Good day, and welcome to the Blue Bird Corporation Fiscal 2018 Second Quarter Earnings Call and Webcast. Today's conference 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, Cody. Welcome to Blue Bird's Fiscal Second Quarter 2018 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 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?

Well, thanks, Mark. So good afternoon, everybody, and thank you for joining us today for our second quarter earnings call for fiscal 2018. We welcome this opportunity to share with you our latest quarterly results. So let's start with an overview of our financial performance on Slide 4. As we previously explained in prior calls, the school bus industry is extremely seasonal, and the first half sales typically represents around 35% to 40% of the full year sales. Well, despite the typically slow first half, we did achieve strong sales results in the second quarter with almost 2,500 buses sold, which was 3% higher than last year's second quarter and, importantly, a 43% increase over the first quarter. You'll recall that our first quarter sales were well above last year. So in fact, for the first half of the year, our unit sales were up a very strong 7%. At $270 million, second quarter net sales revenue was 4% higher than last year. So the net revenue growth was a little higher than the unit sales growth of 3%, largely due to our significantly higher mix of alternative fuel-powered school buses, which grew from [Audio Gap] year to a 34% mix in the second quarter this year. In fact, through the first half of the year, our unit sales of these vehicles grew by a substantial 56%. That's leadership and momentum in the fastest-growing segment of the business. Now as a reminder, in alternative fuels, we 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, however, we've been achieving significant growth in alternative fuel-powered bus sales; and as I just mentioned, we have not slowed down. However,…

Thank you, Phil. And good afternoon, everyone. The next few slides are a summary of our financial performance for the second quarter of fiscal '18. Additional information is in the appendix and deals with reconciliations between GAAP and non-GAAP measures that are mentioned in this review. More detailed material is also available in our 10-Q, which has been filed. The material we're discussing today is based on a close of March of 31, 2018, for the fiscal year '18 second quarter and April 1, 2017, for the prior year. We had no significant changes in our critical accounting policies in the period. Risk factors are largely unchanged or unchanged from the previously filed 10-K. And also, I would remind you to please note the important disclaimers at the end of this deck. So if we move to Slide 9, which is a summary of the second quarter results. Some of this material Phil Horlock has already mentioned, so I'll try not to duplicate. Very quickly, you can see our volumes at the top. Phil talked about those. I would point out that our second quarter volume of 2,441, I did a little research today, and I think it's the highest second quarter volume in Blue Bird in the last 15 years. It may be longer than that, but I can only find 15 years. So we -- that's a good achievement for our team in this slow selling period. If I look at net revenue, we mentioned that it's up 4%. So about 1% of the increase was due to higher average selling prices, and that's also a positive indicator in that we are continuing to get traction on increased average selling prices. The increase was largely due to, obviously, the higher mix of alternative fuel buses and, importantly, came…

Okay. Thanks, Phil, for that. So let's now take a focus on the outlook, as Phil said, for the balance -- for the full year and also for our guidance. If you could just please turn to Slide 14. So first on the industry. With the industry at a 30-year high last year, we do anticipate another near record year in fiscal 2018. I mentioned this in my initial slide. And we really based that on the fact we're seeing really good strong market activity again this year. And also looking at ACT Research on industry orders, we do see a potential for a 2% to 3% industry growth for the numbers, so somewhere 35,000, a little bit above, between 35,000, 36,000. And again, it's important -- that is a strong industry. As we said before, that's the highest industry since 1985 that will be, so a 30-year high. Importantly, we believe we're well positioned to capitalize on these opportunities, and that's what we're trying to do. We do expect Blue Bird growth in the 3% to 4% range, slightly higher than the industry growth. So I think as you can see, we're off to a good start in the first half of the year in achieving that. So our focus in fiscal 2018, as we said in the last earnings call, is on transforming our business structure through a series of actions addressing cost efficiency, quality, capacity and product actions. As we seek to drive our EBITDA margin this year to 8%, up from 7% last year, that's our financial goal for this year. And we look at this as a step towards our desired range of 10% to 12% EBITDA margin in the coming years. That's our goal we want to be, 10% to 12% range and finish…

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

This is Brad Noss on for Matt. I just wanted to start by looking at gross margin, and just seeing if you can help us for a breakdown and quantify the main inputs that we're weighing on gross margins between commodity inflation, labor, freight or any other factors in there.

Well, the major impact on the gross margin is really the commodity and freight. That's more than half of the deterioration. There were -- as I said, there was a little bit of adverse mix and some costs for getting dealers into volume in the second quarter. But the -- that was -- that's more typical of what goes on in the second quarter in Blue Bird. I think the new news was clearly steel cost, the cost of other metals in the commodity area and the ongoing cost escalation of inbound freight. Clearly, the steel will continue to be an issue; and quite frankly, steel hasn't yet settled down, and it probably won't until all the tariff stuff gets through. And I don't see freight easing off yet. I see oil is continuing to see some run-up. I think it hit more than $70 a barrel this week. So we -- we're not assuming these costs are going to go away in the near future. As Phil just mentioned, we're going to price, and that will help alleviate it. And we're also going to continue to look for -- continue to work on measures to offset the costs through various -- a variety of other aggressive actions to reduce product cost. That's about it for that one.

All right. That's helpful. And I guess, just given these continued headwinds and you're not able to really see them beginning to abate in the near term, I mean, what really gives you the confidence in reiterating guidance with these headwinds? What are -- what sort of are you building in? And is it just the pricing and what you previously expected for the transformational initiatives that are really going to offset it? Or what else are you able to do there?

Yes. I think, Brad, you're doing a good job of explaining there. Obviously, the transformational initiatives are driven at -- drive -- [ part ] of driving down costs. We have a lot of people in our team here at Blue Bird focused on that. And we have external help driving that with professional assistance. And so we're seeing -- we are seeing the results. You'll see that coming through in the second half. So it's driving that, trying to exceed in, push further on that. The second thing is obviously the pricing I mentioned. And in fact, I've talked to our dealers on that, half of our dealer network, just this last week, that we'll be doing that, and we discussed why, and they understand that. So we'll be putting that through the network. And the third thing is we are a group who want to be responsive. We try to be responsive in Blue Bird. And we look at things like what's in our budget. We look at where we have positions that are open, where we can push costs off till next year and where can we defer things. Can we push it out until things settle down a little more? There's always levers you can pull and push things out by a quarter or 2 and may give us some bit of free space here to tackle these headwinds. So -- and we control. That's what we do every day. And as Phil mentioned, that was part of how we're able to still come back with a pretty strong result in the second quarter despite seeing the impact of some of those steel things. Pretty late in the quarter, we were able to pull some of those levers. So that's really it. We just get -- is what we work on it every day, Brad, and it's a great question to ask, but we're responding to it.

Great. That's helpful. And then just in regard to the price increases, obviously, you said you just communicated out with the dealers recently. So, I guess, as they begin to book with the new prices, would we see that benefit in Q3? Or would [indiscernible] have to come through in Q4 since most of the production slots are already set for Q3?

Yes. I mean, most of it, you'll sort of see coming through Q4. And of course, like an at -- it's a very dynamic business [indiscernible]. We have quotes out there that can [ stand ]. We're not going to go back and tell someone who's been quoted a price, "I'm going to change what I just agreed with you." So you have to let that run through, and then you'll see sort of towards -- it'll be the fourth quarter really when you'll see the full impact of that. You'll see some towards the end of the third, you should see, but we will honor what we've already got out. That's why I made the point of saying, "The new quotes and new orders, they obviously -- they will receive the higher price." But the ones that are all existing there and still working with our customers on, we wouldn't pull the trigger on that just yet.

Got it. And maybe just one more for me. I think you had mentioned prior that you have the ability or you typically try to sort of prebuy some of your steel to fix out a certain portion in advance. But I was just wondering if you were -- if you're able to do that now to help you -- get you through the rest of the year? Or if the current quarter impact from the steel increases, why that wasn't as, I guess, hedged from previous prebuys or anything like that?

So we're -- with respect to steel buy, our price for cold rolled steel is basically locked for the third quarter. We deal with a broker. And -- so we understand what our pricing will be for the third quarter. And fourth quarter is getting very close. And we're doing everything we can to work with the broker to make sure we get the best price available. Again, our pricing is based on backward -- is backward looking, not forward looking. So we're not getting priced at the moment based on where some of the forwards are, which are not great.

We'll now take our next question from Eric Stine with Craig-Hallum.

It's Aaron Spychalla on for Eric Stine. Maybe first for me, on the alternative fuels, good color and good to hear that things are going well there. Maybe on the electric side, we were out at ACT Expo last week and heard a lot of the interest in the electric bus. And it seems like some of that interest has expanded into markets where there isn't as big of incentives as other markets. So can you kind of talk about that a little bit, please?

Yes. I mean, certainly, I think we're fine with electric products and certainly even with our compressed natural gas bus, which is a significant premium over traditional fuels. They've always been successful where there are grants available. So you look at California. In particular, New York has been quite a good market. Texas has been from time to time, but particularly California. So we've always found that certainly when you say -- it's quite a bit more expensive, electric bus. The interest we're getting around it is certainly where there are grants available. California is terrific. New York is terrific, as I mentioned earlier. And then this VW funding, I think, certainly, the timing of that is really good for us. End of this year it should be available. And we can capitalize that. You're right, there are certain areas and certain cities which they want to show a real green stance, and they're really excited about the opportunity there. And when we are talking to some of those cities where they've set funds aside to have a really strong electric movement where the grants today are not like you would get in California and New York, but they tend to be the smaller volume, the little onesie, twosie, unique cities that -- municipalities that might want to do that. But the big markets are the ones I mentioned earlier, the ones where the grants have to be available. But the nice thing is VW money, if you want a 0 emissions product and you want to try one and you want to test it out, that's a great opportunity. And we're in a nice position, I think, to be able to provide not just 1 bus, but for the Type C and a Type D, and actually a Type A bus through to our Micro Bird partnership powered by electric.

Right. Okay. And then maybe second on the parts. I know that's been an initiative for you to try to get more SKUs into the dealers. Can you just give us an update there?

Yes. On the parts side, it's was a -- it a -- it was a flat quarter for us. And I think often you get that in the second quarter in the parts business. You're looking at January through March, I mean, the first quarter is usually up a little bit. That's because of winter issues, you're back at school, you're dealing with things, the snow conditions, ice. The second tends to be a little -- backs off, a little slower. And then as we get school -- head to toward school start, it picks up again when you're renewing the buses. So I would say the second quarter typically tends to be the least growth in the quarter that you achieve. But look, we've actually -- we actually just appointed a new Senior Vice President, Head of our Parts division. He's a seasoned Blue Bird guy, Dean Coulson. Dean's excited about this opportunity. And we want to overachieve in this space. We're adding new SKUs every week to our portfolio of products. And what that means too, Aaron, is not just original equipment parts in our buses. But we are finding, obviously, when a bus gets 6, 7, 8, 9 years old, the original OEM part may not be required, and maybe they don't want something that lasts quite that long on a 10-year-old bus. So we are looking to sort of look at increasing that SKU -- the parts that we can offer and going beyond the traditional business that we've done. So as I've said consistently, I do believe we should be overperforming to the industry in parts, outgrowing the industry growth, because we have a big unit -- park of buses out there, well over 100,000 -- like 120,000-plus school buses on the road that are actively being used for school buses, requiring parts, requiring service. And we want to get our full share of that. So again, I think going forward we would look to continue growth in the parts business beyond the traditional industry growth of the bus business.

All right. And then maybe last for me, just on the capital allocation strategy. Can you give us an update there? I think I heard in the prepared remarks that you finished the share repurchase program in the second quarter?

Yes, it was completed in the second quarter. We -- the board had authorized up to $50 million, and I think that's exactly what was spent on buying back purchases -- buying back shares. So that one is done.

All right. And then, I mean, I guess, is it just kind of stay tuned there? Or given kind of the free cash flow profile of the business and kind of growth outlook, anything else on share repurchases or dividends or anything like that, that you can discuss at this time?

I think on this one it's a bit like stay tuned on that one because, obviously, we have a lot of things going on this year with our transformational actions. We've got things we're dealing with. We're putting in a brand-new paint shop. So you have quite a bit of capital spending that will run into next year too. But I'll just say stay tuned. We still feel very bullish about our cash outlook. We've got a strong -- as you saw, free cash flow -- adjusted free cash flow is still very strong despite these investments. And I would just say stay tuned on that. For now, we have nothing to announce on that one.

[Operator Instructions] We'll hear now from Chris Moore with CJS Securities.

I think it was Phil Tighe that talked a little bit about the -- kind of a very competitive pricing environment you had seen earlier in the quarter. So was that related to just alternative or overall for all the buses?

Oh, no. Chris, this is Phil. It was all the buses. So there's a lot of movement going on out there with people trying to shore up positions in various markets, particularly markets that they've had for a while. And so it's fairly active. And you couldn't pin it on any one particular bus. It really gets down to companies trying to protect a position that they might have had with a specific account within a state for some time. And so we fight this on a daily basis. As you know, we're a bid business. And so many of the school districts will look for the best price they can get. And so we're always fighting this. But we have seen some people that have been fairly aggressive recently. And I wouldn't put it to the second quarter. I mean, this has really been going on for the first half of the year.

Okay. So, I guess, the question is then, how does that fit in with the strategy of kind of raising prices given the increased commodity cost? Kind of how do those 2 fit together?

Well, I think the cost has happened, right? And it clearly has not just happened to Blue Bird. Our competitors would be experiencing it as well. So we -- we're trying to take care of Blue Bird at the moment. And so we think that this will be one of those structural movements where everybody will look at it. You look at some of the reports from earnings that's come out from other companies, and there's a lot of people being hit with this commodity cost issue. And the only -- one of the tools you've got, you haven't got a lot of tools, but one of the tools you've got is pricing. And so we fully expect -- we know what we're going to do, while we can't comment on what our competitors will do, but we do know that everybody has been hit by these prices.

Got it, got it. You talked earlier in terms of the -- some of that propane buy in the second half could get pushed into '19 with the VW incentive money. Do you have any sense in terms of how much of a benefit a buyer of a propane bus would gain by waiting from second of '18 into '19, how big that incentive is?

Well, it's a great question. I mean, obviously, this VW money is pretty sizable. I mean, it starts with a $14 billion fund. And then the piece that we pay -- we play in is about a $2.7 billion, $2.8 billion worth of funding. And that gets -- there's a whole bunch of potential beneficiaries of that, the transit bus business, the forklift truck business, the transportation around the shipyards for it. So there's a lot of folks vying for this money. We've been out -- certainly, we have a group of lobbyists that we work with who've been out, and we're looking probably to all states to see how much money is available. And we've already heard quite a few states saying they certainly going to allocate a significant portion to the school bus business. We've heard that from many states. The thing is more than half the states haven't actually settled on their actual amounts of money they're going to give to the different segments yet. They've actually said it going to be towards the end of the year. But we have had discussion with some states, and some folks talk about applying a partial incentive. We've heard some states talking about we'll pay for an entire bus as long as it meets a certain NOx level. And that NOx is very important. I mean, this nitrous -- nitrogen oxide level is what this is all about, how much can you take off the road, take out of our climate, how much can you reduce it by. So the better product you've got in terms of meeting that and the cleaner product you've got, the more chance you are of getting funds. And we think we're in a good position. But in fact, in terms of detail, do we know exactly yet -- exactly how these grants are going to be provided? That's not -- that's still being worked on, still being worked on by the beneficiaries of those funds that each state has selected. And we're -- like I say, we are -- we're engaged with those folks, trying to help them figure that out.

Got it. That's helpful. Last question just in terms of big picture on the -- kind of how you guys are looking at the electric bus opportunity. I'm -- are you kind of looking at that where you have the ability, similar to what you did in propane, kind of to lead the charge there with perhaps kind of a less significant market opportunity?

I think if -- yes, I mean -- that's a great question, Chris. I think it fits with our strategy we've been adopting, which is differentiated products and features, and we think there's a market for this. I think it's -- I think the VW funding is a good catalyst to get people who would otherwise never got a chance to get into the electric bus business, get a chance to buy one using these funds because batteries are expensive. And there's no question, a green electric bus powered by electric is going to cost you a lot more than, say, a propane, a green propane bus. It's going to -- for every 1 electric you can buy, you can probably buy maybe 4 propane buses. But nevertheless, there are districts -- and I understand this, who want -- they want 0 emission. I mean California would like to be able to have 0 emission. So they are taking this very seriously, I think, and will certainly utilize a lot of that funding against 0 emission school buses. For us, we like being a leader in this space. We think it's a new opportunity to show what we can do. But I also stressed clearly that anyone who wants a diesel bus, we have the best diesel partner too in Cummins. We're exclusive to Cummins on the diesel engine because no one else is diesel engine. So if you want diesel, we've got that, but we have a very broad array of offerings for everyone.

And that does conclude today's question-and-answer session. I would now like to turn the conference over to Mr. Phil Horlock for additional or closing remarks.

Okay. Well, thank you, Cody. And I want to thank all of you for joining us today on our call. We do appreciate your continued interest in Blue Bird. We always enjoy these calls. It gives me a chance to tell you our story as we complete the quarter and look forward to the outlook for the future. We are focused on profitable growth, and we intend to deliver on our commitments. And I do believe we're well positioned for growth today and in the future. Please don't hesitate to contact our Head of Investor Relations, Mark Benfield, should you have any follow-up questions. And thanks again from all of us at Blue Bird, and have a great day. Thank you.

That does conclude today's conference. Thank you all for your participation.