Q3 2021 Blue Bird Corp Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the Blue Bird 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 answer session at that time. If you have a question. Please press the one followed by the floor 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 Benfield you may begin.
Good afternoon, everyone welcome to Blue Bird's fiscal 2021 third quarter earnings conference call.
The audio for our call is webcast live on Blue dashboard Dot com under the Investor Relations tab, you can access the supporting slides for 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 SEC.
Blue Bird disclaims any obligation to update the information in this call.
This afternoon, you will hear from Blue Bird's CEO, Phil <unk> and CFO, Phil Tighe, then we will take some questions. So let's get started Phil.
Mark well good afternoon, everybody and thanks for joining us today for our fiscal 2021 third quarter earnings call and before I jump into the actual financial results will have to set the stage by giving you a themes you're going to hear about consistently on this call today as they really define our business and where were 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 profit as all being impacted by supply chain disruptions, which have caused delays in our bookings as we had to slow down production because of parts shortages.
Now this shouldn't come as a surprise to anyone.
In the last quarters, our biggest headwind and through what this quarterly reporting period. In these past few weeks, we've heard every automotive OEM and supplier mentioned exactly the same issues that we're dealing with namely semiconductor shortages resin shortages.
Capacity issues and global shipping lingering impact from the storms in Texas early this year and labor shortages of many suppliers. The result of all these issues is that we have many key supplies, placing our customers, including bluebird on component allocation impacting engines transmissions axles brake systems wiring harnesses more.
So the volume impact of these headwinds resulted in US moving 550 units out of the third quarter till later in the year and we have slowed down our production rate in the fourth quarter two in order to handle lease parts shortages. We know the supply chain disruptions are temporary and we're going to walk through them, but I can tell you we haven't lost a single year.
Sale because of the supply chain disruptions, we just pushed the production of those units till later in the year.
So let's look at our 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 8% to 10% below the record levels. We saw pre COVID-19 back in 2019, but well above last year's levels. The good news is that because of the high demand.
Pushing out some production we have 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 parts shortages that cause excessive reworking cost. That's a really strong result, and bodes well for when the headwinds subside.
We priced 5% on all vehicles in 2% to 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 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 and reworking vehicles offline to add missing parts. In fact fill tile 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 remain the undisputed market share leader in electric and propane as Magid bar RL Polk registrations on a trailing 12 month basis through may and today, we have our highest ever backlog.
Our firm electric bus orders.
On that point, we continue to be excited about the view of administration 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 and vehicle customers bodybuilders and EEV drivetrain suppliers, who are keenly interested in using our proprietary chassis to meet their needs.
So overall, our business fundamentals are strong and Youll 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 that temporary no other way of looking at it but demand is strong under the.
Current order rate is at near pre Covid levels, we have a great strong healthy backlog of orders will make a terrific progress in improving our business fundamentals were increasing gross margins through revenue on cost improvements while league and alternative power segments, and we have a record backlog of <unk> orders.
So, 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 are being significantly impacted by supply chain disruptions, which are far worse than at the same time last year.
We sold 2024 buses 76 units higher than a year ago, representing a 4% increase.
Gently had we not being forced to shift those 550 units out to 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 announced <unk>.
Net sales at just under $200 million were also 4% higher than last year's same quarter.
Adjusted EBITDA of $13.2 million was 700000, it was higher than last year, but were significantly impacted by supplier part shortages that drove higher labor costs for rework fully cover the impact of these costs had on our profitability a little later.
Adjusted free cash flow for the quarter was negative $6.4 million, but a substantial.
<unk> $24 million better than a year ago as we operated a much lower inventory levels. This year.
As I mentioned on the last slide we continued 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 <unk>.
During the year represent a deferred profit of almost $9 million out of the third quarter.
That's a significant impact on our third quarter results caused by supply chain disruptions and Phil will show you later the total profit.
Could have been achieved had we not been impacted by the 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 and efficiencies and capacity.
As you recall in the second quarter, we completed all our planned to upgrade actions necessary to ensure we can now build as many vehicles on a single production shift that we used to build on to shift that's greater efficiency greater quality and it's great for our gross margins in fact, the resulting gross margin in the third quarter of 13, 3%.
<unk> 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 at 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 shortage is causing us to defer some production in sales we have a firm backlog of more than 4000 school buses at this time I.
I can tell you that during my time at Bluebird I've never seen such a strong backlog of orders, which is about 2000 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 exclude the excessive rework costs caused by supplier part shortages will that translate into $7 million from higher efficiencies in the third quarter.
We have a lot of activity going on and alternative powered vehicles.
We launched a new and exclusive propane and gasoline engines from Ford and Roush in March the only assemble two liter V. Eight engine has more power as Scott Maw talk it's more compact and has better fuel economy, well, we sold 1100 as 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 with a higher on our 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 as a very exciting opportunity for us and will generate significant growth in the years to come.
While on a trailing 12 months basis through May based on RF Port registrations are electric school bus market share in North America was notwithstanding 68%. This compares with 37% market share just last year, So I'm really pleased with our growth trajectory.
Let your vehicle sales were relatively flat in the third quarter and fiscal year to date through June sales were 15% higher than a year ago. However, this reflects timing of orders and its 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.
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 Blue Bird 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 fall since we started EBIT production only.
Three years ago, it's now more than 750 buses.
That covers all school bus configurations type a type C and tight D. No one matches, our breath of <unk> 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 where we think we're heading and alternative powered vehicles on slide seven.
On the previous slide I mentioned their alternative powered bus mix in the third quarter was 56% of total sales.
While 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, thus 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 blue Bird family. While we're seeing this feature again this year with a 178, new alternative fuel customers and ATI conquest customers who are new.
To the Blue Bird brand.
These are compelling facts and with a higher customer loyalty, we enjoy from these products. It's a great endorsement of our exclusive alternative powered buses the blue bird brand and our exclusive dealer network.
On the EV front as I've said before one other 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 range of the industry with types a type C and D offerings all on the road today, we're number one in market share with sale.
In 19 States and we will deliver our 750 <unk> Electric school bus and more in fiscal 2022.
Every blue Bird electric bus come standard with the vehicle to grid known as <unk> and DC fast charge capability, allowing energy to be transferred back to the power companies grid 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 arrival is a significant total cost of ownership benefit for school districts and operators and it come standard on every single Blue Bird Electric bus.
Well yesterday, we announced that in collaboration with <unk> mobility.
$150 million back to lease financing joint venture between our <unk> partner <unk> and stone Pete partners will be rolling out in electric vehicle leasing program across our nation wide 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 <unk> revenue. This is an exciting and innovative lease financing program to drive electric vehicle adoption.
<unk>, one monthly payments no upfront cost that's comparable with a monthly cost of operating a diesel bus over its lifetime.
From a grant funding stands.
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.
And of course, the new administration's plan to accelerate the electrification of the school bus fleet will be transformative for <unk>.
First we have the bipartisan infrastructure Bill that contains an unprecedented $5 billion, but clean school bus replacement of which $2.5 billion is dedicated 100% to electric powered buses. This could firm between 25 to 30000 Electric school buses over the next few year.
Yes.
Second we have the three five trillion dollar reconciliation bill scheduled for the fall of 2021, which is being developed and is included between 20 and 25 billion in electric School bus funding the initial draft.
This could fund between 120 to 150000 Electric school buses within the 600000 unit School bus fleet. This opportunity afforded by the proposal 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 public school buses, we have the best partners, the best products and they're exclusive to blue bird with less than 20% of school districts, having purchased an alternative public school bus. We have plenty of runway ahead for continued growth I'll show the righthand.
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 starting in fact, we projected in about three years from now between 60% to 70% of all Bluebird buses will be powered by a fuel alternative to diesel.
And with the support of administration, our expectation is that this will grow to 100% by 2030, virtually all being zero emission buses buyback.
Now with over 7000 customers actively purchasing a blue Bird school buses today supported by a first class franchise dealer network 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 will now turn it over to our CFO.
So Phil Tighe, who will take you through the financial results in more detail now they back later to cover our outlook in 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 Bluebirds third fiscal quarter of 2021. This quarter and is based on a close date of July three 2021, whereas the prior year's third quarter was based on a July four 2020 close tight.
We will file the 10-Q today.
<unk> 12 after the market closes 10.
10-Q 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 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.
<unk> covered a lot about the volumes, so I won't spend too much time on that.
I'll just point out that.
The backlog that we're carrying forward a 4000 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.
And we on our 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 volume box net revenue of $192 million was up about 1% versus last year, but five.
Verbal bus volume was largely offset by a year over year decline in bus revenue per unit from about 93000 to about 90000, which was largely the result of a significantly higher mix of amongst most economically cross 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 seven three litre engine and the growing demand for our EV buses.
<unk> revenue for the quarter was $15 million, representing an improvement of $6 million or 74% compared to the prior quarter with many school districts were closed.
This is an indicator that the normal work for school districts is starting to get back to pre COVID-19 levels. Although we are still about 10% lower than our normal sales for the third quarter for parts 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 forex on the on a year over year basis.
On an adjusted basis net income was $5 million up approximately 1 million versus last year.
Adjusted EBITDAR of $13 million was up by that 1 million compared to the prior year quarter and I'll cover this in more detail on the next slide.
Our adjusted EBITDA margin was six 7%, which was a slight improvement compared to last year.
Diluted earnings per share of <unk> 16 per share was up by about <unk> 11 per share compared with prior year, while adjusted diluted earnings per share of 19 States was up by about three cents per share versus the prior year quarter.
The 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.
That is a pleasing result for for a quarter, where we had very difficult headwinds from the serious supply 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 2022 to the third quarter of fiscal 2012.
One starting on the left side of this chart higher box volume of 76 units and higher parts volume of approximately 74% more than last year.
Count 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 cost of resin.
As a result of the winter storms in Texas.
The good news was that our ongoing procurement initiatives continues to show positive results and offset negative impact of economics in the period.
Efficiencies in operating expenses, partially offset the positive volume results efficiencies would have been positive in the third quarter, if we were able to produce to airplane.
On the box shown to the right on the slide we have shown the impact that we've calculated for the <unk>.
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 profit toward infective being around $28 million or more than double what we have achieved in the quarter. We expect that the continuing to 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 the continuation of higher costs that are being experienced in all modes of fright as Phil mentioned, we have implemented a bad cost of sand pricing to <unk>.
<unk> offset these headwinds and we will 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 at that $26 million.
We reduced both raw material inventory and finished goods inventory working process inventory was actually higher year over year. As a result of the units that could not be completed or booked due to part 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.
Fiscal year 19 in fiscal year <unk> free cash flow was positive in the third quarter in both of those years and significantly higher profit will 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 the.
Observable net debt is dealt with on the next slide.
Net debt was $155 million.
<unk> was $53 million lower than the same period last year due to low lower total debt of $50.55 million, resulting from lower borrowings on our revolver and Rick and required payments on term debt.
We had two active financial covenants in our credit agreement for the period.
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 and liquidity was 104 million at quarter end versus a minimum covenant 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 has described earlier in the presentation. We strongly believe we are making significant structural progress that sets Blu blu build up well once the temporary headwinds.
Many companies are experiencing six looking to the fourth quarter, we do not see significant improvement in the supplier or freight issues in 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 look 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.
Okay.
We have consistently stated on prior earnings calls our emphasis bluebirds on delivering superior operating performance to drive margin growth.
After a really tough first half of the fiscal year. The industry has begun to recover but now we have supply chain disruption to deal with now we cant change the external factors, but we can focus on improving every element of our business. So that we are well positioned to schools fully resumed 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 improving cost structure.
As Phil and I discussed along with many other industries, we're seeing a rising commodity costs and supply chain disruption.
As we have done for the past several years, we took pricing recently to cover those higher cost 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 drive 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 on growth is a top priority and are organizing the EV business as a focused dedicated team within blue, but we are working with a number of commercial vehicle customers on the opportunity to supply them with electric powered chassis. Now we are in early stages of discussion, but it is clear there interest lies in receiving an <unk>.
Electric powered chassis just like we have another 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 micro bird joint venture has just acquired a controlling stake in echo tuned our Quebec.
Based electric drivetrain integrator, an assembler does be micro buds Taipei electric vehicle partner for the past five years with this product market what has become the market leader in Taipei Electric school buses with 80% market share across the U S and Canada. This past 12 months and more than 150 units sold already.
Firm order backlog, we are delighted with this acquisition, which brings significant expertise in electric vehicle integration into the Blue bird family, providing support and application across the entire Blue Bird electric vehicle product range Taipei type C N type D.
Turning to the external environment I've mentioned at great length today is that until resolved the supply chain disruptions that are affecting virtually all global industries and increasing concerns over rising Colby Delta variant cases will continue to impact our production plans and delayed deliveries again the emphasis.
I want to make is on delayed deliveries and not lost sales needless to say we are 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% to 30000 unit range compared with 34% to 35000 units. We saw in the recent pre COVID-19 years.
However, we estimate that the inability of the supply chain to provide Pos consistently on time will reduce the actual production based deliveries.
By about 5000 buses this year, resulting in 24 to 25000 customer deliveries in fiscal 2021.
This 5000 unit shortfall is being pushed into early fiscal 'twenty 'twenty two 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 to 35000 units that we've been experiencing prior to Covid. This suggests we're at a run rate presently of around 31 to 32000 annual units.
The demand fundamentals for the industry are favorable with property values of property taxes remaining strong 25% of the North American School bus fleet being over 15 years of age and the by the 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, which we provide guidance.
We have lowered the low end of the range and we review the range and recognition of the production shortfalls caused by second half supply chain disruption and consequent parts shortages.
While demand remains strong and we will fulfill all deferred orders we have no ability to slop. 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 24020.5000 buses 5000 units lower than 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 delivered on prior earnings calls I would 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 our 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 I'm resurgence of Covid cases that is expected to carry into fiscal 'twenty two at least through the first half of the year as you saw we achieved a significant increase.
And 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 backlog.
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 2600 unit sales.
Importantly, this would have represented an adjusted EBITDA margin of 11%.
Now these factors 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 temperature, 10% adjusted EBITDA margin likely later now in fiscal 'twenty, two and fully on track in the fiscal 2023 time frame.
So despite the COVID-19 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 EMEA term to this and we'll continue to drive improvements across all elements of our business, thereby improving our underlying margins and report out.
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 one followed by the four on your telephone you will hear us retail problem to acknowledge your request. If your question has been answered and I would like to withdraw your registration. Please press. The one followed by the story again, if you'd like to.
Your question. Please press one four on your telephone keypad.
The first question.
Our first question comes from the line of Eric Stine with Craig Hallum. Please proceed with your question.
Great. Thanks for taking the questions, it's Aaron's Mahalla Entre Eric.
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 in 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.
Do you think are kind of out there in the market as well.
Yes, sure Erinn, it's Phil here, Phil Let me, let me take a crack at that question.
I think.
When you look at this first of all just education right I mean, you have to.
What we learned I often talk about what we learned through propane, which is a premium priced product all the diesel you have to educate the value. So.
This starts with talking about the fact that service costs are going to be so much lower than the <unk> diesel engine. Several thousand dollars a year lower on diesel engine you have to talk about the fact that when the Youll hook you up through newly to these utility companies youre going be able to generate business grid revenue significant earnings potential.
It is significant on all of that helps to reduce when you put it into a lease price you look at pricing for the price of a bus the infrastructure charging station also as against the compared with a conventional combustion engine the benefits of that lowest service.
That the BTG opportunity, we can with that venture would levo, we can put together a really attractive package on a lease cost. This very comfortable actually very close to what people are paying today to run that diesel engine units and thats. The premise. So we've worked a lot with new beyond this one with the guys at stone Pete leave all the joint venture.
To make that happen what we've got to do is the truck. We're going on now is rolling this out through our deal on that educates now dealer sales to teach customers about this what it means because the big change will be many of our schools are used to a capital budget they own the buses. They buy the bus we've got a capital budget release, we want to change that model, obviously and things.
How about leasing the bus don't put that on your balance sheet. It will be held by Lee by this entity levo much like predominantly.
But absent any financing credit company for an automotive OEM for example, so its educating teaching training of course, well the GAAP.
This is another fantastic modern technology zero emissions perfectly suited I mean, there is nothing better than a school bus.
When you look at sort of utilization of electric buses.
The best segments of the business far it nothing bad in school buses a range is perfect. It ties and so we've got to educate on that I mean, other message, obviously financing or.
It's when we go out here and someone says the capital budget and we try and think how can we help you buy that down a little bit and reduce that cost him through grants were very good at accessing grants, we've done a terrific job and 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 so hard to sell when you sort of the district has to figure out <unk> itself, how do I collect that revenue how do I make sure I get my service cost and so I really think this leave opportunity with us.
Just remember newbie as a partner on the <unk> you know every bus is enabled.
<unk> capable provided technology comes from new V. So we feel really good about driving that as a really attractive on a breakthrough prototypes really for us through our network.
Great. Thanks for the color.
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.
The legislation and this financing package that you talked about just what would trigger and what other steps will be needed to kind of expand that.
Yes, I mean, obviously when you look at our electric system right, we buy batteries, where buying a motor.
We're buying through through comments, we buy the software system, you'll like the brains of it we assemble so it's up to us to make sure that we have all that capacity in place through through the likes of comments through our electric throughout bunker suppliers and so on so that's what we worked through in case that we've got our own capacity will be assembled all list and our <unk>.
Plants.
Right now because volume has been still relatively low.
And offline activity when we put we put all that together on a chassis and then we bring it on the production line and then we run it just like a normal book.
But it isn't offline activity today, what we'll be doing in 'twenty. Two is that we are bringing up online and that will give us much more capable capacity. So we're looking at getting up to sell it. During the next this next fiscal year, we will get to the point, where our run rate of capacity and Bluebird will be up to about 3000 units which are <unk>.
Previously and.
Beyond that we each year will progressively increase the capabilities there and we're doing the same in terms of pressing our supply chain all of us to support us to make sure. They have it and we do that by making sure we give them 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.
Those are already in our supply chain we're already.
Our suppliers, that's what we're going to need to.
'twenty two so I think that bodes well for us when you talk about the the by the administration.
I'm not going to happen overnight. We've seen this we saw this with the.
The VW money for example, the EPA administered it took a while for that to get out because some of the factors. They consider this.
This advantaged state counties across the U S who they want to really prioritize these buses in how do you get how would you prioritize that once the ground rules for it and so on so forth.
I think we might see some of that personally we view this as recently, reaching customers towards the end of 'twenty, two 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 deal is getting out and working with customers uses levo model to try and.
Grow the business.
Organically, we have done that to date.
Understood.
Maybe last question for me just on the the chassis any more color that you can provide there on just how those early conversations are going.
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 some kind of attention from that yes, sorry, yes look.
Youre not going to see and it's been promised, particularly I think until 2022 fiscal 2022, I mean I can tell you. This.
Tim yesterday meeting with customers meeting as I mentioned I think on my call in when we did it we talked about the three elements. So that the end customer who drives a delivery of analysts peg that for example.
Then we have a bodybuilder puts a body on the chassis and you have folks who provide chassis today with electric.
Electric vehicle electric drive and its been a conversion job right through a gasoline engine a way with electric drive train and we're talking to all three of those.
Electrification team had meetings yesterday.
I can't tell you where does that come down 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 strategy.
We are basically a plus seven so theres chassis upper class six to class seven while many of these.
These folks would like as a classified chassis. So we just aren't going to look at what we do is similar to the design will be global we have sat down rates ever since.
We've got the shafts are designed for school bus, but it's not a big step for us and our design and sort of drop at lower bringing it down like Nida.
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, let them put a drivetrain and it obviously will.
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 what we're seeing we've got some.
Initial orders in there to talk to you about but I would look to sort of mid 2022, I would say for us to really unveil if you liked our product plans and our.
And a real customer plans on that but I can tell you. We're working on it we're not doing this nicely <unk>. We are talking right now so those customers and partners, we intend to work with.
Great. Thanks for the color and for taking the questions, we'll stay tuned on that and do better.
As a reminder, if you wish to ask a question. Please press the one followed by the four 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 good.
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 when I look at the so on the one that I hear you describing the supply chain complications on the other hand, your inventory has increased quite a bit for the last couple of quarters and it looks like your raw material inventory in particular like doubled.
In about six months.
Can you just maybe talk through like.
The puts and takes here why 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.
We are doing.
I think we used the words on this on this call that frankly going into third quarter. We didn't anticipate this level of supply chain disruption the once who many signals from our supply as this was they were going to run into these problems I don't think they knew about it frankly.
So when we when we sort of entered into the third quarter, we had a much higher level I mean, obviously for at least 550 units higher than 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 a good lead time to our suppliers typically six weeks 10 weeks on some components.
We were doing that are marching towards a higher volume level and then what happened is the supplies that I mentioned on the critical thing when I talk about allocations on engines and transmissions.
<unk> harnesses.
These are sort of big deals right and so.
I do have a high level of interest we're going to exhaust side, it's not that we're going to sit here and just say, let's keep the high inventory level going what we wanted to make sure as we're going to 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 that takes a while to readjust down pretty.
Pretty quick change in the capability of the supply chain on certain components. So we'll work it down but it's yes, the inventories how they want it to be how.
How do we sold the end vehicles, we plan on selling the products. We want it we would have been sitting here, saying inventory looks in great shape, but we'll just burn it off and we're not obviously, we are fighting and working hard to get a better allocation of more like the things were shot up but I'm not obviously doubling down on the things we've got so to speak in the past we have we'll just burn off.
Got you, Okay 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.
But.
Well I don't want to get into saying ones in particular, but I was just obviously.
Here's the way we work and we can if we can.
Line of sight to getting some parts of it might be later than we need and we can drive the vehicle off the line, we'll build the bus we can build a bus and put the pumps on life in asphalt fill tie when he talks about some of those rework costs. So the cost is on a quarter.
We've taken the bus off line because as far as where can we drove it all and then we put the product now Davidson engine, we cant we cant build a buzzword in engine, we cant build a busted out of wiring harnesses, which aren't building most of the transmission.
Those are the ones when those don't come in we get out like we think allocation on that that means we have to stop production and so if you think about 550 buses for US is just over two weeks of downtime in the plan think of it that way and Thats, what we have to do we have to.
Essentially at least not consistently it wasn't like I. So I took a nice two weeks down to recover its more sporadic than that.
Because that's the way the supply chain was handling it.
Got you.
Last question on this topic I apologize, but the.
Like are you 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.
And John This is Phil Tighe.
We have one.
One <unk>.
Pre buy of some inventory that we did.
The expensive part and that is intense.
Okay.
But let me just.
Supplement phils comment to you about inventory a bit sure.
If you're looking at the press release.
And the balance sheet not that the inventory level of churn for 'twenty, one as the July 3rd level.
The comparison is October three of 2020 on that balance sheet.
And remember that the first.
<unk> is the inventory to support the first quarter of the year and Thats, our lowest volume in any quarter.
Sure.
The July inventory is typically to support.
Our.
Highest volume of any quarter in the year. So so so basically sitting on inventory that was supposed to support the highest quarter and unfortunately.
We've talked about the deferred the other thing I would say is if you compare the July inventory of this year too.
Two July inventory 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 am 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 stuff getting pushed into your next fiscal year I suppose the two questions I have are one does.
Does that alter in any way in your view the seasonal traditional seasonal pattern will school districts in.
Fleet, operator, it would be more willing to take buses at spots in a year than a historical where the historically would not be and then secondly does this impact your view electrification at all like in other words that people are going to delay electrification as an example delay electrification because they just have this kind of the pig moving through the Python and they have to deal with that first.
Yes, let me take the second question. The second part first electric trucks, we're very bullish about it doesn't impact that at all.
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 let's for electrified vehicles.
We can do that is different is quite a different supply chain with dealing with not the same levels of the issues.
These lending we've always said there is much more complex if you like a traditional combustion engine as more complexity Ashland electric vehicle Haswell and some resource.
Technology smarter, but.
So we don't see anything that's versatile and electric and electrified vehicles in that case now your first part of the question.
Which is when I look at the industry. The great thing is you know a good amount of the dealer network is that we have dealers that yes, a lot of these what we call promised de stock but.
We informed our deals and customers very early on in the quarter that we were running into some some headwinds here and then we'd have to put some back and thats, where our dealers are extremely use that's why you have a great dealer network, while they use it so what they did is they go out they alone the vehicles. They have got to those school districts. When the school does that require a retiring the old buses they lend them on what's called a loan.
On a bus and they pushed them going on to keep them working.
So we.
Because we went out upfront with customers they understand what's happening here you understand there is a supply chain issue a global supply chain issue around the world.
So it gives us a bit of a past I guess this year in terms of.
Recognizing I'm going to have our buses after school start with our dealers are really helping them make it through the year. So they're ready when those schools do start that they go to full school bus fleet.
But I do expect that when we get when we get through 'twenty two.
Hopefully we get through all of this pandemic the way that we can put it behind us.
<unk> out of the way.
Looking at the end of next year to do it in a more of a normalized for the school delivery basis, absolutely. It will be school buses for school start.
That's the most important value.
Value, we think we can give to to those customers.
Got it. Thank you so much for all the thoughts guys.
You bet John Thanks.
And 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 Blue Bird and we look forward to update you all again next quarter.
And I'll leave it 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 our pre Covid 2019, frankly income unless there's 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 of their <unk>.
Supply chain issues I want to make it really clear that temporary that is not structural those are going to get fixed and IP supply that we're dealing with is intent on fixing them. They want to fix them and there is a labor issue that bringing on labor, where they can they're handling that it was a tier two tier three supply for them, they're addressing that so this is all of that is temporary.
Thing, we're going to make we're going to get through it wanted to give you a sense of what we're doing I'm 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 of improved gross margin, we priced again for the fourth year in the same timeframe aggressively to help our margins just help out.
Profitability.
Turning to fuels.
First 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.
And so great recognition of the Bluebird product out there and our partner. So that's what we're going to keep doing what we can do on keep driving this improve our business and I'll tell you I mean, the point I made about when you do adjust for the issues that impacted our third quarter those supply chain issues, what we push volume 550 <unk>.
Buses out we incurred cost as Phil mentioned for reworking them for dealing with that material shortage in our plant when you adjust for that.
Boost up to about $28 million, we had an 11% EBITDA margin.
And that really is a strong margin for third quarter and that's what we've been trying to demonstrate that we will be we are on track when we get into a more normalized supply chain situation youre 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 contact any of us obviously.
Mark So the number one content their head of Investor Relations and again, we thank you all of you from Bluebird have a great evening.
Yes.
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.
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