Blue Bird Corporation (BLBD) Earnings Call Transcript & Summary

Hello, everyone, and a warm welcome to the Blue Bird Corporation Fiscal 2023 Second Quarter Earnings Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions] I will now turn the call over to our host, Mark Benfield, Head of Investor Relations at Blue Bird Corporation. Please go ahead.

Thank you. And welcome to Blue Bird's Fiscal 2023 Second 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 2 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. Let's get started. Matt?

Thank you, Mark. And good afternoon, everyone. Razvan and I are extremely excited to update you on our results for quarter 2, which was probably the most pivotal quarter for the company in years and begins to highlight the real potential of our business. This quarter, we're going to show a 180-degree turn in our financials as we've been forecasting for some time. I'm pleased to say that we not only delivered as promised but once again delivered results ahead of schedule, a testament to the hard work that our teammates have been doing every day. On Slide 6, you can see some of the key takeaways for the quarter. Overall industry demand continues to be robust, and the backlog for Blue Bird school buses is at nearly 5,800 units. We are now through most of the legacy priced buses in our backlog. As a reminder: We define these legacy priced units as those at price levels prior to October of 2021. This along with operational improvements drove the significant inflection in our financials. We also reinvested back into the business, putting in over $3 million in wage increases for our frontline teammates this year, starting this quarter, while continuing to improve processes throughout our operations, upgrading our facilities and even opening an all-new EV center which we will talk about in detail during the call. Through the efforts of the best workforce in the business, strong leadership, lean process improvements and just playing hardcore tenacity, we are seeing some of the best performance the company has ever seen in a second quarter. And let us not forget the EPA's fantastic Clean School Bus Program that recently closed its first phase and announced its direction for Phase 2. The success of this program has led to a staggering number of EVs in our backlog. The business is performing well and the turnaround is ahead of schedule. Now let's take a look at some of the highlights from the second quarter. The financial performance for fiscal year '23 quarter 2 shows a massive improvement from a year ago. Our units sold were over 2,300, which drove record second quarter revenue for Blue Bird up over $90 million from fiscal year '22. This was a 373-unit increase from the same time period last year. Adjusted EBITDA was $31 million better than this time last year and we posted $20 million for the quarter. As a result, adjusted free cash flow for the quarter was $23 million, up $2 million compared to the second quarter of fiscal year '22, overall a fantastic second quarter for Blue Bird. On the right-hand side of the slide, you can see some of the ongoing highlights for the business. As I mentioned, demand continues to be strong. Our backlog is incredibly robust at roughly 5,800 units worth over $775 million in revenue. Included in that backlog is $200 million of firm orders for 621 electric school buses, a large uptick from last quarter due to the impact of the EPA's Clean School Bus Program. In fact, we are incredibly proud of some of the recent large EV deployments, including Broward County in South Florida and the city of Boston. As we have discussed in previous quarters, we have raised pricing considerably since July of 2021. Our average selling price for the quarter is up 22% year-over-year. Our sales for the quarter were 63% alternative power, demonstrating our continued leadership in the space. Part of that was our EV growth, up 175% year-over-year. Now parts sales continues to be another bright spot for us, up 37% year-over-year. The increasing average age of school buses on the road is having a material effect on our aftermarket sales. With our EV demand so high and more coming from the EPA's Clean School Bus Program, we had to increase EV chassis capacity, so we recently opened up our -- a new EV buildup center, which we are thrilled about. We are ready for the increasing demand, as the EPA has recently announced Phase 2 of the program, which is another $400 million, this time through a grant program. As you can see on Slide 8, we are delivering some of the best operational performance in nearly 2 years in several critical areas. Set-ups and throughput are up significantly, as missing parts are down due to our efforts to improve material flow to the plant. Those have included adjusting our warehousing strategy, re-sourcing numerous problematic suppliers and revising production constraints. This has also contributed to the lowest number of hours per bus in the best manufacturing efficiency in 2 years. In turn, this generated a number of all-time records for quarter 2, including revenue, EV bookings, parts sales and adjusted EBITDA. Not only that this proves the company is back on track, but we are now exceeding some historic financial benchmarks for the organization. Slide 9 is a reminder of our key pillars around care, delight and deliver. Our focus areas within those pillars include our people, lean transformation, expanding our total addressable market and scaling EV. I want to briefly touch on the progress of each of those since our last call. Regarding our teammates, in January, a large-scale wage increase took effect for our hourly teammates. We also increased our paid vacation days to 14 this year, unheard of in most manufacturing environments. We also continued to update our facilities to enhance the working environment, including putting massive air chillers into our facility for the summer months. We are also in the final phase of rolling out a new [ self-manufacturing ] organizational structure designed to provide more resources for our frontline teammates by narrowing the span of control and offering essential support. Through continued focus on our lean transformation, we are seeing improvements in quality and throughput even while the supply chain environment is still far from normal. The commercial chassis continues to progress while we stay focused on ramping up our EV school bus production, but on this call, we really want to focus on highlighting our all-new EV center. A lot of great work went into this, and it's core to our future. On Slide 10, you can see photos of our new 40,000-square-foot EV center. Previously this was actually an old coating facility on the Blue Bird campus. Through relatively minimal investment and a lot of hard work by our team, we turned it into a modern EV commissioning center. It's where we install the EV batteries along with some of the final components on the thermal management system and bring up [ the state of charge ] for the batteries. This new facility will help us meet the EV demand forecasted over the next 5 years. As we have mentioned in previous earnings calls, this will allow us to take EV production from 4 to 12 units per day by the middle of this year, with the ultimate goal of 20 units per day whenever demand warrants it. Plus it is a great example of where we are headed with our entire production footprint rooted in the foundational principles of the Blue Bird production system and lean. Slide 11 is again a reminder of the EPA's clean school bus rebate program. This program allocates $5 billion over 5 years for clean and cleaner-emission school buses. Approximately 2,500 buses were funded in the first phase of this program, with an average rebate of $375,000 per electric bus. Customers had until the end of April to submit payment request forms to the EPA, demonstrating that new buses as well as eligible infrastructure have been ordered. Some of our customers have asked for an extension beyond the April 30 deadline due to delays on the final quotes for their charging infrastructure, but we have already seen many orders come in through this program and fully expect to garner well over 500 orders for the first phase when it is all said and done. The long-term impacts of this program will be well over $1 billion in revenue to our organization. The EPA recently launched Phase 2 of their program, and on Slide 12, you can see the details. As we expected in Phase 2, announced in late April, it is a competitive grant program, with an anticipated $400 million to be awarded in this round. Applications will be taken from now through the end of August. And we can expect those grant award winners to be announced in late '23, with orders in the first calendar quarter of '24. We have established substantial resources both internally and externally to work closely with our dealers and end customers in supporting them in this grant-writing process. The focus of this grant program will be larger deployments, and we expect the EPA to fund only 25 to 50 awards. The applications will have a scoring process and priority districts will be given preference in the evaluation criteria. We expect this second phase to fund 900 electric buses, and we conservatively estimate that we will get at least 200 of these. We continue to remain excited about the Clean School Bus Program and look forward to working with our dealers and customers on Phase 2 to deploy more industry-leading electric buses. I would now like to hand it over to Razvan to walk through our fiscal year '23 quarter 2 financial results in more detail as well as our updated fiscal year '23 guidance.

Thanks, Matt. And good afternoon. It's my pleasure to share with you the financial highlights from Blue Bird's fiscal 2023 2nd quarter results. The quarter end is based on a close date of April 1, 2023, whereas the prior year was based on a close date of April 2, 2022. We will file the 10-Q today, May 11, 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 14 is a summary of the second quarter and year-to-date results for fiscal 2023. It was an excellent operating quarter for Blue Bird with somewhat reduced supply chain disruptions and with an increased number of higher-margin units driving both our top line and our bottom line results. We have exceeded the revenues and adjusted EBITDA of our conservative quarterly guidance provided in the last earnings call, and in fact, we delivered the Q4 expected results 2 quarters earlier. The team has done a fantastic job and generated 2,304 unit sales volume, which was 373 units or 19% higher than prior year. Consolidated net revenue of $300 million was $92 million or 44% higher than prior year, driven by higher units, higher parts sales, improved mix of electric buses and pricing actions that took hold significantly in this quarter. The adjusted free cash flow was positive at $23 million and $2 million higher than the prior year second quarter. This outstanding performance was driven by the increased profitability combined with strong working capital management; and supports our great liquidity position at the end of this quarter, which was over $100 million. Adjusted EBITDA for the quarter was $20 million given our high volume of now profitable buses, increased part sales and margins, offset by increased labor costs. Given the transitional nature of our fiscal '23 Q1 results which included still a large portion of old-backlog low-margin [ buses ], our year-to-date performance is still solid at 4,261 units sold, thereof 227 EVs, with $536 million in revenues, adjusted EBITDA of $16 million and excellent free cash flow of $43 million. Moving on to Slide 15. As mentioned before by Matt, our backlog at the end of Q2 continues to be extremely strong at nearly 5,800 units, with the vast majority of these units at much higher price levels compared to the fiscal '22 built units. Breaking down the second quarter $300 million in revenues into our 2 business segments. The bus net revenue was $273 million, up by $85 million versus prior year. Our average bus revenue per unit increased from $98,000 to $119,000 or 22%, which was largely the result of pricing actions taken over the past 18 months as well as a higher mix of electric buses. EV sales in the second quarter were at a level of 135 units or 86 more than last year, a 176% increase. Parts revenue for the quarter was $26 million, representing a growth of $7 million or 37% compared to the prior year. This extraordinary performance was in part due to a large parts backlog reduction due to improved supply chain in aftermarket. And we expect the future fiscal '23 quarters to be in the low 20 million. Gross margin for the quarter was approximately 12% or 10.4 percentage points higher than last year due to our improved operational performance and our pricing catching up with the inflationary costs over the last 18 months. In fiscal '23 second quarter, adjusted net income was positive $9 million or $19 million higher than last year. Adjusted EBITDA of approximately $20 million or 7% was up compared with prior year by $30 million and 11.7 percentage points. Adjusted diluted earnings per share of positive $0.27 was up $0.58 versus the prior year. In summary, our operating performance and financial results demonstrated in this quarter are evidence that our turnaround is working. And it sets a new base for our future performance towards our long-term goal of profitable growth. Moving on to Slide 16. We have positive developments year-over-year also on the balance sheet. We ended the quarter roughly with $18 million in cash and reduced our debt significantly by $17 million. Our liquidity [ is strong ] above $100 million at the end of fiscal '23 Q2 with a 0 balance on our revolver. The improvements in operating cash flow and adjusted free cash flow were primarily driven by improved operations and margins and were supported by only a small improvement in trade working capital in this quarter. As a reminder. At the end of November 2022, we entered into the sixth amendment to our credit facility, extending the maturity date through December 31, 2024. The sixth amendment provides for revised covenants, modifications to the revolving credit facility and a new pricing grid. The amended covenants and the extended maturity of our loan provide Blue Bird with both flexibility and stability as our business continues to recover from the COVID-19 pandemic and the associated global supply chain disruptions. Slide 17 shows the walk from fiscal '22 Q2 adjusted EBITDA to the fiscal '23 Q2 results, starting on the left, at negative $10.7 million. The impact of the bus segment gross profit in total was $27.1 million split between volume and pricing effects, net of material cost increases, of $23.3 million; and operational improvements of $3.8 million. The operational improvements consist of year-over-year manufacturing efficiency improvements and lower [ freight in ] costs. The favorable development in the parts segment gross profit was $5.4 million, driven by higher sales and improved margins. Additionally, our Micro Bird joint venture results improvements were more than offset by increases in our fixed costs, mainly personnel related, for a net of negative $2 million compared to Q2 a year ago when very tight cash conservation measures were in effect. The sum total of all of the above-mentioned developments drives our strong fiscal '23 Q2 reported adjusted EBITDA result of $20 million or 7%. On to Slide 18. Looking ahead, we are happy to reiterate that we are now largely past most of the old backlog units with fixed pricing from fiscal '21 orders. And we will continue to benefit, in the second half of fiscal '23, from pricing/mix improvement based on the age and price level of our current backlog. Our production schedule is now virtually full for the rest of the fiscal '23, with some models, Type D, for example, going already into fiscal '24. However, supply chain and labor inflationary cost pressures still exist. And not all of the upcoming price increases will flow to the bottom line in fiscal '23. Given our large backlog, we already announced for fiscal '24 a model year price increase of $2,500 per bus, net, for all bus types built after October 1, 2023, to cover expected inflationary and raw materials cost increases. On Slide 19, you can see the spot market development for steel prices over the last 2 years. After the initial reduction in early 2022, steel spot prices shot back up in March and April after the Ukraine war started. However, [ that bubble ] reversed itself by August. The favorable trend continued through December 2022, and we benefited from this in fiscal '23 Q2. However, the steel prices started to increase again all the way through the end of April. And this will offset a portion of our pricing realization for the remainder of calendar year 2023, as mentioned on the previous slide. Please keep in mind that we have now a comprehensive steel buying strategy. And we are entering in future locked contracts for steel prices with certain tonnages up to 12 months forward, minimizing our exposure. On Slide 20, looking at fiscal year 2023, we want to share with you our updated forecasts by quarter, which serves as basis for our fiscal '23 total year guidance. As a reminder: We are taking a more transparent and conservative approach this year, as it will still be a somewhat uncertain year from a supply chain perspective. However, we have improved already all the other business levers that we could address, as now demonstrated by our very strong fiscal '23 Q2 actual results. Looking forward at fiscal '23 Q3 and Q4, we are increasing our forecasted revenues in the range of $275 million to $300 million for each quarter as well as increasing our EBITDA margin by approximately 1 percentage point each quarter. For Q3, we are projecting adjusted EBITDA of $21 million, with a range of $19 million to $23 million. For Q4, we are projecting adjusted EBITDA of $23 million, with a range of $20 million to $26 million. Putting it all together, for the total year, we expect revenues in excess of $1.1 billion; and an increased mid-point adjusted EBITDA of $60 million, with a range of $55 million to $65 million. Moving to Slide 21. In summary, we are forecasting a significant improvement year-over-year in all aspects, with revenues up more than 35% to approximately $1.1 billion, adjusted EBITDA in the range of $55 million to $65 million and positive free cash flow of $30 million to $40 million. On Slide 22, we wanted to reiterate our long-term outlook. We are very happy about the results of our turnaround taking hold and our prospects ahead. And we are looking forward to share with you in our next earnings call our first indications regarding fiscal year '24. Looking a bit beyond that, once the supply chain normalizes, which has not happened yet, we expect to sell 9,500 units, including 1,500 units EVs; and generate $100 million or 8% adjusted EBITDA on $1.25 billion in revenue. Looking further to the medium term. Our EV growth and operational improvements can support volumes of 10,500 to 11,000 units, including EVs in the range of 2,500 to 3,500 units, generating revenues of $1.5 billion to $1.75 billion with adjusted EBITDA of $150 million to $200 million or 10% to 11%. Our long-term target remains to drive profitable growth towards $2 billion in revenues comprising of 12,000 units, of which 5,000 are EVs; and generate EBITDA of $250 million or 12%. We are incredibly excited about Blue Bird's future. And now I will turn it over back to Matt to further expand on this.

All right, thank you, Razvan. On to Slide 24. As detailed in the fiscal year '23 guidance that Razvan just walked through, we are again now raising guidance based on the strong performance of the business. All the hard work the Blue Bird team has put in for nearly 2 years is paying off. We plan on booking at least 8,350 units, a 22% increase over fiscal year '22; and driving a top line of $1.1 billion. That's a 37% increase year-over-year. Parts sales will be ahead of plan, delivering at least $88 million in revenue, up 15%. We now expect the adjusted EBITDA performance to be approximately $60 million, up nearly fivefold compared to fiscal year '22. EV bookings continue to be on plan, and we expect those to more than double year-over-year. Now there have been no significant changes in the ACT retail sales forecast for fiscal year '23. It continues to be supply chain constrained across the industry. And our targeted bookings will put us right where we want to be around that 30% market share. As other industries are slowing down, we are just heating up with incredible demand in front of us. As we have touched on in past calls, industry retail sales have been off from their average of 32,000 units per year for the past 3 years in a row. And the national school bus fleet is aging. The market was first constrained by COVID and school closures, and it has been held up more recently by the supply chain. This aging fleet must be replaced. And we expect substantially robust years ahead of us to address this pent-up demand. ACT is forecasting a compound annual growth rate of 10% from our fiscal year '23 through our fiscal year '27. Our business is performing well after 2 long years, and we look forward to executing on the robust market ahead. The future is incredibly bright for Blue Bird, so let's turn to Slide 25 as a summary reminder of the strong investment highlights around our company. We are a great countercyclical play to many companies and industries being affected by the slowdown in consumer spending. Plus, not only are the fundamentals of our industry strong. It is just starting to heat up, with this 10% compound annual growth rate expected over the next 5 years. Second, there is commitment from the highest level of government to electrify this country's school bus fleet. In addition to the $5 billion from the federal government, there is another $5 billion in other federal, state, provincial and local programs, $10 billion in total to accelerate this transition to electric school buses. Blue Bird will be a direct beneficiary of this, as we have more electric school buses on the road today than anyone. We also have a proven reputation as a leader in our alternative-powered school buses for over a decade, as evidenced by the 20,000-plus propane-powered Blue Birds on the road today. Our exclusive partnership with Ford and ROUSH offers us a distinct performance advantage no one else has with propane. And on EV, our collaboration with Cummins offers a proven partner investing billions in alternative fuel solutions, something no other electric school bus manufacturer has to offer. And as impressive as the outlook is for school buses, we are still looking for more growth opportunities and want to expand our total addressable market. The commercial stripped chassis offering could eventually add a few thousand units per year on top of our projected long-term forecast. And with our lean transformation efforts, we are removing non-value-added processes and reducing standard production hours per bus. We are continuously looking for ways to take out costs and at the same time increase quality. As we touched on today, our pricing is now aligned to market economics and we are through the majority of legacy priced buses. All these factors will provide us with 10%-plus adjusted EBITDA margins in the mid-term normalized operating environment. As you saw in the guidance we provided for the fourth quarter of fiscal year '23, we get to approximately 9% adjusted EBITDA on supply-constrained volume, proving that, in a normalized operating environment, double-digit adjusted EBITDA margin will be in reach. As I mentioned at the beginning of this call, the hard work by the Blue Bird team has paid off and the business is ahead of plan and even exceeding historical performance benchmarks. I want to thank the nearly 1,800 teammates for all their hard work; as well as our outstanding dealer body, who sacrificed with us over the last 2 years. We couldn't have done it without them, and they are and will always be critical to our success. We now would like to open up the line for questions. Thank you.

[Operator Instructions] The first question today comes from the line of Eric Stine with Craig-Hallum.

Great to see the results.

Thank you, Eric. Appreciate it.

Just curious -- yes, yes. And just curious. I mean obviously supply chain is still an issue. Seeing it ease a little bit, I mean, I guess I'll start with probably a near-impossible question to answer, but I mean, is there -- do you have any thoughts about this kind of seeing the light at the end of the tunnel? Or is this kind of a new norm? It's just going to drag on and it's something you're expecting to have to deal with, yes, for a long time.

Yes, thanks for the question, Eric. This is Matt Stevenson. I mean we definitely are seeing some improvements. And some of it is moderating, but there still is volatility in the supply chain; and really it isn't one specific component. It's kind of across the board. Of course, as you know, we use the same set of suppliers the commercial truck industry uses. And that industry is still going pretty strong. And most of the challenges reside around our Tier 1s and Tier 2s getting frontline labor. So we as a team have just gotten a lot better dealing with it, so we remain optimistic on our ability to continue to deliver.

I guess, kind of a follow-up on that, if I look back, think back a couple of years. I mean the norm was certainly not to carry this much backlog, which obviously is related to the supply chain. I mean, do you envision a scenario where -- if you'd play this out a while, that you'd kind of catch up and you will get back to more normal levels? Or again, I mean, is this -- do you kind of think that this is the norm where you've got this elevated level of backlog? Which, I mean, I guess, is a good problem to have, but it would also be nice to be able to work that down.

Yes. Based on sort of pent-up demand that we reviewed there and what ACT is forecasting and a lot of robust years in front of us, we expect to still have a healthy backlog. We, of course, monitor the situation weekly, if not daily, in terms of our ability to ramp up production, but we continue to be conservative and ramping up our production to make sure we're watching all of inbound material and getting buses out the door.

And do you feel -- I mean obviously you're almost through the low-price backlog and you're putting through the price increases for fiscal '24. Do you feel like, I mean, the market is basically conditioned for that? I mean, are you sensing any pushback? I know steel prices have started to turn higher again. I mean, what's your thought on price going forward?

Eric, this is Razvan. Thank you for the question. We are monitoring carefully the cost development. And as long as there is still inflationary pressure, whether it's from labor costs or steel prices going back up, we will consider pricing actions to offset for these upcoming increasing costs. So it's a bit too early to know very long term how the situation will develop, but at least for fiscal '24, we took the first step in order to cover for these inflationary costs.

Yes. Okay, that's great. I'll take the rest offline.

Our next question comes from Mike Shlisky with D.A. Davidson.

I guess I wanted to ask first about some comments you made on EV, Matt, and the EPA awards. I guess I'm -- some of your comments around, for example, the 2022 awards. You mentioned you're getting at least 500 out of the full amount. And for the 2023 awards that are already out there, so far, you think you can get about 200. And it just sounded like that's below the historical 30% share you had on the overall school bus market, so could you comment on what might be driving your market share there? Or is it just [ conceptions ] and we're just like rounding? I'm just kind of curious whether [ you're all ] confident you can actually match or beat your share on EVs that you have on the overall bus market.

Mike, in -- this is Matt. Thank you for the question. Really it's just our conservative nature, much like, you'd probably recall, on the first phase of the program, the '22 program, we said 500 to 700. We're just taking a very conservative approach here when we look at the '23 grant -- or the grant program for Phase 2. And that has a reduced amount of money. That's anticipated to be only $400 million versus the roughly $1 billion that was in the first phase, but still again it's really just the conservative nature of our approach. And our target is to go after and get at least that 30% or more, but for these purposes, we say 200 or more.

Great. Can you guys hear me okay?