Blue Bird Corporation (BLBD) Q1 2020 Earnings Call Transcript

Blue Bird Corporation (BLBD -2.93%)
Q1 2020 Earnings Call
Feb 12, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Blue Bird Corporation fiscal 2020 first-quarter earnings conference call. 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, sir.

Mark Benfield -- Director of Investor Relations

Thank you, Nadia. Welcome to Blue Bird's fiscal 2020 first-quarter earnings conference call. The audio for our call is webcast live on investors.blue-bird.com. You can access the supporting slides by clicking on the presentations portion of our IR web page.

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'll hear from Blue Bird's CEO, Phil Horlock; and CFO, Phil Tighe.

Then we will take some questions. Let's get started. Phil?

Phil Horlock -- Chief Executive Officer

OK. Well, thanks, Mark. Well, good afternoon, everyone, and thank you for all joining us today for our first-quarter earnings call for fiscal 2020. We continue to make great progress at Blue Bird as we start to improve both overall profitability and margins.

We always welcome opportunity to share with you our latest quarterly results, so let's start an overview of those financial results on Slide 4. As we previously explained, the school bus industry is extremely seasonal, and the first quarter is always the softest quarter of the year, with unit sales typically representing no more than 14% to 15% of the full-year volume. This is also our expectation for fiscal 2020. And so I'm pleased to report that despite the soft sales quarter, we had a really strong first-quarter financial performance relative to prior years.

In fact, it was the second highest profit in more than 10 years with adjusted EBITDA of $8 million, which is $800,000 or 11% over a year ago. Importantly, this was our sixth consecutive quarter where profits increased over the prior year despite higher commodity surcharges from our suppliers to address tariffs that impacted us from the second quarter of last year. 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 are driving our overall profit and margin improvement through three key initiatives.

First, following the bus pricing that we took in late fiscal 2018 to address the escalation in tariff-led commodity costs, we plan to price each year to recover economic increases. As you will recall, we took pricing again in July 2019, and we'll see the benefits throughout this year. Second, cost reductions that we are achieving through our transformational initiatives. We began this journey two years ago and have seen significant year-over-year savings in every quarter since then, and we intend to continue 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 our total sales is key to profit growth as we got a superior selling price and gross margin compared with conventional fuel buses. Our growth in this segment continues to outpace the overall market by a long way, as you'll hear later. Now, all three of these actions improved our results over the first quarter last year and are cornerstones of our ongoing plan to increase both gross profit and EBITDA margins.

So let me get back to our first-quarter results. We improved profitability despite selling 140 fewer buses than last year. Now, we mentioned in our last earnings call that first-quarter volume will be down versus a year ago as we launched our new robotic paint facility, requiring additional planned downtime in October and a gradual production ramp-up. This is simply a retiming of volume to later in the year.

Now, while volume was down 9% from a year ago, first-quarter net sales revenue of $153 million was only 1% below last year. The increased sales revenue mainly reflects a richer mix of higher-priced alternative fuel-powered buses and the favorable impact of our bus pricing actions that I just mentioned. In fact, our average bus selling price was over $5,000 per unit higher than in the first quarter last year. And parts sales also grew substantially at 17% over the first quarter last year, although but half of that is explained on the additional sales week we had in the first quarter of fiscal 2020 compared to last year.

So overall, we had a very strong revenue performance. Our adjusted free cash flow was about $90 million negative for the quarter. As you know, traditionally, we are always negative in this first quarter, but this was $34 million less than a year ago. This was largely due to higher raw inventory having the end of December 10, 2019, to address some unique circumstances, as I would describe those later.

Suffice to say, we will return to normal inventory levels as the year progresses. This is just a timing issue. Adjusted net income of $2 million and adjusted diluted earnings per share of $0.07 were up $800,000 and $0.02, respectively, from a year ago. Now, if we look at the underlying strength of the industry on Blue Bird's results, we remain upbeat about the business fundamentals.

We are forecasting the industry of around 34,000 school buses in fiscal 2020, which is about the same as last year, and that's a near-record level over the past 30 years and compares favorably with the average over that same period of 31,000 school buses. With a strong outlook for property values and corresponding property taxes, which are the major funding sources for school buses, together with the fact that 190,000 school buses on the road today have been serviced for more than 15 years and school to enrollment is increasing, we are confident that the industry outlook remains at around this level for the foreseeable future. Bottom line, the demand for school bus is clearly very strong, with funding the only limiting factor. We saw another record first-quarter sales mix for alternative fuel-powered school buses, surpassing last year's previous record.

At an impressive 39% mix of our total unit sales, we beat last year's first-quarter mix by five points. It's clear that we lead the industry by a long way in alternative fuel-powered school buses. Now, as a reminder, which I do in every earnings call, in alternative fuels, we get all of our propane, compressed natural gas, electric and gasoline-powered buses as all of these are alternatives to diesel, which has been a staple fuel for years. For the last 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 our performance in this area in more detail a little later. All in all, I'm very pleased with our first-quarter results. We increased our gross profit margin significantly versus a year ago through a richer mix of alternative-fuel buses, cost reductions, and pricing. That was the fourth consecutive quarter of gross margin growth and is a key element for improving our EBITDA margin, and we expect continued gross margin improvement from these actions as we move forward through the fiscal year.

We're maintaining fiscal-year 2020 guidance for all three metrics on which we report, with midpoint of range for adjusted EBITDA at 13% above fiscal 2019 and $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. So, let me now review with you our key operating achievements on Slide 5. We recorded a number of significant achievements in the first quarter, and each one 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 have seen those results now, as evidenced by our gross profit margin increase of 1.6 points in the first quarter over last year, and there is much more to come. Although we carefully planned ramp-up in October-November, 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'll be able to see the quality and the efficiency benefits we expected.

As 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 $5,000 a unit, representing a 6% increase. Again, this reflects our increased mix of higher-priced alternative fuel-powered buses and our recent pricing actions, together with the favorable impact of higher option take and standardization of selected priceable features. Now, while adjusted EBITDA margin increased by 0.6 points in the first quarter of fiscal 2020 over last year, which is a great result, this is on top of achieving higher margins in every single quarter of fiscal 2019.

I believe that to be a strong indicator that our consistent and effective strategy can deliver continuous improvement. As I mentioned earlier, we continue to be the undisputed leader in alternative fuel-powered school buses with impressive 46% of our total year-to-date sales and firm order backlog. That's quite a mix, and it's actually four points above the same time last year. Furthermore, the total number of alternative-fuel buses sold and in our backlog are up 5% from a year ago.

That's strong growth performance in an overall flat school bus industry, particularly when we consider the major sales season is ahead of us. Simply put, that's leadership and real momentum in the fastest-growing segment of the school bus market. Remaining on top in alternative fuels, we continue to see strong and growing interest in our latest product, our zero-emission electric-powered school bus, which is powered by a Cummins electric drivetrain. We delivered 24 buses in the first quarter of fiscal 2020, and altogether, we have more than 90 buses delivered in our firm order backlog so far this fiscal year.

We anticipate many more orders for the year based on the quote activity we are seeing. 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 really excited about this opportunity. And finally, we are reaffirming guidance for fiscal 2020, and that reflects continued growth in sales and profits as we continue to deploy our three focus initiatives to drive higher growth and EBITDA margins, namely, annual pricing to cover economics, structural cost reductions, and increased mix of alternative fuels. It's fair to say we continue to advance the business on multiple fronts, and we are focused entirely on profitable growth.

Now, let's take a closer look at the third-quarter financial results on Slide 6. I have touched on many of these results earlier, and full time, I'll run through the details later. So let me just summarize the first quarter. Bus sales and total net sales were down 3% and 1% from prior year, respectively, which is significantly less than the planned 9% volume decline as we achieved 6% higher average selling price per bus.

Parts sales were 17% higher than a year ago, although half of that growth was due to the extra sales week in the first quarter of this year compared to last year. Nevertheless, we are pleased with the 8% organic growth we achieved in the first quarter, which comes on the back of a full-year growth of 7% last year. That's really impressive performance by the sales team. Adjusted EBITDA was $800,000 or 11% above a year ago.

The end result was the second-highest first-quarter profit for more than 10 years and the sixth consecutive quarter that we have grown profits over the prior year. Turning now to Slide 7, let's just take a closer look at our alternative fuel bus sales performance. At 2,074 units, our booked sales and backlog today of alternative-fuel buses is 5% higher than a year ago and, importantly, a record for this time of the year. As I mentioned earlier, alternative-fuel bus sales represented 46% of our total sales, which is up again from the previous record of 42% that we set a year ago at this same time.

Significantly, too, 111 customers have purchased our all alternative fuel-powered buses from us for the first time ever this year. That's on top of more than 400 customers who tried alternative-fuel options last year for the first time. Now, those are compelling facts and really helped drive customer loyalty and complex business and are a great endorsement of our exclusive alternative-fuel buses, the Blue Bird brand name, and our franchise exclusive dealer network. So I think it's pretty evident that we are not slowing down in this segment of the industry.

No other school bus manufacturer comes close to our alternative-fuel sales mix or our market share. I previously covered the fact that we now have either sold or have firm orders in hand for more than 90 electric buses orders for delivery in fiscal 2020, and we expect more to follow with all the customer interest we're 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 the 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 from the funds that have been issued.

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 both 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, reduction in NOx gases is the major criteria in funding through the VW settlement. To this point, our new ultra-low NOx propane bus is certified at one-tenth of NOx emissions output of other manufacturers' buses and to the EPA standard. Plus our propane bus is widely recognized as having the lowest operating costs of any of the school bus on the market, and we've been very successful today in utilizing VW funds for our full-time bus customers.

So with Blue Bird Propane, there's one simple message. 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. As you can clearly see, sales are up again, and we're achieving record levels of sales so far this year.

We are also seeing continued strong growth in our gasoline-powered bus in fiscal 2020. It's readily understood by technicians and mechanics who really appreciate the mission of simplicity and cold-weather start capability that it shares with propane. 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 in alternative fuels and the significant growth and market share we are achieving.

And with less than 15% of school districts still having purchased an alternative fuel-powered school bus, we have plenty of runway ahead for continued growth. First, I think a closer look at how we are driving cost reductions throughout Blue Bird. Turning to Slide 8. Now, we have shown you this slide in our last earnings call, and it illustrates the progression of our transformational initiatives over the past two years and into fiscal 2020.

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

Now, we continue to pursue these initiatives in fiscal 2019 and begin to have design changes to our process to reduce cost without compromising quality. In the second phased -- second phase rather, we also focused heavily on the build, launch, testing, and validation of our new robotic paint facility, which also necessitated plant rearrangements to optimize our process. We achieved additional savings of $18 million in fiscal 2019, and as Phil will show you later, we continue to drive further significant savings in fiscal 2020 from these actions. As we enter fiscal 2020, Phase 3 now supplements the earlier processes by driving down the cost of production, both from a fully operational robotic paint facility and from focused plant productivity actions.

Our new automated paint facility provides the opportunity to reduce rework with increased first-time run capability, to reduce labor and material through robotic application of paint, and to achieve savings and warranty expense and to deliver higher straight time capacity. Importantly, with the new paint facility attached to the exterior of our present assembly building, we've freed up space in the plant to allow more efficient line rearrangement of tasks and stations and the addition of several stations for more efficient operations and improved quality control. All these actions are designed to improve efficiencies and drive down total cost. We have deployed industrial engineering resources to optimize in-station workflow in the newly arranged production line.

We are applying engineering resources to focus on design for manufacturing capability targeted at reducing production costs and improving quality of rework, and we are confident of achieving significant efficiencies. And we have many more actions planned over the next few years. This systemic and cumulative approach of driving down total costs over multiple years is key to delivering higher gross profit and EBITDA margins, and we'll continue to share these results with you in the quarterly earnings call. 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 reaffirm our full-year guidance.

Over to you, Phil.

Phil Tighe -- Chief Financial Officer

Thank you, Phil, and good afternoon to everyone. The next few slides are a summary of our financial performance for the first quarter of 2020. The material that we are discussing is based on the close of January 4, 2020 for the first quarter of 2020 and December 29, 2019 for the first quarter of 2019. Detailed material will be available in our 10-K, and that will be filed tomorrow, February 13, and we encourage you to read the 10-K and the important disclosures that it contains.

There is also an appendix attached to today's presentation that deals with reconciliations between GAAP and non-GAAP measures, as well as some important disclaimers already mentioned by Mark. With respect to accounting pronouncements, there was nothing significant adopted in the first quarter of FY '20. We did elect to adopt ASU 2019-12, which simplifies the process with calculating interim income taxes and the accounting with deferred tax liabilities for foreign equity-method investments. There was no material impact to Blue Bird from adopting this statement.

Now, let's have a look at the summary of key results for the first quarter on Slide 10. So I think you can see from this, and Phil's already mentioned a lot of it, that we had an improvement versus prior year in quite a number of the items. So gross margin percent was up. Net loss was down.

Adjusted net income was up. Adjusted EBITDA was up. The adjusted EBITDA margin was up, and the diluted earnings per share improved by $0.03 from a loss of $0.05 to a loss of $0. 02, and the adjusted diluted was up by about $0.02.

So we've already talked about the fact that the volume was down and net revenue was down, and we'll go into a little more detail on the net revenue when we get to the bridge so that you can, perhaps, have a better understanding of that. And we will spend a little bit of time talking about that cash when we get to the free cash flow slide. So I think on the net revenue, you can probably talk about the $1.7 million. That's about 1% down.

Lower bus volumes with 140 units or 9% was worth about $12 million. Phil mentioned that bus revenues were up by over $5,000. The higher revenues actually drove about $8 million offset to the loss in the volume. But then, of course, parts was up by about $2.7 million or 17%, which has already been mentioned.

So we basically offset a large chunk of the amount that the volume was down through a lot of good work by the team on bus revenue and on parts revenue. Again, the bus revenue per unit increase of 6%, was due to a number of factors. One was the pricing actions we've taken in FY '18 and '19 to offset inflation, including steel and commodity prices, as well, of course, as the higher mix of alternative fuels. And also, our sales team has been working diligently trying to identify the best revenue we can get on every sale in every state.

Gross margin at 13.9% was up 160 basis points versus a year ago. Bus gross profit was 11%, which was up 130 basis points compared to a year ago, and the mix of parts sales improved from 11.3% of total to 12% at an average margin of about almost 35%. Our net loss obviously reduced to about $0.4 million, so that was an improvement of $800,000. Lower interest cost improved other income, and JV income and lower taxes drove the improvement.

On an adjusted basis, net income was $2 million positive, up from $0.8 million last year. Adjusted EBITDA, as already mentioned, was up 10% to 11%, and we'll talk more about that on the bridge. The EBITDA margin of 5.2% for the first quarter was up by 0.5 point versus the prior year, and this is the fifth consecutive quarter with positive year-over-year margin improvement. Diluted earnings per share, we've covered, and we will talk a little more about the impact of cash and debt when we get to the free cash flow slide.

Slide 11 is the bridge and walks from first quarter of fiscal '19 to first quarter fiscal '20. Key takeaways are volume and product mix improved by $600,000. So we know that the volume was down, but we did have favorable product mix. We sold more of the buses with higher margins than we did in the prior year.

In large part, that is due to alternative-fuel sales, and also, parts sales mix in total was up, which contributed to the positive news for volume and product mix. Pricing, net of economics, was about $1.5 million unfavorable, and this was largely due to higher material costs. The higher material costs were net of some favorable movement that we're now seeing in steel and also higher tariffs. You will recall there were tariffs that were implemented in the first half of calendar '19, and so we are still seeing some flow-through of those tariffs into our FY '20.

Transformational cost initiatives added $0.9 million, which was largely around about continued improvement in design cost and in reducing supplier costs. Efficiencies were favorable, and this was despite the fact that we were in the launch of the paint shop in the first month or so of the first quarter, so there were a lot of costs involved in getting the paint shop up and running. And so despite all of that, we will be able to breakeven some favorable news in efficiencies including favorable news in warranty, as well as manufacturing. Operating expense and other was unfavorable, and that was largely due to a nonrecurrence of a temporary rebate program that one of our major suppliers gave us in the first quarter of fiscal '19.

It did not carry forward into fiscal year '20 and is a large part of the deterioration for that. Overall, I think profit up by 11% in the first quarter was a good result for us. I would just say that -- and I think this is reiterating things that Phil said. We continue to work on improving both the per-unit revenue and the cost structure at Blue Bird as key enablers for achieving our long-term objectives.

We talked about bus revenue, gross margin. We are continuing to push on gross margin, and I would say that this could have been higher for the first quarter, except that we did incur some costs for the paint shop launch. So that dropped us back, but we're seeing good traction on gross margin. And finally, the transformational initiatives.

I know you look at $900,000. And so that wasn't very much, but it is our lowest quarter in terms of volume, and most of the savings are driven by bus sales. So it's an important field in reducing the cost of each bus we sell. So from a liquidity perspective, that $900,000 was worth about $600 a unit on every bus we sold in the first quarter.

And of course, that will flow through to the buses we sell in the rest of the year and provide both -- improving our profitability as volumes grow through the year. The next slide, Slide 12, is the free cash flow. And you can see here that the free cash flow is up by around about $34 million, at least for the adjusted free cash flow, and a similar number for the free cash flow. And the big issue is clearly, you trade working capital.

Everything else is pretty stable. The year-over-year increase in trade working capital is fundamentally all temporary items, and they will be eliminated, if not in the second quarter, at least in the balance of the year. And there were four principal areas. The first is we had a number of -- we have a number of stockpiling actions on some major powertrain components due to some supplier capacity constraints.

We had stockpiled a number of engines, and that stockpile will run down as we go out of this fiscal year and will be covered by the fiscal year. We also had a work pattern change versus 2019 in the first quarter. Typically, we bring in inventory for production in the second quarter, in the first week of that quarter, which we will get confused about calendar, but basically, the first week of the second quarter is just after new year. So we tend to bring in a bid.

Unfortunately, due to the timing of our production pattern in fiscal year '20, we had to bring in a lot of inventory to support our current production in the latter part of December, and that caused this quite a run-up in inventory down out of the first quarter. Again, that will sort itself out as we go through the second quarter. Blue Bird has been on a major program to consolidate all of that inventory into a single major warehouse to improve flow to the plant and to improve efficiency and profitability. We did all of that move in basically the first quarter of fiscal '20, so we did build up inventory to ensure that we were protected against any glitches as we were moving parts from a number of warehouses to a central warehouse.

So we took a fairly conservative approach to protect production during this overhead overhaul, and I think that while it was a strain on our cash, it certainly paid dividend and did not lose any production. And finally, we did have a number of buses that were still in a work in process at the end of the first quarter. In other words, they were largely built but still being finished. These were the more complex buses that we build for the federal government and some buses that we were building for some major fleets that were more like transit buses than school buses and require a lot of incremental work.

So those buses will all be delivered before the end of the second quarter, and we'll get the majority of that stockpiling or inventory out of the way. So again, I'd say that the engine stockpiling will probably run that out by the end of -- we will run that out by the end of the fiscal year. Everything else, work pattern change, protection against the warehouse move and the buses that were still in production will be cleaned out over the next several months. Final slide, Slide 13, looks at our net debt leverage and liquidity.

Debt of $215 million was up about $6 million during the prior year due to $15 million drawn on the revolver higher than prior year at that time, and that was really drawn to expand some of the trade working capital. Our net leverage ratio came in at 2.5, again, well below the threshold of the covenant of 3.75. And we believe our liquidity at $66 million is good for this time of year. And particularly, it gives us some fairly solid amount of cushion while we're carrying higher-than-normal inventories, and we would expect to see that grow as we run down the inventories.

So that's a brief summary for you, and I'll now turn back -- the discussion back to Phil Horlock, who will describe the outlook for fiscal-year 2020 and our position on CARB. Over to you, Phil.

Phil Horlock -- Chief Executive Officer

Thank you, Phil. So let's now focus on the fiscal 2020 outlook, as Phil just said, and our full-year guidance. And please turn to Slide 15. The headline on this slide says we are simply continuing to follow the plan we laid out to grow margins.

We started this two years ago, and we're well on track and well under way with this. Before I just get into the details of that, just a quick comment, again, about the industry. For three years now, we've been running at about 34,000 units, and these are really 30-year highs that we're seeing. But the great thing is when you look at the outlook here for profit focus, I mentioned before, profit values, funding availability and the likes of VW funds to boost some decisions that are made earlier in the cycle, it just gives us real confidence we see in the foreseeable future of holding to this level.

And it's important also to note, as I mentioned previously, 190,000 buses and a 500,000 fleet across North America is over 15 years of age, so there's tremendous demand to buy new buses. This industry is not slowing down because of lack of demand. As we consistently stated, our plans for continued profit growth focus on achieving significant gross margin and EBITDA margin improvement from three key areas. I'm going to repeat myself here.

I think we're supposed to remind ourselves, our front is very straightforward, very simple, and we're executing it. First is annual cost-recovery pricing. We took pricing in '18 for surcharges for steel and other commodity increases. And in late fiscal 2019, we took a further 2% price increase on all vehicles and options, and that will have a significant annual effect in fiscal 2020.

We've seen a flow-through of that late announcement back in fiscal '19. Second, our continued transformational cost reductions. I explained earlier the processes we are attacking now, the various areas we're going into all across, whether it's purchasing, whether it's a plant, it's in the manufacturing situations, design. We're exploring every possible avenue.

What now we have done so far in '18 and '19, we drove a cumulative cost savings of $38 million in over those two years, and we expect significant benefits again in fiscal 2020 and beyond. Manufacturing efficiencies and quality will be a key area of focus this year and in future years. And third, as we've been doing this for several years now, we will continue to pursue growth to maintain our leadership position in alternative fuels, which command a superior margin and higher customer loyalty. With a record year-to-date mix of 46% of booked sales and firm order backlog and the main second-half selling season still ahead of us, our alternative fuel leadership position will continue to be a significant boost to selling price and gross margin.

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 this fiscal year. So let's now take a look at what all this means to fiscal 2020 guidance, turning to Slide 16. First, no change at all from the guidance that we announced at the December earnings call. Net sales guidance is between $1,020 billion to $1,050 billion, which would be between $2 million to $32 million higher than fiscal 2019.

I want to stress, this is not a plan entirely based on higher volume but rather a prudent margin-based approach to drive higher profits and revenue. Adjusted EBITDA guidance is now between $90 million to $95 million, a significant $8 million to $13 million or 11% to 16% increase over fiscal 2019. And by the way, that's 13% higher at the midpoint of our guidance. As a reminder, we are in a very seasonal business, with typically two-thirds of our sales occurring in the second half of the fiscal year.

That said, we expect fiscal 2020 to follow a similar pattern, with the vast majority of our profits and improvement over fiscal 2019 being earned in the second half of the year as we realize that higher volume. Adjusted free cash flow is between $30 million to $35 million and continues to be a strong feature of our business model. While this is slightly down from our fiscal 2019 results, this is more than explained by unique spending to support plant upgrades and design changes that drive higher productivity. So in wrapping up, we had a very strong first-quarter results in the softest quarter of the year, both operationally and financially.

Importantly, all of our production slots are full for the first half of our year, and we announced the new slots in the second half of the year. So we have good visibility on pricing, margins, and profits through the second quarter. 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 and are executing over the past two years. That concludes our formal presentation.

I'm now going to pass it back to our moderator to begin the Q&A session.

Questions & Answers:

Operator

[Operator instructions] We'll first go with Justin Clare from ROTH Capital Partners. Please go ahead.

Justin Clare -- ROTH Capital Partners -- Analyst

Hi, everyone. Thanks for taking my questions. 

Phil Horlock -- Chief Executive Officer

Hi, Justin.

Justin Clare -- ROTH Capital Partners -- Analyst

So first off, I guess, unit sales for Q1 were down 9% year over year. I was wondering if you could just give us a sense for how much of that decline was due to the extended shutdown that you took to ramp up the paint facility versus potentially a lower level of orders for that quarter or you being maybe more selective with customers.

Phil Horlock -- Chief Executive Officer

It was entirely due to the paint shop. We took all the orders in. We just timed them out. So I'd expect -- it's fair to say you'd probably see those balancing back in the second quarter.

So it's all due to the paint shop. We're building 50 to 60 buses a day, so you can imagine, so when you ramp it up slowly, you don't build 40, 50 to 60 from the start point. You're building 15, then 20, then 30. So this is just the units, Justin, into the second quarter.

Justin Clare -- ROTH Capital Partners -- Analyst

OK. Great. That's helpful. And then gross margins and the adjusted EBITDA margin both improved year over year despite the lower volumes that you saw.

So as volumes ramp up through the year here, can we anticipate margins moving higher through the end of the year?

Phil Horlock -- Chief Executive Officer

Well, yeah. I think if you do the math with our guidance, you'd see that. Yes, we certainly do. I mean, as we see much more volume coming through and we hold the pricing we put in place and we keep the alternative mix, also the fuel mix is going where we need to be, we do see improving margins throughout the year, both the gross margin and EBITDA margin.

Justin Clare -- ROTH Capital Partners -- Analyst

OK. And then in terms of inventory, you talked about stockpiling engines. Can you talk about what type of engines were in a shortage and what the cause was? And then has the shortage been resolved at this point, or is this an issue that's ongoing?

Phil Horlock -- Chief Executive Officer

Yes. I wouldn't call it certainly a shortage of engines that we were protecting for. This was just making sure we're ready for the second-quarter stuff. And then we mentioned -- Phil mentioned earlier about the -- we started the -- back in fiscal '19 January, the first week was a shutdown.

We saw the holiday week, actually. In fiscal 2020 January, it was a production week, so we brought some engines in earlier, and we contained it. But there's no shortage of engines as such. We're just being prudent.

Justin Clare -- ROTH Capital Partners -- Analyst

OK. So then, I guess, related to that, I'm guessing that you didn't have to pay a higher price, like prices have not gone up for engines as a result of any shortage, so we shouldn't expect any margin impact there. Is that the right way to think of it?

Phil Horlock -- Chief Executive Officer

That's correct. Yes, there's no margin impact on that, no.

Justin Clare -- ROTH Capital Partners -- Analyst

OK. Great. I'll pass it on.

Phil Horlock -- Chief Executive Officer

Thanks, Justin. 

Operator

We'll next go with Eric Stine from Craig-Hallum. Please go ahead.

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

Hi, everyone. 

Phil Horlock -- Chief Executive Officer

Hi, Eric.

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

Hey. As I always kind of focus on, I'm just -- would love to chat a little bit about the 111 new alt-fuel customers added. Just curious how that breaks down between existing Blue Bird customers who are going that direction for the first time and, I guess, conquest customers, as you call them. And then maybe if you could just talk about kind of the competitive environment given you've got a big lead and just one or some of the other players, whether it be different technologies, product launches, what are you seeing from them.

Phil Horlock -- Chief Executive Officer

Well, first of all, your first question, yes, it's a very good quarter as we are in a very good year-to-date position with 111 new customers coming in. And I think typically, over the time, we've been about 50-50 between conquest customers. Obviously, people are new -- not only new to alternative fuel but new to the Blue Bird brand. And when we look at new to the Blue Bird brand, we've talked about in the last five years, they've come to us. 

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

OK.

Phil Horlock -- Chief Executive Officer

People knew about our brand previously, obviously. But let me talk about alternative fuels. We talk about specifically, they're brand-new to anything, whether it's gas, propane or electric or CNG. What's interesting for us, actually, the way we count that too is if a guy brought gasoline before and now say let me try some propane, we don't actually count that as a new customer.

He's already in the family. So I think we do a very conservative view of this when we look at it. But we love getting people into alternative fuels because we find the loyalty of that customer base is very loyal because they love the product, and there's nowhere else you can buy it from. You can't buy that powertrain for propane, for gasoline at the CNG from anyone but Blue Bird.

In fact, you can't drive a bioelectric drivetrain, which is powered by a Cummins product, Cummins drivetrain from anyone else but Blue Bird. So we like being there for whatever is in that position. It's good for us.

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

Yes. That's a good segue to electric. I mean, obviously, another strong quarter. That was one of the big drivers of ASP, the increase there.

I mean, it seems like in the past, this has been more of a niche product. It's been more based on incentives in key markets. I mean, do you feel like it is kind of moving beyond that? I mean, I know it's a slow process, but moving beyond that and is becoming more of a mainstream outside of those specific examples?

Phil Horlock -- Chief Executive Officer

Yes. Well, let's put it this way. We're still in a situation where, unless there is significant rents available, customers cannot afford to buy an electric-powered school bus. It's anywhere from three to four times the price of a traditional combustion-engine type of bus.

That's a fact. But what you are seeing is a lot of states saying, "Let me try, and I'm going to put some funds to all of this. Let me try a few." But they know the school districts will be still out of their pocket. And then I don't want to know if the battery technology is going to improve, if they're going to come down in prices.

You see, all those updates are out there. A lot of intrigue around vehicle [Inaudible] and where it's going and fast charge and all these things. So I think what I'm telling you is that it's not -- I wouldn't say it's mainstream, although probably it's in California because they're so keen on zero emission in California. They put a lot of grants behind this.

But they're unique. They always have been in this space. Fuel emissions for them is mainstream. But I would say that there's an incredible grown interest and fascination for trying this, really, across the country.

And what we see, like I said before, funds are available, the VW funds. In many cases, in most cases, I would say, there's always been an element portion to let you buy a few electric buses. So I think, yes, it's picking up momentum, and we just want to be there, obviously, and capitalize on these opportunities.

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

Yes. OK. And then last one for me. Just on the parts business, I mean, that was another strong quarter, also a big driver of the margin improvement.

Maybe just a discussion on that. I know you had the launch of the X-Parts. That offering, I believe, it was last fiscal year. And so maybe just outlook at parts business and how that's played out versus your original expectations.

Phil Horlock -- Chief Executive Officer

Yes. Well, I think if you look at last year, 7% growth was a nice growth in the industry, but I thought it was flat, right? So that was good. And we grew, and it continued in the first quarter with -- you take out the extra sales. As we've already mentioned, it was still a strong 8% to 9% for the growth level we got in that first quarter, so really nicely done.

I think the X-Parts program, we're stocking that every month with new SKUs. We'll put new parts in there. Dealers are picking it up. We're nowhere near our company play victory yet.

There's long runway ahead, but it's got a lot of interest, and we're definitely picking up new business because of it, I can tell you that. I think also, the second point is that we've been at this business with the Ford products since 2012, so what we see there is more and more units are coming off warranty. And now, we're into getting to the service model, replacing parts, and we weren't able to do that. Unlike other powertrains out there in the market, we're allowed -- Ford gives us the right to be very competitive on all of those parts that they put into the engines and transmission.

That's also a growth we're seeing. So I think it's actually the way, by more access to the market, and we're going to bring our SKU base now that -- we didn't have that before. And we think that's pretty important to grow in this business. And so yes, I think it's going well.

And I think it's 7% growth in the first quarter, softest quarter, so the year is pretty good coming off of a school start.

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

OK. Thanks a lot.

Phil Horlock -- Chief Executive Officer

You bet. Thanks, Eric.

Operator

We'll next go with [Inaudible] Research. Please go ahead.

Unknown speaker

I'm somewhat new to the names. I just wanted to ask about -- I know you're doing a lot better in your margins. Would you say that you reach profitability in the next coming year? Could you give us an idea on that?

Phil Horlock -- Chief Executive Officer

Say that again, reached profitability in what [Inaudible]? You just cut out a little bit.

Unknown speaker

OK. It seems like things are improving. So could you give an idea about what -- maybe about what quarter you could reach profitability?

Phil Horlock -- Chief Executive Officer

Well, I think, look, we tend not to give -- we don't give guidance by quarter. We give guidance for full year. And we certainly said that by the end of this year, we expect to be the run rate -- to get to our 10%-plus margin objective. That's where we want to be.

So that's all we're really putting out there right now in that. We'll take this in a quarter time, see how we go and keep delivering quarter by quarter. On every margin, so far, we're up for this year in both gross margin and EBITDA margin, and we look to improve.

Unknown speaker

OK, great. One other thing. I know you mentioned about tariffs. Do you see those improving in this coming year, and will it make a big difference?

Phil Horlock -- Chief Executive Officer

Well, when I last called the president, he wasn't willing to tell me if he was pulling off the tariffs yet. No. I mean, I think what's happened is we are not planning in our guidance, what we've given, tariffs coming off. So if they do, obviously, that will be a big boost from there.

I'd like to think that over the course of time, we'll see tariffs coming down, but we have not -- our guidance, our objectives we're putting out there do not reflect that, so I think we're just going to wait and see what happens. It's also what we bear in mind. We work with many of our suppliers. When they look at repricing, they look at what's happened to them in the last -- anywhere from 6 to 12 months.

So for example, one of our major suppliers last year put on tariffs in the early -- I guess at the start of the second quarter, basically, of '19 because they look back on what they were doing, what has happened to them, and that's the way they look. They look back at the last several months. They put a surcharge on. So that actually did two factors in '19.

I think most people think the work, we saw them late. But the bottom line is I think we don't plan on reducing tariffs, but I think we'd like to -- we see this opportunity, I guess, down the road.

Unknown speaker

What sort of impact did the tariffs have on your earnings per share?

Phil Horlock -- Chief Executive Officer

Yes, I have to -- I think it's...

Phil Tighe -- Chief Financial Officer

We'll have to get back on that. It wasn't major, but we don't know. It certainly had an impact on earnings per share. And I guess you'd have to look at it over the year and the quarter because it will be some -- and I think Phil's exactly right.

We're not planning on the tariff coming off. When it does come off, it will clearly be an improvement to margin.

Unknown speaker

OK, great. Well, thanks for taking my question.

Phil Horlock -- Chief Executive Officer

You bet. Thanks, Chris.

Operator

Thank you for your question. [Operator instructions] We'll next go with Lewis Moser from [Inaudible] Investments.

Unknown speaker

Yes. I was wondering about the announcement you made. I believe it was yesterday afternoon and, once again, early this morning about a shareholder that is selling 11 million shares. Can you talk about that?

Phil Horlock -- Chief Executive Officer

Yes. I'll let -- how about our treasurer handle that comment?

Paul Yousif -- Vice President, Treasurer, and General Counsel

Lewis, this is Paul Yousif. The S-3 registration yesterday registered 11 million shares. We first registered those shares back in 2015 with Cerberus and sold those shares. Subsequently, those were just sold under a private transaction to American Securities.

We registered those shares. They own those shares. There will be no proceeds to the company. That registration will be good for three years.

Unknown speaker

OK. So it's over a period of time.

Phil Horlock -- Chief Executive Officer

Yes, always, always. Lewis, I call that good housekeeping, right, just reregistering the shares.

Paul Yousif -- Vice President, Treasurer, and General Counsel

That's right.

Phil Horlock -- Chief Executive Officer

And so that's all it is.

Unknown speaker

OK. Thank you.

Phil Horlock -- Chief Executive Officer

Thanks, Lewis.

Operator

Thank you for your question. [Operator instructions]

Phil Tighe -- Chief Financial Officer

While people are waiting, this is Phil Tighe. I need to make one clarification. I believe in my opening address, I referred to filing of the 10-K tomorrow. It's actually a 10-Q.

So I don't want anybody to be confused between -- with my mistake. It's a 10-Q that will be filed tomorrow. Thank you.

Operator

This concludes today's question-and-answer session. I'd like to give back the floor back to the moderators.

Phil Horlock -- Chief Executive Officer

Thank you. OK. Thank you, Nadia, and thanks to all of you joining on our call today. We appreciate your continued interest in Blue Bird.

And as you can see by our first-quarter results and our full-year outlook, we are focused on total profit growth and margin growth, and we intend to deliver on our commitments. And I believe we are well-positioned for growth today and in the future. So please don't hesitate to contact the head of profitability and investor relations, Mark Benfield, if you have any follow-up questions. Thanks again from all of us here at Blue Bird and have a great evening.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Mark Benfield -- Director of Investor Relations

Phil Horlock -- Chief Executive Officer

Phil Tighe -- Chief Financial Officer

Justin Clare -- ROTH Capital Partners -- Analyst

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

Unknown speaker

Paul Yousif -- Vice President, Treasurer, and General Counsel

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