Greetings and welcome to the Blue Bird Corporation Fiscal 2017 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce to your host, Mark Benfield, Director of Investor Relations. Thank you, Mr. Benfield. You may begin.

Thank you, Devon. Welcome to Blue Bird’s fiscal second quarter 2017 earnings conference call. The audio for today’s 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 Investor Relations 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 releases and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird’s President and CEO, Phil Horlock; and CFO, Phil Tighe. Then, we will take some questions. So, let’s get started. Phil?

Thanks Mark. Well, good afternoon everyone and thank you for joining us today for our fiscal 2017 second quarter earnings call. We welcome this opportunity to share with you our latest quarter results, so let’s start with an overview of our sales and financial performance on Slide 4. As we’ve explained in prior calls, the school bus industry is extremely seasonal and first half sales typically represent around 35% to 40% of the full year sales. While despite the typically slow first half, we achieved strong sales results in the second quarter, with almost 2,400 buses sold, which is 11% higher than last year’s second quarter. And importantly a 59% increase over the first quarter. So for the first half of the year, our unit sales were up strong 9%. At $209 million, second quarter net sales were 9% higher than last year. So the net sales revenue growth was a little lower than our unit sales growth of 11%, which we expected, as customer mix and timing of specific customer orders due change between quarters from year-to-year. Our alternative-fuel powered school bus sales mix was stronger 22%, up from 13% mix of sales last year. Now as a reminder, in alternative fuels we can all of our propane, compressed natural gas and gasoline-powered school buses has all of these alternatives to diesel, which has been the stable fuel for years. For the last several years, we've been achieving significant growth in alternative fuel bus sales, and we have not slowed down this year. As you'll hear later, we expect another great year for the industry’s best-selling alternative-fuel school bus. Our adjusted EBITDA of $8.1 million was down about $2 million from last year. The profit decline from last year reflects the change in customer mix that I mentioned earlier,…

Thank you, Phil, good afternoon everyone. The next few slides will be a brief summary of our financial performance for the second quarter. There also slides in the appendix that are point out the deal with reconciliations between GAAP and non-GAAP measures mentioned in this review. A further detail in discussion will be available with our 10-Q filing, which I believe will be available to everyone later this afternoon. The second quarter material we're discussing is based on the close of April 2, 2016 and April 1, 2017. And I'll remind you that the fiscal year for Blue Bird is from October through September, so this is the close of our second quarter. Furthermore, I point out to you that the risk factors are unchanged from our previously filed 10-Q, and I would also suggest you take note of the disclaimers at the end of this deck. Let's move to Slide 9, which is a summary of the second quarter results. I won't go through much of the data that Phil has already covered. So if you look at volumes, I don't think I'll get into that, but I would like to point out that the second quarter volume for 2017 of 2,367 units is, in fact, our best result since fiscal year 2008, and is also better than our internal plan. This volume is really driven by continued strong performance by our dealer network throughout the U.S. and Canada. If we look at net revenue, Phil already talked about the improvement in net revenue. Total bus revenue was up about 9.5%, but as indicated on a per unit basis, it was down by a little over 1 point. Unit revenues were impacted by a few things, and I'll just briefly touch on these for your information. The first one…

Okay. Thanks, Phil. Let’s now talk from the outlook for the year and our full year guidance. First let's turn to Slide 14. As the headline says, we're focusing continued growth in the industry and for Blue Bird. We're projecting new bus sales, as measured by industry registrations compiled by R.L. Polk to grow 3% to 4% reaching up to 34,000 new buses. We are also forecasting Blue Bird unit sales growth for the full year of between 6% to 8% outpacing the industry and supported in large part by the substantial year-to-date growth of 43% in alternative-fuel powered bus orders that we have in hand. Our year-to-date total bookings and order backlog are strong at 8% above the same time last year and quote activity is higher too, and we are now filling our production slots in the fourth quarter, again supporting our view of the 6% to 8% growth for the full year. So with the seasonality of our business, we project very strong growth in financial performance in the second half of the year, which we've done for the last several years, with higher sales in support of school start. That said, we are beginning to invest in the development of new and exciting products that will foster future growth, and we are mindful of increasing commodity prices, which we're monitoring very closely, particularly steel. So let's now turn to fiscal 2017 full year guidance on Slide 15, which reflects these factors. As we mentioned earlier on the call, we are reaffirming the full year guidance we provided on our last earnings call, with growth projected in each of the three metrics. First, net sales of between $980 million and $1.10 billion, up $48 million to $78 million from fiscal 2016. Adjusted EBITDA of $72 million to $76 million, which is flat to an increase of $4 million from last year, as we continue to invest in new products to drive future growth. We believe it's important for our long-term goals to grow the business, obviously, and to improve our profitability. Adjusted free cash flow continues to be a strong feature of our business model, representing over 50% of our adjusted EBITDA in typical years. And we are reaffirming guidance of between $38 million to $42 million, an increase of $5 million to $9 million over last year. So in wrapping up, we have a solid second quarter and first half performance, and importantly we have sales momentum, particularly in alternative-fuel powered buses. We look to continue the substantial growth in the second half of fiscal 2017, as demand increases in line with the seat out of our business and our guidance supports this. We'll continue to update you on our progress each quarter. So that concludes our formal presentation. I'm now going to pass it back to our moderator, Devon, to begin the Q&A session.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Eric Stine with Craig-Hallum. Please proceed with your question.

Hi, everyone. Thanks for taking the questions.

You bet, Eric.

So I'm very interested in the 275 new alt fuel customers. Just – could you just give us a comparison if you're able to, year-over-year and then also just characterize the size of those orders? I mean a safe assumption that those are pretty small and that the next when those customers come back for that second round of orders, you would expect that to expand potentially, significantly?

Yes, it's a great question. Obviously, new fiduciary [ph] gasoline, so that's a big piece for the gasoline we believe we got really good acceptance so we are selling just about in every state across the nation now. So when you look at the 275, you look at the fact that I mentioned there, we have orders in hand there just under 3,000 in alternative-fuel powered buses. You're right, some of those orders are quite small, you get customers are trying gasoline for the first time obviously, diesel for the first time for many of these folks and they're in that 275. We still got customers are trying propane for the first time but the majority of that is really around our new gasoline customers coming to us, looking at it. They love the simplicity of gasoline. They understand it and of course, as you know, it's a terrific acquisition price. It's a really, really nice price points for those customers, so as we've seen with propane and we’ve got several years of that, typically what happens these customers come in, they try these products, relative to lower volume, they like them typically come in the follow the year with a higher level of business for us. So obviously, we're very excited to be welcoming 275 customers to the Blue Bird lineup.

Yes, congratulations on that. Maybe, I guess sticking with alt fuels especially – well, propane and also gasoline and at the product immersion tour event, I got a little color on this, but just – could you talk a little bit about the VW funding that is coming and some of the steps that you are taking in your dealer network, but also with your customers? I guess, first so that propane and gasoline are part of the funding, but then also Blue Bird being positioned for them.

Yes, that’s a good question. Obviously, we're well aware for of the VW opportunity, the funding availability of this company, which is going to be spread among a whole bunch of different sectors, look I don't want to get into exactly what all our competitor practice are in the space, so legal to say, we look at our propane products, Eric, as you know, we believe, and we’ve seen this time after time it has the best total cost of ownership value of any bus on the road, no matter what type of fuel it is, nothing is proven in our performance in that. So not surprisingly, when we look at that VW money, we look at our opportunities there with our propane products really not only use that money. But provide the best value for our customers out there. Because yes, there's going to be money available but we want to make sure it spent wisely the wiser you spend it, the more buses you can buy, and we think we're very well-positioned for that with propane and with gasoline of course.

Okay. So maybe a last one for me, just in terms of the large contractors, I know, a few quarters ago I asked and you thought early in 2017, you'd have a better idea. I know 2016 was pretty quiet. I mean any indications that those large – some large contractors are out there with some orders that could be had later in the year?

We're still working with those large contractors obviously we've been bidding regularly on that piece of business. It’s you know 2009 technical term we use, it can be a lumpy business year-to-year. As you know, we don’t have a long-term contract firm relationship with either first student or NEC, but we’ve been a great partner and we’re very pleased our relationship with STI, and we continue to do a nice business with them. But we have also sold some of our alternative-fuel products to the other companies too because we’re able to bring the best product to market. So it’s really been our dealer channel, quite frankly. There’s been a great story for us this year. Dealers have done a terrific job embracing our products that are out there, done a terrific job looking to rather than school districts, and that’s like it has been for us for many years and by far the vast majority of where our business comes from.

Got it, okay. Thanks a lot.

Thanks, Eric.

Thank you. Our next question comes from the line of Matt Koranda with Roth Capital. Please proceed with your question.

Hi, guys good evening.

Hi, Matt.

Just wanted to cover the gross margins during the quarter if we could with a little more granularity, I think you guys highlighted the mix part reasonably well in the prepared remarks. But can you just highlight or quantify if there was any raw material cost increase that fed into the gross margins during the quarter? And then just, could you provide a little more detail on what was the product launch that drove the labor inefficiencies?

Matt, this is Phil. Material, we had reasonably good story on in the first quarter – first and second quarters. We have as you may know, we have long-term contracts with the majority of our material buy, and we were able to take advantage of that. So we’d see a great deal of material – pressure on material. We will probably see a little bit as steel continues to rise in the second half but that’s well within our planning base. So, all in all, material I think was good. I think that one place – and I didn’t mention it in the discussion on margins previously, was we sold quite a lot of units in Canada, both in the first and second quarters. And obviously, the exchange rate over there has been hurting us a bit. We – the Canadian schools pay in Canadian dollars. And so we can’t just pass the large move that’s happened in the exchange rate straight through to them, so we did take a hit to revenues by our sales in Canada, and we have been quite successful in Canada right across the country, to tell the truth. We’ve done well in Quebec and Ontario and Alberta and even Saskatchewan. So we’ve been doing well in Canada. So that’s something that we’re hopeful that the exchange rates might flatten out a bit over there, but that’s one that has pressed us a little bit on margins. I’m sorry Matt, I missed your final piece of that question. Could you repeat that?

Yes, sure. I think you were talking about a program or a product launch during the quarter that had some labor inefficiencies that…

Yes. I think there was relatively small change on the diesel engines on emissions move. And for some reason that I don’t want to really go into, we had a few hiccups getting that engine into the bus, and that caused some labor inefficiencies during the second quarter, it’s lined out and working very smoothly now, but we just had a few parts that we had to change around somewhat and do some – do a little bit of rework, but we’re beyond that.

Okay, got it. And with the Canada mix of unit sales for you guys have like higher than normal this quarter? Or you’re just referencing FX being a headwind?

It was up and FX is an issue.

Okay. And do you – are you able to break out or quantify the Canada mix and unit sales for the quarter?

I’m not – I can’t, sorry.

Okay, all right, got it. One other thing I wanted to cover I think on Slide 7, you guys are sort of implying roughly another 600 units in alt-fuels that you expect to book and deliver during fiscal 2017. Can you just talk about sort of the visibility that you have into that number? And what may swing it higher or lower for the year for you guys?

Yes. This is Phil Horlock. The way we look at this, obviously is let me talk about bookings and backlog, here we are in a call today, we’re talking about the second quarter results. Well, we already have visibility, many weeks – several months, almost three months into the future. Solid firm plans in place so we are sitting in May, we’re talking about many months – we’re already well into the fourth quarter. So we have a good sense of what we’ve already got in that order bank, we know the price of those units, we know the spec of those vehicles, we have a good sense of that. We also operate what we call our own pipeline, unlike all industry does, we know whether our quotes out there, we know when the school boards are meeting, and we track on that and when order – when the decisions are going to be made. So we use our pipeline of opportunity, plus the orders we still have yet to build, and that gives us the confidence of the 3,500 units we mentioned there. So we have good visibility at this point in time.

Got it, okay. And then any more color or breakdown that you maybe able to provide on sort of gas versus propane in that, I know CNG is kind of nominal, but any directional commentary at least on gasoline…

I would say this, propane continues to our best-selling alternative-fuel powered school bus it really is. But gasoline has done extremely well, and I wouldn’t say it’s overtaken or anything but I’d say it’s doing very well. I mean, so propane is still one, gas is two, and CNG is three but we are delighted with our gasoline performance. Yes, I just don’t want to get into specifics but we’re very happy. I think the issue is – the reason for us its nice that we’ve been out there now for several years without Ford propane engine which obviously is the bases for our gasoline engine our customers understand that. So it’s going really well, and it’s well accepted.

Got it, okay. Maybe one last one for me guys just kind of looking out over the next year or so. I know EBITDA margins this year had compressed a little bit in terms of the outlook just because the incremental SG&A that you had to spend for some growth programs. Could you just kind of – I think you quantified it before but could you update us on sort of the latest on the spend, the incremental SG&A for the year – to support your growth programs. And then when do those sort of taper down or are we expecting sort of better EBITDA margins to shine through in fiscal 2018, how do we think about that further out?

Yes, I mean just a little, its obviously, you’re right, we put in some SG&A this year. We’ve also kept our engineering high, we believe in products. We believe in bringing our products to market, and we said that people want and value. We saw that propane certification we’re going for here on a NOx level again that’s another puts us right further in front than they’ve already been. So I think you’re going to see us keep investing in products going forward, we’ll probably have somewhat of a nominal sort of level now on that. On SG&A side, those pick toward as we put in place. We find them successful, they work for us, those – the product immersion tours that was new spending for us this past year. You also said me talk about quality and customer service and just do a little work on dealer development too in terms of really making sure our dealers are operating as best they can with our assistance. So we put those processes in place this year, we put the people in place this year. So I think this has been a year, I think, of really setting ourselves in place for future growth, and we sort of like where we are right now, I guess, what I’d say.

All right, guys. I’ll jump back in queue. Thanks.

Thanks.

Thanks.

Thank you. Our next question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Hey, guys thanks for taking my call. On the gasoline buses, just obviously their lower price are doing extremely well. How could you tell if it’s those are taking share from propane or other buses versus kind of incremental sales?

Yes. It’s good question, Chris. So what we do is, we obviously, we’re buying data, I mean we know, when a customer comes to us, we know what buses – whose buses they buy whether our competitors, we know whether they been a diesel supported before or propane supported before. And so we do categorize them in terms of what they can say is a genuine conquest, being that we’ve – they’re new to the Blue Bird family, and new to our team and new to our product. And we also know whether they may have been a Blue Bird diesel customer previously already, propane or a CNG customer previously. So we know exactly what they were doing before, and I’d tell you, it’s really work great for us. It’s been a really nice conquest tool for this year to bring a lot of new customers into the Blue Bird family, we’re excited about it.

Got you. So, Tighe, I think you mentioned the gross margins on the parts where you're down a little bit. Is that a kind of a conscious move or just was mix? Or how does that work?

No, I think we talked about this before Chris, it's – we're trying to grow our parts business. And one of the things we're doing is, we're selectively getting more competitive in some areas and introducing some product lines that will probably have a lower margin because of the nature of those products. So the parts margins are going to stay very, very good, but I think that will edge down a little bit versus where they been historically, and we will see the benefit through increased sales and increased total profitability from parts. Where we'll update on where our parts business is going, we've got a good management team over there, and they're really doing some innovative things to grow a business.

Got you. Last question, the $3 million one time investment banking fee, can you refresh me, what was that related to?

Okay, well that was related to, you might recall several months ago our major shareholder, American Securities made a move to try to buy the remaining shares of the company, we want a special committee and that special committee had an investment bank and that was the fee to the investment banker. That's done behind us and all finished now.

Got you. I just wasn’t sure if there was some – some M&A on the horizon that I can read into on this.

Not at this point. No.

Okay, got it. All right, appreciate it.

Thank you. Our next question comes from the line of Mike Mork with Mork Capital Management. Please proceed with your question.

I got a question just on the channel, the alternative-fuel powered bus sales. If you are going to take an educated guess in five years, what would the industry mix be versus conventional diesel alternative-fuel and what would your mix be?

I'm not going to take a wild guess.

Okay. I think, can you guess, sorry.

Your guess would be better than mine, I know that.

I look at, like I said we’re 30% we think we could be in over 30% alternative-fuel mix this year. I think going forward, we certainly see that will keep gaining traction, so I'm – I tend to look at things like maybe 50% a few years from now, and obviously they got a five years or three years but we intend to keep giving customers what they want. I mean we're going to keep improving those products and giving a better value proposition, and we love the fact they are exclusive to us. And we love the fact we've been in the alternative-fuel business for about 9th year now [indiscernible] most recent generation of propane being which I mean installed by an OEM. So I think when I look forward, yes, I think 50% is on the road and when we reach 50%, we'll take a look where that can take us, but I think that's probably three to five years out something like that.

The acceptance is just growing and the interest is growing and obviously, there's more and more interest in clean emissions and simplification is important and that's what they offer, that's what we can offer.

And if you are at 50% say in three to five years what was the industry would be like, about 30% or so?

Well, it depends on what our competitors do. I can't really comment on that, I just know –we are just going to keep doing what we're doing. I mean, obviously, right now 30% our sales let’s say, that's where we think we're going to be. I don't think the competition – the competition a long way of that number. So it's difficult to say where the industry will be, but we're confident we’ll certainly continue to hold the vast majority of the share of that business.

Okay, thank you.

You bet. Thank you.

Thank you. This concludes – there are no further questions at this time. I'd like to turn the floor back over Mr. Horlock for closing comments.

Well, thank you, Devon, and thanks to all of you for joining us on the call today. We appreciate your continued interest in Blue Bird. As you can see, we are focused on profitable growth, and we intend to deliver on our commitments. And we're well-positioned for growth today and into the future by the actions we're taking, even today, to build a better model for the future. So please don't hesitate to give a call to our Head of Investor Relations, Mark Benfield, should you have any follow-up questions. We're always happy to answer and help you where we can. So thanks, again, from all of us at Blue Bird, and we wish you a good evening.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.