Greetings, and welcome to the Blue Bird Corporation Third 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. Mark Benfield, Manager of Investor Relations. Thank you, Mr. Benfield. You may begin.

Thank you, Manny. Welcome to Blue Bird's Fiscal Third 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. 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 morning, you will hear from Blue Bird's President and CEO, Phil Horlock; and CFO, Phil Tighe, then we will take some questions. So let's get started. Phil?

Well, thanks, Mark. Good morning, and thank you all for joining us today for our third quarter earnings call. We welcome this opportunity to take you through our latest quarter results. It's been a very busy third quarter for us and we've achieved significant progress. Just take a look at our key results on Slide 4. As the headline says, we had a really strong third quarter. We sold almost 3,800 buses, representing a substantial 26% increase over last year's third quarter, with net sales correspondingly up 23%. And year-to-date, our unit sales are up 6%. As we have mentioned in all of our earnings calls and conferences this year, the school bus industry is a seasonal business, with sales heavily weighted to the second half of the year. To put this into perspective, our third quarter unit sales were 77% higher than our second quarter. In support of the surge of third quarter bus demand, we added a second shift early this year, and we reached our production capacity of 70 units a day in June. Our propane bus demand continues to be very strong, with propane sales representing about 1/4 of our total third quarter unit sales. In fact, year-to-date, propane bus sales were up 70% from a year ago, and I'll be discussing our propane performance in more detail a little later. Continuing along the engine front, we opened customer ordering in the third quarter for our new small V8 diesel and gasoline-powered buses, both of which I should remind you are exclusive to us. With a high volume and continued focus on driving down costs, we achieved adjusted EBITDA of $32.5 million in the quarter, $9.1 million above last year and year-to-date, we are now $7 million ahead of last year's results. Our cash at the…

Thanks, Phil. Good morning, everyone. It's my pleasure to present to you the third quarter results for fiscal year 2016 for Blue Bird Corporation. The third quarter closing date for fiscal year 2016 was July 2, and comparisons in this presentation are made to the same period in 2015, which closed on July 4 of 2015. As you've heard from Phil Horlock and we'll see in the next few slides, we've experienced a very strong third quarter. Before we do go through these slides, there is an item that I need to cover with you. We have not filed our 10-Q at this time. It will likely be filed Monday or Tuesday next week. The holdup is that we're working through one last element of the component of the special compensation payment related to the phantom equity, which existed under Cerberus. That may result in an additional noncash expense in the third quarter. We estimate that the maximum pretax impact that we expense could be about $1.4 million. This would impact operating expenses, operating profit, PBT, and on an after tax basis, it would increase the net loss. Obviously, it would not impact any of the non-GAAP measures that we generally talk about, such as adjusted EBITDA or adjusted net income. If this potential adjustment is made in the 10-Q, we will issue a press announcement to update every one of the impact. We apologize for the potential confusion, and we'll try to limit it. So if we can go to the next slide and look at a summary of the third quarter results. Phil has already mentioned the absolute volume for the third quarter was 3,768 units. It's up 26% versus the prior year. Importantly, that result included a 92% increase in propane sales versus the prior year. An…

Okay. Thanks, Phil. So let's now focus on the balance of the year and our full year guidance. Please turn to Slide 15. As we look at the full year forecast, we -- for volume, we are lowering our outlook slightly from what we have previously advised by between 200 to 400 units, resulting in our latest full year sales outlook now in the range of 10,600 to 10,800 buses. This can be largely attributed to one single factor. We have been working with the California Air Resources Board, or CARB as they are known, on emission certification for our new gasoline engine. Based on our standard prior experience with CARB and with the EPA, we were confident of achieving certification in time to support vehicle shipments in July, well ahead of school start. However, CARB has expanded certification processes earlier this year, requiring submission and analysis of more emissions test data, such that we are now forecasting, as a result, earliest shipment of gasoline engines buses to customers in September, so a delay of about 3 months. We are still waiting on CARB and EPA certification approval and have complete confidence that we will be compliant based on our test results. I will just say this is simply a timing delay that we have to deal with. It is nothing more. Consequently, we have reduced our volume forecast of gasoline bus shipments in this fiscal year, primarily because of the risk of missing school start in some instances. Nevertheless, I should say, customer interest in our gasoline-powered school buses remains extremely high, as evidenced by firm orders in hand for a launch so late in the year. And we plan to deliver a significant number of gasoline-powered buses in September, assuming we have CARB and EPA certification in hand.…

[Operator Instructions] Our first question is from Eric Stine of Craig-Hallum.

Just wanted to start with propane. I know 24% of the mix in the quarter, just curious, your thoughts as you look forward, where you think that can go, I guess, specific to propane? But then as you also think about the gasoline bus and CNG, I mean, how do you think about just your overall alternative fuel offering as part of your overall mix?

Yes, a good question, Eric. I mean, obviously, we feel very good about giving customers a lot of range of choices. And I think in propane, we've sort of proven over the last several years that we are well and truly the leader of that -- in that position [ph] and we're are proud of that fact. I mentioned we should be up more than 25% this year, which is pretty serious when you look at we're in an industry going up 3% to 4%. That's a pretty impressive growth on one particular segment that we're dominant in. I think we look to continue seeing that grow. I mean, we'll set a plan next year. I'm not going to give you the number right now, but you can bet that we're looking to continue to grow that business. We barely -- there's still a lot of customers out there who haven't tried propane still. It's not like we've tapped the whole market out there. We're very aggressive on giving people demonstration units through our dealer network. All of our dealers have demonstration buses. They've bought into it. They believe in it. So I think propane has a great future and it's -- in my opinion, it provides the best total cost of ownership of any product in the market today and will continue to do so for many years. Gasoline? Gasoline's a great -- a really interesting product. I mean, the real values of gasoline are around the acquisition price for those markets, particularly, who are struggling with capital. They have to take a low-priced product. The gasoline's our entry vehicle. It's a lower -- it's our lowest priced product that we offer. Simple to maintain, great in cold weather, drives really well. I mean, and we had a Ride…

Got it. And then maybe just on the gasoline bus and the timing issue here. So you're expecting a few hundred, it sounds like, in September. I mean, is this something that you do expect to ship the remainder in the first quarter of next year? I mean, or is it something that's timed to the start of the school year and if that passes, then maybe those shipments aren't to the levels you thought. How should we think about maybe that the seasonality is not as steep as it typically is in the first quarter because of that gasoline bus?

Yes, it's a little bit of both, actually. Obviously, we've got some customers who will be coming back to us for the buses in October, November, December time frame, but obviously, you're right. Most folks wanted the bus at the school start. Actually why we took the numbers down because when you deliver in September, there are several states where you actually miss school start. But we're confident as the next fiscal year takes place, we'll get a lot of demo buses out, get them in the hands of customers, get them used to it, see how terrific this product is. So I think we'll see pretty nice volume in that all through next year, and then obviously, the peak volume again will be in the second half. So it's a little bit of both. It's not that every single unit we're going to see just flipping over, that we took our numbers down by until October, November but we will see a nice volume tick up in the first quarter with gas.

Got it. Okay. Maybe last one for me, just turning to the second shift. It's been great to have that in place here, back half of the year. Just maybe talk through some of the things that you need to deal with as you flex that down while still maintaining your capabilities. And then -- I mean, is transit or getting into international markets, are those things that you can take advantage of now that you have the second shift and again, kind of smooth out that seasonality?

Yes, dealing with seasonality has always been one of our issues that we've dealt with pretty successfully. I mean, we -- traditionally, we do bring on temporary labor as we ramp up our volume. We ramped up our volume this year from January onwards. When we moved it to the second shift, we brought on several hundred employees, which we do every year, temporary employees. And come late September, early October, we and those included [ph] employees go back to their other jobs that they do in the off-season. So that's worked very well for us. I mean, we've got a way of handling that. We handle it pretty well. I think you're right. I mean, we look for the commercial bus and the international has been -- they're on the same seasonality issues so it can be nice offsets to us. And -- but at the same time, too, we want to sell where we can. We like to sell more units in some of the off-season. And sometimes, you've got to go look a little harder on that to make it happen. And I do think the broader array of products you have, the more chance you have doing that, you get it in the hands of customers. In the October through February, let's say, time frame, I think we have a chance to really ship C Types a little bit, but we're able to handle this, like I said, through our temporary labor pack that we utilize.

The next question is from John Rolfe of Argand Capital.

A couple of questions for you. First, the share-based comp expense in the quarter was much higher than you've been running at, and I'm not talking about the special comp payment, just the typical share-based comp expense. What should we be sort of modeling for, for an ongoing reasonable rate there? I was surprised it was so high. I mean, the stock price over the course of the fiscal quarter was only up about 10%. So how should I be thinking about that?

So John, this is Phil Tighe. It's a good question. With the transfer of the Cerberus equity to American Securities, that triggered a vesting of all of the share-based comp that had been awarded to date. And that's what you see in the third quarter, is the vesting of the whole thing. It's really unclear for now. For your model, you can't assume anything going forward until there is some agreement formed with the Compensation Committee and the board on what our future plan might be. Maybe -- John, I don't know. You'll have to make your own decisions on what you assume, but right now, we don't have a plan going forward.

Okay. Okay. Okay. And then secondly, I guess the elephant in the room is obviously the outstanding offer from American Securities. And I know you guys can't or are not going to comment on that further than what you said in your press release yesterday. I guess, from a minority shareholder's perspective though, I guess the desire or the concern is that, as a minority shareholder, I and others can make the same or have the same information that enables us to assess what we think Blue Bird equity is worth, and that we can make that assessment the same way that American Securities is able to make that as a board member with access to your projections going forward. So I guess my question is, in that regard, look, I know that, typically, you don't provide guidance until your fourth fiscal quarter, but could you perhaps provide any sort of soft directional guidance as we look into fiscal 2017 for volumes or for top line growth or anything along those lines? So that we could sort of get some comfort with where we think the business is heading as we go into next year?

Yes. I appreciate your question, John. Unfortunately, where we are right now, we cannot provide that. We have -- especially with this process that's underway with our special committee that's been signed by the board to look at this American Securities offer. So -- and also, we haven't got the board's agreement to release anything on that. So at this time, unfortunately, we can't give you any information. But certainly, I recognize your concern and we can talk about it here. But at this time, we can't release any information on -- beyond what we've already done on guidance for this year.

Okay. Well, let me ask the question another way. As you've talked about sort of 3% to 4% industry growth. You guys are obviously more heavily levered towards the higher growth, propane piece of that. You've got some shipments on the gasoline-powered units moving into next year. I mean, is it fair to assume that we should see unit growth for next year that is significantly above what the industry is growing at? Is that a reasonable expectation?

Well, John, I mean, again, you're asking me significantly. I mean, what's significant? I don't know if we're ready to put a number on that. I would just tell you what I said before on the -- with the -- when Eric asked. We're looking to grow the propane mix. We've got a full year volume of gasoline that's going to be exciting for us. We have consistently said that we're in a nice position, we think, in the industry recovery cycle. I think it's maybe a 3% industry growth next year. At this point, probably something we'd be looking at. So I think if you look at our 3% industry growth, we're coming out with a full array of new products next year, full years' worth of them, and we have momentum, obviously. I think it's true to say, we expect and we would hope that we'd grow volume again next year. Yes, I think it's just like this year, we'd hope to grow it a little bit more than the industry, if that helps.

The next question is from Mike Baudendistel of Stifel.

Just wanted to ask you. A lot of the other companies we cover this quarter in truck manufacturing have had a favorable gross margin impact in the quarter from favorable material costs. I noticed yours is up, I think you said 70 basis points. Was a big part of that just favorable material costs?

Yes, Mike. This is Phil Tighe. We had favorable material costs in there and sort of a combination of things. Obviously, there's some commodity good news, but also, we have agreements over the majority of our suppliers with annual improvements in cost. And we track those pretty closely, and the suppliers have been performing well. So in addition, we continue to make design changes to our bus to reduce costs, and so we had some favorable design changes in the bus this year. And finally, the plant continues to find ways to use material better as they build the bus. And by that, I mean the sort of things like glues and paints and rivets and all that stuff, which adds up to a lot of money. And so by being very effective in improving the usage of material. So it really is a combination. Don't look at it as just economics, it's -- or just commodity prices. There's a lot of good hard work that's going on to take the cost of the bus down long term.

Okay, good. I also wanted to ask, on propane, you're getting a lot of good grow there. And could you just give us a sense of how much of that growth with the propane has been driven by the contractors, like student transportation or versus getting more traction from the school districts?

It's been heavily driven this year by school districts through -- the sales through our dealer channel. I mean, heavily weighted. In fact, yes, I mean, the significant growth you're seeing is in the school district business. School districts are really embracing this product. I mean, the first movers, no question, were the fleets. Particularly STI, as you mentioned, who've been a tremendous advocate for our propane product and a terrific partner of ours. And they believe in it. They love it, and they definitely helped to get the word out about it. But now we're seeing school districts really embracing this. The growth is really coming from the school district business.

And Mike, this is Phil Tighe again. As I've sort of mentioned and you -- I glossed over it a bit quickly. But in the third quarter, we had over 90 customers for propane buses, which is a lot for us. And the majority of those customers bought 10 units or less. So there were a couple of big buys but nothing significant. So what we see, as Phil said, is just school districts right across the country regularly buying propane buses now.

Our next question is from Siegfried Eggert of GeoInvesting.

My question relates to the open letter from the Spitfire management, capital management. Could you guys give us a reaction to this letter and what you feel about it?

Well, Siegfried, I've read it too and I have no comment to make. I mean, that's in the hands of the special committee. But they have it now and they're looking at it and a bunch of other things, too, yes.

Okay. Could you give me a little background on the thought process that led to the formation of the independent committee?

Well, that's a typical -- typically what a board does. I mean, we -- when a board receives an offer such as this, we look for an independent -- the independent members of our board, who -- obviously that means they're not affiliated with American Securities. We formed the 3-person board that we mentioned: Dan Hennessy, Gurminder Bedi, Alan Schumacher, all independents, and Dan is the Chairman of that special committee. And he's got the ability as the press release said yesterday, that committee has the ability to go out and review and assess the American Securities offer and also, obviously, they'll contemplate the Spitfire response and it's all part of the process.

Okay. My last relate to that matter too. When can we expect the further developments or news from your side in this matter?

Well, I can't, Siegfried. I mean, you saw the press release yesterday. I'm sure you saw it. Just -- the special committee just appointed their attorney and their investment banker who's going to work with them. So I mean, the process is just starting here. I think it's a little open ended. We don't have any date. There's no definitive date on this. It's a process the special committee will go through and I'm sure at the appropriate time, they'll want to announce publicly at some point where they are and what their position is.

Our next question is from Scott Blumenthal of Emerald Advisers.

Phil, whichever one wants to answer this, when did you realize that you were not going to get the CARB/EPA certification in time to ship buses this year? And what's the feedback that you've received from both of those regulatory agencies with regard to when to expect it?

Well, we are going to ship this year. I mean, first of all let me tell you [ph] we are -- we plan shipping this year because we're -- on the assumption, of course, that in the next month, let's say, we receive certification from CARB and EPA. I'd say, it's been over the last couple of months with the -- and by the way, just so you know that, this product is a product that's developed by ROUSH. ROUSH CleanTech is the sort of manufacturer of record for this engine. So they're the ones who deal all the time with CARB and EPA. So they're on the phone every day, where are we, answering the questions, dealing with them. And so along those last couple of months, we sort of continually revised our delivery dates, or the schedule. And where we are now is, being this'd be the earnings call, we're letting folks know that we've reassessed where we are. It caused to think -- it caused us to know that the volume commitment we thought we'd have, because we'd be able to have a little longer period at which to deliver bus for school start, has been reduced. But we will, as I said earlier, we expect, unless we don't get the CARB and EPA certification before the end of September, which we really don't expect. We expect to get it based on our deals with ROUSH CleanTech. We expect to deliver, as I said, several hundred units in the month of September.

We're talking about the gasoline engine, right?

Yes, the gasoline.

Okay. And ROUSH CleanTech is the manufacturer of record, I think, you said. Is that correct?

Yes.

Okay. So...

As they are on the propane bus.

Got it, got it. Since this is exclusive...

This is just on the engine, you understand? Just on the engine. It's not on the bus. They're shipping [ph] engine to us, yes.

Yes, absolutely. Okay. Is there any certification process that we might need to know about with regard to CNG at this point? Or is that a non-issue with that platform?

We believe it's a non-issue on our platform. And like I said, Scott, I just want to -- this is -- when I gave my presentation earlier I said it's a timing delay. There's no structural issue here that's going on here. It's purely kind of -- we are extremely confident of this product based on all of our results. It's just we're just dealing with the questions that CARB and EPA, as they should, are doing a very thorough job of evaluating this product.

[Operator Instructions] The next question is from Chris Moore of CJS Securities.

Just looking at Slide 10, the EBITDA walk. So maybe could you just go through again the negative $7.5 million on the customer mix?

Yes, sure. So a couple of things going on in there. We had quite a few -- there was a big bid in Canada, in the province of Ontario. And we won quite a few buses in there. The margins were pretty low. Two reasons they were low. One is that our competitors were bidding very aggressively to win that business because you like to get the big volume business. And secondly, of course, as we convert from U.S. dollars to Canadian dollars, it hurts a little bit in Canada these days. And so we had to pay attention to the fact that the Canadian dollar buys less, and that caused us to reduce the margins further in there. So the good news was we won a large piece of the Ontario business. The bad news was the margins weren't as great as we would have liked. We also have one business in a number of other states that, in past years, Blue Bird struggled with, but we are -- as we are more competitive now, we're really starting to make inroads in a lot of them -- a lot of the lower margin states. So we had quite an impressive mix of business in some of the states that we normally are pretty low share. And so that's good news for us, in that we're getting traction there. And so as I commented, I think, in the presentation, as we do get things like the gasoline bus and the V8 diesel out on the road, those buses are naturally at a lower price point with good margins, which should enable us to compete much more effectively in some of the more challenging markets and give us an opportunity, in fact, versus our competition. So that drove really the majority of the $7.5 million on a year-over-year basis. There was maybe about $1.5 million sitting in there, as I said, where we spent more money getting these new products out into the market to potential customers and dealers and training people on it. And as Phil suggested, we gave them rides and drives and all that sort of good stuff. So that program was pretty successful. We got a lot of very positive feedback from it, so I think that's a good investment. And there was a little bit of structural personnel cost in there, but not very much. So that's largely the $7.5 million, Chris.

Got you. Okay, terrific. American Securities, I know you can't opine on the outcome. Just in terms of the mechanics, I know that the kind of non-aligned shareholders are a important component here. The preferred shareholders, can they vote without converting?

To our knowledge, no. They do -- I'm taking legal advice here on the background, Chris. My understanding is they have to consent on the merger though. So I don't understand the ins and outs of that completely, way beyond me. But the preferreds do have a consent clause.

Okay. And then in terms of just the special committee. So at the end of the day, do they need to take the advice of the shareholders or they ultimately have the final decision on which way to go?

Just one second, Chris.

Chris, so according to learned counsel here, they can either reject or approve. Or they can -- yes, so they can reject, they can approve or they can recommend a different transaction. That covers the waterfront near as I can tell.

We have no further questions in queue at this time. I would like to turn the conference back over to management for closing remarks.

Okay. Thank you, Manny. And thanks to all of you for joining on our call today. This is Phil Horlock, by the way. We appreciate your interest in Blue Bird. I think you can see we are focused on profitable growth. We had a really strong, we believe, third quarter, and we do intend delivering our commitments. That's what we do at Blue Bird. I think we're well positioned to grow today and in the future. Please don't hesitate to contact our Head of Investor Relations, Mark Benfield, should you have any follow-up questions. So thanks, again, from all of us at Blue Bird and wish you a good day.

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