Blue Bird Corporation (BLBD) Q2 2020 Earnings Call Transcript

Blue Bird Corporation (BLBD 0.01%)
Q2 2020 Earnings Call
May 14, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

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 would like to turn the conference over to Mr. Mark Benfield, executive director of profitability and investor relations.

Please go ahead, sir.

Mark Benfield -- Executive Director of Profitability and Investor Relations

The audio for our call is webcast on our website, blue-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 could cause actual results to materially be different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC.

Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird's president and CEO, Phil Horlock; and CFO, Phil Tighe. Then we will take some questions. So let's get started.

Phil?

Phil Horlock -- President and Chief Executive Officer

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'd 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 and we 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 margin growth strategy and an experienced team with a proven track record of delivering results and handling difficult times. COVID-19 has not changed 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, as not surprisingly, all this have slowed with 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 start. We have strong business fundamentals evidenced by our year-over-year profit growth into the past seven consecutive quarters, and we have taken austerity measures to preserve cash.

We increased our revolving credit facility as an insurance measure, and we've acted swiftly and decisively to protect our employees and to secure our supply chain so that we continue to build and deliver buses to our customers on time. In particular, I'd like to give 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 that have -- that are not of our own making and over which we have limited control. Despite these unprecedented challenges, I've been so proud of the positive attitude and outstanding morale of the Blue Bird team in ensuring we stay open for business and to 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 delivered 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, reflecting a combination of annual pricing and a richer mix of higher-priced alternative fuel-powered buses, which is 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 Fort Valley production facility is based. Despite the fact we have no confirmed COVID-19 cases among our employees at the -- additionally, since several of our suppliers have been forced to shut down their operations, we took a decision to suspend production for three weeks, commencing in the last week of March. Operation employees were furloughed, and we assisted them in applying for 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're able to restart full production on April 20th. We have instituted strict measures to control the risk of employee infection in the plan, 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 bank revolving 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 our production slots through June and are now working on filling fourth-quarter slots covering July through September. Turning to the industry outlook and 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 with schools being closed and shelter-in-place mandates being widespread. Our expectation, supported by the views of our dealer network, is that the order rate will increase through June as states reopen and school transportation employees return to work and the demand for new buses for school start 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 star 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 start. 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 to have a clearer view of the outlook over the next four to six weeks as states reopen and school transportation teams return to work. Let's now turn to Slide 5 and 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 our seventh consecutive quarter where profits increased over the prior year.

Unit sales of 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%, representing 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 diluted earnings per share of $0.10 were down $1.1 million and $0.05, respectively, from a year ago. Operationally, there were three significant results in the second quarter that bolstered our profits, another cornerstone of our margin growth strategy. First, at 49% sales mix for alternative fuel-powered school buses, we beat last year's second-quarter record by seven 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 to 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 and are on 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 have since 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 at our second-quarter financial results on Slide 6.

I touched on many of these financial results earlier, and Phil Tighe will run through the details later and provide more texture behind 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. Through also 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 six months of the year. Turning now to Slide 7, let's take a closer look at our alternative-fuel bus sales performance.

Despite the adverse impact of COVID-19 and inherent slowdown of bus orders, the mix of bookings and backlog of alternative fuel-powered buses remained strong at 46%, equal to last year's record mix at this time of the year. Our market share remains a strong as ever in this segment and is presently running at about 65%, led by propanes with a share of almost 80% of that segment. Significantly, 216 customers have purchased or ordered 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 have enabled us to conquest new business from our competitors, bringing 99 new customers to the Blue Bird 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 comes close to our alternative fuel sales mix or 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, and we expect more to follow with all the customer interest we are seeing for the newest addition to our alternative-fuel lineup. In fact, this number will grow to more than 150 orders by the end of this week. This is a very dynamic order process that we operate in.

Looking forward. A 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 earmarking specific funds for school bus purchases. We are really pleased with the success we've had so far from these funds that have been issued. With the 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 through 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. And with less than 15% of school districts having purchased an alternative fuels-powered school bus today, 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. Schools were one of the first institutions to react to the pandemic, with the first closings starting on March 15.

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 full year. Not surprisingly, school closures have resulted in major disruption to our business, and we have seen a significant slowdown in school bus orders from mid-March to present.

Key to the slowdown in orders is that school transportation staff were confined to 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, agendas were focused on continuity of education and school reopening and 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 and quotes for new buses as school transportation staff focus on their school bus needs for school staff.

Through June, we anticipate a significant step-up in demand as new bus orders are placed for school start delivery, and this view is supported by feedback from school transportation directors. Following the slowdown in orders for more than two months, however, it is infeasible to deliver all bus needs for school starts. Consequently, the new school sales in fiscal 2020 is now forecast to be in the 30,000 to 31,000 units range, some 10 to 12% below prior forecast. We do anticipate additional sales in the first quarter of fiscal 2021, however, as bus deliveries will need to be made at the school start.

There is simply too much uncertainty today around the economic and social impacts of COVID-19, such that, as I mentioned earlier, we are withdrawing financial guidance for fiscal 2020 at this time. We should have a clearer picture in the next four to six weeks as business resumes. Let me now turn to Slide 9 to cover Blue Bird's response to the 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 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 plans to generate and preserve cash at Blue Bird. We have focused on all three of these elements. First, robust protocols are in place to ensure a safe workplace, including a mandatory temperature check of all individuals entering the plants each day, wearing of masks and social distancing in the plant environment. We are also working with the Georgia National Guard to have all Blue Bird on-site employees tested for COVID-19, and to date, more than half of our plant employees have been tested.

Two, we work as well with the suppliers to address critical inventory needs, necessitating expedited shipping as needed and shuffling of production sequencing to handle timing of parts and component deliveries and bringing onboard additional suppliers where practicable. And three, our own austerity measures to preserve cash include significant capital expenditure reductions and expense cuts on all nonessential items, furloughing production employees during shutdown while facilitating state and federal payments of their unemployment benefits and increasing liquidity through 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 how transformation initiatives to improve cost structure are helping us today and in the future. Let's turn to Slide 10. We've shown this slide over the last two earnings calls, and it illustrates the progression of our transformational initiatives of over the past two years and into fiscal 2020. Importantly, you can see this as a cumulative approach where additional processes and tools are being added as we strive to drive down total costs.

We began Phase 1 in fiscal 2018; and our initial focus was on reducing purchased material costs and services through a combination of initiatives, including new commercial agreements with suppliers and resourcing, with minimal product design change. In fact, you might recall that in fiscal 2018 we recorded savings of over $20 million from these actions. We continued to pursue this initiative in fiscal 2019 and began to add design changes to our process to reduce costs without compromising quality. In this second phase, we also focused heavily on the build and launch, testing and validation of our all-new robotic paint facility, which also necessitated plant rearrangements to optimize our process.

We achieved additional savings of $18 million in fiscal 2019, and these actions continued into fiscal 2020. In fiscal 2020 and beyond, Phase 3 now supplements the other processes by driving down the costs of production both in our fully operational robotic paint facility and from focused plant productivity initiatives. Our new automated paint facility provides the opportunity to reduce rework with increased first time rate capability, to reduce labor and material costs through robotic application of paint and to achieve service and warranty expense and to deliver higher rate time capacity. We are applying engineering resources to focus on design-for-manufacturing capability targeted at reducing production costs and improving quality and rework.

And we are confident of 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 over multiple years is key to delivering higher gross profit and EBITDA margins. We will continue to share the results with you in our quarterly earnings call.

I'll now turn it over to Phil Tighe, who will take you through the financials. And I'll be back later for the fiscal 2020 outlook and wrap up the formal presentation. Over to you, Phil.

Phil Tighe -- Chief Financial Officer

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 for fiscal year 2020. The material that we are discussing today is over close of April 4, 2020, and March 30, 2019, or FY '19.

Detailed material is available in our 10-Q which was filed today. We encourage you to read the 10-Q and the important disclosures that it contains. You will note that we have included two new items in our 10-Q filing. The first is a discussion about the potential impact of COVID-19.

This is included in both the MD&A and as a new risk factor. The major issues that 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 withdraw guidance for fiscal year 2020. We also included a subsequent event, and Phil has already touched on this.

Blue Bird did go to our bank syndicate for an increase to our existing revolver. We have recently successfully closed the second amendment, and the revolver is now at about 142 million, up by 42 million from the prior level. We see this as prudent planning to ensure adequate liquidity in most potential risks environments. The appendix attached to today's presentation deals with reconciliations 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 FY '20. And so now let's move to Slide 12 and take a look at a summary of key results for the second quarter. So this slide summarizes some important GAAP and non-GAAP measures for our second quarter and for the same period last year. Blue Bird, as Phil has discussed, remains very focused on our ongoing margin growth strategy, improving our alternative fuel mix, improving the revenue that we get for each bus and transformational cost initiatives.

Net revenue, as you can see on the slide, was 255.4 million, up 43.8 million or 28 -- or 21% versus last year. Higher bus volume of 323 units was worth about 28 million of improvement. And in line with our strategy for higher bus revenue per unit, 16 million was contributed by an incremental 7% revenue for each bus sold, which translates into about $6,100 per unit. The bus revenue per unit increase was due to pricing actions that we took in July of fiscal year '19 to offset the impact of inflation; as well as the higher mix of electric vehicles, alternative vehicles; and a successful program implemented by our sales team to really try to improve the revenue we get on each site.

Gross margin, you can see, was 9.5%, down about 280 basis points versus a year ago. The deterioration in margin is almost entirely the result of the unusual cost factors into the second quarter, including the impact of COVID-19 and launch costs associated with rearrangements being made in our assembly facility. We will talk more about this on 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, plus some favorable income 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've previously described.

Diluted earnings per share of -- was a loss of $0.02, and this was $0.01 better than the prior year. Adjusted diluted earnings per share of $0.10 in the second quarter was $0.05 less than in the prior year. Cash at the end of the second quarter was 34.1 million. This 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 the additional amount that was drawn on the 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 covenants in this critical COVID-19 environment, and we still have a way to go to get our costs of production moving in the right direction. And again we will talk about that on the 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. Some key takeaway items: Market factors, these are volume, product mix, pricing and customer mix within parts sales; and improved about 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 over 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 changes are in place to enable the achievement of the full benefits from our new paint shop 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 plant in Fort Valley during the last week of March and for the first two weeks of April.

Costs incurred included costs to continuously sanitize the plants, protective gear for workers and equipment to monitor worker temperatures as they enter the plant, expenses to support our employees during shutdown and a loss of overhead absorption. In addition, our JV plant in Canada was also closed for almost the whole of March and, by the way, was closed for all of April as well. And this contributed 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.

These included higher healthcare 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 making the team really did a deep dive onto obsolete and scrap material. And we have written that off, so I think that's largely behind us. And then higher overtime and other labor costs. Importantly, we've experienced improved efficiencies since the plant started operating again on April 20, and our team is working on plans that will improve manufacturing costs through the balance of the year.

We continue to work on improving both the per-unit revenue and cost structure of Blue Bird as key enablers for achieving our long-term profit objectives. The results in the second quarter are encouraging despite the impact of ongoing [Inaudible] COVID-19. Bus revenue per unit, as we said, was up by $6,100 a unit or 7.1%. Transformational initiatives continued to result in cost reductions, and on a year-to-date basis, our team has improved costs by $5 million.

And 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 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 anytime in business, as we all know, and 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, the first quarter is very low, and we'll start to build second quarter. We typically see a cash drain in the first quarter due to lower volumes and December holiday shutdown. As operations resume to a normal level in the second quarter and volumes increased, 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 were 75 million in first quarter and grew to 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 purely 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 by $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. No.2, we have adopted a 13-week cash forecasting process that forecasts cash sources and usage by week and allows a weekly analysis of cash movements versus forecasts. And finally, No.

3, as we have discussed, we added 42 million to our existing revolver of 100 million. Last slide addresses improving debt, leverage and liquidity, Slide 15. Liquidity was at 97.2 million at the end of the second quarter. After giving effect to the May 7 amendment to the credit facility, which increased our available revolver by 41.9 million, our pro forma liquidity would have been 139.1 million at quarter end.

We believe that we are well positioned in terms of liquidity to weather further disruptions from the coronavirus issue. We took a three-week shutdown 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 amount of 15 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 of production and having an order backlog that has now flown through early July provides a steady and predictable revenue stream. Increasing our revolver adds further cushion to liquidity, and significant cash conservation actions worth up to 40 million are being pursued and have already been identified. We believe the combination of these three factors provides us with a strong outlook for liquidity for the balance of the year and enables us to meet all of our obligations. Importantly, our net leverage ratio for the second-quarter stood at 2.4:1, which is well below the 3.75:1 threshold.

Debt at the end of the quarter was 208.6 million, which was down 1.3 million versus prior year despite an additional 10 million drawn on the revolver and a high amount of trade working capital. I will now turn the discussion back to Phil Horlock for some important comments about the outlook for the balance of fiscal year '20 and the actions we are taking. Over to you, Phil.

Phil Horlock -- President and Chief Executive Officer

Thanks, Phil. So let's now cover the fiscal 2020 full-year outlook. Turn to Slide 17. As the headline says, we are confident in our ability to weather the storm we're all experiencing, but the economic and market outlook remains uncertain.

This headline isn't unique to Blue Bird, as you've seen many companies giving the same message over the past several weeks, but we are confident in our ability because, as our second-quarter results showed, Blue Bird's business fundamentals remained strong. And we'll 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, as 25% of the U.S. and Canadian fleet of buses are 15 years of age or older.

This represents more than 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 should continue to be the major funding mechanism for school buses, and we expect them to remain strong in the near term, the impacts of lost state sales taxes and state income taxes could impact overall future state funding for education, which includes school buses. The precise impact and potential federal government assistance are unclear, although the recent CARES 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 versus the total annual costs of education for K-12 public schools, at about $2 billion a year, the annual capital outlay of 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 the education budget that is used to purchase school buses each year, with property taxes being a major funding source. It remains to be seen, however, how states will allocate their 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 through June while meeting this lower incoming order rate we have been seeing since mid-March, when schools closed and shelter-in-place mandates were set. We are now beginning to fill our fourth-quarter production slots. And we expect a significant increase in orders in the coming weeks as school transportation staff return to full-time work and focus on their bus needs for school star. We are preparing to meet an increase in fourth-quarter demand, but the third-quarter volume will be down from last year because of the slowdown in orders over the past several weeks.

We also expect strong volumes for the first quarter of fiscal 2021, with the recent delay in orders for school buses causing deliveries to 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 have better clarity on the outlook in the next four to six weeks as states and provinces open up and business resumes. While our latest outlook for the industry in fiscal 2020 is now between 30,000 to 31,000 buses or 10 to 12% below our prior forecast, 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 helps to put the new industry forecast into context. It is still a relatively strong industry forecast even in these difficult times. In responding to the lower industry forecast, I am announcing today that we have taken the decision to pull forward our plan to move to a single-shift production schedule from two shifts today, and we'll implement this action on June 1st. We believe this to be a prudent move and will improve cost and efficiencies going forward.

This will require moving our operating pattern, moving from four 10-hour production days per week on two shifts today to five 10-hour days per week on one shift at straight time. Looking forward, we will be addressing production capacity constraints in the first quarter of fiscal 2021 to ensure we can meet second half peak season demand next year with a sustained single-shift production schedule. This is a great example of Blue Bird restructuring its business in response to these difficult times and 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 continue to grow and thrive in the long run.

That concludes our formal presentation. I will now pass it back to our moderator to begin the Q&A session.

Questions & Answers:

Operator

[Operator instructions] And first, we'll hear from Eric Stine with Craig-Hallum

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

Hi, everyone. Thanks for taking the questions. 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 the municipality? Or how do you think about that?

Phil Horlock -- President and Chief Executive Officer

Well, I think, Eric, that's why we talk about withdrawing guidance at this time. It's really tough for us to say, I think, what the outlook is. Businesses are just starting to reopen. States are reopening.

Shelter in place are being lifted. And we're going to see what the outlook is. The federal government, do 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 taxes have been obviously impacted too, so I just -- we're going to see how that plays out.

I mentioned that a relatively small piece of what -- the school budget is for bus purchases and only just to give a reference point there. And because our major funding method is that 70% of school bus funding is still from property taxes, and we expect they'll stay high. Housing prices are still holding up. The collection of those funds is critical for our bus business, so -- but we're just going to see how this rides out.

Obviously, we've taken out 10 to 12% this year from a full industry outlook. So that's the near-term look. We're just going 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 as schools start. So we should start to see that in the next four weeks or so and get a clearer view of what -- the picture, but unfortunately, right now, like everybody else, I'm just, we're just -- we can conjecture. We can try and do a forecast, but we have just limited information, I think, at this point. We should -- these things move so rapidly around.

I do – I would say, we feel confident -- I do feel confident, into the balance of this year, that we'll see an increase in volume and increase in the requirements coming through from June onwards to support at school start the need for new buses. I don't think that will happen.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

Yes, OK. And maybe just turning to cash generation. Obviously, you're pulling guidance. In your previous guidance, you've been talking about for the last three quarters of the year generating, I think, $120 million plus.

I mean I know, with that withdrawn guidance, is a lot of uncertainty, but just any commentary on the cash generation expectation going forward? I mean clearly that's still a big objective and very likely for you. Is that fair to say?

Phil Tighe -- Chief Financial Officer

Eric, this is Phil, the other Phil. So cash generation from the traditional source, which is sales and -- which will be down as we go through at least the third quarter. The fourth quarter is still a little hard to predict, as Phil said. And we want to get a lot of input on that until we -- I mean until some of the school budgets start to sort themselves out.

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. They've got a target of 40 million initially. And they'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'll squeeze that a bit more, but I still see that we will have positive cash in the second half.

And we just can't predict exactly where advantage is.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

No, I get that, I mean, but it sounds -- I mean, yes, uncertainty, but I mean, from a high level, the typical pattern of 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 -- Chief Financial Officer

Yes.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

OK. Maybe last one for me -- yes.

Phil Horlock -- President and Chief Executive Officer

I just say, I think there are still -- I just think -- I wanted to say I think, as Phil mentioned, I mean, well, yes, well, our volume is down. I think the combination of lower volume, but we have been working on these cash preservation, cash conservation initiatives and cash generations, I will call them -- will cause us to be cash flow positive this year. We don't anticipate we're eating into our base core business. We are -- we intend to be positive this year.

And we'll see how that unfolds, but we have plans in place to do that and that's the goal.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

OK, got it. Last one for me. I -- one of the unintended consequences of COVID, I think, is just more of a focus on the environmental side. Any thoughts about, given your leadership position in alternative fuels, ability to pick up share as things "normalize," whatever that looks like going forward?

Phil Horlock -- President and Chief Executive Officer

Well, we certainly always like to try and pick up share. And I think, when you look at the fact that even in a bumpy last month of the year and the last quarter we just had, we still picked at least -- We've done quite a bit of conquest business, which frankly is share growth for us. I think I mentioned on the call that 65% market share for us in alternative fuels actually is up a little bit from last year. And we're almost 80% on propane.

So yes, we always try to emphasize those products. I think it's 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're growing it again a significant 7 percentage points up in our mix in this last quarter, I think, bodes well for us. So yes, we intend to keep trying to go forward. And obviously we can pick up share, particularly in what I call school district business. That's our bread-and-butter business, selling directly to our schools, through our dealer channel to the school districts.

So that's our goal, to keep pushing on that front.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

OK, thanks.

Phil Horlock -- President and Chief Executive Officer

Thanks Eric.

Operator

[Operator instructions] Next, we'll hear from Craig Irwin with Roth Capital Partners.

Craig Irwin -- ROTH Capital Partners -- Analyst

Good evening and thanks for taking my questions. So your prepared remarks seem to point to your confidence in a V-shape 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 are covered by orders in hand? And how does that compare to last year?

Phil Horlock -- President and Chief Executive Officer

Well, let's take -- let's -- without giving specifics because we don't want to give too much specific on what we call our bookings and backlog and where we stand today. But I think, if you look at the decline we're showing in the industry projection, that's pretty much what we see right now in our bookings and backlog, yes. And that's what's really happened in the last couple of months as pandemic has really taken hold. So that number of, I think we'll say, 10 to 12% is probably about where we think we would be looking to be down.

And that's what we're seeing right now, on that pace. Well, in terms of where we are right now to filling our slots, we're into July. So if -- we know our volume in the third quarter. We know what we have to build.

They're all filled through June, and we're filling July right now. So we've got August, September and about three weeks in July still to go. That's where we are. When it comes to optimism on what it'll look, I -- first and foremost, we talk to transportation directors.

I mean these are the guys who are out there every day trying to keep kids safe, and they're the guys who buy our buses. They're the guys who talk to their school boards about what their needs are. And these are our dealer network, as well as feet on the ground out there. In terms of real hard data points, we look at property values.

We correlate -- our business correlates very closely with property taxes. And as values of homes still stay high, no one's having collapsed in the last couple of months, we remain optimistic about that being the major funding mechanism. As I said before, though, the big unknown is we're not going to have the overall state budgets because we've clearly lost sales tax revenue. We've lost state income tax revenue.

We don't quite know what the federal government is going to do to support that. What we found interesting was, last week of April, as I mentioned on my -- in my comments earlier, the CARES funding did allocate $16 billion to education for public schools. These are a -- pretty powerful doing that so quickly in this pandemic process. So I think, looking at that, house prices, talking again to directors; and while we still wait to see as June unfolds and hearing what are school boards approving for their budgets for this coming year.

That's the most important thing. Virtually all states finalize their budgets through June and release funds in July, beginning of July. So that's, hence, the four to six weeks I talked about. And I think it will become very clear for us.

Craig Irwin -- ROTH Capital Partners -- Analyst

Great. 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 '07, 08, '09. It took a few years, actually a handful of years, to us -- for us to actually scrape in the bottom in overall school bus sales in the market. Is there anything that you would point to specifically that would have the speed of 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 -- President and Chief Executive Officer

Yes. Let me take that one. And I'm sure Phil will have some comments on this too, but when the last crisis happened in 2008, it was driven really by -- it was a banking financial crisis. I mean that's where I learned about credit default swaps and all sorts of things going on.

We learned about people grabbing mortgage and foreclosing. And that took a while to actually bed in. And house prices precipitously fell between 2008 -- and in fact, the trough for us was 2011. We lagged significantly because it took a good three years for house prices to hit the bottom, and that was as foreclosures increased and defaults on mortgages occurred.

You had people defaulting on their car loans, I mean, all sorts of things. We don't -- we aren't in that situation here. That -- because that is the major funding method for school buses, so once profit taxes fell, we saw eventually over that three years a precipitous drop from the 35,000 units we sold in 2007 to about a 24,000-unit 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. Is anyone talking about that? We've researched it. We've talked to some of those experts who look at that thing.

This is a different issue, right? This is a pandemic that shut business down significantly for the last two months. I look at it that way. And we're all trying to get out and get states reopen. I think the other factor is it remains to be seen what the federal government does.

I mean the federal government acted quickly with a stimulus package. In fact, they supported education quickly with that $16 billion injection from the CARES funding. I think it shows their willingness there to support the economy aggressively, probably more so than in the past. So I think that's what we -- I think the way I -- it's quite a different situation here we're in right now than we were in 2008.

I'll 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, was about eight years of age. That's about half the duration of a bus. A typical bus lasts for about 15 years.

That's the useful life of -- until operating costs get too high. It was eight years. Right now, it's 11 years. And as I mentioned before, there are still 150,000 buses still over 15 years of age.

That's a lot of costs to run those, a lot of concerns about the emissions on those buses. So I think that does bode well for what I would say a good argument, when the school budget is set, to say we've got to carve out money for school buses. We've got to get these old, dirty buses off the road and replace them and because that's -- it's the right thing to do in the -- with children riding those products and keeping our environment clean. Phil, have you anything to add that you just want to stay on the what's different between now and what we had back in the last downturn? OK, it looks like Phil has got nothing else to say.

OK --

Craig Irwin -- ROTH Capital Partners -- Analyst

That's all right --

Phil Tighe -- Chief Financial Officer

I was on mute. I forgot to push my button. I think -- and you've covered it, Phil, 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 tax was -- 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 in a relatively shorter term. There's no doubt that it will probably be less because there'll be a lot of businesses that could 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've rightly pointed out, three or four years --

Craig Irwin -- ROTH Capital Partners -- Analyst

OK. So my last question I wanted to ask is about the ability to flex spending. So you've obviously been really proactive in managing your expenses, 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've sought 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," higher-reliability design that you guys have been working around for the last number of quarters as you design for the future.

Phil Horlock -- President and Chief Executive Officer

That's a very specific competitive question to us. And given talking about our product plans and what we're going to try, we try and stay clear of that. We announce things when we're ready. I will tell you this: We talk to the EPA regularly.

We talk to CARB regularly. And when we look with our new products with our partners at Ford or ROUSH CleanTech -- they're obviously connected very closely. So yes, we do whatever it takes to ensure we meet all the requirements and we meet them on a basis that recognizes the environment we operate in. That's all we want to say on that matter at this time, but I think it's a good comment you've asked.

Unfortunately, I can't get into too much details, for the competitive reasons, on that one.

Craig Irwin -- ROTH Capital Partners -- Analyst

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 -- President and Chief Executive Officer

Thanks very much, appreciate that.

Unknown speaker

Thank you.

Operator

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

Phil Horlock -- President and Chief Executive Officer

Yes. Thank you, Belinda. And thanks to all of you for joining us on the call today. We appreciate your continuing 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 the this COVID-19 pandemic, adapting and restructuring as needed. And we will continue to strive and grow profitably over the long term. I have no doubt about that.

We've got a great team who is focused. Before I drop off the call, though, I want to take this opportunity to thank my colleague and friend for more than 25 years. He's on the call today, Phil Tighe. After eight years as CFO of Blue Bird, Phil will be stepping down from this role at the end of May.

It's been a real pleasure to have been on this whole journey with Phil taking Blue Bird from a privately held company to a public company in 2015. I'm also delighted to say that Phil won't be leaving us but will 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 at Blue Bird. I want to wish him all the best.

Many of you on the call have got to know Phil well over the past few years, and I'm sure you share my sentiment. And please feel free to give him a call and thank him for everything he's done for us. So as Phil moves on, I'm pleased to recognize that Jeff Taylor will be coming in as the new CFO, effective June 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 and investor relations, Mark Benfield, should you have any follow-up questions. Thanks again from all of us here at Blue Bird, and have a great evening.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Mark Benfield -- Executive Director of Profitability and Investor Relations

Phil Horlock -- President and Chief Executive Officer

Phil Tighe -- Chief Financial Officer

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

Craig Irwin -- ROTH Capital Partners -- Analyst

Unknown speaker

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