Greetings, and welcome to the Blue Bird Corporation Second Quarter Fiscal Year 2016 Earnings Conference Call and webcast. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Merten. Thank you, you may begin.

Thank you, Darren. Welcome to Blue Bird's Fiscal Second Quarter 2016 Earnings Conference Call. The audio for our call is webcast live on blue-bird.com under the Investor Relations tab. You can access the supporting slides on our website by clicking on the presentations box on the Investor Relations landing page of our website. Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from: Blue Bird's President and Chief Executive Officer, Phil Horlock; and Chief Financial Officer, Phil Tighe. Then we will take some questions. So let's get started. Phil?

Well, thanks, Jeff. Good afternoon, and thank you, all, joining us today for our second quarter earnings call. We welcome this opportunity to take you through our latest quarter results. But first, I'd like to start by giving a sense of the winning culture we are building at Blue Bird, and importantly, what we stand for at Blue Bird. So let's turn to Slide 4. We start with our experienced school bus team, where our employees have an average of 14 years of employment with us. In fact, when you exclude the new employees we've hired over the last 3 years, our average tenure is almost 20 years. That's best in industry experience in making school buses. We constantly challenge ourselves to drive the business forward and seize opportunities to improve and win in the market, while demanding innovation throughout all activities to provide Blue Bird with competitive advantages that customers want and they value. And we reward these behaviors through our management compensation process. The fact that we have the broadest array of products with many features that are exclusive to us in the industry and have been the fastest growing school bus company over the past few years are outcomes are the winning culture we are building. What we stand for is straightforward: to design, build, sell and service the world's finest school bus. Unique among the school -- the major school bus OEMs, we're exclusively focused on the school bus business, from our purpose-built chassis and body designs and right through our dealer network. This focus resonates with our customers, where in a recent blind survey that we commissioned, Transportation Direct has ranked Blue Bird #1 in our 4 priorities: safety, quality, durability and serviceability. We are proud of that fact, and we'll continue to have drive…

Thank you, Phil. And good afternoon, everyone. It's my pleasure to present to you the fiscal year's 2016 second quarter results for Blue Bird Corporation. Please remember that our fiscal year for Blue Bird Corporation is a 52-53 week period, and the closing date for each quarter is the Saturday closest to the last calendar day of each quarter. The second quarter material that we are discussing today is based on a close of April 4, 2015 for the 2015 fiscal year and April 2, 2016 for the fiscal year 2016 period. If we can go to Slide #10. We added this slide to the deck to try and show you some of what's occurring on a quarter-by-quarter basis. It's a pretty simple graphic and shows you the ramp up in unit volume revenues, EBITDA and net income between the first quarter and the second quarter. As you can see, all of these 4 majors are substantially positive. Our unit volume up by about 51%, revenue up by about 46%, adjusted EBITDA was up by over 90% and net income of $1.4 million compared to a loss of $2.3 million in the first quarter. So this is further evidence of the impact of seasonality in our business. It's also evidence of the momentum going from first into second, and that momentum will grow as we move into the third and fourth quarters, which as we've explained previously, are the quarters when we generally make the majority of the money in Blue Bird. Moving to Slide 11. This slide looks at the second quarter results versus the prior year. I -- we believe the results are very encouraging. Phil Horlock has mentioned some of these, so I won't spend a lot of time repeating the data, but I'll point out a…

Okay. Thanks, Phil. So what I want to do now is focus on the balance of the year and our full year guidance. So let's turn to Slide 16. The new bus registration data provided by R. L. Polk, which you've seen before in this chart, illustrates seasonality of the school bus business, and the chart on the right fully shows that. As I discussed in prior earnings calls, this seasonality is driven by the buying pattern of school districts. And traditionally, they emphasize delivery and preparation of new buses for the start of the new school year and by release of municipal budgets as well to fund them. Usually this happens in the May through July period. Obviously, it's a much higher demand in the second half of our fiscal year of April through September, causing about 2/3 of our annual vehicle registrations to occur in the second half. This is what we've seen year after year in our industry. Now as I mentioned earlier, we've taken steps to add capacity in the second half of the year to ensure that we can better accommodate the delivery needs of our customers, and we are well positioned to handle the anticipated surge in orders and to meet school start. From a sales standpoint at Blue Bird, we are maintaining our forecast through this sales projection of between 10,800 to 11,000 buses for the full year, and with first half sales of 3,540 buses already behind us, we do closely monitor seasonality of industry registrations. You can see that when you just calculate about 33% of our volume was booked in the first half of the year. So let's now take a look at our full year guidance and turn to Slide 17. Our second quarter financial results were in line…

[Operator Instructions] Our first question comes from Eric Stine with Craig-Hallum.

I was hoping to start with propane. I believe -- I just wanted to confirm, but did you say that 40% of the mix in the quarter was to new customers? I guess, confirm that first.

Yes, 40% of our sales went to new customers in the quarter, yes.

Okay. And then, maybe could you just focus on repeat customers? Just curious what you're seeing there. I mean, when you look at those customers, do you feel that it is now part of regular buying patterns of those customers, where they go propane and they're very hesitant to do anything with diesel? Or do you still feel like it's more of people dipping their toe in the water and testing a little bit more here and there, but that they have yet to really go full out on propane?

Well, I think that existing customers, Eric, we're definitely seeing folks very loyal to propane. I mentioned that in, I think, in my presentation that it's the highest loyalty product we have. It's substantially higher than -- loyalty than diesel. What I mean by that is, once a customer tries propane, invariably, they want to stick with it, and that's a very high percentage. So we've seen a lot of the higher volume business coming from new -- from our existing customer base. But we're also seeing in all the, the less than 10 units sort of levels of volume being acquired by new customers, and we like that, smaller volume. But certainly, we're seeing a very -- it's a very sticky business the way we look at it, very loyal customers for propane. It's been great for us.

When you -- maybe just turning to gasoline. When you look at gasoline, and I know that your propane launch goes back, what's, it's been 8 years, something like that.

Yes, yes.

I mean, are there any similarities that you see that maybe guide you because, I've heard the same thing in terms of the demand for the gasoline offerings coming here in fourth quarter. Any lessons you've learned or expectations you have for gasoline, given what you learned with propane?

Yes, I think, we've learned you have to go out and educate your customer base on what's it all about. Explain why we're doing it, what the advantages are, very clearly. I mean in this case, the tremendous gasoline advantage, it'll be the lowest-priced bus that we offer. It's simpler, it's a simpler product, simple to maintain. I think I would say, compared to obviously with propane, I mean, I wish everyone who operates a gasoline vehicle has had them in their own homes, so they're used to gasoline. It's not a difficult sell. It's easy to cool. When you take a long field trip with those school buses, I can easily fill up with gasoline, it's no issue. So, I think, it's certainly, what we've seen is, people get it very quickly. I also think, though, I've said, because we've seen the -- the fact that we have so much success with propane using the Ford engine and the Ford transmission, and when we point out the gasoline engine uses the same engine, the same transmission, the same partnership, the same support, it's a great product for us and an easy sell to many of our customers.

Got it. And is it fair to say that when you think of sales there, that gasoline likely takes away from diesel sales, but rather than propane, or is there...

Yes -- no, I do believe so. I mean, look, I've said all along that propane, in my opinion, is perfect in this industry, it is the lowest operating cost product in the business. We look over the life cycle, it's the most efficient. But gasoline is also very simple and very easy, and I think we are seeing a lot of folks who are -- who have had their own issues with diesel, regeneration of the diesel engine, the things -- the emissions hardware, the complexity of diesel engines, gasoline is a real simple product to get your arms around, and technicians are certainly looking forward to seeing that in the marketplace. So we feel pretty good about it.

Got it. Maybe just a last one for me. Just great you've got the visibility you do into the second half, and that the second shift’s coming on. Can you just remind us what you think that second shift means for your gross margins on the product side?

Well we haven't really publicly given that data yet. I mean, I certainly think from that standpoint of gross margin, I think, it's -- when we talk about gross margin, we mean about what comes out of the plant productions levels of gross margin. I think we look at this as being very comparable to what we saw whether operating on one shift, we pay a little bit of a shift premium, it's not that much, but at the same time, we will make a great use of our plant, and we're making great use of our labor force, our indirect labor, our plant facility, so I think we certainly see it as moving into a second shift that we're able to really get a nice, very effective gross margin contribution is the way to look at it. Obviously, we aren’t putting the same level of fixed costs in, that we got to support our first shift, so I think we feel a little bit good moving forward.

Our next question comes from Mike Baudendistel of Stifel.

Just wanted to ask you. You mentioned that ASP was up 2.6% in the quarter, and you attribute that to product mix changes. Wonder if you could tell us what it is on sort of a same equipment basis?

I'm sorry, Mike, I'm not -- can you -- could you help us out a little bit with that?

Well, I just meant if you sort of exclude the impact of the mix, I mean, on similar pieces of equipment. Is pricing flattish? Or is it going one way or the other?

Yes, I would say that the selling price was up a touch. But the way to think that through is, there was a bit of a different customer mix in the second quarter versus the first quarter. So -- and I think, we've had this discussion before. Prices tend to vary around the country, so we had a little bit of a stronger customer mix there.

Okay, and then I also wanted to ask you, I guess, the follow-up on the last analyst's question. I guess historically, have there been any special costs or productivity issues when you bring on a large number of new employees, which it sounds like you're doing here in the second -- third quarter?

Well, we've gone through a pretty -- I think, I mentioned, we took a fairly slow ramp up to this and what we neglected to mention was, we put the new employees through an extensive training program, off-line training, basically classroom, which was done with the cooperation of the State of Georgia, where we talk to them about quality, we talk to them about safety, we talk to them about good operating practice and then we introduced them into the line, while the rates were low, and they got the chance to figure it all out. So I think, in this case, the manufacturing team has done a really nice job of ensuring that the people who’d go on the line are going to produce quality buses. It can happen in these assembly environments that if you just throw people on the line without adequate training, you will get all sorts of bad habits.

Okay, good, that's good to hear. And then, last one for me is, I just wanted to see if you had any expectations for gross margins on the new products, whether it's a V8 engine or the gasoline engine, do you expect that to be sort of in line with your current diesel offering or any different?

Well, we haven't talked about it a lot. But we think as we can put a bus in the market that's a lower cost base, it should allow us to improve a bit.

Our next question comes from John Rolfe with Argand Capital.

So on the first quarter call, which was, whatever, 3 or 4 months ago, you guys had indicated that you expected first half volumes to be down about 4% to 6% year-over-year. And you ended up coming in with volumes for the first half down about 10%. You now have, I guess, production locked in for 3Q, up 20% year-to-year, which is very strong. So I guess there's 2 possible explanations that I can think of: one, the seasonality is even more pronounced than you were expecting several months ago; or alternately, possibly some production might have slipped from 2Q into 3Q. So was one of those responsible for sort of that shift? Or is it a combination of both? Or is there some sort of explanation that I'm not thinking of?

Yes, John, this is Phil Horlock. I mean, you're spot on about it being -- it's been a bit of both, really. But let's just put it in perspective here. The actually -- the actual change in the volume projection was 150 buses, and actually, we produced 150 buses. We've had a couple of customers who wanted to inspect those buses before they will release them. So while we built them in the second quarter, they'll be booked as a sale in the third. In fact, they've already been -- they're already in course of being inspected right now, and they'll be released. So it's just -- that's all I was going to say. It's just lumpiness of our business we have between quarters that we had to deal with.

And was -- not that this is even terribly relevant, but was that the technical accounting issue that was referenced in the delay of the 10-Q?

No, that was nothing -- that has nothing to do that. That was just simply some things just took a little extra time for us to get through, and that was no issue at all, to do with this, no.

Okay, okay. And so then, just to close the loop on the volumes, then if I plug in that 20% year-to-year volume growth in 3Q in order to get to the midpoint of your volume expectations for the full year, you only need to show sequential growth in 4Q on a volume basis of about 5%, which would actually be well below what you've booked for sequential growth in 4Q each of the last 2 years. So is there any additional color you can kind of give there? I mean, again, is it just this sort of lumpiness you're talking about year-to-year, and there's really nothing else material going on with the trends, with respect to seasonality?

Yes, I think that this time, it is. I mean, with diesel, it's –- we will look at it right now, and we look at what we've done to deliver in the third and the fourth quarter, and to meet that range we mentioned earlier. I think, yes, we'd like to get these buses delivered to -- earlier if possible, so schools can have time to get them all prepped and ready for school start. So it starts like -- you sort of get the job done for the year earlier, if you can. So you're all ready, by the end of August, you're nicely done, and you can worry about the next fiscal year. So, hey, if we can beat it, we'll beat it, but right now that's our projection, is around that 10,800 to 11,000 number.

Okay, great, and just one more question. It's been impressive, the increases in quoting activity. Could you address to what do you attribute these really significant increases in the quoting activity? And then secondly, any sort of qualitative color you could give on quoting activity conversion rates, I mean, have those been in line with what you would hope or what you've seen in the past? How has that been trending?

Yes, I think, I definitely think there's more, we think the industry is going to be up by about 4% to 5% this year, more mellow, like 4%. So I think there's definitely more money available out there for school districts. So -- and what we're seeing is a lot of school districts out there putting bids out, seeing what's available, encouraging all the manufacturers to bid for them. I would say also that we've got some new vehicles out there we've never had before, which is encouraging people to, hey, now let's take a look at that product. May have thought of having a diesel previously, I'm going to put a bid out, take a look at your new products out there. And we'll set probably, the last point is that we are -- we're aggressive in looking at every opportunity. We try to make sure we don't leave any stone unturned, and what we have to do is to find those bids, we go heavy on it. And we make sure we aggressively pursue every opportunity out there in every school district, in every state. Did you have a question there on conversion rate, but I didn't answer? I think he did. Okay, so he dropped off. Okay, any further questions?

Yes, our next question comes from Chris Moore with CJS Securities.

Just a couple of quick ones, most have been answered, but you talked about currently 64 buses a day, reaching 70. Is that a function of the specific buses that you're building? Can you do more diesel than you can propane? Or is there much of a difference there?

Between a basic, what I'll call a Type C diesel engine, a propane, yes, we can build that. That's a typically, I call it, typical spec type vehicle, 72 buses a day. Obviously, if we can have very complex bus, with lots of options in, a lot of content in, that skews our mix, it might be a little bit less than that. We actually plan on the number of hours. We can actually quote to building a bus every day. But 70, 70 is like the nominal level. But some days you might build 68, you might build 72, depending on the mix, but 70 is a good capacity we plan on.

Got you. Okay. With respect to the trajectory on the propane mix, obviously very big increase year-over-year. Longer term, do you think you can get this north of 30%, in the 35% range? Or any sense as to what can happen over the next year or 2?

Yes, I look at it right now, we're at 18%, as we said in the first half of the year. And we definitely think there’s potential and take it up well above 20%, and keep growing this business. So we are -- yes, I mean, we're not putting a number out there, and saying it's 30%, 35%, we're just going to keep being aggressive on it year after year, that's all I would say. But yes, so when you look at the trajectory we've been on the last few years, it's been great growth for us, and we really believe in this product, as do the customers. So I think we certainly, we see a lot of growth potential for this product for us.

If there are no further questions, I would like to turn the call back over to Mr. Phil Horlock for closing remarks.

Okay. I'll start by thanking you all for joining us on the call today. We appreciate your continued interest in Blue Bird. And I'd like you to know, I think you can see we're very focused on profitable growth, giving customers the products they want and they value, and we intend to deliver on our commitments. While we do strive to be shareholder friendly, and in this regard, Slide 21 does show our upcoming investor conferences. And we'll be more than happy to meet any of you there. Please don't hesitate to contact our Head of Investor Relations, Jeff Merten, should you have any follow-up questions. So thanks again, from all of us at Blue Bird, and wish you a good evening. Thanks.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.