Blue Bird (NASDAQ:BLBD) Q1 2021 Earnings Call

0:00 Greetings and welcome to Bluebird Corporation's fiscal 2021 first quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mark Benfield, Executive Director, Profitability and Investor Relations. Thank you. You may begin. Thank you and welcome to Bluebird's fiscal 2021 first quarter earnings conference call. The audio for our call is webcast live on blue-bird.com under the investor relations tab. You can access supporting slides on our website by clicking on the presentations box on our IR landing page.

0:46 Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Bluebird disclaims any obligation to update the information in this call. This afternoon, you will hear from Bluebird's president and CEO, Bill Horlock, and CFO, Jeff Taylor. Then we will take some questions. So let's get started. Bill? Thanks, Mark. Well, good afternoon, everybody, and thanks for joining us today for our first earnings call for fiscal 2021, where we'll cover our first quarter results. Before I jump into our financial performance, I'd like to give you an assessment of how I see our business environment today, and importantly, how we are adapting to the market conditions and prioritizing our plans going forward.

1:37 So let's turn to slide four. As the headlines say, in a challenging market, we're continuing to drive business structure improvements, and importantly for our future, substantially increasing our focus on the growing electric vehicle business. From an industry standpoint, not surprisingly, the first quarter was another challenging one, as we dealt with about 40% of students attending only virtual classes, with the balance split fairly evenly between in-classroom teaching and the hybrid program. As I have stated on previous earnings calls, one fact is clear and obvious. When schools are closed, buses aren't being ordered. The good news is that when schools are open, it's business as usual with school bus orders being placed. That's great for us to know as we move forward.

2:27 Following the recent holiday break, however, we have been seeing more schools resuming in-classroom teaching, and that's led to increased quote activity for our new buses. This is a leading indicator that industry recovery is on the horizon, bolstered by increasing deployment of the COVID vaccine and a new administration's declared intent to open all schools within the first 100 days of its term. As we've consistently stated, it's our expectation that the industry recovery will begin in the second half of fiscal 2021 in support of the next school year start. Shifting now to Bluebird, our first quarter results were solid despite dealing with COVID as we continue to improve our business structure and underlying margins. We significantly improved working capital in the quarter compared with last year as we drove down inventory, operating at much leaner levels than in prior years.

3:20 At 46% of total sales, we had another first quarter record mix of alternative powered bus sales, maintaining our strong leadership position. And we were number one in trailing 12 months market share for both electric and propane powered buses. Now today, you're going to hear a lot about our electric vehicle results and our plans on this earnings call. But needless to say, we're excited with the comments made by the new administration that on supporting electrification of 500,000 school buses that transport our children every day. We're significantly increasing our focus and resources in the electric bus segment where we are the market leader as customer interest and percentage growth in zero emissions vehicles is outpacing every other segment of our business.

4:08 In this regard, I'm pleased to announce today it's our intention to offer Bluebird electric chassis to the Class 3 through 7 truck market. Now this is a new business opportunity for us that we will launch later in 2021 and is an obvious outcome from having the broadest range of alternative powered chassis in the business, led by our zero emissions electric and low emissions propane products, all of which I should remind you are built in our factory. So overall, Bluebud is well positioned for profitable growth, our schools resuming classroom teaching and the industry recovery begins. and we plan to remain at the forefront of the inevitable and exciting industry shift towards zero emission student transportation.

4:53 Let's now turn to slide five and we'll cover the first quarter financial highlights. Our first quarter is always a seasonally low quarter of the year, following school start in the prior quarter. Now despite this fact and the impact of COVID-19, our financial results were solid. At 1,255 buses, Our unit sales were down 205 from last year, representing a decline of 14% entirely due to the pandemic, but well below the 23% volume decline we saw in the fourth quarter of fiscal 2020. Similarly, net sales of $130 million were 15% below last year. Adjusted EBDR of $5.8 million was $2.2 million below the same period last year, more than explained by the lower unit sales.

5:43 Now while adjusted free cash flow was $13.9 million negative in the quarter, which reflects seasonality of our business, this was a substantial $77 million improvement over last year. We certainly saw the benefits of our stringent inventory and cash management controls that we've been deploying, which we've now institutionalized in our company. All three of these financial results on which we provide guidance, namely net sales, adjusted EBITDA, and adjusted pre-cash flow were in line with our plan. As I talked earlier about improving our business structure and underlying margins, we delivered on many operational fronts, which is summarized on the lower half of this slide. As you can see, these achievements reflect our three-pronged margin growth strategy that we have communicated consistently on prior earnings calls, namely improving bus selling price, increasing mix of alternative powered vehicles and reducing structural costs.

6:41 So let's now turn to slide six and review our major operating achievements to date, and importantly, see the specific results of the margin growth initiatives that I just mentioned. We continue to drive transformational initiatives to improve efficiencies, quality, and capacity. Let me give you a great example of this. By the end of the first quarter, we substantially completed all of our plant upgrade actions necessary to ensure we can build as many vehicles on a single production ship that we used to build on two shifts. That's great for efficiency, quality, and gross margins, especially as industry volume recovers. As a reminder, we have now delivered more than $50 million savings from these transformational initiatives since we started three and a half years ago.

7:28 Next, we increased our average selling price of us by about $2,000, or 2% over last year, primarily reflecting the impact of the annual pricing to recover economics that we took late in fiscal 2020. I'm particularly pleased with this accomplishment in the lowest volume quarter of the year. Now we have a lot of activity going on in alternative powered vehicles. Just announced publicly today, we've just renewed our exclusive partnership with Ford Motor Company for several more years for the supply of our market leading gasoline and propane engines. with Ford and Roush, we're enjoying an exclusive and successful three-way partnerships that's lasted more than 10 years and we see no sign of it ending.

8:13 In early spring, as I mentioned in our prior earnings call, we'll be launching our next generation exclusive propane and gasoline engine from Ford and Roush. The all new 7.3 liter V8 engine. It brings more power, it's more compact, it's got more torque and it delivers more fuel economy. As our tagline says, The best just got better. Our combined alternative power mix was a record 46% of unit sales for the first quarter. That's 7% above last year. 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.

9:00 On a 12-month basis, which in this case covers calendar year 2020, our electric bus market share was an outstanding 63%. This compares with 25% market share in 2019, so I'm really pleased with this growth trajectory. Fiscal year to date, we now have 107 electric buses either sold or in our firm order backlog, and that number is up 24% from the same time last year. That's really nice growth in a down industry, and it's just the beginning for electric vehicles. And finally, when you look at the total number of electric vehicles, we have either sold or are firm orders for since we started EV production just three years ago. It's more than 400 buses.

9:45 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 significantly impacted today by COVID-19, costs are down, average selling price is up, alternative fuel mix is higher, and we have exciting new growth opportunities ahead with electric vehicles and chassis. Let's now take a quick look at where I think we are heading on alternative powered vehicles on slide seven. On the previous slide, I mentioned that our alternative pallet bus mix in the first quarter was a record 46% of total sales. Well, that's grown.

10:33 It's now at 50%, reflecting second quarter bookings to date and our firm order backlog. That's another record mix for Bluebird at this time of the year, five 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. As we've covered on prior earnings calls, our range of buses attracts new customers who have never tried an alternative powered bus, and many are new to the Bluebird family. We saw this feature yet again in the first quarter. These are compelling facts, and with the higher customer loyalty we enjoy from these products, it's a great endorsement of our exclusive alternative powered buses, the Bluebird brand, and our great dealer network. And we're off to a terrific start with our electric buses this year. As a reminder, we're not new at the EV business, nor are we a startup that's achieved only a handful of deliveries.

11:25 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 Type A, Type C, and Type D offerings on the road today. We're number one in market share and are preparing to deliver our 400th electric bus in the coming months. From a grant funding standpoint, The vast majority of the BW 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 propane electric buses from the funds that have been issued. And the recently announced $100 million Bezos Earth Fund grant to the World Research Institute also provides a boost with its unique carve-out for zero emission school buses.

12:15 In summary, I'm very proud of our strong and undisputed leadership position in alternative-powered bus sales. 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 today, we are plenty of runway ahead for continued growth. Now, I showed the right-hand box in our last earnings call, and you can see how far we've come in the last four years. And looking ahead, we don't see this growth stopping. We project that four years from now between 60 to 70 percent of all blue buses sold will be powered by a fuel that's not alternative diesel. That's an increase of up to 3,000 alternative powered buses over this year.

13:00 We're bullish about this growth opportunity and are investing in the business. And we see electric and propane power as a way forward in alternative power as we drive toward low and zero emission products. Because of its outstanding growth potential, however, and the unprecedented interest in zero emission transportation, electric power is a priority focus for us. So let's take a deeper look at our EV strategy and plan, turning to slide eight. As we learn from our growth and success, when we bring an entirely new product to market, it takes more than just a great product to win year after year. Customers want turnkey solutions that take care of their issues and their questions. In the case of propane, it was, what do we buy propane fuel?

13:46 How do we lock in the fuel price? What fueling infrastructure is required? What's the best vehicle configuration for my duty cycle? What are those TCO benefits? And so on. In the case of electric vehicles, we call this the EV ecosystem. Carefully selecting the best partners in the business, working with us to handle each aspect of the acquisition and ownership experience to make it easy for our customers. As a graphic in the left-hand box shows, we are well on our way to confirming our EV ecosystem, our partners, and their participation with us. We'll be sharing this with you at upcoming earnings calls and EV conferences. Turning to the right side of the slide, we show our key growth initiatives. First, continued leadership in delivering electric-powered school buses.

14:35 With more than 500,000 school buses on the road, that's an addressable market of more than $100 billion in the years ahead as we move along the inevitable journey to zero emissions. You may have seen recently, both the state of California and General Motors have recently declared their intent to phase out combustion engines by 2035. Those are bold statements, but the shift is happening. Second, using our strengths in chassis manufacturing, and breadth of powertrain choices, we can provide EV chassis to producers of commercial vehicles who seek a proven OEM chassis and factory installed electric powertrain. With more than 150,000 buses on the road today, Bluebird buses and chassis cover about 1.5 billion miles annually and we are now accumulating over 2 million miles each year with our EV buses.

15:30 That experience and know-how gives confidence to our customers. We're looking forward to our EV growth journey and we'll fill you in on our progress as we move ahead. As we look to expand beyond school buses, let me just show you how we match up against a truck industry classification for chassis, turning to slide nine. From our large to small buses, our chassis fit the requirements of truck classification three through seven. That covers GBWR demand from 10,000 pounds to 33,000 pounds, which is an extensive range. and with our factory installed electric powertrains addressing every one of these truck classes today, we're well positioned for this growth opportunity in chassis sales. I would also be remiss if I didn't mention that we can also provide propane, CNG, gasoline and diesel power for these classifications.

16:22 We're in a great position. I'll now turn it over to our CFO, Jeff Taylor, who'll take you through the financial results in more detail. Then I'll be back later to cover outlook and fiscal 2021 guidance. Over to you, Jeff. Thanks, Phil, and good afternoon, everyone. It's my pleasure to share with you the financial highlights from Bluebird's first quarter of fiscal 2021. The quarter end is based on a close date of January 2nd, 2021, whereas the prior year first quarter was based on the January 4th, 2020 close date. We will file the 10-Q tomorrow, February 11th, which includes additional material and disclosures regarding our business and financial performance.

17:09 We encourage you to read the 10Q and the important disclosures that it contains. The appendix attached to today's presentation reconciles differences between GAAP and non-GAAP measures mentioned on this call as well as other important disclaimers already mentioned. With that, please refer to slide 11 and I will review the key results for the quarter. Overall, it was a solid quarter for Bluebird, especially considering it was a seasonally slow quarter, which was further impacted by lower demand due to the global pandemic. Everyone across the company executed well, but our operations areas deserve to be highlighted for their outstanding performance. First quarter volume of 1,255 units was down 14% compared to the prior year period, on lower industry volumes due entirely to the COVID pandemic.

18:04 Net revenue of $130 million was $23 million or 15% lower year over year for the quarter. Bus net revenue of $118 million was down $17 million on lower volume. Bus average selling price or ASP was $93,900 per unit, a year over year increase of $1,600 per unit due to favorable product mix and option content. In addition to price increases to offset inflationary cost pressures. Our alternative fuel mix was 46% in the first quarter, which is up seven percentage points over the same quarter last year. Very strong performance. Parts revenue for the quarter was 12.6 million, representing a decrease of 5.8 million year over year as many maintenance facilities were shut down due to the virus and consistent with lack of in-person schooling.

19:02 Gross margin of 11.1% was 280 basis points lower than the prior year period. The deterioration in margin in the first quarter was almost entirely the result of lower fixed cost absorption due to lower volume, higher cost associated with COVID and lower mix from the part segment. Selling general and administrative, was $14.7 million, which was down $5.8 million on reduced spending and cost control actions in our management and engineering areas. Once again, very strong performance. GAAP net loss was $1.6 million as compared with $0.4 million for the first quarter of 2020. On an adjusted basis, net income was $0.1 million, down approximately $2 million versus last year.

19:56 Adjusted EBITDA of $5.8 million was down by $2.2 million compared with the prior year quarter, which I will cover in more detail on the next slide. Our adjusted EBITDA margin was 4.4%, a decrease of approximately 80 basis points. Diluted EPS of negative six cents per share was four cents per share lower than prior year, while adjusted diluted EPS was 0.00 per share, or 7 cents per share lower than the prior year quarter. Weighted average diluted shares were 27.1 million during the first quarter versus 26.5 million in the same period last year. Liquidity was approximately 121 million as our revolver balance was untapped and fully available at quarter end.

20:48 Looking at the first quarter on slide 12, year over year adjusted EBITDA bridge. Starting on the left of the chart, lower bus volume of 205 units and lower parts volume of approximately 32% were partially offset by favorable mix and lower freight and warranty expense. All of these factors combined to decrease adjusted EBITDA by 4.2 million with volume being the primary factor. Pricing and transformational initiatives such as strategic sourcing and product redesign projects added $1.8 million combined. Lastly, operating expenses were lowered due to cost controls while manufacturing costs were unfavorably impacted by lower fixed cost absorption on lower volume partially offset by improved efficiency that resulted in adjusted EBITDA of $5.8 million for the quarter.

21:46 Moving on to free cash flow, slide 13. The table shows both first quarter free cash flow in addition to adjusted free cash flow. The first quarter is normally a seasonally low quarter for free cash flow due to low demand and building working capital. First quarter adjusted free cash flow was negative 13.9 million, a year-over-year improvement of $77 million, largely on 64 million lower trade working capital. while free cash flow was negative 14.8 million and 80 million improvement year over year. I couldn't be happier with the control of trade working capital this quarter and particularly the supply chain organization managing inventory in a difficult environment.

22:35 Looking at net debt and leverage and liquidity on slide 14. Net debt of 147 million was 61 million lower versus prior year due to lower borrowing on the revolver, approximately $35 million, significantly improved trade working capital, required term loan payments over the past year, approximately $10 million, and increased cash balances year over year, approximately $16 million. Our net leverage ratio for the first quarter was 3.1 times. While the net leverage covenant is suspended for 2021 under the amended credit agreement, It is still relevant to set the rate of interest on our outstanding borrowings. We have two active financial covenants for the period.

23:22 First, the trailing 12 months EBITDA as defined under the credit agreement was $48.7 million versus a minimum requirement of $24.5 million. Second, liquidity was $121 million at quarter end versus a minimum covenant of $15 million. Our liquidity continues to remain strong as our cost controls, working capital discipline, and structural margin improvement