Good day, and welcome to the Blue Bird Corporation Fiscal 2019 Second Quarter Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Mark Benfield, Director of Investor Relations. Please go ahead, sir.

Thank you, Carolyn. Welcome to Blue Bird's fiscal second quarter 2019 earnings conference call. Our call is webcast live on blue-bird.com under the Investor Relations tab. You can access the supporting slides on our Web site by clicking on the presentations portion of the IR webpage. 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?

Okay. Thanks, Mark. Well, good afternoon, and thank you all for joining us today for our second quarter earnings call for fiscal 2019. We have some great things going on at Blue Bird and we welcome this opportunity to share with you our latest quarter results. So let's start with an overview of those financial results on Slide 4. We had a strong second quarter with adjusted EBITDA of $12.2 million, which was $2.2 million or 22% higher than the same period last year. This is our second highest profitable second quarter in more than a decade. As Phil Tighe will show you later, we increased profitability despite significantly higher commodity prices than we had in the second quarter last year. You'll recall that the escalation in steel costs began largely in the second half of last year and we remain at those elevated levels today. During this earnings call you're going to hear a recurring theme of how we are driving our profit improvement. First, bus pricing that we took in late fiscal 2018 to address the escalation in commodity costs. This is resulting in a significant increase in our average bus selling price. Second, cost reductions that we're achieving through our transformational initiatives. Both of these actions are significantly improving our results over last year and are cornerstones in our plan to increase gross profit and EBITDA margins. And third, continued leadership and growth in alternative fuels will re-earn a superior margin compared with conventional fuel. Now we improved profitability in the second quarter, despite selling 170 fuel buses in the last year. I think it's important to explain that the entire volume decline versus last year was due to a part shortage by one supplier. This resulted in us exiting the second quarter with 182 buses built,…

Thank you, Phil, and good afternoon, everyone. Next few slides are a summary of our financial performance for the second quarter of fiscal year 2019. I would advice the material we are discussing today is based on the close of March 30, 2019 for the second quarter ended March 31, 2019 for prior year comparisons. And more detailed material is available in our 10-Q which has been filed. We encourage you to read the 10-Q and the full disclosure statement, please. Attached to this report there is an appendix which deals with some of the reconciliations between GAAP and non-GAAP measures that are mentioned in the review, as well as some important disclaimers already mentioned by Mark. We had no new accounting pronouncements in the second quarter of '19, although it was previously mentioned we did adopt a number of these statements in the first quarter and they are discussed in the 10-Q. Those pronouncements included revenue, leases, pensions, hedges, cash flow and internal use of software. There were also no changes to the risk factors from 10-Q previously published. So now let's look at an overview of some of the key results on Slide 10. Phil has mentioned quite a few of them around volume and revenue, so I won't take you back through all that. I'll make one brief comment on the volume just so everybody's clear. We booked 2,271 units in the second quarter. We actually produced over 2,450 units through the plant based on firm orders from customers. Just to reemphasize, the gap between those is about 180 units which are buses already built and awaiting, just a delay of components that we're short from one of our suppliers. When they are provided, we expect to put those units to the customers who are waiting for…

Okay. Well, thanks, Phil. So, let's now focus on the fiscal 2019 outlook and our full year guidance. Turn to slide 15. The recent industry running at around 34,000 to 35,000 units annually, we're at a 30 year high. And we do anticipate another strong year in fiscal 2019 with industry again around 35,000 units. As I mentioned earlier, strong housing prices and property taxes, the fact that 30% of school buses in operation are older than 15 years, along with the boost of new funding ahead from the VW settlement all support this position. Our plans for fiscal 2019 and beyond, as we start to think about 2020 and beyond those periods, focus on gross margin and EBITDA margin improvement from three key areas. First, the impact of the cost recovery pricing that took effect in late fourth quarter of last year, this will have a full annual effect in fiscal 2019 and we saw significant benefit in the second quarter. Second, the full year impact of the transformational cost reductions implemented in the second half of fiscal 2018 and the continuation of this initiative in 2019. Again, we saw the favorable impact in the second quarter. And third, the new paint facility which also will enable significant manufacturing rearrangements and process improvements, will increase manufacturing efficiencies and improve quality, particularly as we move into fiscal 2020 when we get the full benefits of a full year for our new paint shop. Of course, as we have been doing for several years, we will continue to pursue growth and maintain our leadership position in alternative fuels which commands a superior margin and higher customer loyalty. Our financial targets for fiscal 2019 are on the right path towards our previously communicated EBITDA margin goal of at least 10% by fiscal…

Thank you. [Operator Instructions] And we'll go first to Matt Koranda with ROTH Capital Partners.

Hey, guys. Good evening. Thanks. I'll start off on the implied EBITDA guide for the second half of the year. So it looks like we're still sort of counting on about $11 million of year-over-year improvement in the back half to get to the midpoint of the full-year guide. So when I think about the waterfall chart that you guys showed, I think it was on Slide 11 for the quarterly walk, it looks like pricing and cost and transformational initiatives are sort of relatively evenly split in terms of the improvement that you've made year-over-year in 2Q. Is that what it's going to look like in the back half of the year? Just trying to get a sense for sort of -- are you counting on more price or cost to get you there? And then how much more of a headwind does commodity and component increase represent for the remainder of the year in your guide?

Let me start with the last bit, Matt. So you recall that the commodity -- the real increase in steel came in the second half for us last year. So what you're seeing in the second quarter is a bit higher than we actually expect to see. The caveat to that is the raw steel cost increase came very quickly in the second half, on top of the supplier pass-through on steel kind of went slower. So these [indiscernible] pick up that. But I would expect the commodity pricing will ease a bit on a year-over-year basis as we go through the second half. Now, I would add that everybody's been reading in the press and we don't yet know what's going to come out of the discussions with the Chinese delegation in Washington this evening or tomorrow. But assuming for a minute that there is no agreement, we could see a number of items impacted by the addition of duties. That could impact us by maybe a couple million dollars through the balance of the year. We're looking at ways to offset that but these things take a little time. But we do see maybe an incremental couple of million dollars coming from tariffs, assuming that there is a very good [indiscernible].

Just to clarify that, Phil, the couple of million dollars of swing, is that still envisioned in the lower end of -- the lower band of your EBITDA guide then or would that be below the low end?

No. That's envisioned in the lower end.

Hey, Matt. This is Phil Horlock. Let me just pick up a couple of the other points you raised. I mean, certainly, look. When we implemented our pricing to handle the commodities, that was really -- there was very little impact of that in 2018. It was right at the back end. So when you think of, when you see our year over years by quarter coming through this year, you can expect to see a significant pricing benefit year over year in each quarter of 2019 versus '18. That's going to happen. And similarly so, while the bulk of our cost reductions obviously last year occurred in the second half, we'll continue to drive costs down. So there is more of a -- there's a bigger, full year effect of those from last year plus what's continued to drive aggressively, cost reduction. So I think you can expect to see significant pricing every quarter and also continued significant cost reductions each quarter. As Phil mentioned, once you get to the second half of the year, you're not going to see the significant bump -- the substantial bump up in commodity costs that you saw in the first half of this year because we already had those baked in last year. Does that make sense?

Very helpful. And then so the 182 buses worth about 2 million in gross profit, and I'm assuming that's gross profit, I guess that would suggest that the buses were worth, call it somewhere around 16 million in revenue. Have those already gone out during the quarter, and then, to the extent that you're able to describe what the component was that drove the delay, would be helpful.

Because of confidentiality agreements, I can't really disclose the supplier. Needless to say, we've been working with that supplier. About 50% of those buses are now out but we're working through it. We're getting production now, we're getting constant supply of those parts now. I can tell you; we haven't missed a bus at all now. And we're also at the same time getting a surplus so we can fix the buses that are still sitting there with some incomplete -- with some parts that need to be addressed. So the bottom line is, half those have been taken care of. The rest will certainly be out in the next, I would say two to three weeks and we're getting it handled. But going forward we believe we've -- it looks like maybe we stabilized the situation and addressed it with our supplier.

Okay. Good to hear. And then, on the alt fuels mix, in the backlog at 46% that's pretty substantially ahead of where I would have anticipated. I guess how much of that do you think you can attribute directly to the VW settlement money that's being disbursed, I know you said the bulk of that's still ahead of you any way to try to parse that out in any meaningful way?

I'd say very little at this point. Maybe a couple hundred units. Seriously, a couple hundred units might be in there, which are propane I would say. We've got some diesel in there too because diesel is also, clean diesel is included in the VW money, but isn't in the alternative fuel mix, obviously. But look, there's very little beneath. Even in the states that actually have actually granted some funding, they're doing it in such small stages, they're like, parceling this out. And so, there's been very little out. It really is well ahead of us. So the great thing is prompting somebody, so I honestly have said this before. It is the only true alternative fuel that makes sense at any grant, any support, or anything. It's the best value cost of ownership vehicle, and it's got the clean aspect to it too. So, I think what you see there, there's a really strong endorsement of that product. I mentioned about the 57 new customers coming to the alternative fuel family. 55% of those were propane customers. That's still growing and that's our fastest-growing alternative fuel, like, this year when we look at the growth we see in alternative fuels, so, very strong.

Okay, great. And then, you had been quoting on 100 units I think last quarter and now you have 100 in the backlog. So can you explain, I mean, it seems a little high to assume a 100% win rate there. But is that just a product of the fact that you guys are the only guys in production with the electric bus, only big OEM, I guess I would say? What's going on there?

Well I think it was -- I think I said last quarter we told you there were 100 out there. I mean, between last quarter and this quarter there's been 100 more bids at least being put out there. Obviously, we think we are the only major OEM in town. I mean, our two major manufacturers don't have an electric bus to offer yet. So I think it bodes well for us in that. And this is obviously, not surprisingly, heavily weighted to California where there are grants being offered and our dealer there, A to Z Bus Sales out of California did a terrific job in marketing that for us. So yes, we're excited and we have initial units in our pipeline that we're pursuing, but we're off to a great start. Excited about that.

Excellent. I'll just do one more and then I'll stop hogging the floor, here, but on the paint facility and the progress there, there were two dates that you guys mentioned and I just wanted to get some clarification. So I think June 6 was one date where you said the first bus painted. And then June 29 was limited production? Just help me understand the difference between those two dates, and then how do we get -- what needs to happen between those two to get to kind of limited production?

You know what, I think that was a mistake by me. I think I meant to say 2019 and not June 29. June 6th is when we -- that's job one, so to speak, when we launch our -- we pick up this production bus through it. Prior to that we're in testing mode right now, making sure things work and it's the coating is working well. Job one is there but I meant to say, progressing I think through 2019 we will ramp up the production where the full implementation will be October of '19. That's where we'll be fully running the entire plant will be switched over to 100% to our new facility. Until then we're going to run parallel. We're still painting manual and we've still got robotic and we'll progressively increase that through the year and then eventually switch over 100% in October.

Okay. I could have misheard you there, too, but thanks for the clarification. I will jump back in queue guys.

We'll hear next from Chris Moore with CJS Securities.

Hey, good afternoon guys. Yes, with the little bit of shift of revenue into Q3, just trying to get a sense, sometimes Q3 is the strongest, sometimes Q4. On a relative basis, any reason to think that either of the quarters are going to be much different than the other?

I think we're thinking of it pretty close. I mean, you've summed it up right. Sometimes Q3 is stronger, sometimes Q4 is stronger. I think they're pretty close right now in terms of our outlook. Is that right, Phil?

Q4 will be a little bit stronger.

Yes. So Phil's reminding me, Q4 might be a little bit stronger than Q3. A little bit stronger. And that's probably because we see some of these VW funds. I think we're seeing some of that might be coming out later in the year which could be certainly a nice boost for Q4. So we'll keep everyone posted on that.

Got it. In terms of aftermarket parts, obviously the first half, the percentage of revenue is a little bit higher because of mix. Given those relative margins are so strong, any meaningful way to increase the aftermarket contribution. I know that you had talked in the past that you had -- you're in a better position with the alt-fuel process on that front. As they age a couple years out can that mix go up a little bit?

Yes. We have a very, very favorable agreement with Ford and ROUSH CleanTech on all of the propane, the gasoline, the CNG products. And they come with a five-year warranty obviously, so everything's including warranty up to the first five years. And many of those, you know, we started that deal in 2012 with those folks. So they're now actually rolling off, see they're rolling off that warranty now. And we are seeing definitely increased revenue from those business lines. Good revenue -- good service revenue, maintenance revenue.

That's helpful. One last for me. Just in terms of the free cash flow, I'm looking at the -- obviously the other was a big contributor, accrued expenses, other receivables. Any further detail on that?

You might recall from the prior one, Chris that we have a lot of expense, and that's sort of worked its way through the system. So we're seeing that wash out.

Okay. All right. Let me jump back in line I appreciate it, guys.

Thanks Chris.

Next, we'll go to Eric Stine with Craig Hallum.

Hi, everyone there. I jumped on late, I was juggling multiple calls so I apologize if I touch on something that you've already talked about. So it sounds like that 46% alt fuel number, percent of the mix, just curious. Conquest customers, is there any way that you can break out or how do you think about conquest customers that you have because the other OEMs at least until recently haven't had a gasoline, but don't have an electric vehicle?

Yes. Well first of all, I don't think the conquest number right now in the numbers I'm giving you, is -- let me try and spread that out. The conquest is interesting. Let's talk about what the definition is. Conquest means we switch a customer from a competitive bus, to our bus. Someone who's recently been buying competitives, and hasn't been buying our buses, he moves to us. And I gave you; I think we gave you a number that I think was like 16% of our sales were conquest. Then when I talked about the new customers to the alternative fuel family, those are actually -- they can be our customers, too. They can be referred, they can be Blue Bird diesel deciding, I'm going to try a Blue Bird propane or a Blue Bird gasoline or a Blue Bird CNG or a Blue Bird electric. And then they could also be Thomas and IC customers coming, trying out our products. So there's a bit of a mixture there, but you know, that's all our competitors, by the way, they have a propane product. Both of them have propane. They market it, they sell it, and obviously we command that space. And one of our competitors have a gasoline product, and again, we do command that space and we're mindful of that. Electric obviously we are in there, we are first to market of the major manufacturers. We're excited about that. And I think it's good to get a foothold. I think this plays to what we do very well. We've been very good at pioneering new business segments along the way and so it's strong for us. We feel good about it.

Yes. I guess it may be tough to quantify, but clearly, you're getting new customers because of your alt fuels.

Yes. The nice thing is, in alt fuels though, with what we have seen, Eric, is that I mentioned before I used the line that owner loyalty is higher. Because of our products, let's be frank. The diesel engines, we've all got the same diesel engines. It's a great diesel engine, by the way. Cummins does a terrific job and we love working with Cummins. But all three of us use the same diesel engine. Alternative fuels, we're special because we have the best product by a country mile. No one can touch it. I mean, the relationship we have with Ford and ROUSH CleanTech, the way we work together, the way the product holds up in the market, the success we've had, the fuel economy, the performance -- just the sheer emissions level, which is well below anybody else's level of emissions, just shows we're different. And electric, I'm excited about being with Cummins. Right now, I think we are Cummins', I'm sure we're Cummins' biggest electric vehicle customer and we're excited about that to be buying drivetrains from them. So, I look at it from the standpoint of, competition comes in, they make us stronger. They make the product really have a mainstream acceptance. And we like that, and we've clearly got leadership in that segment.

I guess a follow-up to that, I mean, can you talk about the difference that it is making in the market now that Cummins and -- the Cummins and EDI are buying EDI? You know, just having that name in the market, is that having a positive impact on uptake or interest levels?

Yes. I think yes, I think it does have. I think obviously everyone knows Cummins. It's a great brand name. They're a powerhouse engine manufacturer. So I think they're coming into the game. I think it gives people really good confidence. I mean, EDI is a great company but EDI is now Cummins of California. I think that's a big strength I think we have going forward. But, I also think people look at us as, this is a Blue Bird electric bus too. And they know we've done a great job in alternative fuels and we support them. We have a very strong dealer network. So it's a really nice combination. But no doubt, to me, Cummins makes us stronger.

Got it. And maybe the last one for me and I hope you haven't touched on this, but the issue there. So it sounds like, I mean, in terms of the buses that were delayed and pushed into 3Q, that that is in good shape. Just curious how you feel about that supplier, given that you're getting into obviously your heaviest part of the year here, and whether that's in order to handle the volumes that you need?

Yes. Well obviously, when things like this happen we work closely with that supplier. So we need to say our supply chain folks and our leadership of our supply chain is heavily engaged with that supplier to ensure we understood what the inhibitors were, what the bottlenecks where, that gave them that problem. I think we worked with them on the plan for recovery and the plan that right now is on track that is working. But we continue to work it. We don't take anything for granted. But like I say, and you know, they're a supplier we worked with over the years. They're not a new supplier to us. But, we are working with them well, and I feel confident going forward. I reckon that we have a viable plan together. It was a blip. It was an unfortunate incident that caught us right at the end of the quarter. If this had happened probably in back in sort of the -- let me think about it. February time frame or late January, we would have handled that within the quarter. You wouldn't even have heard about it. So I think, I really feel we're over it now and we're addressing it.

Okay. I appreciate it thanks.

Thanks Eric.

[Operator instructions] And it appears we have no further questions at this time.

[Indiscernible] thanks, Carolyn. And thanks to all of you for joining us on the call today. We do appreciate your continuous interest in Blue Bird and we really enjoy having the chance to talk to you on these quarterly earnings calls. As you can see by our second quarter results and outlook for the full year, we are focused on profitable growth and we intend to deliver on our commitments. And I believe we're well positioned for future growth and also growth today, of course. Please don't hesitate to contact our Head of investor relations, Mark Benfield, should you have any follow-up questions. Thanks again from all of us at Blue Bird and have a great evening.

And that would conclude today's conference. Thank you for your participation. You may now disconnect.