Blue Bird Corp (BLBD) 2018 Q2 法說會逐字稿

Good day, and welcome to the Blue Bird Corporation Fiscal 2018 Second Quarter Earnings Call and Webcast.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Mark Benfield, Director of Investor Relations.

Please go ahead, sir.

Thank you, Cody.

Welcome to Blue Bird's Fiscal Second Quarter 2018 Earnings Conference Call.

The audio for today's call is webcast live on blue-bird.com under the Investor Relations tab.

You can access the supporting slides on our website by clicking on the Presentations box on the Investor Relations landing page.

Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different.

Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC.

Blue Bird disclaims any obligation to update the information in this call.

This afternoon you will hear from Blue Bird's President and CEO Phil Horlock and CFO Phil Tighe.

Then we will take some questions.

Let's get started.

Phil?

Well, thanks, Mark.

So good afternoon, everybody, and thank you for joining us today for our second quarter earnings call for fiscal 2018.

We welcome this opportunity to share with you our latest quarterly results.

So let's start with an overview of our financial performance on Slide 4.

As we previously explained in prior calls, the school bus industry is extremely seasonal, and the first half sales typically represents around 35% to 40% of the full year sales.

Well, despite the typically slow first half, we did achieve strong sales results in the second quarter with almost 2,500 buses sold, which was 3% higher than last year's second quarter and, importantly, a 43% increase over the first quarter.

You'll recall that our first quarter sales were well above last year.

So in fact, for the first half of the year, our unit sales were up a very strong 7%.

At $270 million, second quarter net sales revenue was 4% higher than last year.

So the net revenue growth was a little higher than the unit sales growth of 3%, largely due to our significantly higher mix of alternative fuel-powered school buses, which grew from

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year to a 34% mix in the second quarter this year.

In fact, through the first half of the year, our unit sales of these vehicles grew by a substantial 56%.

That's leadership and momentum in the fastest-growing segment of the business.

Now as a reminder, in alternative fuels, we count all of our propane, compressed natural gas and gasoline-powered buses, as all of these are alternatives to diesel, which has been the staple fuel for years.

For the last several years, however, we've been achieving significant growth in alternative fuel-powered bus sales; and as I just mentioned, we have not slowed down.

However, I want to point out we don't expect to see the growth continuing at this record pace in the second half of the year for a couple of reasons.

First, we did see a number of customers elect to purchase their alternative fuel buses in the first half this year after purchasing in the second half last year.

Consequently, that will impact the year-over-year comparison in the second half.

Second, in the past few months, we have seen some customers electing to push their propane purchases to fiscal 2019 in anticipation of receiving funding from the Volkswagen Clean Air Act Settlement Fund later this calendar year.

That fund targets the replacement of all diesel buses with new school buses that emit low levels of NOx emissions.

Our propane, compressed natural gas and electric-powered buses are perfect choices to utilize these funds next fiscal year.

Nevertheless, as you'll hear later, we expect another record year for the industry's best-selling alternative fuel school bus in total sales for the fiscal 2018.

At $10 million, second quarter adjusted EBITDA was $1.6 million or 19% above last year.

Through the first half, our adjusted EBITDA was $4.3 million above last year despite headwinds we're seeing in commodity costs, led by escalating steel prices.

Our first half results support our full year outlook for adjusted EBITDA.

Adjusted net income and adjusted diluted earnings per share were both higher than the same period a year ago.

Now while our net debt at March 31 was about $21 million higher than at the same time last year, that increase is more than explained by utilizing $50 million of cash for our stock repurchase program that we successfully completed over the past 6 months.

We are well underway now in the transformational initiatives that we kicked off in the first quarter, which are focused on accelerating our profitable growth.

The initial impact of these actions will be seen largely in the second half and particularly in the fourth quarter as they are implemented.

Looking at the overall industry outlook, ACT Research on net orders indicate that the industry should grow slightly and should again exceed 35,000 units.

This is strong demand and will be the second highest school bus industry since 1985.

All in all, our results for the second quarter was solid, and we're in line with our expectations and fully support our full year guidance.

Let me now review our year-to-date key operating achievements on Slide 5.

We recorded a number of significant achievements, and each one will make us more competitive and support our growth going forward.

Through the first half, our average selling price per bus was 3% higher than a year ago.

Through yesterday, our year-to-date bookings and backlog of firm, noncancelable orders were 3% above last year, representing a significant 77% of our full year unit sales target.

Our production slots are now full through the third quarter, and we are now filling the fourth quarter schedule.

Importantly, 20% of our customers were new to the Blue Bird brand of buses in the second quarter, and also that was the same number for the first half of the year.

And that's a great endorsement of our products and our dealer network spread.

In fact, through our dealer network, our pipeline of potential orders is up 6%.

Now this reflects units quoted but bids not yet awarded.

That's a really good indicator of the strength of the industry and of real solid customer interest in Blue Bird.

Not surprisingly, we are again seeing significant growth in orders in our alternative fuel-powered school buses, with a 7% increase in fiscal year orders through yesterday compared with the same time last year.

As I mentioned when covering the prior slide, second half growth will be down from the record growth we saw in the first half.

Remaining on the topic of alternative fuels, I'm delighted to announce that we have extended our exclusive partnership with ROUSH CleanTech for another 7 years through to 2025.

Together, we brought class-leading products to market and firmly established Blue Bird as the undisputed leader in alternative fuel-powered school buses.

It was easy -- it was a really easy decision for both companies to extend their exclusive contract.

Since the first quarter, our all-new Type C electric bus has qualified for both the HVIP and TVIP voucher programs in California and New York.

This means we are the only manufacturer to qualify both Type C and Type D electric buses for these programs, providing customers with grants of between $150,000 to $220,000 per bus, representing a significant buydown on the initial acquisition cost.

This qualification, together with more than a dozen electric bus Ride and Drives that we've held nationwide, has enabled us to quote more than 200 units to school districts, and we've already received our first orders for delivery later this year.

We're off to a great start in our electric bus program.

As I mentioned earlier, we are well underway in implementing our transformational initiatives.

In this regard, we are working with automotive process experts to drive down the direct cost of our buses, to upgrade our assembly plant, thereby increasing efficiencies, quality and capacity, and to implement a major new product program with significant upgrades.

We have now broken ground on the construction of our all-new paint shop in our main plant operation at Fort Valley, and completion is scheduled for early 2019.

These actions are key to improving EBITDA margins toward our goal of 10% to 12%.

Beginning this year, we will project a 1-point improvement in adjusted EBITDA margin as we go from 7% last year to 8% this year.

And finally, based on our first half performance and outlook for the balance of the year, we are reaffirming full year guidance for all the metrics on which we report.

I will cover this in more detail toward the end of the call.

It's fair to say that we continue to advance the business on multiple fronts on our focus on profitable growth of Blue Bird.

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 a little later.

So just to summarize the second quarter.

We exceeded our fiscal 2017 results in every category, with the exception of parts sales, which were flat.

Total net sales for the second quarter were up 4%, and adjusted EBITDA was up 19% from last year.

Through the first half, every category was up from last year, with net sales up 10% to $379.2 million and adjusted EBITDA up 39% to $15.3 million.

Turning now to Slide 7. Let's take a closer look at our alternative fuel bus sales performance.

With almost 3,200 buses booked or in the order backlog as of yesterday, we are well on our way to achieving a new full year sales record of more than 4,000 alternative fueled school buses.

As I mentioned earlier in the first half, we saw growth of 56%, with alternative fuel buses being a strong 33% mix of total sales, a new first half record for us.

We continue to be the undisputed leader in the fastest-growing school bus segment, with our market share running at over 85% last year in this category.

We now have more than 16,000 alternative fuel-powered school buses on the road.

And with less than 15% of school districts having purchased an alternative fuel-powered bus, we are well positioned for future growth.

We offer the widest range of alternative fuel-powered buses and the most modern and proven engine in the industry.

With our exclusive partnership with Ford and ROUSH CleanTech across all alternative fueled engines, it makes it easy for customers to grow their alternative fuel fleet.

With the same engine architecture, the same transmission and the same service requirements across all 3 products, that being propane, CNG and gasoline, it's an easy move for a school district or a fleet operator.

Propane is widely recognized as having the lowest total cost of ownership in the market and is a green engine.

In fact, the Blue Bird level of nitrogen oxides or NOx emissions at 0.5 gram per brake horsepower hour is 1/4 of other manufacturers' buses.

These gases contribute to the formation of acid rain and smog.

So the best-in-class level of NOx is another great reason for choosing Blue Bird propane and CNG.

Our gasoline engine is readily understood by technicians and mechanics who really appreciate the emission's simplicity and the cold weather start capability it shares with propane.

It also has a lower price point than diesel, so it really works well for those customers where acquisition price is a key concern.

And I can tell you, sales are running very strong this year.

We are taking orders for our new -- all-new Type C and Type D electric buses, with deliveries beginning late summer, and we're in the midst of a nationwide series of Ride and Drive events to showcase our latest alternative fuel bus.

And as we look forward to next year and beyond, with the broadest range of the cleanest, low NOx school buses in the industry, Blue Bird is in a great position to capitalize on the VW Clean Air Act Settlement Funds.

These funds are specifically targeted at reducing harmful NOx emissions by replacing aging diesel-powered vehicles on the road with vehicles powered by clean fuel.

With low NOx propane and compressed natural gas and 0 emission electric buses, no school bus manufacturer is better positioned than Blue Bird.

With the first half behind us and a strong backlog of orders ahead of us, we are on track to deliver a record number of alternative fuel-powered buses this year, more than 4,000 units.

So let me now turn it over to Phil Tighe, who will take you through the financials.

Then I'll be back later to cover the fiscal 2018 outlook and guidance.

Over to you, Phil.

Thank you, Phil.

And good afternoon, everyone.

The next few slides are a summary of our financial performance for the second quarter of fiscal '18.

Additional information is in the appendix and deals with reconciliations between GAAP and non-GAAP measures that are mentioned in this review.

More detailed material is also available in our 10-Q, which has been filed.

The material we're discussing today is based on a close of March of 31, 2018, for the fiscal year '18 second quarter and April 1, 2017, for the prior year.

We had no significant changes in our critical accounting policies in the period.

Risk factors are largely unchanged or unchanged from the previously filed 10-K.

And also, I would remind you to please note the important disclaimers at the end of this deck.

So if we move to Slide 9, which is a summary of the second quarter results.

Some of this material Phil Horlock has already mentioned, so I'll try not to duplicate.

Very quickly, you can see our volumes at the top.

Phil talked about those.

I would point out that our second quarter volume of 2,441, I did a little research today, and I think it's the highest second quarter volume in Blue Bird in the last 15 years.

It may be longer than that, but I can only find 15 years.

So we -- that's a good achievement for our team in this slow selling period.

If I look at net revenue, we mentioned that it's up 4%.

So about 1% of the increase was due to higher average selling prices, and that's also a positive indicator in that we are continuing to get traction on increased average selling prices.

The increase was largely due to, obviously, the higher mix of alternative fuel buses and, importantly, came in the face of some pretty intense competitive pressure in some of the bigger industry markets around the country, where some of the competitors have been really aggressive in the last few months.

I want to turn to gross margin.

You can see the gross margin was 10%, and that's down about 1.8 points versus last year.

The primary driver of the lower margin was cost of production.

And I don't think any of you will be surprised to hear that, that was principally due to commodity costs, primarily cold rolled steel and other metals, including aluminum and lead, zinc and copper.

All of these were up in the second quarter versus the prior year.

Our cold rolled steel prices were up about 10%, and we expect to see a further increase in steel during the third quarter as a result of pricing actions that we've all seen in the past 3 months or so.

In addition to commodity costs, we continue to experience higher inbound freight costs.

This is something that we talked about in the first quarter report.

Diesel costs are up about 17% versus prior year.

And the shortage of drivers that we experienced in the first quarter is continuing to impact the availability of trucks and, therefore, costs.

Blue Bird is not sitting back and letting this happen to us.

We're working on a broad range of actions to reduce the impact of commodity cost and freight increases and to minimize and offset the effect on ongoing margins.

Also impacting the second quarter margin were somewhat higher costs for programs designed to incentivize our dealers to really go after business in the slow period, and I think you'd agree that we did manage to get higher volumes.

And finally, we did get one of those nice surprises that one state that we generally don't do a lot of business in came in and ordered more than our annual sales volume in the second quarter.

Unfortunately, they're one of the lower margin states in the business, and that caused us a little bit of a customer mix problem.

It was nice to get the volume, but we sure wished it had been higher margins.

Also included in the gross profit, although hidden behind the commodity cost increases and the freight increases, we did start to see the first evidence of our operational transformation initiatives.

We are really starting to see that come to fruition as we're implementing each of the initiatives progressively over the rest of the year.

So we expect to see a lot more of that in the second half as the savings from a full range of actions that have been approved and are being implemented come to be realized.

And so you'll obviously hear a lot more of this as we go through our third and fourth quarter discussions.

Net income was $1.8 million.

It was down about $900,000 versus the prior year.

Adjusted diluted earnings per share was $0.15, which was up versus last year.

Net income was impacted, obviously, by the reduction in the gross margin.

That was the big negative impact.

Operating expenses were down.

Other costs were favorable, and tax was favorable.

So all in all, the $900,000 was really just -- the deterioration was really driven by the sudden impact of commodity cost increases.

Adjusted EBITDA, we'll cover that a little more on the next slide.

Suffice to say, the margin of 4.6% was up about 0.6 point versus the prior year, and that was a reasonable result for us.

Debt and cash.

You can see that cash is down $28 million year-over-year, and debt was favorable by about $7 million.

The reduction in the cash comes in the face of the share buyback program that you're all aware of.

We spent just about $50 million buying back shares.

And so, obviously, that cash has come out.

But I think we're still focused on the guidance for our cash.

Our adjusted free cash flow will still be over $40 million.

And so we're very positive about where cash is going in the full year.

We don't show the year-to-date or -- so the first half data much here.

It is in the 10-Q that's filed.

Just a couple of comments quickly.

Revenue in the first half is up by about 10%.

Volume accounts for 7 points of that, with higher average selling prices accounting for the balance.

Gross profit is about flat, and that's due largely to the higher cost of goods sold due to commodities and mix.

Net loss for the first half was $6 million or -- which is about equal to last year at $200,000 higher.

The loss before tax is $4.4 million.

And I would point out that, that's almost $5 million better than the prior year.

Unfortunately, tax was about $4.4 million worse than prior year.

And equity in our nonconsolidated subsidiary was down about $700,000.

And that's really a timing issue.

They're getting their production out, and that will make up a lot of that ground in the second half.

Finally, adjusted EBITDA for the year-to-date is $15.3 million, which is a 39% improvement over the prior year.

And we are -- that fully supports us achieving our guidance, I think, for the full year.

If we go to Slide 10, this is a fairly brief bridge on the second quarter versus the prior year.

It shows that -- it shows our EBITDA of $10 million.

Phil Horlock already mentioned that's up $1.6 million or 19% compared to last year.

You can see there are only 2 large items that contributed to the change.

Gross profit on the bus was down $2.9 million, and we've talked about the impacts of commodity cost and freight.

But the partial offset was higher volume and the higher average revenue, as we discussed.

We did make significant progress in controlling operating expenses and other costs in the quarter.

We had a lot of emphasis on controlling our SG&A, and we got some good news out of some work we've been doing on our pension.

So that came through.

And we've generally put a lot of controls of all elements of expenditure.

We've retimed and reduced some of the bigger spending that we do in SG&A.

And we'll continue to do this as a partial offset to some of the commodity cost increases as we go forward.

Slide 11 talks about free cash flow for the second quarter.

You can see there that the adjusted free cash flow of $3.3 million is down by about $21 million versus the prior year.

If you look at the trade working capital, you'll see that's been a big swing around from the second quarter of '17 to the second quarter of '18.

And it really comes about from the timing of accounts receivable.

We had a fleet sale in the first quarter of fiscal year '17.

We got the money in the second quarter.

So the second quarter looked really good last year.

This year, that fleet sale, same customer, the sale occurred in the second quarter, and we'll get -- we've already got the money, but unfortunately, it's in the third quarter.

So that's really the major cause of the free cash flow change.

So it's basically a timing issue.

CapEx obviously was a little higher, and cash taxes were a little higher.

But all in all, we believe we're in good shape for the balance of the year on free cash flow.

As you know, more than 60% of our sales will happen in the third and fourth quarter, and that's when we start to generate a lot of cash at Blue Bird.

Final slide for me is on Slide 12.

And you can see there, debt stands at $147.6 million and cash at $10.3 million.

So our net debt is $137.3 million.

Our net leverage ratio stands at 1.6 versus the covenant of 3.75.

So that's -- we've got plenty of room and cushion there.

And our liquidity stands at $78.4 million.

Again, I'd remind you that the cash result is after spending $50 million buying back shares.

So we will start to build cash back in the second half, and we'll end up with a very strong cash position despite the CapEx that we're spending as part of our transformational initiatives.

So that's it for me.

Thank you for your attention.

And I'll hand you back to Phil Horlock, who will talk about the outlook for 2018 -- for the balance of 2018, and then take questions.

Thanks.

Okay.

Thanks, Phil, for that.

So let's now take a focus on the outlook, as Phil said, for the balance -- for the full year and also for our guidance.

If you could just please turn to Slide 14.

So first on the industry.

With the industry at a 30-year high last year, we do anticipate another near record year in fiscal 2018.

I mentioned this in my initial slide.

And we really based that on the fact we're seeing really good strong market activity again this year.

And also looking at ACT Research on industry orders, we do see a potential for a 2% to 3% industry growth for the numbers, so somewhere 35,000, a little bit above, between 35,000, 36,000.

And again, it's important -- that is a strong industry.

As we said before, that's the highest industry since 1985 that will be, so a 30-year high.

Importantly, we believe we're well positioned to capitalize on these opportunities, and that's what we're trying to do.

We do expect Blue Bird growth in the 3% to 4% range, slightly higher than the industry growth.

So I think as you can see, we're off to a good start in the first half of the year in achieving that.

So our focus in fiscal 2018, as we said in the last earnings call, is on transforming our business structure through a series of actions addressing cost efficiency, quality, capacity and product actions.

As we seek to drive our EBITDA margin this year to 8%, up from 7% last year, that's our financial goal for this year.

And we look at this as a step towards our desired range of 10% to 12% EBITDA margin in the coming years.

That's our goal we want to be, 10% to 12% range and finish this year at about 8%, up 1 point from a year ago.

The actions to get there are being implemented progressively through fiscal 2018 and beyond.

And as Phil and I both mentioned, we do expect to see results particularly in the second half of fiscal 2018 and into the following year.

The rapid escalation of commodity price is a key issue that we're watching very closely, and Phil talked about this at some length, and particularly led by steel and by our freight -- increasing inbound freight costs, which, obviously, fuel costs are a big driver of that.

But we are taking actions, as you saw in the first half, to address -- to offset the high cost.

And we will be also taking pricing on all new quotes and orders going forward.

So we are going to be implementing that through the balance of the year.

We typically -- as you know, this is an industry that is often tough to price against.

It's a competitive bid business.

But we -- over the years, we found that when -- obviously, when there's regulatory issues and big shifts, like commodity price change, the industry has been able to do that.

So we would look to do that through the balance of the year while steel prices remain high.

Finally, I would say the core of our plans we'll continue to work on our passion, and that's to provide best-in-class and differentiated products that customers want and value.

That is what regard is -- that's our mission.

That means making the best quality bus at a great value price and giving features and products that no one else has.

And I think our alternative fuel success to date is a great example of that.

Now based on our fuel production schedule for the third quarter and the anticipated timing of savings from our transformational actions this year, we expect the fourth quarter will be our highest unit sales quarter and profit quarter in fiscal 2018.

And that compares with last year when we recorded the highest quarterly volume and profit in the third quarter.

So a little different versus last year.

Fourth quarter will -- should be our highest profit and our highest volume based on what we have in our pipeline, our outlook here for our transformational savings for the balance of the year.

So let me now turn to fiscal 2018 guidance on Slide 18, which reflects all of these initiatives.

Based on fiscal first half results and the outlook for the remainder of the year, we are reaffirming guidance on all 3 reported metrics.

Net sales guidance is between $1,010,000,000 and $1,040,000,000.

Adjusted EBITDA guidance is between $80 million to $85 million, a significant $11 million to $16 million increase over fiscal 2017, as we focus on driving down costs and improving our EBITDA margin.

Adjusted free cash flow is between $40 million to $45 million, which does reflect the new combined federal and state tax rate of 28% to 29% that we advise you of in the last earnings call that we had.

And in fact, for fiscal 2019 and beyond, the tax rate should normalize at around about a 25% level.

Just a point to mention, adjusted free cash flow continues to be a strong feature of our business model and now represents more than 50% of our adjusted EBITDA despite the plant facility upgrade investments in fiscal 2018.

So in wrapping up, we had a strong fiscal 2018 second quarter and first half performance, both operationally and financially, and we are maintaining full year guidance.

Escalating commodity prices are a key concern to us, and we are taking action, including pricing, as I just mentioned, to address our increased cost.

We look to profit and margin growth in fiscal 2018, and our plans and guidance support this.

And we'll continue to update you on our progress each quarter.

That concludes our formal presentation.

I'll now pass it back to our moderator, Cody, to begin the question-and-answer session.

Over to you, Cody.

(Operator Instructions) We'll take our first question from Matt Koranda with Roth Capital.

This is Brad Noss on for Matt.

I just wanted to start by looking at gross margin, and just seeing if you can help us for a breakdown and quantify the main inputs that we're weighing on gross margins between commodity inflation, labor, freight or any other factors in there.

Well, the major impact on the gross margin is really the commodity and freight.

That's more than half of the deterioration.

There were -- as I said, there was a little bit of adverse mix and some costs for getting dealers into volume in the second quarter.

But the -- that was -- that's more typical of what goes on in the second quarter in Blue Bird.

I think the new news was clearly steel cost, the cost of other metals in the commodity area and the ongoing cost escalation of inbound freight.

Clearly, the steel will continue to be an issue; and quite frankly, steel hasn't yet settled down, and it probably won't until all the tariff stuff gets through.

And I don't see freight easing off yet.

I see oil is continuing to see some run-up.

I think it hit more than $70 a barrel this week.

So we -- we're not assuming these costs are going to go away in the near future.

As Phil just mentioned, we're going to price, and that will help alleviate it.

And we're also going to continue to look for -- continue to work on measures to offset the costs through various -- a variety of other aggressive actions to reduce product cost.

That's about it for that one.

All right.

That's helpful.

And I guess, just given these continued headwinds and you're not able to really see them beginning to abate in the near term, I mean, what really gives you the confidence in reiterating guidance with these headwinds?

What are -- what sort of are you building in?

And is it just the pricing and what you previously expected for the transformational initiatives that are really going to offset it?

Or what else are you able to do there?

Yes.

I think, Brad, you're doing a good job of explaining there.

Obviously, the transformational initiatives are driven at -- drive -- [part] of driving down costs.

We have a lot of people in our team here at Blue Bird focused on that.

And we have external help driving that with professional assistance.

And so we're seeing -- we are seeing the results.

You'll see that coming through in the second half.

So it's driving that, trying to exceed in, push further on that.

The second thing is obviously the pricing I mentioned.

And in fact, I've talked to our dealers on that, half of our dealer network, just this last week, that we'll be doing that, and we discussed why, and they understand that.

So we'll be putting that through the network.

And the third thing is we are a group who want to be responsive.

We try to be responsive in Blue Bird.

And we look at things like what's in our budget.

We look at where we have positions that are open, where we can push costs off till next year and where can we defer things.

Can we push it out until things settle down a little more?

There's always levers you can pull and push things out by a quarter or 2 and may give us some bit of free space here to tackle these headwinds.

So -- and we control.

That's what we do every day.

And as Phil mentioned, that was part of how we're able to still come back with a pretty strong result in the second quarter despite seeing the impact of some of those steel things.

Pretty late in the quarter, we were able to pull some of those levers.

So that's really it.

We just get -- is what we work on it every day, Brad, and it's a great question to ask, but we're responding to it.

Great.

That's helpful.

And then just in regard to the price increases, obviously, you said you just communicated out with the dealers recently.

So, I guess, as they begin to book with the new prices, would we see that benefit in Q3?

Or would (inaudible) have to come through in Q4 since most of the production slots are already set for Q3?

Yes.

I mean, most of it, you'll sort of see coming through Q4.

And of course, like an at -- it's a very dynamic business (inaudible).

We have quotes out there that can [stand].

We're not going to go back and tell someone who's been quoted a price, "I'm going to change what I just agreed with you." So you have to let that run through, and then you'll see sort of towards -- it'll be the fourth quarter really when you'll see the full impact of that.

You'll see some towards the end of the third, you should see, but we will honor what we've already got out.

That's why I made the point of saying, "The new quotes and new orders, they obviously -- they will receive the higher price." But the ones that are all existing there and still working with our customers on, we wouldn't pull the trigger on that just yet.

Got it.

And maybe just one more for me.

I think you had mentioned prior that you have the ability or you typically try to sort of prebuy some of your steel to fix out a certain portion in advance.

But I was just wondering if you were -- if you're able to do that now to help you -- get you through the rest of the year?

Or if the current quarter impact from the steel increases, why that wasn't as, I guess, hedged from previous prebuys or anything like that?

So we're -- with respect to steel buy, our price for cold rolled steel is basically locked for the third quarter.

We deal with a broker.

And -- so we understand what our pricing will be for the third quarter.

And fourth quarter is getting very close.

And we're doing everything we can to work with the broker to make sure we get the best price available.

Again, our pricing is based on backward -- is backward looking, not forward looking.

So we're not getting priced at the moment based on where some of the forwards are, which are not great.

We'll now take our next question from Eric Stine with Craig-Hallum.

It's Aaron Spychalla on for Eric Stine.

Maybe first for me, on the alternative fuels, good color and good to hear that things are going well there.

Maybe on the electric side, we were out at ACT Expo last week and heard a lot of the interest in the electric bus.

And it seems like some of that interest has expanded into markets where there isn't as big of incentives as other markets.

So can you kind of talk about that a little bit, please?

Yes.

I mean, certainly, I think we're fine with electric products and certainly even with our compressed natural gas bus, which is a significant premium over traditional fuels.

They've always been successful where there are grants available.

So you look at California.

In particular, New York has been quite a good market.

Texas has been from time to time, but particularly California.

So we've always found that certainly when you say -- it's quite a bit more expensive, electric bus.

The interest we're getting around it is certainly where there are grants available.

California is terrific.

New York is terrific, as I mentioned earlier.

And then this VW funding, I think, certainly, the timing of that is really good for us.

End of this year it should be available.

And we can capitalize that.

You're right, there are certain areas and certain cities which they want to show a real green stance, and they're really excited about the opportunity there.

And when we are talking to some of those cities where they've set funds aside to have a really strong electric movement where the grants today are not like you would get in California and New York, but they tend to be the smaller volume, the little onesie, twosie, unique cities that -- municipalities that might want to do that.

But the big markets are the ones I mentioned earlier, the ones where the grants have to be available.

But the nice thing is VW money, if you want a 0 emissions product and you want to try one and you want to test it out, that's a great opportunity.

And we're in a nice position, I think, to be able to provide not just 1 bus, but for the Type C and a Type D, and actually a Type A bus through to our Micro Bird partnership powered by electric.

Right.

Okay.

And then maybe second on the parts.

I know that's been an initiative for you to try to get more SKUs into the dealers.

Can you just give us an update there?

Yes.

On the parts side, it's was a -- it a -- it was a flat quarter for us.

And I think often you get that in the second quarter in the parts business.

You're looking at January through March, I mean, the first quarter is usually up a little bit.

That's because of winter issues, you're back at school, you're dealing with things, the snow conditions, ice.

The second tends to be a little -- backs off, a little slower.

And then as we get school -- head to toward school start, it picks up again when you're renewing the buses.

So I would say the second quarter typically tends to be the least growth in the quarter that you achieve.

But look, we've actually -- we actually just appointed a new Senior Vice President, Head of our Parts division.

He's a seasoned Blue Bird guy, Dean Coulson.

Dean's excited about this opportunity.

And we want to overachieve in this space.

We're adding new SKUs every week to our portfolio of products.

And what that means too, Aaron, is not just original equipment parts in our buses.

But we are finding, obviously, when a bus gets 6, 7, 8, 9 years old, the original OEM part may not be required, and maybe they don't want something that lasts quite that long on a 10-year-old bus.

So we are looking to sort of look at increasing that SKU -- the parts that we can offer and going beyond the traditional business that we've done.

So as I've said consistently, I do believe we should be overperforming to the industry in parts, outgrowing the industry growth, because we have a big unit -- park of buses out there, well over 100,000 -- like 120,000-plus school buses on the road that are actively being used for school buses, requiring parts, requiring service.

And we want to get our full share of that.

So again, I think going forward we would look to continue growth in the parts business beyond the traditional industry growth of the bus business.

All right.

And then maybe last for me, just on the capital allocation strategy.

Can you give us an update there?

I think I heard in the prepared remarks that you finished the share repurchase program in the second quarter?

Yes, it was completed in the second quarter.

We -- the board had authorized up to $50 million, and I think that's exactly what was spent on buying back purchases -- buying back shares.

So that one is done.

All right.

And then, I mean, I guess, is it just kind of stay tuned there?

Or given kind of the free cash flow profile of the business and kind of growth outlook, anything else on share repurchases or dividends or anything like that, that you can discuss at this time?

I think on this one it's a bit like stay tuned on that one because, obviously, we have a lot of things going on this year with our transformational actions.

We've got things we're dealing with.

We're putting in a brand-new paint shop.

So you have quite a bit of capital spending that will run into next year too.

But I'll just say stay tuned.

We still feel very bullish about our cash outlook.

We've got a strong -- as you saw, free cash flow -- adjusted free cash flow is still very strong despite these investments.

And I would just say stay tuned on that.

For now, we have nothing to announce on that one.

(Operator Instructions) We'll hear now from Chris Moore with CJS Securities.

I think it was Phil Tighe that talked a little bit about the -- kind of a very competitive pricing environment you had seen earlier in the quarter.

So was that related to just alternative or overall for all the buses?

Oh, no.

Chris, this is Phil.

It was all the buses.

So there's a lot of movement going on out there with people trying to shore up positions in various markets, particularly markets that they've had for a while.

And so it's fairly active.

And you couldn't pin it on any one particular bus.

It really gets down to companies trying to protect a position that they might have had with a specific account within a state for some time.

And so we fight this on a daily basis.

As you know, we're a bid business.

And so many of the school districts will look for the best price they can get.

And so we're always fighting this.

But we have seen some people that have been fairly aggressive recently.

And I wouldn't put it to the second quarter.

I mean, this has really been going on for the first half of the year.

Okay.

So, I guess, the question is then, how does that fit in with the strategy of kind of raising prices given the increased commodity cost?

Kind of how do those 2 fit together?

Well, I think the cost has happened, right?

And it clearly has not just happened to Blue Bird.

Our competitors would be experiencing it as well.

So we -- we're trying to take care of Blue Bird at the moment.

And so we think that this will be one of those structural movements where everybody will look at it.

You look at some of the reports from earnings that's come out from other companies, and there's a lot of people being hit with this commodity cost issue.

And the only -- one of the tools you've got, you haven't got a lot of tools, but one of the tools you've got is pricing.

And so we fully expect -- we know what we're going to do, while we can't comment on what our competitors will do, but we do know that everybody has been hit by these prices.

Got it, got it.

You talked earlier in terms of the -- some of that propane buy in the second half could get pushed into '19 with the VW incentive money.

Do you have any sense in terms of how much of a benefit a buyer of a propane bus would gain by waiting from second of '18 into '19, how big that incentive is?

Well, it's a great question.

I mean, obviously, this VW money is pretty sizable.

I mean, it starts with a $14 billion fund.

And then the piece that we pay -- we play in is about a $2.7 billion, $2.8 billion worth of funding.

And that gets -- there's a whole bunch of potential beneficiaries of that, the transit bus business, the forklift truck business, the transportation around the shipyards for it.

So there's a lot of folks vying for this money.

We've been out -- certainly, we have a group of lobbyists that we work with who've been out, and we're looking probably to all states to see how much money is available.

And we've already heard quite a few states saying they certainly going to allocate a significant portion to the school bus business.

We've heard that from many states.

The thing is more than half the states haven't actually settled on their actual amounts of money they're going to give to the different segments yet.

They've actually said it going to be towards the end of the year.

But we have had discussion with some states, and some folks talk about applying a partial incentive.

We've heard some states talking about we'll pay for an entire bus as long as it meets a certain NOx level.

And that NOx is very important.

I mean, this nitrous -- nitrogen oxide level is what this is all about, how much can you take off the road, take out of our climate, how much can you reduce it by.

So the better product you've got in terms of meeting that and the cleaner product you've got, the more chance you are of getting funds.

And we think we're in a good position.

But in fact, in terms of detail, do we know exactly yet -- exactly how these grants are going to be provided?

That's not -- that's still being worked on, still being worked on by the beneficiaries of those funds that each state has selected.

And we're -- like I say, we are -- we're engaged with those folks, trying to help them figure that out.

Got it.

That's helpful.

Last question just in terms of big picture on the -- kind of how you guys are looking at the electric bus opportunity.

I'm -- are you kind of looking at that where you have the ability, similar to what you did in propane, kind of to lead the charge there with perhaps kind of a less significant market opportunity?

I think if -- yes, I mean -- that's a great question, Chris.

I think it fits with our strategy we've been adopting, which is differentiated products and features, and we think there's a market for this.

I think it's -- I think the VW funding is a good catalyst to get people who would otherwise never got a chance to get into the electric bus business, get a chance to buy one using these funds because batteries are expensive.

And there's no question, a green electric bus powered by electric is going to cost you a lot more than, say, a propane, a green propane bus.

It's going to -- for every 1 electric you can buy, you can probably buy maybe 4 propane buses.

But nevertheless, there are districts -- and I understand this, who want -- they want 0 emission.

I mean California would like to be able to have 0 emission.

So they are taking this very seriously, I think, and will certainly utilize a lot of that funding against 0 emission school buses.

For us, we like being a leader in this space.

We think it's a new opportunity to show what we can do.

But I also stressed clearly that anyone who wants a diesel bus, we have the best diesel partner too in Cummins.

We're exclusive to Cummins on the diesel engine because no one else is diesel engine.

So if you want diesel, we've got that, but we have a very broad array of offerings for everyone.

And that does conclude today's question-and-answer session.

I would now like to turn the conference over to Mr. Phil Horlock for additional or closing remarks.

Okay.

Well, thank you, Cody.

And I want to thank all of you for joining us today on our call.

We do appreciate your continued interest in Blue Bird.

We always enjoy these calls.

It gives me a chance to tell you our story as we complete the quarter and look forward to the outlook for the future.

We are focused on profitable growth, and we intend to deliver on our commitments.

And I do believe we're well positioned for growth today and in the future.

Please don't hesitate to contact our Head of Investor Relations, Mark Benfield, should you have any follow-up questions.

And thanks again from all of us at Blue Bird, and have a great day.

Thank you.

That does conclude today's conference.

Thank you all for your participation.