Q3 2019 Earnings Call
Please standby.
Good day, ladies and gentlemen, and 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.
Thank you Lisa welcome to Bluebirds fiscal third quarter 2019 earnings conference call.
The audio for call is webcast live on Blue dashboard Dot com under the Investor Relations tab.
Good access 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 MACI.
Excuse me to 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.
Bluebird disclaims any obligation to update the information in this call.
This afternoon, you will hear from Bluebirds, President and CEO , Phil Boardwalk and CFO . Phil Type then we will take some questions.
So let's get started.
No.
Well, thanks, Mark well good afternoon, everybody and thank you all joining us today for our third quarter earnings call the fiscal 2019.
We have some great things going on at Blue, but today, we always welcome this opportunity to share all its quarters' results with you. So let's start with an overview of those financial results on slide four.
I suppose sideline say, 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.
Well I first want to set the scene. During this earnings call you'll hear a recurring theme of how we're driving our overall profit margin improvement through three distinct key initiatives.
First the bus Prosigna, we talked in late fiscal 2018 to address the escalation in tariffs, let commodity costs. This is resulting in significant increase in average selling price for us.
And that you will hear later that we plan to pricing to recover economic increases.
Second.
The cost reductions that we are achieving through our transformational initiatives. We saw the results in the second half of fiscal 2018, we continue to generate further cost savings in every quarter this year and going forward.
Good continued leadership and growth in alternative fuels, increasing our mix of alternative fuel powered bus buses as a percentage of total sales, what we own a superior sales price or 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 up 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 a sale until the unit is actually we see that the customer's location.
That occurred in early July and so we'll now be booked as fourth quarter sales.
Even though our unit sales were down the third quarter volume of 34, 3420 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 was our largest volume and profit quarter.
While third quarter net sales revenue of $309 million was down about $5 billion from a year ago. This decline of around 2% was much less than the decline in unit sales.
The low decline in sales revenue, mainly reflects 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 selling price was a substantial $6000 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 higher receivable. So fleet units delivered 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 trade working capital that will reverse itself in the fourth quarter.
69, nine cents adjusted diluted earnings per share was down 23% from Threeq.
Down 23 cents from a year ago.
It's important to note that this decline is more than explained by the non recurrence of onetime tax benefits. We received in the third quarter last year, Phil will provide more explanation a little later.
As we look at the underlying strength of the industry on Blue birds result, we remain upbeat about the business fundamentals.
With a stronger with the property values and corresponding property taxes, which are the major funding source for school buses together with the fact that 150000 school buses on the road today have been in service or more than 15 years and schoolchildren enrollments is increasing we are confident in the industry that will remain at around the 34 to 35000 unit Mark in fiscal 2019.
By the way, that's a near record level over the past 30 years and compares favorably with a 31000 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 Bluebird added outstanding 53% of our total unit sales. This is the first time that alternative fuel bus sales, but actually the diesel bus sales in a quarter.
This mix is 18 points higher than last year's 35% mix.
As the industry by a long way.
As a reminder, the alternative fuels, we count all of our propane compressed natural gas electric and gasoline powered buses as all of these are alternative 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 as I just mentioned, we have 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 has 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.
Third quarter gross profit margin of 13.5% was 1.2 points higher than our second quarter margin you recall that that margin was about two 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 bring a major product and feature upgrades to the market.
All in all Im very pleased with our third quarter results, we increased our gross profit margin through pricing cost reductions at a richer mix of alternative fuel buses and we expect continued gross margin improvement in the fourth quarter from these these actions and I'll be discussing that later.
Our results were in line with our expectations of support our full year guidance importantly, we're 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 five.
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 increases in the past two quarters and there was much more to come.
Our all new fully automated paint shop is operational and we have pending up to full busted a day as we tweak the system for optimum performance. The fancy buses look great and we're already seeing the quality and efficiency, but benefits we expected.
As I will show you later this is an important initiative to drive efficiency improvements throughout the plan in the coming years.
As I covered earlier, we increased our third quarter school bus selling price significantly by $6000 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 price alternative fuel buses.
I should also add that just last month on July the 15th we increased prices by 2% on all vehicles and options to address annual economic increases in material and labor.
We recall this is standard industry pricing necessary to cover economics each year.
Just yesterday, we announced publicly the launch of our all new and exclusive ex Partes brand.
Well, we will supply the most popular service and maintenance costs for all makes and models of school buses sold exclusively through our dealer network.
Next possible offer new and remanufactured parts priced very competitively, which meet or exceed the original supplies specifications.
At launch the X. Pos rains consists of engine and brake pads and the product portfolio, which will be expanded progressively to meet customers demands.
We and our dealers are excited about the growth prospects for this new initiative, which have 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 on 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.
Thats leadership and momentum in the fastest growing segment of the school bus market.
Remaining on the topic of alternative fuels, we are seeing very strong interest in our latest products are all new zero emission electric powered school bus, which is powered by a common 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 all one of only two school bus manufacturers to qualify for the recent California Energy Commission Electric School bus Grant funding with every blueberry Electric school bus eligible that's our Taipei type C and that will tie D. This is $75 million grant that provide significant subsidies battalions, California school districts to purchase electric private school bus is 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'll cover this in more detail towards the end of the call.
It's fair to say that we continue to advance the basis 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 six.
So many of these results earlier unfilled tower 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 shifted into the third quarter and already delivered and book to sales in the fourth quarter.
The 8% increase in average selling price was a partial offset to the volume shortfall.
Parts sales for the third quarter were up very slightly just a $100000 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 Pos sales will be in the fourth quarter with solid growth over last year.
Despite lower volume and the impact of higher steel at commodity prices adjusted EBITDA of $29 million was about $5 million higher than a year ago.
So, let's turn to slide seven and take a close look at our alternative fuel bus sales performance.
In each of our earnings call. 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 unit high unit sales in the third quarter, which were 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've seen alternative fuel bus sales surpassed diesel bus sales in the quarter and this is being led by our class leading propane powered division bus.
As I said earlier, our year to date volume alternative fuel school bus is booked are enough for them all that 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 own slowing down in this segment of the industry and know the school bus manufacturer comes close to our alternative fuel unit sales mix.
You might have an interest 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 have taken delivery of the first ever alternative fuel powered bus Bluebird bus. This is a strong endorsement of an exclusive alternative fuel buses, the bluebird 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 are seeing for the newest additions to our alternative fuel lineup.
Looking forward the vast majority of the VW mitigation funding is still ahead of us anticipated a stronger industrial the next three years or so with many states earmarking specific funds for school bus purchases.
In addition, as mentioned earlier all of electric powered bus is qualified to participate in the California, California Energy Commission Grant funding, which should enable school districts to purchase around 230 electric buses over the next two years.
With the ride this range of alternative fuel powered buses the most modern improve and engine in the industry, which is exclusive to blue bloods through our partnership with for the Rush clean Tech 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 Inox gas is a major criteria in funding through the VW settlement.
So this point on new ultra low Nox propane buses certified at 110th of the Nox emissions output of other manufacturers bus buses and the EPA standards 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 Bluebird propane the lowest operating cost and the lowest nox emissions of any internal combustion engine in school bus.
Our growing number of customers understand this and sales are up and we know something to see Bluebird propane sales utilizing the first phases of the VW settlement funding in states, where aggressive being release I am very pleased with our performance to date and 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 and readily understood by technicians and mechanics.
Truly appreciate admissions simplicity and cold weather stock capability. It shares with propane and also has a lower price point than diesel. So really works for those customers were acquisition price is a key concern.
Now with our year to date bookings and order backlog for alternative fuel bus is 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 5300 units. That's an increase of 500 units from the prior earnings call.
So this will be another record sales year for bluebirds alternative fuel powered school buses.
Let's now take a closer look at how we're driving cost reductions throughout bluebird turning to slide eight.
We first showed this slide at our second quarter earnings call to provide more color and texture on how we are driving down total cost throughout the company.
We began last year with the results achieved primarily in the second half of fiscal 2018, you might recall that our profits last year included the gain over fiscal 2017 of $26.5 million the cost reduction actions, which more than offset the impact of escalating steel cost and other commodities in 2018.
In fact these actions as depicted in the top of the slide one 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 selected design changes we worked extensively with external automotive experts to ensure best practices and processes were applied and we delivered results.
We continue to pursue these initiatives today and the results are will be evident in our third quarter cost savings and will continue to drive further additional savings throughout this drug 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 would increase from this time capability to reduce labor material costs through robotic application of pain to achieve savings in warranty expense and to deliver higher straight time capacity now same is a largely barrel realized in fiscal 2020 as full production ramp up of the pains show begins in October this year.
But importantly, with the new paint facility attached to the exterior of our present Assembly building, we're freeing up space within the plan to allow more efficient line rearrangements of tasks and stations.
The addition of several stations for more efficient operations and improve quality control.
We have deployed industrial engineering resources to optimize in station work flow in the newly arrange 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 our plan over the coming years.
This systemic approach to driving down total cost over multiple years is key to us delivering higher gross profits and higher EBITDA margins will continue to share the results with you in our quarterly earnings calls.
Let me now turn it over to Phil Tide will take you through the financials and I'll be back later to cover the fiscal 29, 2019 outlook and guidance over to Phil.
Thank you Phil and good afternoon, everyone.
The next few slides or a summary of our financial performance for the third quarter fiscal 19, I would remind you that.
Today, we're discussing data that based on the close of June when he died ability for that.
Fiscal delighted.
At June 30, Eighteight through yet.
Detailed material will be availability to 10-Q, which we will file tomorrow.
We encourage you to read the 10-Q and the disclosures that it needs.
There is some appendix material attached to today's presentation of the that deals with reconciliations between GAAP and non-GAAP measures that our beach. This review. In addition, there are some important disclaimer as already mentioned by Buck.
There were no new accounting pronouncements adopted in the third quarter of fiscal year to date.
Although as previously mentioned, we did adopt to Debra you stated in the first quarter as I discussed in the 10-Q.
Two.
You'd be able to see that when it comes out tomorrow.
Also included in the Q that was published for the second quarter results.
Those pronouncements included revenue leases pages and pages cash flow and the total uses software.
There were no changes to risk factors from the previously published published 10-K.
So now I will turn to slides have attained.
This is a summary of the third quarter, but for fiscal year to date.
Fiscal year 18.
Phil has mentioned a lot of this data for you so our work.
Laboriously take you through every Lloyd.
Just try to add a few.
Few insights for you.
You can see the unit volume at the top of the fact that it's about 326 units below.
Last year.
I would point out that this week, we closed the gap orders for the balance so.
Fiscal year to date for the fourth quarter.
And based on what we see today.
These will support clearly support the the guidance that weve given.
So thats.
They do a strong year for us.
We turn to revenue.
You can see the the fact that net revenue was down.
The volume impact to the revenue was at that 26 billion.
Yes, we as you could see below the debt revenue Lloyd the bus revenue per unit was up by about $6000. So the higher revenue per unit sold a school bus was worth about 20 billion. So they offset for that of about just over $5 billion reduction, but I think the highest revenue is very encouraging.
We have been able to make that price increases hold and I think the team is doing a good job with the.
The the stronger mix of alternative fuel boxes.
As well as well as a number of other revenue factors that would they work.
Gross margin.
With that 170 basis points versus a year ago and again. This is this is.
A combination of both revenue and the results of their transformational cost initiatives.
That that cost initiatives ongoing and we will continue to see results as.
Forward, all that I would point out that the gross margin for June 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.
Brief bridge that talks about the movement is EBITDA from 2000.
88 to 2019.
I will point out to you that on a year to date basis again, adjusted EBITDA was roughly 48, and a half million thats up 17% or about 7.2 billion versus last year and in line with where we need to be to achieve guidance.
The EBITDA margin improved to 9.4%.
For the third quarter versus 7.7% last year.
And again, we as we previously stated we have improved the margins versus the same quarter last year the prior four quarters.
That's a nice trend to be audited, we hope to continue.
The year to date margin was seven.
2% or 120 basis points better than last year.
The third quarter at area code was $40.6 million.
And that was down 7.3 billion compared to third quarter of fiscal year 18.
However, the third quarter of fiscal year Eighteight benefited from the release of uncertain tax position with about $8 billion.
And that is also probably a little detail either acute.
So.
The the benefit that 18 head.
More than accounted for the deterioration year over year.
Again on a year to date basis medical was 12.7 million or 3.2 million lower than the prior year that 3.2 was more than accounted for by the.
The tax position.
Diluted earnings per share again.
You can see there.
At 55 cents it was 22 cents lower than last year and.
The.
The absence of the.
Of the benefit that we received in fiscal year to date was worth about 28 cents, which more that accounts for the deterioration.
Finally, our cash.
At $29 million was about.
20 at 12.9 million lower than last year the reduction in the cash at the end of the third quarter was fully explained by about an $8 million increase in accounts receivable due to a large fleet contract, which had payment terms that ended in July we have subsequently receive that cash.
And so that.
That receivable balance has stated.
Has been eliminated.
Dan at 210.6 was up 64.6 million, including incremental debt raised October of last year to fund the $50 billion tender offer as well as at $25 million of borrowings on the revolver, we fully expect that all of the borrowings on the revolver will be eliminated eliminated during the fourth quarter.
If we quickly go to the next slide which is very good.
This this slide as you say walks from third quarter two.
Fiscal year 80 to 90.
The key takeaway items are.
Pricing actions in the fourth quarter of 18.
Lots are largely offset steel and other commodity costs and all.
So.
Favorable.
The impact of.
Number of items, including a higher mix of propane.
Resulted in favorable pricing.
$12 million that that was a great achievement for the quarter transformational cost initiatives again.
Kebede at $5 higher year over year, and the you too.
Reduce their cost of production.
Volume and mix was down about 2 million based on the 396 units.
396 units would have driven a higher number but we did have favorable favorable on the mix effects. In this that was limited to $2 million and that of course.
We do continue to to see.
Commodity and other cost increases the market added.
That was worth about $10 million.
As Phil has already mentioned, we do that we do to down to 2% price increase in the middle of July .
Which.
Double one will help offset the.
All these increases included did that to be the too big to the port pricing going forward with where we have to manage.
The recovery of cost increases through pricing.
If we quickly moved to the next slide.
You can see here the free cash flow.
At first half third quarter adjusted free cash flow was $4 billion. This was $32 million low lower than fiscal year 80 days.
The result is more than accounted for by higher trade working capital.
Including the the higher accounts receivable that we talk to that.
Hi, a couple of slides back due to.
Fleet style and again that cash has already been received and secondly inventories were up.
They are up really for two reasons. One is we are stockpiling.
So materially due to a bottle changes that will occur.
During fiscal year 2020, and we are we are.
And we were building inventory.
In advance of the high production levels that will be we will be.
We will be experiencing as we move through the fourth quarter.
Fourth quarter is going to be very logical for us.
So good we're maintaining guidance for adjusted free cash flow do due to the fact that profits are expected to be higher in the fourth quarter.
The prior year as we said the accounts receivable balance has base.
Eliminated.
And we will run the inventories down through the fourth quarter as we build the buses that have already been audited.
And as we prepare for several weeks shutdown.
Total.
And then one last slide will be is.
Is.
Debt leverage and liquidity side debt of 210 million as we said is off due to the.
Due to the $50 million term debt that was used to fund its tender offer and also the existence of.
25 million over the resolve.
At the top of the closed.
Good quarter.
The net leverage ratio of 2.4 is well below our covenant of.
Our 2.6, I should say, sorry, reading off and on schedule 2.6 is well below our covenant of four.
So were comfortable with that and.
At present liquidity of $97.2 million.
These quite acceptable for us.
So with that.
When you back to fill whole ARPU described the outlook for the fourth quarter and have guided said ramp up prior to taking questions.
Okay. 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 to 35000 units. So we are a 30 year highs and we do anticipate another strong year in fiscal 29 team within this year just to run about the same level.
As we have consistently said our plan for fiscal 2019, and beyond folks and 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 price another 2% across the board last month, and this will benefit fiscal 2020 in offsetting economics.
Second the full year impacted 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 fiscal 2019, and that will flow through obviously into the fourth quarter as well.
Now the next phase of our transformation initiatives includes the impact of our new paint facility, which also enable significant production line rearrangements on process improvements and will increase manufacturing efficiencies and improved quality, particularly as we move into fiscal 2020 . So this is a significant a significant initiative to impact margins next year.
And third as we have been doing to 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.
53% mix of sales in the third quarter. This is 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 physical 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 adjusted EBITDA walk from fourth quarter fiscal 2018 to our outlook for the fourth quarter fiscal 2019, as Phil mentioned, we have virtually fill all of our available production slots for the fourth quarter. So we have a really good handle on the margin and profit outlook for those vehicles remember all those vehicles affirm orders with firm prices established on the non cancelable.
So the outlook for fourth quarter fiscal 20, non 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 a not surprisingly the walk is very similar to what we've been seeing throughout the year and is consistent with our profit growth strategy.
Higher pricing, a $7 million compared with the year ago again, reflecting the pricing we took to offset tariffs, let economics and a higher mix of alternative fuel powered buses. We took a further 2% pricing last month on the full impact of this will be seen next fiscal year, that's very little impact of this in July when all of our slots are basically fall and obviously, we price protect all it is already in the system.
We also will see cost reductions of around $4 million, resulting from our transformational initiatives.
And volume and forget to be a little higher than a year ago, resulting in a 2 million dollar gain.
And then we continue to deal with higher economics impacted by increased Harris compared with a year ago.
But all in all our fourth quarter outlook reflects again profitable growth in the next quarter. However, 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 have confidence in our strategy to continue to drive increased gross profit and EBITDA margins through the three options. We have consistently outlined both in todays earnings calls on prior earnings calls one annual industry pricing to cover economics.
Through 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 to between $190 million to $1.025 billion.
Adjusted EBITDA guidance to between $80 million to $85 million significant $10 million to $50 million increase over fiscal 2018, as we focus on driving down costs, increasing unit revenue and improving EBITDA margin.
Adjusted free cash flow guidance is between 20 $428 million to $28 million now adjusted free cash flow continues to be a strong feature 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 expenditures 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 the start of the call. The recurring theme that is driving our improvements to that reflects higher bus pricing substantial cost reductions and alternative fuel leadership.
We saw the positive impact is these benefits in the second quarter at our last earnings call and then again today in the third quarter as we increase profitability by 20%. Despite the impact of higher tariffs, let commodity costs and lower unit sales.
These actions are driving profit and margin improvement in fiscal 2019, with adjusted EBITDA forgets to be 14% to 21% higher than fiscal 2018.
Our plans and guidance support this and we expect to end the year haven't 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 concludes our formal presentation I'll now hand, you back to our moderator Lisa to begin the Q and a session.
Thank you and ladies and gentlemen, if we have a question. Please press star one on your telephone keypad.
If you're using a speaker phone. Please make sure your mute button is turned off to allow your signal to reach our equipment.
Once again, everyone Star one if you have a question.
We'll go first to Eric Stine, Craig Hallum.
Yes, Hello, it's Aaron Spychalla on for Eric Stine, Thanks for taking the questions.
Hi, Eric.
First for US obviously, congrats on the alternative fuel number it's really impressive one thing that caught my eye was just a Volkswagen settlement funding really cannot only beginning now can you just kind of talk about what what the next steps.
Are there and when you expect those funds to start to be released.
Yes, yes, sorry, now I expect like at least on the slide you probably saw that.
Yes. The total funds are talking about for the transit in school bus business $2.7 billion only $150 million sold off all been released.
And then I'd say the first fed been quite tentative in terms of fig of people figuring out where to put the money and how quick to put it out there, but I think we can expect now is 47 states have been finalized the 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 publish surpassing certainly surpassing the mouth among its been really so far. So I think we can all look confident to that those funds really supporting our industry outlook.
All right and then.
Maybe second for Us just on.
If 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.
Yes, I mean, I think we're probably about four things really have a baseball game, but the Brits British Guy, saying that is very confusing to most people, but we're probably only by the fall settings about baseball game I mean, what we did when we see them today, we really worked very hard on just looking at our current suppliers commercial agreements.
Recognizing we've increased volume for many of them over the years, we've grown business. So we really go slower commercial agreements and were able to get significant cost reductions I think the next phase Faros, which gets excited about these opportunities to look at other markets.
We have some significant sourcing studies going on right now and its a.
We want to make sure we can bring the best competitive cost with great quality into all onto our business. So and then you couple that with that looking at design cost stack initiatives, both with our supply base on internally, which helps a little longer runway to us we see we see quite a good road ahead for US here. So I guess, what I'm, saying is phase one was commercial and that will occur more in sourcing and then we start to turn to design. So we have a good good set of phases here with our supply base.
Alright, 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 et cetera.
No we don't know it today I mean, obviously, we keep those confidential, but we will have the first opportunity when we're ready to publicly declare will with solid news is opportune to it as an earnings call to tell you what we're doing but we have some pretty exciting things in our product cycle plan that will be really pleased to hear about as we go forward.
All right sounds good we'll stay tuned thanks for taking the questions.
You bet. Thanks Aaron.
Once again, ladies and gentlemen, please press star one on your telephone keypad. If you have a question, we'll pause for just a moment.
Gentlemen at this time there are no further questions.
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 Bluebird.
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 we are well positioned for growth today and in the future.
So please don't hesitate to contact our head of Investor Relations, Marc Banfield should ever should you have any follow up questions. Thanks again from all of US here, a bluebird and have a great evening bye.
And once again that does conclude today's conference I would like to thank you all for your participation you may now disconnect.