Blue Bird Corporation

Please stand by. We're about to begin. Good day, everyone, and welcome to the Bluebird Corporation Fiscal 2020 Second Quarter Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mark Benfield, Executive Director of Profitability and Investor Relations. Please go ahead, sir.

The audio for our call is webcast on our website. Blue-Bird.com under the investor relations tab. You can access the supporting slides on our website by clicking on the presentations portion of our IR landing page. Our comments today include forward-looking statements that are subject to risks that could cause actual results to materially be different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Bluebird disclaims any obligation to update the information in this call. This afternoon, you will hear from Bluebird's president and CEO, Phil Horlock, and CFO, Bill Kai. Then we will take some questions. So let's get started. Phil?

Well, thanks, Mark. Well, good afternoon, everyone, and thank you for joining us today for our second quarter earnings call for fiscal 2020. Before I jump into the presentation, I'd like to give a brief introduction on how I assess opposition today. A lot has changed since our first quarter earnings call in January, and these are clearly not normal times. But let me just state that Bluebird is well positioned to weather the unprecedented pandemic, and we will continue to grow and thrive in the long run. We're in a very strong financial position with ample liquidity. We have a history of robust cash generation, a culture of winning and leadership in growing segments, a clearly defined multi-growth strategy, and an experienced team with a proven track record of delivering results and handling difficult times. COVID-19 has not changed any of these factors, as you will see shortly with a great second quarter result. We expect the third quarter volume will be down from last year, as not surprisingly, orders have slowed with schools being closed since mid-March and shelter-in-place mandates established throughout the US and Canada. However, as states reopen, and school transportation teams return to work, we expect to see new bus orders increase with higher fourth quarter production in support of school staff. We have strong business fundamentals evidenced by our year-over-year profit growth in each of the past seven consecutive quarters, and we have taken austerity measures to preserve cash. We increased our revolving credit facility as an insurance measure, and we acted swiftly and decidedly to protect our employees and to secure our supply chain so that we continue to build and deliver buses to our customers on time. In particular, I'd like to give special thanks to our incredible employees for their commitment and dedication to Bluebird over the past several weeks. The coronavirus has impacted almost every aspect of our daily lives, and we are all facing personal uncertainties that are not of our own making. and all of which we have limited control. Despite these unprecedented challenges, I've been so proud of the positive attitude and outstanding morale of the Bluebird team in ensuring we stay open for business and to deliver buses that will keep our children safe and our company healthy. So with that introduction, let's move on to slide four and take a closer look at the state of our business. As the headline says, we are confident in the state of our company and our business outlook, despite the uncertainties we are all facing. We deliver strong financial results in the second quarter, with substantial growth in volume and net sales. Importantly, our average selling price was 7% higher than a year ago, with a combination of annual pricing and a richer mix of higher-priced alternative fuel-powered buses, which is a new record mix for the second quarter. Together with cost savings from our ongoing transformation initiatives, are a three-pronged profit growth strategy, namely pricing for economics, growing alternative fuels, and reducing structural costs, delivering results once again this quarter, as it has done over the past two years. In the second half of March, we took decisive action to address increasing employee concerns over the growing number of coronavirus cases in middle Georgia, where our Fort Valley production facility is based. Despite the fact that we had no confirmed COVID-19 cases among our employees at that Additionally, since several of our suppliers have been forced to shut down their operations, we took the decision to suspend production for three weeks, commencing in the last week of March. Our production employees were furloughed, and we assisted them in applying for federal and state unemployment benefits during this period. We were successful in achieving classification as an essential business in both Georgia and Ohio, where our fast distribution center is located, and were able to restart full production on April 20th. We have instituted strict measures to control the risk of employee infection in the plan, which I will cover later. I can tell you the employee morale and enthusiasm of being back to work has been outstanding. Earlier this month, we increased our bank revolver capacity from $100 million to $142 million, and we now have ample liquidity to manage through this uncertain time. We also implemented a number of austerity measures to preserve cash, including limiting capital expenditures, virtually eliminating travel and significant SG&A reductions. As a consequence of our business continuity actions, we have now filled our production slots through June and are now working on filling fourth quarter slots covering July through September. Turning to the industry outlook and the present market in general, not surprisingly, COVID-19 has had an impact. Since mid-March, we have seen incoming orders for school buses at a lower rate than prior year. We should not come as a surprise to anyone with schools being closed and shelter-in-place mandates being widespread. Our expectation, supported by the views of our dealer network, is that the order rate will increase through June as states reopen and school transportation employees return to work, and the demand for new buses for school staff will be significant. Nevertheless, we believe it unlikely that the four-year industry will recover to the prior forecast level of 34,000 buses. and anticipated industry of between 30,000 to 31,000 buses or 10 to 12% below the prior forecast. We do expect that some buses required for school staff will spill over into the first quarter of fiscal 2021 as the lower order rate over the past several weeks cannot be recovered by school staff. Bottom line, we are well prepared to manage our way through this pandemic, but the uncertainty of predicting the economic outlook requires that we withdraw guidance at this time. We expect to have a clearer view of their outlook within the next four to six weeks as states reopen and school transportation teams return to work. Let's now turn to slide five, review the key financial results for the second quarter. We had a very strong second quarter financial performance. Adjusted EBITDA of $12.7 million was half a million dollars over last year and our second highest profit for this quarter in more than 10 years. Importantly, this profit included production cost penalties of about $3 million due to COVID-19. As I mentioned earlier, this was also our seventh consecutive quarter where profits increased over the prior year. Unit sales of almost 2,600 buses were up 14% above last year, with net sales revenue at a substantial 21% higher than a year ago. Our average best-selling price grew by 7%, representing an increase of more than $6,000 per unit. So overall, this was a really strong revenue growth performance. Adjusted free cash flows the second quarter was $38.2 million, an increase of about $25 million over the last year. And adjusted net income of $2.8 million and adjusted interest per share of $0.10 were down $1.1 million and $0.05 respectively from a year ago. Operationally, there were three significant results in the second quarter that bolstered our profits and are the cornerstone of our margin growth strategy. First, at 49% sales makes for alternative fuel powered school buses, we beat last year's second quarter record by seven points. We remain the undisputed market leader in the fastest growing segment of the business. Second, we saw earlier that the pricing we took in July 2019 to recover economics is holding. and is a key contributor to the $6,100 increase in average bus selling price. And third, our transformation initiatives to reduce structural costs encompassing purchase material, bus design and manufacturing are delivering ongoing savings and are on track. As I've communicated on prior earnings calls, these three initiatives represent our key strategy to drive ongoing profit and margin improvement. and finally, we're in a strong liquidity position to weather the COVID-19 pandemic. At the end of the second quarter, our liquidity was $97.2 million and we have since strengthened that position with a $42 million increase in our evolving credit line. Overall, I am very pleased with our second quarter financial results which we achieved despite the cost impact of COVID-19 and in particular, I'm pleased with our underlying operating accomplishments. Let's now take a closer look at our second quarter financial results on slide six. I touched on many of these financial results earlier, and full-time, we'll run through the details later and provide more texture behind the overall numbers. I think I can summarize this very easily by saying that for the second quarter and for the first half, adjusted EBITDA and net sales revenue were up from last year for both the bus business and the park business. To illustrate the momentum we have coming out of the first half, total net sales were up 11%, and adjusted EBITDA was up 7% in the first six months of the year. Turning now to slide seven, let's take a closer look at alternative fuel bus sales performance. Despite the adverse impact of COVID-19 and inherent slowdown of bus orders, the mix of bookings and backlog of alternative fuel-powered buses remains strong at 46%, equal to last year's record mix at this time of the year. Our market share remains as strong as ever in this segment and is presently running at about 65%. led by four things with a share of almost 80% of that segment. Significantly, 216 customers have purchased or ordered alternative fuel buses from us for the first time ever this year. That's on top of more than 400 customers who tried alternative fuel options last year for the first time. Importantly, our alternative fuel powered buses have enabled us to conquest new business from our competitors, bringing 99 new customers to the Bluebird family so far this year. Those are compelling facts. And with the high customer loyalty we achieve from these products, it's a great endorsement of our exclusive alternative fuel buses, the Bluebird brand, and our dealer network. So it's clear we are not slowing down in this segment of the industry. No other school bus manufacturer comes close to our alternative fuel sales mix or our market share. So far this fiscal year, we have either sold or have firm orders in hand for more than 130 electric bus orders, and we expect more to follow with all the customer interest we are seeing for the newest addition to our alternative fuel line-up. In fact, this number will grow to more than 150 orders by the end of this week. This is a very dynamic order process that we operate in. Looking forward, the vast majority of the VW mitigation funding is still ahead of us, will help us boost sales over the next three years or so with many states earmarking specific funds for school bus purchases. We are really pleased with the success we've had so far from these funds that have been issued. With the widest range of alternative fuel-powered buses, the most modern and proven propane, gasoline, and CNG engine in the industry, which is exclusive to Bluebird for our expanding partnership with Ford and Ledge Cleantech, and our leadership position in low-nuts emissions, We are well positioned to capitalize on the BWU funding and other growth opportunities going forward. In summary, I'm very proud of our strong and understated leadership position in alternative fuels. And with less than 50% of school districts having purchased an alternative fuel out of school bus today, we are plenty of runway ahead for continued growth. Let's not change gears somewhat and turn to slide eight and spend some time looking at how the COVID-19 pandemic as impacted Bluebird, and importantly, how we are dealing with it. Schools are one of the first institutions to react to the pandemic, with the first closing starting on March 15th. By the end of March, over 90% of US states and Canadian provinces have closed all their schools. Since then, almost all regions have confirmed that schools will be closed until the next school year. Not surprisingly, school closures have resulted in major disruption to our business, and we've seen a significant slowdown in school bus orders from mid-March to present. Key to the slowdown in orders is that school transportation staff were confined to working from home, and school bus service operations came to a standstill. Additionally, school board meetings were eliminated or postponed, and when they did meet, agendas were focused on continuity of education and school reopening, and not necessarily procurement of school buses. But as states begin to reopen from mid-May and shelter-in-place restrictions are being lifted, we are now seeing a return to work and increased interest in quotes for new buses as school transportation staff focus on their school bus needs for school start. Through June, we anticipate a significant step up in demand as new bus orders are placed for school start delivery. And this view is supported by feedback from school transportation directors. Following the slowdown in orders for more than two months, however, it is infeasible to deliver all bus needs for school starts. Consequently, the new school bus interest of fiscal 2020 is now forecast to be in the 30,000 to 31,000 units range, some 10% to 12% below prior forecast. We do anticipate additional sales in the first quarter of fiscal 2021, however, as bus delivers will need to be made after school starts. There is simply too much uncertainty today around the economic and social impact of COVID-19, such that, as I mentioned earlier, we are withdrawing financial guidance for fiscal 2020 at this time. We should have a clearer picture in the next four to six weeks as business resumes. Let me now turn to slide nine to cover Bluebird's response to the COVID-19 pandemic. Classified as an essential business in both Georgia and Ohio, along with virtually all of our dealerships, our prime objective is business continuity. As you can see on this slide, successful business continuity requires three critical elements. One, the safety and well-being of our employees. Two, continuous production and timely receipt of material from our supply base. And three, sufficient liquidity and robust plans to generate and preserve cash at Bluebird. We have focused on all three of these elements. First, robust protocols are in place to ensure a safe workplace, including a mandatory temperature check of all individuals entering the plant each day, wearing of masks and social distancing in the plant environment. We are also working with the Georgia National Guard to have all Bluebird on-site employees tested for COVID-19, and to date, more than half of our plant employees have been tested. Two, rigorous follow-up with suppliers to address critical inventory needs, necessitating expedited shipping as needed, and shuffling of production sequencing to handle timing of parts and component deliveries, and bringing on board additional suppliers where practicable. And three, our own austerity measures to preserve cash, including significant capital and financial reductions and expense cuts on all non-essential items, following production employees during shutdown while facilitating state and federal payments of their unemployment benefits and increasing liquidity to our revolving credit line. All of these actions are helping us to manage through this difficult time with employee well-being and business continuity as the major objectives. As we face these uncertain times, we haven't taken our focus away from driving cost reductions. Let's now take a closer look at our transformation initiatives to improve cost structure by helping us today and in the future. Let's turn to slide 10. We showed this slide at the last two earnings calls, but it illustrates the progression of our transformation initiatives over the past two years and into fiscal 2020. Importantly, you can see this as a cumulative approach where additional processes and tools are being added as we strive to drive down total costs. We began Phase 1 in fiscal 2018, and our initial focus was on reducing purchase material costs and services through a combination of initiatives, including re-commercial agreements with suppliers and resourcing, with minimal product design change. In fact, you might recall that in fiscal 2018, we recorded savings of over $20 million from these actions. We continued to pursue this initiative in fiscal 2019 and began to add design changes to our process, to reduce costs without compromising quality. In this second phase, we also focused heavily on the build, launch, testing, and validation of our all-year robotic paint facility, which also necessitated plant rearrangements to optimize our process. We achieved additional savings of $18 million in fiscal 2019, and these actions continue into fiscal 2020. In fiscal 2020 and beyond, phase three now supplements the older processes are driving down the cost of production, both from a fully operational robotic paint facility and from focused plant productivity initiatives. Our new automated paint facility provides the opportunity to reduce rework with increased first-time run capability, to reduce labor and material costs with robotic application of paint, and to achieve savings in warranty expense and to deliver higher straight-time capacity. We are applying engineering resources to focus on design for manufacturing capability, targeted at reducing production costs and improving quality and rework, and we are confident of achieving significant efficiencies in the months and years ahead. Many more efficiency actions are planned over the next few years. This systemic and cumulative approach to driving down total costs over multiple years is key to delivering higher gross profit and EBITDA margins. We will continue to share the results with you in our quarterly earnings call. I'll now turn it over to Phil Tye who will take you to the financials and have a back later to cover the fiscal 2020 outlook and wrap up the formal presentation. Over to you Phil.