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

Thank you, Derek. Welcome to Blue Bird's fiscal fourth-quarter and full-year 2019 earnings conference call. The audio for our call is webcast live on blue-bird.com under the Investor Relations tab. You can access the supporting slides on our website by clicking on the presentation box on the IR landing page. The comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you'll hear from Blue Bird's president and CEO, Phil Horlock, and CFO Phil Tighe. Then we will take some questions. Phil?

Well, thanks, Mark. Well, good afternoon everybody, and thank you for joining us today for our fourth quarter and our full-year earnings call for fiscal 2019. We've made great progress this year at Blue Bird, as we strived to improve both overall profitability and margins. We always welcome this opportunity to share our latest quarterly and full-year results with you. So let's start with an overview of those financial results on Slide 4. As a subheadline says, we had a really strong fourth quarter. In fact, it was the highest in more than 10 years, with adjusted EBITDA of about $33 million. That was $4 million higher than a year ago, representing a 15% year-over-year increase. Importantly, this is our fifth consecutive quarter where profits increased over the prior year despite higher commodity costs. Before proceeding further, and as I mentioned in our prior earnings call, let me set the strategy that we are pursuing. Throughout this and future earnings calls, you will hear a recurring theme of how we're driving up overall profit and margin improvement through three key initiatives. First, the bus pricing that we took in late fiscal 2018 to address the escalation in tariff-led commodity costs resulted in a significant increase in an average bus selling price in fiscal 2019. Importantly, we plan to price each year to recover economic increases and did so again in July this year. Second, cost reductions that we are achieving through our transformational initiatives, we saw the results in the second half of fiscal 2018 and we continue to generate further cost savings in every quarter of fiscal 2019 and intend to do so going forward. And third, continued leadership and growth in alternative fuels. Increasing our mix of alternative fuel-powered buses as a percentage of total sales is key…

Well, thank you, Phil, and good afternoon, everyone. The next few slides are a summary of our financial performance for the fourth quarter and the full year of 2019. The material we're discussing today is based on the close of September 28, 2019, and September 29, 2018. The detailed material will be provided in our 10-K that will be filed tomorrow. We encourage all of you to read the 10-K and the important disclosures that it contains. In addition, the appendix attached to today's presentation deals with reconciliations between GAAP and non-GAAP measures mentioned in this review as well as important disclaimers that Mark Benfield has already talked to. Similar to our third quarter review, we have no new accounting pronouncements adopted in the fourth quarter, although as we have previously mentioned, we did adopt a number of new standards in the first quarter and they are discussed in detail on footnote 2 in the 10-K, which as I said will be available tomorrow. There were minor changes to -- you will note minor changes to some of the risk factors from the previously published 10-K. These are really just trying to keep the risk factors up to date, the latest conditions. Finally, I would suggest that -- we had a very important audit in fiscal-year '19. This was the first time that we did a fully integrated audit, controls-based, and we had come through with an unqualified audit. So I think this was an important achievement for Blue Bird first controls-based fully integrated audit. So now if we move to Slide number 10. This is a summary of the fourth quarter. You can see fourth quarter for fiscal '19 and fiscal '18 in a better/worse. Some of this -- much of this Phil has already touched upon. So I'll…

Okay. Thanks, Phil. So let's turn to Slide 17 and take a look first at our 2020 outlook. As the headline says, our outlook reflects a continuation of our margin growth plan that we've been lending over the last couple of years. Now the school bus industry is running about 34,000 units a year over the past two years, which are, I should remind you again, 30-year highs. We do anticipate another strong year in fiscal 2020, with industry just around the same level. As I've consistently stated, our plans for continued profit growth focus on achieving significant gross margin and EBITDA margin improvement from three key areas. First, annual cost recovery pricing. And price at late fiscal 2018 and again in July 2019, when we took a 2% price increase on all vehicles and options. At last, we'll have a full annual revenue impact in fiscal 2020 and it will, of course, be favorable. Second, continued transformational cost reductions. I explained earlier the various areas we're addressing as we expanded our processes, tools and our focus. We saw a significant favorable profit impact in both fiscal 2018 and fiscal 2019, and we expect significant benefits again in fiscal 2020 and beyond. Manufacturing efficiencies and quality improvements will be a key added area of focus in 2020 and beyond. And third, as we have been doing for several years, we're looking to pursue growth to maintain our leadership position in alternative fuels, which command a superior margin and higher customer loyalty, which is always good for business. Our financial targets for fiscal 2020 are on a glide path toward our previously communicated EBITDA margin goal of a run rate of at least 10% by the end of fiscal 2020. And we do expect the second half of 2020 to be…

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

Everyone, thanks for taking my questions. First off, I guess, I wanted to ask you about your expectations for unit sales and then revenue per unit in fiscal '20. Based on the guidance, it looks like we could see modest growth in both. So was wondering if I could just get a little bit more detail there. Are you expecting, I guess, a smaller price increase in 2020 than what we saw in 2019?

First of all, we don't actually issue guidance metric for volume, Justin, we don't. We give -- these are the three things I mentioned. We give the sales, we get profits and we give adjusted free cash flow. But I think when we look at the market, we're going to look at what the inflation has been, what economics in general at various indices have been and right about the same time frame, probably July time, we'll look at such in 2020 on pricing. That will be it, all depending on what the economics is that we're seeing out there in the industry. We'll make it industry base a specifically way to look at this. When I talked before about the growth in sales, you can see it goes from a fairly moderate number to probably about 3% over fiscal '19. And I think I mentioned that we're trying to just tell you that we are banking on a big volume surge. If we see opportunities, we're going to glance at them. But we aren't banking on that. Rather, we look at those three things, higher revenue per unit drives better margins, reducing cost drives better margins, and then finally, the increased mix of alternative fuels, which also improves better margins. And I should remind you that we've come a long way in our business over the last several years, and we have roughly about one-third of the market. That's our market share as we track it. So we're in a good position, but if we see opportunities, we're going to take them.

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

I think it should naturally, because I think we've got a lot momentum go on now. We've got the VW funds ahead of us. We've got a remarkable growth in propane. I'm very pleased with that. And I think we've -- certainly, our products are the -- they're the best in the market by a margin. That's why we're recognized for that. You look at fuel economy, you look at cost of ownership, we're the best in that. And obviously, we've got electric vehicles too that -- we're the only one of the major manufacturers present to offer that vehicle. So yes, again, we're not ready to put a mix number on that. I mean I don't think you asked me a year ago where we have grown 10 points of mix, that entity, as Phil just said, that looks a little rich. But heck, in the last half of the year, we were over 50%, and that for the first time ever, those alternative fuels overtook diesel in sales. So we're pretty bullish on the outlook, but we just don't -- I wouldn't want to put a number on that right now.

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

I'd say, well, certainly, in 2019, we saw a tremendous surge in propane. But you still saw, I think -- we were pretty close. The total sales of gasoline and propane were very similar. But you have to recognize the VW mitigation funds that are available, don't include gasoline. You can include your clean diesel. You can include propane, CNG and electric. So gasoline doesn't really get to look account benefit from those funds. Probably I've explained a little bit why we had a significant surge in 2019. Now those funds, only $150 million into a $600 million allocation for us -- bus industry. So I would think we can still expect to see propane doing very well, but I wouldn't discount gasoline. Gasoline in the plant is an easy pot for someone who's worried about new technology. Believe it or not, there still are customers out there who think propane is a new technology, and we have to educate them, train them, give them demo buses. Gasoline, though, is a really easy solution, right? Everyone drives gasoline cars, technology is simple. It's -- it can be easy to buy the fuel. Technicians love it. So I think -- I guess so what I'm telling you, I think we'll see continued growth in both really going forward. I mean I think there's a recognition. Those products are just great for the school bus industry. Now electric vehicles, I wouldn't discount that either. But I think it's always going to be tech electric vehicles with the price of them, it's whether are grants available. [Indiscernible] has been obviously the leader and with state grant support. The VW mitigation funds provide, again, funding for that. But of course, you can buy a lot more propane buses than you can buy electric buses with the same amount of money. So I think what we're seeing is people trying electric, because there are funds available. I think we're going to see growth in all of that. And I just believe we're in a good position to be there to capitalize on it.

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

Yes, hello. It's Aaron Spychalla on for Eric. Maybe first for us, on that Volkswagen funding, it sounds like we're still early in that process, and that's an important part as you kind of go after some of these conquest accounts. Can you just kind of talk a little bit about how you see that rolling out in fiscal '20 and the next couple of years? And then I did see on the slide, it kind of talked about $600 million. And I thought in the past, that was maybe closer to $3 billion. Just maybe can you give us some color there?

Yes. Well, the $3 billion, the $2.9 billion covers the entire gamut of transportation. So you're into transit buses, you're into school buses, you're into [indiscernible], you're into forklift trucks, you're into everything. Now when we say $600 million, that's specifically carved out for school buses. That's a guarantee. There's a lot of activity within the bounds that isn't called out for anything yet, still going to be sorted out. But a specific amount for school buses is $600 million. I think it's a good sign. I don't think of any other industry, as I recall, within that $2.9 billion settlement that actually have such a big carve-out. So there's still some work to do to decide where is that money going to go exactly. $150 million or so has sort of taken about 18 months, I'd say, to get there. I think the pace will pick up. But the interesting thing is that money -- and you've got 10 years to spend it and a minimum three years to actually spend it. So somewhere between 3 and 10 years, that funding will last. So I think we may have seen a quick surge when the money became available. Something similar may happen next year. They might tell us a little bit. But I think we're in a pretty good position. I will say that within that $150 million that went so far, we had a really nice a share of it. This is with our propane products. We've got a nice chunk of that allocated to Blue Bird products.

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

Yes. Well, again, we don't tend to give details with it, but I'll give you an example. On the capital expenditures, as we move into what we call design changes to try and drive productivity improvement, you're into that buying new tools, modifying tools, yes, expensive, that does take cash, it takes money. The things we're doing to the plant, where we did a lot of station modification rearrangements, that's real hard investment money you've got to spend. Now we're doing nothing, obviously, like the paint shop spending that we did over the last couple of years. That's a little bit of residual money left on that, but we'll take 2020 as well as we commission the -- commission that plant early in 2020, and we have to do some work on that. So I think when we look at the overall, the reason we're spending a little less cash flow is because we are investing in initiatives that will drive profitability. We are making sure that what we spend will increase profitability going forward for us. That's one point.

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

Well, for the full year, absolutely. But when you look at the first quarter, we launched that -- we actually launched that late in October. In fact, we took an extended shutdown in October to be able to do that. We did a lot of -- we took a -- during that shutdown period, we did a lot of concrete arrangements. As such, we actually delayed coming back into production compared with a year ago. So when you look at that first quarter, which for us is October-December, you've got Thanksgiving holidays, you've got extended plant shutdown, we've got the Christmas holiday, we shut down again there. There was a limited number of workdays. What I'm telling you is while we feel very good about the full year, we obviously [indiscernible] there. I think it's true to say, there might be a little bit less volume to plot in the fourth quarter, because we took an extended shutdown to ensure that when that paint shop lineup was up and running, it was running day 1 in painting buses. So there's a little less capacity available for us in the first quarter than we had last year. But obviously, we'll catch that up, no problem, not that we lost sales. We catch all that up back in the second and third and fourth quarters.

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

Thanks. Thank you.

Thank you. We have no additional questions in the queue at this time. [Operator Instructions] It does appear we have no further questions at this time. And I'd like to turn the conference back over to Mr. Phil Horlock for any additional or closing remarks.

Okay. Thanks, Derek, and thanks to all of you joining us on the call today. We do appreciate your continuous interest in Blue Bird. And I hope you can see by our fiscal 2019 results and our outlook for next year that we are entirely focused on total profit growth and margin growth. And we intend to deliver on our commitments. We're well positioned for growth today and in the future. So please don't hesitate to contact our Head of Profitability and Investor Relations, Mark Benfield, should you have any follow-up questions. Thanks again from all of us here at Blue Bird, and have a great evening.

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