Phil Horlock - Chief Executive Officer Phil Tighe - Chief Financial Officer Mark Benfield - Head of Profitability and Investor Relations

Good afternoon, ladies and gentlemen, and welcome to Blue Bird Corporation Fiscal 2021 Third Quarter Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mark Benfield. You may begin.

Good afternoon, everyone. Welcome to Blue Bird's fiscal 2021 third quarter 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 for our website by clicking on the presentations box on our IR 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 afternoon, you will hear from Blue Bird's CEO, Phil Horlock; and CFO, Phil Tighe. Then we will take some questions. Let’s get started. Phil.

Thanks Mark. Well good afternoon everybody, and thanks for joining us today for our fiscal 2021 third quarter earnings call. Now before I jump into the actual financial results, I like to set the stage by giving you the themes you're going to hear about consistently on this call today, as they really define our business and where we're heading. So let's now turn to slide four. As you can see from this slide, we're making great progress and improving the business and growing margins. But our bottom line profits are being impacted by supply chain disruptions, which have caused delays in our bookings and we had to slow down production because of parts shortages. Now this shouldn't come as a surprise to anyone. As I said in the last quarter it’s our biggest headwind and throughout this quarter reporting period in these past few weeks, we've heard every automotive OEM and supplier mention exactly the same issues that we're dealing with; namely, semiconductor shortages, resin shortages, capacity issues in global shipping, lingering impacts from the storms in Texas early this year and labor shortage of many suppliers. The result of all these issues is that we have many key supplies placing their customers, including Blue Bird, on component allocation; impacting engines, transmissions, axels, brake systems, wire harnesses and more. So the volume impact of these headwinds resulted in us moving 550 units out of the third quarter to later in the year. And we have slowed down our production rate in the fourth quarter too in order to handle these parts shortages. We know these supply chain disruption are temporary and we're going to work through them. But I can tell you, we haven't lost a single unit sale because of supply chain disruptions. We just pushed the production…

Well, thank you, Phil and good afternoon everyone. It's my pleasure to share with you the financial highlights from Blue Birds third fiscal quarter of 2021. This quarter end is based on a closed date of July 3, 2021, whereas the prior year third quarter was based on July four 2020 close date. We will file the 10-Q today, August 12 after the market closes. Our 10-Q includes additional material and disclosures regarding our business and financial performance. We encourage you to read the 10-Q and the important disclose that it contains. The appendix attached in today's presentation includes reconciliations of differences between GAAP and non-GAAP measures mentioned on this call, as well as important disclaimers. Now let’s turn to slide nine, which is the summary of third quarter results. Phil has covered a lot about the volumes, so I won’t spend too much time on that. I will just point out that the backlog that we are carrying forward is 4,000 units, which is in very good shape for finishing out this year and more importantly, perhaps a strong start to fiscal year 2022, where we've already filled the first quarter and we are now scheduling units into the second quarter. Consolidated net revenue of $197 million, was $8 million or 4% year-over-year, better than the prior third quarter. This was primarily due to higher parts volume. Bus net revenue of $192 million was up about 1% versus last year, but favorable bus volume was largely offset by a year-over-year decline in bus revenue per unit from about 93,000 to about 90,000, which was largely the result of a significantly higher mix of most economically priced which is gasoline powered bus. The gasoline powered bus was up year-over-year in volume terms, about 80%. Alternative fuel vehicles as Phil mentioned…

Thanks, Phil. So let me now summarize the outlook that we see for the balance of this year and beyond. Let's go to slide 14. As we consistently stated on prior earnings calls, our emphasis on Blue Bird is on delivering superior operating performance to drive margin growth. After really tough first half of the fiscal year, the industry begins to recover, but now we have supply chain disruption to deal with. Now we can't change the external factors, but we can focus on improving every element of our business, so that we are well positioned as schools fully resume in classroom teaching and the industry fully recovers. That means executing our margin growth strategy by improving bus selling price, alternative powered bus mix and improving cost structure. As Phil and I discussed, along with many other industries we are seeing rise in commodity costs and supply chain disruption. As we have done for the past several years, we took pricing recently to cover those higher costs, 5% across all vehicle lines, and we may take another increase later this year if costs escalate further. As I mentioned earlier, an example of a structural change to drives superior operating performance was our move to a single shift production schedule. We know we build a bus more efficiently and with better quality when all of our team is looking together on the same single shift. That's great news for us as the industry and supply chain and recover. We have established electric vehicle leadership on growth as a top priority and we’re organizing the EV business as a focused, dedicated team within Blue Bird. We are working with a number of commercial vehicle customers on the opportunity to supply them an electric powered chassis. Now we're in early stages of discussion,…

[Operator Instructions]. Our first question comes from the line of Eric Stein with Craig-Hallum. Please proceed with your question.

Great! Thanks for taking the questions. It's Aaron Spychalla on for Eric.

Hey Aaron!

Hey Aaron!

Hi! Maybe first on the Levo JV, can you kind of give some more color on the type of education that the market kind of needs as this gets deployed and then just any thoughts on timing for deployment of that $750 million and then at a high level just talk about other types of financing structures that you think are kind of out there in the market as well?

Yeah, sure Aaron. This is Phil, Phil Horlock. Let me take a crack at that question. I think when you look at the specialist in education, right, I mean you have to – what we learned – I often talk about what we learned through propane, which is a premium priced product over diesel, you have to educate the value. So you know this start we're talking about, the fact that service costs are going to be so much lower than there any diesel engine. I mean, several thousand dollars a year lower on diesel engine. You have to talk about the fact that when we hook you up through Nuvve to the utility companies, you're going to be able to generate very good revenue, significant earnings potential. I mean it is significant, and all that helps to reduce – when you put into a lease price, you look at pricing for the price of a bus, the infrastructure of charging station, also against the – compared with a conventional combustion engine, the benefits of that lower service and the V-to-G opportunity. We can with that venture with Levo, we can put together a really attractive package on the lease cost. This is very comfortable actually, it’s get very close to what people are paying today to run their diesel engine units, and that's the premise. We worked a lot with Nuvve on this and with the guys of Stonepeak, Livo the joint venture to make that happen. What we're going to do is, the track we're going on now is rolling this out through our dealer network; educating our dealers to be able to teach customers about this, what it means. Because a big change will be, many of our school are used to a capital budget. They own…

Great! Thanks for the color. Maybe second on the EV capacity, can you just kind of talk a little bit about the next steps there and timing to get to that? And then just given the legislation and this financing package that you talked about, just what would trigger and what other steps would be needed to kind of expand that?

Yeah. I mean obviously when you look at our electric system right, we buy batteries, we're buying the motor, we're buying through companies, we buy the software system you like that wins [ph] a bit and we assemble that. So it's up to us to make sure that we have all that capacity in place through the likes of come-in’s through our electric, through our battery supplies and so on; that's what we worked through. Then we got our own capacity. We'll assemble all this in our plant and right now because volumes have been still relatively low, it's sort of an offline activity when we put all that kit together on a chassis and then we bring it on the production line and then we run it just like a normal bus. But it is an offline activity today. What would be doing in ’22 is that we are bringing up online, and that will give us much more capable capacity. So, we're looking at getting up to summit during this next fiscal year. We'll get to the point where our run rate of capacity in Blue Bird will be up to about 3,000 units which I’ve signaled previously, and beyond that, we each year we’ve progressively increased the capabilities there. And we're doing the same in terms of pressing our supply chain, obviously support us to make sure they have it, and we do that by making sure we give them volume projections and demand projections, so they know it's real. We're going to need those units. Nice thing is with our backlog we have right now, almost 400 buses, you know those are already in our supply chain. We already informed our suppliers, that’s what we are going to need going into ‘22. So, I think that bodes well for us. When you talk about the Biden administration, that's not going to happen overnight. We've seen this, we started with the VW money for example, the EPA administered. It's took a while for that to get out, because some of the factors they consider, just advanced state of counties across the U.S., who they want to really prioritize these buses in. How do you prioritize that? There are some ground rules for it, and so on so. So I think we might see some of that personally. We view this as recently, reaching customers towards the end of ’22, but probably more likely in 2023 fiscal before they figured out the true allocation of that. In the meantime, we are going to keep doing what we're doing, pushing our dealers, getting out there, working with customers, use this legal model to try and grow the business organically like we have done that today.

Understood. Maybe last question for me just on the chassis, you know any more color that you can provide there on just how those early conversations are going. How you're differentiated in the market versus other solutions today? And then just any thoughts on kind of targets or when we might see some contribution from that?

Yeah look, you’re not going to see anything from us particularly I think until 2022, fiscal 2022. I mean I can tell you this, and frankly I had a team yesterday meeting with customers, meeting with – I mentioned I think on my call that when we did it, we talked about the three elements. We got the end customer who drives a delivery van, let’s take that for example; and then we have a body builder who puts the body on the chassis, and you have folks who provide chassis today with a electric vehicle, electric drive, it’s been a conversion job, right? It’s really gasoline, engine away, put the electric drive-through in it. We're talking to all three of those. In fact my electric team, our meetings was yesterday, I can't tell you where, because of confidentiality reasons, but they met with all three of those constituents to talk about what they want from us. Now what we have to do is, we have a fantastic chassis. We are basically a Class 7 solid chassis, Upper Class 6 to Class 7. What many of these folks would like is a Class 5 chassis. So we’re start going to look a what we do, similar to the design what we got, we have to start downing the rates, everything. We got a chassis designed for a school bus. But it’s not a big step for us to take that design and sort of drop it lower, bring it down, lightening it up, and what we'll be looking to do in the next nine months or so is developing a prototype chassis that we can then show to these guys, let them – we’ll put a drive train in it obviously and we’ll approve the product out. So, I think this next year you'll see us talking more about where we are on that, talking more about the customers as we get into next fiscal, which customers are we talking to and well we’ve certainly have got some initial orders in there to talk to you about, but I'd look to sort of mid 2022 I would say for us to really unveil if you like our product plans and our real customer plans on that. But I can tell you, we're working on it. We're not doing this in isolation. We are talking right now to those customers and partners that we intend to work with.

Great! Thanks for the color and for taking the questions. We'll stay tuned on that.

You bet Aaron. Thanks.

[Operator Instructions]. Our next question comes from the line of John Lopez with Vertical Group. Please proceed with your question.

Hi! Thanks very much, guys. How are you?

Good John, how are you doing?

Feeling great, and you? Thanks for taking the questions. I apologize, I cut over a little bit late. So I'm guessing you might have covered this, but if you did, we can take it offline. When I look at the, so on hand I heard you describing the supply chain complications. On the other hand your inventory has increased quite a bit for the last couple of quarters and it looks like your raw material inventory in particular is like doubled in about six months. So can you just maybe talk through like the puts and takes here, why – if things are so tight, logistics are so problematic, like why are you able to build inventory yet ultimately not fulfill deliveries?

Well, I think you're going to look at the type of inventory that we're doing. I think we use the words on this call that frankly going into the third quarter, we didn't anticipate this level of supply chain disruption. There weren’t too many signals from our supply that this was – they were going to run into these problems. I don't think they knew about it to be frankly with you. So when we sort of entered into the third quarter, we had much higher level. I mean, obviously we started at 50 units higher than we intended to be at. And so we were out there, that time we entered the quarter with a much higher production plan. Obviously we've got to give lead time to our suppliers, typically six weeks, ten weeks on some components and we were doing that in March and therefore towards a higher volume level. And then what happened is, the supplies that I mentioned, they are critical. When I talk about allocation on engines and transmissions, axe, hose, harness, these are sort of big deals, right. And so we have to have a high level – we are going to exhaust that, it’s not like we’re going to just sit here and say, let's keep the high inventory level going. What we want to make sure is we're going to burn that off. We're going to burn that off for the next few months and get it down to a level, but that takes a while to readjust down. So, there pretty quick change in capability of the supply chain on certain components. So we'll work it down, but it's, yes the inventory is higher than we want it to be. How do we sell the vehicles we plan on selling, got the product through on it. We would have been sitting here saying, inventory looks in great shape, but we'll just burn that off and we're obviously – we are fighting and working hard to get a better allocation on more if you like, of the things we’re short off. But I'm not obviously doubling down on the things we've got so to speak. I mean the parts we have, we’ll just burn off.

Got you, okay. And I'm sorry, it sounds like you did cover this earlier, but the parts that you're sort of having the most acute problem with are what?

Well, I don't want to get into saying ones thing in particular, but I would just obviously – here's the way we work. If we can have a line of sight to get in some parts that might be later than we need, and we can drive the vehicle off the line, we'll build a bus. We can build a bus and put the parts on late, and that’s what Phil Tighe when he talked about some of those rework costs, that it costs in a quarter, it’s actually what that is. We've taken the bus offline, we got as far as we can, we drove it off and then we put the part on. Now if its and engine, we can't build a bus without an engine. We can't build a bus without a wiring harness. We can’t build a bus without transmission and those are the ones, when those don’t come in, we get allocation on that; that means we have to stop production. And if you think of that 550 buses for us, it’s just over two weeks of downtime in the plan, think if it that way. And that’s what we have to do, we have to wind down essentially, and it’s not constant, it wasn’t like I took, I took a nice two weeks down to recovery it. It was more a sporadic than that, because that’s the way the supply chain was handling it.

Got you. Sorry, just last question on this topic, I apologize. But the – like are you sitting on significantly more inventory than you normally would. Like you almost seems if you have to be, like more inventory of certain things and is that intentional?

John, this is Phil Tighe. We have one pre-buy of some inventory that we did and its expensive part and that is intentional. Let me just supplement Phil’s comment to you about inventory a bit. If you are looking at the press release and the balance sheet, not that – the inventory level that shown for ’21 is the July 3 level. The comparison is October 3 of 2020 on that balance sheet and remember that the first – October is the inventory to support the first quarter of the year, and that's our lowest volume in any quarter. The July inventory is typically to support our highest volume of any quarter in the year. So basically what’s been on inventory that was supposed to support the highest quarter, and unfortunately we've talked about the deferral. The other thing I would say is, if you compared the July inventory of this year to July inventory of last year, it's down by I believe it's about $22 million maybe more.

Sure, okay. I got you. That helps, and I'm sorry, if I could just sneak one morning just about thinking through next steps. I think I heard you guys talk in some detail just about the sort of jam up in the system if you will. People want buses; they can't get buses, that stuff is getting pushed into your next fiscal year. I suppose the two questions I have are one, does that alter in any way in your view the seasonal traditional seasonal pattern. Will school districts and fleet operators be more willing to take buses at spots in the year than they historically would not be. And then secondly, does this impact in your view electrification at all? Like, in other words are people going to delay electrification as an example delay electrification because they just have this, kind of the peg moving through the pipeline and they have to deal with that first?

Yeah. Let me take second question, the second part of your electrification – talk to you about it, bullish about it; it doesn’t impact us at all. I mean I’m actually from a standard of what are we doing, if I have to prioritize what I build, obviously we're going to prioritize electrified vehicles, and we can do that. It’s an entirely different supply chain we're dealing with, not the same levels of the issues. These lending, we always said these are much more complex if you like, a combustion engine, that's more complexity actually than an electric vehicle has in some resort. Technology is smarter, but – so we don't see anything that versus electrified vehicles in that case. Now your first part of the question, which when we look at the industry, the great thing is a good amount of dealing in that work is that we have dealers out – yes, a lot of these are what we called promise days to school star. Well, you know we informed our dealers and customers very early on in the quarter that we were running into some sort headwinds here, and that we'd have to push some back. And that's where our dealer is extremely – that’s why we have a great dealer of network. What they use is – so what they did is, they go out, they loan the vehicles they've got to those school districts. When the school district requires, are retiring their old buses, they lend them on what’s called a loaner bus and that keeps them going and they keep them working. And so we – I think because we went out upfront with customers, they understand what's happening here. They understand there's a supply chain issue, a global supply chain issue around the world, and they’ve given us a bit of a pass I guess this year in terms of letting recognizing, I'm going to have a buses out the school start. But our dealers are really helping to make it through the year, so they're ready when those schools do start, they really got a full school bus fleet. But I do expect that when we get, when we get through ’22, hopefully we get through all this, the pandemic is out of the way and we can put it behind us and the supply chain is out of the way. We'll be looking at the end of next year to do it in more of a normalized for the school delivery basis? Absolutely. It will be school buses for school start, because that's the most important value we think we can give to those customers.

Got you. Thank you so much for all the thoughts guys.

You bet John. Thanks.

And we are showing no further questions on the audio lines at this time. I will turn the conference back over to you.

Okay. Well, thanks Jennifer and I want to thank everyone on the call for joining us today. We do appreciate as I say every quarter your interest in Blue Bird, and we look forward to updating you all again next quarter. Just want to leave you with a couple of thoughts. As you can see, I mean the great news is the industry is really bouncing back, and in fact when I talked about being 9% to 10% under the record levels of pre-COVID of 2019, frankly we’re looking, coming out a little bit higher than that I'd say more recently. So again, I think it really bodes well for our industry and what we're seeing out there. Supply chain issues, I want to make it really clear, they are temporary. That is not structural. Those are going to get fixed. Every supply that we're dealing with is intent on fixing them. They want to fix them. If it’s a labor issue, they are bringing on labor where they can, they're handling that. If it’s a Tier 2, Tear 3 supplier for them, they are addressing that. So this is all, it's a temporary thing we're going to make; we're going to get through it. I want to give you a sense of what we're doing. I'm somewhat repetitive here, but we’re all about making ourselves have a stronger business. That's why even in these tough times we tell you of improved gross margin. We priced again for the fourth year in the same time timeframe aggressively to help our margins and help our profitability. Alternative fuels, I mean, we're at the best ever position in our history in terms of alternative fuel percentages and obviously you can see the growth in EV that we're seeing, we're incredibly excited about…

This does conclude today's conference call. We thank you for your participation and ask that you kindly disconnect your lines. Have a great rest of the day everybody!