Good afternoon, and welcome to the Blue Bird Corporation Fiscal 2022 Third Quarter Earnings Conference call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mark Benfield, Executive Head of Investor Relations of Blue Bird. Please go ahead.

Thank you, and welcome to Blue Bird's fiscal 2022 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 on our website by clicking on the presentations box on the 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 on the following two slides and in our 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, Matthew Stevenson; and CFO, Razvan Radulescu. Then we will take some questions. So let's get started. Matt?

Thank you, Mark and good afternoon everyone. As you can see on the left hand side of the slide, our aggressive plan to improve our business operations is taking hold. And as we predicted on the previous earnings calls, Q3 was a defining quarter for us. We posted an adjusted EBITDA of $9 million for the quarter on revenue of $206 million with 1726 units. Our volumes are still constrained by the ability of some key suppliers to provide components. Free cash flow was negative $40 million as we increased inbound material early at the beginning of the calendar year in anticipation of increasing production volumes. However, those increased volumes did not materialize due to the supply disruptions caused by the war in Ukraine, it continue to COVID lockdowns in China. We posted good results on lower than planned volumes by aggressively controlling costs recovering economics in pricing and adjusting our operations to improve efficiencies in a challenging environment. In the quarter and since our last earnings call, our business has made substantial progress and we have launched several critical programs and initiatives. Our backlog at the end of Q3 stood at a stout 6,300 units worth nearly $700 million. That backlog is 63% alternative power, which is critical for Blue Bird because customers using our exclusive Ford/Roush gasoline and propane solutions are more loyal, given the performance of these excellent powertrains. Our EV backlog also ticked up to nearly 400 units. The Cummins Blue Bird partnership on EVs continues to be the preferred solution for electric school buses in the market. We also announced expanding our collaboration with lightening e-motors by announcing an EV repower solution for model year 2023 and newer pro-powered safety buses. This is important because school buses have a long lifecycle and many customers are…

Thanks Matt, and good afternoon. It's my pleasure to share with you the financial highlights from Blue Bird's fiscal 2022 third quarter results. The quarter-end is based on a close date of July 2, 2022 whereas the prior year was based on our July 3, 2021 close date. We will file the 10-Q today August 10, 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 disclosures that it contains. The appendix attached to today's presentation includes reconciliations of differences between GAAP and non-GAAP measures mentioned on this call as well as important disclaimers. Slide 11 is a summary of the third quarter results for fiscal 2022 and fiscal 2021. It was another operationally tough quarter for Blue Bird with reemerging supply chain disruptions and commodity cost pressures that have impacted many manufacturing industries. With these challenges Blue Bird unit sales volume of 1,726 units was 298 units, lower than prior year due to the constrained supply base, which was impacted by the Ukraine war and the COVID lockdowns in China. We experienced supply issues for multiple components across a number of suppliers. Through July however, we started to see improvement in the number of missing parts per bus as Matt already mentioned. Blue Bird backlog of 6,300 units at quarter-end is incredibly strong and almost 60% higher than a year ago. As of today, our production capacity, which will remain constrained for the balance of the calendar year is full through March and we are selling fiscal 2023 Q3 production slots. Our ability to complete and deliver all of these units on time will depend on supply stability of key components. Consolidated net revenue of $206 million was $9 million higher than…

Thank you, Razvan. On to Slide 22, we continue focusing on our foundational objectives of taking care of employees, delighting customers and dealers and delivering profitable growth. As you heard throughout the prepared remarks today, we are making progress on our core focus areas for fiscal year 2022 which include our people, lean transformation, expanding our total addressable market with our electric commercial chassis and scaling for the growth in EV. Slide 23 is a reminder of the timeline for the EPA Clean School Bus Program. The applications are due in little over a week and as I stated earlier, we've been working with a large number of customers on the application process. We expect to qualify lottery winners, we notified sometime in October. And we will see those orders in the first quarter of our fiscal year 2023. Priority districts qualify for 375,000 in funding per bus and non-priority districts qualify for 250,000. There is also money for cleaner emission school buses like propane in which we are the leader in the amounts of 15,000 or 25,000 per bus. We have deployed substantial resources internally and externally to ensure our customers are successful in participating in this program. Blue Bird is well positioned to receive many orders for clean and cleaner emission buses through this funding. In summary, the fundamentals of our industry are strong demand is robust and Blue Bird's backlog of $700 million and 6,300 units this proof of this. We have significantly increased our standard gross margins through initiatives to address pricing on the new orders and on the backlog. We also deployed mechanisms of longer-term deals to ensure cost recovery in inflationary environment. The supply chain is starting to show signs of stabilization plus we have implemented numerous measures to dramatically improve parts availability. Although, there are some constraints on the horizon for the fourth quarter that will again limit production volume and more specifically impact our throughput on EV units. We expect these constraints to lessen throughout the remainder of the calendar year. We have taken aggressive measures to cut costs and right-size the operation through this period to improve profitability. Our lean transformation initiatives are making progress in reducing production hours per bus and will bear fruit in an normalized supply chain environment. As we work to continue on expanding our total addressable market with the electric commercial chassis, we are expanding our leadership in electric school buses through increased infrastructure solutions for customers and bridge solutions to a fully electric future. We look forward to updating you on our progress. And in the meantime we stay laser focused on our priorities in our deliverables. We would now like to open up the line for questions. Thank you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Mike Shlisky with D.A. Davidson. Please go ahead.

Yes, hello, good afternoon. Thank you. I guess I wanted to maybe get a little more clarity on the guidance. You've mentioned that the pricing is getting better, presumably you have better pricing once you build out your backlog in Q4 versus Q3. Supply chain currently has gone better in the last 30 days or so. You mentioned your internal improvements are all improving. You kind of -- you've left open the door for basically flat sales and less EBITDA in the fourth quarter. So I'm curious as how likely is that to happen? How likely is the low end from this point, given what you know here around mid-quarter that would make it worse. It just seems like everything is doing better, but you're looking open the door for something negative to happen. So just a little bit more color there would be appreciated.

Hi Mike, this is Razvan. Thank you for the question. And as we look at Q4, there are several other factors at play here. So you are correct in the sense that our standard gross margin is improving every quarter as the mix of units is getting better and better. On the other hand, on the cost side, we do have several supplier-driven cost increases that are becoming effective on July 1 based on our contracts, whether they are on a three-month escalator or six months escalator. And additionally, as mentioned in the remarks before, the harm for experience in the steel prices throughout Q2 and into Q3 is becoming due in our cost also in Q4. So we have higher costs in Q4 compared to Q3. Additionally, as mentioned in the guidance section as well, we are experiencing this critical but temporary EV supply chip shortage and definitely the EV in our backlog and in our production are some of the higher-margin units. So when you combine all those factors, this is why our Q4 is not a continuing improvement compared to Q3.

Okay. Thanks. Maybe touch on some EV questions real quick as well while we're on that topic. I guess, first, I want to get a sense for maybe EV bus orders call it, the last month or two and this month and next couple of months. Has most EV orders been put on hold entirely until folks hear back from the federal government in October and you anticipate some kind of either those that won the lottery will place the order, those that didn't will just shrug their shoulders and also place the order, but they've all been holding off more recently. Is that --

Mike, this is Matt Stephenson. No, that's not the case. There's a number of orders coming through the funnel here. And so people are continuing to order buses, whether it's from the HVIP program or other funding mechanisms across the country. But we do expect that onslaught of somewhere around 1,500 buses coming out of that first tranche of the Clean School Bus Program, and those orders will fall in our first fiscal quarter of '23.

Okay. And just a follow-up there, Matt. I know that the buses can be built by 2024, the ones that are selected. But do you intend to make sure that all the ones that order through Blue Bird are all built in fiscal 2023 and time for next school year?

Yes. So one of the things we're doing, Mike, is we're allocating production slots for EV every month in working with our key partners, [Cummins and EXALT] to make sure we have component availability. And our goal would be to try to work through as many of those as possible by the end of our fiscal year '23.

Okay. I can just throw one last one in there. I guess I was curious about how the backlog was supposed to work during fiscal Q3. I would expect it to go down quite a bit, normally just given seasonality and how you build things in advance for customers of the next school year. Is that how it normally would be? And were you actually pleased with the level? I know that certain things couldn't ship or didn't ship, but are you pleased with where things turned out, given the seasonality on the backlog?

Yes. I mean the backlog we have is great, but we also have a number of customers that have been waiting for their buses, and we anticipate, as Razvan stated earlier, higher production rates that this supply chain couldn't sustain. So we would have had more buses in production if we were able to -- yes, you were correct. At this time, you should have seen the backlog peak sometime in the spring and then come down for the seasonality of the business.

From a dollar percentage, even though it was flat, the units being lower it's just -- is that basically just pricing or mix with EVs or will be both?

It's a bit of both for sure. So it's an increasing level of EVs and as well as the recent pricing actions taking hold, combined with the partial backlog pricing recovery, we were able to put in place together with our dealer partners.

Super. I appreciate the color. I'll pass it along.

Thank you, Mike.

The next question comes from Eric Stine of Craig-Hallum. Please go ahead.

Hi, everyone.

Hi Eric.

Maybe I'll just stick with the infrastructure funding that's coming here in the somewhat near term. I mean, any thoughts, market intelligence, I'm sure you're in constant discussion with your dealers, and they've got feet on the ground. Propane, I would think you have a dominant share. Any thoughts on what your capture rate or you hope your capture rate is for the EV piece of it?

Yes. I mean, Eric, we're working really hard. We've deployed a number of external and internal resources to partner with our customers to submit applications. In fact, I just saw some data today that was third-party market data, that 90% of the applications out there have been for EV in totality out there. So I imagine the lion's share of the funding will go for EV, and we expect Blue Bird to get our historic share of EV at a minimum on this program.

Got it. I guess we'll stay tuned on that. Maybe just on pricing. Can you just talk about -- I mean, everyone is aware of what's going on in the market, but I would think it's still heavy lifting to some extent to go back and try to get some repricing of buses that are still in backlog, especially in light of the fact that, as you said, some of these customers have been waiting for a very extended period of time to get buses. So maybe -- just talk about that process, whether there was pushback, how much and some of the steps you had to take?

Yes, Eric, it was a lengthy process. We -- like I mentioned in the call, we have a great dealer body in the Blue Bird dealers stand. We work through our dealer counsel and really explain the unprecedented nature of inflation and commodity costs and just the industrial cost that all manufacturers have seen and took that messaging out to our customers, and we supported that. I was even on calls with end customers as well as, of course, our sales team and other internal resources. And I think inflation has been communicated so much, whether it's in the news or various channels that customers generally were pretty understanding of the unprecedented situation. I mean schools have seen everything from their capital projects, budgets been way out of sight to the school lunch programs, you name it. They're getting hit from increased costs. So it wasn't something that they were not familiar with. But like anything, as you can imagine, it just took a lot of time and extensive communication to be successful. And again, thank our dealers and walking hand-in-hand with us in this process.

Got it. And then maybe last one for me, just following up there. I mean any thoughts on ability with the customer base accepting those -- that repricing thoughts on ability to hold on to some of these price increases should some of these inflationary what's going on in the market, should those ease a bit? Do you think you can hold on to price? Or do you think that that's going to be part of the deal, having to give some of that back?

Yes. So definitely, we will monitor carefully our competitiveness into the marketplace as we look into the future, and we will have to assess how our pricing actions are comparing to the other competitors. At this point, there is still a lot of cost pressure from the supply base, whether it's inflation, still some commodities with a time lag. So I would say short term, it's unlikely that we will go down. However, we will have to monitor and see how the trends in the general materials and inflation for label are developing throughout the next fiscal year.

Got it. Thank you.

This concludes our question-and-answer session. I would like to turn the call back to Matthew Stevenson for any closing remarks.

All right. Thank you, MJ, and thank you to all of those joining us on the call today. As you heard during our prepared remarks, demand for buses remains incredibly strong with a backlog of 6,300 units or $700 million. We also have taken aggressive cost mitigation actions through the end of the calendar year 2022. On standard gross margins in the backlog, we've been able to double them since October of 2021 through our implemented pricing actions we discussed in depth. And parts availability is improving through changes we have made in our operation and increased stability in the supply base. Plus, we are continuing our leadership on electric buses, nearly 400 units in the backup log, and that is set to dramatically increase when the Clean School Bus Program winners are announced this fall. Now we look forward to updating you on our progress next quarter and appreciate your continued interest in Blue Bird. Should you have any follow-up questions, please do not hesitate to contact our Head of Investor Relations, Mark Benfield. And thanks again from all of us here at Blue Bird. Have a good afternoon

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.