Blue Bird Corp Q2 FY2020 Earnings Call

Good day everyone and welcome to the Blue Bird Corporation Fiscal 2020 Second Quarter Earnings Conference Call. As a reminder, today’s conference is being recorded. At this time, I'd like to turn the conference over to Mr. Mark Benfield, Executive Director of Profitability & Investor Relations. Please go ahead, sir.

The audio for our call is webcast on our website blue-bird.com under the Investor Relations tab. You can access the supporting slides on our website by clicking on the presentations portion of our IR landing 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 President and CEO, Phil Horlock; and CFO, Phil Tighe. Then we will take some questions. Let's get started. Phil?

Well, thanks, Mark. Good afternoon, everyone and thank you for joining us today for our second quarter earnings call for fiscal 2020. Before I jump into the presentation, I would like to give a brief introduction on how I assess our position today. A lot has changed since our first quarter earnings call in January, and these are clearly not normal times. But let me state that Blue Bird is well positioned to weather this unprecedented pandemic and will continue to grow and thrive in the long run. We're in a very strong financial position with ample liquidity. We have a history of robust cash generation, a culture of winning and leadership in growing segments, a fully defined multi-growth strategy, an experienced team with a proven track record of delivering results and handling difficult times. COVID-19 has not changed any of these factors. As you will see shortly we had a great second quarter result. We expect the third quarter volume will be down from last year, which hasn't surprised anyone, given that all this has slowed and schools have been closed since mid-March and shelter-in-place mandates have been established throughout the U.S. and Canada. However, as states reopen and school transportation teams return to work, we expect to see new bus orders increase with higher fourth quarter production in support of school staff. We have strong business fundamentals, as evidenced by our year-over-year profit growth in each of the past seven consecutive quarters. We have taken austerity measures to preserve cash. We increased our revolving credit facility as an insurance measure, and we acted swiftly and decisively to protect our employees and to secure our supply chain. So we continue to build and deliver buses to our customers on time. In particular, I'd like to give a special thanks to our incredible employees for their commitment and dedication to Blue Bird over the past several weeks. The coronavirus has impacted almost every aspect of our daily lives, and we are all facing personal uncertainties, not about our own making and all in which we have limited control. Despite these unprecedented challenges, I have been so proud of the positive attitude and outstanding morale of the Blue Bird team in ensuring we stay open for business and deliver buses that will keep our children safe and our company healthy. So with that introduction, let's move on to Slide 4 and take a closer look at the state of our business. As the headline states, we are confident in the state of our company and our business outlook, despite the uncertainties we are all facing. We do have strong financial results in the second quarter with substantial growth in volume and net sales. Importantly, our average selling price was 7% higher than a year ago, reflecting a combination of annual pricing and a richer mix of higher-priced alternative fuel powered buses, which was a new record mix for the second quarter. Together with cost savings from our ongoing transformation initiatives, our three-pronged profit growth strategy—namely pricing for economics, growing alternative fuels, and reducing structural costs—delivered results once again this quarter, as it has done over the past two years. In the second half of March, we took decisive action to address increasing employee concerns over the growing number of coronavirus cases in middle Georgia, where our whole body production site is based. Despite the fact we had no confirmed COVID-19 cases among our employees, we took the decision to suspend production for three weeks commencing in the last week of March. Operational employees were furloughed, and we assisted them in applying for federal and state unemployment benefits during this period. We were successful in achieving classification as an essential business in both Georgia and Ohio, where our parts distribution center is located, and we were able to restart full production on April 20th. We’ve instituted strict measures to control the risk of employee infection in the plant, which I will cover later. I can tell you the employee morale and enthusiasm of being back to work have been outstanding. Early this month, we increased our brand revolver capacity from $100 million to $142 million, and we now have ample liquidity to manage through this uncertain time. We also implemented a number of austerity measures to preserve cash, including limiting capital expenditures, virtually eliminating travel, and significant reductions in SG&A. As a consequence of our business continuity actions, we have now filled up our slots for the fourth quarter covering July through September. Turning to the industry outlook in the present market, not surprisingly, COVID-19 has had an impact. Since mid-March, we have seen incoming orders for school buses at a lower rate than the prior year, which should not come as a surprise to anyone. The schools being closed and shelter-in-place mandates being widespread. Our expectation, supported by the views of our dealer network, is that the order rates will increase through June as states reopen and school transportation employees return to work, and the demand for new buses for school staff will be significant. Nevertheless, we believe it unlikely that the full-year industry will recover to the prior forecast level of 34,000 buses and anticipate an industry of between 30,000 to 31,000 buses, or 10% to 12% below the prior forecast. We do expect that some buses required for school staff will spill over into the first quarter of fiscal 2021, as the lower order rate over the past several weeks cannot be recovered. Bottom line, we are well-prepared to manage our way through this pandemic. But the uncertainty of predicting the economic outlook requires that we withdraw guidance at this time. We expect to have a clearer view of the outlook within the next four to six weeks, as states reopen and school transportation teams return to work. Let's now turn to Slide 5 to review the key financial results for the second quarter. We had a very strong second quarter financial performance. Adjusted EBITDA of $12.7 million was $0.5 million over last year, and our second highest profit for this quarter in more than 10 years. Importantly, this profit included production cost penalties of about $3 million due to COVID-19. As I mentioned earlier, this was also a seventh consecutive quarter where profits increased over the prior year. Unit sales at almost 2,600 buses were 14% above last year, with net sales revenue at a substantial 21% higher than a year ago. Our average bus selling price grew by 7%, representing an increase of more than $6,000 per unit. Overall, this is a really strong revenue growth performance. Adjusted free cash flow in the second quarter was $38.2 million, an increase of about $25 million over the last year. Adjusted net income of $2.8 million and adjusted earnings per share of $0.10 were down $1.1 million and $0.05, respectively, from a year ago. Operationally, there were three significant results in the second quarter that are not profits but are cornerstones of our margin growth strategy. First, a 49% sales mix for alternative fuel powered school buses. We beat last year's second quarter record by 7 points. We remain the undisputed market leader in the fastest growing segment of the business. Second, we noted that the pricing we took in July 2019 to recover economics is holding and is a key contributor to the $6,100 increase in average bus selling price. And third, our transformation initiatives to reduce structural costs, encompassing purchase material, bus design, and manufacturing are delivering ongoing savings on our new track. As I’ve communicated on prior earnings calls, these three initiatives represent our key strategy to drive ongoing profit and margin improvement. Finally, we are in a strong liquidity position to weather the COVID-19 pandemic. At the end of the second quarter, our liquidity was $97.2 million and we’ve strengthened that position with a $42 million increase in our revolving credit line. Overall, I am very pleased with our second quarter financial results, which we achieved despite the cost impact of COVID-19, and in particular, I'm pleased with our underlying operating accomplishments. Let's now take a closer look at our second quarter financial results on Slide 6. I touched on many of these financial results earlier, and Phil Tighe will run through the details later and provide more texture beyond the overall numbers. I think I can summarize this very easily by saying that for the second quarter and for the first half, adjusted EBITDA and net sales revenue were up from last year for both the bus business and the parts business. To illustrate the momentum we have coming out of the first half, total net sales were up 11% and adjusted EBITDA was up 7% in the first six months of the year. Turning now to Slide 7. Let's take a closer look at alternative fuel bus sales performance. Despite the adverse impact of COVID-19, an inherent slowdown in bus orders, the mix of bookings and backlog of alternative fuel powered buses remains strong at 46%, equal to last year's record mix for this time of the year. Our market share remains as strong as ever in this segment and is presently running at about 65%, led by school buses with almost 80% share of that segment. Significantly, 216 customers have purchased our alternative fuel buses for the first time ever this year. That's on top of more than 400 customers who tried alternative fuel options last year for the first time. Importantly, our alternative fuel powered buses enable the acquisition of new business from our competitors, bringing 99 new customers to the new bus family so far this year. Those are compelling facts. And with the high customer loyalty we achieve from these products, it's a great endorsement of our exclusive alternative fuel buses, the Blue Bird brand, and our dealer network. It’s clear we are not slowing down in this segment of the industry. No other school bus manufacturer comes close to our alternative fuel sales mix or market share. So far this fiscal year, we have either sold or have firm orders in hand for more than 130 electric bus orders. We expect more to follow with all the customer interest we are seeing for the newest addition to our alternative fuel line. In fact, this number may grow to more than 150 orders by the end of this week. This is a very dynamic order process that we operate in. Looking forward, the vast majority of the VW mitigation funding is still ahead of us and will help us boost sales over the next three years or so, with many states earmarking specific funds for school bus purchases. We are really pleased with the success we've had so far from these funds that have been issued. With the widest range of alternative fuel powered buses, the most modern and proven propane, gasoline, and CNG engine in the industry, which is exclusive to Blue Bird for our expanding partnership with Ford and ROUSH CleanTech and our leadership position in low-NOx emissions, we are well positioned to capitalize on the VW funding and other growth opportunities going forward. In summary, I'm very proud of our strong and undisputed leadership position in alternative fuels. At less than 15% of buses purchased in alternative fuels to date, we have plenty of runway ahead for continued growth. Let's now change gears somewhat and turn to Slide 8 and spend some time looking at how the COVID-19 pandemic has impacted Blue Bird and, importantly, how we are dealing with it. Schools were one of the first institutions to react to the pandemic, with the first closures starting on March 15th. By the end of March, over 90% of U.S. states and Canadian provinces had closed all their schools. Since then, almost all regions have confirmed that schools will be closed until the next school year. Not surprisingly, the school closures have resulted in major disruption to our business, and we've seen a significant slowdown in school bus orders from mid-March to present. Key to the slowdown in orders is that school transportation staff were confined to working from home and school bus service operations came to a standstill. Additionally, school board meetings were eliminated or postponed, and when they did meet, the agenda focused on continuity of education and school reopening, not necessarily procurement of school buses. But as states begin to reopen from mid-May and shelter-in-place restrictions are being lifted, we are now seeing a return to work and increased interest in new buses as school transportation staff focus on their business needs for school staff. Through June we anticipate a significant step-up in demand as new bus orders are placed for school starts. However, it is infeasible to deliver all bus needs for school starts. Consequently, the forecast for new school bus business in fiscal 2020 is now between 30,000 to 31,000 units, about 10% to 12% below the prior forecast. We do anticipate additional sales in the first quarter of fiscal 2021, however, as bus deliveries will need to be made at school start. There was simply too much uncertainty around the economic and social impact of COVID-19, so it's important to note, as I mentioned earlier, that we are withdrawing financial guidance for fiscal 2020 at this time. We should have a clearer picture in the next 4 to 6 weeks as business resumes. Let me now take to Slide 9 to cover Blue Bird's response to the COVID-19 pandemic. Classified as an essential business in both Georgia and Ohio, along with virtually all of our dealerships, our prime objective is business continuity. As you can see on this slide, successful business continuity requires three critical elements: one, the safety and well-being of our employees; two, continuous production and timely receipt of material from our supply base; and three, sufficient liquidity and a robust plan to generate and preserve cash at Blue Bird. We are focused on all three of these elements. First, robust protocols are in place to ensure a safe workplace, including a mandatory temperature check of all individuals entering the plant each day, we are using masks and maintaining social distancing in the plant environment. We are also working with the Georgia National Guard to have all onsite employees tested for COVID-19. To date, half of our plant employees have been tested. Second, we are working with suppliers to address critical inventory needs, necessitating expedited shipping as needed and adjusting the production sequencing to handle the timing of parts and component deliveries, as well as bringing on board additional suppliers where practicable. And third, our own austerity measures to preserve cash include significant capital spending reductions and expense cuts on all nonessential items following the furlough of production employees during the shutdown while facilitating the state and federal payments of their unemployment benefits and increasing liquidity to our revolving credit line. All of these actions are helping us to manage through this difficult time with employee well-being and business continuity as our major objectives. As we face these uncertain times, we haven't taken our focus away from driving cost reductions. Let's now take a closer look at our transformation initiatives to improve cost structure that will help us today and in the future. Let's turn to Slide 10. We showed this slide over the last two earnings calls, but it demonstrates the progression of our transformation initiatives over the past two years and into fiscal 2022. Importantly, you can see this as a punitive approach for additional processes and tools are being added as we strive to drive down global costs. We began phase one in fiscal 2018, with our initial focus on reducing purchase material costs and services through a combination of initiatives, including recommenced agreements with suppliers and lead sourcing with minimal product design changes. In fiscal 2018, we recorded savings of over $22 million from these actions. We continued to pursue this initiative in fiscal 2019 and began to redesign changes to our processes to reduce costs without compromising quality. In this second phase, we also focused heavily on the build-to-launch, testing and validation of our already robotic paint facility, which also necessitated plant rearrangements to optimize our process. We achieved additional savings of $18 million in fiscal 2019, and these actions continue into fiscal 2020. In fiscal 2020 and beyond, Phase III now supplements the order processes by driving down the cost of production both from a fully operational robotic paint facility and some focused plant productivity initiatives. Our new automated paint facility provides the opportunity to reduce labor costs through robotic application. And to achieve savings in warranty expense and to deliver the highest productivity capacity. We are applying engineering results to focus on design, manufacturing capability, targeting the reduction of production costs and improving quality and rework. We are confident in achieving significant efficiencies in the months and years ahead. Many more efficiency actions are planned over the next few years. This systemic and cumulative approach to driving down total costs over multiple years is key to delivering higher gross profit and EBITDA margins. We'll continue to share the results with you in our quarterly earnings call. I will now turn it over to Phil Tighe, who will take you through the financials, and I will be back with the fiscal 2020 outlook to wrap up the formal presentation. Over to you, Phil.

Thank you, Phil, and good afternoon to everyone. It's my pleasure to share with you the financial details of Blue Bird's second quarter fiscal year 2020. The material that we are discussing today is as of April 4, 2020, compared to March 30, 2019, or fiscal year '19. Detailed material is available in our 10-Q, which was filed today, and we encourage you to read the 10-Q and the important disclosures that it contains. You'll note that we have included two new items in our 10-Q filing. First is a discussion about the potential impact of COVID-19. This is included in both the MD&A and as a new risk factor. The major issues that Blue Bird and most other companies face are uncertainty on many levels: demand, availability of funds to buy products, safety of people, and supply of components. As Phil has mentioned, the uncertainties have forced us to withdraw guidance for fiscal 2020. We also included the subsequent event and so he's already touched on this; Blue Bird did go the other way banks syndicate for an increase to our existing revolver. We recently closed the Second Amendment, and the revolver is now at about $142 million, up by $42 million from the prior level. We see this as prudent planning to ensure adequate liquidity in most potential risk scenarios. The appendix attached to today's presentation deals with reconciliation between GAAP and non-GAAP measures mentioned in this review, as well as important disclaimers already mentioned by Mark. There were no significant accounting pronouncements adopted in the second quarter of fiscal year '20. So now let's move to Slide 12 and take a look at a summary of the results for the second quarter. This slide summarizes some important GAAP and non-GAAP measures for our second quarter compared to the same period last year. Blue Bird, as Phil has discussed, remains very focused on the ongoing margin growth strategy, improving our alternative fuel mix, improving the revenue that we get for each bus, and transformational cost initiatives. Sales revenue was $255.4 million, up $33.8 million or 21% versus last year. Prior bus volume was up by 323 units, which contributed to $28 million in revenue improvement. Our strategy to increase business revenue per unit contributed $60 million, which was driven by an incremental 7% revenue increase for each bus sold, translating to about $6,100 per unit. This increase was due to pricing actions we took in July of FY '19 to offset the impact of inflation, alongside the higher mix of electric vehicles, alternative vehicles, and the successful initiatives implemented by our sales team aimed at improving the revenue for each sale. Gross margin was 9.5%, down about 290 basis points versus a year ago. This deterioration in margin is almost entirely the result of unusual cost factors in the second quarter, including the impact of COVID-19 and launch costs associated with plant rearrangements. Blue Bird reduced the net loss incurred in the second quarter of fiscal year 2020 to approximately $0.6 million. Improved EBITDA was largely offset by higher interest costs and higher depreciation, along with less favorable tax usage. On an adjusted basis, net income was $2.8 million, down $1.1 million versus last year, and adjusted EBITDA of $12.7 million was up by $0.5 million compared with the prior year, with details to be discussed on the next slide. The EBITDA margin was 5%, and the deterioration versus the prior year is more than explained by the unusual actions previously described. Diluted earnings per share was a loss of $0.02, which was $0.01 better than the prior year. Adjusted diluted earnings per share of $0.10 in the second quarter was $0.05 less than the prior year. Cash at the end of the second quarter was $34.1 million, up by $8.5 million compared to last year. At the end of the second quarter, we had $30 million drawn on our revolver versus $20 million last year. Importantly, this left us with an additional $63 million available, prior to the $42 million that we recently received approval for from the banks. Debt was $208.6 million, down by $1.3 million, including an additional amount that was drawn on the revolver of $10 million. In conclusion, we made good progress on improving top-line revenue, and importantly, revenue per new bus sold. We made good progress on generating cash and meeting required objectives in this critical COVID-19 environment. We still have a way to go to get our cost of production moving in the right direction. And again, we'll talk about that on the next slides. If we now move to Slide 13, this slide shows the key drivers in the change of adjusted EBITDA from the second quarter of fiscal year '19 to the second quarter of fiscal year 2020. Two key takeaway items were market factors, which include volume, product mix, pricing, and customer mix, in parts sales, which improved by $10 million versus the prior year. Volume was up by about 323 units, contributing $3.6 million to the improvement. The balance of the improvement came from pricing, product and customer mix. We continue to benefit from the favorable mix we've seen in prior quarters along with the pricing that we have continued to implement. This is clearly a very positive impact on our results. Transformational cost initiatives added about $3 million in the second quarter, and we continue to benefit from these aggressive cost reduction actions, with more to come as the year progresses. Two key factors had a substantial impact on the second quarter, accounting for about $6 million, and are considered to be confined to fiscal year 2020. Launch costs are due to continuing inefficiencies until all of the plant and sourcing changes are in place to enable us to achieve the full benefits from our new operations and other plant rearrangement activities. We expect these changes to be largely completed during the second half of fiscal year 2020. COVID-19 precautions caused us to close the plant in Fort Valley during the last week of March and the first two weeks of April. Costs incurred included continuous sanitization of the plants, protective gear for workers, equipment to monitor worker temperatures as they enter the plant, expenses to support our employees during the shutdown, and loss of overhead absorption. In addition, our JV plant in Canada was closed for almost the entire month of March and was closed for all of April as well; this contributed to the losses we see in the second quarter. Efficiencies and other costs were unfavorable in fiscal year '20, amounting to about $6 million. This included higher healthcare costs, a cleanup of obsolete and scrap material as we moved all of our inventory from the Fort Valley facility to a central warehouse, and additional costs to address higher overtime and other labor costs. Importantly, we've experienced improved efficiency since the plant started operating again on April 20, and our team is working on plans to improve the manufacturing cost through the remainder of the year. We continue to focus on improving both the per-unit revenue and cost structure at Blue Bird as key enablers for achieving our long-term profit objectives. The results in the second quarter are encouraging, despite the impact of the ongoing COVID-19 pandemic. Bus revenue per unit, as we said, was up by $6,100 per unit, or 17.1%. Transformational initiatives continue to result in cost reductions, and on a year-to-date basis, our team's improved costs by $5 million. These activities will continue with the launch of new actions in the second half. Manufacturing efficiencies since the plant reopened on April 20 are running at or above 90% compared to the mid-80s in the prior weeks of the second quarter. Let's move to Slide 14 and turn our attention to free cash flow. Generation of cash and maintaining adequate liquidity is critical at any time in business, as you all know, but it's even more so during unusual times like the present pandemic. Fiscal year 2020 second quarter adjusted free cash flow was $38.2 million, compared to $13.5 million for the same period last year. This was a significant improvement, as you can see. Free cash flow also was $32.8 million, which was $23.3 million better than the prior year. The favorable results in free cash flow were largely from normalization of trade working capital. Our trade working capital is very seasonal and fluctuates with volume. In the first quarter, it’s very low and starts to build in the second quarter. We typically see a cash drain in the first quarter due to lower volumes and a December holiday shutdown. As operations resumed to a normal level in the second quarter and production increased, we saw our traditional negative working capital model provide us with incremental free cash flow. For those interested, you can see on our balance sheet that accounts payable was $75 million in the first quarter and reached $116 million in the second quarter. This increase included no changes in supplier terms and conditions, and all suppliers were paid on a timely basis. It is truly a reflection of the increase in activity. We reduced our cash outflows for capital spending year-over-year by $7 million, and tax payments were improved by $2 million. During the disruption caused by COVID-19, we have strengthened our focus on cash and cash flow in three key areas. One, we assigned one of our senior VPs to take charge of the cash conservation team covering all aspects of our business. This was an important step, and the team is presently charged with delivering about $40 million of identified cash improvement items in the second half. Number two, we have adopted a 13-week cash forecasting process that forecasts cash sources and uses by week and allows weekly analysis of cash movements versus forecasts. Finally, we added $42 million to our existing revolver of $100 million. The last slide addresses our debt leverage and liquidity on Slide 15. Liquidity was at $97.2 million at the end of the second quarter. After accounting for the May 7th amendment to the credit facility, which increased our revolver by $41.9 million, our pro forma liquidity would have been $139.1 million. We believe that we are well positioned in terms of liquidity to weather further disruptions from the coronavirus issue. We took a three-week shutdown in the last week of March and the first two weeks of April, which caused the majority of our cash inflows during that period. We continued payments to our suppliers, which amounted to a weekly outflow of $15 million to $20 million. Our bus assembly operations restarted on April 20, and we are now seeing a normalized level of cash receipts. The combination of the reopening of production and having an order backlog that is now filled through early July provides us with a steady and predictable revenue stream. Increasing our revolver and further enhancing liquidity while implementing significant cash conservation actions has already identified over $40 million in improvements moving forward. We believe the combination of these three factors provides us with a strong outlook for liquidity throughout the remainder of the year. And we are on track to meet all of our objectives. Importantly, our revenue ratio for the second quarter stood at 2.4:1, which is far below the 2.75:1 threshold. Debt at the end of the quarter was $208.6 million, which was down $1.3 million versus last year, despite an additional $10 million drawn on the revolver due to trade working capital movements. I will now turn the discussion back to Phil Horlock for some important comments about the outlook for the balance of fiscal year '20 and the actions we are taking. Over to you, Phil.

Thanks, Phil. Let’s now cover the fiscal 2020 full-year outlook. Turn to Slide 17. As the headline states, we are confident in our ability to weather the storm that we are experiencing now. But the economic and market outlook remains uncertain. This headline isn't unique to Blue Bird, as we’ve seen many companies give the same message over the past several weeks. However, we are confident in our ability because, as the second quarter results show, Blue Bird's business fundamentals remain strong. As we continue to deliver on our profit growth strategy, as we have done for the past two years. Turning to the market, it's worth noting that customer demand remains very high for new school buses. 25% of the U.S. and Canadian fleets of buses are 50 years of age or older. This represents more than 150,000 buses that customers want to replace. While customer demand is very high, the limiting factor is funding availability. While property values and property taxes still continue to be the major funding mechanism for school buses, and are expected to remain strong in the near term, the impact of lost state sales taxes and state income taxes could impact overall funding for education, which includes school buses. The precise impact of potential federal government assistance is unclear. Although the recent funding action provided $16 billion in late April to assist in the education needs for K-12 public schools, it needs to be put into context as this is only a fraction of the total annual cost of education for K-12 public schools. Out of that, the annual capital expenditures for new school bus purchases typically represent less than 0.3% of the total capital and expense budget for education in the United States, which totals about $700 billion. It's important to recognize the small portion of the education budget that is used to purchase school buses each year and how states will allocate the funding going forward remains to be seen. Our immediate focus at Blue Bird is on protecting our employees' safety so that we can ensure business continuity. In this regard, we have lowered our production rate in June while meeting the slower incoming order rate we’ve seen since mid-March when schools closed and shelter-in-place mandates were implemented. We are now beginning to fill our fourth quarter production slots. We expect a significant increase in orders in the coming weeks as school transportation staff return to full-time work and focus on their bus needs for school start. We are prepared to fulfill an increase in fourth quarter demand. For the third quarter, volume will be down from last year due to the slowdown in orders over the past several weeks. We also expect strong volumes in the first quarter of fiscal 2021, with the delayed orders for school staff spilling over into the next fiscal year. Like many public companies, however, we are withdrawing guidance at this time. As I mentioned earlier, we expect to have a better clarity on the outlook for the next four to six weeks as states and provinces open up and business resumes. While our latest forecast for the industry in fiscal 2020 is now between 30,000 to 31,000 buses, a 10% to 12% decrease from prior forecasts, it's worth noting that the school bus industry has averaged about 31,000 units a year over the past 30 years. This context illustrates that we are still looking at a relatively strong business forecast even in these difficult times. In response to the lower volume forecast, I am announcing that we have decided to pull forward our plan to move to a single-shift production schedule from two shifts today, which will be implemented on June 1. We believe this is a prudent move that will improve cost efficiencies going forward. This will require a shift in our operating pattern from four 10-hour production days per week on two shifts to five 10-hour days per week of one shift at straight time. Looking forward, we will be investing in production capacity constraints in the first quarter of fiscal 2021 to ensure we can meet second-half peak season demand next year with a sustained single-shift production schedule. This is a great example of Blue Bird restructuring its business responsibly during difficult times to ensure we remain competitive in the future. In conclusion, I want to reiterate my initial comments: Blue Bird is well-positioned to weather this unprecedented pandemic. We have ample liquidity, our business fundamentals are strong, and we will take whatever restructuring actions are necessary to navigate through this period and ultimately grow and thrive in the long run. That concludes our formal presentation. I will now pass it back to our moderator to begin the Q&A session.

Thank you, sir. And first we'll hear from Eric Stein with Craig-Hallum.

Hi, everyone. Thanks for taking the questions.

Hi, Eric.

So you just mentioned it a little bit on the funding side, and I know that near-term, some of the issues, it's more about timing rather than availability. But even though it's a small part of spending, school spending, talking about school buses, I mean, what are your thoughts long-term, given municipal budgets stretched, given what's going on right now? Is that something that you feel like would be relatively insulated from maybe some of the other needs of a municipality, or how do you think about that?

Well, I think, Eric, that's why we talk about withdrawing guidance at this time. It's tough to say what the outlook is. States are just starting to reopen. Shelter-in-place orders are being lifted. We're going to see what the outlook is. The federal government has an appetite to support the states because obviously, states have lost significant amounts of sales tax over the last couple of months. State income tax has also been impacted. I just—I don’t know how that plays out. I mentioned that there is a relatively small piece of the school budget for bus purchases. Just to give a reference point, our major funding mechanism—70% of school bus funding—comes from property taxes. We expect that to remain high. Housing prices are still holding up, and collecting those taxes is critical for our bus business. We’ll have to see how these rides play out. Obviously, we’ve taken down our expectation by 10% to 12% from the full industry outlook. So that’s the near-term look. We need to see how the government reacts and when budgets start to get released. The first sign of that will be in June, which is typically when education budgets are set and approved by school boards. That will trigger bus buying late in the season. So we should start to see that in the next four weeks or so and get a replay of the Prichard report. Right now, like everybody else, I’m just trying to conjecture and forecast, but we have limited information. I am hopeful and confident that we will see an increase in volume and requirements coming through from June onwards to support school staff for new buses. I believe that will happen.

Yes. Okay, thanks for that. And maybe just turning to cash generation. Obviously, you're pulling guidance, and your previous guidance you've been talking about for the last three quarters of the year, generating, I think, $120 million. I mean, I know with that strong guidance, a lot of uncertainty. But just any commentary on the cash generation expectation going forward? I mean, clearly, that's still a big objective and very likely for you. Is that fair to say?

Eric, this is Phil. Cash generation is tough right now. The traditional source, which is sales, will be down as we get through at least the third quarter, and the fourth quarter is still a little hard to predict. As Phil said, we want to get input on that until we have clarity. We did mention in the call that we’ve put a team in place to reduce a lot of our cash spending for the balance of the year. I've set a target of $40 million initially, and I have identified all of the items to get to that target. So we’re comfortable that they will succeed. If necessary, we will tighten that even more if needed. I'll still say that we expect to have positive cash flow in the second half of the year; we just can’t predict exactly where.

I get that. It sounds—yes, I mean, yes, uncertainty, but I mean from a high level, the typical pattern, you know, that first quarter there's a big usage and then that flips for the remainder of the year. It sounds like that's still in place.

Yes. Okay, well, I think there’s a combination of increased volume and ongoing cash conservation measures. We anticipate that distribution cash flow will remain positive this year. We do not expect the pandemic to adversely affect our core business. We project we will be positive this year, and we will see that unfold. But we have plans in place to accomplish this.

Okay, got it. Last one for me. One of the unintended consequences of COVID, I think, is just more focus on the environmental side. Any thoughts about your ability to pick up share given your leadership position in alternative fuels as things normalize, whatever that looks like going forward?

Yes, we certainly always want to pick up share. Notably, even in the bumpy last month of the year, during the last quarter we just had, we continued to gain market share. We have significant conquest business, which frankly is scheduled for us. As reported in the call, we maintain a 65% market share in our sector and almost 80% share on propane. We continue to emphasize these products, which are not only great for the environment but also ideal for the children who ride our buses. The fact that our alternative fuel sales mix grew by 7 percentage points this last quarter bodes well for us. We intend to continue pushing forward and strive to gain further market share, as school district business is our core and we sell directly to school districts through our dealer channel.

Okay, thanks.

Thanks, Eric.

Next we will hear from Craig Irwin with ROTH Capital Partners.

Good evening and thanks for taking my questions. Your prepared remarks seemed to point to your confidence in a V-shaped recovery and a strong inflection upward after what you've been working through right now. Can you share with us the specific data points that give you this confidence and optimism about the next few months? And the second part of the question is, what portion of your production slots for the fourth fiscal quarter do you expect to be recovered by orders on hand? And how does that compare to last year?

Let's see if I can give you specific data points because we want to get to the specifics of what we call our bookings and backlog and where we stand today. If you look at the decline we are showing in the industry projection, that’s pretty much what we see right now in our bookings and backlog. And that’s happened over the last couple of months, as the pandemic has taken its toll. We're seeing the 10% to 12% decrease, which is about where we anticipate. As for filling our slots for production, we don't have definite volume for the third quarter yet; we know what we have to build as we go through June, leading into July. When it comes to our optimism, we base that on discussions with transportation directors, the very people out there every day trying to ensure school children are transported safely. These are the decision-makers who talk to their school boards about what their needs are. We’ve also spoken with our dealer network as well as our own assets. In terms of actual hard data, we monitor property values because they correlate closely with our business health. Home prices have stayed relatively stable; they haven't collapsed in the past couple of months. We remain optimistic about that being our key funding mechanism. As I mentioned earlier, states have seen huge losses in sales tax revenues recently. What we found interesting was that in the last week of April, the federal government allocated $16 billion to K-12 education, which is significant considering the current situation. We're closely watching how state budgets will be finalized in June, as this information will be important for our assessments moving forward.

Great. Thank you for that. The most important question on the minds of your largest shareholders and institutions evaluating your stock are the parallels to the financial crisis of 2007-2009. It took several years for us to reach the bottom in overall school bus sales during that downturn. Can you point to anything specific that would suggest a shorter duration for recovery this time? The rapid onset of COVID-19 has clearly been abrupt, but what else suggests to you that we will reach a bottom in a more rapid manner compared to that previous cycle?

Yes, let me take that one. I’m sure Phil has some comments too. The last crisis in 2008 was driven by the banking and financial crisis, where we learned of credit default swaps and how many people defaulted on mortgages. That drew things out significantly because it led to foreclosures; house prices tanked. It took several years to reach a bottom, to about 2011. We fell significantly because there was a massive drop-off in house prices over those years. This time, we don’t see a precipitous drop in housing prices. That has not been the case; we've talked to experts who confirmed this to us. The current situation is a pandemic that has forced businesses into shutdown for the past few months, but we're all navigating our way out as states reopen. The other factor is the federal government's quick response with stimulative actions and the support for education through funds like the $16 billion in the CARES Act. This shows their willingness to support the economy aggressively, perhaps more so than in past times. I think that is an important variable to note. Additionally, the average age of a school bus in 2008 before the financial crisis was about eight years old. Today, it’s eleven years old. We have a significant number of buses that are over 15 years old looking to be replaced, creating a strong impetus for fleet replacement that is critical for our business.

With regard to the distinction between now and when we faced the last downturn, a big difference is in state funding. The central state pools that rely on sales and income tax funds differ significantly from property tax funding. In 2008, once property taxes fell, it took years to recover to previous levels. However, we aren’t experiencing a similar situation with property taxes; they still appear to be strong and unlikely to drop significantly.

Thank you for that. My last question is about your ability to flex spending. You've taken proactive action to manage expenses. Regarding the environmental obligations you have to meet next year with new engine packages, did you get a waiver from the EPA, or have you made a decision yet about deferring investment in the next generation bus construction?

That’s a very specific, competitive question regarding our product plans. We try to stay clear of addressing those. However, we are in continuous discussions with the EPA and CARB regarding our initiatives and will ensure we meet all environmental requirements while also accounting for the current conditions. Unfortunately, I can’t provide specifics at this time for competitive reasons.

Understood. Congratulations on the strong delivery numbers. You guys should be commended for your proactive stance on cost controls and market positioning. Congratulations again for the quarter.

Thanks very much. I appreciate that.

And there are no further questions at this time. Mr. Horlock, will turn the conference back over to you for any additional or closing remarks.

Yes. Thank you all for joining us today. We appreciate your ongoing interest in Blue Bird. As you can see from our second quarter results, we’ve made significant progress on multiple fronts, and we will work through this COVID-19 pandemic adapting and restructuring as needed, and continue to thrive and grow profitably in the long term. I have no doubts about that. We have a great team that is focused on driving results. Before I finish, I want to take this opportunity to thank my colleague and friend of more than 25 years, Phil Tighe. He will be stepping down from his role as CFO at the end of May after eight years with Blue Bird. It’s been a real pleasure to work with Phil as we took Blue Bird from a privately held company to a public company in 2015. Phil will stay on in a consulting capacity, working with me and our leadership team on strategic issues and special topics. I want to thank Phil for his many contributions during his time with Blue Bird. He has earned the respect of many of you on this call. Feel free to reach out to him for his tremendous service. As Phil moves forward, I’m pleased to announce that Jeff Taylor will be taking over as the new CFO effective July 1. Jeff has extensive experience as a public company CFO, most recently with Wabash, and was with us on today’s call. I believe he will be a great asset to our company moving forward and I'm sure many of you will get to meet him in the coming months. Thank you, Phil, for your terrific service, and welcome, Jeff, to the school bus business. Thank you all for joining the call today. We are well positioned to deal with this pandemic, and we look forward to achieving continued profitable growth in the long run.

That does conclude today's conference. We thank you for your participation. You may now disconnect.