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.