Greetings and welcome to Blue Bird Corporation Fiscal 2020 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mark Benfield, Executive Director, Profitability and Investor Relations. Thank you. You may begin.

Thank you and welcome to Blue Bird's fiscal 2020 third quarter 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 Jeff Taylor. Then we will take some questions. So, let's get started. Phil?

Okay. Well, thanks Mark. Well, good afternoon everybody and thank you for joining us today for our third quarter earnings call for fiscal 2020. Before I jump into the presentation, I'd like to give you a brief introduction on how I assess our position today. The third quarter was a difficult one. With employee concerns over the coronavirus pandemic and supplier shutdowns causing Blue Bird to close its plant for two weeks, schools were also closed and transportation employees were sheltering in place. School boards were deliberating over plans for school start in the fall and new bus orders were delayed significantly. Let me state, however, that Blue Bird is in a strong financial position with ample liquidity. We have a history of robust cash generation, a culture of winning, and leadership in growing segments, a clearly defined margin growth strategy, and an experienced team with a proven track record of delivering results and handling difficult times. And COVID-19 has not changed any of these factors. Fourth quarter volume will be up substantially from the third quarter although still significantly down from last year. The delay in new bus purchases is being driven by the uncertainty surrounding COVID-19 impact in the school classroom and consequent decisions by many school districts to extend online teaching at least through the first semester. However, when schools begin to reopen for in-classroom teaching, we expect to see increased demand to replace the aging school bus fleet and we are well-prepared to handle that. We're continuing to drive business structure improvements despite the pandemic impact as evidenced by higher unit revenue and lower costs in the third quarter, which has been a consistent pattern over the past two years. And we have taken austerity measures to preserve cash and improve profitability and our liquidity is…

Thanks, Phil, and good afternoon to everyone on the call today. It's my pleasure to be able to share an overview of Blue Bird's 2020 third quarter financial details. We closed the third quarter on July 4, 2020, whereas our prior year close was June 29, 2019. We expect to file the 10-Q by the end of day Thursday, which includes additional details on our quarterly performance and other important disclosures. The appendix attached to today's presentation details the reconciliations between GAAP and non-GAAP measures mentioned today, as well as other important disclaimers already mentioned by Mark. With that, please refer to slide nine and I will review the key results for the quarter. The current operating environment was unlike any that the company has faced in the past, due to the global pandemic. It was a challenging quarter for us, with the manufacturing operations shutdown for the first two weeks in April, in response to supplier disruptions and as a precaution to protect our employees. Additionally, supply shortages and disruptions persisted throughout the quarter. Nevertheless, we responded swiftly by taking precautions to protect the health and safety of all Blue Bird employees while concurrently taking cost control actions to protect our liquidity and balance sheet. As Phil mentioned, we are taking additional cost control actions, as the pandemic continues, resulting in delays to schools reopening. Third quarter volume was 1,948 units, 1,472 units lower than the prior year, due to the order disruption caused by COVID-19. Consolidated revenue of $189.2 million was down $119.6 million, or 39%, compared to the prior year quarter. Bus net revenue of $180.6 million was down $111.6 million, driven by lower volume. Bus net revenue per unit, however, was approximately $92,700 which represented a strong $7,300 per unit increase from the prior year. This…

Thanks Jeff. So let's now summarize the four business priorities that we are focused on today at Blue Bird. Turning to slide 14. First is the safety and well-being of our employees. We have taken significant measures to protect our employees from COVID-19 and have established a rigid protocol that has served us well to date both in our plant and our office buildings. We'll continue to explore new techniques and technologies to further assist in ensuring our employee safety and health are at the forefront. Needless to say a safe and healthy workforce is key to our business continuity and we have an incredibly loyal and dedicated team of professionals. Second, is annual pricing to recover economics and the introduction of new products and features with a 9% increase in average bus selling price in the last quarter, which includes pure pricing, a richer vehicle mix and higher option take, we are confident in our capability to price annually. Third, is our relentless focus on driving down structural costs through our transformational cost initiatives, which by the end of this year will have delivered more than $50 million in savings since we started three years ago. As you saw earlier, we are supplementing this program with targeted reductions in SG&A specifically in the area of compensation and benefits and organizational restructuring. And fourth, our continued growth in the mix of alternative fuel powered school buses where we benefit from higher margins and increased owner loyalty compared with conventional fuels. Our leadership position across all of these fuel types indicate our strategy is working and we look forward to continued strong growth in the years ahead. And as I mentioned earlier, the rapidly growing interest for electric buses is a really exciting opportunity for us at Blue Bird. Pursuing these…

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from the line of Eric Stine with Craig-Hallum. Please proceed with your question.

Hi, everyone.

Hi, Eric.

Hey, so I noticed in your presentation, it looks like you're planning to increase production or that it's in place for the second quarter of fiscal 2021. And just curious, I mean is that based on maybe feedback you're getting from your dealer network or customers? Or is that a target that you've got in place now and then as time goes by and as that gets closer you'll have a better indication if that is when you start to see some pick back up again in volumes or some of the recovered volumes based on timing? Any thoughts on that would be great.

Yes, Eric, this is Phil here. Yes I mean that's really our plan to – that's our production plan to increase capacity following a couple of actions we're going to take in the October shutdown and Christmas shutdown period, so we can really handle any surge in volume that will come because despite the fact with this COVID-19 environment, there's no question, there's always a surge in the second half of the year. And with some uncertainty now with obviously school – many schools being out with online teaching and being closed. And obviously, as soon as we get through this pandemic and cases start to slow, we know schools want to reopen. We want to be ready for when that happens because they're going to want buses. When schools open, they're going to want buses again. So we just put a plan in place recognizing the first quarter is always traditionally our lowest volume. We can handle that with the current capacity. We want to be ready to meet any demand surges that occur from the January, February time period onwards.

Understood. Understood. Okay. Maybe just turning to the paint shop. I know that you've got that ramped up. Early on you had some issues. I think it was the outside rail that perhaps you were outsourcing, you cook that in in-house and that things are going well. Maybe an update on the paint shop. And maybe is there a way to quantify, what type of impact that had on the margin strength this quarter?

Well, yes. I mean, first of all the paint shop, we've been making subtle changes all the way through this year. For example, I'll give you one comment that we had actually been running – I think we've told you this before, we've been running our old paint shop to put the primer on the bus and then put the top coat in the new paint shop because it was a compatibility issue we were seeing with the quality of the paint versus the new robotic paints job. We've overcome that now. In fact this – just this last six weeks, we are now completely painting every single bus through the new paint shop both the primer and top coat. It's called wet-on-wet system. So it's still -- we put a primer on and go straight into the top coat. We never touched that bus between the two coats, like we're doing previously. And, certainly, we're seeing definite productivity gains, less rework required because of that, which is what we wanted to see. I think you're going to see the full year effect of that really coming in as we get through into October with our new fiscal year. So a few things we want to do through the October shutdown. And that will benefit us as we go forward into next year. As far as impact this year, it's probably a little too recent to quantify what that is. I think there's certainly a few hundred thousand dollars of benefit we're seeing from that, but the big benefits we'll see will be as we get into next fiscal year, frankly.

Got it. Okay.

So we'll talk about -- as we talk about plans for next year, you'll start seeing our year-over-year plans, we'll, sort of, make an effort to talk about that, as we go through our results.

Okay. Sounds good. Maybe last one for me. Just on the price -- the ASP increase there. And I know alternative-fuels and, specifically, electric and maybe I missed it in results or in your commentary, but, I mean, was that an abnormally high level this quarter in terms of electric? Or is that a number based on what you see in backlog orders, et cetera, that you view as a sustainable level?

I got to tell you, we are seeing every quarter increased -- interest increased orders coming for electric. I mean, it's gone really well for us this year. And in fact, our biggest -- I'll tell you, our biggest quarter year for electric will be our fourth quarter. So we really feel good about where that's going. I think it's resonating with customers. There are grants available through the California Energy Commission in California, we got the VW grants available, just like anywhere else you sell, on trucks or anything, on your electric vehicles that are sold on big products, they tend to be supported by grants. But we're seeing a nice real uptick in that. And, in fact, we just recently increased our capacity capability even in our Fort Valley plant here to handle more on a daily basis. So, yes, it's going well. And that isn't a one-off thing. I think we look to this as a real good growth opportunity for us. And I'll be honest with you. I've been a little surprised by the way it's taken off, but now I'm not surprised anymore. And I keep pushing my guys for more sales. So we feel good about where it's going.

All right. That’s great. Thanks.

Okay. Hey, before I get to the next question, just one thing I want to point out, I did make one little misstatement when I was going through slide four. The slide was correct, but I said our industry volume outlook for fiscal 2021 is 28,000 to 29,000 buses. Obviously, I meant fiscal 2020, which is what the slide says, because we aren't giving an outlook or guidance yet on 2021. So I just want to correct that statement I made there. Thanks.

Our next question comes from the line of Craig Irwin with ROTH Capital Partners. Please proceed with your question.

Good evening and thanks for taking my questions. So, first question is the slide, the 160-plus electric buses. Can you maybe give us a little bit of color on the breakdown there? Is that all for California? Or are you making deliveries across the country? And is that for shipment exclusively in this fiscal year that ends in September?

Obviously, California, Craig, is the biggest market for us. I'd say about 75% of that are the California market, but we've been selling at Washington, we sold to New York. I know we've built in things in Georgia, Alabama just this last week, took delivery of a couple of buses. So it's all over the place. Texas, too. We're seeing a lot of states really picking up the interest here. And, I'd say, that the VW grant money is coming very well for us there. There's somewhat, what's called HVIP money as well which we can use for electric buses. So every state is really looking at it. There's no question. There's a ton of excitement around it, with school districts, parents and we want to be at the forefront of it. So it's not just California now, which it was sort of last year, it's growing to -- it's growing across the nation now.

Okay. And then you mentioned the VW mitigation funds, the Dieselgate funds, right? So I guess around a-quarter of that has been dispersed in the last year. Would you expect a greater amount to be dispersed in this upcoming fiscal year? What are you hearing about the probable disbursements there? And how do you feel about your competitive positioning for those awards?

Okay. So, I think, we're probably going to look at something similar to this year. Because I think what you're going to find a lot of districts that might be wondering about, hey, my school is closed, I'm doing online teaching. I want to get buses when it opens again. Obviously when there are grants available they can access that really quickly. It's a very easy sell with a school board to go in and say opportunity here to take some grant money. So we expect it to be something similar to this year. In terms of us why we think we're well positioned the products in there are diesel obviously the clean diesel that we all have now. We have a great partner in there with Cummins. So I think it's a fuller level playing field. But obviously propane, electric, compressed natural gas are all part of that. When it comes to propane -- and you'd remember why this money came about. It's because of -- I should just say simply, people were cheating on emissions. That engine was just not right was not true and the money was made of -- VW was fined when it became available. When you look at our engines though our propane product in particular, our NOx output nitrogen oxide is 1/10 of the EPA standard. So eventually you start to think about why are you -- why we -- what is money available for to book clean engines on the road and we have the cleanest affordable TCO message out there with our propane and we are the only one in the market with such a clean propane product. So I think it's great for us. It comes to electric again. Lots of states are doing that different ways. Some are normalizing it to make it the same as a conventional sort of product. Some are given significant investments just for fuel electric. But obviously when you look at sheer volume there's far more assigned to propane to CNG or to gasoline than the entire electric amount because electric cost so much. But I think I look at it how we're positioned. Of the three major manufacturers in this business, we're the only one with an electric bus on the road today who's delivering buses. So we feel good about that. So I think -- our leading position in propane, electric is following, where we are on CNG I think we're in really good shape and we keep working it.

Okay. And then the $15 million in EBITDA savings right? I think you indicated that 1/3 of that is from the move to a single shift and the other 2/3 is from adjustments in SG&A. Can you just confirm for us that, that was achieved in this past quarter so the full benefit should be there in the fourth fiscal quarter? And what do you see as flexible opportunities to increase that cost savings cushion as we go into fiscal '21, if many of these school districts that are remaining closed - just don't have the demand and you do see demand pushed out over the course of next fiscal year.

Okay. Let me take that first part, firstly your first section first then. So the paint shop we implemented -- sorry paint shop, the single shift was June one we put it in. So yes you're going to get a full quarter effect in the fourth quarter that we've only just been over 1.5 months into it. But the SG&A I think I've said on the call that -- well that will be substantially implemented I said at the end of this month. So we certainly won't get a full quarter effect of that. You're going to get really just one month effect of that. And now the $50 million was an annualized amount I put in there. So you think about your modeling next year and you think about SG&A and the single-shift impact essentially over this last year, it will be in the order of $15 million less the -- that we have our first quarter, we have one quarter this year of the single-shift benefit. Could I just...

Craig, the second part of your question was really what's the future opportunity there for additional savings and how do we balance that with our outlook for next year? And I would say that's -- yes that's really a work in progress. So we're taking significant actions this quarter to rightfully position the company for the environment that we're in today. And we'll continue to monitor that going forward. If the environment continues to deteriorate then obviously, we'll evaluate that for further actions that we may need to take. But remember, we really want to balance the opportunity to recover when the market recovers. And so, if we cut too deeply then we'll sacrifice some of our ability to really bounce back when the market bounces back. And so we're taking that into account as we evaluate those options going forward.

Great. And then last question if I may. Can you guys comment -- maybe comment on the electric school bus growth rates that we're likely to see over the next few quarters? Are you seeing growth rate's well over 100% right now? And do you expect similar growth rates to continue over the next handful of quarters?

Well I mean when you look at this year I think certainly versus last year, it probably is about 100% growth versus last year whether or not that continue -- I'd love to see that continue. It's hard to say really because it's so grant-focused right now, grant-driven right now that it's just -- it's a little different to school district just to see that I can just alter all my desired new buses into electric or try and increase it. However having said that, your point is right on spot on because the fourth quarter orders that we had that we were building in the fourth quarter and booking in the fourth quarter are quite a bit above the third quarter which is over the second quarter. So we definitely are seeing that growth. But I don't think I don't have double. Double will be great. We're just going to see what happens. I'm not prepared to put a number on that. But I will tell you this, it's going to grow. And it's going to grow substantially. But double might be a little bit optimistic.

Right. And I think we would expect to see strong growth rates return once the pandemic is cleared and we get that headwind really off of us. But in the short term that will impact the overall market and where that market grows.

But one thing I will say Craig, you hit on something really interesting because when you go talk to school districts, they're very familiar with diesel. Propane is now incredibly mainstream, so is gasoline, CNG is still not perfect for our market quite frankly. It's too expensive, filling station, filling infrastructure, what would they want to talk to is -- when they usually talk it's about tons of electric buses. What's going on there? What's the TCO benefit? What can I expect to say? How much does it cost? So there is definitely a strong buzz around it that we are excited about. We want to make sure that we're ready for it. Hence I talked about just this last quarter we increased our own daily capacity capability. So we're planning to be there when -- to capitalize any growth opportunities.

Great. And just a clarification, right. So the growth of electric buses we understand is greatly outstripping any activity in the regular school bus market. Can you confirm that we do continue to see really solid positive growth in electric school buses, despite COVID despite the headwinds on the rest of the business?

Well yes, I'd say so, yes. Yes. I mean we have to recognize too we're from a fairly small amount of volume right now. So it's easy to grow. I mean, if you look at what we've done with propane and gasoline over the years, we were 20%, 30% growth some years. And now we're selling in a good year, this year for example, we'd have been looking at 5000-plus of those two product lines versus 160 electric buses. So some of it's from the baseline it's from but certainly percentage growth-wise you're absolutely right. Electric is going to outpace the rest.

Excellent. Thanks again, for taking my questions and congratulations for decent results in this difficult environment.

Thanks Craig. Appreciate that. Thank you.

There are no further questions. I'd like to hand it back over to Mr. Horlock for closing remarks.

Thanks Doug and I want to thank everyone on the call today for joining us. We do appreciate your interest in Blue Bird and we look to updating you all again on our progress next quarter. Before I sign off, I'd like to just leave you with a final message from Blue Bird today. It's sort of somewhat repetitive, but I just want to get this across for everybody. First, we are very well positioned to handle this unprecedented pandemic. We have ample liquidity. We're improving our business structure which you saw certainly in the third quarter again when I talk about that, I'm talking about taking costs out and growing the base revenue that means the underlying margin is improving. And we're going to take whatever restructuring actions necessary to get through this period and our plan is to continue to grow and thrive in the long run. So if you have any follow-up questions, please don't hesitate to give a call to our Head of Profitability and Investor Relations; Mark Benfield. So thanks again from all of us at Blue Bird and have a great evening.

Ladies and gentlemen this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.