Stand by. Good day, everyone, welcome to the Blue Bird Corporation Fiscal 2018 Third Quarter Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Mark Benfield, Director of Investor Relations. Please go ahead, sir.
Thank you, Yolanda. Welcome to Blue Bird's Fiscal Third Quarter 2018 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, Bill Tai. We'll take some questions. Phil?
Well, thanks, Mark. Welcome everyone for joining us, thanks for calling in today for the third quarter earnings call for fiscal 2018. We welcome this opportunity to share our latest quarter results with you, let's start with an overview of our financial results on slide four. Let me begin with a comment on the industry outlook. We still expect new bus sales to be flat to slightly higher than last year and should again exceed 35,000 new buses. This is strong demand and would be the second highest school bus industry since 1985, which is helping us at the beginning right now. For Blue Bird, we achieved strong sales results in the third quarter with almost 3,750 buses sold, which is only about 100 units below last year's record sales for a third quarter looking back over a decade. A very strong unit sales quarter for us.
Additionally, it represented a substantial 53% increase over this year's second quarter unit sales. For the first nine months of the year, unit sales are up a little over 2% from last year. Importantly, in the third quarter, almost 20% of our end customers were new to the Blue Bird brand, representing about 30% of our total sales. That's a really strong endorsement of our products and dealers with gasoline and diesel-powered buses leading the way in conquest business. At $340 million, third quarter net sales revenue was 6% below last year's level, reflecting the lower volume and mix change I just mentioned, led by higher gasoline and diesel bus mix this year, priced a little lower than the average. At $23.7 million, third quarter adjusted EBITDA was $9.2 million below last year.
We mentioned on our prior earnings call that we were experiencing significant headwinds in commodity costs, led by escalating steel prices related to the tariffs imposed by our government, which were not anticipated earlier in the year. As you are no doubt aware, other automotive manufacturing industries have been similarly impacted by higher steel prices, which, together with higher freight costs, will help explain our lower third quarter profits compared with last year. It's important to note, however, that we've taken specific action to offset this issue going forward, and I will discuss the specifics of this just a little later. Adjusted net income and Adjusted diluted earnings per share were both higher than the same period a year ago. On a GAAP basis, net income and diluted earnings per share also improved from a year ago.
Adjusted free cash flow for the quarter was strong at $36 million, which is $22 million higher than the same period last year. Looking ahead, our production schedule is now full through fiscal 2018, so we have a solid line of sight to our full quarter sales and margins, and our backlog of firm orders for fiscal 2019 is up over 50% from this time last year. We are projecting double-digit growth once again in alternative fuel-powered bus sales, with a record sales mix at nearly 40% of our total unit sales. That's up from the prior record of 34% last year, another strong year for the industry's best-selling alternative fuel-powered school bus.
As a reminder, in alternative fuels, we count all of our propane, compressed natural gas, gasoline, and our all new electric-powered buses, as all of these are alternatives to diesel, which has been a staple fuel for years. For the last several years, we've been achieving significant growth in alternative fuel bus sales, and as I just discussed, we have not slowed down this year. I mentioned earlier, we have taken specific action to address the unexpected and sudden steel price escalation that's impacted us this quarter. Let me cover these now. First, we increased prices on all of our bus models in June to cover the higher cost of steel. Now, there is a lag before this takes full effect, however, as our order backlog is price protected, and quotes for new business, which represent our pipeline for future orders, are guaranteed for 90 days.
Our ability to offset the third quarter steel cost increases within the quarter was limited. Consequently, the impact of our cost recovery pricing action won't be seen until late in the fourth quarter and of course, will apply fully to fiscal 2019. Second, as communicated previously, we are well underway on the transformational initiatives we kicked off in the first quarter, which are focused on accelerating our margin growth. While we've made significant progress on reducing procurement costs, we will see these margin improvements taking hold in the fourth quarter. Importantly, fiscal 2019 will benefit substantially from the full-year flow-through of these actions. I will touch on this again later in the outlook section of the presentation. As a result of the sudden adverse impact of economics on third-quarter earnings, we are lowering our full-year guidance.
We do expect to restore profitability and margins in the fourth quarter and beyond as we see the improvements from our price and cost reduction actions taking effect. Let me now review our year-to-date key operating achievements on slide five. Here we call the number of significant achievements that each one will make us more competitive and support our profitable growth going forward. I'm excited to report that we recently achieved EPA and CARB certification of our class-leading propane bus at a NOx emissions level of 0.02 grams per brake horsepower hour. We already were the market leader at 0.04 grams of NOx emissions. The best just got better. This means our propane engine emits just one tenth of the NOx level that our competitors offer. That's great news for our customers, but even better news for the children who ride our buses and for their parents.
With the broadest range of low emissions vehicles in the market, including our zero emission Type C and Type D electric-powered bus, we continue to be the undisputed leader in the fastest-growing segment of the business. Speaking of electric buses, our production Type D electric bus rolled off the line last week and delivered to a customer this quarter. As a reminder, we are the only nationwide school bus manufacturer today that offers electric-powered school buses in Type C and Type D configurations. We've had a great customer response to our more than 20 ride and drives across the country. Great feedback from our customers. Construction is well underway for our all-new automated paint shop, with pilot runs and validation scheduled for this fall. This is a key initiative for efficiency improvements next year.
As I mentioned earlier, we priced to recover the recent tariff-related escalation of steel costs prices, this will take hold late in the fourth quarter and fully apply in fiscal 2019. Turning to orders. Our fiscal 2018 bookings and total order backlog, sorry, which includes fiscal 2019 orders, are up 4% from a year ago, which is a strong position to be in against a relatively flat industry outlook. Our fourth quarter production slots are now full with non-cancelable orders. Importantly, our alternative fuel bus deliveries for fiscal 2018 and backlog are up 16% from the same time last year. That's another substantial growth in alternative fuels for Blue Bird, and we anticipate that nearly 40% of our bus sales this year will be powered by alternative fueled engines.
Just a few years ago, that was less than 5%, which shows what a way we've come here with almost 40% now being non-diesel engines that Blue Bird sells. Talking with industry experts, our transformational plans to improve margins are on track, driving improvements in quality, cost efficiencies, and capacity. We expect significant cost savings and margin growth in the fourth quarter and beyond, supporting our plan to continue margin growth towards our 10% EBITDA margin objective. We are reducing full-year guidance as an outcome of our third quarter results and the impact of the sudden escalation of steel prices and other commodities. Despite these headwinds, however, we're expected to recover in the fourth quarter. Fiscal 2018 adjusted EBITDA guidance is slightly higher than last year's results. Now let's take a closer look at our second quarter financial results on slide six.
I touched on many of these financial results earlier. (Phil Horlock) will run through these in detail later on. Just to summarize the third quarter, total net sales on adjusted EBITDA were down as we were about 100 units lower than the record third quarter volume of last year, and we had a higher mix of gasoline and diesel-powered Type C buses. Of course, steel economics hit us hard in the third quarter, with little ability to offset the cost impact within the quarter. Parts sales were up a strong 9% in the third quarter as we added new parts to our product range, and we saw increased sales through our franchise dealer channel. For the first nine months of the year, total net sales were up $15.4 million, while adjusted EBITDA was down by $4.4 million, more than explained by the third quarter decline.
Turning now to slide seven. Let's take a closer look at our alternative fuel bus sales performance. As the chart on the left shows, we are well on our way to achieving a new full-year sales record of around 4,500 alternative fuel-powered school buses. That's a 16% increase over last year. As I mentioned earlier, we expect the mix of these buses to be nearly 40% of our total sales, up from 34% last year. We continue to be the clear leader in the fastest growing school bus segment, with our market share now running at about 80% and certainly over that in certain parts of the country. We now have more than 17,000 alternative fuel-powered school buses on the road, and with less than 15% of school districts still having purchased an alternative fuel-powered bus, we are well positioned for future growth.
We offer the widest range of alternative fuel-powered buses and the most modern and proven engine in the industry. With our exclusive long-term partnership with Ford ROUSH CleanTech across all alternative fueled engines, it makes it easy for customers to grow their alternative fuel fleet with Blue Bird. With the same engine architecture, transmission, and service requirements across all three products, propane, compressed natural gas, and gasoline, it's an easy move for a school district or a fleet operator. Propane is widely recognized as having the lowest total cost of ownership in the market and is a green engine. Our latest EPA and CARB certification for emitting nitrogen oxides, or NOx emissions, at 0.02 grams per brake horsepower hour is one-tenth of other manufacturers' buses. I want to repeat that. That is one-tenth of the other manufacturers' emission level.
These gases contribute to the formation of acid rain and smog. The best-in-class level of NOx is another great reason to choosing Blue Bird propane. Despite our growth, in the past few months, we have seen some customers elected to push their propane purchases to fiscal 2019 in anticipation of receiving funding from the Volkswagen Clean Air Act Settlement fund late this calendar year. That fund targets the replacement of old diesel buses with new school buses that emit low levels of NOx emissions. Our propane, compressed natural gas, electric-powered buses are perfect choices to utilize these funds. No one is in the position we are to capitalize on utilizing them. Our gasoline engine is readily understood by technicians and mechanics, who really appreciate emission simplicity and cold weather start capability it shares with propane.
It also has a low price point in diesel, really works for those customers where acquisition price is a key concern, and sales are running extremely strong this year. We are taking orders for our all-new Type C and Type D electric buses for deliveries beginning this quarter. As we look forward to next year and beyond, with the broadest range of the cleanest low NOx school buses in the industry, 8 times more alternative fuel-powered buses on the road than all of our competitors combined, and still less than 15% of customers having tried an alternative fuel-powered school bus, Blue Bird is in a very strong position. Let me now turn it over to Phil Horlock, who will take you through the financials, and I will be back later to cover the fiscal 2018 outlook and guidance and a first look at fiscal 2019. Over to you, Phil.
Thank you, Phil. Good afternoon, everyone. The next few slides are a summary of our financial performance for the third quarter. Phil has already hit some of the highlights for you, and we will spend a little bit of time listening to Phil. Additional information is available in the appendix, including key reconciliation between GAAP and non-GAAP measures, as well as important disclaimers. Detailed material is available in our 10-Q, which has been filed. We encourage you to read the 10-Q and the important disclosures it contains. The material we are discussing today is based on the close as of June 30, 2018, for the 2018 fiscal year, and July 1, 2017, for fiscal year 2017. I would point out there are no significant changes in our fiscal accounting policies in the period, and risk factors are unchanged from the previously filed 10-K.
Let's now take a look at a summary of results shown on slide nine. This slide summarizes our actual results for the third quarter and the same period of 2017. We also included second quarter of fiscal year 2018 results, as we believe there are some important points that you can draw from that and the importance of seasonality in our business and to highlight progress in some key areas. Looking at volume for the third quarter, Phil has already talked about this, 3,746 units. We are down 100 units versus the record volume achieved in 2017. We have talked previously about the highly seasonal nature of the school bus business and the fact that generally production and sales in the first half is less than 40% of the full year.
You can see the growth in volume from second quarter to third quarter of over 1,300 units. We expect volumes in the fourth quarter will be similar to the level achieved in the third and higher than the fourth quarter period last year. Alternative fuel vehicles, as Phil mentioned, accounted for about 35% of our third quarter volume, and we are looking at about 40% alternative fuel for the full year. We also are very happy to be announcing that we will be making delivery of our first electric buses in the fourth quarter. Net revenue, as mentioned on the prior slide, is down by about $8 million, or 6%. The revenue decline is really attributable to two factors. One is the lower volume, which is a substantial part of the decline.
The other is a per unit revenue decline, which is primarily due to changes in the mix of products sold. We had a very strong quarter with gasoline buses. This is our lowest priced bus in the market and a great bus for people who are very acquisition price-minded. We also were very strong in the Type C diesel bus market in the third quarter, and that also contributed to a lower average revenue. Gross margin is another thing I would like to point to. It was 11.8% this quarter. It was down about 1.7 points below last year. Importantly, it was up by almost 2 points versus the second quarter, where we hit 10%. You can see we are improving in the second quarter and the third quarter versus second quarter, and we'll see further improvement in the fourth quarter.
The commodity costs, as Phil has talked about, were the majority of the reasons for the reductions in margin. Our cold-rolled steel prices, and the majority of the steel we buy is cold roll, were up about 27% versus the second half of the prior year. While we are beginning to see some reduction in the long-term outlook, steel continues to be a major factor in our profits for the balance of 2018. In addition to commodity costs, we continue to experience higher inbound freight costs, something that we discussed in our prior two reports. The higher freight costs are due to diesel, which is up substantially, and a shortage of drivers. Freight costs in total are up about 29% compared to the same time last year. Material and freight economics combined deteriorated, caused Blue Bird's margin base almost 2 points in the third quarter.
Absent this impact on the margin ratio, it's about the same as last year. As Phil has discussed, we're working on a broad range of actions to reduce our production costs and improve ongoing margins. These plans are unchanged. We're sticking with them, and they are starting to deliver what we had predicted they would. You'll see some impact coming in the fourth quarter and a significant improvement in fiscal year 2019. In late June, again, we implemented pricing to help offset these cost increases that we had experienced. We will not see a major contribution of that pricing to our profits until fiscal year 2019, as Phil explained, due to the way the prices are locked in for firm orders in advance of production. As previously discussed, the initial benefits from our operational transformation initiative provided a small offset to margin reductions in the first half.
We continued to make progress in the third quarter, and we expect the initiatives to have a more substantial impact on margins in fourth quarter and beyond. Net income, I think we've already covered, but it's at $21.9 million. That was about $1.9 million better than last year, despite the lower EBITDA. Adjusted to diluted earnings per share at $0.91, was up by $0.21 versus last year. Favorable tax treatments were the primary driver in the net income result, offsetting the reductions in gross profit driven by lower volumes and higher costs. We'll talk about adjusted EBITDA margin on the next slide. Cash, always important. We closed the quarter with $41.9 million of cash. This was down by $8 million versus the prior year, and that was more than accounted for by CapEx spending in the relevant period to support upgrades to our production facility.
You've heard previously that we are putting in new paint shops and doing other things in the plant. Debt was reduced by $7 million in the period. Really the change in net debt was about $1 million for the quarter. Please note the large increase in cash between the second quarter of 2018 and the third quarter of 2018, again, pointing out the seasonality that we experience in this business. If you go to the next slide, this is a bridge that walks from third quarter of fiscal year 2017 to the same period in fiscal year 2018 on an adjusted EBITDA basis. You can see the deterioration of about $9 million compared to last year and the two big items that caused that. Bus volume and mix obviously was down due to the 100 less units and also the higher mix of Type C diesel buses.
Gross profit was also down by about $6 million, and this is all attributed to higher material costs and freight. Rapid increase in the material and freight economics in the third quarter were really responsible for us not achieving a substantially better result. As you can see, there were no other really major concerns in the third quarter for us. We're taking aggressive actions to offset as much of the impact of higher costs as we can in the balance of the year, although it is clear the full offset is not going to be achieved in 2019. The next slide 11, is a brief graphic of what's happened with steel and with freight. You can see hot roll is actually up about 65%, cold roll up about 27%, and then freight around 29%.
I would point out that it appears that hot roll, we may start to see some downward turns. The 12-month forward prices for net Midwest hot roll steel is showing a reduction of about $150 a ton about 12 months out. This is a promising indicator, although there's still a lot of uncertainty, and I don't think we can actually bank on that at the moment. Again, I'll just summarize, we're taking really three significant actions. As Phil mentioned, we've already implemented pricing in June. We will see a small impact of that in the fourth quarter, but it will substantially impact in fiscal year 2019. In our fiscal year 2019. We are also working out whatever levers we can pull to resource lower cost areas or suppliers, and taking other actions to generally improve our cost structure.
Obviously, we are full steam ahead on our transformational initiatives program, and considering some expansions to its scope at the time. With respect to freight, we are working with our logistics suppliers to identify less expensive options, although it will be difficult to offset the magnitude of this increase without a reduction in fuel prices or more capacity being added to key routes. On the next slide, which is slide 12, we talk to an outlook for the fourth quarter 2017 to the fourth quarter of 2018. This is not something that we typically provide in our calls. We thought for obvious reasons, given that we've only got three months to go, it was something that would be useful. Please don't read this as an indication that we're committing to regularly update on one quarter out projections.
As you can see, we project the fourth quarter will be around $7 million better than last year. Volume and parts will be up, and mix does not seem to be a problem for us. I would remind you that right now we have total visibility to our bookings and backlog for the balance of this year. We have a fairly firm hand on that. You can see the impact of economics. It continues to hit us recently hard in the fourth quarter. We're looking at about $7 million year-over-year. Finally, you see that we have a large number called All Other. That is a lot of cost efficiencies that we've been taking to reduce costs and maintain profits, at least at a bit above last year.
Also, obviously, it does include the fourth quarter outlook for our transformational initiative, which is starting to take serious hold. I guess importantly, if you took out the economics or the unexpected part of the economics, our fourth quarter would be looking much closer to $40 million than $30 million, which would have been a great result for Blue Bird. I'll move now to the next slide, which is slide 13, which is free cash flow. We had a strong quarter for free cash flow at $31.5 million for free cash flow and $35.7 million for adjusted free cash flow. The lower adjusted EBITDA and higher CapEx were more than offset by favorable trade working capital and other expenses.
Our strength in cash generation continues to allow us to support the substantial changes we're making to achieve our long-term profit targets and create even greater value for our shareholders. The final slide from me is one that looks at net debt, liquidity, and leverage. Net debt at the end of the third quarter stood at $103.9 million, including $31.9 million in cash. This is about $32 million better than the result at the end of the second quarter. Net leverage ratio of 1.9, a substantial below the required level of 3.75. Facility stood at $110 million, $31.6 million better than the end of the second quarter. There were no drawings from the revolver. Thank you for your attention.
I will now turn you back to Phil, who will talk about our outlook for the balance of 2018.
Okay. Well, thanks, Bill. Let's now talk on the outlook and our full year guidance. Let's turn to slide 16. As I did mention at the start of the presentation today, we do anticipate another strong industry, about 35,000 units or slightly higher. Again, this is certainly a high business we're operating in right now. We feel really good about where we are. That said, we expect Blue Bird sales growth to be in the 3% range, just a little bit above the industry growth. That's a strong position as well to be in. Second half, adjusted EBITDA margins will be better than the first half, but lower than expected in the third quarter.
We are forecasting margin recovery in the fourth quarter, as Bill showed you on the bridge, from cost recovery pricing, which is late in that quarter, and the cost reductions that we talked about. Our focus on fiscal 2018 is on transforming our business structure through a series of cost, efficiency, quality, capacity, and product actions. Really, this is a multi-year sort of upgrade here we're doing, but very much focused this year and into next year on transforming our operations. We set a goal this year, as you know, of an 8% adjusted EBITDA margin up from 7% last year. The impact of the escalating steel prices that we talked about and other commodities in the second half, that's through the third quarter and what we'll see also in the fourth, that has hammered about one point of full year EBITDA margin.
We expect now I think around 7% again for the full year. Again, we're really targeted. If you look at the anticipated steel economics we saw, along with some other commodity increases, had they not happened, would have been about an 8% EBITDA margin for the full year. Again, that's one reason we're down and looking at 7% again. However, importantly, as we exit the year, the actions we have taken on pricing and cost reduction position us extremely well to grow the margin next year and towards a desired range of 10%-12% EBITDA margin in the coming years. Finally, as you know, we strive to create shareholder value. As I'm sure you're all aware, we initiated two, in fact, stock repurchase programs this past year.
I'm pleased to announce that our board of directors have approved a $50 million tender offer to repurchase shares at a premium to market. We expect to initiate this tender offer in mid-September, and we'll release further details at that time. Let's now turn to fiscal 2018 guidance on slide 17. First, we have narrowed our net sales guidance to between $1.01 billion to $1.02 billion, about $20 million less of the range that we had previously. Our adjusted EBITDA guidance is now between $70 million-$72 million. That's a slight increase over fiscal 2017 results, despite the significant commodity headwinds which we saw in the second half. It is down from our prior guidance of $80 million-$85 million. Adjusted free cash flow is now between $30 million-$34 million, reflecting a lower profit outlook.
Adjusted free cash flow, as Bill mentioned, continues to be a strong feature of our business model, representing 40%-50% of adjusted EBITDA, despite the plant quality upgrade investments we're making in fiscal 2018. The slide shows our forecast for the fourth quarter, consistent with our revised guidance, and also did a bridge between 2018 and 2017. An important point I want to make here is the volume and profit outlook is for a record fourth quarter as we look back over the past decade, as we expect to recover from the profit shortfall we saw in the third quarter. As you know, we're taking pricing actions, we're taking cost recovery actions, and they're already planned and already initiated, actually, in the fourth quarter. Let's now take an initial look at fiscal 2019 on slide 18.
As we look to our 2019 outlook, we expect higher gross profit margin and overall profitability in fiscal 2019 from three key areas. First, the impact of the cost recovery pricing that we took in late fourth quarter. This will have a full annual effect, a significant annual effect in fiscal 2019. Second, our full year impact of the transformational cost reduction initiatives that we implemented in late fiscal 2018. The following slide will depict the significance of this, and I'll cover that in just a second or two. Third, the plant facility and process improvements we are making to increase manufacturing efficiency this year will help drive margin improvements in 2019. We expect financial targets for fiscal 2019 to be on the glide path towards our previously communicated EBITDA margin goal of 10%+ by fiscal 2020.
We'll provide fiscal 2019 guidance at our next earnings call in December. Let's now turn to slide 19 to begin to see how our transformational cost reduction should impact fiscal 2019. It's a fairly simple slide, but I think you can see here that we will be exiting fiscal 2018 with significant run rate savings from actions that we've already taken in 2018 to reduce our costs. In fact, as we look at the run rate effect of those actions, it's about twice the level of savings we saw in 2018. This is a significant margin improvement as we look to 2019, and we'll provide more detail of these savings when we discuss fiscal 2019 guidance in December. Again, we feel we're well-positioned to capitalize on the good work we've done this year, and that it will flow through to next year.
Let me now wrap up the presentation on slide 20. First, it's clear that fiscal 2018 third quarter profits were significantly impacted by the sudden escalation in steel prices. There was little ability to recover that within the third quarter itself. However, we've taken specific actions to address the impact of higher economics, and we expect results and margins to be restored in the fourth quarter. You saw that analysis when B ill showed you the bridge earlier. We also have many operational positives, including our leadership in alternative fuel-powered school buses. Transformation initiative is underway and on track. Our strong free cash flow, which is a feature of our business model. We are well-positioned for profitable growth in fiscal 2019 as we benefit from the run rate of the actions we took late in fiscal 2018.
We are committed to profitable growth and our EBITDA margin goal of 10%+ by 2020. We expect our fiscal 2019 guidance to support this objective. Finally, we're pleased to announce, as we did earlier, another shareholder value initiative, a $50 million share repurchase tender offer, which we expect to launch by mid-September, providing shareholders with a premium to market price. We'll continue to update you on our progress each quarter on these and other initiatives. That concludes our formal presentation. I'll now pass it back to our moderator, Yolanda, to begin the Q&A session.
Thank you. If you would like to signal for a question at this time, please do so by pressing star one on your telephone keypad. If you are using a speakerphone today, please ensure that your mute function has been turned off to avoid a signal feedback to our equipment. Again, that's star one at this time for any questions. We'll pause for just a moment. Our first question will come from Matt Ryan with ROTH Capital Partners. Please go ahead.
Hey, guys. Good afternoon. Just wanted to get a sense for the timing of the price increases that you mentioned. I think you said June was sort of the first price increases that you put through. Could you give a little bit more detail in terms of the magnitude and the address, the vehicles? Was it in the form of surcharges? Just a little more color in terms of how that played out. We don't want to talk about specifics on that. We never really talk about pricing specifically on a unit basis. We would say it was pretty significant. I think when you look at the steel price per mass that was showed on the bridge, you can get the impression it's a pretty significant amount. In June, we put that through with all of our dealers, all of our customers.
We put through a surcharge to account for that. We literally took all of our prices for every single vehicle we've got, we put on a standard surcharge across all of our products. As I mentioned earlier, we have this timeline because we have to recognize we're in a big business. We have bids out there. They run for 90 days. The bids go to boards to get them approved. It takes time. So we honor those commitments. Similarly, our backlog of orders, which are several months out in the future, are all price protected. So the real impact of that is about a three-month timeline, basically, before we see that impact, and that's later the fourth quarter. Like I said, we've talked to all of our dealers about it.
They understand it, and it's in our pricing model right now, and it's on our price sheet for the dealers.
Okay. Just a sense for, could you help us with how steel flows through your P&L? I'm assuming, I think we've had this discussion before, but I just can't recall it off the top of my head. How far ahead are you buying steel? You buy steel today, it goes into a bus at what point in time?
Well, Matt, generally, our material comes in, let's say, two weeks prior to a bus being built. Steel may come in a little earlier than that because we actually do a fabrication for the raw steel that we buy. You could look at that potentially coming in two to three weeks in advance of the actual vendor-supplied commodities. Maybe more than a month, for the raw steel. We do try and take advantage of the market and do some pre-buys where we can on steel. That will be largely a factor of prices that we can get from our major suppliers at a point in time. Probably the furthest out we ever go on those deals at the moment is about six months.
Okay, got it. I guess what I'm trying to get at is, it seemed like maybe you guys had the visibility into the steel price increases earlier this year. If you look at the commodity indices, you can see it kicking up even late last year and early this year. I'm just a little confused as to why it was surprising to you guys in June. Was it just a factor of why you had to wait? You had a bunch of bids out there that rolled out towards the end of last year, and you had to wait for those to expire before you could put pricing through?
Yeah, that's really the point. There are two different factors. The surprise was the rapid run-up in the steel price versus spots. That was driven when all of the domestic steel producers increased their prices this year. It happened fairly close to the announcement of tariffs. I'll let you draw your own conclusions on that one. The pricing issue for us is a little different. Once we saw where steel was going, we took our time to understand exactly what we thought the long-term cost increase was going to be, because this was not something where we wanted to go out initially and then make more adjustments to prices subsequently and add a lot of confusion into the industry.
Once we understood where we thought steel was settling out, we made the decision in June, and we actually went through a round of meetings with all of our dealers prior to announcing it to make sure that they understood what was coming and how to deal with it. That took us a little bit of time, but I think what we've done is we've put a pricing increase out there, which will largely cover us versus where we see steel, and stand us in good stead for the future. Of course, that's assuming that there's no other major dislocation in steel going forward. As I said, we are seeing a bit of a downward trend in the 12-month future. I just don't know whether that's real or just noise at the moment.
Can I just add one thing, Matt? I think obviously, I could add one thing, Matt. I mentioned before, I've actually seen this in other industries. Automotive, Ford, GM have all talked about steel price increases. One sort of benefit, some of our dealers do actually carry other product lines besides our school buses. They may sell agricultural specialist equipment, RVs, fire trucks. All of those guys have all got the same impact, and they're all passing on price increases. It's not something unusual. This has run in the past, and we had to do it now. It's the appropriate thing to do. By the way, we've previously done a surcharge before as well in that same technique.
Got it. Then just maybe to talk a little bit about the competitive environment and, does this impact you guys competitively in any way when you're going out for some of the competitive bids? Sort of following suit. How should we think about that?
My line of sight is exactly how all the other competitors are doing with the dealer body or the customers or their end customers. I probably get into that of what they're doing, I don't know. I will tell you, though, most of our business, 95% of our business is through dealing with our dealers. We sell buses to our dealers. We pass this further on to our dealers, and then our dealers in turn deal with the end customer. That's their role. They have the job then of going out and selling the value they give and the products we have, which we're very strong about, and passing it on as they can feel appropriate. As I said, looking at where our backlog is right now, where our orders are right now, I'd say we're certainly continuing to do what we've always been doing.
I said holding our own. It was the right thing to do with sales, and fortunately, our dealers have accepted it.
Okay. Last one from me. If we look at the adjusted EBITDA walk that you guys provided, thanks for that, on slide 12, the Q4 one. Just wanted to get a sense. It looked like the $11 million in positives in the all other category. Could you break that out just in terms of, is most of that pricing? I'm just trying to get a sense for the other sort of immediate levers that you guys have.
Very little of that. Matt, very little, if any of that, will be pricing. You just won't see too much in the pricing curve. This is fundamentally a mixture of various cost reduction actions that we've taken. As you think about the progression of that transformational initiative, and I think we've talked about this before, there was a little bit in the first half, not too much. We always knew that it was really going to hit its stride towards the end of the year in the fourth quarter, as we worked through inventory and the new agreements with many of our suppliers changed in price. That's where we see a large part of the cost increase coming from.
However, given that we saw the gap between where pricing would take effect and the cost increases, we did take other actions in reducing spending in a lot of other areas.
Okay. That's all from my side. Okay, thanks.
Thanks, Matt.
Our next question will come from Eric Stine with Craig-Hallum. Please go ahead.
Hi, everyone. Maybe we could just dig into, you mentioned 20% of your sales, and I'm not sure if this was for the quarter or for the year to date. You said 20% of your sales are from new customers, and I'm just curious, commentary on how much of that is alternative fuels, given your big head of steam in propane and gasoline, and then I guess only the right response to the market.
Yeah, that's a good question. Let me give you a little background on this. Like I said before, we are in sort of a lumpy business, right? Customer orders come in differently every year. They don't always come in the same time of the year. You go out and you deal with looking for business where they can do business and trying to find where they can play to our strengths, which is a great strength, obviously. When we looked at that was for the quarter. We just got it exactly on the quarter in question. These are sales to end customers, so we know we've got into customers' hands through our dealer network. When I said it was about 20% of customers were new to Blue Bird. A big chunk of those were gasoline. Actually, we grew in other things.
We grew gasoline, we grew propane, we grew diesel. In terms of total impact of new customers coming in, the majority you'd say were sort of in the gasoline and diesel area, and to a lesser extent in propane. I think I touched on propane a little bit too. I wanted to make that point that we have seen in the last four or five months, states are getting aware that the Volkswagen money's coming available. Propane is very, very high on that agenda for utilizing those funds. They're pushing it off and saying, "Well, I might as well wait till I get the Volkswagen money because that's extra for me. And I'll instead deal with my fleet for the gasoline and diesel products." Although it's still been an excellent year for propane.
I'd say certainly the contracts that we saw in the third was largely gasoline and diesel, to a lesser extent, propane.
Got it. That's, I guess, a good segue to my next question. The Volkswagen funding and the push out there. Impressive that 40% of your mix this fiscal year anticipated to be alternative fuels. Just curious, any thoughts on how much that number will be limited by the fact that people are pushing out propane buys?
Well, I think the fact now we're getting some clarity, some line of sight here on the Volkswagen funding availability, I do think we're in a good position. I would say the gasoline, though, I should mention, gasoline product is not included in the Volkswagen funding. We've been looking at our propane and our electric buses as really being the key vehicles we have to put into that. I certainly think that, yeah, it's a great opportunity for us, we have a very active team here working with our dealers, working with the state and the school districts. Look at the states, there are entities who actually go and get this money out. They decide on the plan, we've been working with them very closely and telling our story. I do think we're excited about this at the end of fiscal 2019 for propane.
The other way to do it is actually just
Yeah. Maybe last one for me, just on the operational initiatives. I know Phil mentioned that potentially you expand the scope of that, I don't know if you can share anything here. I know the paint shop was a big one, that'll have a really big impact when that comes on in early 2019. Would you say those additional things in scope are more broad-based and little steps, or are there any other large steps similar to the paint shop, for instance?
Nothing the size of the paint shop, Eric. We're looking at some areas of the plant where we can significantly improve efficiency and workflow. We're also taking a hard look at some redesign initiatives of the existing bus, which may pay a lot of dividends going forward. These are things that we have kicked off, and we won't see a whole lot until later in fiscal year 2019 from these, but they're fairly exciting.
Got it. Thanks a lot.
Yeah, thank you.
Thank you. Our next question will come from Chris Moore with CJS Securities. Please go ahead.
Thanks, guys. Maybe just a little bit on the tax benefit. Can you just talk to the detail a little bit on that?
Chris, when you get a chance, we cover it in quite a lot of detail in the Q2. It is fairly technical. There are a range of actions. One of the large ones was we did have an uncertain provision in our balance sheet, and working with our auditors and tax consultants, we've been advised that we could release that. That's a fairly large part of the reduction. That's really a one-timer. We took some bad news for it a couple of years ago, and now we're happy to let it go.
Got it. Okay. The $11 million that you had talked about in terms of some of those all other initiatives, some is transformational, some is a little bit of pricing. I guess what I'm trying to understand is how much of that reduction spending is just one-time things that you're just taking short-term to lower the cost structure?
Small part of that. The way I'd look at it actually, Chris, if you want, is if you go and take a look at slide 19 that Phil presented, which on purpose didn't include any numbers.
Exactly. That was my next question. Sorry.
If you're spatially good, which I'm not, you can see there's a fairly large jump in the size of that box going into fiscal year 2019. What I would suggest is that all of the stuff we're doing, we're getting only a portion of the benefit of it in the fourth quarter of fiscal year 2018. You should expect to see a rather large contribution in fiscal year 2019.
Yeah. You asked about, I think Phil's right. Only a small portion of the amounts you saw in the $11 million was what I call one-timer. There's a little bit in there for the pricing. We made that very late in the year, September, that's really pushed back. Now it's there after the June period. The bulk of that is stuff that we believe is sustainable, and we know we've got that. We've doubled cost out of the business, and we've got a terrific team working on this hard all year. That's why we call it transformational, and now we get the full run year, fully packed with that, and into next year. As you mentioned earlier, we talked about earlier, we have other initiatives we're going to do to increase efficiencies that will bolt on to that next year as well in the plan.
We're really excited about the 2019 outlook. This one is all coming together now at the end of this year, which will launch on a really good ramp-up into 2019.
Got it. All right, guys. Appreciate it. I'm going to jump back in line.
Thank you. As a reminder, that's star one to signal for a question. At this time, we'll go next to Michael Shlisky with Stifel. Please go ahead.
Thank you. I just wanted to ask you on your EBITDA margin comments, it sounds like you're expecting somewhere in the neighborhood of 9% adjusted EBITDA margins next year. Am I right about that? It sounds like you have 8% if you adjust it for the input costs and you're expecting 200 basis points in the next two years. Is there any reason to think there's going to be more or less progress made in 2019 versus 2020 on that?
Mike, I have to look at my model here before I give you guidance. It's always a little difficult for me to do that, and we're not ready to drop it on because we're still working on our 2019 budget. Certainly, it's fair to say with 8% adjusted this year with the actions we've taken, we certainly would look to be, I'm going to tell you right now, be somewhere north of 8% to get to a 10% obviously by 2020. You have to wait a little bit on that, but I think what you're doing, you're in the right direction to think that way. I think the way you're thinking is good.
Okay. Related to that, the range of 10 to 12 by 2020, what was the difference between 10 and 12? It's a pretty reasonably wide range.
I think I'd say 10% to 12% more is our long term. I think we said 10% plus by 2020. We don't want to get to 2020 and stop. We're going to keep going. It's not like we've done it. We're great. We're home. I think we just want to say 10% plus is our goal for 2020. Obviously, we're a couple of years away from 2020, beyond that, we want to keep growing, and certainly the next level will be how do we get from 10% to 12% longer term.
Got it. That makes sense. Just wanted to ask you would see an increase in the prices. Has there been any elasticity with customers buying fewer buses at all to make up for that? There's only so much budgeted.
No, I really haven't seen that. I think it's been a good, solid year here for everybody. I think this year's gone really well for us. As Phil mentioned, based on the forward order outlook, Mike, we haven't seen any drop off. We haven't seen anywhere where we've lost a bid.
Got it. I also wanted to ask you on the freight costs, can you give us a ballpark figure of how much your annual freight spend is, just so we can put that in perspective?
This is inbound freight, Mike. Typically, it's running in excess of $12 million a year, something like that.
Okay. Got it. Just last one from me. The Ford/Roush deal has been such a competitive advantage for you. Is the relationship with your partner on electric, is that a similar exclusive relationship? What access do your competitors have to your partner there?
No, we're exclusive with our partners on that one. In fact, I've only just saw recently, what I'm excited about is EDI, who's our technology partner in this vendor we have, they've been acquired by Cummins. Now Cummins owns EDI. I've already met with Cummins last week to talk about that. We're really excited about that partnership because you get the strength and the backbone of Cummins technology they've got, and it's a great move. Yeah, we have an exclusive on that product for a period of time, yes.
Sounds good. Thank you very much.
Thank you.
The next question will come from Scott Stemberger with Emerald Advisors. Please go ahead.
Good afternoon, gentlemen. Thank you for taking my question.
Hi, Scott.
Phil, and either Phil could answer this. I think you explained the steel issue pretty well. You also lowered your top-line sales guide a little bit and mentioned that at least in Q3, there was a little higher mix of gas and diesel, which have a lower price point. I was wondering if the lowering of the guide is because of what came in in Q3, and since you have pretty good visibility into Q4, that you may be seeing the same thing in Q4.
Yeah. I think the third quarter was a richer mix actually of gasoline and diesel. We were actually, I'd say, quite surprised by the amount of gasoline we sold. It's terrific. It's just going to end a little lower revenue. We just played it prudent, and particularly the look out now, we've only got line of sight to the fourth quarter. We're getting pretty close to the year-end. We just prudent to narrow our guidance. We dropped $20 million off the top end. The average came down, but we kept the low point. We just narrowed it down. It was largely due to, as you saw when you look at year-over-year, you could see the type of impact we saw on the revenue in the third quarter. It was prudent to do that.
Fourth quarter, I think, is more of a typical quarter. It's going to be strong. I think the propane in the fourth quarter is good. It looks really good for us. The mix looks strong. I think it'll be a pretty good revenue quarter, but we just kind of prudent to take the full year range down a little bit, narrow it down.
Okay, fair enough. You did mention that we saw at least mid-fall or this week saw the first electric bus roll off the line, that you can deliver some of those in the fourth quarter. Do you expect to deliver a couple of those? A handful?
Oh, yeah. We'll deliver several in the fourth quarter. Several is not several hundred. We'll deliver several. Yeah, that was the first one. That was a nice event for us, we've got more lined up, the customers are all California-based. We've got grant support for those, we're excited about it, so is our partner out here in California.
Okay, that's great. Fair enough. You talked a little bit about the Volkswagen push- out, which is pushing customers into 2019, I suspect that would also be pushing customers then into 2019 pricing. Is it possible that you may actually derive a benefit from the fact that those are getting pushed out and then those customers are then going to end up booking orders at the higher price into your pricing season?
Yeah, I think that's a good way to look at it. Obviously, had they bought the buses prior to the tariff change and the steel prices going up, that would have been fine, too. I do think it's a great point you raise. In terms of the things that we've got the pricing on now, it's out there in the system, that will be the price we'll move from when we access the VW slots. I've got to say, I just want to stress, I made this point on the call I feel really good about the product range we've got for that VW money. We have the best partners on propane by a mile. Roush Ford. Terrific partners. We've known those guys since 2012. We're in great position.
I just think now with the electric and the power of Cummins behind EDI, we're in great shape on that product too. I think we're in a really good position. We like where we are right now and so do our dealers.
You said that you had pretty decent visibility into some of that money. When do you really expect the bulk of that to start to impact your orders?
I think we'll start to see some of it coming out probably in minimal amount November, December. It looks like it's mainly second quarter of next year, probably when we're going to see the orders come in. It's just all through the year. People get this money, and they can apply it over several years. You can take two to three years to use the money, use it faster. It looks like all these guys who are organizing the funds have been a little slower than were expected to decide how they're going to utilize it. Every state's doing it differently. Some are giving discounts against prices. Some of them are paying for an entire bus. It all varies differently by vehicle line. The great thing is, the real metric for what determines which grants are available is the NOx level of emissions the vehicle emits.
That's why I made a big point of our NOx level now on propane and where we obviously are on that, and electric and zero emissions we're in good shape. I think we'll start to see later at the end of the calendar year, so maybe a few in November, December, we'll get some interest. I think it'll pick up really in the start of the next calendar year, January 2019 onwards.
We are talking about orders for those, not deliveries for those?
Yeah, we're talking orders. Yeah.
Okay, just one clarification. I think in his comments, (Phil T). said that the full offset of steel prices will not be achieved in 2019, but I think he meant '18. Is that correct?
I think I did '18, Phil.
I think you meant 2018, too. Thank you.
Thanks for picking that up and letting me clarify it.
Okay, thank you.
Okay. Thanks, Phil.
That will conclude our question and answer session for today, and we would like to turn the conference back over to Phil Horlock for any additional or closing remarks.
Well, thank you, Yolanda, and thanks to all of you for joining us on the call today. We appreciate the continued interest in Blue Bird. I hope you realize that we are focused on profitable growth, and we intend to deliver on our commitments. I do believe a wealth of growth today and into the future. Please do not hesitate to contact our head of investor relations, Mark Benfield, should you have any follow-up questions. Once again, thanks from all of us at Blue Bird and have a great day.
Again, that will conclude today's call