Blue Bird Corporation

Ladies and gentlemen, and welcome to the Bluebird Corporation Fiscal 2021 Third Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star and zero. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mark Banfield. You may begin.

Good afternoon, everyone. Welcome to Bluebird's fiscal 2021 third 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 for our website by clicking on the presentations box on the IRR 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 SEC. Bluebird disclaims any obligation to update the information in this call. This afternoon, you will hear from Bluebird's CEO, Phil Horlock, and CFO, Phil Tai. Then we will take some questions. Let's get started. Phil?

Thanks, Mark. Well, good afternoon, everybody, and thanks for joining us today for our fiscal 2021 third quarter earnings calls. Now, before I jump into the actual financial results, 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 now turn to slide four. As you can see from this slide, we're making great progress in improving the business and growing margins. But our bottom line profits are being impacted by supply chain disruptions, which has caused delays in our bookings as we had to slow down production because of part shortages. Now, this shouldn't come as a surprise to anyone. as a signal that last quarter is our biggest headwind. And throughout this quarterly reporting period in these past few weeks, we've heard every automotive OEM and supplier mention exactly the same issues that we're dealing with, namely semiconductor shortages, resin shortages, capacity issues in global shipping, lingering impacts from the storms in Texas earlier this year, and labor shortages of many suppliers. The result of all these issues is that we have many key suppliers placing their customers, including Bluebird, on component allocation, impacting engines, transmissions, axles, brake systems, wiring harnesses, and more. So the volume impact of these headwinds resulted in us moving 550 units out of the third quarter to later in the year. And we have slowed down our production rate in the fourth quarter, too, in order to handle these parts shortages. We know these supply chain disruptions are temporary, and we're going to work through them. But I can tell you, we haven't lost a single unit sale because of supply chain disruptions. We just push the production of those units till later in the year. So let's look at the real business structure progress that we're now seeing. First, our industry is definitely bouncing back. Present demand as measured by incoming orders is about eight to 10% below the record levels we saw pre-COVID back in 2019, but well above last year's levels. The good news is that because of the higher demand and by pushing out some production, We now have a record level of firm bus orders in our backlog. Our gross margin percentage was up again in the third quarter, despite dealing with part shortages that cause excessive reworking costs. That's a really strong result and bodes well for when the headwinds subside. We priced 5% on all vehicles in two 2.5% tranches in early July and again just last week. Of course, there's a lag before we see this hitting the top line as it applies to new orders after that date, and as active quotes are price protected for a period of time. But the full annual effect of that pricing to recover economics will be realized in fiscal 2022. Real underlying manufacturing efficiencies were up two from a year ago. That means higher productivity after adjusting out the additional labor time we incurred in reworking vehicles offline to add missing parts. In fact, Phil Tai will show you more about this later and discuss the financial impact that causes in the quarter. Free cash flow was well above last year's third quarter, about $24 million higher. And we had another record mix of alternative powered buses and remained the undisputed market share leader in electric and propane as Medjibar RL Polk registrations on a trailing 12-month basis through May. And today we have our highest ever backlog of firm electric bus orders. On that point, we continue to be excited by the new administration's stance on electrification of the school bus fleet, providing unprecedented funding support. This will be transformational. And we're becoming increasingly engaged in discussions with end vehicle customers, bodybuilders, and EV drivetrain suppliers who are keenly interested in using our proprietary chassis to meet their needs. So overall, our business fundamentals are strong, and you'll hear these consistent themes throughout this earnings call, just as you have in prior calls. So the bottom line message is this. Despite dealing with significant supply chain headwinds that will inevitably pass, they're temporary, no other way of looking at it, bus demand is strong, and the current order rate is at near pre-COVID levels. We have a great, strong, healthy backlog of orders. We're making terrific progress in improving our business fundamentals. We're increasing gross margins for revenue and cost improvements. We're leading in alternative power segments, and we have a record backlog of EV orders. Let's now move to slide five for a summary of the third quarter financial results. I'm really pleased with our third quarter results, which were above last year's levels when you consider that we have been significantly impacted by supply chain disruptions, which are far worse than at the same time last year. We sold 2,024 buses, 76 units higher than a year ago, representing a 4% increase. Incidentally, had we not been forced to shift those 550 units out of the third quarter, unit sales would have been 32% higher in the third quarter this year. That's a great indicator of the industry recovery that we are now seeing. Net sales at just under $200 million were also 4% higher than last year's same quarter. Adjusted EBITDA of $13.2 million was $700,000 higher than last year, but was significantly impacted by supplier part shortages that drove higher labor costs for rework. Paul will cover the impact that these costs had on our profitability a little later. Adjusted free cash flow for the quarter was negative at $6.4 million, but a substantial $24 million better than a year ago as we operated at much lower inventory levels this year. As I mentioned on the last slide, we continue to improve our gross margins by delivering on our operating commitments, despite supply chain disruptions. This improvement reflects our three-pronged margin growth strategy, which we've communicated consistently on prior earnings calls. namely improving bus selling price, increasing mix of alternative powered vehicles, and reducing structural costs. Finally, it's worth pointing out that the 550 units that were pushed out of the third quarter to later in the year represented a deferred profit of almost $9 million out of the third quarter. That's a significant impact on the third quarter results caused by supply chain disruptions, and Phil will show you later the total profit that could have been achieved had we not been impacted by those supplier part shortages. So let's now turn to slide six and review our major operating achievements this quarter, and importantly, see 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 you recall, in 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 shift. That's great for efficiency, great for quality, and it's great for our gross margins. In fact, the resultant gross margin in the third quarter of 13.3% was 220 basis points above last year's result, and importantly, 210 basis points higher than the second quarter. That bodes well for bottom line margins as the industry and supply chain recover. As a reminder, we have delivered more than $50 million in savings from these initiatives since we started almost four years ago. Now, with the school bus industry recovering and the supply shortages causing us to defer some production and sales, we have a firm backlog of more than 4,000 school buses at this time. I can tell you that during my time at Bluebird, I've never seen such a strong backlog of orders, which is about 2,000 units higher than the same time last year. In fact, we are now filling fiscal 2022 second quarter production slots. I mentioned earlier the improved underlying productivity from our manufacturing team when we excluded the excessive rework cost caused by supply of parts shortages. Well, that translated into $7 million from higher efficiencies in the third quarter. We have a lot of activity going on in alternative powered vehicles. We launched our new and exclusive propane and gasoline engines from Ford and Roush in March. The all-new 7.3-liter V8 engine has more power. It's got more torque. It's more compact. and has better fuel economy. Well, we sold 1,100 of those engines in the third quarter, well above our launch target, which is a key contributor to the record 56% mix of alternative powered vehicles that we achieved in the third quarter. That's a substantial 10 points above a year ago, and none of our competitors come even close to our mix of non-diesel business. More good news. Our order backlog is running at 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. Well, on a trailing 12-month basis through May, based on our airport registrations, our electric school bus market share in North America was an outstanding 68%. This compares to 37% market share just last year, so I'm really pleased with our growth trajectory. Electric vehicle sales were relatively flat in the third quarter, and fiscal year today through June, sales were 15% higher than a year ago. However, this reflects timing of orders and is not a true reflection of the interest and demand activity that we're seeing. In fact, our order backlog for electric powered buses in all configurations Type A, C, and D totals nearly 400 buses today. The majority of these will be delivered in fiscal 2022, but it's more than three times the backlog we've held in any other quarter, and it's just the beginning for Bluebird electric vehicles. Just to clarify, these are firm orders supported by customers' purchase orders. In addition, we're carrying a pipeline of anticipated new EV orders today in excess of 200 additional units. Finally, when you look at the total number of electric buses that we have either sold or have orders for since we started EV production only three years ago, it's now more than 750 buses. That covers all school bus configurations, type A, type C, and type D. No one matches our breadth of EV products and market leadership in the school bus industry. In summarizing our operating achievements in one word, I would say that we have momentum. even in an industry impacted by COVID and supply chain disruption. Let's take a quick look now at where we think we're heading in alternative powered vehicles on slide seven. On the previous slide, I mentioned our alternative powered bus mix in the third quarter was 56% of total sales. Well, our year-to-date mix of total sales and order backlog is 52%, which is another record for Bluebird at this time of the year, two 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 have covered the point that our best-in-class range of buses attracts new customers who have never tried an alternative-powered bus, and many are new to the Bluebird family. Well, we're seeing this feature again this year, with 178 new alternative-fueled customers and 88 Conquest customers who are new to the Bluebird brand. 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 exclusive dealer network. On the EV front, as I've said before, we're not a startup company with a PowerPoint presentation on unrealistic goals. We've been building and delivering zero-emission school buses for nearly three years now. We have the broadest EV range in the industry with types A, type C, and type D offerings all on the road today. We're number one in market share with sales in 19 states, and we'll deliver our 750th electric school bus and more in fiscal 2022. Every Bluebird electric bus comes standard with a vehicle-to-grid known as V2G and DC fast charge capability, allowing energy to be transferred back to the power company's grid for its battery storage system at a high power of 60 kilowatts. This innovation provides customers with the opportunity to generate revenue by selling power 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 bus. Well, yesterday, we announced that in collaboration with Levo Mobility, a $750 million backed lease financing joint venture between our V2G partner, Nuvi, and Stone Peak Partners will be rolling out an electric vehicle leasing program across our nationwide dealer network later this year. This will provide customers with an attractive and affordable monthly lease price that incorporates electric school bus and charging infrastructure, along with the benefits of lower operating and service costs and the addition of V2G revenue. This is an exciting and innovative lease financing program to drive electric vehicle adoption. One monthly payment, no upfront costs, that's comparable with a monthly cost of operating a diesel bus over its lifetime. From a grant funding standpoint, the vast majority of the VW mitigation funding is still ahead of us and will help us 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 our electric and propane buses from the funds that have been issued. And of course, the new administration's plan to accelerate electrification of the school bus fleet will be transformative. First, we have the bipartisan infrastructure bill that contains an unprecedented $5 billion for clean school bus replacement, of which $2.5 billion is dedicated 100% to electric-powered buses. This could fund between 25,000 to 30,000 electric school buses over the next few years. Second, We have the $3.5 trillion reconciliation bill scheduled for the fall of 2021, which is being developed and has included between $20 and $25 billion in electric school bus funding in the initial drafts. This could fund between 120,000 to 150,000 electric school buses within the 600,000 unit school bus fleet. This opportunity afforded by the proposed bill to electrify the school bus fleet just cannot be overstated. It's a huge opportunity for us and our industry. In summary, I'm very proud of our strong and undisputed leadership position in alternative-powered school buses. We have the best partners, the best products, and they're exclusive to Bluebird. And with less than 20% of school districts having purchased an alternative-powered school bus, we have plenty of runway ahead for continued growth. I've showed the right-hand box on prior earnings calls, and you can see how far we've come in the last four years. Looking ahead, we don't see this growth stopping. In fact, we project that in about three 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, virtually all being zero-emission buses by then. Now, with over 7,000 customers actively purchasing our Bluebird school buses today, supported by a first-class franchise dealer network that has built relationships with every one of those customers, we are bullish about this growth opportunity and are investing in the business. The shift to zero emissions is a top priority for us. I'll now turn it over to our CFO, Phil Tai, who will take us through the financial results in more detail. I'll be back later to cover our outlook on fiscal 2021 guidance. Over to you, Phil.

Thank you, Phil, and good afternoon, everyone. It's my pleasure to share with you the financial highlights from Bluebird's third fiscal quarter of 2021. This quarter end is based on a closed date of July 3, 2021, whereas the prior year third quarter was based on a July 4, 2020 closed date. We will file the 10Q today, August 12, after the market closes. Our 10Q includes additional material and disclosures regarding our business and financial performance. We encourage you to read the 10Q and the important disclosures that it contains. The appendix attached in today's presentation includes reconciliations of differences between GAAP and non-GAAP measures mentioned on this call, as well as important disclaimers. So let's turn to slide nine, which is a summary of third quarter results. Phyllis covered a lot about the volume, so I won't spend too much time on that. I will just point out that the backlog that we're carrying forward of 4,000 units puts us in very good shape for finishing out this year, and more importantly, perhaps a strong start to fiscal year 2022, where we've already filled the first quarter and we are now scheduling units into the second quarter. Consolidated net revenue of $197 million was $8 million, or 4% year over year, better than the prior third quarter. This was primarily due to higher parts volumes. Bus net revenue of $182 million was up about 1% versus last year, but favorable bus volume was largely offset by a year-over-year decline in bus revenue per unit from about $93,000 to about $90,000, which was largely the result of a significantly higher mix of our most economically priced bus, which is the gasoline-powered bus. The gasoline-powered bus was up year-over-year in volume terms by about 80%. Alternative fuel vehicles, as Phil mentioned, comprised about 56% of our sales in the third quarter due to the outstanding success of the new 7.3 litre engine and the growing demand for our EV buses. Parts revenue for the quarter was $15 million, representing an improvement of $6 million or 74% compared to the prior quarter when many school districts were closed. This is an indicator that the normal work for school districts is starting to get back to pre-COVID levels, although we are still about 10% lower than our normal sales for the third quarter for parks. And this can be largely attributed to the shortages driven by supplier disruption, which we have already mentioned. Turning to GAAP net income, this was $4 million, an improvement of $3 million, or about 4x, on a year-over-year basis. On an adjusted basis, net income was $5 million, up approximately $1 million versus last year. Adjusted EBITDA of $13 million was up by about $1 million compared to the prior year quarter, and I will cover this in more detail on the next slide. Our adjusted EBITDA margin was 6.7%, which was a slight improvement compared to last year. Diluted earnings per share of $0.16 per share was up by about $0.11 per share compared with prior year, while adjusted diluted earnings per share of $0.19 was up by about $0.03 per share versus the prior year quarter. There were weighted average diluted shares of 27.4 million in the third quarter versus 27.1 million in the same period last year. Liquidity was strong at approximately 104 million at the end of the third quarter, and we had no borrowings on our revolver. Overall, as you can see on this page, we exceeded most of the metrics And that is a pleasing result for a quarter where we had very difficult headwinds from the serious supplier disruptions and the continuation of the global freight issues. We'll now turn to the next slide where we look at the third quarter of fiscal 2020 to the third quarter of fiscal 2021. Starting on the left side of this chart, higher bus volume of 76 units and higher parts volume of approximately 74% more than last year account for the year-over-year increase in adjusted EBITDA. Net economics is mainly the result of higher steel and commodity costs as well as higher costs of resins as a result of the winter storms in Texas. The good news was that our ongoing procurement initiative continues to show positive results and offset negative impact of economics in the period. Efficiencies and operating expenses partially offset the positive volume results. Efficiencies would have been positive in the third quarter if we were able to produce to our plan. On the box shown to the right on the slide, we have shown that the impact that we've calculated for the temporary issues with supply disruption and freight problems. You can see there that we, as discussed, have moved about 550 units out of the third quarter at an approximate profit impact of $8.8 million. And efficiency impacts from part shortages, labor disruption, and freight costs cost us another $5.5 million in the quarter. So the bottom line there is that had we been able to operate to our plan, our profits would in fact have been around $28 million or more than double what we have achieved in the quarter. We expect that the continuing supply disruption will not cease by the end of September, the end of our fiscal year, and therefore we expect that the fourth quarter will not improve significantly versus the third. We also expect to see raw material and component inflationary cost pressure increase in the fourth quarter due to the significant increases in steel and other commodities, as well as a continuation of higher costs that are being experienced in all modes of freight. As Phil mentioned, we have implemented about 5% pricing to offset these headwinds, and we'll continue to monitor that situation to determine when and how much pricing we have to take to offset any further increases. The next slide looks at free cash flow. Free cash flow in the third quarter was negative $6 million. However, this was a $26 million improvement versus the same period last year. And as you can see from the slide, this was largely the result of lower inventories, about $26 million. We reduced both raw material inventory and finished goods inventory. Work in process inventory was actually higher year over year as a result of the units that could not be completed or booked due to park shortages. For the quarter, the ending inventory was actually $22 million lower this year as compared to last year consistent with our revised production outlook. Adjusted free cash flow was also negative $6 million and was $24 million better than the same period last year. If you go back and look at what I would consider our last two normal years, fiscal year 19 and fiscal year 18, free cash flow was positive in the third quarter in both of those years, and significantly higher profits were largely the result of that cash flow position. So we are confident that as the industry starts to return to normal and the supply situation returns to normal, our cash generating ability will again be observable. Net debt is dealt with on the next slide. Net debt was $155 million, which was $53 million lower than the same period last year due to lower total debt of $55 million resulting from lower borrowings on the revolver and required payments on term debt. 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 $45 million versus a minimum requirement of $25 million. So we had a comfortable cushion on this one. The second is liquidity. As defined under the credit agreement, our liquidity was $104 million at quarter end versus a minimum covenant of $15 million. Therefore, we remain in compliance with our credit agreement covenants. In conclusion, the third quarter included many positive signs, as Phil Horlock has described earlier in the presentation. We strongly believe we are making significant structural progress that sets Bluebird up well once the temporary headwinds that many companies are experiencing cease. Looking to the fourth quarter, we do not see significant improvement in the supplier or freight issues in the only six or seven weeks left in the period, and therefore do not expect to see the strong profits that we typically have in the fourth quarter of our fiscal year. With that, I will now turn the discussion back to Phil, who will describe the outlook and give his closing remarks.

Thanks, Phil. So let me now summarize the outlook that we see for the balance of this year and beyond. Let's turn to slide 14. As we consistently stated on prior earnings calls, our emphasis at Bluebird is on delivering superior operating performance to drive margin growth. After a really tough first half of the fiscal year, the industry is beginning to recover, but now we have supply chain disruption to deal with. Now, we can't change the external factors, but we can focus on improving every element of our business so that we are well positioned as schools fully resume in-classroom teaching and the industry fully recovers. That means executing our margin growth strategy by improving both selling price, alternative powered bus mix, and improving cost structure. As Phil and I discussed, along with many other industries, we're seeing a rise in commodity costs and supply chain disruption. As we have done for the past several years, we took pricing recently to cover those higher costs, 5% across all vehicle lines. And we may take another increase later this year if costs escalate further. As I mentioned earlier, an example of a structural change that drives superior operating performance was our move to a single shift 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 and supply chain recover. 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. We are working with a number of commercial vehicle customers on the opportunity to supply them with an electric-powered chassis. Now, we're in early stages of discussion, but it's clear Their interest lies in receiving an OEM electric-powered chassis just like we have, and not a modification of a combustion engine chassis, which has been the norm to date. On the topic of electric vehicles, we made an important strategic announcement earlier today that is very exciting for us. Our Microbird joint venture has just acquired a controlling state in Ecotunes. a Quebec-based electric drivetrain integrator and assembler that has been MicroBird's Type A electric vehicle partner for the past five years. With this product, MicroBird has become the market leader in Type A electric school buses, with 80% market share across the U.S. and Canada this past 12 months, and more than 150 units sold are in its firm order backlog. We are delighted with this acquisition, which brings significant expertise in electric vehicle integration into the Bluebird family providing support and application across the entire Bluebird electric vehicle product range, Type A, Type C, and Type D. Since the external environment, I've mentioned at great length today that until resolved, the supply chain disruptions that are affecting virtually all global industries and increasing concerns over rising COVID Delta variant cases will continue to impact our production plans and delay deliveries. Again, The emphasis I want to make is on delayed deliveries and not lost sales. Needless to say, we're aggressively following up on these issues and intend to fulfill every order. Now we estimate that the customer demand for new school buses in fiscal 2021 is in the 29,000 to 30,000 unit range, compared with 34,000 to 35,000 units we saw in the recent pre-COVID years. However, we estimate that the inability of the supply chain to provide parts consistently on time will reduce the actual production-based deliveries by about 5,000 buses this year, resulting in 24 to 25,000 customer deliveries in fiscal 2021. This 5,000 unit shortfall is being pushed into early fiscal 2022 for fulfillment. Importantly, however, the current rate of incoming orders clearly shows that the industry is recovering, indicating current demand to be around 8% to 10% below the 30-year record level of 34,000 to 35,000 units that we've been experiencing prior to COVID. This suggests we're at a run rate presently of around 31,000 to 32,000 annual units. The demand fundamentals for the industry are favorable, with property values and property taxes remaining strong, 25% of the North American school bus fleet being over 15 years of age, and the Biden administration supporting electrification of the school bus fleet. Overall, the current demand for new school buses is healthy, it's strong, and it's robust. Let's now turn to our guidance range on slide 15. This slide shows the key metrics for which we provide guidance. We have lowered the low end of the range, and we reduced the range in recognition of the production shortfalls caused by second-half supply chain disruption and consequent parts shortages. While demand remains strong and will fulfill all deferred orders, we have no ability to slot these units in fiscal 2021 production with less than seven weeks until the fiscal year ends. For net sales revenue, we now forecast a range of between $730 and $780 million, adjusted EBITDA between $37 and $43 million, and adjusted free cash flow between $30 million negative and $10 million negative. Our guidance reflects the industry for delivered vehicles, I should stress delivered vehicles, ranging from 24,000 to 25,000 buses. 5,000 units lowered in our assessment last quarter as production levels were cut and sales delayed because of those supply issues I've talked about on this call today. As the heading says, we believe it's important to plan prudently and somewhat conservatively while aggressively pursuing operational improvements. As I did on prior earnings calls, I'd now like to share our view on when we expect to be back on track to achieving our goal of at least a 10% EBITDA margin. Let's turn to slide 16. This slide illustrates the adjusted EBITDA impact of COVID-19 on fiscal 2020 and the additional impact of supply chain disruption on 2021 and 2022. We were on track to achieve original guidance for fiscal 2020 until the pandemic hit in the third quarter of last year. While we are seeing strong industry demand recovery from COVID, beginning in the second half of fiscal 2021, following a very low first half, we now have the supply chain disruption and resurgence of COVID cases that are expected to carry into fiscal 2022, at least through the first half of the year. As you saw, we achieved a significant increase in gross margin of 220 basis points in the third quarter, and we continue to see strong growth in alternative powered vehicles and at a record EV backlog. As Phil showed you earlier, without those supply chain shortages that hit us in the third quarter, our adjusted EBITDA would have been about $28 million on 2,600 unit sales. Importantly, this would have represented an adjusted EBITDA margin of 11%. Now, these facts bode well for our future financial performance, and as the industry recovers and supply chain recovers, we plan to resume our glide path towards at least a 10% adjusted EBITDA margin, likely later now in fiscal 22 and fully on track in the fiscal 2023 timeframe. So despite the COVID and supply chain challenges and its impact on today's school bus industry, we haven't lost sight of our mission, to grow profitability and increase our EBITDA margin to at least 10% in the near term. To this end, we'll continue to derive improvements across all elements of our business, thereby improving our underlying margins and report out our progress each quarter. That concludes our formal presentation. I'm now going to pass it back to our moderator to begin the Q&A session.

If you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. Again, if you'd like to register a question, please press 1-4 on your telephone keypad.

And one moment, please, for the first question. Our first question comes from the line of Eric Stein with Craig Hubbell.

Please proceed with your question.

Great. Thanks for taking the questions. It's Aaron Spahala on for Eric.

Hey, Aaron. Hey, Aaron.

Hi. Maybe first on the Levo JV. Can you kind of give some more color on the type of education that the market kind of needs as this gets deployed? And then just any thoughts on timing for deployment of that $750 million? And then at a high level, just talk about other types of financing structures that you think are kind of out there in the market as well?

Yeah, sure, Aaron. It's Phil here, Phil Horlock. Let me take a crack at that question. You know, I think... I think when you look at this, first of all, it's an education, right? I mean, you have to, what we learned, I often talk about what we learned through Propane, which is a premium price product over diesel. You have to educate the value. So, you know, this starts with talking about the fact that service costs are going to be so much lower than they are on your diesel engine. I mean, several thousand dollars a year lower on a diesel engine. You have to talk about the fact that when we hook you up through Nuvi to these utility companies, you're going to be able to generate vehicle grid revenue, significant earnings potential. I mean, it is significant. And all that helps to reduce, when you put into a lease price, you look at pricing for the price of a bus, the infrastructure of charging station, offset that against the, compared with a conventional combustion engine, the benefits of that lower service and the VTG opportunity. We can, with that venture, with Levo, we can put together a really attractive package on a lease cost that's very comparable, actually. It gets very close to what people are paying today to run their diesel engine units. And that's the premise. We've worked a lot with Nuvi on this and with the guys at Stonepeak, Levo, the joint venture to make that happen. What we've got to do is the track we're going on now is rolling this out through our dealer network, educating our dealers to be able to teach customers about this, what it means. Because a big change will be many of our school districts are used to a capital budget. They own the buses. They buy the bus. They get a capital budget release. We want to change that model, obviously, and think about how about leasing the bus? Don't put that bus on your balance sheet. It will be held by this entity, Levo, much like any financing credit company for an automotive OEM, for example. So it's about us educating, teaching, training. Of course, what they get is they get a fantastic modern technology, zero emissions, perfectly suited. I mean, there's nothing better than a school bus. When you look at utilization of electric bus, the best segment of the business for it, nothing better than a school bus. The range is perfect. It ties in. So we've got to educate on that. I mean, other methods of obviously financing are it's – It's when we go out here and someone says, I have a capital budget, and we try and think, how can we help you buy that down a little bit and reduce that cost? Obviously, there are grants. We're very good at accessing grants. We're doing a terrific job in the likes of California in doing that. We have a top-notch dealer, AZ Bus Sales, who handles that sort of work. But it's hard to sell when the district has to figure out B2G itself. How do I collect that revenue? How do I make sure I get my service costs down? I really think this will leave opportunity with us. Just remember, Nuvi is our partner on V2G. Every bus is enabled, V2G capable, provided technology that comes from Nuvi. So we feel really good about driving that as a really attractive and a breakthrough product, actually, for us through our network.

Great. Thanks for the call, Eric. Um, you know, maybe second on the EV capacity, can you just kind of talk a little bit about the next steps there and timing to get to that? And then just given, you know, the legislation and this financing package that you talked about, just, you know, what would trigger, uh, and what other steps would be needed to kind of expand that?

Yeah. I mean, obviously, you know, when you look at our electric system, right, we buy batteries, we're buying a motor, um, You know, we're buying through Cummins. We buy the sort of software system, you know, like the brains of it. And, you know, we assemble that. So it's up to us to make sure that we have all that capacity in place through the likes of Cummins, through our electric, through our battery supplies and so on. That's what we work through. I mean, in case of, then we've got our own capacity where we assemble all this in our plant. And, you know, our, right now, because volume's been still relatively low, it's sort of an offline activity when we put all that kit together on a chassis. and then we bring it on the production line, and then we run it just like a normal bus. But it is an offline activity today. What we'll be doing in 22 is that we are bringing that online, and that will give us much more capable capacity. So we're looking at getting up to certainly during this next fiscal year, we'll get to the point where our run rate of capacity in Bluebird will be up to about 3,000 units, which I've signaled previously. And You know, beyond that, each year we'll progressively increase the capabilities there. And we're doing the same in terms of pressing our supply chain, obviously support us to make sure they have it. And we do that by making sure we give them volume projections and demand projections so they know it's real. We're going to need those units. Nice thing is with our backlog we have right now, almost 400 buses. You know, those are already in our supply chain. We're already informed our suppliers that's what we're going to need going into 2022. So, you know, I think that bodes well for us. When you talk about the Biden administration, look, that's not going to happen overnight. We've seen this. We saw this with the VW money, for example, the EPA administered. It took a while for that to get out because some of the factors they consider are disadvantaged state or counties across the U.S. who they want to really prioritize these buses in. How do you prioritize that? What's the ground rules for it? And so on and so forth. So I don't think, I think we might see some of that. Personally, we view this as reaching customers towards the end of 22, but probably more likely in 2023 fiscal before they figured out the true allocation of that. In the meantime, we're going to keep doing what we're doing. pushing our dealers, getting out there, working with customers, use this Levo model to try and, you know, grow the business organically like we have done that today.

Understood. You know, maybe last question for me, just on the chassis, you know, any more color that you can provide there on just how those early conversations are going, you know, how you're differentiated in the market versus other solutions today, and then Just any thoughts on kind of targets or when we might see some kind of action from that?

Yeah, look, you're not going to see anything from us, particularly, I think, until fiscal 2022. I mean, I can tell you this. In fact, I had a team yesterday meeting with customers. I mentioned, I think, on my call when we did it, we talked about the three elements of it. You've got the end customer who drives a delivery van. Let's take that for example. And then we have a bodybuilder who puts a body on a chassis. Then you have folks who provide chassis today with a electric vehicle, electric drive, and it's been a conversion job, right? They threw a gasoline engine away with electric drive training. We're talking to all three of those. In fact, my electrification team had meetings yesterday. I can't tell you where because of confidentiality reasons, but they met with all three of those constituents to talk about what they want from us. Now, what we have to do is we have a fantastic chassis. We have basically a Class 7 sort of chassis. upper class 6 to class 7. What many of these folks would like is a class 5 chassis. So we've still got to look at what we do. It's similar to the design where we have to downrate everything. We've got a chassis designed for a school bus, but it's not a big step for us to take our design and sort of drop it lower, bring it down, lighten it up. And what we will be looking to do in the next nine months or so is developing a prototype chassis, that we can then show to these guys. We'll put a dry print in it, obviously, and we'll prove the product out. So I think this next year, you'll see us talking more about where we are on that, talking more about the customers as we get into next fiscal, which customers are we talking to, and we've got some initial orders in there to talk to you about. But I'd look to sort of mid-2022, I would say, for us to really unveil, if you like, our product plans and our real customer plans on that. But I can tell you, we're working on it. We're not doing this in isolation. We are talking right now to those customers and partners that we intend to work with.

Great. Thanks for the call, Aaron, and for taking the questions. We'll stay tuned on that. You bet, Aaron. Thanks.

As a reminder, if you wish to ask a question, please pass the 1 followed by the 4 on your telephone. Our next question comes from the line of John Lopez with Vertical Group. Please proceed with your question.

Hi, thanks very much, guys. How are you? Good, John. How are you doing?

Doing great.

And you. Thanks for taking the question. I apologize. I cut over a little bit late, so I'm guessing you might have covered this, but if you did, we can take it offline. So on the one hand, I hear you describing the supply chain complications. On the other hand, your inventory has increased quite a bit for the last couple quarters, and it looks like your raw material inventory in particular has doubled in about six months. Can you just maybe talk through, like, the puts and takes here? If things are so tight and logistics are so problematic, like, why are you able to build inventory yet ultimately not fulfill deliveries?

Well, I think you've got to look at the type of inventory that we're doing. You know, I think we used the words on this call that, frankly, going into the third quarter, we didn't anticipate this level of supply chain disruption. There weren't too many signals from our suppliers that they were going to run into these problems. I don't think they knew about it, to be frank with you. So, you know, when we sort of entered into the third quarter, we had a much higher level. I mean, obviously, at least 550 units higher than we intended to be at. And so we were out there at that time. We entered the quarter with a much higher production plan. Obviously, we've got to give lead time to our suppliers, typically six weeks, 10 weeks on some components. And we were doing that and marching, therefore, towards a higher volume level. And then what happened is the supplies that I mentioned, you know, and the critical thing, when I talk about allocation on engines and transmissions, axles, harnesses, these are sort of big deals, right? And so we have to have a high level of engine, and we're going to exhaust that. It's not like we're going to sit here and just say, let's keep the high inventory level going. What we want to make sure is we're going to burn that off. We're going to burn that off through the next few months and get it down to a level. But it takes a while to readjust down to this pretty quick change in capability of the supply chain on certain components. So we'll work it down, but it's – yes, the inventory is how we want it to be. Had we sold the vehicles we planned on selling and got the products we wanted, we would have been sitting here saying the inventory looks in great shape. But we'll just burn that off, and we're not – obviously, we are fighting and working hard to get a better allocation or more, if you like, of the things we're short of. but I'm not obviously doubling down on the things we've got, so to speak. I mean, the parts we have will just burn off.

Gotcha. Okay. And I'm sorry, it sounds like you did cover this earlier, but the parts that you're sort of having the most acute problem with are what?

Well, I don't want to get into saying ones in particular, but I was just – obviously, here's the way we work. If we can have a line of sight to get in some parts that might be later than we need and we can drive the vehicle off the line, we'll build a bus. We can build a bus and put the parts on later. And that's what Phil Tai, when he talked about, you know, some of those rework costs, that it costs us in a quarter, that's exactly what that is. We've taken the bus offline, we've got as far as we can, we drove it off, and then we put the part on. Now, if it's an engine, we can't build a bus without an engine. We can't build a bus without a wiring harness. We can't build a bus without a transmission. And those are the ones that when those don't come in, we need allocation on that. That means we have to stop production. And so if you think about it, 550 buses for us is just over two weeks of downtime in the plan. Think of it that way. And that's what we had to do. We had to shift the plan down essentially. And it's not consistent. It wasn't like I took, you know, a nice two weeks down to recover. It was more sporadic than that because that's the way the supply chain was handling it.

Gotcha. Sorry, just last question on this topic. I apologize, but the – Like, are you sitting on significantly more inventory than you normally would? Like, it almost seems like you have to be, like, more inventory of certain things. And is that intentional?

Hey, John, this is Phil Tai. We have one pre-buy of some inventory that we did, and it's an expensive part, and that is intentional. I see.

Okay.

But let me just supplement Phil's comment to you about inventory a bit. If you're looking at the press release and the balance sheet, note that the inventory level that's shown for 21 is the July 3rd level. The comparison is October 3 of 2020 on that balance sheet. And remember that the first quarter October is the inventory to support the first quarter of the year, and that's our lowest volume in any quarter. Sure. The July inventory is typically to support our highest volume of any quarter in the year. So basically we're sitting on inventory that was supposed to support the highest quarter, and unfortunately, you know, we've talked about the deferral. The other thing I would say is if you compare the July inventory of this year to July inventory of last year, it's down by, I believe it's about $22 million, maybe more.

Sure.

Okay.

I got you. That helps. And I'm sorry, if I could just sneak one more in just about thinking through next steps. I think I heard you guys talk in some detail just about the sort of jam up in the system, if you will. People want buses, they can't get buses. That's just getting pushed into your next fiscal year. I suppose the two questions I have are, one, does that alter in any way, in your view, the seasonal, traditional seasonal pattern? Will school districts and fleet operators be more willing to take buses at spots in the year where they historically would not be? And then secondly, does this impact, in your view, electrification at all? Like, in other words, are people going to delay electrification, as an example, delay electrification because they just have this, you know, kind of the pig moving through the python and they have to deal with that first?

Yeah, let me take a second question for the second part of electrification. It doesn't impact that at all. I mean, you know, we are actually, from the standpoint of what are we doing, if I had to prioritize what I build, obviously we're going to prioritize electrified vehicles. And we, you know, we can do that. It's a different supply chain we're dealing with. not the same levels of issues. You know, a diesel engine, we've always said, is much more complex, if you like. A traditional combustion engine has more complexity, actually, than an electric vehicle has, in some ways. Technology is smarter, but, you know, so we don't see anything adverse at all on electrified vehicles in that case. Now, your first part of the question, which is when you look at the industry, the great thing is, you know, the great thing about having a dealer network is that We have dealers out there. Yes, a lot of these are what we call promise dates for school staff. But, you know, we informed our dealers and customers very early on in the quarter that we were running into some headwinds here and that we'd have to push some back. And that's where our dealers are extremely used. That's why you have a great dealer network. What they use is, so what they did is they go out and they loan their vehicles they've got to those school districts. When the school districts are retiring their old buses, they lend them what's called a loaner bus. And they keep them going. And they keep them working. And so I think because we went out up front with customers, they understand what's happening here. They understand there's a supply chain issue, a global supply chain issue around the world. And they're giving us a bit of a pass, I guess, this year in terms of recognizing I'm going to get my buses after school starts. But our dealers are really helping them make it through the year so they're ready when those schools do start. They've got a full school bus fleet. But I do expect that when we get through 22, hopefully we get through all this pandemic out of the way and we can put it behind us and the supply chain is out of the way, we'll be looking at the end of next year to do more of a normalized school delivery basis. Absolutely. It will be buses for school staff because that's the most important value we think we can give to those customers.

Gotcha. Thank you so much for all the thoughts, guys. You bet, John. Thanks.

We are showing no further questions on the audio lines at this time. I will turn the conference back over to you.

Okay. Well, thanks, Jennifer, and I want to thank everyone on the call for joining us today. We do appreciate, as I say, every quarter your interest in Bluebird, and we'll look forward to updating you all again next quarter. I just want to leave you a couple of thoughts. As you can see, I mean, the great news is the industry is really bouncing back. And, in fact, when I talked about being 9% to 10% under the record levels of 34 of pre-COVID of 2019, frankly, we looked at incoming odds a little bit higher than that, I'd say, more recently. So, again, I think it really bodes well for our industry and what we're seeing out there. Supply chain issues. I want to make it really clear. They're temporary. That is not structural. Those are going to get fixed. And every supplier that we're dealing with is intent on fixing them. They want to fix them. If it's a labor issue, they're bringing on labor where they can. They're handling that. If it's a tier two, tier three supplier for them, they're addressing that. So this is all, it's a temporary thing we're going to make, we're going to get through it. I want to give you a sense of what we're doing. I'm being somewhat repetitive here, but we're all about making ourselves have a stronger business. That's why even in these tough times, we tell you I've improved gross margin. We've priced again for the fourth year, you know, in the same timeframe aggressively. to help our margins and help our profitability. Alternative fuels, I mean, we're the best ever position in our history in terms of alternative fuel percentages. And obviously, you can see the growth in EV that we're seeing. We're incredibly excited about it. And it's a great recognition of, you know, the Bluebird product out there and our partners. So that's what we're going to keep doing. Keep doing what we can do and keep driving this, improve our business. And I tell you, I mean, the point I made about when you do adjust, For the issues that impact us in the third quarter, those supply chain issues where we push a volume of 550 buses out, we incurred costs, as Phil mentioned, for reworking and for dealing with that material shortage in our plant. When you adjust for that, I mean, the profits boost up to about $28 million. We have an 11% EBITDA margin. And that really is a strong margin for a third quarter. And it's what we've been trying to demonstrate, that we'll be, we are on track When we get into a more normalized supply chain situation, you're going to see our margins really pop. And so I'm going to leave you that message. So thanks again for your support for us. Any follow-up questions, please don't hesitate to contact any of us. Obviously, Mark's the number one contact there, head of investor relations. And again, we thank you all here from Bluebird. Have a great evening.

This does conclude today's conference call. We thank you for your participation and ask that you kindly disconnect your lines. Have a great rest of your day, everybody.