Good day, everyone, and welcome to the Blue Bird Corporation Fiscal 2018 Third Quarter Earnings Conference Call and Webcast. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Mark Benfield, Director of Investor Relations. Please go ahead, sir.

Thank you, Yolanda. Welcome to Blue Bird's Fiscal Third Quarter 2018 Earnings Conference Call. The audio for our call is webcast live on blue-bird.com under the Investor Relations tab. You can access the supporting slides on our website by clicking on the presentations box on the IR landing page. Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird's President and CEO, Phil Horlock; and CFO, Phil Tighe. Then we'll take some questions. Phil?

Well, thanks, Mark. So good afternoon, everyone, for joining us, and thanks for calling in today for our third 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 financial results on Slide 4. Let me begin with a comment on the industry outlook. We still expect new bus sales to be flat to slightly higher than last year and should again exceed 35,000 new buses. This is strong demand, and would be the second-highest school bus industry since 1985. This is a good industry to be in right now. So at Blue Bird, we achieved strong sales results in the third quarter with almost 3,750 buses sold, which is only about 100 units below last year's record sales for a third quarter looking back over a decade. So a very strong unit sales quarter for us. Additionally, it represents a substantial 53% increase over this year's second quarter unit sales. So for the first 9 months of the year, unit sales are up a little over 2% from last year. Importantly, in the third quarter, almost 20% of our end customers were new to the Blue Bird brand, representing about 30% of our total sales. That's a really strong endorsement of our products and dealers with gasoline and diesel-powered buses leading the way in conquest business. At $340 million, third quarter net sales revenue was 6% below last year's level, reflecting a lower volume and mix changes, I just mentioned, led by higher gasoline and diesel bus mix this year, priced little lower than the average. At $23.7 million, third quarter adjusted EBITDA was $9.2 million below last year. Now we mentioned in our prior earnings call that we were experiencing significant headwinds…

Thank you, Phil. Good afternoon, everyone. The next few slides are a summary of our financial performance for the third quarter. Phil has already hit some of the highlights for you, and we'll spend a little bit of time with some detail. Additional information is available in the appendix and deals with reconciliations between GAAP and non-GAAP measures as well as important disclaimers. Detailed material is available in our 10-Q, which has been filed. We encourage you to read the 10-Q and the important disclosures that it contains. The material we're discussing today is based on the close as of June 30, 2018, for the '18 fiscal year and July 1, 2017, for fiscal year '17. I would point out there are no significant changes in our critical accounting policies in the period. And risk factors are unchanged from the previously filed 10-K. And let's now take a look at our summary of results shown on Slide 9. This slide summarizes our actual results for the third quarter and the same period of 2017. We also included second quarter of fiscal year 2018 results as we believe there are some important points about that you can draw from that and the importance of seasonality in our business and to highlight progress in some key areas. Looking at volume for the third quarter, Phil has already talked about this, 3,746 units, about 100 units down versus the record volume achieved in 2017. We've talked previously about the highly seasonal nature of the school bus business and the fact that generally production and sales in the first half is less than 40% of the full year, so you can see the growth in volume from second quarter to third quarter of over 1,300 units. We expect volumes in the fourth quarter will…

Okay, well, thanks Phil. So let's now focus on the outlook and our full year guidance. Let's turn to Slide 16. As I did mention at the start of the presentation today, we do anticipate another strong industry, about 35,000 units or slightly higher. So again this is a 30 year high business we're operating in right now. So we feel really good about where we are. That said, we expect Blue Bird sales growth to be in the 3% range, just little bit above the industry growth. So that's a strong position as well to be in. Second half adjusted EBITDA margins will be better than the first half, but lower than expected in the third quarter. We are forecasting margin recovery in the fourth quarter, as Phil showed you on the bridge, from cost recovery pricing, which is late in that quarter and the cost reductions that we talked about. Now our focus on fiscal 2018 is on transforming our business structure through a series of cost efficiency, quality, capacity and product actions. Really, this is a multiyear sort of upgrade here we're doing, but very much focused this year and early next year on transforming our operations. We had set a goal this year, as you know with 8% adjusted EBITDA margin, up from 7% last year. Well the impact of the escalating steel prices that we talked about and other commodities in the second half that's through the third quarter and what we will see also in the fourth that is accounted for about 1 point of full year EBITDA margin. And so we expect now to be around 7% again for the full year. So again we're really telling you that if you look through the unanticipated steel economics we saw along with some other…

[Operator Instructions] Our first question will come from Matt Koranda with Roth Capital.

Just wanted to get a sense for the timing of the price increases you mentioned. I think you said June was sort of the first price increases that you put through, but could you give a little bit more detail in terms of sort of the magnitude and, I guess, the vehicle those took, was it in the form of surcharges? Just a little more color in terms of how that transpired?

Yes. I mean, well, we don't want to talk about specifics on that, we don't really talk about pricing specific on a per unit basis, but needless to say, it was pretty significant. I think, when you look at the steel price there, Matt, that fell short on the bridge, you can get the impression of pretty significant demand. But in June, we pulled that through with all of our dealers, all of our customers, we put through a surcharge to account for that. So we literally took all of our prices for every single deal that we've got, we put on a standard surcharge across all of our products. As I've mentioned earlier, we do have this time lag because we have to recognize we're on in a big business, we have bids out there that are valid for 90 days, school district go to boards to get them approved. It takes time. So we honor those commitments. And similarly, backlog of orders, which are several months out in the future are all price protected. So the real impact of that, there's about a 3 months’ time lag, basically, before we see that impact, and that's late in the fourth quarter. But like I said, we talk to all of our leaders about it, they understand it and it's in our pricing model right now and it's on our full price to the dealers.

Okay. And then, just a sense for, I guess, when -- could you help us with how steel flows through your P&L.? So I mean, I'm assuming, I think, we've had this discussion before but I just can't recall at the top of my head, how far ahead are you buying steel? So you buy steel today and it goes into a bus at what point in time?

Matt, generally, material comes in, let's say, 2 weeks prior to a bus being built. Steel may come in a little earlier than that because we actually do fabrication for the raw steel that we buy. So you could look at that potentially coming in 2 to 3 weeks in advance of the actual vendor supplied commodities, that may be more than a month for the raw steel. We do try and take advantage of the market and do some prebuys where we can on steel. That will be largely a factor of price -- a factor of the prices that we can get from major suppliers at a point in time. Probably, the furthest out we ever go on those deals at the moment is about 6 months.

Okay. Got it. I guess, what I'm trying to get at is sort of it seemed like maybe you guys had the visibility into the steel price increases earlier this year. I mean, if you look at the commodity indices, you can kind of see it ticking up even late last year and early this year. So I'm just a little confused as to sort of why it was surprising to you guys in June? Or was it just a factor of like you had to wait -- you had a bunch of bids out there that sort of rolled out toward the end of last year and you had to wait for those to expire before you could put pricing through?

Yes. That's really the point. I mean, I guess, 2 different factors, right? The surprise was the rapid run up in the steel price, right, versus spots. And that was driven when all of the domestic steel producers increased their prices this year. And it happened fairly close to the announcement of tariffs. So let you draw your own conclusions on that one. The pricing issue for us is a little different. Once we saw where steel was going, we -- there was -- we took our time to understand exactly what we thought the long-term cost increase was going to be because this was not something where we wanted to go out initially and then make more adjustments to prices subsequently and add a lot of confusion into the industry. So once we understood where we thought steel was settling out, we made the decision in June and we actually went through a round of meetings with all of our dealers prior to announcing it to make sure that they understood what was coming and how to deal with it. So that took us a little bit of time, but I think what we've done is put a price increase out there, which will largely cover us versus where we see steel and stay in a good state for the future. Of course, that's assuming that there's no other major dislocation in steel going forward. As I said, we are seeing a bit of a downward trend in the future, the 12 month future. I just don't know whether that's real or just noise at the moment.

If I could just add one thing, Matt. I think I'll -- if I could add one thing, Matt. I mentioned before, I'm sure you've seen this in other industries, I mean, automotive, Ford, GM have all talked about steel price increases. And also the benefit, some of our dealers do actually carry other product lines besides our school buses. They may sell agricultural, specialist equipment, RVs, firetrucks. All of those guys have all got the same impact and they're all passing on price increases. So it's not something unusual, this, we've done it in the past and we have to do it now. It's appropriate thing to do. And by the way, we've previously done it as a surcharge before as well, taking that same technique.

Got it. And then, just maybe if you could talk a little bit about the competitive environment and sort of -- I mean, does this impact you guys competitively in any way when you're going out for some of the competitive bid processes or other competitors sort of following suit? How should we think about that?

I don't really -- my line of sight is exactly what the other competitors are doing with their dealer body or the customers are really -- their end customers. I don't really -- I can't really get into that, and what they're doing, I don't know. I will tell, though, most of our business, 95% of our business is through -- with our dealers. We sell buses to our dealers. We pass the surge onto our dealers, and then our dealers in turn deal with the end customer. That's their role. So they have the job then of going out and selling the value they give and the products we have, which we're very strong about and passing on as they can feel appropriate. I would say that looking at where our backlog is right now, where our orders are right now, I'd say we're certainly continuing to do what we've always been doing, that's holding our own. And we're -- it was the right thing to do, we felt, and certainly, our dealers have accepted it.

Okay. Last one for me. If we look at the adjusted EBITDA walk that you guys provided, thanks for that, on Slide 12, the Q4. One, just wanted to get a sense, I mean, it looks like the $11 million in sort of positives in the all other category, I mean, could you break that out just in terms of -- I mean, is most of that pricing, I'm just trying to get a sense for the other sort of immediate levers that you guys actually have...

Very little of that -- Matt, very little of, if any of that would be pricing. We just want to see too much in the pricing. This is fundamentally a mixture of various cost reduction activities we've taken. And it's the -- as you think about the progression of our transformational initiative, and I think we've talked about this before, there was a little bit in the first half, not too much, and we always knew that it was really going to hit its stride towards the end of the year in the fourth quarter as we work through inventory and the new agreements with many of our suppliers came into place. So that's where we see a large part of the cost increase coming from. However, given that we saw the gap between where pricing would take effect and the cost increases, we did take other actions in reducing spending in a lot of other areas.

Our next question will come from Eric Stine with Craig-Hallum.

So maybe we could just dig into -- you mentioned 20% of your sales, and I'm not sure if it was for the quarter or for the year-to-date, but the 20% of your sales were to new customers, and I'm just curious, commentary on how much of that is alternative fuels given your big head start in propane and gasoline and that you've got the only electric bus in the market.

Yes, it's a good question. I mean, let me give a little background on this stuff. I mean, I think, I've said before, we are sort of a lumpy business, right? Customer orders come in differently every year, they don't always come in at the same time of the year. And so you go out and your dealers are looking for business, where they can do business and trying to find where they can play to our strengths, which is their strengths, obviously. And so when we look at -- that was for the quarter. So we're just talking exactly on the quarter in question, but these are sales to end customers, so we know when these got into customers' hands through our dealer network. So when I said it was about 20% of customers were new to Blue Bird, a big chunk of those were gasoline. We actually grew in everything, we grew gasoline, we grew propane, we grew diesel. In terms of total impact of new customers come in, the majority, you'd say, were in the gasoline and diesel area and to a lesser extent in propane. I think I touched on propane a little bit, too. I wanted to make that point that we had seen in the last 4, 5 months, states are getting aware that there was VW money is coming available. Propane is very, very high on that agenda for utilizing those funds. So they're pushing out and say, well, I might as well wait until I get VW money because that's extra for me, and I'll instead deal with my fleet with the gasoline and diesel products, although, this will have been an excellent year for propane, but I'd say, still the conquest though we saw in the third was largely gasoline and diesel and to a lesser extent propane.

Got it. And that's, I guess, a good segue to my next question, the VW funding and the pushout there. I mean, impressive that 40% of your mix this fiscal year anticipated to be alternative fuels. I mean, just curious, any thoughts on how much that number will be limited by the fact that people are pushing out propane buys?

Well, I think, the fact now, we're getting some -- finally some line of sight here on the VW funding availability. I do think we're in a good position. I would say, the gasoline, though, I was mentioning -- it's worth mentioning, the gasoline product is not included in the VW funding. So we're looking at our propane and our compressed natural gas and electric buses as really being the key vehicles we have to put into that. But I certainly think that, yes, it's a great opportunity for us. And we get a lot of -- we have a very active team here, working with our dealers, working with the state and the school district, the states with their -- they have entities who actually go and put this money out there, decide on the plan, and we've been working with them very closely on telling our story. So I do think we're excited about this as we enter fiscal '19, particularly for propane and on electric buses actually.

Maybe last one for me, just on the operational initiatives. I know Phil mentioned that, potentially, you expand the scope of that, and I don't know if you can share anything there. I know the paint shop was a big one and that will have a really big impact when that comes on in early '19. But I mean, are there any -- would you say those additional things in scope are more broad-based in little steps or are there any other large steps similar to the paint shop, for instance?

Nothing the size of the paint shop, Eric. We're looking at some areas of the plant where we can significantly improve efficiency and workflow. We're also taking a hard look at some redesign initiatives of the existing bus, which might pay a lot of dividends going forward. So these are things that we have kicked off to -- and we won't see a whole lot until later in fiscal year '19 from these, but the team is fairly excited about it.

Our next question will come from Chris Moore with CJS Securities.

Maybe just little on the tax benefit, can you just talk to the detail a little bit on that?

I think, Chris, when you get a chance, we cover it in quite a lot of detail in 10-Q because it is fairly technical. There are a range of actions. One of the large ones was we did have a uncertain provision in our balance sheet and working with our auditors and tax consultants. We've been advised that we could release that. So that's a fairly large part of the reduction. So that's really -- it's really a one-timer, but we took the bad news for it a couple of years ago, and now we're ready to let it go.

Got it. Okay. The $11 million that you talked about in terms of the -- some of those all other initiatives, some is transformational, some is a little bit of pricing. I guess, what I'm trying to understand is how much of that reduction in spending is kind of one-time things that you're just kind of tightening the belt short-term to lower the cost structure?

Small part of that. I mean, the way I look at it actually, Chris, if you want to, is -- if you go and take a look at Slide 19 that Phil presented, which on purpose didn't include any numbers...

Exactly. That was my next question. Go ahead.

But if you're spatially good, which I'm not, you can see there's a fairly large jump in the size of that box going into fiscal year '19. So what I would suggest is that, all of the stuff we're doing, right, we're getting only a portion of the benefit of it in the fourth quarter of fiscal year '18. And you should expect to see a rather large contribution in fiscal year '19.

Yes. I mean, you asked about -- I mean, I think, Phil is right. I mean, only a small portion of these -- the amount you saw, the $11 million was what I call one-timer. There's a little bit in there for the pricing. We made that very clear it's late in the year with September. So that's really pushed back 90 days after the June period. So the bulk of that is stuff that we believe is sustainable, and we've got that, we've got those costs out of the business and we've got a terrific team working on this hard all year. That's why we call it transformational. And now we get the full run year -- full effect of that into next year. And we -- and as you mentioned earlier -- we talked about earlier, we have other initiatives we're trying to do to increase efficiencies that will bolt onto that next year as well in the plan. So I'm really -- we're really excited about the '19 outlook. I mean, this is why it's all coming together now at the end of this year, that we can launch and have a really good ramp up into '19.

[Operator Instructions] At this time, we'll go next to Mike Baudendistel with Stifel.

I just wanted to ask you on your EBITDA margin comments, and it sounds like you're expecting somewhere in the neighborhood of 9% adjusted EBITDA margin the next year, and maybe, am I right about that? I mean, it sounds like you have 8% if you adjusted for the input costs and you're expecting 200 basis points at least in the next 2 years. I mean, is there any reason to think there's going to be more or less progress made in '19 versus '20 on that?

Mike, [indiscernible] model here before I give the guidance is always a difficult for me to do that, and we're not ready to drop that on because we're still working on our 2019 budget. But certainly, it's fair to say with 8% adjusted this year with the actions we've taken, we certainly would look to be -- I'm going to tell you right now, be somewhere north of 8% to get a 10%, obviously, by 2020. So you've got to wait a little bit on that. I think what you're doing -- you're in the right direction, put it that way. I think what you're thinking is good.

Okay. And then, related to that, the range of 10% to 12% by 2020. I mean, what would the difference be between 10% and 12%? It's a pretty reasonably wide range.

I think I'd say 10% to 12% more is our long term. I think we'd say 10%-plus by 2020. I mean, we don't want to get to 2020 and stop. We're going to keep going. I mean, it's not like we've done it, we're great. We're whole. I think we just want to say 10%-plus is our bogey for 2020. And that's only -- obviously, we're a couple of years away from 2020. And beyond that, we want to keep growing. And certainly, the next level will be how do we get from 10% to 12% longer term.

Got it. That makes sense. And just wanted to ask you, with the increase in the prices, has there been any elasticity with customers buying fewer buses at all to make up for that, if there's only so much budgeted?

No. We haven't seen that. I mean, I think, it's been a good solid year here for everybody. Our industry has gone really well for us and...

I think Phil mentioned that based on the forward order outlook, Mike, we haven't seen any drop-off. We haven't seen anywhere where we've lost a bid.

Got it. That's good. And also wanted to ask you, on the freight costs, can you give us a ballpark figure of how much your annual freight spend is, just so we can sort of put that in perspective?

This is inbound freight, Mike, and typically, it's running in excess of $12 million a year, something like that.

Okay. Got it. And then, just last one for me. I mean, sort of the Ford, ROUSH deal has been such a competitive advantage for you. I mean, is the relationship with your partner on electric, is that a similar exclusive relationship? Or what access do your competitors have to your partner there?

No, we're exclusive with our partners on that one. In fact, I don't know if you saw recently, what I'm excited about is EDI who is our technology partner in this event that we have, they've been acquired by Cummins. So now Cummins owns EDI, and I've already met with Cummins last week to talk about that, and we're really excited about that partnership because it gives us strength and the backbone of Cummins technology they've got and it's a great move. Yes, we have an exclusive on that product for a period of time, yes.

Our next question will come from Scott Blumenthal with Emerald Advisors.

Phil, and either Phil could answer this, I think you explained the steel issue pretty well, but you also lowered your top line sales guide a little bit, and mentioned that at least in Q3, there was a little higher mix of gas and diesel, which have a lower price point. I was wondering if the lowering of the guide is because of what came in Q3, and since you have pretty good visibility into Q4, that you may be seeing the same thing in Q4?

No. I think, yes, I mean, I think the third quarter was, I mentioned before, was a richer mix definitely of gasoline and diesel. We were actually, I'd say, quite surprised by the amount of gasoline we sold, it's terrific. We just command a lower revenue. So we'd say it was prudent as we look -- especially when we look out now and we only got -- we got line of sight to the fourth quarter. We're getting pretty close to the year-end. We thought it was prudent in our guidance. So we dropped $20 million at the top end. So the average came down, but we still -- we kept the low point, we just narrowed it down. But it was largely due to -- as you saw, when you look at year-over-year, you could see the -- sort of the impact we saw in the revenue in the third quarter. So it was prudent to do that. Fourth quarter, I think, is more of a typical quarter. It's going to be strong. I think the propane in the fourth quarter is good. It looks really good for us, the mix look strong, and I think it will be a pretty good revenue quarter, but we just thought it was prudent to take the full year range down a little bit, narrow it down.

Okay. Fair enough. And you did mention that we saw -- recently saw or this week saw the first electric bus roll off the line and that you may deliver -- even deliver some of those in the fourth quarter. Do you expect to deliver a couple of those? A handful or?

Oh, yes, we'll deliver several in the fourth quarter. I mean, several is not several hundred, but we'll deliver several. And yes, that was the first one. It was a nice event for us and we've got more lined up. And the customers are virtually all California-based. I mean, we've got some big ground support for those, and we're excited about it, and so is our partner out there in California.

Okay. That's great. Fair enough. And you talked a little bit about the VW pushout, which is pushing customers into 2019, and I suspect that, that would also be pushing customers then into 2019 pricing. So is it possible that you may actually derive a benefit from the fact that those are getting pushed out and then those customers are then going to end up booking orders at a higher price due to your price increases?

Yes. I think that's a good way to look at it. I mean, obviously, had they built the buses prior to the tariff change, the steel prices going up, that would have been fine, too. But I do think it's a great point you raised. I mean, it's good for us, I think, that we've got the pricing on now. It's out there in the system, and a little bit of price we'll move from when we access the VW funds. I've got to say, I feel really -- I mean, I do -- I just want to stress, I mean, I made a point on the call, I feel really good about the product range we've got for that VW money. We have the best partners on propane by a mile with ROUSH, ROUSH, CleanTech and Ford. I mean, terrific partner. We've been with those guys since 2012. We're in great position. And I just think now the electric and the clout and the power of Cummins behind EDI, we're in great shape on that product, too. So I think we're in a really, really good position. We like where we are right now, and so do our dealers.

And you said you had pretty decent visibility into some of that money. When do you really expect some kind of the bulk of that to start to impact your orders?

I think we'll start to see some of it coming up free in the November -- minimal amount November, December. Looks like it's mainly second quarter of next year probably when we sort of see the orders come in. Then it's just all through the year because they've got -- the people get this money and they can apply it over several years. So you can take 2, 3 years to use the money, use it faster, and it looks like the -- all these guys who are organizing the funds have been a little slower than expected to decide how they're going to utilize it. Every state is doing it differently, some are giving discounts against prices, some of them are paying for an entire bus. It all varies differently by vehicle line. The great thing is the real metric for what determines how -- which grants are available is the NOx level of emissions the vehicle emits. That's why I made a big point in talking about our NOx level now on propane and where we obviously are on that, and electric and 0 emissions are in good shape. But I think we'll start to see later this -- later the end of calendar year, so maybe a few in November, December, we'll get some interest, I think. But it'll pick up really in the start of the next calendar year, start of '19, January '19 onward.

Okay. And we are talking about orders for those, not deliveries for those?

Yes. We're talking about orders, yes.

Okay. And just one clarification. I think, in his comments, Phil Tighe said that the full offset of steel prices will not be achieved in 2019. I think he meant '18. Is that correct?

I think I meant '18, Scott.

I think you meant '18, too. Thank you.

Thanks for taking that up and letting me clarify it.

That will conclude our question-and-answer session for today. I would now like to turn the conference back over to Phil Horlock for any additional or closing remarks.

Well, thank you, Yolanda, and thanks to all of you for joining us on the call today. We appreciate continued interest in Blue Bird. I hope you realize that we're focused on profitable growth and we intend to deliver on our commitments, do believe we're well-positioned for growth today and into the future. Please do not hesitate to contact our Head of Investor Relations, Mark Benfield, if you have any follow-up questions. And once again, thanks from all of us at Blue Bird, and have a great day.

Again, that will conclude today's conference. Thank you all for joining. You may now disconnect.