Blue Bird Corporation
Q2 2020 Earnings Call Transcript

Published: 15 May 2020

[Operator:]

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

[Mark Benfield:]

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

[Phil Horlock:]

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

[Phil Tighe:]

Thank you, Phil and good afternoon to everyone. It's my pleasure to be able to share with you the financial details of Blue Bird's second quarter fiscal year 2020. The material that we are discussing today is a close of April 4 of 2020 and March 30, 2019 or fiscal year '19. Detailed material is available in our 10-Q, which was filed today. and the attention which was filed today. We encourage you to read the 10-Q and the important disclosures that it contains. You'll note that we have included two new items in our 10-Q filing.First is a discussion about the potential impact with COVID-19. This is included in both the MD&A and as a new risk factor. The major issues at Blue Bird and most other companies face is uncertainty on many levels, demand, availability of funds to buy products, safety of people and supply of components.As Phil, has mentioned the uncertainties have forced us to throw products system in 2020. We also included the subsequent event. And so -- he's already touched on this, Blue Bird, did go other way banks syndicate for an increase to our existing system revolver. We have recently successfully closed the Second Amendment and the revolver is now at about a $142 million, up by $42 million from the prior level.We see this as prudent planning to ensure adequate liquidity in most potential risks scenarios. The appendix attached to today's presentation deals with reconciliation between GAAP and non-GAAP measures mentioned in this review, as well as important disclaimers already mentioned by Mark. There were no significant accounting pronouncements adopted in the second quarter of fiscal year of '20. So now let's move to Slide 12, then take a look at a summary of the results for the second quarter.So this slide summarizes some important GAAP and non-GAAP measures for our second quarter we took the same period last year. Blue Bird, as Phil has discussed, remains very focused on the ongoing margin growth strategy, improving our alternative fuel mix, improving the revenue that we get for each bus, and transformational cost initiatives. [Technical difficulty] as you can see on the slide was $255.4 million, up $33.8 million or 21% versus last year.Prior bus volume of 323 units was worth in that $28 million or improving. [Indiscernible] strategy to hire business revenue per unit, 60 million was contributed by an incremental 7% revenue that each bus sold, which translates into about $6,100 per unit. The business revenue per unit increase was due to pricing actions that we took in July of FY '19 to offset the impact of inflation, as well as the higher mix of electric vehicles, alternative vehicles and the successful program implemented by our sales team to really try to improve the revenue we did on each [indiscernible]Gross margin, you can see was 9.5%, down about 290 basis points versus a year ago. The deterioration in margin is almost entirely the result of the unusual cost factors into second quarter, including the impact of COVID-19 and launch costs associated with rearrangements. Being mined in our assembly facility. We'll talk more about this in the future slides.Blue Bird reduced the net loss incurred in the second quarter of fiscal year 2020 to about six tenths. Improved EBITDA was largely offset by higher interest costs and higher depreciation, less than favorable use in tax. On an adjusted basis, net income was $2.8 million, down $1.1 million versus last year.Adjusted EBITDA of $12.7 million was up by $0.5 million compared with prior year and details will be discussed on the next slide. The EBITDA margin was 5% and the deterioration versus the prior year is more than explained by the unusual actions that we previously described.Diluted earnings per share was a loss of $0.02, and this was $0.01 better than prior year. Adjusted diluted earnings per share of $0.10 in the second quarter was $0.05 less than the prior year. Cash at the end of the second quarter was $34.1 million, which was up by $8.5 million compared to last year.At the end of the second quarter, we had $30 million drawn on our revolver versus $20 million last year. Importantly, this left us with an additional $63 million available and that was prior to the $42 million that we recently had approval from the banks. Debt was $208.6 million. This was down by $1.3 million, including additional amount that was drawn on revolver of $10 million.In conclusion, we made good progress on improving top line revenue and importantly, revenue per new bus sold. We made good progress on generating cash and meeting required cognate in this critical COVID-19 environment. We still have a way to go to get our cost of production moving in the right direction. And again, we'll talk about that on next slides.If we now move to Slide 13, this slide shows the key drivers in the change of adjusted EBITDA from second quarter of fiscal year '19 to second quarter of fiscal year 2020. Two key takeaway items, market factors. These are volume, product mix, pricing. and customer mix in part sales and improved by $10 million versus the prior year. Volume was up by about 323 units. This was worth $3.6 million. The balance of the improvement came from pricing, product and customer mix.We continue to benefit from the favorable mix that we’ve seen on prior quarters and the pricing that we continue to take. And this is clearly a very positive impact on our results. Transformational cost initiatives added about $3 million in the second quarter and we continue again to benefit from these aggressive cost reduction actions and there are more to come as the year progresses.Two key factors had a substantial impact on the second quarter, about $6 million. But are considered to be probably confined to fiscal year 2020. Launch costs are due to continuing inefficiencies until all of the plant and sourcing chooses are in place to enable the achievement of the full benefits from our new [indiscernible] and other plant rearrangement activities.We expect these changes to be largely completed during the second half of fiscal year 2020. COVID-19 precautions caused us to close the point in Fort Valley during the last week of March and for the first two weeks of April. Costs incurred included cost to continuously sanitize the plant's, protective gear for workers, equipment to monitor worker temperatures as they enter the point, expenses to support our employees during shutdown and a loss of overhead absorption.In addition, our JV plant in Canada was also close to almost the whole of March and by the way, was close to all of April as well and this contributes to the loss that we see in the second quarter. Efficiencies and other costs were unfavorable in fiscal year '20 and that also was worth about $6 million. This included higher health care costs, a cleanup of obsolete and scrap material as we had moved all of our inventory from the Fort Valley facility to a central warehouse in [indiscernible]. The team really did a deep dive on to obsolete scrap material and we have written that off. So I think that’s largely behind us. And then higher over time and other labor costs.Importantly, we've experienced improved efficiency since the plant started operating again on April 20. And our team is working on plants that will improve the manufacturing cost through the balance of the year. We continue to work on improving both the per unit revenue and cost structure at Blue Bird as key enablers for achieving our long-term profit objectives. The results in the second quarter are encouraging, despite the impact of the ongoing [indiscernible] () COVID-19.Bus revenue per unit, as we said, was up by $6,100 a unit or 17.1%. Transformational initiatives continue to result in cost reductions and on a year-to-date basis our team's improved cost by $5 million. These activities will continue with the launch of new actions in the second half. And finally, manufacturing efficiencies since the plant reopened on April 20 are running at or above 90% compared to the mid 80s in the prior weeks in the second quarter.Let's move to Slide 14 and turn our attention to free cash flow. Generation of cash and maintaining adequate liquidity is critical at any time in business, as you all know. But it's even more so during an unusual time, such as the present pandemic. Fiscal year 2020 second quarter adjusted free cash flow was $38.2 million as compared to $13.5 million for the same period last year. This was a significant improvement, as you can see.Free cash flow also was $32.8 million, which was $23.3 million better than the prior year. The favorable results in free cash flow were largely from normalization of trade working capital. Our trade working capital is very seasonal and fluctuates with volume. As you know, in the first quarter it's very low and start to build in the second quarter. We typically see a cash drain in the first quarter due to lower volumes and December holiday shut down. As operations resumed to a normal level in the second quarter and [indiscernible] increase, we see our traditional negative working capital model, providing us with incremental free cash flow.For those who are interested, you can see on our balance sheet that accounts payable was $75 million in the first quarter and reached to a $116 million in the second quarter. This included no changes in supplier terms and conditions. And all suppliers were paid on a timely basis. It is truly a reflection of the increase in activity.We reduced our cash outflows of capital spending year-over-year by $7 million and taxes were improved were $2 million. During the disruption caused by COVID-19, we have strengthened our focus on cash and cash flow. Three items. One, we assigned one of our senior VPs to take charge of the cash conservation team covering all aspects of our business. This was an important step. And the team is presently charged with delivering about $40 million of identified cash improvement items in the second half. Number two, we have adopted a 13-week cash forecasting process that forecast cash sources and uses by week and allows a weekly analysis of cash movements versus forecast. And finally, number three, as we have discussed, we added $42 million to our existing revolver of $100 million.Last slide addresses including debt leverage and liquidity on Slide 15. Liquidity was at $97.2 million at the end of second quarter. After giving effect to the May 7th amendment to the credit facility, which increased our revolver by $41.9 million, our pro forma liquidity would have been $139.1 million. We believe that we are well positioned in terms of liquidity to weather further disruptions from the coronavirus issue.We took a 3-week shut down in -- in the last week of March and first two weeks of April, which caused the majority of our cash inflows. During that period, we continued payments to our suppliers, which amounted to a weekly announcement of $15 million to $20 million.Our bus assembly operations restarted on April 20. And we are now seeing a normalized level of cash receipts. So the combination of the reopening in production and having an order backlog that is now soon through early July, provides a steady and predictable revenue stream. Increasing our revolver and further pushing to liquidity and significant cash conservation actions, it's to 640 million being pursued and has already been identified. We believe the combination of these three factors provides us with a strong outlook for liquidity in the balance of the year.And NAV is asked to meet all of our objections. Importantly, our revenue ratio for the second quarter stood at 2.4

[Phil Horlock:]

Thanks, Phil. So let's now cover the fiscal 2020 full-year outlook. Turn to Slide 17. As the headline says, we are accompanying our ability to weather the storm well experiencing. But the economic and market outlook remains uncertain. This headline isn't unique to Blue Bird as we’ve seen many companies given the same message over the past several weeks. But we are confident in our ability because as the second quarter results show, Blue Bird's business fundamentals remain strong. As we continue to deliver on our profit growth strategy, as we have done so over the past two years.Turning to the market, it's worth noting that customer demand remains very high for new school buses. 25% of the U.S. and Canadian fleets of buses are 50 years of age or older. This represents more than a 150,000 buses that customers want to replace. So customer demand is very high. The limiting factor is funding availability. While property values and property taxes still continue to be the major funding mechanism for school buses, and are expected to remain strong in the near-term, the impact of lost state sales taxes and state income taxes could impact overall intestate funding for education, which includes school buses.The precise impact on potential federal government assistance are unclear. Although the recent [indiscernible] funding action provided $16 billion in late April to assist in education needs for K-12 public schools. However, if we're putting into context the size of school bus expenditures, this is the total annual cost of education for K-12 public schools. Out of that $2 billion a year, the annual capital outweigh the new school bus purchases typically represents less than 0.3% of the total capital and expense budget of $700 billion for education in the United States. I think it's important to recognize the small portion of education budget that is used to purchase school buses each year with property taxes being the major funding source. It remains to be seen, however, how states will allocate the funding going forward.Our immediate focus at Blue Bird is on protecting our employees safety so that we can ensure business continuity. In this regard, we have lowered our production rate in June, while meeting a slower incoming order rate we’ve been seeing since mid March when schools close and shelter-in-place mandates were set.We are now beginning to fill our fourth quarter production slots. We expect a significant increase in orders in the coming weeks of school transportation staff with terms of full time work and focus on their bus needs for school star. We are prepared to built an increase in four quarter demand. For the third quarter volume was down from last year because of the slowdown in orders over the past several weeks. We also expect strong volumes to the first quarter fiscal 2021 with the recent delayed orders for school star will spill over into the next fiscal year.Like many public companies have done, however, we are withdrawing guidance at this time. As I mentioned earlier, we expect to a better clarity on the outlook for the next four to six weeks as states and provinces open up and business resumes. While our latest state for the industry in fiscal 2020 is now between 30,000 to 31,000 buses. While 10% to 12% below our prior forecasts. It's worth noting that the school bus industry has averaged about 31,000 units a year over the past 30 years.I think this sums to put the new industry focus in the context is still a relatively strong business forecast even in these difficult times. In responding to the lower [indiscernible] forecast, I am announcing today that we have taken decision to pull forward our plan to move to a single shift production schedule from two shifts today and we will implement this action on June 1.We believe this to be a prudent move and will improve cost efficiencies going forward. This will require a vision to our operating pattern moving from four 10-hour production days per week on two shifts today to five, 10-hour days per week of one shift at straight time. Looking forward, we'll be investing in production capacity constraints in the first quarter of fiscal 2021 to ensure we can do the second half peak season demand next year with a sustained single shift production schedule. This is a great example of Blue Bird restructuring this business and responsibly difficult times are making us more competitive in the future.In conclusion, I just want to end with my comment that I made at the beginning of this call. Blue Bird is well-positioned to weather this unprecedented pandemic. We have ample liquidity. Our business fundamentals are strong. We will take whatever restructuring actions are necessary to get through this period and we will into grow and fly in the long run.That concludes our formal presentation. I will now pass it back to our moderator to begin the Q&A session.

[Operator:]

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

[Eric Stine:]

Hi, everyone. Thanks for taking the questions.

[Phil Horlock:]

Hi, Eric.

[Eric Stine:]

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

[Phil Horlock:]

Well, I think, Eric, that's why we talk about withdrawing guidance at this time. Truly, tough this to say. I think what the outlook is. This are just starting to reopen. States are reopening. Shelter-in-place are being lifted, we're going to see what the outlook is. The federal government, did they have an appetite to support the states? Because obviously states have lost significant amounts of sales taxes with -- over the last couple of months or so. State income tax have been obviously impacted, too. So I just -- we don't see how that plays out. I mentioned that there are relatively small piece of what the school budget is for a bus purchase. It only just to give a reference point there, because our major funding mechanism, 70% of school bus funding they stole from property taxes. We expect they'll stay high. Housing prices are still holding up, the collection of those bumps is critical for our bus business. So we're just going to see how these rides are. Obviously, we've taken out 10% to 12% this year from a full industry outlook. So that's the near-term look. We just got to see how the government reacts. and when budgets start to get released, the first sign of that will be in June time. Typically, that's when education budgets for schools are set and approved by school boards. And that then triggers the buying of buses late in the seat to support school schools. So we should start to see that in the next four weeks or so and get a replay of what the Prichard report. You're right now like everybody else -- I’m just else on just that. We just we can conjecture. We can try and do a forecast, but we have just limited information, I think, at this point. So if this thing is move so rapidly on this. I do. I hope I get that confidence. How do you feel confident into the balance of this year that we will. We'll see an increase in volume, an increase in the requirements coming through from June onwards to support school staff new to the bosses. I don’t think that will happen.

[Eric Stine:]

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

[Phil Tighe:]

Eric, this is Phil. The other Phil. So cash generation of true month. The traditional source, which is sales, which will be down as we get through at least the third quarter, and the fourth quarter, still a little hard to predict. As Phil said, we want to get a lot of input on that until we -- in terms of some of the school budget stock here, well, it's open

[Eric Stine:]

We did mention in the call that we’ve put a team in place to reduce a lot of our cash spending for the balance of the year. I've got a target of $40 million initially, and I've identified all of the items to get to that target. So we're very comfortable that they will succeed. And if need be, we will squeeze that a bit more. But I still say that we will we will have positive cash in the second half and we just can't predict exactly where.

[Eric Stine:]

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

[Phil Tighe:]

Yes. Okay Well, I think maybe like for me. [Indiscernible] I mean, well, yes, I'm always down. I think a combination of more volume. But we have been working on these cash preservation, cash conservation initiatives and cash generation, so I will call them generation, will [indiscernible] call then. We will call distribution cash flow positive this year. We don’t anticipate we are eaten into our base core business. We are -- we tend to be positive this year and we will see that unfold. But we have plans in place to do that. And that's a go.

[Phil Horlock:]

Okay. Got it. Last one for me. One of the unintended consequences is COVID. I think it's just more of a focus on the environmental side. Any thoughts about you, given your leadership position in alternative fuels, the ability to pick up share as

[Phil Tighe:]

Yes, we certainly always wanted to pick up share. Nothing when you look at the, fact that even in a bumpy last month of the year, in the last quarter we just had, we still pick [indiscernible]. We got a quite a bit of conquest business, which, frankly, is scheduled for us. Elements from the call is 65% market share for us in terms we feel it actually is up a little bit from last year and we're almost 80% on propane. So we always try to emphasize those products, which is great for the environment. It's great for the children who ride our buses. It's the right thing to do. And the fact we've grown yet again, a significant seven percentage points up in our mix in this last quarter, I think bode well for us. So, yes, we intend to keep trying to go forward and see if we can pick up share because what I call in school district business. That's our bread and butter business selling directly to our schools -- through our dealer channel, to the school district. So that's our goal, to keep pushing on that front.

[Eric Stine:]

Okay, thanks.

[Phil Tighe:]

Thanks, Eric.

[Operator:]

[Operator Instructions] Next we will hear from Craig Irwin with ROTH Capital Partners.

[Craig Irwin:]

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

[Phil Horlock:]

Well, let's take without give you specific, because we want to get to some specific on what we call our bookings and backlog and where we stand today. I think if you look at the decline we are showing in the industry projection. That's pretty much what we see right now in our bookings and backlog. And that's what's really happened in the last couple of months as well as pandemic has really taken hold. So that number of -- it was a 10% to 12%. It's probably about where we think we would we'd be looking to be down. And that's what we're seeing right now at that pace. In terms of where we are right now to filling our slots were worried to July. So we are not we don't know our volume in the third quarter. We know what we have to build there will fall through June and we're still in July right now. We've got August, September, and I'm three weeks in July. So to go that's where we are. When it comes to optimism and want to look at, this report was we talked to transportation directors. I mean, these are the guys who are out there every day trying to keep kids safe from the other guys who buy out buses. You don't get a guy to talk to their school boards about what their needs are. And these are dealer network as well as our seats on the ground out there.In terms of real hard data points, we look at property values. We correlate our business [indiscernible] is very closely with property taxes. As values homes still stay high. I mean, collapsed in the last couple of months. We remain optimistic about that being the major funding mechanism as I said before though, the bigger knowledge [indiscernible] state budgets. They're clearly our sales tax revenue, we lost that Income tax. We don’t quite know what the federal government's going to do to support that. What we found interesting was, last week of April, as I mentioned on in my comments earlier, the cast funding did allocate $16 billion to education. The public school, which is pretty powerful, pretty powerful dividend act. So quickly in this pandemic process. So I think looking at that, house prices, talking against countries, obviously wait to see as June unfolds and hearing what are school boards approving for their budgets for this year, for this coming year. That's the most important thing. Virtually all states finalize their budget through June and release funds in July, beginning of July. So that's hence the four to six weeks I talked about when things will become very clear for us.

[Craig Irwin:]

Great. Thank you for that. So the most important question on the minds of your largest shareholders and the institutions that look at your stock are the parallels back to the financial crisis. Seven, Eight, Nine. It took a few years, actually, a handful of years to us for us to actually scraping the bottom in overall school bus sales in the market. Is there anything that you would point to specifically that would have this be a shorter duration, the obvious onset of COVID and the pandemic and work from home for everybody has obviously been much more abrupt. But can you point to anything that would point to a more rapid bottoming process and potentially a much shorter process of us finding the bottom in the market than that handful of years from similar to last time?

[Phil Horlock:]

Yes, let me take that one. I’m sure Phil will have some comments on this too. But when the last crisis happened in 2008, it was driven really by the banking financial crisis. I mean, that's what I learned about credit default swaps and all sorts of things going on. We learned about, people I have a mortgage and I'm foreclosing. And that took a while to actually to bed it and house prices precipitously fell between 2008, and the trough for us was 2011. We lack significantly, because it took a good three years for house prices to hit the bottom. And that was a foreclosures increase and defaults on mortgages occurred. You had people defaulting on their car loans. I mean, also say we don't we aren't in that situation here. That because that is the major funding that the school buses. So once property taxes fell, we saw eventually over that three to precipitous drop from the 35000 units we sold in 2007 to about 24,000 units industry in 2011. And then we clawed our way out of that as housing prices recovered. The difference is here we don't see a precipitous drop in housing prices. We just don't see anyone talking about that, we researched it. We've talked to some of those experts to look at that thing. This is a different issue. This is a pandemic that shut business down significantly from the last two months. I look it that way. And we're all trying to get out of the states we reopen. I think the other factor is remains to be seen what the federal government does. I mean, the federal government reacted quickly with a stimulus package. In fact they supported education, quickly, got $16 billion injection from the CARES funding. I think shows their willingness there to support the economy aggressively. Probably more so than in the past. So I has what we. [indiscernible] quite a different situation that we're in right now than we were in 2008. I say one thing too, from our business standpoint, when we walked into 2008, the average age of a school bus in that fleet I talked about earlier, 600,000 buses in North America. It was about eight years of age. That’s about half the duration of a bus. Similar bus lasts about fifteen years. That's the useful life of total operating costs get too high. It was eight years. Right now it's eleven years. And as I mentioned for this, 250,000 buses still over 15 years of age. That's a lot of costs to run those, conservative issues on those buses. So I think that does bode well for what I would say a good argument when the school bus is set to say we've got to carve out money for school buses, going to get these old dirty buses off the road and replace them because that said it's the right thing to do in the -- with children a lot in those products and keeping our environment clean.Phil, you seem to answer that you just want to stay only. What's different between now and what we have back in the last downturn?

[Phil Tighe:]

Okay. Looks like there's got nothing else to say, okay?

[Craig Irwin:]

That’s all right. Question number new

[Phil Horlock:]

I think and you covered it thorough but there's a really big difference between the state funding from the central state coffers driven by sales tax and income tax and the property tax funding. And Phil mentioned, the property taxes is about 70 % of the funds for school buses. The reason it took so long to come back in the last one is that once property taxes bottomed, it took some years to get back to the prior levels. And quite frankly, we are a little ahead of the prior levels now. We think that with the state income and sales tax, that can come back pretty quickly as long as the states can get up and running. relatively shorter term that there's no doubt that it will probably be bless because there'll be a lot of businesses to get hurt. But the majority of it should get up and running much more quickly than the curve for the rebound on property taxes, which took, as you rightly pointed out, three or four years.

[Craig Irwin:]

Okay. Thank you for that. Thank you. So my last question I wanted ask is about the ability to flex spending. So you've obviously been really proactive in managing your expenses. And, issue and the SG&A number in the March quarter is obviously testimony to tightening the screws and doing what you need to do. Can you maybe talk specifically about whether or not you saw a waiver from the EPA for the environmental obligation you have to meet next year with a new engine package? One of the things that you've been investing in and whether or not you've made a decision yet about whether you would defer the investment in the next generation bus actually the lower cost to manufacture, of higher reliability design that you guys have been working around for the last number of quarters as you design the future.

[Phil Horlock:]

That's a very specific, competitive question to us. And then, given -- talking about our product plans and what we’re going to try. We try and stay clear at that. We announced things already. I will tell you this. We talked to the EPA regularly. We talked to CARB regularly, when we looked at our [indiscernible] Ford or ROUSH CleanTech. They’re obviously connected very closely. So, yes, we will do whatever it takes to ensure we meet all the requirements and with meet him on a basis that recognize the environment we operate in. That's all we want to say on that matter this time. I think it's a good comment you've asked. Unfortunately, I can't get into too much details for competitive reasons on that one.

[Craig Irwin:]

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

[Phil Horlock:]

Thanks very much. I appreciate that. Thank you.

[Operator:]

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

[Phil Horlock:]

Yes. Thank you, Millender, and thanks to all of you for joining us on the call today. We appreciate the continued interest in Blue Bird. As you can see by our second quarter results, we made significant progress on multiple fronts and we will work our way through this COVID-19 pandemic adapting and restructuring as needed and we will continue to thrive and grow profitably over the long-term. I have no doubts about that. We've got a great team who's focused.Before I drop off the call though, I want to take the opportunity to thank my colleague and friend for more than 25 years. He's on the call today, Phil Tighe. After eight years of CFO Blue Bird, Phil will be stepping down from his role at the end of May. It's been a real pleasure to bid on this [indiscernible] with Phil, taking Blue Bird from a privately held company to a public company in 2015.I'm also be obliged to say that Phil won't be leaving us, but we'll be staying on a consulting capacity, working with me and our leadership team on strategic issues and special topics. I want to thank Phil for his endless number of contributions during his time with Blue Bird. I want to wish him all the best.Many of you on the call got to know Phil well over the past few years and I'm sure you share my sentiment. Please feel free to give him a call and thank him for everything he's done for us. So as Phil moves, I'm pleased to recognize that Jeff Taylor will be coming in as the new CFO effective July 1st. Jeff has enjoyed many years as a public company CFO, most recently as CFO of Wabash, and actually was on our call today. Jeff will be a great asset to our company and I'm sure many of you will be meeting him over the coming months.So thanks, Phil, for your terrific service to Blue Bird and welcome, Jeff, to the school bus business. And thanks to all of you for joining the call today. We're well positioned for dealing with this pandemic that faces us and we look forward to continued profitable long-term growth. So please don't hesitate to contact our Head of Profitability & 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:]

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