Hello, all. And welcome to the Blue Bird Corporation Fiscal 2024 First Quarter Earnings. My name is Lydia, and I'll be your operator today. [Operator Instructions]. I will now hand you over to your host, Mark Benfield, Head of Invest Relations, to begin.

Thank you. And welcome to Blue Bird's fiscal 2024 first quarter earnings conference call. The audio for our call is webcast live on blue-bird.com under the Investor Relations tab. You can access supporting slides on our website by clicking on the Presentations box on our IR website. Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted 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'll hear from Blue Bird CEO, Phil Horlock, and CFO, Razvan Radulescu. Then we'll take some questions. Let's get started. Phil?

Thanks, Mark. And good afternoon, everybody. It's great to be here and to share with you our results for our fiscal 2024 first quarter. Now, you recall in our last earnings call, we reported record results for fiscal 2023 fourth quarter and full year. Well, I'm pleased to tell you that our momentum has not slowed down at all, where the Blue Bird team did a fantastic job in delivering another all-time record profit in the first quarter of fiscal 2024. Razvan will be taking you through the details of our financial results shortly, so let me get started with the key takeaways for the first quarter on slide 6. As the headline states, we achieved record financial results in the first quarter of fiscal 2024. As I just mentioned, and as shown in the first line in the box, it was a record adjusted EBITDA for any quarter in our history. And our net sales revenue was a record for any quarter in the first half of fiscal year. So with record profits from revenue, I am very pleased to tell you that we achieved an all-time high adjusted EBITDA margin of 15% in the first quarter, and we're increasing full year guidance once again. In just a few minutes, Razvan will take you through the financial details of what was an exceptional first quarter results for Blue Bird, including a comparison with last year. As we look at the drivers for this terrific progress in Q1, it really is about maintaining and delivering the plan we laid out last year, which focuses on making significant improvements across our entire business. Market demand for school buses continues to be very strong. And our backlog for Blue Bird school buses was at a very healthy 4,600 units at the end…

Thanks, Phil. And good afternoon. It's my pleasure to share with you the financial highlights from Blue Bird's fiscal 2024 first quarter record results. The quarter end is based on a close date of December 30, 2023 whereas the prior year was based on a close date of December 31, 2022. We will file the 10-Q today, February 7, after market close. 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 the call as well as other important disclaimers. Slide 9 is a summary of the fiscal 2024 first quarter record results. It was another outstanding operating quarter for Blue Bird, with somewhat limited supply chain challenges and with an increased number of higher margin units driving both our top line and our bottom line results. We significantly beat the adjusted EBITDA general quarterly guidance provided in the last earnings call. And in fact, we delivered again the best quarter ever for Blue Bird, with 15% adjusted EBITDA margin. The team pushed hard and continued doing a fantastic job and generated 2,129 unit sales volume, which was 172 units or 9% higher than prior year. Record Q1 consolidated net revenue of $318 million was $82 million or 35% higher than prior year, driven by a higher number of units, higher parts sales, improved mix of electric buses, and pricing actions that materialized in this quarter as expected. Adjusted EBITDA for the quarter was a record $48 million, driven by high margins, increased parts sales and margins, partly offset by increased labor costs. The adjusted free cash flow was negative $2 million, and $21 million lower…

Thanks, Razvan. That was a great explanation of our Q1 financial results and our outlook. Let's move on to slide 21. I introduced this slide at our last earnings call. So I won't spend as much time on it today as our priorities and our strategy are unchanged, as they should be. The chart on the left illustrates the three priorities that continue to drive us. We're taking care of our employees, delighting our customers and dealers, and delivering profitable growth. The chart on the right provides more text around the specific strategies that we are pursuing that both align with our priorities and drive our forward year growth plans. At the center is our ultimate objective, to drive sustained profitable growth. As you look at the accomplishments in fiscal 2023, we transformed the business from losses to record profitability, achieving a full year margin of 8%. For fiscal 2024, we just increased our full year earnings guidance to reflect an 11% adjusted EBITDA margin. And over the next couple of years, we plan to grow that margin 12% and then beyond. Our specific strategies focus on delivering these financial goals and as spelled out in this chart, namely, leadership in safety, both in the workplace and with our products is paramount to us. And we're investing both engineering and CapEx in these areas in fiscal 2024. Best products and features, we seek to differentiate ourselves providing more value to our customers. Our buses are purpose built from the ground up for transporting children safely with many unique features. They're not a derivative of a truck chassis, like most of our competitors, and our customers understand the value of this. Leading in quality, durability and alternative power is the cornerstone of our product planning and development, and we will continue…

[Operator Instructions]. Our first question today comes from Mike Shlisky of D.A. Davidson.

I guess I wanted to ask first about the quarterly outlook that you put out there. Kind of you raised from last quarter that. The lowest quarter of the year will be $275 million. You just put up a quarter of $318 million in your fiscal first quarter, which I believe is usually the least revenue just because of the school calendar in most fiscal years. I'm having a hard time figuring out, and I do recognize that there was some EVs in there, even trying to back out the price effect of EVs, it's hard to imagine if the rest of the year typically from a unit level, whether it's EV or ICE, if they're usually up in the first quarter, you having a quarter this year that is $275 million. I'm curious, is there anything on the calendar or schedule that we should be thinking about here that I'm missing that would cause you to have a quarter that would have top line of about $275 million?

Regarding the seasonality of Q1, so before COVID, indeed, this was the lowest revenue and lowest number of units because, historically, we took extended shutdown for the plant to do extended maintenance work, but also because, at that time, the order backlog was very low after the start of the school year. And so, as I mentioned in my remarks, this year, we maintained the speed of production and we did not take an extended shutdown. So we only took a couple of days around Christmas and Thanksgiving break. So we did have indeed more working days in this Q1 than ever before. In terms of the remaining quarters, we want to be conservative in our revenue guidance. And as I said, supply chain still has some constraints, especially with two particular suppliers. So should the supply of parts be lower than the midpoint, this is how we might get to a lower quarter below $300 million, whether it comes through the total number of buses or through the percent of EV inside that number.

And just to follow up there, do you have any planned shutdown for the rest of the year just to kind of make up what you couldn't do in the first quarter or you're going to go forward with it, think about next…?

We're able to flex up if we can later in the year. I mentioned on my comments that, like we did last year, we can build more, we will build more, and that's where we stand. But we've been a little conservative. We're very active with a couple of constrained suppliers, as we mentioned. Really great, obviously, throughput through the first quarter. We've just been a bit prudent in the balance of the year at this point.

It's great to see that you also had growth in the unit sales during the quarter too. That was exciting. It doesn't appear to me as though some of your competitors had growth in their unit sales in the quarter. Can you comment on Blue Bird's market share? You think you're gaining share? And if you could give me two answers, one on the ICE side and one on the EV side, it will be appreciated.

Well, we don't tend to talk too much about share. We definitely have gained some share over the last trailing 12 months. Obviously, in the fiscal year, it's a short timeframe now and things change and different – we're just entering what we call the bigger order season, frankly, when people ramp up and start thinking about buses for school start. But I'll say, our share is strong. It's holding well. A lot of activity. A lot of interest. I mentioned about our win rate. And order rate supports a strong demand. So I think we're feeling – we're confident of what we're saying. We have great faith in our ability. And we have a great product range too that's very expensive. I've talked many times about no one has a product range we've got from electric to propane to gas to diesel, on Type 8, Type As, we're Type Cs and Type D. So we got by far the best product range. So we're confident in our outlook and what we're doing.

Maybe one last one for me. The increased engineering costs that you mentioned, $25 million, maybe a little less than that, that roughly equates to about 2 points of margin on this year's guidance. So, could you maybe tell us, do you think that – it sounds like, without that, you'd be at EBITDA margins of perhaps 13% this year. Are these one-time costs – and if we were to see a flat year next year, just to as a thought experiment, you should be seeing a 13% EBITDA margin business, 9% to 11% EBITDA margin business in a more normalized engineering investment environment.

The year-over-year increase is $12.5 million. So it doubled to $25 million. So that's about 1% of sales on a year-over-year basis. And we do expect to maintain this elevated level for the next couple of years. Some of these projects are multiple-year projects, especially with powertrain, and some other product enhancements. So for the next couple of years, we will sustain this level.

Our next question comes from Eric Stine of Craig-Hallum.

First of all, I've been covering you for a long time, to see almost $50 million in EBITDA in the first quarter is quite something. And with that in mind, as I think about the remainder of the year, and you just touched on it, but maybe I'll ask it a different way or clarify. So, Phil, were you saying that you've had price increases and now you're actually a little bit ahead of where you see materials cost scale? If that is the case, is that something where you think maybe EBITDA is more skewed towards the first half than the second? I guess I'll start there.

I think Razvan talked about in his script. So I'll just let – he wants to just jump in here on this one.

As I mentioned in my remarks, indeed, our pricing curve is now head of the costing curve, especially for the last two quarters. And also, as highlighted with upcoming investments, whether it's on the product and powertrain and R&D, whether it's into CapEx and manufacturing capabilities, which includes also a component of NRE in there, whether it's inflation from the supply chain or on the people side, all these costs are coming mostly starting in Q2, Q3 and Q4. So, the costs are back-end loaded. And the pricing curve is now, let's say, almost maximized for the year. So indeed, we do expect somewhat lower EBITDA in Q2 to Q4 compared to Q1.

You recall what we said Eric was that we priced $2,500 in every bus fixed price in October, start of our fiscal year. And then we priced again six months later. Another pre price increase will go on. Dealers know about it. They have it, accepted it. When we bid with our dealers, we look at – every single bid we do, we have an opportunity to adjust the price up or adjust it down as we see fit with our dealers. But we're keeping really, really close tabs on this. And I think as Razvan explained, we've used the term conservative in our outlook for the rest of the year and we continue to be so because you can never know what happens in a constrained environment we're still dealing with. So I think the position we're in right now is a good position to be.

I can appreciate still being conservative, given all what's going on. Maybe just turning to the EPA funding you mentioned. Well, first of all, good to see that the deadlines to actually get the funding that that's been closed out. I know, for round one, the infrastructure was a big issue. As you think about trying to pull things as much as you can forward into fiscal 2024, where do you think things stand on the infrastructure side? Is that still a limiting factor? Do you see that easing at all?

Yeah, I think it definitely is. Look, I think everyone's getting better at it. We're active with several infrastructure providers. But I think certainly the pace of activity in the first year of this caught a few by surprise. They weren't quite ready for the utility companies, all the charging equipment was in the right place. And actually, I think I've mentioned the last call, I think it was three vehicles were canceled. Others had a lot of cancellations because they were not ready and they just pulled out. And I think that's really the gating factor I was mentioning when I was being a little cautious. I said, look, second half of this year, we've got – awards are being granted and given to people for both these rounds, let's say, by May. And then they've got until April 2026 as the endpoint which to install these buses in. And they're going to work on charging stations first, it feels like to me, and we're helping them. And we working on the chargers they need. But obviously, it could well push back a little bit when they want their buses. They're not going to get buses before they know they got charging stations in place. And that's the challenge now for all of us in this industry to help that and move it along. The fantastic news is EPA stepped up this round two and round three to $1.5 billion. We thought it was going to be $1 billion for the year. $1.5 billion for the year. Well, they have extended the timeframe. Now, like I said before, we're going to do everything we can to accelerate our deployment because we like doing that. I think it's the right thing to do. And we'll work with the charging guys that we work with and others, and we'll work with our end customers too to help them.

Maybe last one for me just on the Clean Bus Solutions joint venture. Just curious, early returns on that? And is that something where you would expect – do you see people waiting to see if the EPA, if they're able to get either grants or rebates? If not, then they turn to the joint venture in that financing solution? Or do you think that that's not necessarily the case and that people go that route regardless, just having a monthly cost that's similar to diesel?

Yeah. I look at it this way. First of all, obviously, EPA grants are really exciting. We have 500,000 school buses on the road, and we're talking about funding 4,300 with this next round. So there's a huge appetite and huge oversubscription of school districts that want electric buses. That's why they stepped up this $1 billion to $1.5 billion. So the EPA – there's a big demand is what I'm saying. So definitely outside of this, outside of the EPA money, and there are other grants around, by the way, there are things called HVIP and TVIP in different states. But this Clean Bus Solutions gives a chance for really affordable – get rid of the upfront stick shock of an EV, get it installed in your business quickly, in your district quickly. So we are very excited about that. So they go hand in hand frankly. Obviously, the EPA is such a tremendous opportunity to accelerate. But our Clean Bus Solutions activity too, we got a ton of interest in it from our dealers and their customers. And we'll just keep working that through the year here and let you know when we get our transactions start hitting.

Our next question comes from Craig Irwin of ROTH-MKM.

Congratulations on the really strong quarter. Much deserved. Even coming into the quarter, there was quite a lot of interest around the gross margin trajectory. And you gave us just another really chunky number this quarter. Can you maybe talk a little bit about the retreat of your competition, the other major school bus OEMs retreating from the alternative fuel markets and how this could impact your gross margins? In the conventional business, the business where you've excelled over the last many years, does this impact the longer term potential margin trajectory for Blue Bird? And then, how should we be looking at EV mix and the impact on margins over the next couple of quarters? Is this may be part of the conservatism that you're giving us in the forward guidance comments?

I don't really like to comment on what our competition is doing. What I do know is that we bid together on state bids, we attend different conferences, and we're there together and they're no longer offering the product that we're both offering, the propane and gasoline. They just got a diesel and electric offering as in the marketplace. All I can tell you is we picked a different competitor, right? We're in our 13th – 14th year actually now with an exclusive with Ford and Roush, which is a pretty strong relationship we have. There was a company called PSI and they're no longer offering it. So, I'd defer to them on why they did that. Obviously, it's exciting for us. We are the leaders in this space. You look at our mix of old fuel vehicles, it's been over 60%. Old power, as they're called, alternatives diesel for quite a while now. Our competition's footprint has been quite different, even with that power train that they had. And so, yeah, we're excited about the opportunity that brings because our propane we know is ultra-low emissions. It's a great product. It gets a great rebate and a grant from the EPA fund to make it very attractive. There are other grants around to support it. It's a terrific product along with our low maintenance gasoline product that's super inexpensive to run. So, you put that together, we feel in good shape. I'm not going to commit on – I see big showgirls here. But I can tell you obviously, not surprisingly, we're looking at who's driving those buses today and what we can do for them. So, that's really important. If I can move to the EV mix side, it's a difficult one to predict. Obviously, 10% mix in…

My next question is around your expectations, you put in the presentation around the EPA Clean School Bus program, Round 2 and Round 3. The 30% win rate is dramatically lower than your long term share in the alternative fuels markets. And it really is mostly the same people, the same group at EPA that's handling the awards, the vouchers for the adoption of EV school buses, these funding opportunities that are so important. You've done way better than 30% with them in the past. Can you maybe talk a little bit about whether or not you think that that EPA is under pressure to share this between different OEMs, if there's maybe just factors in the market that you're considering with knowledge of different programs and different commitments from customers? And why 30%, I guess is the question I'm asking you.

Why 30% is a target we put out there. There's a lot of activity around this. And when you look at who's bidding, we know it's ourselves and our major competitors, IC and Thomas, [indiscernible], BYD, you know these guys, you cover them all, they're all in there. Have they really penetrated our business of school buses significantly? Not the newer guys. If you look at it in totality, it is the big three, so to speak, right, who tends to get the bulk of the business. But I think, right now, I don't see the EPA is targeting share in this. They're not looking at it. When you look at the last grant round, while we got a lot of – this is the one I'm talking now, the 2023 grant that we called it Round A that was just announced. We sort of know where we stand on that so far. A lot of fleet customers won some awards, and they'll be choosing their own buses. A lot of school districts that we traditionally haven't sold to got a lot of awards. Other fleet operators – and I'm talking about the likes of – we all know them, right? First Student, NEC, STA, they got awards. So, obviously, they haven't selected which bus they're going to use yet as such. So we're being a little prudent, right? 30% is a good target to go for. Love to see us beat. We're definitely beating it today looking at our market share. I can see where we are. But this is open to everybody to apply. And obviously, all these manufacturers are putting in applications. All these dealers are putting in applications and many end customers as possible are putting them in. So we haven't got this captive to ourselves. This is sort of broad network of all those districts and operators out there. What we've got to make sure is – we'll try and do our best to make sure they pick our buses. That's what we're going to work on, but we put 30% out there as a target.

My last question is really one of clarification. The 180 buses from LA United, what a win, right? No EPA funding behind that and it's really just state and local funding. So a really strong win. Are those 180 units included in the 420 that you said was in backlog at the end of December or is incremental to the EV school bus backlog?

They were not in the backlog at the end of the [indiscernible]. They're not in that number. Correct.

Hey, congrats on the quarter.

We have no further questions in the queue. So I'll turn the call back over to Phil Horlock for any closing remarks.

Well, thank you, Lydia. And thanks, everyone, for joining us on the call today. We do appreciate your continued interest in Blue Bird and we look forward to updating you again on our progress next quarter. Just a couple of comments, I think last year you saw the momentum increasing throughout the year, profitability improved as we moved through the quarters. And we have continued on the same path by delivering impressive all-time record quarterly profit in the first quarter of fiscal 2024. And with that solid base behind us, that's why we raised our guidance once again, projecting a full-year adjusted EBITDA margin of 11% for fiscal 2024. As a reminder, that is a full 3 percentage points above last year's then record profitability level. And we're confident in getting to a 12% margin within a couple of years as the supply chain constraints continue to ease and we could grow in our business. So with that, any further questions, please don't hesitate to follow up with our head of investor relations, Mark Benfield. And thanks again for all of you for joining us today at Blue Bird and have a great evening. Good night.

This concludes today's call. Thank you for joining.