative is not all of the $11 million, it does represent a fairly substantial portion of the savings and the good news is that on about one quarter or 1/3 of our annual volume. So there is a lot more to come as we look at the full year of next year. If you go to Slide 24. This walks from full year to full year.

So $68.9 million in fiscal-year '17 walking up to $70.4 million

Phil Horlock -- Chief Executive Officer

That's slide 24?

Phil Tighe -- Chief Financial Officer

Oh sorry, I've got the wrong slide number. So Slide 12 -- my apologies for that, walks the full year, $68.9 million up to $70.4 million. Volume and mix was -- while volume was up by about 330 units, we did have adverse mix as I mentioned previously. Parts improved by about $1.1 million. Material economics, the full-year impact for us was about $18.5 million, with -- and I think, there's a few people who will be trying to figure out what the real impact of steel is on Blue Bird.

I'll just comment that, that -- just over 50% of everything we buy had some steel content in it. Anything from a seat frame as a part of the seats to engine block as a part of an engine will be steel. Obviously, the bigger part of the steel content for us is all the metal that we use to build the body and chassis of the bus. Remember, our school buses are all steel as a part of the safety protocol for children that it carries.

So we have, I think, about 17,000 pounds of steel in the body of the bus, something around that. And so when we look at economics on steel, for the year, we have it anywhere from 1% of the components, where steel was a small piece. So we got about a 1% increase on some components to more than 30% increase on raw steel and on some of the commodities with very high steel content. So that drove a lot of the $18.5 million and then freight was also up by a substantial amount of money, about 28% in the full year, driven by two factors: increased steel costs and shortage of drivers and trucks.

So then you look at the $18.5 million and we should reflect upon the fact that we had almost or very little pricing to offset that. The pricing that we have taken as of June, we expect to fully reflect this number if it continues to form part of our cost base moving forward. And then, we see the full impact of transformational cost initiatives and other efficiencies of $26.5 million in the full year. Again, I would point out to you that the transformational cost initiatives really only started to come into play in the second half of the year. There was only a small amount of it in the first half.

So this is a very encouraging feature for us for the future, where we have -- we have really, I think, moves the needle on cost structure in Blue Bird to provide us a very solid for the future guidance that Phil is going to talk about and our long-term objectives. Very quickly, I will point out on the next slide, which is 15, the free cash flow. A couple of important -- 13, I can't read. I'm sorry, 13. I'm having a bad day with page numbers.

Anyway, so free cash flow is on Page 13. I've had that verified. For the full year, our free cash flow came in at $40 million and guidance, you might recall was between $30 million and $34 million, so we were very pleased with where it came in at. If you take a look down the list to adjusted free cash flow, every item was favorable year over year with the exception of CAPEX, which was up about $23 million and that is basically related to that large paint shop that we're building, which will be a state of the art paint shop and give us great, great paint on our buses and higher efficiencies on lower cost to good, which is a pretty good achievement.

So as far as we're concerned, the $40 million was a very favorable outcome on adjusted free cash flow. And I'll turn to my last page and I'll try to get the number right. It looks like it's Slide No. 14. And that is our net debt, leverage and liquidity.

You can see the net debt was $82 million. That's debt net of cash. We had a net leverage ratio of 1.7 and that compares very favorably to our covenant of 4, and we had liquidity of $153 million at the end of the year. I would point out that the debt that we reflect here does not include the increase to our term loan that we took in October.

So there is another $50 million you will see in debt when we do our first-quarter earnings report. Having said that, if you sort of pro forma that in and looked at the 1.7 net leverage ratio, we'd end up at about 2.2 and that's still well under the 4, which is our covenant. So we think, we're in a pretty good position when it comes to net debt and requirements for our banks and for liquidity. So with that, I'll turn it over to Phil, who promises he knows all the page numbers that I don't know. And he can wrap up and show you our guidance for the year.

Phil Horlock -- Chief Executive Officer

OK. Well, thanks, Phil. Thanks for that. So let's now focus on the fiscal 2019 outlook and our full-year guidance and turn to Slide 16. Just talking about the industry first.

Well, recent industry trends running at 34,000 to 35,000 units annually, we are at some 30 years highs on the industry, and we do anticipate another strong year in fiscal-year 2019. The industry probably, around 35,000 units. That's where we think we're going to be. But we see continued growth in housing price and property taxes, being a big factor there, along with new funding from the VW Settlement fund that will support our position.

So I think, all in all, we don't see this industry turning down. We see it solid, strong and continuing. The demand is clearly there. Now our plan for fiscal 2019 focused on key elements of improving gross margin and EBITDA margin from three key areas. First, is the impact of the cost recovery pricing that we took in late fourth quarter to address the escalating commodity cost and freight costs that Phil clearly showed you in the bridge earlier.

This will have a full annual benefit in fiscal 2019. Second, the full-year impact of the transformational cost reduction initiatives that we implemented in late fiscal 2018. And again, I think you clearly saw those, particularly on that fourth quarter bridge, you saw the improvements we were making later in the year. Well, that will obviously will have a favorable full-year effect as we move into 2019. And we're going to continue that initiative too.

This is a key thing. This isn't just for one year and it's over. We are continuing to do that and run it throughout our organization. And third, the plant facility and process improvements we are making to increase manufacturing efficiencies next year. So all these three factors are all about driving margin improvements, particularly on the gross margin side, down to the bottom-line EBITDA margin.

Now we set our financial targets for fiscal 2019 to be on the glide path toward our previously communicated EBITDA margin goal of at least 10% by fiscal 2020. So let's turn to Slide 17 to present our fiscal 2019 full-year guidance. So net sales guidance of between $990 million and $1.025 billion which will be down anywhere from $35 million to flat versus last year. Now we are being prudent in planning our sales outlook, recognizing that we may have to push out some unit sales as we launch our new paint shop and make other synergy and process improvements in the plant. These type of production launch losses are typical for an automotive company undertaking significant facility upgrades and our approach will be clear to minimize that impact as much as possible.

I want to stress we'll be somewhat prudent in our planning base here and getting that sales number. Adjusted EBITDA guidance is now between $80 million to $85 million, a significant $10 million to $15 million or 14% to 21% increase over fiscal 2018. We will be exiting fiscal 2018 with significant run rate savings from our cost-reduction efforts that are already implemented, which will favorably impact fiscal 2019 and we'll continue to pursue new efficiencies. And adjusted free cash flow is between $24 million to $28 million and continues to be a strong feature of our business model. Now while this is down $12 million to $16 million from our fiscal 2018 results, this is more than explained by the significant capital spending we will incur in 2019 from facility upgrades, particularly our new paint shop as it launches. So in wrapping up, I believe in a strong fiscal 2018 performance, both operationally and financially.

And we were able to offset the unexpected rapid rising commodity costs, led by the impact of the steel tariffs. I think, I'd also be remiss if I didn't mention some of the shareholder initiatives that we implemented this year. Buyback programs and the tender offer late in this -- late in our fiscal year to drive shareholder value across to our shareholders. We're exiting fiscal 2018 with significant run rate benefits from cost reductions and cost-recovery pricing, particularly in late fiscal 2018 and these run rate benefits will help us drive significant profit and margin growth in fiscal 2019.

As I said earlier, adjusted EBITDA projected to be 14% to 21% higher than fiscal 2018. Now our plans and our guidance both align with this and we'll continue to update you on our progress each quarter. Well, that concludes our formal presentation. I'll now pass it back to our moderator, Keith, to begin the Q&A session. 

Questions and Answers:

Operator

Thank you [Operator instructions] We'll take our first question from Eric Stine with Craig-Hallum. Please go ahead.

Eric Stine -- Craig-Hallum Capital Group -- Analyst

Hi, everyone. Thanks for taking the questions.

Phil Horlock -- Chief Executive Officer

Hi, Eric.

Eric Stine -- Craig-Hallum Capital Group -- Analyst

Hi. I mean, maybe just starting with alternative fuels. And I know that you've been pretty clear about the expectation that because of the VW funding, that propane, some volumes pushing into fiscal '19. But it's still the gasoline number being, I think, 600 more or so than the propane number for fiscal '18.

Does that do anything to change your view that longer-term propane is probably the higher component of the overall mix? Or is that changing a little bit that you think gasoline actually could be the one that -- could be No. 1 for you?

Phil Horlock -- Chief Executive Officer

Well, I mean, it's a good question. I mean, they've both done extremely well for us and gasoline probably exceeded our expectations to be honest. I think there's quite a bit of pushback against the complexity of diesel and everyone understands gasoline is pretty easy. What we've been seeing though this year is even some of our guys who first got into gasoline two years ago who haven't actually tried propane, they now are actually trying propane.

So I think, gasoline is actually finding us a good leading tool for getting someone into a less familiar alternative fuel such as propane. I honestly believe, I think, all the time there's no question to me, we're going to see the pressure on NOx emissions, the pressure on total cost of ownership. Propane is the best product. It really is.

And I think -- I really truly believe that we've seen it consistently that both in school districts are waiting to settle. They've got VW money coming, it's coming later in the year. And gasoline, by the way is not funded by the VW settlement. You can't buy a bus with VW settlement funds for gasoline.

You can buy propane, compressed natural gas. You can buy electric. You can buy the clean diesel. So I do think, we've seen it clearly time after time, people say: I'm just going to hold off on that propane because I've got some money coming for that, but I'll take a gas bus right now.

So I feel very confident about both. And I think over time, you'll see propane, I think, recovering in that trend and growing heavily in next few years.

Eric Stine -- Craig-Hallum Capital Group -- Analyst

Got it. And then, in terms of the revenue guide, and it sounds like you're -- given that the industry is near its high and say, and maybe not in uncharted territory, but pretty strong that you're being conservative. I mean, are you -- and may be how are you factoring in VW funding into that guide? I mean, knowing that, that funding is going to play out over a number of years?

Phil Horlock -- Chief Executive Officer

At this stage is I am just feeling what you said I'm being somewhat prudent. I mean, we have a pipeline and we track very carefully where the money is off of VW by state. I mean, we go out to reach one of those. We've been working with our partners at ROUSH CleanTech on the -- for all the -- for the propane and CNG side of the business.

And I think, we just -- we will manage the pipeline. I think as we go through the year, we'll keep updating you on where things stand.

Eric Stine -- Craig-Hallum Capital Group -- Analyst

OK. Well, fair enough. And last one from me just on the EBITDA guide. May be just talk about the puts and takes.

I mean, it looks like you're guiding to around 8% to 8.5% margin. Fourth quarter, you just did 8.8%. And you've really you've had very minimal impact from the price increases. I mean, is that where you said it is that based on what you alluded to right at the end of your comments that there is an operational -- when the paint shop comes on, that might impact some volumes and might impact some things operationally? Or is there something else to factor into where you've said it?

Phil Horlock -- Chief Executive Officer

Yeah. I think, what we've done is -- let's talk about our paint-shop issue first. You're absolutely right. What we've done is we've been prudent to recognize the intent to get launch losses.

You don't turn a paint shop on and start building 65 buses a day and paint it. You start it off building two or three or four. I think, mean, we may have some losses that we can't recover during the fiscal year, just because our capacity on line we might get -- we just might be limited. So we've been prudent on that.

That's why you see that move downtick there on the sales side. What I think -- what's the second part of your question, I'm sorry? What's was the second part you asked me?

Eric Stine -- Craig-Hallum Capital Group -- Analyst

Oh, just -- well, just is that the reason? I mean, is that the primary reason for it? Or are there other things we should factor in, because you still haven't really gotten the impact of the price increase?

Phil Horlock -- Chief Executive Officer

Yeah. I think, that's a market-environment thing. I wanted to make it straight and we've got it on every vehicle now that pricing. Again, we're going to keep you updated in every quarter.

I think, I want to picture -- I would actually portray this year '19 as obviously, our goal is to improve the margins. You hit it right. I'd like to be at the least at mid 8% some, such around that number on the margin, 8.4%, 8.5% on our pathway to 10%. It's very much a -- the way we put the guidance together, it's a very much, I call it a cost-led, margin-improvement plan.

Now if we can pick up on the revenue too, and you're right, we've set ourselves some good pricing end of the year, that will help us as well. But right now, we're sort of just -- at this early point of the year, the only juncture of the year when we just first put in guidance out there. This is in our control. So we know our cost, we know our cost basis, and we feel comfortable reporting this guidance out.

And as I say through the year, we'll keep updating you -- keep you a little busy.

Eric Stine -- Craig-Hallum Capital Group -- Analyst

OK. Thank you very much.

Phil Horlock -- Chief Executive Officer

OK.

Operator

[Operator instructions] We'll go next to Matt Koranda with Roth Capital Partners.

Matt Koranda -- ROTH Capital Partners -- Analyst

Hey, guys. Thanks.

Phil Tighe -- Chief Financial Officer

Hey, Matt.

Phil Horlock -- Chief Executive Officer

Hey, Matt.

Matt Koranda -- ROTH Capital Partners -- Analyst

Just wanted to clarify the revenue outlook. So industry units look like they're up about 1,000 units for fiscal '19. You're putting through pricing, it sounds like you have customers that potentially use VW settlement money, which I assume would be a positive, but maybe you're not counting on that yet. But the revenue guide is essentially kind of flat to down a touch.

And I know you alluded to and you just kind of talked about the paint shop and potential production inefficiencies. But does that mean that you're just taking less, that you're going to turn away bookings this year to be prudent and cautious on the start up? I mean just clarify that for me.

Phil Horlock -- Chief Executive Officer

Well, what we're trying to do is I said I will push them out. So we may have slipping some of those into fiscal 2020 is a way to think about it. And last thing I want to do is tell a customer we're not going to take care of you. And obviously, I'm also -- I also want to recognize that we're committed to improving the margin sales.

And so, I mean, when I look at the business deals we've got, if we are going to be somewhat more constrained on capacity, because we got a lower paint shop capability initially. We're going to be somewhat selective too in the business we bid on. A little bit -- probably a little more. But right now, we're seeing how it goes.

We're on track with our paint shop, we're feeling good about it. And I did use the word prudent in there for a reason. Obviously it's out for something -- for guidance, so -- but we're very mindful of this. I mean, I brought as many of those launch loss and pick it up, see what we can get, Matt.

But right now that's what we choose. We chose to put -- show it this way and just recognize there may be some launch losses along the way.

Matt Koranda -- ROTH Capital Partners -- Analyst

OK. And then on the EBITDA outlook. I mean, maybe -- could you guys walk us through -- I mean, you provided the waterfall charts for the fiscal-year '18 EBITDA walk, but is it possible to sort of get a walk to '19 based on the midpoint of your $80 million to $85 million in EBITDA guidance for the year?

Phil Tighe -- Chief Financial Officer

We don't Matt. This is Phil. We don't normally do that. I think, what we'll do is think about providing it on a quarterly basis.

On a fine level though, we will have, unless something changes, we will continue to see some escalation of new tariffs coming out of China. So we have to be a bit prudent worrying about that. We'll be looking at steel. And while it's nice down a little bit versus the height that it get in 2019, it's still substantially above where it was in the first half in fiscal-year '18.

So we think we may see a little bit more there. We are starting to see fuel prices down versus the high level they got to in fiscal-year '18. And yet, they're still up a bit and as you read undoubtedly OPEC is talking about cutting capacity. So that could lead us to a higher fuel price again.

On the trucking industry, we've started to see that there's some easing in the capacity but we haven't seen it in the right -- at the present time. So I think, all in all, we know we've got a lot of good news coming in cost. We are, as Phil said, being still prudent on how we measure sales going forward until we see how the paint shop launches and how some of the other things move. So we could be -- we could have some negative news in there.

And then we were obviously protecting against any other cost increases that come around us.

Phil Horlock -- Chief Executive Officer

Hey, Matt. Maybe -- I know, in the last guidance, we sort of put a visual out there for '19. I think, we did put numbers on it, put some bars on, I think, on the bridge that we did, remember that. We did that.

I think, what I would characterize a bit in line with this, if you think about a bridge, we're going from '18 to '19, how do I get from $10 million to $15 million up. If you look at the market, what I call the market, particularly the volume and the pricing sort of offset, there might be a little -- if we've got some launch losses that take a bit more price initially about wash-out, that will be neutral. At the same time, you're going to see economics below the chart, right? Because we -- they're obviously a full-year effect of economics too, the steel impact, the tariffs came on sort of in the midyear. So now having said that, the future look pretty good to us.

They were better than they are right now. But nevertheless, they're probably -- there is some additional economics, we think. But as Phil showed you, our transformational cost reductions that we took, those initiatives that took place were very much second half of the year. So that -- we know that's going to exceed the economics.

That's the way to look at it, flat on the market practice, negative below the line on economics, but a big bar going up, I guess, on cost reductions, which we're in control of. I feel, we feel good about it, because we've done a lot -- we've already done the vast majority of that. That's already implemented.

Matt Koranda -- ROTH Capital Partners -- Analyst

OK. That's helpful, guys. I mean, I was kind of thinking about it in terms of -- I guess, you referenced only half a year of sort of transformational cost initiative efficiencies, all that stuff from that $26.5 million that you got. And so if I just sort of apply roughly that as a plus up to the $70 million and the bridge then that sort of -- and I assume flat pricing and economics, then you're still factoring in I guess, a fair amount of headwind from the material economics, is kind of how I was thinking about it.

Is that the way to characterize it?

Phil Tighe -- Chief Financial Officer

Yeah, it's a good way, Matt. But remember that the big increases in commodity costs also came through in the second half of that fiscal year. So we will see that as well.

Matt Koranda -- ROTH Capital Partners -- Analyst

Right. There's still some residual left over? OK.

Phil Tighe -- Chief Financial Officer

Yeah.

Matt Koranda -- ROTH Capital Partners -- Analyst

And then lastly, just in terms of the free cash outlook, could you help us with CAPEX. I mean, it's down substantially in '19. Then you referenced some spending initiatives in paint shop and everything, but what exactly is CAPEX in your guidance?

Phil Horlock -- Chief Executive Officer

Hey, just one second. Got it. I mentioned about CAPEX being up in '19, because that's where we're really going to finish, finalize the paint shop.

Matt Koranda -- ROTH Capital Partners -- Analyst

I guess, we can take that off-line.

Phil Horlock -- Chief Executive Officer

So, I mean, again, it's something we don't tend to report at this point because of '19. But it's certainly high than '18. Though the vast majority of the paint shop spending, we're going to see in '19.

Phil Tighe -- Chief Financial Officer

And think about it this way. What we've done thus far is put up the majority of the building for the paint shop. Now the expensive stuff that goes into the building has been paid for, yeah.

Matt Koranda -- ROTH Capital Partners -- Analyst

Got. OK, guys. I'll jump back in queue. Thank you.

Phil Horlock -- Chief Executive Officer

OK, Matt.

Operator

At this time, we have no further questions in the queue. [Operator instructions] We'll take our next question from Chris Moore, CJS Securities.

Chris Moore -- CJS Securities -- Analyst

Hey, guys. Yeah, maybe I could just stay on the EBITDA a little bit longer. So the -- just from a big picture standpoint, the 10% that we're talking about in fiscal '20, is that -- are you still looking at that as kind of cost-driven versus '19? Or is there more assumptions in terms of a little bit revenue leverage is coming from there? Just trying to understand the timing in '19 obviously not all that cost benefits are going to be shown. But trying to understand kind of big picture where that incremental increase could come from.

Phil Horlock -- Chief Executive Officer

Yeah. I think -- OK, I want to take a crack at that, Chris. Yes, I mean, when we look at -- we have a three-year plan we put together and '19 is like the mid point of our three-year plan is where we looked at '18, '19 and '20. When we look at '20, the transformational initiatives, they're going to carry through.

This sort of thing, we are implementing things in '19, will have their full-year effect in 2020, particularly on the probably through design side of our business that we're working through right now. We've appointed the leader of that, we feel good about that. So the transformational is still definitely, continue to grow, improve our margin through to 2020. And the other thing is I'm confident that we'll continue to increase our mix of alternative-fuel vehicles, which do carry a better margin for us.

And we've shown a consistent track record to do that. I think, we will continue to do that. So those are the two main pieces of it. And I think, that when you look at our product line up that we've got, I mean, we have just such a broad range of actually power [non-audible].

I feel confident with the opportunity continue to acquire customers and grow the business. So grow the business, alternative fuel mix, and the continued focus on cost reductions. That's our bread and butter, I think for 2020.

Chris Moore -- CJS Securities -- Analyst

Got it. And just one, maybe we can do this off-line. In terms of share count for that you will be looking at for next year after the buyback etc. What's a reasonable number to be looking at?

Phil Horlock -- Chief Executive Officer

Chris, I've got catch [non-audible] and share with you, after call.

Chris Moore -- CJS Securities -- Analyst

Fair enough. I think, that's it. Thanks, guys.

Phil Horlock -- Chief Executive Officer

Thanks, Chris. Yeah.

Operator

We'll take our next question from John Sullivan with Olstein Capital Management.

John Sullivan -- Olstein Capital Management -- Analyst

Hi. Just not to belabor the CAPEX comments, but I was just curious as to once the paint job and some of the initiatives are done may be heading into 2020 with some more normal level of capital expenditure?

Phil Horlock -- Chief Executive Officer

Maybe $15 million to $20 million a year. Probably about $20 million. There's things we want to do. I think, what we've been doing in the paint shop, we realized the things we'd like to do to upgrade this plant and keep it going.

So I think, we'll look at maybe peak at $20 million low point $15 million as the range.

John Sullivan -- Olstein Capital Management -- Analyst

Perfect. Thank you.

Phil Horlock -- Chief Executive Officer

OK.

Operator

At this time, we have no further questions in the queue. I would like to turn the conference back to your speakers for any additional or closing remarks.

Phil Horlock -- Chief Executive Officer

Yeah. Thanks, Keith. This is Phil Horlock, again. I want to thank everyone for joining us today on the call.

We do appreciate your continued interest in Blue Bird and I think we had some great comments and great questions that we had. We are focused on profitable growth, and we intend to deliver on our commitments, particularly around the margin-improvement area. That's the key growth initiative for us this year and next year. And we're well-positioned to grow today and I believe in the future.

So please don't hesitate to contact our Head of Investor Relations, Mark Benfield, should you have any follow-up questions. Thanks again, from all of us at Blue Bird. And have a great day.

Operator

[Operator signoff]

Duration: 60 minutes

Call Participants:

Mark Benfield -- Director of Investor Relations

Phil Horlock -- Chief Executive Officer

Phil Tighe -- Chief Financial Officer

Eric Stine -- Craig-Hallum Capital Group -- Analyst

Matt Koranda -- ROTH Capital Partners -- Analyst

Chris Moore -- CJS Securities -- Analyst

John Sullivan -- Olstein Capital Management -- Analyst

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