Blue Bird Corporation (BLBD) Q4 2019 Earnings Call Transcript

Blue Bird Corporation (BLBD 0.01%)
Q4 2019 Earnings Call
Dec 11, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to Blue Bird's fiscal fourth-quarter and full-year earnings conference call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Mr. Mark Benfield, executive director of profitability and investor relations.

Please go ahead, sir.

Mark Benfield -- Executive Director of Profitability and Investor Relations

Thank you, Derek. Welcome to Blue Bird's fiscal fourth-quarter and full-year 2019 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 presentation 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 SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you'll hear from Blue Bird's president and CEO, Phil Horlock, and CFO Phil Tighe.

Then we will take some questions. Phil?

Phil Horlock -- President and Chief Executive Officer

Well, thanks, Mark. Well, good afternoon everybody, and thank you for joining us today for our fourth quarter and our full-year earnings call for fiscal 2019. We've made great progress this year at Blue Bird, as we strived to improve both overall profitability and margins. We always welcome this opportunity to share our latest quarterly and full-year results with you.

So let's start with an overview of those financial results on Slide 4. As a subheadline says, we had a really strong fourth quarter. In fact, it was the highest in more than 10 years, with adjusted EBITDA of about $33 million. That was $4 million higher than a year ago, representing a 15% year-over-year increase.

Importantly, this is our fifth consecutive quarter where profits increased over the prior year despite higher commodity costs. Before proceeding further, and as I mentioned in our prior earnings call, let me set the strategy that we are pursuing. Throughout this and future earnings calls, you will hear a recurring theme of how we're driving up overall profit and margin improvement through three key initiatives. First, the bus pricing that we took in late fiscal 2018 to address the escalation in tariff-led commodity costs resulted in a significant increase in an average bus selling price in fiscal 2019.

Importantly, we plan to price each year to recover economic increases and did so again in July this year. Second, cost reductions that we are achieving through our transformational initiatives, we saw the results in the second half of fiscal 2018 and we continue to generate further cost savings in every quarter of fiscal 2019 and intend to do so going forward. And third, continued leadership and growth in alternative fuels. Increasing our mix of alternative fuel-powered buses as a percentage of total sales is key to profit growth as we garner superior selling price and gross margin compared to conventional fuel buses.

Our growth in this segment continues to outpace the overall market by a long way, as you will hear later. Now all three of these actions significantly improved our results over fiscal 2018 and are cornerstones of our plan to increase gross profit and EBITDA margins. So back to our fourth quarter results. We improved profitability despite selling 31 fewer buses than last year, although at 3,726 unit sales, it was our second highest fourth quarter volume in the past 10 years.

Now while volume was slightly down from a year ago, fourth quarter net sales revenue of $344 million was 4% higher than last year. The increased sales revenue mainly reflects the favorable impact of our bus pricing actions that I just mentioned and a richer mix of higher-priced alternative fuel-powered buses. In fact, our average bus selling price was about $3,500 per unit higher than in the fourth quarter last year, again, a strong 4% increase in our average bus price. Turning to the full year.

We announced publicly in mid-November that we achieved our stated guidance on the three metrics on which we report. First, full-year adjusted EBITDA of about $82 million was within guidance and a strong $11.4 million or 16% higher than a year ago. In fact, I'm pleased to report that this was our best full-year result for more than 10 years. And importantly, our adjusted EBITDA margin grew by 1.2 points to 8%.

Second, net sales revenue of $1.019 billion was above the midpoint of guidance. Now while this is the only -- was only slightly lower than net sales a year ago, $6 million lower, in fact, it is worth noting we sold about 600 fewer buses in fiscal 2019. This was a deliberate strategy and our call to reduce lower-margin sales through dealer stocks and to forgo lower-margin business that we won last year, particularly in the third quarter of fiscal 2018. The end result was that despite selling 600 fuel buses in fiscal 2019, net sales revenue was essentially flat as we grew average bus selling price by about $4,000 a unit or 5% over fiscal 2018.

Again, the key drivers being the bus pricing we implemented along with a much richer sales mix of higher-priced alternative fuel-powered buses throughout fiscal 2019. Adjusted free cash flow of about $36 million was approximately $7 million above the high end of guidance. Adjusted net income for the full year of $44 million and adjusted diluted earnings per share of $1.61 were down $7 million and $0.04, respectively, from a year ago. It's important to note, however, that these two declines are more than explained by the nonrecurring one-time tax benefits in fiscal 2018.

Phil Tighe will provide more explanation of this later. As we look at the underlying trends of the industry and Blue Bird's results, we remain very upbeat about the business fundamentals. Based on R.L. Polk school bus registrations, the preliminary industry for fiscal 2019 is holding firm with around 34,000 units and it has done for the past couple of years, at a near-record level over the past 30 years and compares favorably with the average over that same period of time of 31,000 school buses.

With a strong outlook for property values and corresponding property taxes, which are the major funding source for school buses, together with the fact that the 190,000 school buses on the road today have been in service for more than 15 years and school children enrollment is increasing, we are confident that the industry outlook remains around this level for the foreseeable future. We saw yet another record sales mix this year for alternative fuel-powered school buses. At a strong 48% mix of our total unit sales, this was 10 points higher than last year's, then a record, of 38% mix of sales. In fact, our fourth quarter mix was the highest ever for any quarter at Blue Bird at a very impressive 55% of our total unit sales.

We lead the industry by a long way in alternative fuel-powered school buses, that's for sure. As a reminder, in alternative fuels, we count all of our propane, compressed natural gas, electric and gasoline-powered buses, as all of these are alternatives to diesel, which has been the staple fuel for years. For the past several years, we've been achieving significant growth in alternative fuel bus sales. And as I just mentioned, we have not slowed down this year.

We'll cover alternative-fuel performance in more details a little later. As I commented earlier, we are seeing the impact of both our annual pricing and structural cost reduction actions, as evidenced by a strong increase in our gross profit margin of 1.2 points over last year. All in all, I'm very pleased with our fourth quarter full-year results. We increased our gross profit margin through pricing, cost reductions and a richer mix of alternative fuel vehicles.

And we expect continued gross margin improvement from these actions as we move forward to fiscal 2020. All of this translated into the same 1.2 points of growth in our adjusted EBITDA margin. I will cover the fiscal 2020 guidance metrics in more detail later, but I'm pleased to inform you that the midpoint of range for adjusted EBITDA for fiscal 2020 will be 12% above fiscal 2019 at $92.5 million. Importantly, we are on the path to our stated goal for an adjusted EBITDA margin run rate of at least 10% by the end of fiscal 2020.

Let me now review our key operating achievements on Slide 5. We recorded another significant achievement in the fourth quarter and full year, which will make us more competitive and supports our profitable growth plans going forward. Our transformational initiatives to increase margins are on track, driving improvements in quality, cost and efficiencies and capacity. We are seeing those results now, as evidenced by our gross profit margin increases in past 5 quarters, and there is much more to come.

Our all-new automated paint shop is fully operational and every bus is now being painted in that facility. The painted buses look great, and we're beginning to see the quality and efficiency benefits that we expected. I will show you later, this is an important initiative to drive efficiency improvements throughout the plant. As I covered earlier, we increased our full year school bus selling price significantly by about $4,000 a unit, representing a 5% increase for the year.

This reflected the impact of the pricing in late fiscal 2018, and to a lesser extent, the 2% pricing we took on all vehicles and options in July 2019 to cover escalating commodity costs, together with the increased mix of high-priced alternative fuel buses. While adjusted EBITDA margin increased by 1.2 points for the full year, we achieved higher margins in every quarter of the year compared to fiscal 2018. I believe that is a strong indicator that a considerate and the effective strategy can deliver consistent improvement. As I mentioned earlier, we continue to be the undisputed leader in alternative fuel-powered school buses, with an impressive 48% mix of total unit sales in fiscal 2019 compared with 38% in fiscal 2018.

Furthermore, our alternative fuel bus sales grew by 21% from a year ago. When you consider that despite a flat school bus industry compared with a year ago, we achieved 21% growth in specific segments with products that are exclusive to us, that indicates the strength we have in alternative fuels. Simply put, that's leadership and real momentum in the fastest-growing segment in the school bus market. Remaining on topic of alternative fuels, we continue to see strong and growing interest in our latest products, our all-new 0-emission electric power school bus, which is powered by a Cummins electric drivetrain.

We delivered 56 buses in fiscal 2019 and have delivered on our firm orders in our backlog for a further 70 buses so far in early fiscal 2020. We anticipate seeing many more orders for the year based on the quoted activity we are dealing with today. Needless to say, with the widest range of electric-powered school buses on the market today, covering Type A, Type C and Type D configurations, we are very excited about this opportunity. And finally, we are announcing guidance for fiscal 2020 that reflects continued growth in sales and profits as we continue to deploy our three focus initiatives to drive high growth margin and EBITDA margin, namely annual pricings will cover economics, structural cost reductions and increased mix of alternative fuels.

It's fair to say that we continue to advance the business on multiple fronts, and we are heavily focused on profitable growth. Let's now take a look -- a little closer look around at our third-quarter results on -- financial results on Slide 6. I've touched on many of these financial results earlier, and Phil Tighe will run through in detail later. So just to summarize the fourth quarter, bus sales, parts sales, adjusted EBITDA were all higher than a year ago.

The end result was the highest fourth quarter profit for more than 10 years. On a full-year basis, bus sales were down about 1%, parts sales were up about 7% and adjusted EBITDA was 15% higher than a year ago, also representing the highest full-year profit for more than 10 years. So turning to Slide 7. Let's take a closer look at our alternative fuel bus sales performance.

At 5,343 unit sales, we sold a record number of alternative fuel-powered school buses for the year, reflecting a 21% increase over fiscal 2018, which is also the prior record. As I mentioned earlier, alternative fuel bus sales represented 48% of our total sales. In fact, through the second half of the year, alternative fuel bus sales surpassed diesel sales at 54% mix. And again, as I mentioned previously, I think it was 55% mentioned in the fourth quarter, which is the highest which we've ever achieved in any quarter in this segment of the business.

Now the driving force behind the significant growth is our class-leading propane-powered school bus, where unit sales grew by a very substantial 41% over fiscal 2018. That is even more impressive when considering this is the eighth year that we've offered this propane product, which is exclusive to Blue Bird from our partners at Ford and ROUSH CleanTech. The end result is that we hold more than 8% market share in this growing segment with over 16,000 buses on the road today. So it's clear, we aren't slowing down in this segment of the industry.

In fact, no other school bus manufacturer comes close to our alternative fuel sales mix or market share. You might find it interesting to know that just three years ago, in 2016, our alternative fuel sales mix was 26%. So we doubled this level in just a 3-year period. So back to this year, more than 150 new customers will be taking delivery of their first ever alternative fuel-powered Blue Bird bus.

This is a strong endorsement of our exclusive alternative fuel buses that we provide, the blue Bird brand and our exclusive dealer network. I previously covered the fact that we now have about 30 electric bus orders in hand for delivery in fiscal 2020, and we expect more to follow with all the customer interest we are seeing for the newest addition to our alternative fuel lineup. Looking forward, the vast majority of the VW mitigation funding is still ahead of us and should support a strong industry over the next three years or so, with many states earmarking specific funds for school bus purchases. We are really pleased with the success we have had so far for the funds that have been issued.

In addition, all of our electric-powered buses are qualified to participate in the California Energy Commission's grant funding, which would enable school districts to purchase around 230 electric buses over the next two years. We are well positioned to deal with that opportunity. With the widest range of alternative fuel-powered buses, the most modern and proven engine in the industry, which is exclusive to Blue Bird through our partnership with Ford and ROUSH CleanTech and our leadership position in low-NOx emissions, we are well positioned to capitalize on the VW funding and other growth opportunities going forward. In fact, it should be recognized a reduction in NOx gases is the major criteria in funding for the VW settlement.

To this point, our ultra-low-NOx propane bus is certified at one-tenth of the NOx emissions output of other manufacturers' buses and the EPA standard. Plus, our propane bus is widely recognized as having the lowest operating costs of any of the school bus. So the Blue Bird with propane, you can have it all, the lowest operating cost and the lowest NOx emissions of any internal combustion engine in a school bus. Our growing number of customers understand this, and as you saw, our sales are up.

We're also seeing continued strong growth of our gasoline-powered bus in fiscal 2019. It's readily understood by technicians and mechanics, who appreciate the mission of simplicity and cold weather start capability that it shares with its sister product, our propane bus. It also has a lower price point than diesel, so it really works for those customers where acquisition price is a key concern. In summary, we are proud of our strong leadership position on alternative fuels and the significant growth and market share that we're achieving.

And with less than 15% of school districts having purchased an alternative fuel-powered school bus, we have plenty of runway ahead for continued growth. Now let's take a closer look at how we're driving cost reductions throughout Blue Bird. Turning to Slide 8. This is a new slide we are showing to illustrate the progression of our transformational initiatives over the past two years and into fiscal 2020.

Importantly, you see this is a cumulative approach, where additional processes and tools are being added as we strive to drive down total cost. In fiscal 2018, our initial focus on reducing purchase material costs out services through a combination of initiatives, including new commercial agreements with suppliers and resourcing with minimal product design change. We look extensively with alternative external other automotive experts to ensure best practices, and processes were applied and we delivered results. In fact, you might recall that we recorded savings of over $20 million from this initiative in fiscal 2018.

Now we continue to pursue these initiatives in fiscal 2019 and began to have design changes to our process to reduce cost without compromising quality. In the second phase, we also focused heavily on the build, launch, testing and validation of our all-new robotic paint facility, which also necessitated plant's arrangements to optimize our process. As Phil will show you, we have continued to achieve further significant savings in fiscal 2019 from these actions. As we analyze the fiscal 2020, Phase 3 has supplementing-only processes by driving down the cost of production, also fully operational robotic paint facility and from focused plant productivity initiatives.

Our new automatic paint facility provides the opportunity to reduce rework with increased first-time run capability, to reduce labor and material costs through robotic application of paint, to achieve savings and warranty expense and to deliver highest straight time capacity. Importantly, with the new paint facility attached to the exterior of our present assembly building, we are freeing up space within the plant to allow more efficient line rearrangements of tasks and stations and the addition of several stations for more efficient operations and improved quality control. We have deployed industrial engineering resources to optimize in-station workflow in the newly arranged production line. We're applying engineering resources to focus on design for manufacturing capability targeted to reducing production costs and improving quality of rework, and we are confident of achieving significant efficiencies.

And in fact, many more efficiency actions are planned over the next few years in this area. This systemic and cumulative approach to driving down total costs over multiple years is key to achieving high gross profit and EBITDA margins. We will continue to share our results with you in our quarterly earnings calls. Let me now turn it over to Phil Tighe, who will take you through the financials, and then I'll be back later to cover the fiscal 2020 outlook and guidance.

Over to you, Phil.

Phil Tighe -- Chief Financial Officer

Well, thank you, Phil, and good afternoon, everyone. The next few slides are a summary of our financial performance for the fourth quarter and the full year of 2019. The material we're discussing today is based on the close of September 28, 2019, and September 29, 2018. The detailed material will be provided in our 10-K that will be filed tomorrow.

We encourage all of you to read the 10-K and the important disclosures that it contains. In addition, the appendix attached to today's presentation deals with reconciliations between GAAP and non-GAAP measures mentioned in this review as well as important disclaimers that Mark Benfield has already talked to. Similar to our third quarter review, we have no new accounting pronouncements adopted in the fourth quarter, although as we have previously mentioned, we did adopt a number of new standards in the first quarter and they are discussed in detail on footnote 2 in the 10-K, which as I said will be available tomorrow. There were minor changes to -- you will note minor changes to some of the risk factors from the previously published 10-K.

These are really just trying to keep the risk factors up to date, the latest conditions. Finally, I would suggest that -- we had a very important audit in fiscal-year '19. This was the first time that we did a fully integrated audit, controls-based, and we had come through with an unqualified audit. So I think this was an important achievement for Blue Bird first controls-based fully integrated audit.

So now if we move to Slide number 10. This is a summary of the fourth quarter. You can see fourth quarter for fiscal '19 and fiscal '18 in a better/worse. Some of this -- much of this Phil has already touched upon.

So I'll try to skip through it without getting into too much repetition, but you do see the volume, Phil talked about it, is the second highest result in 10 years. I would point out that our average volume over the 10 years is about just under 3,000 units. So the fiscal '19 volume was actually 25% higher than the 10-year average. And I think this is an important fact to keep in mind, the high level of volume that we get in fourth quarter.

Our net revenue, again, up by $11.9 million or about 3.6%. And you saw previously the breakout of that between bus and parts, with both bus and parts contributing to the improvement in the fourth quarter. Interestingly, the bus revenue per unit you see below that is well up. It's up by $3,500 or just over 4%.

And so really, when you look at the increase in net revenue, the higher bus revenue per unit plays a major role in achieving that increase. Because, as we pointed out, our volumes were down by about 30 units versus last year. Again, our revenue per unit is higher due to pricing actions taken in 2018 and '19 to offset the impact of inflation, including commodity costs. It's also up because of a higher mix of alternative fuel vehicles, and Phil has mentioned that.

And also, I would suggest a very successful program that we've implemented to improve the revenue that we said -- that we make on each bus. So this has been the focus of a lot of attention over the last two years by our sales team. Gross margin at 13.6% is about 70 basis points better than a year ago. This is really the result of both the higher average revenue and the impact of the cost reductions from our transformational cost initiative.

We'll talk a little bit -- more about that when we get to the bridge. In the fourth quarter, I'll point out that we had a net income of $11.6 million. That was about $3.3 million lower than the prior year, and this was driven largely by higher interest expenses and higher taxes. On an adjusted basis, our net income came in at $20 million, which was about equal to the prior year.

We've already touched on the adjusted EBITDA at $33.4 million, is up almost 15%, and we'll go through that on the bridge in a slide after next. EBITDA margin improved to 9.7% for the fourth quarter versus 8.8% last year, an improvement of 94 basis points. And we have improved the margin in each quarter in the last year and also on a quarter-by-quarter basis year over year. Diluted earnings per share was down as a result of the lower net income.

Adjusted diluted earnings per share at $0.74 was about $0.04 higher than the same period last year. Finally, I would point out, cash ended at $71 million, up by almost $11 million compared to last year. The end of the fourth quarter is traditionally the high point of that cash and has very much to do with the seasonality of our business. Just a little interesting factoid for you, the $326 million of net revenue that we achieved in the fourth quarter was about 90% of the total net revenue we achieved in the first half of the year.

Again, this is a very seasonal business. Finally, debt was $183 million. That was up about $41 million, and that was almost all due to -- it was more than all due to the debt that we raised in October of 2018 to fund the tender offer. So if we move now to Slide number 11, this is a look at the same metrics, the same layout and metrics for the full year versus the prior one, which was fourth quarter.

And you can see there, volumes were down about 600-or-so units versus the prior year, although again, the result for the full year was about the third highest in the past 10 years, and again, substantially higher than the average for the 10 years, around 18% higher. Our net revenue was down by about $6 million or 0.6%. Net revenue for bus in total was down by $10.5 million or 1.1%, while parts was up by $4.4 million or 7.1%. I should stop here and mention parts.

They are consistently improving revenue on a year-over-year basis. And I took a look at it. Since 2016, parts have increased their revenue by 20%, and we see further opportunities ahead with some of the new products that they are introducing. Revenue per unit for bus, and you can see, was up by almost $4,000.

Again, it's the same conditions that drove the higher revenues in the fourth quarter of 2019, the mix of pricing to offset inflation in commodities as well as higher mix of alternative fuels and a very focused effort on revenue generation on all of our deals. Gross margin at 13.1% was about 120 basis points better than a year ago, and again, for the same reasons, higher revenues and the very successful transformation cost initiatives. Our net income of $24.3 million was a deterioration of $6.5 million versus the prior year. And that is more than accounted for by taxes.

You might recall that in 2018, in fact, I think it was in the third quarter of 2018, we had a large tax credit due to the release of a provision. And so taxes more than account for the reduction in the net income year over year, as we had no such large credit in 2019. I would point out also that on an adjusted basis, net income was $43.5 million. Adjusted EBITDA, we'll talk about when we get to the bridge, and -- but $81.8 million was very strong performance for Blue Bird and particularly pleasing, given the fact that we had lower volume than the prior year.

The margin improved by 120 basis points, again, a solid performance, I believe, for fiscal-year '19. Earnings per share were down, again, really as a result in the full year of the change in tax. In fiscal '19, for those of you who -- when you read through the 10-K, our effective tax rate was, I believe, about 26%. So you see, we paid pretty much normal taxes in fiscal-year '19 and we had a credit in fiscal '18.

Adjusted diluted earnings per share was $1.61, compared to $1.77 last year. Cash and debt, obviously, are the same numbers from the fourth quarter. So if we move to Slide 13, which is the fourth quarter bridge, some takeaways there. You can see the impact of both the pricing actions and the transformational initiatives adding $8 million of profit in the fourth quarter.

So pricing actions of $5 million is actually net of all economics and tariff changes that we received in fiscal-year '19. So coming out with positive profit contribution was a good achievement. And of course, $3 million for the transformational initiatives for new activities in the fourth quarter was very powerful. We had a negative there for $3.3 million, it's called manufacturing launch and opex here.

It's really a combination of manufacturing inefficiencies and some supplier issues that we struggled with. The manufacturing inefficiencies were largely due to some of the inefficiencies we faced in the plant as we were going through the launch of paint shop. There was fairly significant changes to the plant going on. We were also doing a number of other things in the plant that will improve our ongoing efficiencies, but they caused us to work a lot of overtime and have some level of inefficiency in the fourth quarter.

Also, because of the seasonality, a number of our suppliers, including some of the new ones that we brought in under our transformational initiative program, really struggled with the ramp-up in the volume in the fourth quarter. We were forced to do some emergency sourcing to keep production going, and we were forced into some premium freight costs. So that contributed. I think it's important to note that we will get out of that type of spending as now the paint shop is onboard, and progressively in '20, the other initiatives in the plant will take hold.

Assuming that by the fourth quarter of fiscal-year '18 we don't have that sort of activity, that's an additional point of margin that you would see there, remembering that total revenue was in the $300 million range. So we move on to Slide 14, which is the same look -- the bridge for the full year. And so again, I think some key takeaways from this slide. The two big numbers that contributed to the incremental profits were, again, pricing net of economics of $9 million.

This was a very good result for us. I will remind you, particularly many of you who have been following us for some time that the general consensus in the school bus industry was that you can't price for anything other than major regulatory changes. I think we have found that working with our dealers and with our customers, they understand that costs go up and so therefore prices go up. And I think this is a positive step forward to us in maintaining margins and improving margins going forward.

The transformational initiatives of $18 million, again, this was a good result for us. I think Phil mentioned that we made $20 million through this in 2018. So in two years, we've contributed close to $40 million through the transformational initiatives. And this is an ongoing program.

We're very excited about where it's going to take us in the future. I wouldn't commit that we'll get the same level of savings, but we will continue to get positive savings going forward. And it has reduced our cost structure in total, which is very pleasing. You'll see the full-year cost of the inefficiencies and some of the seasonal costs that I mentioned on the prior page, we had about $10 million in total.

Again, very important number to look at. It -- the challenge is in front of the Blue Bird team to make this go away. It will add, at least -- it will add a point to our bottom line margin, and that's a very important factor in us moving toward the margin that we've been talking about of 10-plus percent going forward. We move on to the next slide, which is the free cash flow.

Again, $35.5 million of adjusted free cash flow in fiscal '19. This was about $4.7 million lower than 2018, but significantly higher than the midpoint of the guidance that we issued for 2019. I believe it's about $10 million higher than the midpoint. The improved result is more than accounted for by -- I'm sorry, the result is more than accounted for by higher trade working capital that was up a bit in the full year versus a reduction last year; by higher capex, which we have been talking about, we expected as we were continuing to build the paint shop; and by higher cash taxes.

And they combined to offset the improvement resulting from higher EBITDA profits. I'd point out that free cash flow was $20 million, and this was $4 million better than the prior year. I think, importantly, it was a good result for us to get the adjusted free cash flow of $35 million when we were going through the period of building and launching the new paint shop. So that was a pleasing result for us.

Finally, my last slide is on net debt, leverage and liquidity. You can see our debt and our year-end cash, our net debt was $112 million. Our net leverage ratio was 2.1, still comparing very favorably to our covenant a 3.75. And our liquidity at year-end was $164 million, which was a very strong result for the company.

So with that, I'll turn you back to Phil Horlock, who will talk more about the outlook for 2020 and position on guidance. Over to you, Phil.

Phil Horlock -- President and Chief Executive Officer

OK. Thanks, Phil. So let's turn to Slide 17 and take a look first at our 2020 outlook. As the headline says, our outlook reflects a continuation of our margin growth plan that we've been lending over the last couple of years.

Now the school bus industry is running about 34,000 units a year over the past two years, which are, I should remind you again, 30-year highs. We do anticipate another strong year in fiscal 2020, with industry just around the same level. As I've consistently stated, our plans for continued profit growth focus on achieving significant gross margin and EBITDA margin improvement from three key areas. First, annual cost recovery pricing.

And price at late fiscal 2018 and again in July 2019, when we took a 2% price increase on all vehicles and options. At last, we'll have a full annual revenue impact in fiscal 2020 and it will, of course, be favorable. Second, continued transformational cost reductions. I explained earlier the various areas we're addressing as we expanded our processes, tools and our focus.

We saw a significant favorable profit impact in both fiscal 2018 and fiscal 2019, and we expect significant benefits again in fiscal 2020 and beyond. Manufacturing efficiencies and quality improvements will be a key added area of focus in 2020 and beyond. And third, as we have been doing for several years, we're looking to pursue growth to maintain our leadership position in alternative fuels, which command a superior margin and higher customer loyalty, which is always good for business. Our financial targets for fiscal 2020 are on a glide path toward our previously communicated EBITDA margin goal of a run rate of at least 10% by the end of fiscal 2020.

And we do expect the second half of 2020 to be around that level or higher. So let's now take a look at this means for 2020 guidance, turning to Slide 18. Net sales guidance is between $1.020 billion to $1.050 billion, which would be $2 million to $32 million higher than fiscal 2019. Just to reinforce the point, this is not a plan entirely based on growing volume, but rather a prudent margin-focused approach to drive higher profits and cash flow.

Adjusted EBITDA guidance is now between $90 million and $95 million, a significant $8 million to $13 million or 11% to 18% increase over fiscal 2019. As a reminder, we're in a very seasonal business, as Phil mentioned, with typically two-thirds of our sales occurring in the second half of the fiscal year. That said, we expect this in 2020 to follow the similar pattern, with a vast majority of our profits and the improvement over fiscal 2019 being earned in the second half of the year. Adjusted free cash flow is between $30 million to $35 million and continues to be a strong feature of our business model.

Obviously, slightly down from our fiscal 2019 results, this is more than explained by unique spend to sort plant upgrades that we'll continue to do and design changes that drive higher productivity in 2019 and beyond. So in wrapping up, we had a strong fiscal 2019 performance, both operationally and financially, and achieved or exceeded guidance on all metrics on which we report. Our guidance for fiscal 2020 reflects significant profit and margin growth over fiscal 2019 and is supported by the continuation of the strategy and plans we put in place over the past two years. That concludes our formal presentation, and I'll now pass it back to our moderator, Derek, to begin the Q&A session.

Questions & Answers:

Operator

Thank you, sir. [Operator instructions] We will first go to Justin Clare with ROTH Capital Partners. Please go ahead.

Justin Clare -- ROTH Capital Partners -- Analyst

Everyone, thanks for taking my questions. First off, I guess, I wanted to ask you about your expectations for unit sales and then revenue per unit in fiscal '20. Based on the guidance, it looks like we could see modest growth in both. So was wondering if I could just get a little bit more detail there.

Are you expecting, I guess, a smaller price increase in 2020 than what we saw in 2019?

Phil Horlock -- President and Chief Executive Officer

First of all, we don't actually issue guidance metric for volume, Justin, we don't. We give -- these are the three things I mentioned. We give the sales, we get profits and we give adjusted free cash flow. But I think when we look at the market, we're going to look at what the inflation has been, what economics in general at various indices have been and right about the same time frame, probably July time, we'll look at such in 2020 on pricing.

That will be it, all depending on what the economics is that we're seeing out there in the industry. We'll make it industry base a specifically way to look at this. When I talked before about the growth in sales, you can see it goes from a fairly moderate number to probably about 3% over fiscal '19. And I think I mentioned that we're trying to just tell you that we are banking on a big volume surge.

If we see opportunities, we're going to glance at them. But we aren't banking on that. Rather, we look at those three things, higher revenue per unit drives better margins, reducing cost drives better margins, and then finally, the increased mix of alternative fuels, which also improves better margins. And I should remind you that we've come a long way in our business over the last several years, and we have roughly about one-third of the market.

That's our market share as we track it. So we're in a good position, but if we see opportunities, we're going to take them.

Justin Clare -- ROTH Capital Partners -- Analyst

OK, great. And then -- so you mentioned the alternative fuel mix. Can you talk a bit more about that and how you see it evolving in 2020? Q4 was the highest level you reached for the company. Can you see the alternative fuel mix continue to increase next year?

Phil Horlock -- President and Chief Executive Officer

I think it should naturally, because I think we've got a lot momentum go on now. We've got the VW funds ahead of us. We've got a remarkable growth in propane. I'm very pleased with that.

And I think we've -- certainly, our products are the -- they're the best in the market by a margin. That's why we're recognized for that. You look at fuel economy, you look at cost of ownership, we're the best in that. And obviously, we've got electric vehicles too that -- we're the only one of the major manufacturers present to offer that vehicle.

So yes, again, we're not ready to put a mix number on that. I mean I don't think you asked me a year ago where we have grown 10 points of mix, that entity, as Phil just said, that looks a little rich. But heck, in the last half of the year, we were over 50%, and that for the first time ever, those alternative fuels overtook diesel in sales. So we're pretty bullish on the outlook, but we just don't -- I wouldn't want to put a number on that right now.

Justin Clare -- ROTH Capital Partners -- Analyst

OK. Could you -- could you speak a little bit about where you are seeing strength within your different alternative fuel offerings from gasoline to propane, electric vehicles? Are you seeing more demand or greater growth in demand from one area versus another?

Phil Horlock -- President and Chief Executive Officer

I'd say, well, certainly, in 2019, we saw a tremendous surge in propane. But you still saw, I think -- we were pretty close. The total sales of gasoline and propane were very similar. But you have to recognize the VW mitigation funds that are available, don't include gasoline.

You can include your clean diesel. You can include propane, CNG and electric. So gasoline doesn't really get to look account benefit from those funds. Probably I've explained a little bit why we had a significant surge in 2019.

Now those funds, only $150 million into a $600 million allocation for us -- bus industry. So I would think we can still expect to see propane doing very well, but I wouldn't discount gasoline. Gasoline in the plant is an easy pot for someone who's worried about new technology. Believe it or not, there still are customers out there who think propane is a new technology, and we have to educate them, train them, give them demo buses.

Gasoline, though, is a really easy solution, right? Everyone drives gasoline cars, technology is simple. It's -- it can be easy to buy the fuel. Technicians love it. So I think -- I guess so what I'm telling you, I think we'll see continued growth in both really going forward.

I mean I think there's a recognition. Those products are just great for the school bus industry. Now electric vehicles, I wouldn't discount that either. But I think it's always going to be tech electric vehicles with the price of them, it's whether are grants available.

[Inaudible] has been obviously the leader and with state grant support. The VW mitigation funds provide, again, funding for that. But of course, you can buy a lot more propane buses than you can buy electric buses with the same amount of money. So I think what we're seeing is people trying electric, because there are funds available.

I think we're going to see growth in all of that. And I just believe we're in a good position to be there to capitalize on it.

Justin Clare -- ROTH Capital Partners -- Analyst

OK. Great. Thank you. I will pass it on.

Thank you.

Operator

Thank you. [Operator instructions] We'll next move to Eric Stine with Craig-Hallum. Please go ahead.

Aaron Spychalla -- Craig-Hallum Capital Group LLC -- Analyst

Yes, hello. It's Aaron Spychalla on for Eric. Maybe first for us, on that Volkswagen funding, it sounds like we're still early in that process, and that's an important part as you kind of go after some of these conquest accounts. Can you just kind of talk a little bit about how you see that rolling out in fiscal '20 and the next couple of years? And then I did see on the slide, it kind of talked about $600 million.

And I thought in the past, that was maybe closer to $3 billion. Just maybe can you give us some color there?

Phil Horlock -- President and Chief Executive Officer

Yes. Well, the $3 billion, the $2.9 billion covers the entire gamut of transportation. So you're into transit buses, you're into school buses, you're into [Inaudible], you're into forklift trucks, you're into everything. Now when we say $600 million, that's specifically carved out for school buses.

That's a guarantee. There's a lot of activity within the bounds that isn't called out for anything yet, still going to be sorted out. But a specific amount for school buses is $600 million. I think it's a good sign.

I don't think of any other industry, as I recall, within that $2.9 billion settlement that actually have such a big carve-out. So there's still some work to do to decide where is that money going to go exactly. $150 million or so has sort of taken about 18 months, I'd say, to get there. I think the pace will pick up.

But the interesting thing is that money -- and you've got 10 years to spend it and a minimum three years to actually spend it. So somewhere between 3 and 10 years, that funding will last. So I think we may have seen a quick surge when the money became available. Something similar may happen next year.

They might tell us a little bit. But I think we're in a pretty good position. I will say that within that $150 million that went so far, we had a really nice a share of it. This is with our propane products.

We've got a nice chunk of that allocated to Blue Bird products.

Aaron Spychalla -- Craig-Hallum Capital Group LLC -- Analyst

All right. And then maybe on the free cash flow guidance, down a little bit year over year at the midpoint. Can you just kind of talk about some of the moving parts there? Is the capex -- are you targeting like a similar amount here in fiscal '20? And is there any kind of working capital items there? And then maybe just your broad thoughts on capital allocation since it is obviously still a really strong free cash flow number?

Phil Horlock -- President and Chief Executive Officer

Yes. Well, again, we don't tend to give details with it, but I'll give you an example. On the capital expenditures, as we move into what we call design changes to try and drive productivity improvement, you're into that buying new tools, modifying tools, yes, expensive, that does take cash, it takes money. The things we're doing to the plant, where we did a lot of station modification rearrangements, that's real hard investment money you've got to spend.

Now we're doing nothing, obviously, like the paint shop spending that we did over the last couple of years. That's a little bit of residual money left on that, but we'll take 2020 as well as we commission the -- commission that plant early in 2020, and we have to do some work on that. So I think when we look at the overall, the reason we're spending a little less cash flow is because we are investing in initiatives that will drive profitability. We are making sure that what we spend will increase profitability going forward for us.

That's one point.

Aaron Spychalla -- Craig-Hallum Capital Group LLC -- Analyst

All right. And then maybe last for us, I know you obviously don't guide by the quarter. But just since we're almost through the first quarter, understand the seasonality there. But I mean, are you kind of looking for an increase year over year from a volume or revenue standpoint? And I would assume that some of these initiatives, as we kind of give -- you mentioned the paint shop being at full production here? I mean, would you expect slightly better profitability year over year?

Phil Horlock -- President and Chief Executive Officer

Well, for the full year, absolutely. But when you look at the first quarter, we launched that -- we actually launched that late in October. In fact, we took an extended shutdown in October to be able to do that. We did a lot of -- we took a -- during that shutdown period, we did a lot of concrete arrangements.

As such, we actually delayed coming back into production compared with a year ago. So when you look at that first quarter, which for us is October-December, you've got Thanksgiving holidays, you've got extended plant shutdown, we've got the Christmas holiday, we shut down again there. There was a limited number of workdays. What I'm telling you is while we feel very good about the full year, we obviously [Inaudible] there.

I think it's true to say, there might be a little bit less volume to plot in the fourth quarter, because we took an extended shutdown to ensure that when that paint shop lineup was up and running, it was running day 1 in painting buses. So there's a little less capacity available for us in the first quarter than we had last year. But obviously, we'll catch that up, no problem, not that we lost sales. We catch all that up back in the second and third and fourth quarters.

Aaron Spychalla -- Craig-Hallum Capital Group LLC -- Analyst

Right. OK, understood. Thanks for all the good color and congrats on the quarter.

Phil Horlock -- President and Chief Executive Officer

Thanks. Thank you.

Operator

Thank you. We have no additional questions in the queue at this time. [Operator instructions] It does appear we have no further questions at this time. And I'd like to turn the conference back over to Mr.

Phil Horlock for any additional or closing remarks.

Phil Horlock -- President and Chief Executive Officer

Okay. Thanks, Derek, and thanks to all of you joining us on the call today. We do appreciate your continuous interest in Blue Bird. And I hope you can see by our fiscal 2019 results and our outlook for next year that we are entirely focused on total profit growth and margin growth.

And we intend to deliver on our commitments. We're well positioned for growth today and in the future. So please don't hesitate to contact our Head of Profitability and Investor Relations, Mark Benfield, should you have any follow-up questions. Thanks again from all of us here at Blue Bird, and have a great evening.

Operator

Thank you. And once again, that does conclude today's call. Again, we thank you for your participation. You may now disconnect.

Duration: 56 minutes

Call participants:

Mark Benfield -- Executive Director of Profitability and Investor Relations

Phil Horlock -- President and Chief Executive Officer

Phil Tighe -- Chief Financial Officer

Justin Clare -- ROTH Capital Partners -- Analyst

Aaron Spychalla -- Craig-Hallum Capital Group LLC -- Analyst

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