Blue Bird Corporation
Q1 2020 Earnings Call Transcript

Published: 13 Feb 2020

[Operator:]

Good day, and welcome to the Blue Bird Corporation Fiscal 2020 First Quarter Earnings Conference Call. 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.

[Mark Benfield:]

Thank you, Nadia. Welcome to Blue Bird's fiscal 2020 first quarter earnings conference call. The audio for our call is webcast live on investors.blue-bird.com. You can access the supporting slides by clicking on the presentations portion of our IR web page.Our comments today include forward-looking statements that are subject to risks that may cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call.This afternoon, you'll hear from Blue Bird’s CEO, Phil Horlock; and CFO, Phil Tighe. Then we will take some questions. Let's get started. Phil?

[Phil Horlock:]

Okay. Well, thanks, Mark. Well, good afternoon, everyone and thank you for all joining us today for our first quarter earnings call for fiscal 2020. And we'll continue to make great progress at Blue Bird as we start to improve both overall profitability and margins.We always welcome opportunity to share overview our latest quarterly results. So let's start an overview of those financial results on slide 4. As we previously explained the school bus industry is extremely seasonal and the first quarter is always the softest quarter of the year with unit sales typically representing no more than 14% to 15% of the full year volume.This is also our expectation for fiscal 2020. And so I'm pleased to report that despite the soft sales quarter, we have a really strong first quarter financial performance relative to prior years. In fact, it was the second highest profit in more than 10 years with adjusted EBITDA of $8 million which is $800,000 or 11% over a year ago.Importantly, this was our sixth consecutive quarter where profits increased over the prior year despite higher commodity surcharges from our suppliers to address tariffs that impacted us from the second quarter of last year.Before proceeding further and as I mentioned in our prior earnings call will be set the strategy that we are pursuing. Throughout this on future earnings calls, you will hear a recurring theme of how we are driving our overall profit and margin improvement through three key initiatives. First, following the bus pricing that we took in late fiscal 2018 to address the escalation in tariff-lead commodity costs we plan to price each year to recover economic increases. As you will recall we took pricing again in July 2019 and we'll see the benefits throughout this year.Second, cost reductions that we are achieving through our transformational initiatives. We began this journey two years ago and have seen significant year-over-year savings in every quarter since then and we intend to continue to do so going forward.And third continued leadership and growth in alternative fuels increasing our mix of alternative fuel powered buses as a percentage of our total sales is key to profit growth as we got a superior selling price and gross margin compared with conventional fuel buses. Our growth in this segment continues to outpace the overall market by a long way as you will hear later. Now, all three of these actions improved our results over the first quarter last year and our cornerstones of our ongoing plan to increase both gross profit and EBITDA margins.So let me get back to our first quarter results. We improved profitability despite selling 140 fuel losses than last year. Now we mentioned in our last earnings call the first quarter volume will be down versus a year ago, as we launched our new robotic paint facility requiring additional planned downtime in October and a gradual production ramp-up. This is simply a retiming of volume to later in the year.Now while volume was down 9% from a year ago, fourth quarter net sales revenue of $153 million was only 1% below last year. The increased sales revenue mainly reflects a richer mix of higher-priced alternative fuel powered buses and the favorable impact of our bus pricing actions that I just mentioned.In fact, our average bus selling price was over $5,000 per unit higher than in the first quarter last year. And part sales also grew substantially at 17% over the first quarter last year although but half of that is explained on the additional sales week we had in the first quarter of fiscal 2020 compared to last year. So overall, we had a very strong revenue performance.Our adjusted free cash flow was about $90 million negative for the quarter. As you know traditionally, we are always negative in this first quarter. But this was $34 million less than a year ago. This was largely due to higher OR inventory, having the end of December 10, 2019 to address some unique circumstances as total describe those later. Suffice to say, we will return to normal inventory levels as the year progresses versus this is just a timing issue. Adjusted net income of $2 million and adjusted diluted earnings per share of $0.07 were up $800,000 and $0.02 respectively from a year ago.Now if we look at the underlying strength of the industry on Blue Bird's results, we remain upbeat about the business fundamentals. We are forecasting the industry of around 34,000 school buses in fiscal 2020, which is about the same as last year and that's a near record level over the past 30 years and compares favorably with the average over that same period of 31,000 school buses.With a strong outlook for property values and corresponding property taxes, which are the major funding sources for school buses, together with the fact that 190,000 school buses on the road today have been serviced for more than 15 years and school to enrollment is increasing, we are confident that the industry outlook remaining at around this level for the foreseeable future.Bottom line, the demand for school bus is clearly very strong, with funding the only limiting factor. We saw yet another record first quarter sales mix for alternative fuel powered school buses, surpassing last years previous record. At an impressive 39% mix of our total unit sales, we beat last year's first quarter mix by five points. It's clear that we lead the industry by a long way in alternative fuel power school buses.Now as a reminder, which I do in every earnings call, in alternative fuels, we count all of our propane, compressed natural gas, electric and gasoline-powered buses, as all of these are alternatives to diesel, which has been a staple fuel for years. For the last several years, we've been achieving significant growth in alternative fuel bus sales and as I just mentioned, we have not slowed down this year. We'll cover our performance in this area in more detail a little later.All in all, I'm very pleased with our first quarter results. We increased our gross profit margin significantly versus a year ago, through a richer mix of alternative fuel buses, cost reductions and pricing. That was the fourth consecutive quarter of gross margin growth and is a key element for improving our EBITDA margin and we expect continued gross margin improvement from these actions, as we move forward through the fiscal year.We're maintaining fiscal year 2020 guidance for all three metrics on which we report, with midpoint of range for adjusted EBITDA at 13% above fiscal 2019 and $92.5 million. Importantly, we are on the path to our stated goal for an adjusted EBITDA margin run rate of at least 10% by the end of fiscal 2020.So let me now review with you our key operating achievements on slide 5. We recorded a number of significant achievements in the first quarter and each one will make us more competitive and supports our profitable growth plans going forward. Our transformational initiatives to increase margins are on track, driving improvements in quality, cost and efficiencies and capacity. We are seeing those results now as evidenced by our gross profit margin increase of 1.6 points in the first quarter of last year and there is much more to come.Although we carefully planned ramp-up in October and November, our all-new automated paint shop is fully operational and every bus is now being painted in that facility. The painted buses look great and we'll be able to see the quality and the efficiency benefits we expected. As I will show you later, this is an important initiative to drive efficiency improvements throughout the plan.As I covered earlier, we increased our full year school bus selling price significantly by about $5,000 a unit, representing a 6% increase. Again, this reflects our increased mix of higher-priced alternative fuel powered buses and our recent pricing actions, together with the favorable impact of higher option take and standardization of selected priceable feature.While adjusted EBITDA margin increased by 0.6 points in the first quarter of fiscal 2020 of last year which is a great result, this is on top of achieving higher margins in every single quarter of fiscal 2019. I believe that to be a strong indicator of our consistent and effective strategy can deliver continuous improvement.As I mentioned earlier, we continue to be the undisputed leader in alternative fuel powered school buses with impressive 46% of our total year-to-date sales and firm order backlog. That's quite a mix. And it's actually 4 points above the same time last year.Furthermore, the total number of alternative fuel buses sold and in our backlog, are up 5% from a year ago. A strong growth performance in an overall flat school bus industry, particularly when we consider the major sales season is ahead of us. Simply put, that's leadership and real momentum in the fastest-growing segment of the school bus market.Remaining on top in alternative fuels, we continue to see strong and growing interest in our latest product, our 0-emission electric-powered school bus, which is powered by a Cummins electric drivetrain.We delivered 24 buses in the first quarter of fiscal 2020. And altogether, we have more than 90 buses delivered on our firm order backlog so far this fiscal year. We anticipate many more orders for the year based on the quoted activity we are seeing.Needless to say, with the widest range of electric-powered school busses on the market today, covering Type A, Type C and Type D configurations. We are really excited about this opportunity.And finally, we are reaffirming guidance for fiscal 2020, and that reflects continued growth in sales and profits, as we continue to deploy our three focus initiatives to drive higher growth in EBITDA margins, namely annual pricing to cover economics, structural cost reductions and increased mix on alternative fuels. It's fair to say, we continue to advance the business on multiple fronts and we are focused entirely on profitable growth.Now, let's take a closer look at the third quarter financial results on slide 6. I touched on many of these results earlier. And full time, I'll run through the details later. So let me just summarize the first quarter.Our bus sales and total net sales were down 3% and 1% from prior year respectively, which is significantly less than the planned 9% volume decline as we achieved 6% higher average selling price per bus.Bus sales were 17% higher than a year ago, although half of that growth was due to the extra sales week in the first quarter this year compared to last year. Nevertheless, we are pleased with the 8% organic growth we achieved in the first quarter, which comes on the back of a full year growth of 7% last year. That's really impressive performance by the sales team.Adjusted EBITDA was $800,000 or 11% above a year ago. The end result was the second highest first quarter profit for more than 10 years and the sixth consecutive quarter that we have grown profits over the prior year.Turning now to slide 7, let's just take a closer look at our alternative fuel bus sales performance. At 2,074 units, our book sales and backlog today of alternative fuel buses is 5% higher than a year ago, and importantly our record for this time of the year.As I mentioned earlier, alternative fuel bus sales represented 46% of our total sales, which is up again from the previous record of 42% that we set a year ago at the same time.Significantly too, 111 customers have purchased or all alternative fuel powered buses from us for the first time ever this year. That's on top of more than 400 customers who try to alternate few options last year for the first time.Now those are compelling facts and really helped drive customer loyalty and complex business, under a great endorsement of our exclusive alternative fuel buses, the Blue Bird name under our franchise exclusive dealer network.So, I think it's pretty evident that we are 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.I previously covered the fact that we are now either sold or have further mores in hand for more than 90 electric bus orders for delivery in fiscal 2020. And we expect more to follow with all the customer interest we're seeing for the newest addition to our alternative fuel line.Looking forward, the vast majority of the VW mitigation funding is still ahead of us, and should support the strong industry 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 have had so far from the funds that have been issued.With the widest range of alternative fuel powered buses, the most modern improvement engineering industry, which exclusive to Blue Bird through our partnership with both Ford and ROUSH CleanTech, and our leadership position in low-NOx emissions, we are well positioned to capitalize on the VW funding and other growth opportunities going forward. In fact reduction in NOx gases is the major criteria in funding through the VW settlement.To this point, our new ultra-low-NOx propane bus is certified at one-tenth of the NOx emissions output of other manufacturers' buses and the EPA standard. Plus, our propane bus is widely recognized as having the lowest operating costs of any of the school bus on the market. And we've been very successful today in utilizing VW funds for our propane bus customers.So with Blue Bird propane is one simple message you can have it all, the lowest operating cost and the lowest NOx emissions of any internal combustion engine in a school bus. Our growing number of customers understand this, and as you saw, our sales are up again and we're achieving record levels of sales so far this year.We're also seeing continued strong growth of our gasoline-powered bus in fiscal 2020. It's readily understood by technicians and mechanics, who appreciate the mission of simplicity and cold weather start capability that it shares with propane. It also has a lower price point than diesel, so it really works for those customers where acquisition price is a key concern.In summary, we are proud of our strong leadership position on alternative fuels and the significant growth and market share that we're achieving. And with less than 15% of school districts still having purchased an alternative fuel-powered school bus, we have plenty of runway ahead for continued growth.Let's take a closer look at how we're driving cost reductions throughout Blue Bird. Turning to slide 8. Now we show you this slide in our last earnings call and it illustrates the progression of our transformation relationships over the past two years and into fiscal 2020. Importantly, you see this is a cumulative approach, where additional processes and tools are being added as we strive to drive down total cost.In fiscal 2018, our initial focus on reducing purchase material costs out services through a combination of initiatives, including new commercial agreements with suppliers and resourcing with minimal product design change. We look extensively with alternative external automotive experts to ensure best practices, and processes were applied and we delivered results. In fact, you might recall that we recorded savings of over $20 million in fiscal 2018 from our transformational initiatives.Now we continue to pursue these initiatives in fiscal 2019 and began to have design changes to our process to reduce cost without compromising quality. In the second phase, we also focused heavily on the build, launch, testing and validation of our all-new robotic paint facility, which also necessitated plant's arrangements to optimize our process. We achieved additional savings of $18 million in fiscal 2019. And as Phil will show you later, we continue to drive further significant savings in fiscal 2020 from these actions. As we enter fiscal 2020, Phase 3 now supplements the only processes by driving down the cost of production, also fully operational robotic paint facility and from focused plant productivity actions. Our new automatic paint facility provides the opportunity to reduce rework with increased first-time run capability, to reduce labor and material through robotic application of paint and to achieve savings and warranty expense and to deliver higher straight time capacity.Importantly, with the new paint facility attached to the exterior of our assembly building, we free up space in the plant to allow more efficient line rearrangements of tasks and stations and the addition of several stations for more efficient operations and improved quality control. All these actions are designed to improve efficiencies and drive down further cost. We have deployed industrial engineering resources to optimize in-station workflow in the newly arranged production line.We're applying engineering resources to focus on design for manufacturing capability targeted to reducing production costs and improving quality of rework, and we are confident of achieving significant efficiencies. And we have many more actions planned over the next few years. This systemic and cumulative approach to driving down total costs over multiple years is key to deliver high gross profit and EBITDA margins. And we will continue to share these results with you in the quarterly earnings calls.Let me now turn it over to Phil Tighe, who will take you through the financials, and then I'll be back later to cover the fiscal 2020 outlook and reaffirm our full year guidance. Over to you Phil.

[Phil Tighe:]

Thank you, Phil, good afternoon to everyone. The next few slides are a summary of our financial performance for the first quarter of 2020. Material that we are discussing is based on the close of January 4, 2020 for the first quarter of 2020. And December 29, 2019 for the first quarter of 2019.Detailed material will be available in our 10-K. And that will be filed tomorrow February 13. And we encourage you to read the 10-K and the important disclosures that it contains.There is also an appendix attached to today's presentation deals with reconciliations between GAAP and non-GAAP measures as well as important disclaimers already mentioned by Mark.And with respect to accounting pronouncements there was nothing significant adopted in the first quarter of FY 2020. We did elect to adopt ASU 2019-12 which simplifies the process for calculated interim income taxes.And the accounting deferred tax liabilities for foreign equity method investments. There was no material impact to Blue Bird from adopting this statement. Now let's have a look at the summary of key results for the first quarter, on slide 10.So I think you can see from this. And Phil's already mentioned a lot of it that, we had an improvement versus prior year in quite a number of the items. So gross margin percent was up, net loss was down.Adjusted net income was up, adjusted EBITDA was up. The adjusted EBITDA margin was up. And the diluted earnings per share improved by $0.03 from a loss supplier to a loss of $0.02. And the adjusted diluted was up by about $0.02.So, we've already talked about the fact that the volume was down. And net revenue was down. And we'll go into a little more detail on the net revenue, when we get to the bridge, so that you can perhaps to have a better understanding of that.And we will spend a little bit of time talking about that cash and when we get to the free cash flow slide. So I think on the net revenue, you can probably talk about the $1.7 million. It was down -- that's about 1% down.Lower bus volumes were 140 units or 9% was worth about $12 million. Phil mentioned that, bus revenues were up, by over $5,000. The higher revenues actually drove about $8 million, either offset to the loss in the volume.But this of course parts was up, by about $2.7 million or 17% which has already been mentioned. So we basically offset a large chunk of the amount that the volume was down through a lot of good work by the team, on bus revenue and on parts revenue.The -- again the bus revenue per unit increase of 6%. It was due to a number of factors. One was the pricing actions we've taken in FY 2018 to 2019 to offset the inflation, including steel and commodity prices, as well as of course as the higher mix of alternative fuels.And also, our sales team has been working diligently trying to identify the best revenue we can get on every sale, in every state. Gross margin at 13.9% was up 160 basis points versus a year ago.Bus gross profit was 11%, which was up 130 basis points compared to a year ago. And the mix of part sales improved from 11.3% of total to 12%, at an average margin of about almost 35%.Our net loss obviously, reduced to about 0.4%. So that was an improvement of $800,000. Lower interest cost improved other income. And JV income lower taxes growth and improvement.On an adjusted basis, net income was $2 million positive up from 0.8% last June. Adjusted EBITDA, we've already mentioned was up 10% to 11%. And we'll talk more about that on the bridge.The EBITDA margin of 5.2% for the first quarter was up by 0.5 point versus the prior year. And this is the fifth consecutive quarter with positive year-over-year margin improvement.Diluted earnings per share, we've covered. And we will talk a little more about the impact of cash and debt when we get to the free cash flow slide.Slide 11 is the bridge and walks from first quarter of fiscal 2019 to first quarter fiscal 2020. Key takeaways are volume and product mix improved by $600,000. So we know that the volume was down but we did have favorable product mix. That is the – we sold more of the buses with higher margins than we did in the prior year. In large part that is due to alternative fuel sales and also part sales mix in total was up, which contributed to the positive news for volume and product mix.Pricing net of economics was about $1.5 million unfavorable and this was largely due to higher material costs. The higher material costs were net of some favorable movement that we're now seeing in steel and also higher tariffs. You will recall there were tariffs that were implemented in the first half of calendar 2019. And so we are still seeing some flow-through of those tariffs into our fiscal year 2020.Transformational cost initiatives added $0.09, which was largely around about improvement in design cost and in reducing supplier costs efficiencies were favorable and this was despite the fact that we were in the launch of the paint shop in the first month or so of the first quarter. So there were a lot of costs involved in getting the paint shop up and running. And so despite all of that we will be able to break even some favorable use in efficiencies including favorable news and create warranty as well as manufacturing.Operating expense in other words was unfavorable. And that was largely due to a normal currency of a temporary rebate program at one of our major suppliers gave us in the first quarter of fiscal 2019. That did not carry forward into fiscal year 2020 and is a large part of the deterioration for that.Overall, I think profit's up by 11% in the first quarter was a good result for us. I would just say that – and I think this is reiterating things that Phil said. We continue to work on improving both the – per unit revenue and the cost structure at Blue Bird is the key enabler for achieving our long-term objectives.We talked about bus revenue gross margin, we are continuing to push on gross margin and I would say that this could have been higher for the first quarter except that we did incur some costs for the paint shop launch. So that dropped us back but we're seeing good traction on gross margin.And finally the transformation initiatives. I know you look at $900,000. So that wasn't very much but it is our lowest quarter in terms of volume and most of the savings are driven by bus sales. So it's an important field in reducing the cost of each bus we sell. So a liquidity perspective that 900,000 was worth about $600 a unit on every bus we sold in the first quarter. And of course that will flow through to the buses we sell in the rest of the year and provide both improving our profitability as volumes grow through the year.The next slide, Slide 12 is the free cash flow. And you can see here that the free cash flow is off up around about $34 million at least for the adjusted free cash flow and a similar number for the free cash flow. And the big issue is clearly you trade working capital, everything else is pretty stable. The year-over-year increase in trade working capital and fundamentally all temporary items and they will be ordinated if not in the second quarter at least in the balance of the year.And there were four principal areas. The first is we had a number of – we have a number of stockpiling actions on some major powertrain components due to some supplier capacity constraints. We had stockpiled a number of engines. And that stockpile will run down as we go out of this fiscal year and will be covered by the fiscal year.We also had a work patent change versus 2019 in the first quarter. Typically, we bring in inventory for production in the second quarter in the first week of that quarter, which we will get confused about calendar, but basically the first week of the second quarter is just after New Year. So we tend to bring any bit. Unfortunately, due to the timing of the timing of our production pattern in FY 2020 we had to bring in lot of inventory to support our current production in the latter part of December. And that caused this quite a run-up in inventory down out of – out of the first quarter. Again, that will sort itself out as we go through the second quarter.Blue Bird has been on a major program to consolidate all of our inventory into a single major warehouse to improve flow to the plant and to improve efficiency and profitability. We did all of that move in basically the first quarter of fiscal 2020. So we did build up inventory to ensure that we will protected against any glitches as we were moving parts from a number of warehouses to a central warehouse. So we took a fairly conservative approach to protect production during this overhead – overhaul. And I think that, while it was a strain on our cash is certainly pay dividends you're not losing production.And finally, we did have a number of buses that were still in a work in process at the end of the first quarter. In other words, they will largely build, but still being finished. These were the more complex buses that we build for the Federal Government. And some buses that we were building for some major fleets that were more like transit buses than school buses and require a lot of incremental work. So those buses will all be delivered before the end of the second quarter and we'll get the majority of that stockpiling or inventory out of the way.So again, I'd say that, the engine stockpiling will probably run that out by the end of that – we will run that out by the end of the fiscal year. Everything else work patent change, protection against the warehouse move and the buses that were still in production will be cleaned out over the next several months.Final slide, slide 13, looks at our net debt, leverage and liquidity. Debt $215 million was up about $6 million during the prior year, due to $15 million drawn on revolver higher than prior year at that time. And that was really drawn to expand some of the trend working capital. Our net leverage ratio came in at 2.5% again well below the threshold of covenant of 3.75%. And we believe our liquidity at $66 million is good for this time of the year. And particularly, it gives us some fairly solid amount of cushion, while we're carrying higher than normal inventories and we would expect to see that grow as we run down inventories.So that's a brief summary for you. And I'll now turn back the discussion back to Phil Horlock, who will describe the outlook for fiscal year 2020 and our position on guidance. Over to you Phil.

[Phil Horlock:]

Thank you, Phil. So let's now focus on the fiscal 2020 outlook, as Phil just said in our full year guidance. And please turn to slide 15. The headline on this slide says, we are simply continuing to fold the plan we laid out to grow margins. We started these two years ago and we're well on track and along the way with it.Before I just get into the details of that, just a quick commentary again about the industry. For three years now we've been running at about 34,000 units and these are really 30-year highs that we're seeing. But the great thing is, if you look at the outlook here property taxes I mentioned before property values, funding available and the likes of VW funds to boost some decisions that I make them earlier in the cycle. It just gives us real confidence we see in the foreseeable future of holding of this level. And it's important also to note, as I mentioned previously, 190,000 buses and a 500,000 fleet across North America is over 15 years of age. So there's tremendous demand to buy new buses. This industry is not slowing down, because of lack of demand.As we consistently stated, our plans for continued profit growth focused on achieving significant gross margin and EBITDA margin improvement from three key areas. To repeat myself here, I think, it's both reminding ourselves up front is very straightforward, very simple and we're executing it.First is annual cost recovery pricing, we took pricing in 2018 for surcharges for steel and other commodity increases. And in late fiscal 2019, we took a further 2% price increase on all vehicles and options and that will have a significant annual effect in fiscal 2020. We've seen a flow-through of that lease announcement back in fiscal 2019.Second, our continued transformational cost reductions. I explained earlier the processes we are attacking now. The various areas we're going into, all across whether it's purchasing, whether it's in a plant, it's in the manufacturing situation, about design, we're exploring every possible avenue.What have we done so far, in 2018 and 2019, we drove a cumulative cost savings of $38 million in over those two years and we expect significant benefits again in fiscal 2020 and beyond. Manufacturing efficiencies and quality will be a key area of focus this year and in future years.And third, as we've been doing for several years now, we will continue to pursue growth to maintain our leadership position in alternative fuels, which command a superior margin and higher customer loyalty. With a record year-to-date mix of 46% of book sales and firm order backlog and the main second half selling season still ahead of us, our alternative fuel leadership position will continue to be a significant boost to selling price and gross margin.Our financial targets for fiscal 2020 are on a glide path towards our previously communicated EBITDA margin goal of a run rate of at least 10% by the end of this fiscal year. So let's now take a look at what all this means to fiscal 2020 guidance turning to slide 16. First no change at all from the guidance that we announced at the December earnings call. Net sales guidance is between $1.020 billion to $1.050 billion which would be between $2 million to $32 million higher than fiscal 2019.I want to stress this is not a plan entirely based on higher volume, but rather a prudent margin based approach to drive higher profits and revenue. Adjusted EBITDA guidance is now between $90 million to $95 million, a significant $8 million to $13 million or 11% to 16% increase over fiscal 2019. And by the way, that's 13% higher at the midpoint of our guidance.As a reminder, we are in a very seasonal business, with typically two-third of our sales occurring in the second half of the fiscal year. That said, we expect fiscal 2020 to follow a similar pattern, with the vast majority of our profits and improvement over fiscal 2019 being earned in the second half of the year, as we realized that higher volume.Adjusted free cash flow is between $30 million to $35 million and continues to be a strong feature of our business model. While this is slightly down from our fiscal 2019 results, this is more than explained by unique spending to support plant upgrades and design changes that drive higher productivity.So, in wrapping up, we had a very strong first quarter results in the softest quarter of the year, both operationally and financially. Importantly, all of our production slots are full for the first half of our year and we announced a loss in the second half of the year. So we have good visibility on pricing, margins and profits through the second quarter. Our guidance for fiscal 2020 reflects significant profit and margin growth over fiscal 2019 and is supported by the continuation of the strategy and plans we put in place and are executing over the past two years.That concludes our formal presentation. I'm now going to pass it back to our moderator to begin the Q&A session.

[Operator:]

[Operator Instructions] We'll first go with Justin Clare from ROTH Capital Partners. Please go ahead.

[Justin Clare:]

Hi, everyone. Thanks for taking my questions.

[Phil Horlock:]

Hi, Justin.

[Justin Clare:]

So first off, I guess unit sales for Q1 were down 9% year-over-year. I was wondering if you could just give us a sense for how much of that decline was due to the extended shutdown that you took to ramp up the paint facility versus potentially a lower level of orders for that quarter or you being maybe more selective with customers?

[Phil Horlock:]

It was entirely due to the paint shop. We took all the orders in, we just timed them out. So I'd expect -- it's fair to say, you probably see those balancing back in the second quarter. So it's always the tension. We're building 50 to 60 buses a day. So you can imagine, so when you ramp it up slowly, you don't build 40 to 60 from the start point, you're building 15 then 20 then 30. So this is a unit, Justin, into the second quarter.

[Justin Clare:]

Okay, great. That's helpful. And then gross margins and the adjusted EBITDA margin both improved year-over-year despite the lower volumes that you saw. So as volumes ramp up through the year here, can we anticipate margins moving higher through the end of the year?

[Phil Horlock:]

Well, I think -- yeah, I think if you think -- if you do the math on our guidance, you've seen, yeah, we certainly do. I mean, as we see much more volume coming through and we hold the pricing we put in place and we keep the alternative mix. Also, the fuel mix going where we need to be. We do see improving margins throughout the year as both the gross margin and EBITDA.

[Justin Clare:]

Okay. And then in terms of inventory, you talked about stockpiling engines, can you talk about what type of engines were in a shortage and what the cause was? And then has the shortage been resolved at this point? Or is this an issue that's ongoing?

[Phil Horlock:]

Yeah. I wouldn't call it is really a shortage of engines that we were protecting for. This was just making sure we're ready for the second quarter stuff. And then we mentioned -- Phil mentioned earlier about the -- we started back in fiscal 2019 January the first week was a shutdown, we sell a holiday week actually. In fiscal 2020, January was a production week. So we brought some engines in earlier and we contained it, but there's no shortage of venues as such will just be imprudent.

[Justin Clare:]

Okay. So then I guess related to that, I'm guessing that you didn't have to pay a higher price, like prices have not gone up for engines as a result of any shortage. So we shouldn't expect any margin impact there. Is that the right way to think of it?

[Phil Horlock:]

That's correct way. Yes, there's no margin impact on that no.

[Justin Clare:]

Okay. Great. I’ll pass it on.

[Phil Horlock:]

Thanks, Justin.

[Operator:]

We'll next go with Eric Stine from Craig-Hallum. Please go ahead.

[Eric Stine:]

Hi, everyone.

[Phil Horlock:]

Hi, Eric.

[Eric Stine:]

Hey. As I always kind of focus on I'm just -- would love to chat a little bit about the 111 new old fuel customers added? Just curious how that breaks down between existing Blue Bird customers who are going that direction for the first time? And I guess conquest customers as you call them. And then maybe if you could just talk about kind of the competitive environment given you've got a big lead and just one or some of the other players whether it be different technologies, product launches what are you seeing from them?

[Phil Horlock:]

Well, first of all, your first question, yeah, it's a very good quarter actually very good. Yesterday, a 111 new customers coming in, and I think typically over the time, we've been even about 50-50 between conquest customers and these people are new, not only new to our alternative fuels but new to the Blue Bird brand. And when we look at new to the Blue Bird brand, we talked about in the last five years, they've come to us.

[Eric Stine:]

Okay.

[Phil Horlock:]

Specific about used previously obviously. But let me talk about alternative fuels, we talk about specifically that brand you to anything with just propane or electric or CNG. What's interesting for us? Actually, the way we can that too is if a guy bought gasoline before and now let me try some propane. We don’t actually count that as a new customer. He's already in the family.So I think we do a very conservative view of this when we look at it. But we love getting people into alternative fuels, because we find the loyalty of that customer base is very loyal because they love the product and there's nowhere else you can buy from. You can't buy that powertrain, the propane, the gasoline at the CNG from anyone the blue bird. In fact you can't drive it by our electric drivetrain which is powered by a Cummins product – Cummin drivetrain from anyone else, but Blue Bird. So we like being there for lifting that position. It's good for us.

[Eric Stine:]

Yes. That's a good segue to electric, I mean, obviously another strong quarter. That was one of the big drivers of ASP, the increase there. I mean it seems like in the past this has been more of a niche product. It's been more based on incentives in key markets. I mean do you feel like it is kind of moving beyond that? I mean I know it's a slow process, but moving beyond that and is becoming more of a mainstream outside of those specific examples?

[Phil Horlock:]

Yes. Well let's put it this way. We're still in a situation where unless there is significant rents available customers can unfold to buying electric part of school bus. It's anywhere from 3 to 4 times the price of a traditional robust in engine type of product, just like the past.So -- but what you are seeing is, a lot of states saying let me try and I'm going to put some funds to all of this. Let me try -- but they know the school districts will be still out of pocket. And I don't want to know that battery technology is going to improve. They're going to come down in France. You see all those updates are out there. A lot of intrigue around, vehicle to greater where it's going and fast charge and all these things.So I think what I'm telling you is that, it's not -- I would say, it's mainstream although probably in California because they're so keen of zero emission in California. They put a lot of grants behind this. But they're unique. They always have been in this space. That fee emissions for them is mainstream.But I would say that there's an incredible growing interest and fascination for trying this really, across the country. And what we see like I said before, funds are available, the VW funds in many cases -- in most cases I would say, there's always an element portion to let you buy a few electric buses. So I think yes, it's picking up momentum. And we just want to be there obviously and capitalize on these opportunities.

[Eric Stine:]

Yes. Okay. And then last one for me. Just on the parts business. I mean that was another strong quarter, also a big driver of the margin improvement maybe just a discussion on that. I know you had the launch of the X parts -- that offering. I believe it was last fiscal year. And so, maybe just outlook at parts business and how that's played out versus your original expectations?

[Phil Horlock:]

Yes. Well I think if you look at last year 7% growth was a nice growth in industrial, it was flat right? So that was good. And we grew and we continued in the first quarter, you takeout the extra sales we do our mentioned, it was still a strong 8% -- 8% to 9% for the growth level we got in that first quarter. So really nicely done.I think the ex-parts program we’re stocking that every month with new SKUs offering new parts in there. Our dealers are picking it up. We're nowhere near our company play victory yet. As a long runway your ahead, but it's got a lot of interest and we're definitely picking up new business because of it. I can tell you that.I think also the second point is that, we've been at this business with the Ford products since 2012. So what we see now is, more and more units are coming off warranty. And now we're into getting to the service model, replacing parts and weren't able to do that, unlike other powertrains out there in the market. We're allowed its full gives the right to be very competitive on all of those parts that they put into their engine and transmission. That's also a growth we're seeing.So I think is that in a way by more access to the market and we're going to bring our SKU base now than have out before. And we think that's pretty important to grow in this business. And so, yes I think it's going well. And I think its 10% growth in the first quarter. So this quarter of the year is pretty good coming off for school start.

[Eric Stine:]

Okay. Thanks a lot.

[Phil Horlock:]

You bet. Thanks Eric.

[Operator:]

We'll next go with [indiscernible] Research. Please go ahead.

[Unidentified Analyst:]

I'm somewhat new to the names. Just wanted to ask about -- I know you're doing a lot better in your margins. Would you say that you reach profitability in next coming year, could you give us an idea on that?

[Phil Horlock:]

So again reach profitability and do not want to give what you saying, I missed it out. Come back a little bit.

[Unidentified Analyst:]

Okay. It seems like things are improving. So, could you give an idea about what -- maybe about what quarter you could reach profitability?

[Phil Horlock:]

Well, I think look we tend not to give -- we don't give guidance by quarter. We gave guidance for full year and we've certainly said that by the end of this year, we expect to be the run rate to get to our 10% plus margin objective. That's where we want to be.So, that's all really putting out there right now in that. We think it was a quarter of time see how we go and keep delivering quarter-by-quarter. And every margin so far we're up. So, this year in both gross margin EBITDA margin and we look to improve.

[Unidentified Analyst:]

Okay, great. One other thing I know you mentioned about tariffs. Do you see those improving in this coming year? And will it make a big difference?

[Phil Horlock:]

Well, when I last called the President, he wasn't willing to tell me where is pulling tariffs. I mean I think what's happened is we are not planning in our guidance what we given as tariffs coming off.So, if they do, obviously, that will be a big boost for us. I'd like to think that over the course of time we'll see tariffs coming down. But we have not -- our guidance of our objectives we're putting out there do not reflect that. So, I think he's going to wait and see what happens.It's also with bear in mind we will many of our suppliers when they look at repricing, they look at what's happened to them in the last anywhere from six to 12 months. So, for example, one our major supply is last year put on tariffs in the early -- I guess, at the start of the second quarter basically 2019 because they look back and what they would do what has happened to them and that's the way they look. They look at like the last several months, they put a surcharge on. So, that actually did two factors.In 2019, I think most people think the work we saw them late. But the bottom-line I think -- the bottom-line I think that we don't plan on reducing tariffs, but I think we like it which has opportunity I guess down the road.

[Unidentified Analyst:]

What sort of impact did the tariffs have on your earnings per share?

[Phil Horlock:]

Yes, I have to--

[Phil Tighe:]

We'll have to get back that. It wasn't major, but we certainly had an impact on earnings per share. And I guess you have to look at it over the year rather than a quarter because it will be some. Again, I mean I think Phil's exactly right. We don't planning on the tariff coming off, when it does come off, it will clearly be an improvement to margin.

[Unidentified Analyst:]

Okay, great. Well, thanks for taking my question.

[Phil Horlock:]

You bet. Thanks Chris.

[Operator:]

Thank you for your question. [Operator Instructions] We'll next go with Lewis Mosar [ph] from [Indiscernible] Investments.

[Unidentified Analyst:]

Yes. I was wondering about the announcement you made, I believe it was yesterday afternoon and once again early this morning about a shareholder that is selling 11 million shares. Can you talk about that?

[Phil Horlock:]

Yes. Paul, [Indiscernible] last comment.

[Paul Yousif:]

Hi Lewis, this is Paul Yousif. That three registration yesterday registered 11 million shares. We first registered those shares back in 2015 with surplus of those shares. Subsequent to that those were just sold under a private transaction to American Securities. We simply -- we registered those shares. They own those shares. There will be no proceeds to the company. Their registration will be good for three years.

[Unidentified Analyst:]

Okay. So, it's over a period of time.

[Phil Horlock:]

Yes, I always. That was a good housekeeping, right? Just re-registering the shares.

[Phil Tighe:]

That's right.

[Phil Horlock:]

That's all it is.

[Unidentified Analyst:]

Okay. Thank you.

[Phil Horlock:]

Thanks Lewis.

[Operator:]

Thank you for your question. [Operator Instructions]

[Phil Tighe:]

While people are waiting this is Phil Tighe. I need to make one clarification. I believe in my opening address I referred to filing of the 10-K tomorrow. It's actually 10-Q. So, I don't want anybody to be confused with my mistake. It's a 10-Q that will be filed tomorrow. Thank you.

[Operator:]

This concludes today's question-and-answer session. I'd like to give back the floor back to the moderators. Thank you.

[Phil Horlock:]

Okay. Thank you, Nadia. Thanks to all of you joining on our call today. We appreciate the continued interest in Blue Bird. And as you can see by our first quarter results and our full year outlook, we are focused on total profit growth and margin growth and we intend to deliver on our commitments. And I believe we are well-positioned for growth today and in the future.So, please don't hesitate to contact 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.

[Operator:]

This concludes today's call. Thank you all for your participation. You may now go ahead and disconnect.