U.S. Markets open in 1 hr 39 mins

Edited Transcript of BLBD earnings conference call or presentation 7-Aug-19 8:30pm GMT

Q3 2019 Blue Bird Corp Earnings Call

FORT VALLEY Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Blue Bird Corp earnings conference call or presentation Wednesday, August 7, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Mark R. Benfield

Blue Bird Corporation - Director of IR & Government Affairs

* Phil Tighe

Blue Bird Corporation - CFO & CAO

* Philip Horlock

Blue Bird Corporation - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Aaron Michael Spychalla

Craig-Hallum Capital Group LLC, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen. Welcome to the Blue Bird Corporation Fiscal 2019 Third Quarter Earnings Conference Call and Webcast. Today's program is being recorded. At this time I would like to hand the conference over to Mr. Mark Benfield, Director of Investor Relations. Please go ahead, sir.

--------------------------------------------------------------------------------

Mark R. Benfield, Blue Bird Corporation - Director of IR & Government Affairs [2]

--------------------------------------------------------------------------------

Thank you, Lisa. Welcome to Blue Bird's Fiscal Third Quarter 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 presentations box on the IR landing page.

Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call.

This afternoon you will hear from Blue Bird's President and CEO, Phil Horlock, and CFO Phil Tighe. Then we will take some questions. So let's get started, Phil?

--------------------------------------------------------------------------------

Philip Horlock, Blue Bird Corporation - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Mark. Well, good afternoon everybody, and thank you all for joining us today for our Third Quarter Earnings Call for Fiscal 2019. We have some great things going on at Blue Bird today and we always welcome this opportunity to share our latest quarter results with you. So let's start with an overview of those financial results on Slide 4.

As the first headline says, we had a really strong third quarter with adjusted EBITDA of $29 million which is about $5 million higher than the same period last year. That's a 20% year-over-year profit increase. Importantly, this was our fourth consecutive quarter where profits increased over the prior year despite higher commodity costs.

I'd first like to set the scene. During this earnings call you'll hear a recurring theme of how we are driving our overall profit and margin improvement through three distinct key initiatives. First, the bus pricing that we took in late fiscal 2018 to address the escalation in tariff-led commodity costs. This is resulting in significant increases in average bus selling price for us. And as you'll hear later, we plan to price each year to recover economic increases.

Second, cost reductions that we are achieving through our transformational initiatives. We saw the results in the second half of fiscal 2018 and we continued to generate further cost savings in every quarter this year, and 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, while we earn a superior sales price and margin compared with conventional fuel. Our growth in this segment continues to outpace the overall market by a long way.

All three of these actions are significantly improving our results over the last year and are cornerstones of our plan to increase gross profit and EBITDA margins going forward.

So back to the third quarter results. We improved profitability despite selling 326 fewer buses than last year. More than 250 of those lower sales reflect buses for fleet customers that were shipped in late June but we don't recognize the sale until the unit is actually received at the customer's location. That occurred in early July, and so will now be booked as fourth quarter sales.

Even though our unit sales were down, the third quarter volume of 3,420 buses was 51% higher than the second quarter, illustrating once again the seasonal business in which we operate. As we have explained on previous earnings calls, our second half volume and profits are always substantially above the first half with typically around twice the volume being sold. This year, our fourth quarter will be our largest volume and profit quarter.

While third quarter net sales revenue of $309 million was down about $5 million from a year ago, this decline of around 2% was much less than the decline in unit sales. The lower decline in sales revenue may reflect the favorable impact of our bus pricing action that I just mentioned and a richer mix of higher-priced alternative-fuel-powered buses. In fact, our average bus selling price was a substantial $6,000 per unit higher than in the third quarter last year. That's a very strong 8% increase in our average bus revenue.

Our adjusted free cash flow for the second quarter was $4 million. That's a reduction of $32 million from last year. The decline is entirely explained by high receivables for fleet units delivered and booked late in the third quarter but paid for in July in line with fleet payment terms, and higher inventory to support increased production and sales as we move into the fourth quarter. This is simply timing of (inaudible) working capital that will reverse itself in the fourth quarter.

At $0.69, adjusted diluted earnings per share was down $0.23 from a year ago. It's important to know that this decline is more than explained by the non-recurrence of one-time tax benefits we received in the third quarter last year. Phil Tighe will provide more explanation a little later.

As we look at the underlying strength of the industry and Blue Bird's results, we remain upbeat about the business fundamentals. With a strong outlook for property values and corresponding property taxes, which are the major funding source of school buses, together with the fact that 150,000 school buses on the road today have been in service for more than 15 years and school term enrollment is increasing, we are confident of the industry outlook remaining at around the 34,000 to 35,000-unit mark in fiscal 2019.

By the way, that's a near record level over the past 30 years, and compares favorably with the 31,000-unit industry average over that period.

We saw yet another record unit sales mix for alternative-fuel-powered school buses. In fact, this was the best result in any quarter for Blue Bird at an outstanding 53% of our total unit sales. This is the first time that our alternative fuel bus sales have exceeded diesel bus sales in a quarter. This mix is 18 points higher than last year's 35% mix, and we lead the industry by a long way.

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 last several years we've been achieving significant growth in alternative-fuel bus sales, outpacing the market and as I just mentioned, we've not slowed down this year. We'll cover alternative fuel performance in more detail a little later.

And as I commented earlier, we saw the impact of both our pricing and structural cost reduction actions in the third quarter as evidenced by a strong increase in our gross margin of 1.7 points over last year. To illustrate the continuous improvement in margins that we are driving, our third quarter gross profit margin of 13.5% was 1.2 points higher than our second quarter margin. And you call that that margin was about 2 points higher than a year ago. We have a really strong trend going right now.

Our transformation initiatives are well underway and on track, targeted at lowering our cost structure, driving plant efficiencies and product quality, increasing capacity, and bringing major product and feature upgrades to the market. All in all, I'm very pleased with our third quarter results. We increased our gross profit margin through pricing, cost reductions and a richer mix of alternative-fuel buses and we expect continued gross margin improvement in the fourth quarter from these actions. I'll be discussing that later.

Our results were in line with our expectations and support our full-year guidance. Importantly, we are on the right path to our stated goal for an adjusted EBITDA margin of at least 10% by fiscal 2020.

Let me now review our key operating achievements on Slide 5. We recorded a number of significant achievements in the third quarter, and each one will make us more competitive and support 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 a gross profit margin increase within the past two quarters, and there is much more to come.

Our all-new fully automated paint shop is operational and we are painting up to four buses a day as we tweak the system for optimum performance. The painted buses look great and we're already seeing the quality and efficiency benefits we expected. As I will show you later there's an important initiative to drive efficiency improvements throughout the plant in the coming years.

As I covered earlier, we increased our third-quarter school bus selling price significantly by $6,000 a unit representing an 8% increase. This reflected the impact of the pricing we took in late fiscal 2018 to cover escalating commodity costs together with the increased mix of higher-priced alternative fuel buses.

I should also add that just last month on July 15th we increased prices by 2% on all vehicles and options to address annual economic increases in material and labor. We regard this as standard industry pricing necessary to cover economics each year.

Just yesterday we announced publicly the launch of our all-new and exclusive X-Parts brand, where we will supply the most popular service and maintenance parts for all makes and models of school buses, sold exclusively through our dealer network. X-Parts will offer new and remanufactured parts priced very competitively which meets or exceed the original supply specifications.

At launch, the X-Parts range consists of engine and brake parts and the product portfolio will be expanded progressively to meet customers' demands. We and our dealers are excited about the growth prospects for this new initiative which adds all new parts and all new service opportunities throughout our dealer network.

We continue to be the undisputed leader in alternative-fuel-powered school buses, with our year-to-date sales and firm order backlog representing an impressive 48% mix of total unit sales compared with 38% at the same time last year. Furthermore, as of yesterday, the number of these units sold and in our order backlog are up 21% from a year ago. Now, that's leadership and momentum in the fastest-growing segment of the school bus market.

Remaining on the top of the alternative fuels, we are seeing very strong interest in our latest product, our all-new zero-emission electric-powered school bus which is powered by a Cummins electric drive train. We have firm orders for more than 100 units with delivery scheduled throughout the remainder of the calendar year. We also are one of only two school bus manufacturers to qualify for the recent California Energy Commission's Electric School Bus Grant funding, with every Blue Bird electric school bus eligible. That's our Type A, our Type C and our Type D. This is a $75 million grant that provides significant subsidies to Californian school districts to purchase electric-powered school buses over the next two years. Needless to say, with the widest range electric-powered buses on the road today we are very excited about this opportunity.

And finally, based on our third quarter performance and outlook for the balance of the year, we are reaffirming full-year guidance for all the metrics on which we are measured. I will cover this in more detail toward the end of the call.

It's fair to say that we continue to advance the business on multiple fronts and we are focused on profitable growth. Now, let's take a closer look at our third quarter financial results on Slide 6.

I touched on many of these results earlier and Phil Tighe will run through the details later, so just to summarize the third quarter, total net sales were down about $5 million from last year more than explained by 326 fewer sales of buses, the majority of which was shipped in the third quarter and already delivered and booked as sales in the fourth quarter. The 8% increase in average bus selling price was a partial offset to the volume shortfall.

Part sales for the third quarter were up very slightly, just $100,000 ahead of last year. This followed a substantial 10% growth in the first half, as we successfully introduced new products and tailored incentive programs through our dealer network. However, based on July and August to date sales, we expect our highest quarter for parts sales will be in the fourth quarter with solid growth over last year.

Despite lower volume and the impact of higher steel-led commodity prices, adjusted EBITDA of $29 million was about $5 million higher than a year ago.

So let's turn to Slide 7 and take a close look at our alternative fuel bus sales performance.

In each of our earnings calls so far this year, I told you that we were seeing significant increases each month in incoming orders of alternative-fuel-powered buses, resulting in a growing backlog. Well, that clearly translated into high unit sales in the third quarter, which were a substantial 38% over last year, resulting in the highest-ever quarterly mix of any quarter at 53% of total sales. This is the first time we have seen alternative fuel bus sales surpass diesel bus sales in a quarter, and this surge is being led by our class-leading propane-powered Vision bus.

As I said earlier, our year-to-date volume of alternative fuel school buses booked or in our firm order backlog is 21% higher than the same time a year ago. And that represents a year-to-date mix of 48% of our total buses, 10 points higher than last year.

So it's clear we aren't slowing down in this segment of the industry and no other school bus manufacturer comes close to our alternative fuel unit sales mix. You might find it interesting to know that just three years ago, in 2016, our alternative fuel sales mix was 26%. So our mix has almost doubled over this three-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, the Blue Bird brand, and our strong and exclusive dealer network.

I previously covered the fact that we now have more than 100 electric bus orders in hand and we expect more to follow with all the customer interest we have seen for the newest additions 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. In addition, as mentioned earlier, all of our electric-powered buses 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.

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 all other growth opportunities going forward. In fact, reduction in NOx gases is the major criteria in funding for the VW settlement.

To this point, our new 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 school bus on the road. So you can have it all with Blue Bird propane. 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 sales are up, but we're now starting to see Blue Bird propane sales utilizing the first phases of the VW settlement funding in states where grants have been released. I am very pleased with our performance to date and there's a lot of upside opportunity ahead for us.

We're also seeing continued strong growth of our gasoline-powered bus in fiscal 2019. Now, that gasoline bus is readily understood by technicians and mechanics who truly appreciate the mission of simplicity and cold-weather start capability 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.

Now with our year-to-date bookings and order backlog for alternative fuel buses up more than 20% from the same time last year, and with propane sales leading the pack, we are raising our forecast sales for alternative fuel buses in fiscal 2019 to over 5,300 units. That's an increase of 500 units from the prior earnings call. So this will be yet another record sales year for Blue Bird's alternative-fuel-powered school buses.

Let's then take a closer look at how we are driving cost reductions throughout Blue Bird, turning to Slide 8.

We first showed this slide at our second quarter earnings call to provide more color and texture on how we are driving down total costs throughout the company. We began it last year with results achieved primarily in the second half of fiscal 2018. You might recall that our profits last year included a gain over fiscal 2017 of $26.5 million for cost reduction actions which more than offset the impact of escalating steel costs and other commodities in 2018. In fact, these actions as depicted at the top of the slide, where our initial focus was on driving down purchase material costs and services through a combination of initiatives including commercial agreements with suppliers, resourcing and selective design changes. We work extensively with external automotive experts to ensure best practice and process were applied, and we delivered results.

We continue to pursue these initiatives today and the results will be evident in our third quarter cost savings, and we'll continue to drive further additional savings throughout this year and beyond.

Now our next phase focuses on driving down the total cost of production as shown on the bottom two-thirds of the slide. Our new fully automated paint facility provides the opportunity to reduce rework with increased first-time 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. Now, savings will largely be realized in fiscal 2020 as full production ramp-up of the paint shop begins in October this year. But 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 rearrangement 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 and are confident of achieving significant efficiencies. In fact, by the end of this fiscal year, initial benefits will be realized with savings in production approaching 90 positions representing annual savings of between $4 million to $5 million. Many more efficiency actions are planned over the coming years.

This systemic approach to driving down total costs over multiple years is key to us delivering higher gross profits and higher EBITDA margins. We will continue to share the results with you in our quarterly earnings calls.

Let me now turn you over to Phil Tighe who will take you through the financials and then I'll be back later to cover the fiscal 2019 outlook and guidance. Over to you, Phil.

--------------------------------------------------------------------------------

Phil Tighe, Blue Bird Corporation - CFO & CAO [4]

--------------------------------------------------------------------------------

Thank you Phil, and good afternoon, everyone. The next few slides are a summary of our financial performance from the third quarter of fiscal '19. I would remind you that today we are discussing data that's based on a close of June 29 of '19, for fiscal '19, and June 30, '18, for fiscal year '18.

Detailed material will be available in our 10-Q which we will file tomorrow. We encourage you to read the 10-Q and the important disclosures that it contains.

There is some appendix material attached to today's presentation and that deals with reconciliations between certain GAAP and non-GAAP measures that are mentioned in this review. In addition there are some important disclaimers already mentioned by Mark.

There were no new accounting pronouncements adopted in the third quarter of fiscal year '19, although as previously mentioned we did adopt a number of new standards in the first quarter and they are discussed in the 10-Q, in note 2. You'll be able to see that when it comes out tomorrow. It's also included in the 10-Q that was published for the second quarter results.

Those pronouncements included revenue, leases, pension, hedges, cash flow, and internal use of software.

There were no changes to risk factors from the previously published 10-K.

So now we'll turn to Slide number 10 and this is a summary of the third quarter, but for fiscal year '19 and fiscal year '18. Phil has mentioned a lot of this data for you so I won't laboriously take you through every line. I'll just try and add a few insights for you. You can see the unit volume at the top and the fact that it's about 326 units below last year. I would point out that this week we are closing out orders for the balance of fiscal year '19 for the fourth quarter. And based on what we've seen today these will support, clearly support, the guidance that we are giving. So that's been a strong year for us.

We turn to net revenue; you can see the fact the net revenue was down. The volume impact of the revenue was about $26 million. If we -- as you can see below the net revenue line, the bus revenue per unit was up by about $6,000 so the higher revenue per unit on a school bus was worth about $20 million but I offset for a net of about -- just over $5 million reduction. But I think the higher bus revenue is very encouraging. We have been able to make the price increases hold and I think the team is doing a good job with the stronger mix of alternative fuel buses as well as a number of other revenue factors that we've been working on.

Gross margin up about 170 basis points versus a year ago, and again, this is -- this is a combination of both revenue and the results of our transformational cost initiative. That cost initiative is ongoing and we will continue to see results as we move forward on that. I would point out that the gross margin for year-to-date was about 12.9%. That was also up by 146 basis points versus a year ago. And again, gross margin has been better than prior year for each quarter in 2019.

We talked about adjusted EBITDA and we will show on the next slide a brief bridge that talks about the movement in EBITDA from 2018 to 2019. I will point out to you that on a year-to-date basis again adjusted EBITDA was roughly $48.5 million. That's up 17% or about $7.2 million versus last year, and in line with where we need to be to achieve guidance. Now, the EBITDA margin improved to 9.4% for the third quarter versus 7.7% last year. And again as we previously stated we have improved the margins versus the same quarter last year for the prior four quarters. That's a nice trend to be on and we hope to continue.

The year-to-date margin was 7.2%, or 120 basis points better than last year.

In the third quarter our net income was $14.6 million. That was down $7.3 million compared to third quarter of fiscal year '18. However, the third quarter of fiscal year '18 benefited from the release of an uncertain tax position worth about $8 million, and that is also commented on in our Q. So the benefit that '18 had more than accounted for the deterioration year-over-year. Again, on a year-to-date basis net income was $12.7 million or $3.2 million lower than the prior year, and that $3.2 was more than accounted for by the tax position.

Diluted earnings per share again, you can see there at $0.55 it was $0.22 lower than last year, and the absence of the benefit that we received in fiscal year '18 was worth about $0.28 which more than accounts for the deterioration.

Finally on cash, at $29 million it was about $12.8 million lower than last year. The reduction in the cash at the end of the third quarter was more than explained by about an $18 million increase in accounts receivable due to a large fleet contract which had payment terms that ended in July. We have subsequently received that cash and so that receivable balance has been eliminated.

Debt of $210.6 was up $64.6 million including incremental debt raised in October of last year to fund the $50 million tender offer as well as about $25 million of borrowings on the revolver. We fully expect that all of the borrowings on the revolver will be eliminated during the fourth quarter.

If we quickly go to the next side, which is the bridge, this slide as you can see walks from third quarter fiscal year '18 to '19. The key takeaway items are pricing actions in the fourth quarter of '18, to largely offset steel and other commodity costs, and the favorable impact of a number of other items including a higher mix of propane resulted in favorable pricing of $12 million. That was a great achievement for the quarter. Transformational cost initiatives, again, came in at $5 million higher year-over-year and these continue to reduce that cost of production.

Volume and mix was down about $2 million based on the 396 (sic) [326] units, so 396 (sic) 326 units would have driven a higher number but we did have favorable other mix effects in there. So that was limited to $2 million. And then of course, we do continue to see commodity and other cost increases in the market. And that was worth about $10 million. As Phil has already mentioned, we did announce a 2% price increase in the middle of July which number one will help offset the economics increases included in that $2 million, and number two I think sets an important precedent going forward where we have to manage the recovery of cost increases through pricing.

If we quickly move to the next slide, you can see here the free cash flow. Our third quarter adjusted free cash flow was $4 million. This was $32 million lower than fiscal year '18. The result is more than accounted for by higher trade working capital, including the higher accounts receivable that we talked about a couple of slides back due to the fleet sale. And again, that cash has already been received. And secondly, inventories were up, and they were up really for two reasons. One is we are stockpiling some material due to a model change that will occur during fiscal year 2020, and we are -- and we were building inventory in advance of the high production levels that we will be experiencing as we move through the fourth quarter. Fourth quarter is going to be a very large quarter for us.

So again we're maintaining guidance for adjusted free cash flow due to the fact that profits are expected to be higher again in the fourth quarter and the prior year as we said, the accounts receivable balance has been eliminated. And we will run inventories down through the fourth quarter as we build the buses that have already been ordered, and as we prepare for several weeks of shutdown in October.

And then one last slide for me is net debt, leverage and liquidity. So, debt of $210 million as we said is up due to the $50 million term debt that was used to finance the tender offer and also the existence of $25 million on the revolver at the time of the close of the quarter. The net leverage ratio of 2.4 (sic) [2.6] is well below our covenant of -- oh, 2.6 I should say, sorry. I'm reading off an old schedule. 2.6 is well below our covenant of 4, so we're comfortable with that. And present liquidity of $97.2 million is quite acceptable for us.

So with that I'm going to hand you back to Phil Horlock who will describe the outlook for the fourth quarter and our guidance and wrap up prior to taking questions.

--------------------------------------------------------------------------------

Philip Horlock, Blue Bird Corporation - President, CEO & Director [5]

--------------------------------------------------------------------------------

Okay. Thanks, Phil. So let's now take a focus on the full-year fiscal 2019 outlook and our full-year guidance, and please turn to slide 15.

With recent industry running at 34,000 to 35,000 units, so we are at 30-year highs. And we do anticipate another strong year in fiscal 2019 with industry just around about the same level. As we have consistently said, our plants at fiscal 2019 and beyond focus on achieving significant gross margin and EBITDA margin improvement from three key areas. First, the impact of the cost recovery pricing that took effect in late fourth quarter of last year. This will have a full-year, full annual effect in fiscal 2019 and we saw significant benefit in the first half and third quarter. We'll see further benefits in the fourth quarter. And we priced another 2% across the board last month, and this will benefit fiscal 2020 in offsetting economics.

Second, the full-year impact of the transformational cost reductions implemented in the second half of fiscal 2018 and the continuation of those through 2019. Again, we saw the favorable impact in the first half and third quarter of fiscal 2019 and that will flow through obviously into the fourth quarter as well.

Now, the next phase of our transformational initiatives includes the impact of our new paint facility which also enables significant production line rearrangements and process improvements and will increase manufacturing efficiencies and improve quality particularly as we move into Fiscal 2020. So this is our significant initiative to impact margins next year.

And third, as we have been doing for several years, we will continue to pursue growth and maintain our leadership position in alternative fuels which command a superior margin and higher customer loyalty. A 53% mix of sales in the third quarter, there's a significant boost to selling price and gross margins.

Our financial targets for fiscal 2019 are on the glide path towards our previously-communicated EBITDA margin goal of at least 10% by fiscal 2020.

So let's now take a look at what all this means for the fourth quarter of this year, turning to Slide 16.

This slide shows the adjusted EBITDA walk from fourth quarter fiscal 2018 to our outlook for the fourth quarter of fiscal 2019. As Phil mentioned, we have virtually filled all of our available production slots in the fourth quarter so we have a really good handle on the margin and profit outlook for those vehicles. Remember, all those vehicles are firm orders with firm prices established, and they are non-cancelable.

So the outlook for fourth quarter fiscal '29 (sic) ['19] adjusted EBITDA is $34 million. This reflects the profit required to achieve the midpoint of our full-year guidance which is $83 million. As you can see, and not surprisingly, the walk is very similar to what we've been seeing throughout the year and it's consistent with our profit growth strategy. Higher pricing of $7 million compared with a year ago, again reflecting the pricing we took to offset tariff-led economics and the higher mix of alternative-fuel-powered buses. We took a further 2% pricing last month and the full impact of this will be seen next fiscal year. There's very little impact of this in July when all of our slots are basically full, and obviously we price-protect orders already in the system.

We also will see cost reductions of around $4 million resulting from our transformational initiatives, and volume is projected to be a little higher than a year ago resulting in a $2 million gain.

And then we continue to deal with higher economics, impacted by increased tariffs compared with a year ago. But all in all, our fourth quarter outlook reflects again, profitable growth in the next quarter and will be the highest fourth-quarter result in the past 12 years. And more importantly, this will be our fifth consecutive quarter of year-over-year profit growth.

We are confident in our strategies continuing to drive increased gross profit and EBITDA margins through our three actions we have consistently outlined both in today's earnings calls and prior earnings calls. One, annual industry pricing to cover economics. Two, relentless focus on cost reductions through our transformational initiatives. And three, increased mix of class-leading and exclusive alternative fuel buses, at higher margins than conventional fuel.

So let's now turn to Slide 17 to review our fiscal 2019 full-year guidance.

Based on our fiscal third quarter year-to-date results and the outlook for the remainder of the year we are reaffirming guidance on all three reported metrics. Net sales guidance between $990 million to $1.025 billion. Adjusted EBITDA guidance is between $80 million to $85 million, a significant $10 million to $15 million increase over fiscal 2018, as we focus on driving down cross, increasing unit revenue, and improving EBITDA margin. Adjusted free cash flow guidance is between $24 million to $28 million. Now, adjusted free cash flow continues to be a strong feature of our business model and typically represents more than 50% of our adjusted EBITDA.

Of course, our fiscal 2019 guidance for adjusted free cash flow is being impacted by the unique capital expenditure required to complete construction of our all-new paint facility.

Now, I should point you to the box on the right of this slide which shows the outlook for the fourth quarter based on the midpoint of our full-year guidance. As you can see, profitability is particularly strong with adjusted EBITDA margin imputed at around 10%.

So, in wrapping up, we had a very strong third quarter performance both operationally and financially. As I mentioned at the start of the call, the recurring theme that is driving our improvements today reflects higher bus pricing, substantial cost reductions, and alternative fuel leadership. We saw the positive impact of these benefits in the second quarter at our last earnings call and then again today in the third quarter, as we increased profitability by 20% despite the impact of higher tariff-led commodity costs and lower unit sales.

These actions are driving profit and margin improvement in fiscal 2019 with adjusted EBITDA projected to be 14% to 21% higher than fiscal 2018. Our plans and guidance support this and we expect to end the year having increased profitability in the last five consecutive quarters compared with a year ago. We'll continue to update you on our progress each quarter.

Well, that concludes our formal presentation. I will now hand you back to our moderator, Lisa, to begin the Q&A session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We'll go first to Eric Stine, Craig Hallum.

--------------------------------------------------------------------------------

Aaron Michael Spychalla, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Yes, hello, it's Aaron Spychalla on for Eric Stine. First for us, obviously congrats on the alternative fuel number. It's really impressive. One thing that caught my eye was just the Volkswagen settlement funding really kind of only beginning now. Can you just kind of talk about what the next steps are there, and when you expect those funds to start to be released?

--------------------------------------------------------------------------------

Philip Horlock, Blue Bird Corporation - President, CEO & Director [3]

--------------------------------------------------------------------------------

Yes. Aaron, I expect, like you saw on the slide, you probably saw that the total funds we're talking about for the transit and school bus business, $2.7 billion. Only $150 million have so far been released. And that said, the first phase has been quite tentative in terms of people figuring out where to put the money and how quickly to put it out there. But I think we can expect now, with 47 states having finalized their plans, over the course of the next year, particularly probably from October through the middle of next year, you'll see quite a few phases coming through and probably surpassing, certainly surpassing the amount of money that's been released so far. So I think we can all look confident to that -- those funds really supporting our industry outlook.

--------------------------------------------------------------------------------

Aaron Michael Spychalla, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

Maybe second for us, just on -- you kind of touched on it a little bit, but on purchasing. Can you just talk about what inning you are in, in that respect, and just what the next steps are there?

--------------------------------------------------------------------------------

Philip Horlock, Blue Bird Corporation - President, CEO & Director [5]

--------------------------------------------------------------------------------

Yes, I mean, I think we're probably about the fourth innings, really, of a baseball game. A British guy saying that is very confusing for most people, but we're probably on about the fourth innings of our baseball game. I mean, what we did -- you know, when we -- today we really work very hard on just looking at our current suppliers, commercial agreements, you know. We're recognizing we've increased volume for many of them over the years. We've grown business. So we renegotiate a lot of commercial agreements and we're able to get significant cost reductions. I think the next phase for us, which gets excited about, is opportunities to look at other markets. We have some significant sourcing studies going on right now and it's -- we want to make sure we can bring the best competitive costs with great quality into our business. So, and then you couple that with looking at design cost stack initiatives both with our supply base and internally, which obviously is a little longer runway to us. We see quite a good road ahead for us here. So I guess what I'm saying was, phase 1 was commercial. Now we're looking more at sourcing and then we start to turn to design. So we have a good set of phases here with our supply base.

--------------------------------------------------------------------------------

Aaron Michael Spychalla, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [6]

--------------------------------------------------------------------------------

All right, thanks for the color there. And then maybe just last for me, I saw a mention of significant new product and feature upgrades under development. Anything new that you can share on what those might be, anything on timing, etc.?

--------------------------------------------------------------------------------

Philip Horlock, Blue Bird Corporation - President, CEO & Director [7]

--------------------------------------------------------------------------------

No, not today. I mean obviously, we'd like to keep those confidential. But we will -- the first opportunity when we're ready to publicly declare, we'll certainly use this opportunity of an earnings call to tell you what we're doing. But we have some pretty exciting things in our product cycle planned that you'll be pleased to hear about as we go forward.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

(Operator Instructions) Gentlemen, at this time there are no further questions.

--------------------------------------------------------------------------------

Philip Horlock, Blue Bird Corporation - President, CEO & Director [9]

--------------------------------------------------------------------------------

Okay. Well, thank you, Lisa, and thanks to all of you for joining us on the call today. We do appreciate your continued interest in Blue Bird. And as you can see by our third quarter results and outlook for the year, we are focused on driving profitable growth and we intend to deliver on our commitments. And I believe are well-positioned for growth today and in the future. So please, contact our head of Investor Relations, Mark Benfield, should you have any follow-up questions. Our thanks again from all of us here at Blue Bird and have a great evening. Goodbye.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

And once again, that does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.