Good day, ladies and gentlemen, and welcome to the Blue Bird Corporation Fiscal 2018 First Quarter Earnings Conference Call and Webcast. Today’s presentation is being recorded. At this time, I’d like to turn the conference over to Mr. Mark Benfield, Director of Investor Relations. Please go ahead, sir.

Thank you, Catherine. Welcome to Blue Bird’s Fiscal First 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 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 morning, 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?

Well thanks Mark. Well, good morning everybody and thank you for joining us today for our first quarter earnings call for fiscal 2018. We welcome this opportunity to share our latest quarter results with you. So let’s start with an overview of our performance on Slide 4. As we have previously explained, the school bus industry is extremely seasonal, and the first quarter is always the softest quarter of the year with unit sales typically representing no more than 15% of the full year volume. This is also our expectation for fiscal 2018, and so I am pleased to report that our sales and potential results were strong, coming in well above last year’s levels. We sold just over 1,700 buses, which is 14% higher than a year ago. Net sales of $162.5 million showed even stronger growth and 19% above last year, buoyed by significant higher volume of our All American Rear Engine bus, which is our highest priced body style. We recorded our highest ever first quarter sales mix of alternative fuel- powered school bus sales at a healthy 31% of our total bus sales, and that compares with the 23% mix last year. In fact, our volume of alternative fuel buses were substantial, 49% higher from the first quarter last year. That’s leadership and momentum in the fastest-growing segment of the business. As a reminder, in alternative fuels, we do count all of our propane, compressed natural gas and gasoline-powered buses as all of these are alternatives to diesel, which has been the staple fuel for years. For the last several years, we’ve been achieving significant growth in alternative fuel bus sales, and I just mentioned, we have not slowed down this year. We’ll cover alternative fuel performance in more detail a little later. At $5.3 million,…

Thank you Phil. Good morning, everyone. The next few slides are a summary of our financial performance for the first quarter of fiscal year 2018. Additional information in the Appendix will deal with reconciliations between GAAP and non-GAAP measures mentioned in the review. Detailed material will be available today. We will file our 10-Q today. The material we are discussing today is based on a close of December 30, 2017 for the fiscal year 2018 year and December 31 of 2016 for fiscal year 2017. We had no new accounting pronouncements that impacted Blue Bird’s financial results in this report. Risk factors are basically unchanged from the previously filed 10-K. Also, please note there are some important disclaimers at the end of this deck. So if you want to go to Slide 8, which is a summary – Slide 9, I should say, a summary of the first quarter results. Obviously, as you can see from this slide, it’s lined up, the number of key statistics for fiscal year 2018 first quarter versus 2017. It was a fairly strong quarter for us. Volume, as Phil Horlock has already expressed, was an improvement of 14% versus prior year. It was our best first quarter since 2015, and that’s encouraging in that we’re starting to get some momentum back into the first quarter. Phil has already talked about propane being up. It was 31% of our sales, up about 12 points versus the prior year. Also in the first quarter, importantly, and you’ll hear a bit more about this later, we saw a 10 point mix improvement in our larger All American buses at a 30% total mix versus 20%. Net revenue was up by $26 million or about 21%. The majority of this growth was due to volume. Per unit revenue…

Okay. Thanks, Phil. So let’s now focus on the outlook for the year and our full year guidance. So let’s turn to Slide 14. As the headline states, we’re targeting margin growth in fiscal 2018. With the industry the 30-year high last year, we do anticipate another record year in fiscal 2018. Now the last earnings call, I indicated a flat to slightly higher industry. But based on the market activity we are seeing, we do foresee a potential for about a 2% to 3% growth in the industry, even this early stage in the year. Importantly, at Blue Bird, we are well positioned to capitalize on these opportunities. We now anticipate Blue Bird’s sales growth in the 3% to 4% range, slightly higher than projected in the last earnings call. But our focus on fiscal 2018 is on transforming our business structure as we seek to drive EBITDA margin improvement in the coming years toward our desired range of 10% to 12%, up from 7% last year. As I explained earlier, we’re excited about our plans underway on several fronts to drive efficiencies, higher quality and provide additional capacity. This work will progressively be implemented through fiscal 2018, and as Phil and I both mentioned, we expect to see results, particularly in the second half of fiscal 2018 and into the following year. Additionally, we’re continuing to work on our passion to provide best-in-class and differentiated products that customers want and value. That’s how you win in the market. So let’s now turn to fiscal 2018 guidance on Slide 15, which reflects these initiatives. Based on first quarter results, the outlook for the remainder of the year and the favorable impact of the new tax regulations, we are raising our guidance on all three reported metrics. Net sales guidance…

[Operator Instructions] And we’ll hear first from Matt Koranda with Roth Capital Partners.

Hey guys, good morning and thanks for taking the question.

Good morning, Matt.

Good morning, Matt.

Just wanted to start off with the revenue guidance and the raise there. I wanted to clarify, are you raising revenue because you saw strength in your fiscal Q1 deliveries or it’s essentially more of an outlook for industry strength ahead?

I think it’s a combination of both. I mean, obviously, we’ve seen a slightly stronger industry, but we’re also seeing a nice first quarter for us. And obviously, our – as we look and look at the business we’re quoting on, the backlog we have today and what we call – if you don’t talk about it on the call today, what we call our pipeline of activity that we’re working on, we feel good about it. So I think it’s a combination of both, I would say, Matt.

Okay. And then the one to two points of share gain that you guys had provided before and it looks like that’s sort of implied in the guidance here, but do you still view one to two points of share take as feasible? And I was curious, I mean, the – in one of the slides, you highlight 21% of customers or new customers are conquest accounts. It seems like a large portion of customers are conquest accounts. Why wouldn’t we expect – or why shouldn’t we expect more share take, just given those dynamics and the favorable alternative fuel mix that you’ve got?

Well, a couple of things, really, Matt – it’s a great question. But a couple of things I would say, first of all, the first quarter is relatively low volume, 50% typically of our full year. So it’s obviously fairly small in the full scheme of the full year. What tends to happen when you conquest an account often is they try you out, they test you. They come out and buy us. They don’t vet everything that year on you. They might just try it. We’ll take a few of your buses, see what we think of them. And then we like to grow into that the years ahead. So I don’t think you can take it that when I say 21% of customers doesn’t necessarily mean 21% of our volume. That’s the important distinction there. But it bodes well, and I think we do look to grow our market share. And when you talk about one or two points, that’s probably a good ballpark to be in at this early stage of the year.

Turning to gross margins for a moment, just with the mix of alternative fuel and then also you just called out sort of a mix of favorable Type D buses. Was there any element in gross margins or in your cost of good in terms of overtime? What were the inefficiencies that held it back? I mean, I guess Phil Tighe mentioned there was some element of sort of unfavorable mix, just given some of the custom work you did. But is that everything that drove the margins? Or was there overtime that you didn’t call out in the prepared remarks?

Yes. This is Phil, Matt. We were doing – we had a quite high mix of the government buses, which are the Rear Engine All American buses in the first quarter. Those things require a lot of preparation and quite a lot of work to get them ready for inspections, and so there was overtime in there that I didn’t specifically called out. The government is a demanding customer and we love having them, but there’s a lot of work done to get the buses ready. And given the lower volumes in the first quarter, they represented quite a high mix and substantially higher than the first quarter of last year. So that contributed to it. I think some of the other things were more driven around some of the type of – some of the specific markets that bought buses in the first quarter. We had quite a few of the alternative fuel buses going up to Canada, and that also complicates some of the costs. So yes, there were a few things going on. We see the margins being increasingly better than last year as we move through the year.

Got it. And in terms of freight costs, I think you had called out that out as well, Phil, in your prepared remarks. Could you just – is there a way to quantify that in terms of the drag that have presented this quarter? And do you expect that to continue? If so, how do you offset it?

Well, it was a little hard to estimate the pieces of it. We think that the cause for some of the trucks being off the road has been resolved over the last couple of months, and the drivers are back on the road. The fuel cost one will continue to be up, I think. Diesel fuel seems to be holding up at its cost level. We are – as part of that transformational initiative, we are working hard with some logistics providers, and we’re actually looking at alternative routes and more full-load trucking to spread some of the increase in fuel costs. So we don’t expect to see the level of impact as we go through the rest of the year.

Okay. And maybe one more for me, just when I look at the incremental margins on your revised guidance, it looks like, essentially, the implied drop-through on the incremental dollar revenue is about 25% incremental EBITDA. Am I getting that right? And then I guess does that hold true if the industry growth drives your revenue higher than expected for the rest of the year?

Maybe don’t go as high as 24%. I’d have to think about that one, Matt.

Our next question comes from Eric Stine with Craig Hallum.

Just wondering, you mentioned some major product upgrades, and it seems like that is different than just typical coming out with your next generation of your current products. So maybe just some details on what that’s referring to or as much detail as you can share on that going forward.

Yes. Eric, it’s Phil Horlock. So unfortunately, I can’t share that. That’s competitive information. I just – we – just like we have resources for our engineering team. We’re expending on that. If you look at what we talked about, which is a major product upgrade, look at our bus fleet, where we are, I mean, we know these are the things I want to do. I mean, other than that, I really don’t want to get into it. But we’re excited about it. We’ll – as we ready for the course of year, next year, we’ll sort of – probably more when we feel it’s the right time.

Yes, understood, okay. Maybe just turn into alternative fuels and I guess trying to get at maybe thoughts about ASP or average ASP going forward. I know last year, gasoline and propane volumes were pretty equal, but I also know the gasoline, you had some pent-up demand. So how do you think about that mix going forward, mix between gasoline and propane?

Yes, it’s a great question. I mean, both are doing very well. Again, I’m always reluctant to show you in the year to tell you what’s – to declare. Obviously, overall, a great performance. They’ve both been what we expected. Propane has been our – what I call our lead alternative fuel vehicle. It continues to be so for us, continues to be what I still believe best call custom ownership product in the marketplace. But obviously, gasoline, it’s a really easy proposition for other customers. They understand the technology. Refueling’s really straightforward. So is propane, by the way, but everyone’s perspective, gasoline is even easier. So it works really well. So they’re off – both off to great start. But I used to look at as our lead is propane and – but gasoline is extremely well for us.

Okay. Maybe last one for me, this is more big picture. But I know as you look out a few years, 2021, you’ve got the Phase 2 greenhouse gas standards coming, and I know that’s going to have an impact to diesel, the cost of diesel. So just thoughts on, potentially, what you think that does for your business? And do you think that the market fully appreciates the impact that, that is going to have?

Okay. Let me take the last part of the question first. I don’t think necessarily the market is really focused on that. I – certainly, when you’re involved. But when you look at the truck industry, look at whatever OEMs, big automotive OEMs are talking about, they do talk about the cost of transporting – I mean, vehicles that are powered by diesel is getting more and more costly and more and more difficult for customers to afford. I’m just looking at the fact that we’re in a great position. It’s not often you’re in a business that’s been around such a long time, and you see things like 30 or 39% growth in a quarter for a particular segment. So what we’re seeing, I think, is we’re seeing customers now really saying, "Hey, I see it. This is no longer a fashionable boutique, small product. This is mainstream." Propane, now with gasoline being added for us too, but particularly on the alternative fuels, the traditional ones, propane, I do think it’s – puts us in a great position. And by the way, we’re not stopping there. You’re going to see more coming from us. I can tell you that. That’s one product little tip I’ll give you. You’re going to see more coming from us in the propane front to further our advantage in the coming months. And we’re excited about that. I think we’re now actually positioned. Of course, now [indiscernible], we’ve got – now we got the zero emission solution, and we’ve given out – we’re going to be in both Type C, Type D, and I didn’t mention today, but, well, our Micro Bird Type A electric this year. So for those folks who’ve got grants, California, New York, I mean, these are markets where we hear a lot about interest in zero emissions, they setup the play with grants, we’re going to be very well positioned for those businesses, those customers.

Got it. Okay. Thanks a lot.

We’ll now hear from Chris Moore with CJS Securities.

Hey, good morning. Thanks. Maybe just start kind of bigger picture, too. From a kind of overall dynamics of the big three players from a pricing standpoint, what are you seeing for 2018? Is pricing pretty much flat? Is there – you anticipate a little bit more aggressive stance, going after market share from the other two? Or kind of how are you looking at that?

Well, first of all, I don’t really want to talk about the other two. I’ll talk about what we’re seeing. Actually, it’s fairly flat right now. I mean, that’s – it’s a good market. It’s similar to last year. It’s looking a little bit up, as we said, in the industry outlook, but a lot of interest in our products. And certainly, it’s flat to – and if I can – if we can get more pricing where we can, we’re going to take it. But I wouldn’t say there’s been any real change, dynamic change or anything out there in the marketplace from what we can see, so from our customer base. There have to be a little bit position, yes.

Maybe just switch to the alternative fuel for a second. So just in terms of the average expected life of the alternative fuel buses and maybe we need to break it down between the two, but is it similar to diesel? Or how do you look at that?

Absolutely. The life of the school bus typically – the average life of a school bus in most districts are between 12 and 15 year, that’s a guideline. Some states we run their buses for 20 years or more. Absolutely, there are alternative fuel buses to propane, gasoline and the CNG can handle that completely. I mean, we – there’s no issue there. I think it’s pretty proven. I mean, you look at that – I talk about this a lot, but that Ford engine out there is powering a whole bunch of F-series trucks. There’s about 1.5 million of them on the road. Believe me, that’s a tough durable engine that’s proven many hundreds of millions of miles of experience from that product and putting it through its paces. So no, we are very confident. And by the way, we do back up that one, because I mean, we have the best warranty in the business. We offer five years unlimited mileage warranty on that product across the full range of those. So it’s – we don’t see any issue at all on longevity of that product. That’s with diesel.

Got it, got it. And so the point being – I mean, we talked to – you talked last quarter in terms of potentially bigger opportunity on the parts and service side from the alternative fuel because of the ability to – relationship with Ford and ROUSH. So if I’m looking at the potential for parts and service revenue over the lifetime of alternative fuel bus, I mean, what’s a reasonable estimate for revenue as a percentage of the upfront cost of the bus? I mean, is it 10%, 20%, 30%? I’m just trying to get a feel for – from a modeling standpoint, what’s possible moving forward, given that upside on the parts and service.

So are you specifically talking about the Ford- ROUSH parts and service opportunity while I get this?

Yes, right. So what I ‘m trying to understand, kind of – while there’s more opportunity in parts and service on the Ford and ROUSH, I don’t have a good sense as to – let’s just assume it’s on the propane bus. What percentage of that, whatever that might be, $85,000 or $90,000 could you generate in parts and service over the lifetime of that bus?

Yes. I mean obviously when you look at parts and service, the parts and service opportunity varies. They are called to the age of the bus. When you need older bus, more service it needs, more work it needs, more things exchange. They have to change things out. That’s part of the life. I don’t really want to get into sort of dropping a number on the table. What I really mean – because here’s why. We’re just – we’re now in our sixth year of selling the Ford-ROUSH product. First five years were all covered by warranty. I mean, there’s minor service work, routine service. Now we’ll see the benefits going. But relatively speaking, it’s still a fairly small part, isn’t it? There’s still – we have 150,000 school buses on the road that are Blue Bird branded, right, running across North America right now, and which we said before, we sold our 10,000 th propane last year and that’s – so it’s 100,000 of the whole 150,000 network. It is fairly small in the scheme of things, but obviously, we’ll grow going forward. Bit of a long-winded answer, but I mean – I guess to try and think of what I could tell you is, there’s probably – when you look at oil filters and routine maintenance and, occasionally, as the bus ages, year eight, nine, ten and may be some bigger service item, probably $300 [ph] a unit, something like that in the parts and service – in the parts opportunity, something like that, I would say, going forward, that we don’t have today that we could capture.

Got it. So my assumption was the back half of the life of these buses is when that part of the revenue probably would kick in. So all right. I appreciate it, guys.

You bet. Thank you.

[Operator Instructions] We’ll go to Mike Baudendistel with Stifel.

Thank you. Just wanted to ask you, I guess in your adjusted EBITDA guidance, how much is included for transformational costs and product redesign costs?

In adjusted EBITDA guidance, there is nothing included because we’ve adjusted out. Because what – I want to make sure we’ve got this right. There’s a unique cost we’re paying today. We mentioned about we brought into Mexico partners are working with nonrecurring. Once we’re done with this, they’ll be gone. We get the benefits of the savings. So in adjusted EBITDA margin, there is nothing in for that. In fact, there’s a reconciliation page towards the back of the material, and you’ll see what we spell out there in the first quarter, that we specifically excluded from adjusted EBITDA, but obviously, it’s in the net income number.

Okay, yes. I was just asking more for how much you’re planning to adjust out. I got that it was adjusted out or even if you think that’s a relevant number.

Mike, you can see the number on Slide 18, it was about $7 million.

Okay. And then maybe just another question while on that topic of adjustments. I mean, I guess – can you just explain why you feel that stock-based compensation and product redesign costs should be adjusted out from adjusted EBITDA? I mean, both of those things, at least to me, seem like they should be just costs that are from the regular course of doing business.

The product redesign probably there is some history to this. We did it previously. These school buses don’t get redesigned terribly often. The bus – the average life of these buses is like 15 to 20 years before you do anything major to them. So it’s a little hard to call it normal operations. If you look at the automotive industry, where they’re doing a minor or a moderate or a major change on every – on a two-year cycle with vehicles, two for minor and four for moderate and eight for major, the school bus industry is nowhere near that. We’re talking 15 to 20 years between any sort of model change. So we concluded that it was appropriate to deal with it this way because we will spend the money over the next 12 to 18 months and then you probably will not see that sort of money spent again on a bus for 10 years or more. So you don’t really want to skew your ongoing profitability with that sort of large cycle spend. Stock-based compensation, this is really, I think, a pretty common practice, that we’re saying that stock-based compensation would come out on an adjusted EBITDA basis. It’s clearly not – it’s a reflection of valuation of the stock. Be more than happy to talk to you about that off-line, if you want.

I think there’s been a stock-based compensation. It’s a non-cash item. So therefore, that’s one of the item [ph] is a noncash item and, therefore, would – is appropriate to pull it out. That’s the rationale that most companies use.

Got it, understood. And then I guess the other question, just from covering some other manufacturing companies, I mean, some of those other companies are having difficulty with input cost. I know you talked about transportation cost, but I mean, I think some of these others were having difficulty with rising commodity prices and then difficulty with labor. And I guess it gets us to different labor pool. It’s local to that Georgia area. But I just – you talked about running some overtime hours, but are you having difficulty finding and retaining employees with the stronger industrial economy?

Yes, let me take that. I’d say, we’re doing extremely good job here. We are here in what we call Middle Georgia. We’re the largest public company out here, largest manufacturer, and we do a great job. In fact, we run a job fair about a year ago when we had literally thousands of folks fill up, interested a job with Blue Bird. So I think we do a very good job of retaining our employees. We’ve always had this seasonal employee base too that, typically, we’re able to access, just the nature of the farming work around here when they do. So it works well with us. That’s a good counterbalance for us. So we’ve been able to bring some of those folks in full time too as we grow in the business, and we’re successful. So I think that works really well for us. Sorry, what was your second question? You had a second point to that one.

Yes. Anything on commodity price increases that you’re seeing that could impact margins?

Let me take that. We – our biggest commodity by far is steel purchase, a lot of steel goes into a school bus. Our guys have done a lot of work with the mills. And then actually as part of our transformational initiative, we’ve done a serious amount of work with the mills that supply us and other people we work with on steel. We think we’re – we do see steel going up. We’ve seen it, but we think we’re in a position where the steel pricing is something that we can contain with our margin – within our present – within our margin projection for these year. We buy selectively in advance to take advantage of spot rates, and we do buy, we believe, at a pretty good rate from the folks that we do business with. So we’re conscious of the commodity change. We’re conscious of the fact that steel has risen quite a bit, but we have provided for it as we planned our margins going forward.

Got it. Thank you.

Thank you.

Our next question comes from Scott Blumenthal with Emerald Advisors.

Good morning gentlemen.

Good morning Scott.

Good morning.

I’m going to follow-up on one of Mike’s questions here. I don’t know if we – maybe he – if I asked it a different way. And I guess this is a question for Phil Tighe. The product redesign costs that were adjusted as part of the adjusted EBITDA, do we expect that same type of run rate per quarter? And for how long should we expect that? It looked like it was about $750,000.

Yes. It’ll move around a little bit by quarter, but – and I would expect that you will see it for about 12 months. You got through cycles with these development projects. And so we’ll see some of it for about 12 months as we go through the complete engineering and testing cycles.

We noticed that most school buses, regardless of brand, look very similar. So are these redesign changes mandated by new regulations? Or is this something that Blue Bird is undertaking themselves to maybe make the bus more easily producible, more efficient or some other reason?

Well, I think, if I could just mention this. I think it’s what Phil touched on earlier. We talked about the fact that – you’re right, the buses, they look somewhat the same in all regards, right, and they’ve been around – they have 15 to 20 year life. But after 15 years to 20 years, they need – you need to do something to them. So we are – this is our initiative we’re embarking on, to do something that will obviously extend the life. We’ll bring to the market, it’ll be exciting, customers are going to love it, bring new features that’ll help us look in – run this bus out into the future. So that’s the best I can give you. It’ll meet all the regulatory requirements like – as Blue Bird tries to do, exceed them, in many cases, and we’ll also provide the customers with incredible value.

Okay, great. Now Phil, you said that you expect – or that the production slots are full through Q2. And are – you are still running two shifts currently, correct?

Yes, we are.

And certainly plan to do that through Q2.

Yes. Through the rest of this fiscal year, we’ll run two shifts, yes.

Okay. Thank you for that. And also you mentioned that alternative fuel buses were 31% of sales. Is that dollars or units?

Units.

Okay. And I guess my last one to clean things up. I guess this would be for Tighe. Phil, could you give us a number of shares or average price per share in the share repurchase number? I think you mentioned $38 million to date.

Yes. It is to date, I don’t have the number of shares only. We can certainly get it to you. But – is there someone in the room that can do it?

Yes, it will be in the 10-Q filing later today.

Okay, super. Thank you.

Thank you.

Thank you. We’ll hear now from Prasad Phatak with Tappan Street Partners.

Hi guys, how are you?

Hi Prasad.

Good thanks. How are you doing?

Good. Just a quick question for you. It looks like the next sort of nine months the free cash flow generation could be in the – just kind of doing the math on the adjusted free cash flow, could be as high as kind of $70 million, which kind of puts you in the net debt position at year end at – as sub-one times levered. Just kind of curious, with your cash flow hopefully even growing into next year with tax reform and then hopefully some margin improvement, is there any plan for some kind of regular dividend or maybe even like a floating dividend at year-end, where you pay some percentage of yearly cash flows, something like that? Because at some point, we obviously don’t want you to pay out debt, and at some point, your cash balance is just growing so much.

Well, look, I think you’ve raised some good questions. These are all I could tell you. These – at this point, these are things we discussed with the board, and we always thought, well, where are we going to use our cash flow, what’s the best use of it. Obviously, we elected to do a share buyback program at the end of last year. I think it’s gone very well for so far. We’re excited about and that. We just had a board meeting just last week, and what do we do? We talked about cash and how we’re going to use it, and we’ll just let you know as we go forward here. But you raised some great points there, great question. We just want to make sure we do the best things to drive shareholder value, and we’ll let you know some of the details.

And no additional questions in the queue, I’ll turn the floor back over to our speakers.

Okay. Well, thank you, Catherine, and thanks to all of you for joining us on the call today. We do appreciate your continued interest in Blue Bird. I really love the questions you asked. I think you’ve got a sense, I hope, that we are focused on profitable growth, and we intend to deliver on our commitments. And I think we are really well positioned for growth today and well into the future. Please don’t hesitate to call our Head of Investor Relations Mark Benfield, should you have any follow-up questions. Once again, thanks again from all of us at Blue Bird. Have a great day.

Thank you. Again, ladies and gentlemen, that does conclude today’s conference. Thank you all again for your participation. You may now disconnect.