Blue Bird Corporation

Welcome to the Bluebird Corporation Fiscal 2021 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I'll now turn the conference over to your host, Mark Benfield.

You may begin. Thank you. Welcome to Bluebird's Fiscal 2021 Second Quarter 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 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 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, Jeff Taylor. Then we will take some questions. So let's get started. Phil?

Well, thanks, Mark. So good afternoon, everybody, and thanks for joining us today for our fiscal 2021 second quarter earnings call. Now, before I jump into the actual presentation, I'd like to set the stage by giving you the themes you're going to hear about consistently on this call today, as they really define our business and where we're heading. So let's start with that. Second quarter volume was down versus last year's pre-COVID quarter. That shouldn't be a surprise to anyone. We really didn't see the impact of COVID until the third quarter last year. Schools are reopening and the industry is recovering. And as a consequence, second half volume is expected to be up significantly from last year. Our gross margin percentage is up, despite significantly lower second quarter volume. And I know that's a key factor you'll all be interested in. Average bus selling price is up again. We have a strong alternative fuel mix, and we are the clear leader. We're the market share leader in electric and propane on a trillion 12 months basis through March. And our second quarter electric bus sales were up a significant 50%. Our manufacturing efficiencies were up. Our structural cost savings were up. And we're very excited about the new administration's stance on electrification of the school bus fleet. This will be transformational. In summary, we're well positioned for bottom line profit and margin growth as the industry recovers. So with that introduction, let's turn to slide four for an update on how we see our business environment today, and importantly, how we're dealing with the school bus market conditions. As the headline says, in a challenging market, we're continuing to drive business structure improvements, and importantly for our future, substantially increasing our focus on the growing electric vehicle business. Now, the second quarter was a challenging one for our industry, in that we started in January with only about a third of schools fully open for in-classroom teaching. In fact, immediately following the holiday period in December, many schools elected to close or delay their school reopening as COVID cases were spiking at that time. But bolstered by the increase in deployment of the COVID vaccine, however, and the new administration's declared intent to open schools within the first 100 days of its term, we saw a sharp increase in the number of schools reopening for in-classroom teaching, particularly late in our second quarter, around starting mid-February and running into March. So today, more than 60% of schools are now back to teaching fully in the classroom. And notably, only 10% of schools are still utilizing online teaching only. The balance of 30% are deploying a hybrid program, some days in the classroom and some days virtual teaching. As I've stated consistently on previous earnings calls, one factor is clear and obvious. When schools are closed, buses aren't being ordered. The good news is that when schools are open, it's business as usual with school bus orders being placed and we receive those on a consistent basis. Consequently, over the last two months, we've seen a substantial rise in quote activity and incoming orders, significantly outpacing last year, resulting in our order backlog today of around 2,700 buses. That's about 15% above last year at this time. Clearly, that's good news for the industry, and it's great news for Bluebird. As I've consistently stated, it's our expectation that the industry recovery will begin in the second half of fiscal 2021 in support of school start and we're seeing that right now. Shifting now to Bluebird's results, our second quarter results were solid. Despite dealing with COVID and continued supply chain issues that are impacting just about every industrial sector, such as microchips, resins, and China's supply chain being the major factors that we're seeing. Importantly, Despite the additional costs and overtime caused by delays in parts supply, we continue to improve our business structure and underlying margins. In fact, our gross margin percentage was significantly higher than a year ago as we drove higher bus selling prices and plant efficiencies. We also improved working capital in the first half compared with last year as we drove down inventory operating at much leaner levels than in prior years. And at 43% of total sales, we had another strong second quarter mix of alternative powered bus sales, maintaining our clear leadership position. In fact, our alternative power mix would have been a second quarter record at 50% had the EPA and California Air Resources Board, or CARB, not delayed certification of our new 7.3 liter gas and propane engine in the second quarter. This meant we were holding 207 completed buses at the end of March, built with our new engine that will be sold in the third quarter. I'm really proud of the fact that we're number one in trailing 12 months market share for both electric and propane-powered school buses, as measured by RL Polk vehicle registration data. Now, you'll hear a lot today about our electric vehicle results and plans on this earnings call. And needless to say, we remain very excited by the administration's proposed infrastructure bills that would accelerate the transformation of today's 600,000 school bus fleet to electric-powered buses. In total, that's an addressable market of around $120 billion, and the indicated funding support of between $20 and $25 billion over the next 8 to 10 years or so would really jumpstart this change. Not surprisingly, we're very engaged with many political committees and advocacy groups on this topic, including the World Resource Institute that's being funded by the Bezos Earth Fund to help progress this initiative. We're significantly increasing our focus on resources in the electric bus segment, as customer interest and percentage growth in zero emission vehicles is outpacing every other segment of our business. On the previous quarterly earnings call, I mentioned our intention to provide electric and other alternative powered chassis to customers and bodybuilders. I can confirm that we're in early discussions with a number of customers who are very interested in our OEM electric chassis. But obviously, for confidential and competitive reasons, I can't provide any more news on this today, but we will keep you posted as we make progress. So overall, Bluebird is well positioned for profitable growth as schools continue to reopen, the industry recovers, and we capitalize on our improved margin structure. As previously anticipated, we are now seeing significant volume growth in the second half of the year in support of next year's school start. The major risk to those bus deliveries is continued supply chain disruption that is impacting virtually all industrial companies. We're working this every day with our suppliers to maintain business continuity, and our team's doing a great job. I want to stress that this disruption could delay fulfillment of orders, which means that our buses will be delivered after the schools start. Importantly, we don't expect to lose any orders at all. That said, we are reaffirming our guidance range with adjusted EBITDA between $40 and $65 million, which covers the supply chain risk. Let's now turn to slide five, and discuss the second quarter financial highlights. Our second quarter is the second seasonally low quarter of the year after the first quarter. Now, with so many schools being closed for in-classroom teaching for most of the second quarter, not surprisingly, our volume was down significantly. We sold just under 1,500 buses, which was about 130 more than in the first quarter, but 43% below last year's quarter, which was not impacted, as we know, by COVID. Incidentally, last year's volume wasn't near a record for the second quarter. Similarly, net sales of $165 million were down about 36% from a year ago. Despite the substantial drop in volume, we were profitable with adjusted EBITDA of $7.5 million, which is $4.7 million below last year. It's important to note, however, that the lower volume accounted for almost $16 million of decline, but improved efficiencies and structural cost savings generated $11 million profit in the quarter versus last year. These ongoing structural cost improvements have been a cornerstone of our margin growth strategy, and they haven't stopped during the pandemic. Adjusted free cash flow was $1.6 million negative in the quarter. Now, while this was $40.5 million worse than last year's second quarter, the more important measure for cash flow is our first half performance. This was $36 million better than a year ago, despite significantly lower volume, as we recorded substantial working capital improvements during the first quarter and maintained them through the second quarter. All three of these financial results on which we provide guidance, namely net sales, adjusted EBITDA, and adjusted free cash flow, were in line with our plan. As I talked earlier about improving our business structure and underlying margins, we delivered on many operational fronts, which are summarized on the lower half of the slide. As you can see, these achievements reflect our three-pronged margin growth strategy that we've communicated consistently on previous earning calls. Namely, improving bus selling price, increasing mix of alternative powered vehicles, and reducing structural costs. The bottom line is that we improved gross margin by 1.7 percentage points over last year, despite a 43% volume reduction. I'm really pleased with this result in a tough market. So let's now turn to slide six and review our major operating achievements this quarter. And importantly, let's look at the specific results of the margin growth initiatives that I just mentioned. We continue to drive transformational initiatives to improve quality, efficiencies, and capacity. As an example, during the second quarter, we completed all our plant upgrade actions necessary to ensure we can now build as many vehicles on a single production shift that we used to build on two shifts. That's great for efficiency, for quality, and for gross margins. In fact, the resultant gross margin of 11.2% was 170 basis points above last year's result, despite 43% lower volume. That bodes really well for bottom line margins as the industry continues to recover. As a reminder, we've delivered more than $50 million of savings from these transformational initiatives since we started almost four years ago. Next, we increased our average selling price per bus by a substantial $9,000, or 10% over a year ago, primarily reflecting the impact of a richer mix of higher-priced electric and propane-powered buses, a higher option take, and the annual pricing to recover economics that we took late in fiscal 2020. I'm particularly pleased with this accomplishment in the second lowest volume quarter of the year. I mentioned earlier the improved productivity from our manufacturing team. Well, that's translated into $9 million from higher efficiencies in the second quarter. We have a lot of activity going on, too, in alternative powered vehicles. We launched our new and exclusive propane and gasoline engine from Ford and Roush in March. The all-new 7.3-liter V8 engine has more power, it's more compact, it's got higher torque, and it has better fuel economy. As our tagline says, and it couldn't be more true, the best just got better. And we're seeing that, too, in our orders with more than 1,500 units already sold or in our firm order backlog, which is significantly above our launch target. Our combined alternative power mix was 43% of unit sales for the second quarter. That's six points below last year. As I mentioned earlier, delays in the certification of our new engine by the EPA and CARB meant that we were able to deliver 207 buses that we built in March with the new engine. How we delivered them, our alternative power mix would have been a record 50% for the second quarter. The good news, however, is that our order backlog is now running at well over 50% mix of alternative powered buses. And with the higher owner loyalty and margin we generate from these unique products, it's great business for Bluebird. As I covered earlier, the rapidly growing interest for electric buses is a very exciting opportunity for us and will generate significant growth in the years to come. On a trailing 12-months basis through March, based on RL Polk registrations data, our electric school bus market share in North America was an outstanding 62%. This compares with 33% market share in the prior period. So I'm really pleased with our growth trajectory. In the second quarter, we sold and delivered 58 electric buses, which is a 50% increase from a year ago. Again, great percentage growth showing the interest in our Bluebird electric bus. Fiscal year to date, we have 127 electric buses either sold or in our firm order backlog, and we expect to deliver about 200 units by fiscal year end, representing about a 25% growth from the same time last year. That's really nice growth in a down industry, and it's just the beginning for electric vehicles. And finally, when you look at the total number of electric vehicles that we have either sold or have orders for since we started EV production just three years ago, it's now approaching 500 buses. And that covers all school bus configurations, type A, type C, type D. In fact, no one matches our breadth of EV product and market leadership in the school bus industry. In summarizing our operating achievements in one word, I would say we have momentum, even in an industry significantly impacted by COVID. Costs are down, selling price is up, alternative fuel mix is higher, and we have exciting new growth opportunities ahead with electric vehicles and chassis. Let's now take a quick look at where we think we're heading on alternative powered vehicles on slide seven. On the previous slide, I mentioned that our alternative powered bus mix in the second quarter was 43% of total sales. Well, that's grown since to 48%, reflecting our bookings to date and a rich mix of alternative powered vehicles in our firm order backlog. This is another record mix for Bluebird at this time of the year, three points above a year ago. But it's all the more impressive when it's achieved during a pandemic that's impacting an entire industry. On prior earnings calls, we've covered the point that our best-in-class range of buses attracts many new customers who have never tried an alternative-powered bus, and many of them are, in fact, new to the Bluebird family. Well, we're seeing this feature again this year with 151 new alternative fuel customers and 78 Conquest customers who are new to the Bluebird brand joining us since the start of the fiscal year. These are compelling facts, and with the high customer loyalty we enjoy from these products, it's a great endorsement of our exclusive alternative powered buses, the Bluebird brand, and our dealer network. Now, on the EV front, we're not a startup company. We don't have unrealistic goals. We're focused on delivering buses, and we have been building and delivering zero-emission school buses for nearly three years now. We have the broadest EV range in the industry with Type A, Type C, and Type D offerings, and they're on the road today. We're number one in market share with sales in 19 states, and we expect to deliver our 500th electric school bus this summer. In late March, we delivered the nation's first operational DC fast charge, fully vehicle-to-grid-enabled school bus to a customer in Pekin, Illinois. Now, this was not a test, nor was it a demo. Our bus transmitted energy back to the power company's grid from its battery storage system at a high power of 60 kilowatts. This innovation provides customers with the opportunity to generate revenue by selling back to the grid at times of peak usage when school buses are idle. It's a significant total cost of ownership benefit for school districts and operators, and it comes standard on every single Bluebird electric school bus. From a grant funding standpoint, the vast majority of the VW mitigation funding is still ahead of us and will help to boost sales over the next three years or so, with many states earmarking specific funds for school bus purchases. We've had great results so far with electric and propane buses from the funds that have been issued to date. And of course, the new administration's plan to convert the U.S. school bus fleet to electric power is transformative. epitomized by the proposed Clean Commute for Kids Act, which will provide $25 billion over 10 years to accelerate the conversion of the school bus fleet to electric-powered buses. In fact, the co-leader of the bill, U.S. Senator Raphael Warnock from Georgia, visited our plant just last week and rolled in our Bluebird All-American Electric bus. In his subsequent remarks, he confirmed his commitment to electrification bill and his support to the Bluebird team. In summary, I'm very proud of our strong and undisputed leadership position in alternative-powered bus sales. We have the best partners, we've got the best products, and they're exclusive to Bluebird. And with less than 20% of school districts having purchased an alternative-powered school bus to date, we have plenty of runway ahead for continued growth. Now I showed the right-hand box in our last earnings call, and you can see how far we've come in the last four years. And looking ahead, we don't see this growth stopping. In fact, we project that four years from now, between 60% to 70% of all Bluebird buses will be powered by a fuel that's an alternative to diesel. And with the support of the administration, our expectation is that this will grow to 100% by 2030, with virtually all of those vehicles being zero-emission buses by then. With over 7,000 customers actually purchasing our Bluebird school buses today, supported by a first-class franchise dealer network that has built relationships with those customers, we're bullish about this growth opportunity and investing in the business. The shift to zero emissions is a priority focus for us. Now, the opportunity afforded by the proposed bill to electrify the school bus fleet cannot be overstated. Let me discuss it a little more on slide eight. This is an extract of the press release we issued earlier this month in support of the proposed Clean Commute for Kids Act. In summary, this bill provides $25 billion in funding over 10 years, equalizing the price of an electric power school bus with that of a combustion engine bus, and providing necessary charging infrastructure and training. Our estimate is that this will allow conversion of about 12 to 15,000 school buses a year to electric power, representing just under half of the typical annual new school bus demand in the United States. Now, as battery costs come down over time, we expect conversion rate to rise so that by 2030, virtually all new school buses produced and sold will be electric powered. Under this scenario, By 2030, approximately 20% of the 600,000 unit school bus fleet will be electric powered. That's 120,000 electric powered school buses on the road by then. Bottom line, this is the most transformative initiative that the school bus industry has seen since its inception. Now as a clear leader in pioneering and selling alternative powered school buses for more than 10 years, we intend to stay at the forefront. With this in mind, I'm announcing today that we plan to expand our electric bus production capacity from 1,000 buses annually today to 3,000 electric buses next year. I'll now turn it over to our CFO, Jeff Taylor, who'll take you through the financial results in more detail. Then I'll be back a little bit later to cover our outlook and fiscal 2021 guidance. Over to you, Jeff.

Thanks, Phil, and good afternoon. It's my pleasure to share with you the financial highlights from Bluebird's second fiscal quarter of 2021. The quarter end is based on a close date of April 3rd, 2021, whereas the prior year second quarter was based on an April 4th, 2020 close date. We will file the 10-Q today, May 12th, after the market closes, which 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 reconciled differences between GAAP and non-GAAP measures mentioned on this call, as well as other important disclaimers. Let's move to slide 10. And I will review the second quarter key results. Overall, it was a solid quarter for Bluebird, with volume increasing sequentially, as expected, but down year over year. As I mentioned on the prior earnings call, the supply chain environment became more choppy, which persisted throughout the quarter. Our supply chain team is actively managing this situation and has done a tremendous job. Second quarter volume of 1,489 units was down 43% year over year, as the 2020 second quarter was minimally impacted by the pandemic, and as we discussed a year ago, included some pull ahead of units from the 2020 third quarter. while the 2021 second quarter was more significantly impacted by the pandemic with only 36% of schools operating in person at the start of the quarter, resulting in lower demand for new school buses. Additionally, we had 200 plus buses that were in inventory at the end of the quarter, which we did not book due to delayed certification of the new engines. Consolidated net revenue of $165 million was 91 million or 36% lower year-over-year for the quarter, primarily due to lower bus and parts volume. Bus net revenue of $150 million was down $88 million on 1,105 fewer bus sales than the prior year quarter. Bus average selling price, or ASP, was $100,900 per unit, a year-over-year increase of $9,000 per unit due to the favorable mix and option content, in addition to price increases to offset inflationary cost pressures. Our alternative power mix was 43% in the second quarter, which is down six percentage points over the same quarter last year, primarily as a result of transitioning to the new 7.3-liter engine, resulting in a lower mix of propane and gas engine buses. Parts revenue for the quarter was $14.4 million, representing a decrease of $2.3 million compared to the prior quarter, as many school districts were operating in a virtual or hybrid mode. Gross margin of 11.2% was 170 basis points higher than the prior year period, despite lower volume during the quarter. This is a great result and a great job by the team. The increase in gross margin is due to higher average selling prices, improved manufacturing efficiency as a result of structural improvements in our plant, including transitioning to a single shift operation, de-bottlenecking manufacturing constraints, and lower manufacturing overhead from cost controls partially offset by lower fixed cost absorption on lower volume and higher raw material and component cost. We expect to see raw material and component inflationary cost pressure through the end of the year, and we're evaluating a price increase to pass along these added costs. Selling general and administrative, or SG&A, was $17.4 million, which was down $2.5 million, or 12.6%, on reduced spending and cost control actions in our management and engineering areas. Gap net loss was $0.6 million, is effectively flat on a year-over-year basis. On an adjusted basis, net income was $1.4 million, down approximately $1.1 million versus last year. Adjusted EBITDA of $7.5 million was down by $4.7 million compared to the prior year quarter, which I will cover in more detail on the next slide. Our adjusted EBITDA margin of 4.6%, a slight year-over-year decrease of approximately 20 basis points. Diluted EPS of negative 2 cents per share was flat with the prior year, while adjusted diluted EPS was 5 cents per share, or 4 cents per share lower than the prior year quarter. Weighted average diluted shares were $27.1 million versus $26.9 million in the same period last year. Liquidity was approximately $116 million at the end of the quarter as our revolver balance was untapped and available at quarter end. Moving to slide 11, looking at the second quarter year-over-year adjusted EBITDA bridge. Starting on the left of the chart, lower bus volume of 1,105 units and lower parts volume of approximately 14% account for almost all of the year-over-year adjusted EBITDA decrease, before accounting for the partial recovery from the other factors. Pricing net of economics was slightly favorable, while transformation initiatives such as strategic sourcing added $2.3 million. Most notably, though, the $8.6 million improvement in efficiencies, which includes improvement in manufacturing efficiencies and operating expenses, partially offset by higher freight expense and other expenses. We are extremely pleased with the improvement in operating efficiencies in the second quarter. All of these factors combined to decrease adjusted EBITDA by 4.7 million, which resulted in adjusted EBITDA of 7.5 million for the quarter. Moving on to free cash flow, slide 12. The second quarter is normally a low quarter for free cash flow. due to seasonally lower demand and building working capital to ramp up production for the second half of our fiscal year. Second quarter adjusted free cash flow and free cash flow were negative 1.6 million and negative 3.4 million, respectively. Compared to the prior year quarter, adjusted free cash flow and free cash flow were both lower due to a large decrease in trade working capital in 2020, which did not recur in 2021. On a related note, our quarter-ending inventory was lower by approximately $52 million this year as compared to last year, consistent with our current demand level. And as Phil mentioned, our first half free cash flow has increased by $36 million. Moving on to slide 13, net debt of $150 million was $24 million lower versus prior year due to lower total debt of $40 million, resulting from lower borrowings on the revolver of roughly $30 million. and lower term loan balance of approximately $10 million as a result of required payments made during the past year, which were partially offset by less cash flow balance of approximately $15 million. We have two active financial covenants in our credit agreement for the period. First, the trailing 12 months EBITDA as defined under the credit agreement was $44.1 million versus a minimum requirement of $19.3 million. Second, liquidity was $116 million at quarter end versus a minimum covenant of $15 million. Therefore, we remain in compliance with our credit agreement covenants. In conclusion, the second quarter was a solid quarter for Bluebird. Overall, the entire Bluebird team executed well during the quarter as evidenced by the year-over-year increase in gross margin. The improvements in our manufacturing efficiencies and our lower SG&A costs resulting from cost controls. Looking ahead, we saw orders pick up sequentially and our backlog expanded during the second quarter as many school districts have increased in-person schooling and or are planning for a return to school in the fall. We expect the strong performance in our manufacturing operations to continue. However, the supply chain situation, which grew more difficult later in the second quarter and has persisted into the third quarter, will continue to be challenging. The team is focused on the task at hand and has consistently delivered in tough situations. With that, I will now turn the discussion back to Phil, who will describe the outlook for the third quarter and give his closing remarks.

Thanks, Jeff. So let's now summarize the outlook that we see for the balance of this year and beyond. Turning to slide 15. As we have consistently stated on prior earnings calls, Our emphasis at Bluebird is on delivering superior operating performance in order to drive margin growth. After a tough first half of the fiscal year, the industry is beginning to recover. Now, we can't change the industry outcome this year, but we can focus on improving every element of our business so that we're well positioned as schools fully resume in classroom teaching and the industry fully recovers. That means executing our margin growth strategy by improving bus selling price, alternative powered bus mix, and cost structure. As Jeff discussed, along with many other industries, we're seeing rising commodity costs and supply chain disruption. As we've done for the past several years, we will be taking pricing to recover our increased costs, and we expect to do this within the next 45 days. As I mentioned earlier, an example of a structural change that drives superior operating performance was our move to a single ship production schedule. We know we build a bus more efficiently and with better quality when all of our team is working together on the same single shift. That's great news for us as the industry recovers. We have established electric vehicle leadership and growth as a top priority and are organizing the EV business as a focused, dedicated team within Bluebird. I'm working with a number of commercial vehicle customers on the opportunity to supply them with an electric-powered chassis built fully at our Bluebird plant in Fort Valley. We're in an early stage of discussion, but it's clear their interest lies in receiving an OEM electric-powered chassis and not a modification of a combustion engine chassis, which has been the norm to date. Turning to the external environment, there are a number of positive factors impacting our industry outlook. First, the return to in-classroom teaching, and we're seeing that progressively increase. We know that when children are in the classroom, school buses are needed to transport children safely. and we're seeing a significant increase in orders for new buses. On this point, I'll cover our second half volume outlook after this slide. Second, 25% of North American school bus fleet is 15 years or older and aging more when schools are closed. There is great demand and desire for new buses from our school districts and school bus operators. Now, with property taxes being the principal funding mechanism for school buses, and as the press reported this morning, housing prices continuing to rise, we expect the new bus industry to rebound significantly from the pandemic impact. And third, the new administration proposed infrastructure-related bills, which provide funding to convert the 600,000-unit school bus fleet in the United States to electric-powered buses. Now, that's transformative. On the risk side, we and many other industries are dealing with supply chain disruption issues. To date, through sheer hard work and tenacity, we've stayed on track, and our production schedule is now filled through the third quarter, and we're in the process of filling our fourth quarter production slots. But should the material supply situation worsen, however, there is a risk that timely deliveries to customers, and therefore bookings, could be delayed until after school start. Needless to say, we're aggressively following up on this issue, and our intention is to fulfill every order.

Let me now turn to our second half volume outlook on slide 16.

As the heading says, we anticipate a strong increase in second half deliveries based on the increased quote and order rate we've been experiencing and the higher backlog of new orders compared with a year ago, up about 15% right now. As the left box shows, our first half sales this year were down 32% from the pre-COVID levels of last year. Importantly, though, we operate in a highly seasonal business environment where typically 60% to 62% of buses are delivered and sold in the second half of the fiscal year to meet school staff. Even last year, in a COVID-impacted second half, our second half unit sales represented 54% of the full year volume. So if you look at the right-hand box, you can see we're projecting a strong increase in sales of at least 15% from last year's second half as schools reopen and the industry recovery progresses. The significant expected growth in this year's second half sales is a positive sign for a strong industry recovery in the next school year. Let's now turn to our guidance range on slide 17. This slide shows the key metrics which we provide guidance and is unchanged from prior reports. For net sales revenue, we're forecasting a range of between 750 and $975 million. Adjusted EBITDA range is between 40 and $65 million. And adjusted free cash flow is between $5 million negative and $20 million positive. Our guidance reflects industry assumptions ranging from 28,000 units to 30,000 units, with the lower end assuming supply chain issues could disrupt the ability to deliver buses in time for school start and lingering concerns in some school districts over the safety of in-classroom teaching. As the heading says, we believe it's important to plan prudently and somewhat conservatively while aggressively pursuing operational improvements. we will narrow guidance as the supply chain issues and confidence in schools dealing with COVID become clearer. Now, as I did on a prior earnings call, I'd like to share our view on when we expect it back on track to achieving our goal of at least a 10% EBITDA margin. Let's turn to slide 18. This slide illustrates the adjusted EBITDA impact of COVID-19 on fiscal 2020 and 2021. It's clear we were on track to achieve our original guidance of fiscal 2020 until the pandemic hit in the third quarter of last year. And while we're seeing strong industry recovery beginning in the second half of fiscal 2021, following a very low first half, we do expect a significant industry rebound toward pre-COVID levels of fiscal 22, commencing with school start. We also achieved, as you know, a significant increase in gross margin of 170 basis points in the second quarter, despite a more than 40% reduction in volume. This really bodes well for our future financial performance, and as volume recovers, we plan to resume our glide path toward at least a 10% adjusted EBITDA margin in the fiscal 22 and 23 timeframe. So despite the COVID and supply chain challenges, and their impact on today's school bus industry, we haven't lost sight of our mission, to grow profitability and increase EBITDA margin to at least 10% in the near term. To this end, we'll continue to drive improvements across all elements of our business, thereby improving our underlying margins, just as you saw in the second quarter, and we're reporting our progress each quarter. Well, that concludes our formal presentation. I'll now pass it back to our moderator to begin the Q&A session.

And at this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

One moment, please, while we poll for questions. Our first question is from Eric Stein with Craig Hallam.

Please proceed with your question. Hi, everyone. Thanks for taking the questions.

Hey, Eric.

Hey, so maybe, I mean, I know you've spent a lot of time on the guide, and I can certainly appreciate the reasons why you would have it be quite wide. But thinking about it, I mean, is it fair that the supply chain issues are the bigger reason of the two rather than COVID? Because it certainly sounds like your order book you know, would support whether it means, you know, without supply chain issues, it would be high end of the range. I mean, is that a fair assumption? And also knowing, I mean, when do you expect? I would assume you'd have pretty decent visibility soon into that, given you need some time, you know, to fill in those slots and get deliveries done by the end of the fiscal year.

Yeah, Eric, I think that's a great point. You're absolutely right. I mean, there's no question between last earnings call and this call, We feel a lot more confident in schools opening and then the order rates coming in from our customers. No question. The real reason we've got this wide guidance now is all about supply chain. You know, not a weekday goes and go by you hear about, you know, Ford Motor Company or GM and all these guys having issues. PACCAR, I saw their earnings call. I think on our side, like I said, we are working this every day. I can tell you, we meet on this constantly to see where we are. And so far we've been getting through it, but It's a challenge, and that's why we're keeping the wide guidance at this point. I expect next earnings call, I do expect with one more quarter to go, we'll narrow that significantly and give you a better update.

Okay. That's great. Maybe then just turn into electrification and vehicle-to-grid. I mean, clearly an area that you are very focused in, every bus enabled with that. Do you feel like the market understands that? I mean, understands how that's a key piece to the solution on the cost side? And does the market understand that there are third-party financing structures starting to pop up? Because I would think that that would greatly accelerate adoption in that area.

You know, I don't think they do yet. I think that's one of the things we have to do, get out and teach and train and educate. And I honestly think if you go back on the I often talk about propane and our experience. You know, we had to do that then. I mean, we had to pioneer propane by teaching, educating, talking about TCO. And we're doing that now on this point. You know, this is a brand new product. Obviously, we launched our first, you know, high energy. It's really important, by the way, when I talk about the 60 kilowatt, because while there have been demos out there in the past by other manufacturers, no one has done it at the 60 kilowatt level. And I think that's the exciting thing. So, you know, we want to show that districts... You know, over time, the reliance on grants is going to reduce because this will come into the equation. They can make serious money off this and certainly help reduce their TCO along the way. So it's something we've got to do. We're excited about it. And we've got partners who are also pretty skilled in this. But it's certainly how you reduce over time one of the reliance on requiring hefty sort of grants to help you afford the initial acquisition price.

Yep, no, helpful. Last one for me, just on the electric powertrain side of the plans, I mean, I can appreciate you certainly can't give details at all, but maybe just in terms of a revenue contribution, I mean, is it fair to think that this is, I mean, will there be any revenue contribution, or do you think or anticipate in fiscal 21, or is this more of a fiscal 22 event?

From a fiscal 22 item, really. And here's why. I mean, I think obviously there's a lot of excitement around this, not just from us, but from other parties who see us. Hey, why aren't you selling these chassis to third parties? Well, you know, you have to meet the specifications of a customer wants to. I mean, they have their own desired needs. So whatever we end up doing here, when we do get into the business and we're ready to pull the trigger and sell, to get to that point, we've got to make some tweaks, some modifications, customize it for their needs, which is what we're very good at doing. That's what we do every day on school buses. You know, no school bus is the same. We customize these for every school district. That's one of the things I think that why we excel in this space. But we will have to do that as we work through customers. They're going to want to see a prototype. Let me put a body on it. Let me try it out. Let me make sure I like it. That's going to take a few months. But I'm really encouraged by the discussions we're having so far. And I can't tell you enough about how we get this comment that we're tired of buying from a modifier, and we want this from a real OEM who builds that chassis in their plant from the ground up with an electric drivetrain. So we feel good about it. But I think you're right. It's going to be more of a 22 model. type of thing that doesn't see the result in 21.

Okay, thanks a lot. You bet. Thanks, Eric.

Again, as a reminder, if you have any questions, you may press star 1 on your telephone keypad. Doing so will ensure your spot in the Q&A session. Our next question is from Craig Irwin with Roth Capital Partners. Please proceed with your question.

Good evening, and thanks for taking my questions. So, I should apologize up front. I've been juggling a couple earnings calls, so I might have missed this if it was addressed. But the impact of commodities, particularly steel and the run in steel prices, is a question that a number of your shareholders have brought up, a number of people looking at potentially becoming holders of the equity have brought up. Can you remind us how you purchase your major commodities? how you look to lock in price and what the potential impact could be with the options to offset that as far as profitability.

Yeah, thanks, Greg, and good afternoon. We didn't get into that in detail. I'll give a little more color on that. And so in regards to the way we purchase steel, I mean, we have our supply partners that we purchase steel from. Those agreements allow us to purchase from them and there's generally a lag from the spot pricing that you see in the market and when that price flows through to us. So we're a little bit delayed by about a quarter when you see the pricing in the marketplace. We do hedge a portion of our steel position. We don't hedge all of it. And so to that extent, you know, we've got some exposure there On raw steel, we only buy 60 to 70 million a year of raw steel. Most of the steel costs that we incur comes through the components that we purchase. And so it's driven more on the component side than it is on the raw steel side.

And your confidence in passing through that increased cost to end customers, can you maybe talk about, you know, obviously you had great pricing this quarter. But do you see this as something that's manageable as far as, you know, the profit impact over the next number of quarters?

Yeah, let me talk about that, Craig. Yeah, I do, because actually we've already talked to our dealer counsel about that. And, you know, they understand that prices are going up. They read the newspapers. They know it's happening. And, you know, we've been successful in the last few years in passing that through. Just like every other business does, right? The truck business, the car business, and we're in the automotive business too. And yeah, we plan on doing that. So we feel really confident. You know, I just want to just cover just a little bit to what Jeff said. You know, I think it is important to mention that when we buy raw steel, it's a fairly modest amount. And that's what you see on the sheet metal on the product that we bend and we put on our products. Most by far the majority. And we actually do hedge that. Or we buy a – we agree on a volume quantity right at the beginning of the year with our providers, and we lock that price in. And we've been very successful at doing that. And the second thing is, you know, when you think about where does our steel come from, it's engines, transmissions, it's frame rails, which we all buy from our supply base. You know, and that's always a – that's all based on a bunch of indices that they have. And – And typically it's looking back. So, you know, you get these adjustments once or twice a year, and that's still a negotiation for us to have with many of those folks. So I think we have a good process for handling that.

Understood. Understood. Thank you for that. So then my other question is very big picture, right? You've got a couple dozen companies out there that are going to produce vehicles. Many of them have never produced anything before. And, you know, Bluebird is out there with an iconic brand that a lot of us have ridden on our way to school back in the day. Executing wealth in the EV bus market, you know, from the perspective of manufacturing, do you feel that many of the new entrants out there underestimate the challenges of manufacturing and, you know, things like commodity pass-through that we've just covered? Do you feel that maybe there's more to be said for experience than the quality of a marketing plan or the number of press releases? How would you position yourself versus this new crop of so-called competitors?

That's a great question, and I hate to put a remark out there about folks who are trying to enter this business, but I actually look back to what Elon Musk said about Tesla. when he said, you know, he had a great idea and a great vision. He didn't realize the art of manufacturing was going to be so difficult. And it took them a while to, you know, convince everybody there was a real business here in the attraction. And there are a lot of problems. I mean, I've heard Elon Musk talk about it at length. He said, I completely underestimated what it took to manufacture vehicles. Sure, I got the team in place. I got the drawings ready for my buses, my cars in his case. So, yeah, I think it is. And I think certainly in school buses, I mean, you know, a school bus has somewhere between 9,000 and 12,000 parts on it. We have a parts bin of 23,000 parts, which we call from. You know, the actual customization of a school bus is incredible. Every school district, rightly so, you know, they drive a different topography. Their weather conditions are different. They want the unique requirements. So we have a federal level of standard. We have a state level of standard. And we have a school district level of standard. That is a lot to handle. And even after all these years, we sometimes can stumble from time to time, but we get through it because we've been doing it a long time. But, yeah, I think that's the biggest challenge for any of these startup companies who are out there who have sold a few hundred vehicles or actually not even sold any when they say we're going to sell several thousand in the next few years. That's a big challenge. So, yeah, I would agree. I think it's probably the biggest hurdle any of these folks have got. I'm just pleased that we can – You know, we built 11,000 units in the year before COVID, and we've been doing that on a regular basis, and we feel good about our capabilities.

Great. Well, thanks for taking my questions. I'll bring the rest offline.

Thank you. Okay, you bet. Thanks, Craig. Good to talk to you.

And we have reached the end of the question and answer session. I'll now turn the call over to our President and CEO, Phil Horlock, for closing remarks.

Thank you, Molly, for passing it back to me. And thanks to everyone for joining us in our call today. I hope, as you believe, like we do, that our results clearly demonstrate we're focused on driving business structure improvements and really with the ultimate goal of improving our margins. And I feel really good about – I keep coming back to that point that second quarter results, you know, we're seeing the full impact, I think, here now, the nice impact of what we've done on the shift change, what we've done in terms of improving – our operating efficiencies. We've got a brand new paint shop in operation about 18 months now, all delivering. And guess what you're seeing is a significant improvement in gross margin despite a substantial drop in volume. And that's when I think you're sure that things are working. Secondarily is I think, as you know, we're intent on maintaining our leadership in alternative power. We are the leader. We intend to stay the leader. And we're especially excited, obviously, about the interest and the opportunities that the EV affords us in the years ahead. So, you know, the bottom line is I want to thank you all for joining us today. Appreciate your interest in Bluebird, and obviously we'll update you on the progress every quarter. I do want to, as I always do on these calls, I want to give special recognition to our incredible team of employees here for the commitment and dedication, particularly of achieving these results during a pandemic. Now, if you have any follow-up questions, don't hesitate to give a call to our head of profitability and investor relations. That's Mark Benfield. And I want to thank you all again from all of us here at Bluebird. Have a great evening.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.