Good day, and welcome to the Blue Bird Corporation Fiscal 2020 First Quarter Earnings Conference Call. 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, Nadia. Welcome to Blue Bird's fiscal 2020 first quarter earnings conference call. The audio for our call is webcast live on investors.blue-bird.com. You can access the supporting slides by clicking on the presentations portion of our IR web page. Our comments today include forward-looking statements that are subject to risks that may 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'll hear from Blue Bird’s CEO, Phil Horlock; and CFO, Phil Tighe. Then we will take some questions. Let's get started. Phil?

Okay. Well, thanks, Mark. Well, good afternoon, everyone and thank you for all joining us today for our first quarter earnings call for fiscal 2020. And we'll continue to make great progress at Blue Bird as we start to improve both overall profitability and margins. We always welcome opportunity to share overview our latest quarterly results. So let's start an overview of those financial results on slide 4. As we 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 14% to 15% of the full year volume. This is also our expectation for fiscal 2020. And so I'm pleased to report that despite the soft sales quarter, we have a really strong first quarter financial performance relative to prior years. In fact, it was the second highest profit in more than 10 years with adjusted EBITDA of $8 million which is $800,000 or 11% over a year ago. Importantly, this was our sixth consecutive quarter where profits increased over the prior year despite higher commodity surcharges from our suppliers to address tariffs that impacted us from the second quarter of last year. Before proceeding further and as I mentioned in our prior earnings call will be set the strategy that we are pursuing. Throughout this on future earnings calls, you will hear a recurring theme of how we are driving our overall profit and margin improvement through three key initiatives. First, following the bus pricing that we took in late fiscal 2018 to address the escalation in tariff-lead commodity costs we plan to price each year to recover economic increases. As you will recall we took pricing again in July 2019 and we'll see the benefits throughout this year. Second,…

Thank you, Phil, good afternoon to everyone. The next few slides are a summary of our financial performance for the first quarter of 2020. Material that we are discussing is based on the close of January 4, 2020 for the first quarter of 2020. And December 29, 2019 for the first quarter of 2019. Detailed material will be available in our 10-K. And that will be filed tomorrow February 13. And we encourage you to read the 10-K and the important disclosures that it contains. There is also an appendix attached to today's presentation deals with reconciliations between GAAP and non-GAAP measures as well as important disclaimers already mentioned by Mark. And with respect to accounting pronouncements there was nothing significant adopted in the first quarter of FY 2020. We did elect to adopt ASU 2019-12 which simplifies the process for calculated interim income taxes. And the accounting deferred tax liabilities for foreign equity method investments. There was no material impact to Blue Bird from adopting this statement. Now let's have a look at the summary of key results for the first quarter, on slide 10. So I think you can see from this. And Phil's already mentioned a lot of it that, we had an improvement versus prior year in quite a number of the items. So gross margin percent was up, net loss was down. Adjusted net income was up, adjusted EBITDA was up. The adjusted EBITDA margin was up. And the diluted earnings per share improved by $0.03 from a loss supplier to a loss of $0.02. And the adjusted diluted was up by about $0.02. So, we've already talked about the fact that the volume was down. And net revenue was down. And we'll go into a little more detail on the net revenue, when we…

Thank you, Phil. So let's now focus on the fiscal 2020 outlook, as Phil just said in our full year guidance. And please turn to slide 15. The headline on this slide says, we are simply continuing to fold the plan we laid out to grow margins. We started these two years ago and we're well on track and along the way with it. Before I just get into the details of that, just a quick commentary again about the industry. For three years now we've been running at about 34,000 units and these are really 30-year highs that we're seeing. But the great thing is, if you look at the outlook here property taxes I mentioned before property values, funding available and the likes of VW funds to boost some decisions that I make them earlier in the cycle. It just gives us real confidence we see in the foreseeable future of holding of this level. And it's important also to note, as I mentioned previously, 190,000 buses and a 500,000 fleet across North America is over 15 years of age. So there's tremendous demand to buy new buses. This industry is not slowing down, because of lack of demand. As we consistently stated, our plans for continued profit growth focused on achieving significant gross margin and EBITDA margin improvement from three key areas. To repeat myself here, I think, it's both reminding ourselves up front is very straightforward, very simple and we're executing it. First is annual cost recovery pricing, we took pricing in 2018 for surcharges for steel and other commodity increases. And in late fiscal 2019, we took a further 2% price increase on all vehicles and options and that will have a significant annual effect in fiscal 2020. We've seen a flow-through of that lease…

[Operator Instructions] We'll first go with Justin Clare from ROTH Capital Partners. Please go ahead.

Hi, everyone. Thanks for taking my questions.

Hi, Justin.

So first off, I guess unit sales for Q1 were down 9% year-over-year. I was wondering if you could just give us a sense for how much of that decline was due to the extended shutdown that you took to ramp up the paint facility versus potentially a lower level of orders for that quarter or you being maybe more selective with customers?

It was entirely due to the paint shop. We took all the orders in, we just timed them out. So I'd expect -- it's fair to say, you probably see those balancing back in the second quarter. So it's always the tension. We're building 50 to 60 buses a day. So you can imagine, so when you ramp it up slowly, you don't build 40 to 60 from the start point, you're building 15 then 20 then 30. So this is a unit, Justin, into the second quarter.

Okay, great. That's helpful. And then gross margins and the adjusted EBITDA margin both improved year-over-year despite the lower volumes that you saw. So as volumes ramp up through the year here, can we anticipate margins moving higher through the end of the year?

Well, I think -- yeah, I think if you think -- if you do the math on our guidance, you've seen, yeah, we certainly do. I mean, as we see much more volume coming through and we hold the pricing we put in place and we keep the alternative mix. Also, the fuel mix going where we need to be. We do see improving margins throughout the year as both the gross margin and EBITDA.

Okay. And then in terms of inventory, you talked about stockpiling engines, can you talk about what type of engines were in a shortage and what the cause was? And then has the shortage been resolved at this point? Or is this an issue that's ongoing?

Yeah. I wouldn't call it is really a shortage of engines that we were protecting for. This was just making sure we're ready for the second quarter stuff. And then we mentioned -- Phil mentioned earlier about the -- we started back in fiscal 2019 January the first week was a shutdown, we sell a holiday week actually. In fiscal 2020, January was a production week. So we brought some engines in earlier and we contained it, but there's no shortage of venues as such will just be imprudent.

Okay. So then I guess related to that, I'm guessing that you didn't have to pay a higher price, like prices have not gone up for engines as a result of any shortage. So we shouldn't expect any margin impact there. Is that the right way to think of it?

That's correct way. Yes, there's no margin impact on that no.

Okay. Great. I’ll pass it on.

Thanks, Justin.

We'll next go with Eric Stine from Craig-Hallum. Please go ahead.

Hi, everyone.

Hi, Eric.

Hey. As I always kind of focus on I'm just -- would love to chat a little bit about the 111 new old fuel customers added? Just curious how that breaks down between existing Blue Bird customers who are going that direction for the first time? And I guess conquest customers as you call them. And then maybe if you could just talk about kind of the competitive environment given you've got a big lead and just one or some of the other players whether it be different technologies, product launches what are you seeing from them?

Well, first of all, your first question, yeah, it's a very good quarter actually very good. Yesterday, a 111 new customers coming in, and I think typically over the time, we've been even about 50-50 between conquest customers and these people are new, not only new to our alternative fuels but new to the Blue Bird brand. And when we look at new to the Blue Bird brand, we talked about in the last five years, they've come to us.

Okay.

Specific about used previously obviously. But let me talk about alternative fuels, we talk about specifically that brand you to anything with just propane or electric or CNG. What's interesting for us? Actually, the way we can that too is if a guy bought gasoline before and now let me try some propane. We don’t actually count that as a new customer. He's already in the family. So I think we do a very conservative view of this when we look at it. But we love getting people into alternative fuels, because we find the loyalty of that customer base is very loyal because they love the product and there's nowhere else you can buy from. You can't buy that powertrain, the propane, the gasoline at the CNG from anyone the blue bird. In fact you can't drive it by our electric drivetrain which is powered by a Cummins product – Cummin drivetrain from anyone else, but Blue Bird. So we like being there for lifting that position. It's good for us.

Yes. That's a good segue to electric, I mean, obviously another strong quarter. That was one of the big drivers of ASP, the increase there. I mean it seems like in the past this has been more of a niche product. It's been more based on incentives in key markets. I mean do you feel like it is kind of moving beyond that? I mean I know it's a slow process, but moving beyond that and is becoming more of a mainstream outside of those specific examples?

Yes. Well let's put it this way. We're still in a situation where unless there is significant rents available customers can unfold to buying electric part of school bus. It's anywhere from 3 to 4 times the price of a traditional robust in engine type of product, just like the past. So -- but what you are seeing is, a lot of states saying let me try and I'm going to put some funds to all of this. Let me try -- but they know the school districts will be still out of pocket. And I don't want to know that battery technology is going to improve. They're going to come down in France. You see all those updates are out there. A lot of intrigue around, vehicle to greater where it's going and fast charge and all these things. So I think what I'm telling you is that, it's not -- I would say, it's mainstream although probably in California because they're so keen of zero emission in California. They put a lot of grants behind this. But they're unique. They always have been in this space. That fee emissions for them is mainstream. But I would say that there's an incredible growing interest and fascination for trying this really, across the country. And what we see like I said before, funds are available, the VW funds in many cases -- in most cases I would say, there's always an element portion to let you buy a few electric buses. So I think yes, it's picking up momentum. And we just want to be there obviously and capitalize on these opportunities.

Yes. Okay. And then last one for me. Just on the parts business. I mean that was another strong quarter, also a big driver of the margin improvement maybe just a discussion on that. I know you had the launch of the X parts -- that offering. I believe it was last fiscal year. And so, maybe just outlook at parts business and how that's played out versus your original expectations?

Yes. Well I think if you look at last year 7% growth was a nice growth in industrial, it was flat right? So that was good. And we grew and we continued in the first quarter, you takeout the extra sales we do our mentioned, it was still a strong 8% -- 8% to 9% for the growth level we got in that first quarter. So really nicely done. I think the ex-parts program we’re stocking that every month with new SKUs offering new parts in there. Our dealers are picking it up. We're nowhere near our company play victory yet. As a long runway your ahead, but it's got a lot of interest and we're definitely picking up new business because of it. I can tell you that. I think also the second point is that, we've been at this business with the Ford products since 2012. So what we see now is, more and more units are coming off warranty. And now we're into getting to the service model, replacing parts and weren't able to do that, unlike other powertrains out there in the market. We're allowed its full gives the right to be very competitive on all of those parts that they put into their engine and transmission. That's also a growth we're seeing. So I think is that in a way by more access to the market and we're going to bring our SKU base now than have out before. And we think that's pretty important to grow in this business. And so, yes I think it's going well. And I think its 10% growth in the first quarter. So this quarter of the year is pretty good coming off for school start.

Okay. Thanks a lot.

You bet. Thanks Eric.

We'll next go with [indiscernible] Research. Please go ahead.

I'm somewhat new to the names. Just wanted to ask about -- I know you're doing a lot better in your margins. Would you say that you reach profitability in next coming year, could you give us an idea on that?

So again reach profitability and do not want to give what you saying, I missed it out. Come back a little bit.

Okay. It seems like things are improving. So, could you give an idea about what -- maybe about what quarter you could reach profitability?

Well, I think look we tend not to give -- we don't give guidance by quarter. We gave guidance for full year and we've certainly said that by the end of this year, we expect to be the run rate to get to our 10% plus margin objective. That's where we want to be. So, that's all really putting out there right now in that. We think it was a quarter of time see how we go and keep delivering quarter-by-quarter. And every margin so far we're up. So, this year in both gross margin EBITDA margin and we look to improve.

Okay, great. One other thing I know you mentioned about tariffs. Do you see those improving in this coming year? And will it make a big difference?

Well, when I last called the President, he wasn't willing to tell me where is pulling tariffs. I mean I think what's happened is we are not planning in our guidance what we given as tariffs coming off. So, if they do, obviously, that will be a big boost for us. I'd like to think that over the course of time we'll see tariffs coming down. But we have not -- our guidance of our objectives we're putting out there do not reflect that. So, I think he's going to wait and see what happens. It's also with bear in mind we will many of our suppliers when they look at repricing, they look at what's happened to them in the last anywhere from six to 12 months. So, for example, one our major supply is last year put on tariffs in the early -- I guess, at the start of the second quarter basically 2019 because they look back and what they would do what has happened to them and that's the way they look. They look at like the last several months, they put a surcharge on. So, that actually did two factors. In 2019, I think most people think the work we saw them late. But the bottom-line I think -- the bottom-line I think that we don't plan on reducing tariffs, but I think we like it which has opportunity I guess down the road.

What sort of impact did the tariffs have on your earnings per share?

Yes, I have to--

We'll have to get back that. It wasn't major, but we certainly had an impact on earnings per share. And I guess you have to look at it over the year rather than a quarter because it will be some. Again, I mean I think Phil's exactly right. We don't planning on the tariff coming off, when it does come off, it will clearly be an improvement to margin.

Okay, great. Well, thanks for taking my question.

You bet. Thanks Chris.

Thank you for your question. [Operator Instructions] We'll next go with Lewis Mosar [ph] from [Indiscernible] Investments.

Yes. I was wondering about the announcement you made, I believe it was yesterday afternoon and once again early this morning about a shareholder that is selling 11 million shares. Can you talk about that?

Yes. Paul, [Indiscernible] last comment.

Hi Lewis, this is Paul Yousif. That three registration yesterday registered 11 million shares. We first registered those shares back in 2015 with surplus of those shares. Subsequent to that those were just sold under a private transaction to American Securities. We simply -- we registered those shares. They own those shares. There will be no proceeds to the company. Their registration will be good for three years.

Okay. So, it's over a period of time.

Yes, I always. That was a good housekeeping, right? Just re-registering the shares.

That's right.

That's all it is.

Okay. Thank you.

Thanks Lewis.

Thank you for your question. [Operator Instructions]

While people are waiting this is Phil Tighe. I need to make one clarification. I believe in my opening address I referred to filing of the 10-K tomorrow. It's actually 10-Q. So, I don't want anybody to be confused with my mistake. It's a 10-Q that will be filed tomorrow. Thank you.

This concludes today's question-and-answer session. I'd like to give back the floor back to the moderators. Thank you.

Okay. Thank you, Nadia. Thanks to all of you joining on our call today. We appreciate the continued interest in Blue Bird. And as you can see by our first quarter results and our full year outlook, we are focused on total profit growth and margin growth and we intend to deliver on our commitments. And I believe we are well-positioned for growth today and in the future. So, please don't hesitate to contact Head of Profitability and Investor Relations, Mark Benfield should you have any follow-up questions. Thanks again from all of us here at Blue Bird and have a great evening.

This concludes today's call. Thank you all for your participation. You may now go ahead and disconnect.