Blue Bird Corp (BLBD) 2015 Q3 法說會逐字稿

Greetings, and welcome to the Blue Bird Corporation third-quarter earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Jeff Merten, Director of Investor Relations. Thank you, Mr. Merten. You may now begin.

Thank you, Manny. Welcome to Blue Bird Corporation's fiscal 2015 third-quarter earnings conference call. The audio for our call is webcast live on Blue-Bird.com under the investor relations tab. You can access a PDF version of the slides we'll be covering today in the events box in the lower right corner of the investor relations landing page of our website.

Our comments include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among other matters, we have noted in our latest earnings release and filings with the SEC. Blue Bird disclaims any obligation to update information in this call.

This morning you will hear from Blue Bird's President and CEO, Phil Horlock; and CFO, Phil Tighe. Then we'll take some questions.

So let's get started. Phil?

Well, thanks, Jeff. Good morning, and thank you all for joining us today for our third-quarter earnings call. It continues to be a busy and exciting time at Blue Bird since we became a publicly traded company only in February of this year, and we welcome this opportunity to share our results with you.

So let's start with the third-quarter highlights on slide four. With unit sales of nearly 3,000 buses, we had a strong third quarter, up about 8% of 223 buses from last year. As we look at the first three quarters of the year, we sold over 6,900 buses, which represents a 6% increase over last year.

Now, you'll recall at our prior earnings calls, we spent some time talking about the seasonality of our business. Well, our third-quarter unit sales were up a substantial 43% from the second quarter, and we will see continued growth as we move into the fourth quarter.

We handled a volume surge in the second half of the year very effectively through the hiring of temporary labor. From a sales revenue standpoint, we grew by 9% in the quarter, with a healthy 10% growth in bus net sales. This is our fourth consecutive year of volume growth in the first nine months.

Adjusted EBITDA came in at $23 million for the quarter. Now this was slightly below last year, but more than explained by the cost of operating as a public company and the investment we are making in many new products and growth initiatives that will drive increased sales in the future.

Overall, this was a strong result, and Phil Tighe will cover the year-to-year change in more detail later.

Through the first nine months of the year, adjusted EBITDA totaled about $40 million. We are down about $7 million from the same period last year, with almost all of this decline occurring in the first half of the year as we experienced adverse customer mix due to timing of orders. Now, this smoothes out during the year, as all customers finally pledge their orders for buses.

The North American school bus industry, as measured by vehicle registrations, is tracking in line with our expectations and we expect to see full-year growth of about 5% in 2015.

From a product standpoint, our exclusive propane-powered bus continues to sell very well, and we're seeing significant orders from customers who are new to propane. We are projecting double-digit percentage sales growth in propane for the full year, as we lead the industry by a wide margin in alternative fuel-powered bus sales.

I mentioned a moment ago about how we are investing in new products to drive future growth. Well, just a few weeks ago we unveiled our all new gasoline-powered bus, which is a first in today's large school bus industry. I will be covering this in more detail later. But it is an exclusive product utilizing the same modern, class-leading powertrain that powers our propane bus. This product will provide a unique value proposition for many customers, and we're excited to be the first to bring gasoline to the large school bus market.

And finally, with firm customer orders in hand that fill our production slots through the entire balance of our fiscal year, we are reaffirming our full-year guidance that we provided in our proxy filing in January.

Now let's turn to slide five. We talked about smart investment in new products earlier, and our exclusive propane-powered school bus is a great example of doing this. We were the first to market with propane by a long way, and we continue to be the undisputed sales leader in alternative fuel-powered buses.

As I mentioned earlier, we expect double-digit sales growth this year. We can predict this because we have a strong, firm order backlog of propane-powered buses through the balance of the year that are being built and delivered for school start.

Now increasingly, we are seeing new Blue Bird propane customers celebrating their successes and achievements in both TV and print media. Last year, Broward County school district in Florida took delivery of its first Blue Bird propane buses and is expanding its fleet this year. They're realizing over $600,000 annually in that school district with fuel costs and maintenance savings. That's a saving of over $4,000 per bus.

A local ABC network reported on West Virginia taking its first alternative fuel-powered school bus in the state this year, and they chose the Blue Bird propane bus. The New York State School Board Association reported on how Washingtonville Central School District has lowered its maintenance cost by 30% by using Blue Bird propane buses.

And local TV reported on the excitement of DeKalb County in Georgia bringing environmentally friendly Blue Bird propane-powered buses into its fleet, and locking in fuel costs of $0.89 a gallon. And their goal is to transition their entire bus fleet to Blue Bird propane.

These are just a few examples of the many customers touting the environmental and cost of ownership benefits they get from operating Blue Bird propane buses.

As a company, we continue to innovate, and recently launched propane engine calibration alternatives for our customers so we can tailor the bus even better to meet their needs. Now, that attention to building a better product brings in new customers, builds owner loyalty, and is a great example of smart investment in new products that drive growth.

But our exclusive partnership with Ford Motor Company and ROUSH CleanTech doesn't just stop at propane. Let's turn to slide six.

At the School Transportation News Expo Conference and Tradeshow in Reno last month, which is the largest bus show in the country, we unveiled our newest product offering, the Blue Bird gasoline-powered Type C Vision school bus. We are the first and only manufacturer to offer a gasoline-powered bus in this school bus segment.

Mechanics and technicians understand gasoline engines. They are simple to maintain; servicing costs are lower; and they perform exceptionally well in cold climate conditions. The customer response received at the Reno bus show was outstanding.

Now, this bus will utilize Ford Motor Company's proven, modern, and highly efficient 6.8 liter V10 engine that is deployed in more than 1.3 million medium duty S-series trucks on the road today. This is a product that's got plenty of power, plenty of horsepower, plenty of torque, and is built Ford tough.

It's the same engine and transmission used in our propane-powered bus, and another product from our exclusive partnership with Ford and ROUSH CleanTech. Just the same as propane, the product is backed by Ford and ROUSH CleanTech, with the best powertrain warranty in the market: five years and unlimited mileage. As you can imagine, that commonality of powertrain architecture is great news for the mechanics who work on the engine.

Now, this bus will be a great choice for customers who want the lowest acquisition price of any fuel type, and simple maintenance for their technicians. We'll be taking orders later this year, and delivery will begin early next calendar year.

Now let's turn to slide seven. As I mentioned earlier, our unit sales grew by 6% in the first nine months of fiscal 2015. Well, we now have a backlog of firm customer orders that fill all of our production slots through the balance of the fourth quarter. So firm orders in hand, coupled with units already shipped to customers in the fourth quarter, will increase fourth-quarter unit sales by more than 10% compared with the same period last year. And our full-year sales will certainly outpace the projected industry growth of 5%.

Importantly, though, we know the price and bill of materials for all of these bus orders, and as a result we have excellent visibility to our fourth-quarter and full-year financial forecasts.

Now I'd like to turn it over to Phil Tighe who will cover our financial results. Phil?

Thank you, Phil, and good morning to everyone. It's my pleasure to present to you the fiscal-year 2015 third-quarter and year-to-date results for Blue Bird Corporation. I would remind you that Blue Bird Corporation's fiscal year is a 52- or 53-week period, ending on the Saturday closest to the last calendar day of each quarter.

The third-quarter material that we are going to discuss today was for a period ending July 4, 2015. And the comparator for 2014 ended on June 28, 2014. And one last reminder, our fiscal year will finish on October 3 of 2015. The fiscal year for 2014 finished on September 27.

If we can to moved to slide nine, this slide shows some financial highlights for the third quarter and the first nine months. Phil has already mentioned that we delivered 2,993 buses. This was a very solid sales result. It was up 8% versus the prior year.

Overall net sales were up 9% to $262.7 million; $22.3 million up versus last year. You'll note that on a percentage basis, net sales were up a little more than volume increase, so the result is we have grown unit revenues over the prior year.

Adjusted EBITDA was $22.9 million which was roughly $500,000 or 2% below the prior year. So we will go through a bridge on this; but in summary, favorable bus volume and mix was offset by increased cost to support growth.

We are spending more in engineering and product development to support major product enhancements that will be launched during the next two years. One of these enhancements, the new gasoline-powered bus, was discussed by Phil Horlock already today. And there are more exciting new products to come.

We also added resources to upgrade the support of sales of alternative fuels. Phil has already talked about the success with propane, and we are continuing to drive that message home.

As a reminder, school buses have been predominantly powered by diesel engines for many years. And we are undertaking a multifaceted approach to educating decision-makers for new bus purchases about the benefits of moving to alternative fuels. We are convinced this is important spending for the future. Finally, of course, we are incurring incremental costs as a public company.

So again, we believe the third quarter was a very solid result. And Phil Horlock will discuss the outlook for the full year in more detail on a later slide.

For the first nine months, volume was up 6% to 6,910 units, and net sales were up by 5% to $611.5 million. Adjusted EBITDA of $40.5 million was down about $7.3 million. The result, the delta of $7 million is very similar to the year-over-year difference that you saw at the end of the first six months. And basically what it says is we continue to have the issue that we saw with the adverse impact of customer mix in the first six months. Although that will smooth out as we complete the year, and we'll point that out as we look at the bridge.

Slide 10 is a sales overview. This slide looks at the performance of our two segments: bus and parts. As shown, sales revenue from buses increased about 10% in the third quarter to $248.5 million, while sales of parts was reasonably flat versus the prior year, at $14.2 million.

Bus revenue per unit, while not shown, was up about 1.7% versus the same period last year. Also, third-quarter bus revenue on a unit basis was up 1.2% compared with the revenue in the first half of 2015. This is important, and it shows that we are getting back to the more traditional sales.

Just a comment on parts sales being flat. In the third quarter of 2014, parts sales were above forecast. And this was driven by the very severe winter conditions in 2014 that caused widespread school shutdowns and impacted the work of repair shops. So this was a very high sales period for us in the third quarter of 2014 as people tried to get bus repairs done following the bad winter.

We're very pleased that in 2015, we were able to equal the sales levels achieved in the prior-year despite the absence of similar conditions in 2015. So we don't see the flat results as an adverse performance at all.

For the first nine months, bus sales were up about 5% to $569.7 million, and part sales were up by 7% to $41.8 million. Again, bus revenue per unit, which is not shown, was down 0.7 points reflecting the adverse customer and product mix the first half that was only partially offset by favorable revenue per unit in the third quarter. And part sales were up on a year-to-date basis due primarily to higher volume.

So slide number 11 is the bridge for third quarter of 2014 to third quarter of 2015. We've seen the profits previously. So we were at $22.9 million, which is down $0.5 million. And details on the adjustments to EBITDA are shown on slide 25, for those who are looking for that.

We continue to make progress, as you can see on the bridge, with material cost reductions. However, I should point out that lower labor productivity in the third quarter was a partial offset to the material cost productions. Labor productivity was impacted by the timing of a number of key orders and the need to hire additional people to ensure we could support compressed timing to meet customer delivery dates, which led to some efficiency issues.

Volume and mix was favorable, due to 223 incremental bus sales and favorable customer mix. Product mix was a partial offset due to a number of propane orders moving into fourth-quarter build. Importantly, the positive contribution from volume and mix in the third quarter was a substantial improvement compared to the results in the second quarter, where we had both lower year-over-year volumes and adverse customer mix.

Ongoing costs for operating as a public company in the third quarter was $600,000. And this is roughly in line with our projection that the full-year effect of operating as a public company will be at least $2 million.

As previously discussed, we continue to invest in engineering to support exciting, first-to-market new products such as propane and gasoline-powered buses. And we've also added resources to assist our dealers as they work to attract more customers to our propane and other new products. These two items more than account for the growth in other categories in the third-quarter bridge.

We have noted, down at the bottom of the bridge, the net income result for the third quarter. You can see that it was a profit of $10.7 million from continuing operations, which is an improvement of $18.6 million compared to the same period last year. Again for those looking for the details of that, you can see them on slide 22.

We can move to slide 12, and this will show you the fiscal year-to-date bridge. So for the nine months, the profit was $40.5 million or $7.3 million lower than last year, as we have previously told you. Again, a more detailed walk on the adjustments for EBITDA are shown on slide 26.

Cost reductions again were favorable, and that's due largely to material cost reductions and design cost reductions. On a year-to-date basis, volume and mix still remains unfavorable in the third quarter, although that unfavorability has been reduced since the numbers that you saw at the second half. 372 units on a year-to-date basis, and parts volume was favorable; however, we still see the flow-through of the customer mix experienced in the first half.

As pointed out on the prior slide, we did have a favorable customer mix in the third quarter, and we expect that this will continue for the balance of the year. There is -- and we can predict that -- is we obviously have very clear line of sight on the orders that we have for the fourth quarter, and the margins of those orders.

Growth initiatives and other is up about $5 million compared with prior year. We've already discussed the fact that we are investing in some engineering, and expect to see absolute engineering cost levels continue at about the same rate as we have seen in 2015 until we get through the development and launch phase of [approved] new products. With respect to the incremental sales expenses that are being incurred to support the achievement of objectives for our new products, we believe that we will derive significant value from the efforts.

The net income is shown down below the bridge. And you can see that there was a $1 million net loss from continuing operations for the nine months. This was a deterioration of $4.8 million compared to the same period last year.

Details can be seen on page 22, and the major drivers were higher interest expense. You might recall that we took out a significant loan in June 2014, with a partial offset due to lower taxes.

Slide 13 looks at free cash flow and shows the walk from adjusted EBITDA to adjusted free cash flow, which is -- I'd point out -- is a non-GAAP measure; and then to free cash flow for both the third quarter and for the nine-month period.

For the third quarter, the major items in the walk include cash paid for interest of about $4 million. The biggest item is obviously the trade working capital. And this reflects an increase compared with March end, and increasing inventory of raw materials to support fourth-quarter production which will be our peak production. And we also had finished an in-process buses that were waiting delivery, and some receivables with fleets. There was a partial offset obviously with higher payables.

This item will typically show as an outflow at the end of the third quarter as we enter into the fourth quarter production and sales season.

CapEx was relatively modest at $1.6 million. And the other includes employment-related accruals, vacation, et cetera; and accrued in transit. You can also see that the free cash flow was positive, at $8.1 million, which we believe was a good result. The nine-month walk is shown, and is on an adjusted free cash flow basis is $8.8 million negative; and on a free cash flow basis, was negative $35 million. Of course, the big driver for the free cash flow result of $35 million were the cash payments for the business combination and a special combination payment, which were special events in 2015.

Slide 14 addresses net revenue, leverage and liquidity. You can see that net debt at the end of the third quarter stood at $188.1 million, which included $27.8 million of cash, net of checks outstanding. We also show the net leverage ratio was 3.1, which is substantially below the net leverage ratio covenant which is included in the loan agreement, which is 4.75.

Liquidity stood at $82.7 million, and there are no drawings on our revolver. Those of you may remember that we have a revolver of $60 million available to us, should we need it.

So thank you for your attention.

I'll pass it back to Phil Horlock to discuss full-year guidance and wrap up.

Thanks, Phil. So let's turn now to slide 16. We mentioned this earlier in our presentation, so I would just like to reiterate that we are reaffirming our guidance that we provided in our proxy filing in January. We estimate full-year 2015 net sales to be in the range of $918 million to $940 million, an increase of between 7% to 10% from fiscal 2014, which would outpace the industry growth.

Incidentally, this is on top of the 10% sales growth we achieved in fiscal 2014. In fact, our sales are up more than 60% from the industry trough year of 2011. Now, that's real momentum at Blue Bird.

Our guidance for full-year adjusted EBITDA is for an increase of 7% to 12% over fiscal 2014, resulting in an adjusted EBITDA range of $72 million to $75 million. As we have consistently pointed out, the guidance does exclude the ongoing costs of operating as a public company, which, as we said earlier, projects to be at least $2 million for the full-year fiscal 2015. We have forecasted substantial sales and profit growth in the fourth quarter and have strong visibility to the volume and margins for the balance of the year to support this.

On this slide, we're also showing our forecast of adjusted free cash flow for the full year of between $35 million to $40 million. We benefit substantially in the second half from the increased profitability, and also from favorable working capital as the volume grows substantially through the balance of the year.

Now turning to slide 17, let me just summarize what we've covered today. First, we achieved strong sales and strong adjusted EBITDA in the third quarter and we're pleased with our results. Bottom line: we are on plan. We continue to lead the market in propane-powered buses, and sales are on track for double-digit percentage growth contributing to strong growth in second-half margins.

Now, developing exciting new products is at the forefront of what we do at Blue Bird. And we're investing significantly in new products that customers want and value. Our best-selling propane-powered bus and now our new gasoline-powered bus are great examples of this.

We have many more exciting products and features coming to Blue Bird that will continue to differentiate us and drive more growth in the forward years. We are forecasting a strong fourth quarter with our production schedule locked with firm customer orders through the balance of the fiscal year. Consequently, with a strong visibility in the remainder of the year, we are reaffirming our full-year guidance, and also forecasting strong adjusted free cash flow for the full year.

Well, that concludes our formal presentation. I will now pass it back to our moderator, Manny, and we'd be happy to take any questions you might have.

(Operator Instructions). Joel Tiss, BMO Capital Markets.

I wonder -- I missed the very first part -- but I wondered if you guys talked all about any impact of having more selling days in the third quarter and for the full year.

No, we didn't cover that aspect, actually, in our call.

Is there any numbers that we can put to that, just to give us an idea if we need to adjust it out again for 2016?

Yes, we can give you some views on it afterwards. We'll have Jeff Merten follow up with you separately, Joel, and just cover that one with you. I think it's fair to say over the course of the balance of the year, the second half of the year is pretty minor. But we can cover that with you.

Okay. And then are the costs to develop gasoline engines and adopt them into the buses -- is that included in your development cost? Or is that something that is still in front us?

No, that's included. The majority of it, Joel -- this is Phil Tighe -- the majority of it is included. Obviously, we haven't launched the bus yet, so we're still going through launch and the final process changes. But the majority of the spending is already in there.

Okay. And then just generally, can you give us a sense of market share for 2015? Are you gaining, or are you giving a little bit back? I think you had a big year in 2014. And just a quick mention on the pricing environment. Thank you.

Well, first of all of the market share, we tend not to give market share predictions through the course of the year, only because so we don't give actual market share through the year because the industry is so back-loading in terms of registration data.

I certainly believe you're looking at -- I mean, we are looking at growth of, say, significant growth over the 5% industry growth. So we would be looking to see that tick up as the final year's results are done. But we won't declare that position until the end of the fiscal year. That's typically the way we operate.

When it comes to pricing, we are definitely seeing, as Phil mentioned, a tick-up in unit revenue from a year ago. We are seeing buses certainly, I would say, more equipped with features than we probably had last year. We're seeing propane going very well for us, which is a premium priced product over diesel because you're getting a lot of new technology there. So we've seen a nice little trend and tick-up, certainly in the second half of the year, in unit revenue that we feel good about.

We've been able to increase our volume substantially. We've got more growth coming in the fourth quarter. And we're going to, like I say, unit revenue tick up, and we'll be able to hold that nicely.

Great. Thank you so much.

John Rolfe, Argand Capital.

Hey guys, a couple of questions for you. First, in the adjusted EBITDA reconciliation for the quarter, there's little over $600,000 of business combination expenses. Just some clarification: is that part of this sort of $2 million-plus of annual public company expenses that you have talked about? Or is this discrete expenses related to the offering earlier in the year?

John, this is Phil Tighe. This is not part of the $2 million. These are discrete expenses that we viewed as one-time expenses, the sort of wrap-up of the one-time expenses for the whole transaction of the business combination and going public. So these would be, to put it in perspective, probably some legal fees, and maybe some other fees that have occurred as we have transitioned through the business combination.

Okay. Okay, got it. So the adjusted EBITDA that you are presenting there is, in your mind, indicative of an ongoing stand-alone company sort of (multiple speakers) for the quarter.

Our general approach to the adjusted EBITDA is to get us to a more ongoing view of profitability. One of these days, we hope to get the adjustments to zero.

Great. And in that regard, the sort of $400,000 to $500,000 of share-based comp in the quarter -- is that a reasonable level to assume on an ongoing basis? Or is that not a reasonable level to assume on an ongoing basis?

We think it could be a little higher. This is as we first set it up. So I think it will normalize over time. We haven't quite got to what that will be yet, but it's probably a little high at the moment.

It's a little higher now than on an ongoing basis, or it will be a little higher going forward?

Sorry, John, I wasn't clear. It will grow a bit as further stocks get issued.

Okay, got it. Last question, what should we be assuming for a sort of blended tax rate going forward, on a full-year basis?

It's always hard to predict with this stuff, and particularly with us, with the whole business combination that's going around. But we are looking somewhere in the high 20%s, 30% range.

And can you just -- that's lower than I would have expected. Could you just maybe give me a quick explanation? I mean, if I -- why are you guys at 30% versus US domiciled companies which are typically seeing federal in the 35% range, plus some state on top that?

John, there's a lot of stuff that moves around in here. There are credits for manufacturing and other things that happen. I think we can probably talk to you a little more about that over time. But this is the best advice we have from our tax people at the moment, based on what we can see going forward with the investment credits and manufacturing credits and various other opportunities that are available to us.

Okay, but -- and just to finalize. But you do feel like at some level, whether it's 30% going forward or something between that and let's say 40%, you feel like some of that favorable differential in terms of the credits and that sort of thing, and it should be sustainable going forward? Is that a fair assessment?

I think that is a fair assessment, John, yes.

Okay, thanks very much.

Of course, it will depend on whether they change the tax law, going forward, as well.

Yes, of course, thank you.

Sean Kelley, OFS Management.

Thanks. Could you guys just provide a little bit more color update on the competitive environment for propane, and tell us what your competitors are doing and what you are seeing? How quickly they are ramping up their sales of propane buses?

You know, I prefer to talk about what we're doing at Blue Bird. I mean our competition, you're probably better off to ask them what they are up to. I would just tell you that we've seen -- what we have seen is continued growth in new customers that we've acquired this year. We've seen a loyalty -- high loyalty of existing customers coming back to us. We've seen nothing to suggest that we're losing any share in this business. In fact, we're growing the business. We'll grow over double-digit this year. We watch this closely.

I think you have to put that -- I don't really want to say exactly what our competitors saw. I really don't know quite what they saw. I just know that we are, by far, far and away, the leader in propane-powered bus sales is what I can tell you.

I'm sure they sold a few units. I haven't seen too much on the road. In fact, I haven't seen any on the road, I have to say. But I know for a fact we're selling a lot of propane buses.

So when you say you're confident you are not losing any of your propane sales to competitors, the school systems you are already selling propane to -- are they only using Blue Bird propane? Or do a lot of them -- have some of them started to go to several manufacturers? How is that working?

We haven't seen any sort of mixed fleets. We haven't seen anybody come in and say, hey, I want to try a competitive propane bus alongside your bus. I mean, we just haven't. We have got incredibly high loyalty so far we've experienced on propane, which is why we like it so much. Once a customer gets the propane, they love the fact that it's green.

Think about it: it's green; they get the fuel savings. They get to know that engine of ours. They get to understand how to maintain it, service it. Switching costs get a little complex and costly. Plus in a lot of cases, we lined up to the fuel provider for them with a filling station on their site. So that loyalty is remarkably high, actually, and we're pleased about it.

Great. And one last question. So where would Blue Bird's propane offering fall on the price spectrum across the other two providers?

I don't know. You'd have to ask them. I mean, I'm not going to comment on -- I don't actually see all the -- exactly where they price their propane product. I think you'd have to see where they are. We know where we price ours, which is a small premium to diesel. And the customers understand the value proposition, which is within 2 to 3 years you're going to recoup that premium for the fuel savings and maintenance cost savings that you are going realize. And our customers get that. We've articulated that and they like it.

Great. Appreciate your time, thanks.

(Operator Instructions). It appears we have no further questions.

I would like to turn the conference back to management for any closing comments.

Well, thanks, Manny. This is Phil Horlock. I'd like to thank you all for joining us today. If you have any follow-up questions on our earnings results, please do not hesitate to call our Head of Investor Relations, Jeff Merten, who will be happy to assist you. Thank you again and have a great day.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.