Blue Bird - Earnings Call - Q2 2020

Transcript

Speaker 0

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

Speaker 1

The audio for our call is webcast on our website, bluebird.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 could cause actual results to materially be 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, Bill Tighe. Then we will take some questions. So let's get started. Phil?

Speaker 2

Well, thanks, Mark. Well, good afternoon, everyone, and thank you for joining us today for our second quarter earnings call for fiscal twenty twenty. Before I jump into the presentation, I'd 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 just state that Blue Bird is well positioned to weather this unprecedented pandemic, and we 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 margin growth strategy and an experienced team with a proven track record of delivering results and handling difficult times. COVID-nineteen 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, as not surprisingly, all this have slowed with schools being closed since mid March and shelter in place mandates 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 start. We have strong business fundamentals as evidenced by our year over year profit growth in each of the past seven consecutive quarters, and 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 that we continue to build and deliver buses to our customers on time.

In particular, I'd like to give 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 that are not of our own making and only which we have limited control. Despite these unprecedented challenges, I've been so proud of the positive attitude and outstanding morale of the Blue Bird team in ensuring we stay open for business and to do deliver buses that will keep our children safe and our company healthy. So with that introduction, let's move on to Slide four and take a closer look at the state of our business. As the headline says, we are confident in the state of our company and our business outlook despite the uncertainties we are all facing.

We delivered 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 transformational 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 March, we took decisive action to address increasing employee concerns over the growing number of coronavirus cases in Middle Georgia, where our whole product facility is based. Despite the fact that we had no confirmed COVID-nineteen cases among our employees at that.

Additionally, since several of our suppliers have been forced to shut down their operations, we took the decision to suspend production for three weeks commencing in the March. Our production 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 cost distribution center is located, and we're able to restart full production on April 20. We've instituted strict measures to control the risk of employee infection in the plan, which I will cover later. I can tell you the employee morale and enthusiasm of being back to work has been outstanding.

Early this month, we increased our bank revolver capacity from $100,000,000 to $142,000,000 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 SG and A reductions. As a consequence of our business continuity actions, we have now filled our production slots through June and are now working on filling fourth quarter slots covering July through September. Turning to the industry outlook and the present market in general, not surprisingly, COVID-nineteen has had an impact. Since mid March, we have seen incoming orders for school buses at a lower rate than prior year, which should not come as a surprise to anyone with schools being closed and shelter in place mandates being widespread.

Our expectation supported by the views of our dealer network is that the order rate 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 2021 as the lower order rate over the past several weeks cannot be recovered by school staff. 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 five to review the key financial results for the second quarter. We had a very strong second quarter financial performance. Adjusted EBITDA of $12,700,000 was $500,000 over last year and our second highest profit for this quarter in more than ten years. Importantly, this profit included production cost penalties of about $3,000,000 due to COVID-nineteen. As I mentioned earlier, this was also our seventh consecutive quarter where profits increased over the prior year.

Unit sales of 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. So overall, this is a really strong revenue growth performance. Adjusted free cash flow for the second quarter was $38,200,000 an increase of about $25,000,000 over the last year. And adjusted net income of $2,800,000 and adjusted diluted earnings per share of $0.10 were down 1,100,000 and $05 respectively from a year ago.

Operationally, there were three significant results in the second quarter that bolstered our profits and are the cornerstone 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 seven points. We remain the undisputed market leader in the fastest growing segment of the business. Second, we saw earlier 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 and are on track.

As I've communicated on prior earnings calls, these three initiatives represent our key strategy to drive ongoing profit and margin improvement. And finally, we are in a strong liquidity position to weather the COVID-nineteen pandemic. At the end of the second quarter, our liquidity was $97,200,000 and we have since strengthened that position with a $42,000,000 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-nineteen 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 six.

I touched on many of these financial results earlier and Paul Ty will run through the details later and provide more texture behind 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 offset 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 seven, let's take a closer look at alternative fuel bus sales performance. Despite the adverse impact of COVID-nineteen and inherent slowdown of bus orders, the mix of bookings and backlog for alternative fuel powered buses remained strong at 46%, equal to last year's record mix at 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 four things at a share of almost 80% of that segment. Significantly, two sixteen customers have purchased or ordered alternative fuel buses from us 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 have enabled us to conquest new business from our competitors, bringing 99 new customers to the Blue Bird family so far this year. Those are compelling facts.

And with the higher 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. So 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 our market share. So far this fiscal year, we have either sold or have firm orders in hand for more than 130 electric bus orders, and we expect more to follow with all the customer interest we are seeing for the newest addition to our alternative fuel line up. In fact, this number will 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 through our expanding partnership with Ford and Reg 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.

And with less than 15% of school districts having purchased an alternative fuels out of school bus today, we have plenty of runway ahead for continued growth. First, I'll change gears somewhat and turn to Slide eight and spend some time looking at how the COVID-nineteen pandemic has impacted Blue Bird and importantly, how we are dealing with it. Schools are one of the first institutions to react to the pandemic with the first closing starting on March 15. By the March, over 90% of U. S.

States and Canadian provinces have closed all their schools. Since then, almost all regions have confirmed that schools will be closed until the next school year. Not surprisingly, 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 the standstill. Additionally, school board meetings were eliminated or postponed.

And when they did meet, agendas are focused on continuity of education and school reopening and 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 quotes for new buses as school transportation staff focus on their school bus needs for school staff. Through June, we anticipate a significant step up in demand as new bus orders are placed for school start delivery. And this view is supported by feedback from school transportation directors. Following the slowdown in orders for more than two months, however, it is infeasible to deliver all bus needs for school starts.

Consequently, the new school bus interest in fiscal twenty twenty is now forecast to be in the 30,000 to 31,000 units range, some 10% to 12% below prior forecast. We do anticipate additional sales in the 2021, however, as bus deliveries will need to be made after the school start. There is simply too much uncertainty today around the economic and social impact of COVID-nineteen, such that, as I mentioned earlier, we are withdrawing financial guidance for fiscal twenty twenty at this time. We should have a clearer picture in the next four to six weeks as business resumes. Let me now turn to Slide nine to cover Blue Bird's response to the COVID-nineteen pandemic.

Classified as an essential business in both Georgia and Ohio, along with virtually all of our dealerships, our plan 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 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, wearing of masks and social distancing in the plant environment. We are also working with the Georgia National Guard to have all Blue Bird on-site employees tested for COVID-nineteen.

And to date, more than half of our plant employees have been tested. Two, Riggers followed the suppliers to address critical inventory needs, necessitating expedited shipping as needed and shut down the production sequencing to handle timing of parts and component deliveries and bringing onboard additional suppliers where practicable. And three, our own austerity measure to preserve cash, including significant capital expenditure reductions and expense cuts on all non essential items, following production employees during shutdown, while facilitating 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 the 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 are helping us today and in the future. Let's turn to Slide 10. We showed this slide in the last two earnings calls, but it illustrates the progression of our transformational initiatives over the past two years and into fiscal twenty twenty. Importantly, you can see this as a cumulative approach where additional processes and tools are being added as we strive to drive down total costs. We began Phase one in fiscal twenty eighteen, our initial focus on reducing purchase material costs and services through a combination of initiatives, including new commercial agreements with suppliers and resourcing with minimal product design change.

In fact, you might recall that fiscal twenty eighteen, we recorded savings of over $20,000,000 from these actions. We continue to pursue this initiative in fiscal twenty nineteen and began to add design changes to our process to reduce costs without compromising quality. In this second phase, we also focused heavily on the build to launch, testing and validation of our all new robotic paint facility, which also necessitated plant rearrangements to optimize our process. We achieved additional savings of $18,000,000 in fiscal twenty nineteen, and these actions continue into fiscal twenty twenty. In fiscal twenty twenty and beyond, Phase III now supplements the oil processes by driving down the cost of production, both from a fully operational robotic paint facility and from focused plant productivity initiatives.

Our new automated paint facility provides the opportunity to reduce rework with increased first time run capability to reduce labor and material costs through robotic application of paint and to achieve savings and warranty expense and to deliver highest freight time capacity. We are applying engineering resources to focus on design for manufacturing capability, targeted at reducing production costs and improving quality on rework, and we are confident of 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'll now turn it over to Phil Tighe, who will take you through the financials, and I'll be back later to cover the fiscal twenty twenty outlook and wrap up the formal presentation. Over to you, Phil. Thank you, Phil, good afternoon to everyone. It's my pleasure to be able to share with you the financial details of Blue Bird's second quarter for fiscal year twenty twenty. The material that we are discussing today is at the close of 04/04/2020, and March 3039, or fiscal year 'nineteen.

Detailed material is available in our 10 Q, which was filed today. 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. The first is a discussion about the potential impact of COVID-nineteen. This is included in both the MD and A and as a new risk factor.

The major issue that Blue Bird and most other companies face is 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 year twenty twenty. We also included a subsequent event, and Phil has already touched on this, Blue Bird did go to our bank syndicate for an increase to our existing revolver. We have recently successfully closed the Second Amendment and the revolver is now at about 142,000,000 up by $42,000,000 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 'twenty. And so now let's move to Slide 12 and take a look at the summary of key results for the second quarter. So this slide summarizes some important GAAP and non GAAP measures for our second quarter and for the same period last year. Blue Bird, as Phil has discussed, remains very focused on our ongoing margin growth strategy, improving our alternative fuel mix, improving the revenue that we get for each bus and transformational cost initiatives.

Net revenue, as you can see on the slide, was $255,400,000 up $43,800,000 or 21% versus last year. Higher bus volume of three twenty three units was worth about $28,000,000 of improvement. And in line with our strategy for higher bus revenue per unit, 16,000,000 was contributed by an incremental 7% revenue for each bus sold, which translates into about $6,100 per unit. The bus revenue per unit increase was due to pricing actions that we took in July 2019 to offset the impact of inflation as well as the higher mix of electric vehicles, alternative vehicles and a successful program implemented by our sales team to really try to improve the revenue we get on each side. Gross margin, you can see, was 9.5%, down about two ninety basis points versus a year ago.

The deterioration in margin is almost entirely the result of the unusual cost factors into the second quarter, including the impact of COVID-nineteen and launch costs associated with rearrangements being made in our assembly facility. We'll talk more about this on future slides. Blue Bird reduced the net loss incurred in 2020 to about zero six. Improved EBITDA was largely offset by higher interest costs and higher depreciation, less than favorable news and tax. On an adjusted basis, net income was CAD2.8 million, down CAD1.1 million versus last year.

Adjusted EBITDA of CAD12.7 million was up by CAD0.5 million compared with prior year, and details will be discussed on the next slide. The EBITDA margin was 5%, and the deterioration versus prior year is more than explained by the unusual actions that we previously described. Diluted earnings per share was a loss of $02 and this was $01 better than the prior year. Adjusted diluted earnings per share of $0.10 in the second quarter was $05 less than the prior year. Cash at the end of the second quarter was $34,100,000 This was up by $8,500,000 compared to last year.

At the end of the second quarter, we had $30,000,000 drawn on our revolver versus $20,000,000 last year. Importantly, this left us with an additional $63,000,000 available, and that was prior to the $42,000,000 that we recently had approval from the banks. Debt was $208,600,000 This was down by 1,300,000 including the additional amount that was drawn on the revolver of 10,000,000 In conclusion, we made good progress on improving top line revenue and importantly, per new bus sold. We made good progress on generating cash and meeting required covenants in this critical COVID-nineteen 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 second quarter of fiscal year 'nineteen to 2020. Some key takeaway items. Market factors. These are volume, product mix, pricing, customer mix and parts sales, and improved by $10,000,000 versus the prior year.

Volume was up by about three twenty three units. This was worth $3,600,000 The balance of the improvement came from pricing, product and customer mix. We continue to benefit from the favorable mix that we've seen over prior quarters and the pricing that we continue to take. And this is clearly a very positive impact on our results. Transformational cost initiatives added about $3,000,000 in the second quarter, and we continue again to benefit from these aggressive cost reduction actions and there are more to come as the year progresses.

Two key factors had a substantial impact on the second quarter, about $6,000,000 but are considered to be probably confined to fiscal year twenty twenty. Launch costs are due to continuing inefficiencies until all of the plants and sourcing changes are in place to enable an achievement of the full benefits from our new paint shop and other plant rearrangement activities. We expect these changes to be largely completed during the second half of fiscal year twenty twenty. COVID-nineteen precautions caused us to close the plant in Fort Valley during the March and for the April. Costs incurred included cost to continuously sanitize the plants, protective vehicle workers, equipment to monitor worker temperatures as they enter the plant, expenses to support our employees during shutdown and a loss of overhead absorption.

In addition, our JV point in Canada was also closed for almost the whole of March, and by the way, was closed for all of April as well. And this contributed to the loss that we see in the second quarter. Efficiencies and other costs were unfavorable in fiscal year twenty twenty and that also was worth about $6,000,000 This included higher healthcare costs, a cleanup of obsolete and scrap material as we had moved all of our inventory from the Fort Valley facility to a central warehouse in Macon. The team really did a deep dive onto obsolete scrap material, and we have written that off. So I think that's largely behind us.

And then higher overtime and other labor costs. Importantly, we've experienced improved efficiencies since the plant started operating again on April 20, and our team is working on plans that will improve manufacturing costs through the balance of the year. We continue to work on improving both the per unit revenue and cost structure of Blue Bird as key enablers for achieving our long term profit objectives. The results in the second quarter are encouraging despite the impact of ongoing launch costs in COVID-nineteen. Bus revenue per unit, as we said, was up by $6,100 a unit or 70.1%.

Transformational initiatives continue to result in cost reductions. And on a year to date basis, our teams improved costs by $5,000,000 and these activities will continue with the launch of new actions in the second half. And finally, manufacturing efficiencies since the plant reopened on April 20 are running at or above 90% compared to the mid-80s in the prior weeks in 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 we all know.

But it's even more so during an unusual time such as the present pandemic. Fiscal year twenty twenty second quarter adjusted free cash flow was $38,200,000 as compared to $13,500,000 for the same period last year. This was a significant improvement, as you can see. Free cash flow also was $32,800,000 which was $23,300,000 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. As you know, the first quarter is very low and we start to build second quarter. We typically see a cash drain in the first quarter due to lower volumes and the December holiday shutdown. As operations resume to a normal level in the second quarter and volumes increase, we see our traditional negative working capital model grow,

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providing us with incremental free

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cash flow. For those who are interested, can see on our balance sheet that accounts payable was $75,000,000 in the first quarter and grew to $116,000,000 in the second quarter. This included no changes in supplier terms and divisions, and all suppliers were paid on a timely basis. It is purely a reflection of the increase in activity. We reduced our cash outflows of capital spending year over year by $7,000,000 and taxes were improved by $2,000,000 During the disruption caused by COVID-nineteen, we have strengthened our focus on cash and cash flow.

Three items: one, we assigned one of our senior VPs to take charge of a cash conservation team covering all aspects of our business. This was an important step, and the team is presently charged with delivering about $40,000,000 of identified cash improvement items in the second half. Number two, we have adopted a thirteen week cash forecasting process that forecasts cash sources and uses by week and allows a weekly analysis of cash movements versus forecast. And finally, number three, as we have discussed, we added $42,000,000 to our existing revolver of $100,000,000 Last slide addresses improving debt, leverage and liquidity on Slide 15. Liquidity was at $97,200,000 at the end of the second quarter.

After giving effect to the May 7 amendment to the credit facility, which increased our available revolver by $41,900,000 our pro form a liquidity would have been $139,100,000 at quarter end. 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 March and April, which paused the majority of our cash inflows. During that period, we continued payments to our suppliers, which amounted to weekly amounts of 15,000,000 to $20,000,000 Our bus assembly operations restarted on April 20, and we are now seeing a normalized level of cash receipts. So the combination of the reopening of production and having an order backlog that is now firmed through early July provides a steady and predictable revenue stream.

Increasing our revolver adds further cushion to liquidity and significant cash conservation actions worth up to $40,000,000 are being pursued and have already been identified. We believe the combination of these three factors provides us with a strong outlook for liquidity for the balance of the year and enables us to meet all of our obligations. Importantly, our net leverage ratio for the second quarter stood at 2.4:one, which is well below the 3.75:one threshold.

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Debt at the end

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of the quarter was $208,600,000 which was down 1,300,000 versus prior year despite an additional $10,000,000 drawn on the revolver and higher levels of trade working capital. I will now turn the discussion back to Phil Hallor for some important comments about the outlook for the balance of fiscal year 2020 and the actions we are taking. Over to you, Phil. Thanks, Phil. So let's now cover the fiscal twenty twenty full year outlook.

Turn to Slide 17. As the headline says, we are confident in our ability to weather the storm we're all experiencing, but the economic and market outlook remains uncertain. This headline isn't unique to Blue Bird as we've seen many companies given the same message over the past several weeks. But we are confident in our ability because as our 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 so over the past two years. Turning to the market, it's worth noting that customer demand remains very high for new school buses, as 25% of The U.

S. And Canadian fleet of buses are 15 years of age or older. This represents more than 150,000 buses that customers want to replace. So 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 future state funding for education, which includes school buses. The precise impact and potential federal government assistance are unclear, although the recent CARES funding action provided $16,000,000,000 in late April to assist in education needs for K-twelve public schools. However, if we're putting into context the size of school bus expenditures, this is the total annual cost of education for K-twelve public schools. At about $2,000,000,000 a year, the annual capital outlay for new school bus purchases typically represents less than 0.3% of the total capital and expense budget of $700,000,000,000 for education in The United States. I think it's important to recognize the small portion of the education budget that is used to purchase school buses each year, with property taxes being a major funding source.

It remains to be seen, however, how states will allocate their funding going forward. 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 through June, while meeting the slower incoming order rate we have been seeing since mid March when schools closed and shelter in place mandates were set. We are now beginning to fill our fourth quarter production slots, and we expect a significant increase in orders in the coming weeks as school transportation staff return to full time work and focus on their best needs for school staff. We are prepared to beat an increase in fourth quarter demand, but the third quarter volume will be down from last year because of the slowdown in orders over the past several weeks.

We also expect strong volumes for the 2021 with the recent delay in orders for school buses caused deliveries are still over into the next fiscal year. Like many public companies have done, however, we are withdrawing guidance at this time. As I mentioned earlier, we expect to have better clarity on the outlook for the next four to six weeks as states and provinces open up and business resumes. While our latest outlook for the industry in fiscal twenty twenty is now between 30,000 to 31,000 buses or 10% to 12% below our prior forecast, It's worth noting that the school bus industry has averaged about 31,000 units a year over the past thirty years. I think this helps to put the new industry forecast into context.

It is still a relatively strong industry forecast even in these difficult times. In responding to the lower industry forecast, I am announcing today that we have taken the decision to pull forward our plan to move to a single shift production schedule from two shifts today, and we'll implement this action on June 1. We believe this to be a prudent move and will improve cost efficiencies going forward. This will require a vision for our operating pattern moving from four ten hour production days per week on two shifts today to five ten hour days per week on one shift at straight time. Looking forward, we will be investing in production capacity constraints in the 2021 to ensure we can beat 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 in response to these difficult times and making us more competitive in the future. In conclusion, I just want to end with my comment that I made at the beginning of this call. Blue Bird is well positioned to weather this unprecedented pandemic. We have ample liquidity. Our business fundamentals are strong.

We will take whatever restructuring actions are necessary to get through this period, and we will continue to grow and thrive in the long run. That concludes our formal presentation. I'll now pass it back to our moderator to begin the Q and A session.

Speaker 0

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

Speaker 2

Hi, everyone. Thanks for taking the questions.

Speaker 4

Hey. So you just mentioned it a little bit on the funding side. I know that near term, some 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, 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 the municipality?

Or how do you think about that?

Speaker 2

Well, think, Eric, that's why we talk about withdrawing guidance at this time. It's really tough for us to say, I mean, what the outlook is. Businesses are just starting to reopen. States are reopening. Shelter in place are being lifted.

We've got to see what the outlook is. The federal government, do they have an appetite to support the states? Because obviously, states have lost significant amounts of sales taxes over the last couple of months or so. State income taxes have been obviously impacted too. So I just we're going see how that plays out.

I mentioned that a relatively small piece of what the school budget is for bus purchases, only just to give a reference point there. And because our major funding mechanism is that 70% of school bus funding is still from property taxes. We expect they'll stay high. Housing prices are still holding up. The collection of those funds is critical for our bus business.

So but we're going see how this rides out. Obviously, we've taken out 10% to 12% this year from a full industry outlook. So that's the near term look. We're just going to see how the government reacts and when budgets start to get released. The first sign of that will be in June time, typically, that's when education budgets for schools are set and approved by school boards.

And that then triggers the buying of buses late in the season before school start. So we should start to see that in the next four weeks or so and get a real clear view of what the picture is. But unfortunately, right now, like everybody else, I'm just we can conjecture, we can try and do a forecast, but we have just limited information, I think, at this point. And so if this thing has moved so rapidly around us. Do feel confident into the balance of this year that we will see an increase in volume and increase in requirements coming through from June onwards to support school staff and need for new buses.

I don't think that will happen.

Speaker 1

Yes. Okay.

Speaker 4

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, 120,000,000 plus. I mean, I know with that withdrawn guidance, a lot of uncertainty, but just any commentary on the cash generation expectation going forward? I mean, that's still a big objective and very likely for you. Is that fair to say?

Speaker 3

Eric, this is Phil, the other Phil. So cash generation from the traditional source, which is

Speaker 2

sales, which will be down as we get through at least the third quarter. The fourth quarter is still a little hard to predict, as Phil said. And we won't get a lot of input on that until we until some of the school budgets start to sort themselves out. We did mention in the call that we've put a team in place reduce a lot of our cash spending for the balance of the year.

Speaker 3

They've got a target of $40,000,000 initially, and they've identified all of the items to get to that target. So we're very comfortable that they will succeed. And if need be, we'll squeeze that a

Speaker 2

bit more. I still see that we will have

Speaker 3

positive cash in the second half. We just can't predict exactly where it went.

Speaker 4

I get that. I mean, but it sounds I mean, yes, uncertainty. But I mean, a high level, the typical pattern of 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.

Speaker 2

Yes.

Speaker 4

Last one for me. It's still I just want to say,

Speaker 2

I think as Phil mentioned, I mean, while yes, while volume is down, I think the combination of lower volume, but we have been working on these cash preservation, cash conservation initiatives and cash generation, as I would call them, will cause us to be cash flow positive this year. We don't anticipate we're eating into our base core business. We tend to be positive this year. And we'll see how that unfolds, but we have plans in place to do that and that's the goal.

Speaker 4

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

Speaker 2

Well, we certainly always like to try and pick up share. And I think when you look at the fact that even in a bumpy last month of the year and the last quarter we just had, we still picked a lease up. We got quite a bit of conquest business, which frankly is share growth for us. I think I mentioned on the call that 65% market share for us in alternative fuels actually is up a little bit from last year and we're almost 80% on propane. So yes, we always try to emphasize those products.

Think it's great for the environment. It's great for the children who ride our buses. It's the right thing to do. And the fact we're growing yet again a significant seven percentage points up in our mix in this last quarter, I think bodes well for us. So yes, we intend to keep trying to go forward and see if we can pick up share, particularly what I call in the school district business.

That's our bread and butter business, selling directly to our school through our dealer channel to the school district. So that's our goal, to keep pushing on that front.

Speaker 1

Okay. Thanks. Thanks, Eric.

Speaker 0

Next we'll hear from Craig Irwin with ROTH Capital Partners.

Speaker 5

Craig Good evening and thanks for taking my questions. So your prepared remarks seem to point to your confidence in a V shaped recovery and, you know, a strong inflection up out of what you've been working through right now. Can you maybe share with us the specific data points that give you this confidence and this optimism about the next few months? And second part of the question is what portion of your production slots for the fourth fiscal quarter are covered by orders in hand and how does that compare to last year?

Speaker 2

Let's take without giving specifics, because we didn't want to give too much specifics on what we call our bookings and backlog on where we stand today. But I think if you look at the decline we're showing in the industry projection, that's pretty much what we see right now in our bookings and backlog. I mean, that's what's really happened in the last couple of months as well as pandemic has really taken hold. So that number of, I think we said 10 to 12% is probably about where we think we would be looking to be down, and that's what we're seeing right now at that pace. In terms of where we are right now to the filling our slots, we're into July.

So we know our volume in the third quarter. We know what we have to build. They're all full through June and we're filling July right now. So we've got August, September and about three weeks in July still to go. That's where we are.

When it comes to optimism and what I look at, first and foremost, we talk to transportation directors. I mean, are the guys who are out there every day trying to keep kids safe. And they're the guys who buy our buses. The other guys who talk to their school boards about what their needs are and use our dealer network as well or our feet on the ground out there. In terms of real hard data points, we look at property values.

We correlate our business correlates very closely with property taxes. As values homes still stay high, those haven't collapsed in the last couple of months, we remain optimistic about that being the major funding mechanism. As I said before, though, the big unknown is what's going happen to overall state budgets because they clearly lost sales tax revenue. They've lost state income tax revenue. We don't quite know what the federal government's gonna do to support that.

What we found interesting was, you know, April, as I mentioned on my in my comments earlier, the CARES funding did allocate $16,000,000,000 to education for public schools, which is pretty powerful doing that so quickly in this pandemic process. So I think looking at that house prices, talking again to contracts directors, obviously wait to see as June unfolds and hearing what are school boards approving for their budgets, for this coming year. That's the most important thing. And virtually all states finalize their budgets through June and release funds in July, July. So that's hence the four to six weeks I talked about when things will become very clear for us.

Speaker 5

Great. Thank you for that. So the most important question on the minds of your largest shareholders and the institutions that look at your stock are the parallels back to the financial crisis. You know, July, it took a few years actually, you know, a handful of years for us to actually scrape in the bottom in overall school bus sales in the market. Is there anything that you would point to specifically that would have this be of shorter duration?

The obvious onset of COVID and the pandemic and, you know, work from home for everybody has obviously been much more abrupt. But can you point to anything that would point to, you know, a more rapid bottoming process and potentially, you know, much shorter process of us finding the bottom in the market than that handful of years similar to last time?

Speaker 2

Yes. Let take that one. I'm sure Phil left some comments on this too. But, you know, when the last crisis happened in 02/2008, it was driven really by it's a banking financial crisis. I mean, that's where I learned about credit default swaps and all sorts of things going on.

We learned about, you know, people having mortgages and foreclosing, and that took a while to actually bet in. House prices precipitously fell between 02/2008. In fact, the trough for us was 02/2011. We lagged significantly because it took, it took a good three years for house prices to hit the bottom. And that was as foreclosures, increase and defaults on mortgages occurred.

You had, people defaulting on their car loans. I mean, all sorts of things. We aren't in that situation here. That because that is the major funding mechanism for school buses. So once property taxes fell, we saw eventually over that three years, the precipitous drop from the 35,000 units we sold in 2007 to about 24,000 unit industry in 2011, and then we clawed our way out of that as housing prices recovered.

The difference is here, we don't see a precipitous drop in housing prices. We just don't see anyone talking about that. We researched it. We talked to some of those experts to look at that thing. So this is a different issue, right?

This is a pandemic that's shut business down significantly for the last two months. I look at it that way. And we're all trying to get out of the states reopen. I think the other factor is, remains to be seen what the federal government does. I mean, federal government reacted quickly with a stimulus package.

The fact they supported education quickly, that $16,000,000,000 injection from the CARES funding, I think shows their willingness there to support the economy aggressively, probably more so than in the past. So I think that's what we the way out is quite a different situation here we're in right now, than we were in 02/2008. I'd say one thing too from our business standpoint. When we walked into 02/2008, the average age of a school bus in that fleet I talked about earlier, 600,000 buses in North America, was about eight years of age. That's about half the duration of a bus.

Typically, a bus lasts for about fifteen years. That's the useful life until the operating costs get too high. It was eight years. Right now, it's eleven years. And as I mentioned before, there's still 150,000 buses, still over fifteen years of age.

That's a lot of cost to run those, a lot of concerns about emissions on those buses. So I think that does bode well for what I would say a good argument when school buses are set to say, we've got to carve out money for school buses. We're going to get these old dirty buses off the road and replace them because that's certainly the right thing to do in the with children riding those products and keeping our environment clean. Bill, have you anything to add that you just want to say on the what's different between now and what we had back in the last downturn? Okay.

Looks like Bill's got nothing else to say. Sorry, I was on mute. I forgot to press one button.

Speaker 3

I think and you've covered it, Phil, but there's a really big difference between the state funding from the central state coffers driven by sales tax and income tax and the property tax funding. Phil mentioned the property tax is about 70% of the funds for school buses. The reason it took so long to come back in the last one is that once property taxes bottomed, it took some years to get back to the prior levels. And quite frankly, we are a little ahead of the

Speaker 2

prior levels

Speaker 3

now. We think that with the state income and sales tax, that can come back pretty quickly as long as the states can get up and running in a relatively shorter term. There's no doubt that it will probably be less because there'll be a lot of businesses that could get hurt. But the majority of it should get up and running much more quickly than the curve for the rebound on property taxes which took as you rightly pointed out three or four years.

Speaker 4

That's it.

Speaker 5

Thank you for that. Thank you. So my last question I wanted to ask is about the ability to flex spending. So you've obviously been really proactive in managing your expenses and the SG and A number in the March is obviously testimony to tightening the screws and doing what you need to do. Can you maybe talk specifically about whether or not you've sought a waiver from the EPA for the environmental obligation you have to meet next year with a new engine package, one of the things that you've been investing in.

And whether or not you've made a decision yet about whether you would defer the investment in the, next generation bus chassis, the the lower cost to manufacture, higher reliability, design that that you've guys you guys have been working around for, the last number of quarters as you design for the future?

Speaker 2

That's a very specific competitive question to us. Talking about our product plans and what we want to try we try and stay clear of that. We'll announce things when we're ready. I will tell you this, we talk to the EPA regularly. We talk to CAB regularly.

When we work with our energy products with our partners at Ford or Raj CleanTech, They're obviously connected very closely. So yes, we do whatever it takes to ensure we meet all the requirements, so we meet them on a basis that recognize the environment we operate in. That's all we want to say on that matter at this time. But I think, you know, it's a good comment you've asked. Unfortunately, I I can't get into too much details for the competitive reasons on that one.

Speaker 5

Completely understood. Congratulations, for the strong deliveries number. And you guys should be commended for the proactive stance on cost controls and positioning for this market. So congratulations again for the quarter.

Speaker 2

Thanks very much. Appreciate that. Thank you.

Speaker 0

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

Speaker 2

Yes. Thank you, Melinda, and thanks to all of you who's joining us on the call today. We appreciate your continued interest in Blue Bird. As you can see by our second quarter results, we made significant progress on multiple fronts, and we will work our way through the COVID-nineteen pandemic, adapting and restructuring as needed, and we'll continue to thrive and grow profitably over the long term. I have no doubt about that.

We've got a great team who's focused. Before I drop off the call though, I want to take this opportunity to thank my colleague and friend for more than twenty five years. He's on the call today, Phil Tighe. After eight years of CFO of Blue Bird, Phil will be stepping down from this role at the May. It's been a real pleasure to be on this growth journey with Phil, taking Blue Bird from a privately held company to a public company in 2015.

I'm also delighted to say that Phil won't be leaving us, but will be staying on in the consulting capacity, working with me and our leadership team on strategic issues and special topics. I want to thank Phil for his endless number of contributions during his time at Blue Bird. I want to wish him all the best. Many of on the call got to know Phil well over the past few years, and I'm sure you share my sentiment. And please feel free to give him a call and thank him for everything he's done for us.

So as Phil moves on, I'm pleased to recognize that Jeff Taylor will be coming in as the new CFO effective June 1. Jeff has enjoyed many years as a public company CFO, most recently as CFO of Warbash and actually was on our call today. Jeff will be a great asset to our company, and I'm sure many of you will be meeting him over the coming months. So thanks, Phil, for your terrific service to Blue Bird, and welcome, Jeff, to the school bus business. And thanks to all of you for joining the call today.

We're well positioned for dealing with this pandemic that faces us, and we look forward to continued profitable long term growth. So please don't hesitate to contact our 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.

Speaker 0

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