Blue Bird Corporation

Good day and welcome to the Bluebird Corporation Fiscal 2020 First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Mark Benfield, Director of Investor Relations. Please go ahead, sir.

Thank you, Nadia. Welcome to Bluebird's Fiscal 2020 First Quarter Earnings Conference Call. The audio for our call is webcast live on investors.blue-bird.com. You can access the supporting slides by clicking on the presentations portion of our IR web page. Our comments today include forward-looking statements that are subject to risks that may 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. Bloomberg disclaims any obligation to update the information in this call. This afternoon, you'll hear from Bluebird CEO, Phil Horlock, and CFO, Phil Knight. Then we will take some questions. Let's get started. Phil?

Okay. Well, thanks, Mark. Well, good afternoon, everyone, and thank you for all joining us today for our first quarter earnings call for fiscal 2020. We're continuing to make great progress at Bluebird as we strive to improve both overall profitability and margins. We always welcome the opportunity to share with you our latest quarter results, So let's start with an overview of those financial results on slide four. As we've previously explained, the school bus industry is extremely seasonal, and the first quarter is always the softest quarter of the year, with unit sales typically representing no more than 14 to 15% of the full year volume. This is also our expectation for fiscal 2020, and so I'm pleased to report that despite the soft sales quarter, We had a really strong first quarter financial performance relative to prior years. In fact, it was the second highest profit in more than 10 years with adjusted EBITDA of $8 million, which is $8,000 or 11% over a year ago. Importantly, this was our sixth consecutive quarter where profits increased over the prior year, despite higher commodity surcharges from our suppliers to address tariffs that impacted us from the second quarter of last year. Before proceeding further, and as I mentioned on our prior earnings call, let me set the strategy that we are pursuing. Throughout this and future earnings calls, you will hear a recurring theme of how we are driving our overall profit and margin improvement through three key initiatives. First, following the bus pricing we took in late fiscal 2018 to address the escalation in tariff-led commodity costs, we plan to price each year to recover economic increases. As you will recall, we took pricing again in July 2019 and we will see the benefits throughout this year. Second, cost reductions that we are achieving through our transformational initiatives. We began this journey two years ago and have seen significant year-over-year savings in every quarter since then and we intend to continue to do so going forward. And third, continued leadership and growth in alternative fuels. Increasing our mix of alternative fuel-powered buses as a percentage of our total sales is key to profit growth, as we earn a superior selling price and gross margin compared with conventional fuel buses. Our growth in this segment continues to outpace the overall market by a long way, as you will hear later. Now all three of these actions improved our results over the first quarter last year and are cornerstones of our ongoing plan to increase both gross profit and EBITDA margins. So, let me get back to our first quarter results. We improved profitability despite selling 140 fewer buses than last year. Now, we mentioned on our last earnings call that first quarter volume will be down versus a year ago as we launched our new robotic paint facility, requiring additional planned downtime in October and a gradual production ramp-up. This is simply a retiming of volume for later in the year. Now, while volume was down 90% from a year ago, The fourth quarter net sales revenue of $153 million was only 1% below last year. The increased sales revenue mainly reflects a richer mix of higher priced alternative fuel powered buses and the favorable impact of our bus pricing actions that I just mentioned. In fact, our average bus selling price was over $5,000 per unit higher than in the first quarter last year. And past sales also grew substantially. 17% over the first quarter last year. Although about half of that is explained by an additional sales week we had in the first quarter of fiscal 2020 compared to last year. So overall, we had a very strong revenue performance. Now, adjusted free cash flow was about $90 million negative for the quarter. As you know, traditionally, we're always negative in this first quarter. But this was $34 million worse than a year ago. This was largely due to higher raw inventory, have been at the end of December 2019 to address some unique circumstances, and I will describe those later. Suffice to say, we will return to normal inventory levels as the year progresses. This is just a timing issue. Adjusted net income of $2 million and adjusted value per share of 7 cents were up $800,000 and 2 cents respectively from a year ago. Now if you look at the underlying strength of the industry, and Bluebirds Results, we remain upbeat about the business fundamentals. We are forecasting an industry of around 34,000 school buses in fiscal 2020, which is about the same as last year. And that's a near record level over the past 30 years and compares favorably with the average over that same period of 31,000 school buses. With a strong outlook for property values and corresponding property taxes, which are the major funding sources for school buses, together with the fact that 190,000 school buses on the road today have been in service for more than 15 years and school children enrollment is increasing, we are confident that the industry outlook remaining at around this level for the foreseeable future. Bottom line, the demand for school buses is clearly very strong with funding the only limiting factor. We saw yet another record first quarter sales mix for alternative fuel powered school buses surpassing last year's previous record. At an impressive 39% mix of our total unit sales, we beat last year's first quarter mix by five points. It's clear that we lead the industry by a long way in alternative fuel powered school buses. Now as a reminder, which I do this every earnings call, in alternative fuels we count all of our propane, compressed natural gas, electric and gasoline powered buses. As all of these are alternatives to diesel, which has been the staple fuel for years. For the last several years, we've been achieving significant growth in alternative fuel bus sales, and as I just mentioned, we have not slowed down this year. We'll cover our performance in this area in more detail a little later. All in all, I'm very pleased with our first quarter results. We increased our gross profit margin significantly versus a year ago through a richer mix of alternative fuel buses, cost reductions, and pricing. That was the fourth consecutive quarter of gross margin growth and is the key element for improving our EBITDA margin. And we expect continued gross margin improvement from these actions as we move forward through the fiscal year. We are maintaining fiscal year 2020 guidance for all three metrics on which we report, with midpoint of range for adjusted EBITDA at 13% above fiscal 2019 at $92.5 million. Importantly, we are on the path to our stated goal for an adjusted EBDR margin run rate of at least 10% by the end of fiscal 2020.