Good day, and welcome to the Blue Bird Corporation Fiscal Third Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mark Benfield, Director of Investor Relations. Please go ahead, sir.

Thank you, Stephanie, and welcome to Blue Bird's Fiscal Third Quarter 2017 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 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 release and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird's President and CEO, Phil Horlock, and CFO, Phil Tighe. Then we will take some questions. Let's get started. Phil?

Thanks, Mark. Good afternoon, everybody, and thank you for joining us today on our fiscal 2017 third quarter earnings call. We welcome this opportunity to share with you our latest quarterly results. So let's get started with an overview of our financial results on Slide 4. We achieved the highest third quarter bus sales in more than 10 years with 3,849 school buses sold. That was a 2% increase over last year and importantly, a significant 63% increase over the second quarter. So for the first 9 months of the year, our unit sales were up about 5.5% from 1 year ago. Our $333 million third quarter net sales grew by 3%, slightly higher than the growth in unit sales. We recorded our highest-ever sales mix of alternative-fuel-powered school bus sales at a substantial 41% of our total bus sales. In fact, this compares with a 25% mix last year and a 22% mix in the prior quarter. As a reminder, in alternative fuels we count all of our propane, compressed natural gas and gasoline powered buses. All of these are alternatives to diesel, which has been the staple fuel for years. For the last several years, we've seen significant growth in alternative fuel bus sales at Blue Bird 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 net income of $20 million and earnings per share of $0.68 for the quarter were well above last year, up $23 million and $0.86 a share respectively. Last year, you might recall we incurred significant expenses for the change in control of the company that impacted our fiscal year '16 third quarter results and, of course, these expenses are not repeated this year. Our adjusted…

Thank you, Phil, and good afternoon, everyone. The next few slides are a summary of our financial performance for the third quarter of fiscal year 2017. For those looking for some additional information, the appendix to this presentation deals with reconciliations between GAAP and non-GAAP measures and there is more detailed material available in our 10-Q filing. The third quarter material that we are discussing today's is based on a close of July 2, 2016, for fiscal year '16 and July 1, 2017, for fiscal year '17. As a reminder, the fiscal year for Blue Bird commenced on October 2, '16 and will complete on September 30, 2017. There were no new accounting pronouncements that impacted in Blue Bird in this report. Risk factors are unchanged from the previously filed 10-K, and also please note the important disclaimers at the end of the deck. If we go to Slide 9, you will see that we have a number of the results from the third quarter summarized on this page. While I don't plan to go through each one of them, I'll touch on a few that I think could be interesting. Phil has talked about the volume in the third quarter and the fact that it was our highest in the last 10 years, the highest third quarter volume. In addition, the third quarter was the highest single quarter of production ever achieved in our Fort Valley assembly plant. Our production team was also faced with a number of challenges beyond the volume requirement. We had a higher mix of rear-engine buses, our Type D rear-engine buses. These are our most complex and labor-intensive units and the high demand in the third quarter presented a number of challenges in line balancing and skill management. The plant also had a number…

Thanks, Phil. So now let's focus on the outlook for the year and our full year guidance. Let's now turn to Slide 14. As the headline says, we are forecasting continued growth in the industry and for Blue Bird. We are projecting new bus sales, as measured by industry registrations compiled by R.L. Polk, to grow between 3% to 4%, reaching between 33,500 and 34,000 school buses. We're also forecasting Blue Bird unit sales growth of between 6% to 8%, outpacing the industry and supported in part by the full year availability of our new engine choices. Our substantial year-to-date growth of 37% in alternative-fuel-powered bus orders supports the strategy. Our total bookings and order backlog are strong at 7% above the same time last year, and quote activity is higher, too. And we have almost completely filled our production slots in the fourth quarter and for the full year. Looking to the fourth quarter, we expect unit sales to be above last year's level and profitability to be about the same as last year, as we continue to invest in the development of new and exciting products, along with expanded customer support that will foster future growth. So let me now turn to fiscal 2017 guidance on Slide 15, which reflects these factors. As Phil and I both mentioned earlier, we are lowering our guidance in our 3 financial metrics, reflecting the shift of specific sales, including those to the government, from the fourth quarter of fiscal 2017 to the first quarter of fiscal 2018. Unfortunately, there just aren't enough remaining production days left in fiscal 2017 to build and sell additional buses in order to hold guidance. I've told you before, we have a somewhat lumpy business here. When orders can come in at different times of the…

[Operator Instructions] And we'll take our first question from Matt Koranda from Roth Capital.

This is Brad Noss on for Matt. Just wanted to go into the reduced guidance and the $5 million of delayed sales going into fiscal '18. So for the -- obviously, with the $5 million delay in revenue coming along with $5 million reduced adjusted EBITDA guidance, can you just split out sort of what is -- how much of the EBITDA is coming from the delayed -- the forecasted delayed sales and how much was coming from the, essentially, lost profits and the higher production costs?

I'd say that virtually all of that is coming from the delayed sales. Typically, what's happened is, Matt, is...

Brad.

Sorry, Brad -- a few hundred units there that have -- where the customers want to only take the buses when they have had a chance to inspect the buses, and they can't get their inspectors there at a time early enough for us to book those sales in 2017. So that's all that's happened here. We just have a few hundred sales that literally will flip over and we'll see them turn into deliveries in the first quarter, very early in the first quarter of 2018. On the overtime days, I mean, when we work our cost issues -- I mean, when Phil talked about the fact that we worked some more overtime, you're right, we worked a lot of overtime, but we sort of planned -- as we worked through the quarter, we were planning on that and we thought we could cover it in our guidance. That wasn't really an issue as such as much as the volume slippage that occurred there and the push into 2018.

So I guess, the only question I'm having is just considering the midpoint of the revenue guidance coming down, the $5 million, and then also the midpoint of the adjusted EBITDA guidance coming down around $5 million, that would sort of imply that there were 100% EBITDA margin in the slippage, which I obviously assume isn't the case. So I'm just trying to sort of split out what -- why the EBITDA midpoint would come down concurrently with that $5 million revenue drop.

This is Phil. Phil's exactly right that we had planned to work overtime, but the overtime comes at a fairly significant cost so it's not a 1 for 1 revenue and margin -- revenues and -- so we are continuing to incur costs. We haven't really broken it out between volume and cost at this time. We'll probably have a more fulsome discussion around that when we get to the full year earnings.

I think it's true to say, too, and I think Phil talked earlier about the fact that as we were producing units, so -- [ the units fall ] through the fourth quarter, too. We've had a very strong mix of the pretty rich, what we call our rear-engine units, which command a higher revenue and so they're higher profit, but a higher revenue. And that obviously was a key factor to us in boosting our revenue performance. Nevertheless, the loss of units moving out of the quarter would hurt our profit performance.

Okay. That's helpful. And so also when we're looking at that -- those delayed shipments going into Q1, should -- are there any other dynamics to consider or should we essentially boost our Q1 assumptions by that full slippage from the delayed orders?

Obviously, we haven't declared our guidance yet for fiscal year 2018. I think it's fair to say, yes, we expect a better performance in the first quarter, quite a bit better performance in the first quarter of '18 than '17, absolutely. We'll have more units, we'll sell more units. Those units will move over and definitely help us in the first quarter of '18. Yes.

Okay. Perfect. And then just in regards to the high mix of the rear-engine buses or the Type D buses that you had in this quarter, was there anything driving that higher than the typical mix? Or can you just talk about the dynamics there?

I would just say we make a great rear-engine product for those markets that really want a high-capacity horsepower -- high-horsepower vehicle, we call it a pusher engine, particularly in markets where the terrain is a lot of hills and tough and out west, in particular. We had a nice surge in orders that we've seen in the last several weeks and months, helped us bolster the third quarter and particularly the fourth quarter. So I mean to say, it's really a strong product for those of want a bus that's, like I said, very powerful and high capacity in terms of passenger payload.

Okay. But the -- the way to think about it is it can just be lumpy in regards to when you'll get a large Type D order versus orders trending to more Type D buses overall in the business?

Yes, absolutely. I mean, we have a, like Phil said, there's a lot more hours to produce a Type D rear-engine bus and it can be lumpy, and we have to deal with that. And then in our plant, it can cause us some problems. So when we get a high order rate come in, the customer wants those buses quickly, we have to man up accordingly and hence, it drove some of the overtime that Phil talked about.

And then going forward, if you continue to have a higher mix than typical for the Type D's, is there anything that you are able to do proactively to help with the overtime hours and any of the other production setbacks there? Or is it just sort of the nature of that unit that it would require those same adjustments?

Well, Phil alluded to some changes we're looking at doing, and I talked about it earlier. We are looking at process changes. For example, we've learned, basically, to build all that rear-engine product online in the mainline, and it's tough when you have these vehicles going back to back in the assembly stations. So what we are looking at doing is take some of those unique build characteristics off-line in off-line assembly, so we can then sequence them in better to the line. And that'll help us improve, really, our just standard production capability performance. It should really help avoid those overtime spreads that we had to cope with, where we had to add extra people and extra days on to cope with [indiscernible] we saw this year.

Okay. Perfect. And then just 1 more here for me, just in regards to the alternative fuel mix, I'm not sure if you're able to split it out specifically between gasoline and propane, but can you just give a little bit color on what you're seeing? If the majority of the increase is coming from the gasoline ramping up, or just what the dynamics are there?

You know, we sort of don't share that, it's sort of competitive data. All we say is they've both been terrific products for us, particularly the propane and the gasoline. I mean, propane continues to be our leading alternative-fuel-powered bus, no question. It's still #1 in the market by a mile, country mile, and gasoline has done really well for us. Both have done terrifically well for us this year. We actually -- by the way, one big milestone we just did last week, just a little tidbit here, we launched -- we sold our 10,000th propane-powered school bus, actually in Georgia, to a conquest customer, Fulton County, to -- delivery of 90 propane buses, which included our number 10,000. If you totaled up the number of buses our competitors sold, it's pretty much 10x the number of buses than they sold in this segment of the business.

And we'll take our next question from Eric Stine with Craig-Hallum.

It's [ Aaron Spaal ] on for Eric. Maybe first, I guess, on gross margins, you kind of touched on it a little bit with some of the process changes, but I mean, where can those kind of go to here in the near term with the second shift and some of the trends you're seeing in alternative fuels and then what you're seeing on the material cost side of things?

I think what we're trying to do is when we look at the ramp-up of production we've had in the last 2 years -- remember, 2016 was the first time we ever launched 2 shifts in this plant and then -- we launched it in January 2016. This year, we kept it in all year. We produced a record number of units in our Fort Valley plant, particularly in the third quarter. When we sold -- what we're doing is -- we've had to really fight to get all these done. I mean, literally, it's been quite a battle for us. But we got it done, we got a record number of sales out and our team did a great job, but we worked excessive overtime. We worked to make sure we have the quality on those products. And part of it was, I think, it's a challenge for us being on that second shift. And I thought I should mention that we've hired somewhere around -- upwards of about 300 -- 500 new full-time employees these last 3 years to support the growth in volume. We're sort of a victim of our own success in a way. But when we look at going forward with our manufacturing team, we're looking at process changes, we're looking at selective automation that we can introduce to the line, looking at more off-line subassembly so the main assembly line has more repeatability because that's what really -- we struggled with a little bit. We've got a little too much going on in all of our individuals workstations on the line. If you look back 3 years ago, we weren't building anything like the number of propane buses. They were principally diesel. Now we're building a lot of propane. We weren't building gasoline, now we're building gasoline. The rear-engine surge we had this year has been a great success for us, but dealing with that with added complexity is tough. We've built -- a vehicle rolls off the Blue Bird line every -- between every 12 and 13 minutes. So when you have these complex products that are different, you try to contain them in the standard 12- or 13-minute pull-time, it's quite difficult. So we want to try and pull some of those activities out of the station so we can present them to the line much easier. And we do have plans for selective automation as well that will help speed up some of our processes and make them simpler.

Maybe on the market, you talked about 3% to 4% market growth, but can you just maybe kind of talk a little bit about -- when you look at school budgets and property taxes and maybe the overall average age of the buses in the fleet, I mean, can you just talk about what might be preventing that from being a larger number or when you might see some of that maybe replacement cycle really hit over the next couple of years?

Yes, first of all, look at it, we had a trough in our business in 2011. It's nice to see the business still growing 3% to 4% some 7 years after the trough -- we hit the trough. And so when you look at it, most states, and it's across the country really, housing prices have risen, there are more property taxes available and that's a big funding mechanism for school buses. But that same money is also funding a lot of education and schoolteachers. So there's a limit to how much the educational authority is going to put to school buses. Here is the good thing. I guess it's a good thing. The demand is there. The demand to actually buy more school buses is there because the average age of the bus fleet is about 11.5 years across the entire industry. And the typical school bus is replaced between 12 and 15 years, so we have an aging fleet. We have around 150,000 buses that are over 15 years of age in the market. Believe me, districts would love to change these buses. It's a question of them having to share the funding that's available when you put these property taxes and special bonds and [ spots ] funds together to help fund them. But look, it's -- everyone's benefiting. I think education authorities are benefiting, there is more money available, and we've been able to benefit as well. We're pretty much -- at 35,000 units, 34,000 or so, 35,000, we're starting to approach the peak levels of the -- before the recession and I still think there's a lot of runway on this. So we feel good about the outlook.

We'll take our next question from Chris Moore from CJS Securities.

Just back to the 150 or so government buses that are going to ship in Q1, a couple of things. One is what percentage of the buses that you sell are to the government? It's got to be very small at this point in time, correct?

Yes, it's typically less than 5% a year. It's a small piece of the business.

The issue, Chris, is that they were heavily focused into the third quarter. Typically, they flow through the year, but for some reason, we got a lot of orders requiring build in the third and fourth quarter and so we've struggled to meet that demand.

Phil's right. We have several hundred bus orders and actually the budgets came in pretty late this year, round about the March, April time frame. And I can tell you though, we are the -- we've said it before. I'm not sure if you're aware of this, but we are the preferred choice for the government for school buses. We typically have 80% of all those large type of bus sales. So -- but they did come later in the year and the government puts a very stringent inspection process on them, where an inspector will show up every month to review what was built the prior month, not what was built in the last couple of days, but literally they were built in prior weeks. And they come in, they inspect them and they release a few at a time. So we're sort of beholden to the inspector's timeliness of getting here. I mean, he's been here -- for example, he was here this week. We released a whole bunch of buses this week. But there's still a lot we are building now that have taken slots that -- we hoped we could get them through the process of inspection this week, but unfortunately the inspector's availability pushes it into the next fiscal year.

My thought process was perhaps, on the government side, you might be able to spread production out a little bit more, but I guess -- I mean, their fiscal year being September, it kind of coincides with that. So most of the government orders are still going to be before the end of a given fiscal year.

Yes, correct.

In terms of the makeup of those buses, are they purchasing a pretty good mix or are they focused more on the alternative fuels?

They are good mix. There's a lot of diesel engines in their mix. They tend to be -- they tend to look at what they purchased before, they understand them well. It's basically -- it's a pretty highly spec-ed vehicle. It's a school bus with obviously regular different type of seats, different windows in, a lot of unique componentry in there. So many of these buses, they might be in military bases in the U.S. but also overseas, even as troops carriers in some locations. So there is a wide range of specifications on these buses.

And then just back to the overall cycle for a second. Last cycle, it was 2011, you kind of lagged a couple of years. I'm trying to get a sense as to -- does this cycle look similar to the prior one to you? Does it look like it's a little bit softer and more extended? Softer isn't the right word but -- less peaks and more kind of gradual? Just trying to understand when we might wake up and say things are really starting to slow?

That's a great question. I am always asked that question, too. Our board asks us that question. When we look at the market out there and we research a lot around property values and property prices and property taxes in general, most states are a lot healthier than they ever have been. Looking at economic outlook right now, we've got a new administration and things are going pretty well since they were put in place. So I think we're quite bullish on the outlook here. Like I said before, there is a large demand to change. And what we are excited about is -- what's different the last cycle is this move to alternative-fuel-powered buses. There is a real interest now in emissions and being green and being different and doing what's right to improve the environment. I think we're well positioned for that. I do see the study, which I like, I don't like -- sometimes I think when you get these 11%, 12% surges, they're one-off and they're pulling back in the next few years. We've had a nice controlled increase, literally every state, with the exception probably of Illinois, which is going through its own problems and there's a lot of pent-up demand in Illinois. But in the majority of states, we talk to the state directors regularly, obviously we've got dealers in every state, which is our conduit to understand what's going on in the environment, and I'd say virtually every market we looked at is its steady growth is where our expectation is for.

Last question on the $50 million, on the buyback. Does that potentially extend to the repurchase of the warrants in the right circumstances? It seems like this way you're not minimizing the float at all, taking away some of the overhang, and it seems like you'd be kind of accomplishing the same thing in terms of bringing back ultimately that fully diluted number?

Yes, you're absolutely right. [indiscernible] It does include the warrants.

And we'll take our next question from Michael Baudendistel from Stifel.

I'm intrigued by this announcement that you have an electric school bus in development, I guess a few electric school buses in development, and maybe you can just explain how that is going to fit into your product portfolio? I guess, currently, the propane is the higher acquisition cost, but then a lower operating cost. Is that even more true with an electric, the way you see it?

Here's the way I look at it. Today, Mike, I think you know, you've studied us pretty well. We're pretty consistent with our message. The best total cost-of-ownership bus in the industry is a Blue Bird propane-powered school bus. No question. The best value over 15 years without doubt. Now the electric buses, for those markets -- and California is obviously one who puts a lot of grants on the table for folks who really want to have 0 emissions, and in many cases, they're putting hundreds of thousands of dollars' worth of grants to allow bus purchases. Recently, New York has put a proposal together to providing grants to get 0-emission buses on the ground. We want to be in a position to capitalize on that. And we saw it as a natural extension of what we're doing on alternative fuels. So it's not for everybody. It's obviously more expensive. We all know battery technology right now, battery costs in particular, are expensive, and to move a 33,000-pound GBW bus, you need a lot of battery. So it's an expensive product, but we want to be there for those districts that really want 0 emissions and provide grants to support it, and we will be.

Great. That makes sense. I just wanted to ask you, on the propane side, you have this exclusive relationship with Ford and ROUSH and it's really given you a competitive advantage and, like you said, you have way more propane school buses than anybody else, I think in large part because of that relationship. Is there an equivalent relationship with any supplier on the electric side?

Not at this stage. That doesn't mean there never will be. Doesn't mean we won't, but I can tell you at this stage there isn't, but it's early days. By the way, Mike, we do like to be different and we [indiscernible] products are the best in the market and differentiators, we do like to get exclusivity. It's important to us.

Can you talk a little bit about -- also sticking with the electric. What kind of goes into the powertrain for the school bus aside from the batteries you mentioned? Are you using different suppliers entirely there? And if you could tell who those suppliers were? Any details would be great.

Well right now, our electric buses on the -- and I'll talk about the larger buses, because we're talking about that Type D bus that we showed in Reno at the bus show, and then the Type C that we actually have a government grant for to build a Type C bus, where the Department of Energy gives a grant for that. Both of those buses we are developing with partners out in California, ADOMANI and EDI, which is Efficient Drivetrains, Incorporated. Specifically, EDI and ADOMANI have been successful already in this electric space and we think they're great partners. We love the speed they act and respond to us. And I tell you, the pace at which we're moving here to bring the bus to market is quite impressive. From the standpoint of technology, you're right, the battery is well on the cost [ line ], but also it's the brains in the vehicle to control the heat management systems. For example, the product we showed, the Type D, has no transmission, it's a direct drive system right from the engine powering the wheels, so -- the axles. So it's an exciting product for us.

Our next question comes from Scott Blumenthal with Emerald Advisors.

So Phil T, did you give an estimate for the total cost of overtime during the quarter?

No, I did not.

Is that something you can break out for us or are you not comfortable doing that?

Yes, I'm not too comfortable doing that. I gave you the number of days we worked, so -- but I don't really want to do the cost on it.

Can you remind me what the days worked were?

Out of the 13 production weeks in the third quarter, we worked overtime days in 10 of those weeks.

Just to give you some color of how we operate here, we work 4 days a week, 4 10-hour shifts. That's the 40 hours, Monday through Thursday, and typically Friday, Saturday, Sundays, are days off. In this case -- and that actually gives us flexibility for surge that we have to take when we get additional volume. So this will be work in the Fridays. So then we move into working the fifth day. So we get another 10 hours out of that fifth day.

Okay, that's helpful. Thank you. And then Phil T. again, can we expect or should we expect maybe a little bit of a margin headwind in Q4 since we'll be under-absorbing some of the SG&A due to the push-outs?

Yes. I would think that's a fairly astute observation.

No, you wouldn't be able to venture a guess on what that might be? Or once again [ that's me ].

No. I don't really want to get into guessing quarters because -- with the team.

You do provide us guidance, [ I just got to ] make a guess, right?

Well, I think when we provided guidance, I did say that as we look at the fourth quarter, I think we're going to see some higher sales. But to your point about [indiscernible] absorption being a little down, I did say probably the profits will be about flat versus 1 year ago, EBITDA. Probably not a bad assumption.

Phil H., I know you defined the government when you mentioned that this 150 bus block is largely or completely for the military, but can you talk about the -- you mentioned premium seating and better windows. I suspect those tend to be Type D buses. And is there any margin difference there between what you're building for the government and what you build for transportation companies or school districts?

Well, the difference is that there's typically a richer mix of options on those vehicles. The seats are not traditional school seats. They're much more -- a different structure, they handle adults. So when you look at it, yes, there's more cost in that product. And there's typically, as a result, a little more absolute margin in those products, yes.

You did say that was a very small proportion of your overall sales, but I don't recall you saying what percentage.

Typically it doesn't exceed 5%. It's 4% to 5% of our sales.

Okay. that's really helpful. And going back to the regular diesel engine buses, which still are a little bit more than 50%, almost 60% of what we're selling at this point. Have you ever disclosed as to what portion tends to be Type C, Type D?

No, we don't really do that. Certainly, the Type C bus is the best-selling bus in the industry. It's known, that. It's a long-nose bus. And if you look at industry, it's typically 2/3 to 70%, between 67% and 70% of the industry. And I think it's true to say we are pretty much in that range.

And I guess 1 more, if I can ask about the share repurchase program. I looked today at the trading activity and I think we traded about 27,000 shares. Just wondering what the thought process was behind deciding to do that instead of maybe a special dividend because there's not a lot of activity going on now, and to take some of that out there, you almost have to trade by appointment these days. So give us the thought process behind it.

Look, with our board, we talked about special dividends and then we talked about this buyback. We're a pretty new public company. We generate a lot of cash, free cash and we explored what should we do. Should we pay down debt? Should we pay a dividend? What's the best thing for shareholders? And we thought -- it's the first time we really have done anything special beyond just the normal course of business. And hopefully, a rise in share prices, based on our results -- we just came to this decision with our board that this was a good use of -- a good special onetime sort of an event to offer. And obviously, we put it over 24 months. You mentioned the share, the 27,000 we've seen weeks where it's been 60,000 and as high as 100,000. It's a little lumpy, quite frankly. We just thought from the standpoint of when we met with our board, this will be a good way to help our shareholders, the best choice for us in the near term. Doesn't mean we won't rule out other things down the road, but certainly for now, this was our unanimous agreement with our board to pursue this.

And there are no further questions. I'll hand it back over to Phil Horlock for any closing remarks.

Okay, well, thank you, Stephanie, and I want to thank all of you on the call today for joining us. We appreciate your continued interest in Blue Bird. I hope you can see we are focused on profitable growth and intend to deliver on our commitments. And I think we try and differentiate ourselves as best we can and try to make a real impact with our customers, and we're certainly seeing that in the results of the third quarter. I think we're very well positioned for growth today and for the future. Please don't hesitate to give a call to our Investor Relations Director Mark Benfield should you have any further questions. And thanks again from all of us at Blue Bird and wish you a very good evening.

And this concludes today's presentation. We appreciate your participation. You may now disconnect.