Blue Bird Corp (BLBD) Q1 2020 Earnings Call Transcript

Good day, and welcome to the Blue Bird Corporation Fiscal 2020 First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Mark Benfield, Director of Investor Relations. Please go ahead, sir.

Thank you, Nadia. Welcome to Blue Bird's fiscal 2020 first quarter earnings conference call. The audio for our call is webcast live on investors.blue-bird.com. You can access the supporting slides by clicking on the presentations portion of our IR webpage. Our comments today include forward-looking statements that are subject to risks that may 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. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you'll hear from Blue Bird’s CEO, Phil Horlock; and CFO, Phil Tighe. Then we will take some questions. Let's get started. Phil?

Okay. Well, thanks, Mark. Well, good afternoon, everyone and thank you for all joining us today for our first-quarter earnings call for fiscal 2020. And we'll continue to make great progress at Blue Bird as we start to improve both overall profitability and margins. We always welcome the opportunity to share an overview of our latest quarterly results. So let's start with an overview of those financial results on slide 4. As we previously explained, the school bus industry is extremely seasonal, and the first quarter is always the softest quarter of the year, with unit sales typically representing no more than 14% to 15% of the full-year volume. This is also our expectation for fiscal 2020. And so I'm pleased to report that despite the soft sales quarter, we have a really strong first-quarter financial performance relative to prior years. In fact, it was the second highest profit in more than 10 years, with adjusted EBITDA of $8 million, which is $800,000 or 11% over a year ago. Importantly, this was our sixth consecutive quarter where profits increased over the prior year despite higher commodity surcharges from our suppliers to address tariffs that impacted us from the second quarter of last year. Before proceeding further and as I mentioned in our prior earnings call, I will set the strategy that we are pursuing. Throughout this and future earnings calls, you will hear a recurring theme of how we are driving our overall profit and margin improvement through three key initiatives. First, following the bus pricing that we took in late fiscal 2018 to address the escalation in tariff-led commodity costs, we plan to price each year to recover economic increases. As you will recall, we took pricing again in July 2019 and we'll see the benefits throughout this year. Second, cost reductions that we are achieving through our transformational initiatives. We began this journey two years ago and have seen significant year-over-year savings in every quarter since then, and we intend to continue to do so going forward. And third, continued leadership and growth in alternative fuels. Increasing our mix of alternative fuel-powered buses as a percentage of our total sales is key to profit growth, as we command a superior selling price and gross margin compared with conventional fuel buses. Our growth in this segment continues to outpace the overall market by a long way, as you will hear later. Now, all three of these actions improved our results over the first quarter last year and are cornerstones of our ongoing plan to increase both gross profit and EBITDA margins. So let me get back to our first-quarter results. We improved profitability despite selling 140 fewer buses than last year. Now we mentioned in our last earnings call that first-quarter volume would be down versus a year ago as we launched our new robotic paint facility, requiring additional planned downtime in October and a gradual production ramp-up. This is simply a retiming of volume to later in the year. Now while volume was down 9% from a year ago, fourth-quarter net sales revenue of $153 million was only 1% below last year. The increased sales revenue mainly reflects a richer mix of higher-priced alternative fuel-powered buses and the favorable impact of our bus pricing actions that I just mentioned. In fact, our average bus selling price was over $5,000 per unit higher than in the first quarter last year. And part sales also grew substantially at 17% over the first quarter last year, although half of that is explained by the additional sales week we had in the first quarter of fiscal 2020 compared to last year. So overall, we had a very strong revenue performance. Our adjusted free cash flow was about $90 million negative for the quarter. As you know, traditionally, we are always negative in this first quarter. But this was $34 million less than a year ago. This was largely due to higher inventory levels at the end of December 10, 2019, to address some unique circumstances, which I'll describe later. Suffice it to say, we will return to normal inventory levels as the year progresses, as this is just a timing issue. Adjusted net income of $2 million and adjusted diluted earnings per share of $0.07 were up $800,000 and $0.02 respectively from a year ago. Now if we look at the underlying strength of the industry and Blue Bird's results, we remain upbeat about the business fundamentals. We are forecasting the industry to have around 34,000 school buses in fiscal 2020, which is about the same as last year and that's a near record level over the past 30 years and compares favorably with the average over that same period of 31,000 school buses. With a strong outlook for property values and corresponding property taxes, which are the major funding sources for school buses, coupled with the fact that 190,000 school buses on the road today have been serviced for more than 15 years and school enrollment is increasing, we are confident that the industry outlook will remain at around this level for the foreseeable future. Bottom line, the demand for school buses is clearly very strong, with funding the only limiting factor. We saw yet another record first-quarter sales mix for alternative fuel-powered school buses, surpassing last year's previous record. At an impressive 39% mix of our total unit sales, we beat last year's first-quarter mix by five points. It's clear that we lead the industry by a long way in alternative fuel-powered school buses. Now as a reminder, which I do in every earnings call, in alternative fuels, we count all of our propane, compressed natural gas, electric, and gasoline-powered buses as all of these are alternatives to diesel, which has been a staple fuel for years. For the last several years, we've been achieving significant growth in alternative fuel bus sales and as I just mentioned, we have not slowed down this year. We'll cover our performance in this area in more detail a little later. All in all, I'm very pleased with our first-quarter results. We increased our gross profit margin significantly versus a year ago, through a richer mix of alternative fuel buses, cost reductions, and pricing. That was the fourth consecutive quarter of gross margin growth and is a key element for improving our EBITDA margin, and we expect continued gross margin improvement from these actions as we move forward through the fiscal year. We're maintaining fiscal year 2020 guidance for all three metrics on which we report, with a midpoint of range for adjusted EBITDA at 13% above fiscal 2019 at $92.5 million. Importantly, we are on the path to our stated goal for an adjusted EBITDA margin run rate of at least 10% by the end of fiscal 2020. So let me now review with you our key operating achievements on slide 5. We recorded several significant achievements in the first quarter, and each one will make us more competitive and support our profitable growth plans going forward. Our transformational initiatives to increase margins are on track, driving improvements in quality, cost, efficiencies, and capacity. We are seeing those results now as evidenced by our gross profit margin increase of 1.6 points in the first quarter of last year, and there is much more to come. Although we carefully planned the ramp-up in October and November, our all-new automated paint shop is fully operational, and every bus is now being painted in that facility. The painted buses look great and we'll be able to see the quality and efficiency benefits we expected. As I will show you later, this is an important initiative to drive efficiency improvements throughout the plant. As I covered earlier, we increased our full-year school bus selling price significantly by about $5,000 a unit, representing a 6% increase. Again, this reflects our increased mix of higher-priced alternative fuel-powered buses and our recent pricing actions, together with the favorable impact of higher option take and standardization of selected priceable features. While adjusted EBITDA margin increased by 0.6 points in the first quarter of fiscal 2020 versus last year, this is on top of achieving higher margins in every single quarter of fiscal 2019. I believe that to be a strong indicator that our consistent and effective strategy can deliver continuous improvement. As I mentioned earlier, we continue to be the undisputed leader in alternative fuel-powered school buses, with an impressive 46% of our total year-to-date sales and firm order backlog. That's quite a mix, and it's actually 4 points above the same time last year. Furthermore, the total number of alternative fuel buses sold and in our backlog are up 5% from a year ago. A strong growth performance in an overall flat school bus industry, particularly when we consider the major sales season is ahead of us. Simply put, that's leadership and real momentum in the fastest-growing segment of the school bus market. Remaining on top in alternative fuels, we continue to see strong and growing interest in our latest product, our zero-emission electric-powered school bus, which is powered by a Cummins electric drivetrain. We delivered 24 buses in the first quarter of fiscal 2020. And altogether, we have more than 90 buses delivered on our firm order backlog so far this fiscal year. We anticipate many more orders for the year based on the quoted activity we are seeing. Needless to say, with the widest range of electric-powered school buses on the market today, covering Type A, Type C, and Type D configurations, we are really excited about this opportunity. And finally, we are reaffirming guidance for fiscal 2020, and that reflects continued growth in sales and profits, as we continue to deploy our three focus initiatives to drive higher growth in EBITDA margins, namely, annual pricing to cover economics, structural cost reductions, and increased mix on alternative fuels. It's fair to say we continue to advance the business on multiple fronts and we are focused entirely on profitable growth. Now, let's take a closer look at the third-quarter financial results on slide 6. I touched on many of these results earlier. So let me just summarize the first quarter. Our bus sales and total net sales were down 3% and 1% from the prior year, respectively, which is significantly less than the planned 9% volume decline as we achieved a 6% higher average selling price per bus. Bus sales were 17% higher than a year ago, although half of that growth was due to the extra sales week in the first quarter this year compared to last year. Nevertheless, we are pleased with the 8% organic growth we achieved in the first quarter, which comes on the back of a full year growth of 7% last year. That's really impressive performance by the sales team. Adjusted EBITDA was $800,000 or 11% above a year ago. The end result was the second highest first-quarter profit for more than 10 years and the sixth consecutive quarter that we have grown profits over the prior year. Turning now to slide 7, let's just take a closer look at our alternative fuel bus sales performance. At 2,074 units, our book sales and backlog today of alternative fuel buses is 5% higher than a year ago and importantly, represents a record for this time of the year. As I mentioned earlier, alternative fuel bus sales represented 46% of our total sales, which is up again from the previous record of 42% that we set a year ago at the same time. Significantly too, 111 customers have purchased alternative fuel-powered buses from us for the first time ever this year. That's on top of more than 400 customers who tried alternative fuel options last year for the first time. Now those are compelling facts and really help drive customer loyalty and complex business, along with a great endorsement of our exclusive alternative fuel buses, the Blue Bird name under our franchise-exclusive dealer network. So, I think it's pretty evident that we are not slowing down in this segment of the industry. No other school bus manufacturer comes close to our alternative fuel sales mix or our market share. I previously covered the fact that we are now either sold or have firm orders in hand for more than 90 electric bus orders for delivery in fiscal 2020. And we expect more to follow with all the customer interest we're seeing for the newest addition to our alternative fuel line. Looking forward, the vast majority of the VW mitigation funding is still ahead of us and should support the strong industry over the next three years or so, with many states earmarking specific funds for school bus purchases. We are really pleased with the success we have had so far from the funds that have been issued. With the widest range of alternative fuel-powered buses and the most modern improvements in engineering industry, which are exclusive to Blue Bird through our partnerships with both Ford and ROUSH CleanTech, and our leadership position in low-NOx emissions, we are well-positioned to capitalize on the VW funding and other growth opportunities going forward. In fact, the reduction in NOx gases is the major criteria in funding through the VW settlement. To this point, our new ultra-low-NOx propane bus is certified at one-tenth of the NOx emissions output of other manufacturers' buses and the EPA standard. Plus, our propane bus is widely recognized as having the lowest operating costs of any school bus on the market. And we've been very successful today in utilizing VW funds for our propane bus customers. So with Blue Bird propane, it's one simple message: you can have it all, the lowest operating cost and the lowest NOx emissions of any internal combustion engine in a school bus. Our growing number of customers understand this, and as you saw, our sales are up again, and we're achieving record levels of sales so far this year. We're also seeing continued strong growth of our gasoline-powered bus in fiscal 2020. It's readily understood by technicians and mechanics, who appreciate the mission of simplicity and cold weather start capability that it shares with propane. It also has a lower price point than diesel, so it really works for those customers where acquisition price is a key concern. In summary, we are proud of our strong leadership position in alternative fuels and the significant growth and market share that we're achieving. And with less than 15% of school districts still having purchased an alternative fuel-powered school bus, we have plenty of runway ahead for continued growth. Let's take a closer look at how we're driving cost reductions throughout Blue Bird. Turning to slide 8. Now we showed you this slide in our last earnings call, and it illustrates the progression of our transformation relationships over the past two years and into fiscal 2020. Importantly, you see this as a cumulative approach where additional processes and tools are being added as we strive to drive down total cost. In fiscal 2018, our initial focus was on reducing purchase material costs through a combination of initiatives, including new commercial agreements with suppliers and resourcing with minimal product design change. We worked extensively with alternative external automotive experts to ensure best practices and processes were applied, and we delivered results. In fact, you might recall that we recorded savings of over $20 million in fiscal 2018 from our transformational initiatives. Now we continue to pursue these initiatives in fiscal 2019 and began to have design changes to our process to reduce cost without compromising quality. In the second phase, we also focused heavily on the build, launch, testing, and validation of our all-new robotic paint facility, which also necessitated plant arrangements to optimize our process. We achieved additional savings of $18 million in fiscal 2019. And as Phil will show you later, we continue to drive further significant savings in fiscal 2020 from these actions. As we enter fiscal 2020, Phase 3 now supplements the only processes by driving down the cost of production, using our fully operational robotic paint facility and from focused plant productivity actions. Our new automatic paint facility provides the opportunity to reduce rework with increased first-time run capability, reduce labor and material through robotic application of paint, achieve savings in warranty expense, and deliver higher straight time capacity. Importantly, with the new paint facility attached to the exterior of our assembly building, we free up space in the plant to allow more efficient line rearrangements of tasks and stations, and the addition of several stations for more efficient operations and improved quality control. All these actions are designed to improve efficiencies and drive down further costs. We have deployed industrial engineering resources to optimize in-station workflow in the newly arranged production line. We're applying engineering resources to focus on design for manufacturing capability targeted to reducing production costs and improving quality of rework, and we are confident of achieving significant efficiencies. And we have many more actions planned over the next few years. This systemic and cumulative approach to driving down total costs over multiple years is key to delivering high gross profit and EBITDA margins. And we will continue to share these results with you in the quarterly earnings calls. Let me now turn it over to Phil Tighe, who will take you through the financials, and then I'll be back later to cover the fiscal 2020 outlook and reaffirm our full-year guidance. Over to you, Phil.

Thank you, Phil. Good afternoon, everyone. The following slides provide a summary of our financial performance for the first quarter of 2020. The information we are discussing reflects the close of January 4, 2020, for this quarter and December 29, 2019, for the comparable quarter last year. Detailed information will be available in our 10-K, which will be filed tomorrow, February 13. We encourage you to review the 10-K and the important disclosures included. An appendix attached to today's presentation addresses reconciliations between GAAP and non-GAAP measures and includes important disclaimers mentioned by Mark. Regarding accounting pronouncements, no significant changes were adopted in the first quarter of FY 2020. We did choose to adopt ASU 2019-12 to simplify the process for calculating interim income taxes and accounting for deferred tax liabilities related to foreign equity method investments, with no material impact on Blue Bird from this adoption. Now, let's take a look at the summary of key results for the first quarter, as presented on slide 10. You can see, which Phil has already highlighted, that we saw improvements in several areas compared to last year. Gross margin percentage increased, net loss decreased, adjusted net income grew, adjusted EBITDA rose, and the adjusted EBITDA margin improved. The diluted earnings per share improved by $0.03, changing from a loss of $0.05 to a loss of $0.02, while the adjusted diluted earnings per share increased by approximately $0.02. While we noted that volume and net revenue both declined, we'll provide more details on net revenue when we discuss the bridge for a clearer understanding. We will also cover cash when we reach the free cash flow slide. On net revenue, there was a decline of $1.7 million, approximately 1%. Reduced bus volumes were down by 140 units or 9%, equating to about $12 million. Phil noted that bus revenues increased by over $5,000, driving an approximately $8 million offset to the volume loss. Parts revenue was also up by about $2.7 million or 17%. Our efforts on bus and parts revenue effectively mitigated a significant portion of the volume decrease. The bus revenue per unit increase of 6% stemmed from various factors, including pricing actions taken in FY 2018 to 2019 to address inflation and the higher mix of alternative fuels. Our sales team has consistently worked to maximize revenue on each sale in every state. Gross margin at 13.9% rose by 160 basis points year-over-year. Bus gross profit was 11%, up 130 basis points from the previous year. The part sales mix improved from 11.3% of total sales to 12%, with an average margin nearing 35%. Our net loss was reduced to about 0.4 million, an improvement of $800,000. Lower interest costs positively impacted other income, along with joint venture income, lower taxes, and growth. On an adjusted basis, net income reached a positive $2 million, up from $800,000 in June. Adjusted EBITDA increased by 10%, and we will discuss that further on the bridge. The EBITDA margin for the first quarter reached 5.2%, marking a 0.5 point improvement year-over-year and the fifth consecutive quarter of positive year-over-year margin improvement. As previously mentioned, we will provide further details about cash and debt when we reach the free cash flow slide. Slide 11 shows the bridge from the first quarter of fiscal 2019 to the first quarter of fiscal 2020. Key points include a $600,000 improvement in volume and product mix. Although volume was down, we had a favorable product mix, selling more buses with higher margins than the previous year, primarily due to increased alternative fuel sales and an improved parts sales mix. Pricing, net of economic factors, was about $1.5 million unfavorable mainly due to rising material costs, which were partially offset by some favorable movements in steel and higher tariffs. The impact of tariffs from the first half of calendar 2019 is still being felt in FY 2020. Our transformational cost initiatives led to a $0.09 increase, largely driven by improvements in design costs and supplier expenses. Efficiencies were seen, despite costs associated with launching the paint shop in the early part of the first quarter. Overall, the profit increase of 11% in the first quarter was a solid outcome for us. We continue to focus on enhancing both per unit revenue and our cost structure, which is crucial for achieving our long-term goals. We are actively working to push gross margins further, and while they could have been higher this quarter, we incurred costs related to the paint shop launch. The transformation initiatives resulted in $900,000 in savings, which may seem modest in terms of volume, but are significant considering our lowest quarter of the year. Most savings stemmed from bus sales, translating to about $600 per bus sold this quarter, and these improvements will enhance our profitability as volumes increase throughout the year. Slide 12 is about free cash flow, which stands at approximately $34 million for adjusted free cash flow, with a similar figure for total free cash flow. The main issue is related to working capital, while other aspects remain stable. The year-over-year uptick in trade working capital stems from temporary items which will normalize, if not in the second quarter, at least throughout the rest of the year. The main areas contributing to this include stockpiling actions on some major powertrain components due to supplier capacity constraints, along with an abnormal inventory pattern compared to 2019. Typically, we would bring in inventory in the first week of the second quarter after the New Year, but timing issues in FY 2020 required us to bring in substantial inventory in late December to support production. This led to a noticeable increase in inventory during the first quarter, but this will adjust in the second quarter. Blue Bird has also made significant progress in consolidating all inventory into a central warehouse to enhance flow and efficiency, a move completed in the first quarter of fiscal 2020. Despite the strain on cash initially, we believe it will yield positive results by preventing production delays. We also had a number of buses in progress at the end of the first quarter, requiring additional work, primarily on complex models destined for the Federal Government and large fleet operators. These buses will be delivered by the end of the second quarter, relieving the backlog of inventory. Lastly, on slide 13, we examine our net debt, leverage, and liquidity. Total debt of $215 million increased by about $6 million from the prior year due to a $15 million draw on revolving credit to expand trade working capital. Our net leverage ratio stands at 2.5%, significantly below the covenant threshold of 3.75%. We consider our liquidity of $66 million as solid for this time of year, providing a reasonable cushion while we manage higher than normal inventories, which we expect to decrease as inventory levels normalize. That concludes my summary. I will now turn the discussion back to Phil Horlock, who will outline the outlook for fiscal year 2020 and discuss our guidance. Over to you, Phil.

Thank you, Phil. So let's now focus on the fiscal 2020 outlook, as Phil just said in our full-year guidance. Please turn to slide 15. The headline on this slide says we are simply continuing to fold the plan we laid out to grow margins. We started these two years ago and we're well on track, and along the way with it. Before I just get into the details of that, just a quick commentary again about the industry. For three years now, we've been running at about 34,000 units and these are really 30-year highs that we're seeing. But the great thing is if you look at the outlook here – property taxes, I mentioned before property values, funding available, and the likes of VW funds to boost some decisions that I make them earlier in the cycle. It just gives us real confidence we see in the foreseeable future of holding at this level. It's important also to note, as I mentioned previously, that 190,000 buses in a 500,000 fleet across North America are over 15 years of age. There is tremendous demand to buy new buses. This industry is not slowing down because of lack of demand. As we consistently stated, our plans for continued profit growth are focused on achieving significant gross margin and EBITDA margin improvement from three key areas. To repeat myself here, I think it’s both reminding ourselves up front is very straightforward, very simple, and we're executing it. First is annual cost recovery pricing; we took pricing in 2018 for surcharges for steel and other commodity increases. In late fiscal 2019, we took a further 2% price increase on all vehicles and options, and that will have a significant annual effect in fiscal 2020. We've seen a flow-through of that last announcement back in fiscal 2019. Second, our continued transformational cost reductions. I explained earlier the processes we are attacking now. The various areas we're going into, all across whether it's purchasing, whether it's in a plant, it's in the manufacturing situation, about design, we're exploring every possible avenue. What have we done so far? In 2018 and 2019, we drove a cumulative cost savings of $38 million in over those two years, and we expect significant benefits again in fiscal 2020 and beyond. Manufacturing efficiencies and quality will be a key area of focus this year and in future years. Third, as we've been doing for several years now, we will continue to pursue growth to maintain our leadership position in alternative fuels, which command a superior margin and higher customer loyalty. With a record year-to-date mix of 46% of book sales and firm order backlog and the main second half selling season still ahead of us, our alternative fuel leadership position will continue to be a significant boost to selling price and gross margin. Our financial targets for fiscal 2020 are on a glide path towards our previously communicated EBITDA margin goal of a run rate of at least 10% by the end of this fiscal year. So let's now take a look at what all this means for fiscal 2020 guidance, turning to slide 16. First, no change at all from the guidance that we announced at the December earnings call. Net sales guidance is between $1.020 billion to $1.050 billion, which would be between $2 million to $32 million higher than fiscal 2019. I want to stress this is not a plan entirely based on higher volume, but rather a prudent margin-based approach to drive higher profits and revenue. Adjusted EBITDA guidance is now between $90 million to $95 million, representing a significant $8 million to $13 million or 11% to 16% increase over fiscal 2019. By the way, that's 13% higher at the midpoint of our guidance. As a reminder, we are in a very seasonal business, with typically two-thirds of our sales occurring in the second half of the fiscal year. That said, we expect fiscal 2020 to follow a similar pattern, with the vast majority of our profits and improvements over fiscal 2019 being earned in the second half of the year, as we realize that higher volume. Adjusted free cash flow is projected to be between $30 million to $35 million and continues to be a strong feature of our business model. While this is slightly down from our fiscal 2019 results, this is more than explained by unique spending to support plant upgrades and design changes that drive higher productivity. So, in wrapping up, we had a very strong first quarter results in the softest quarter of the year, both operationally and financially. Importantly, all of our production slots are full for the first half of our year, and we announced a loss in the second half of the year. So, we have good visibility on pricing, margins, and profits through the second quarter. Our guidance for fiscal 2020 reflects significant profit and margin growth over fiscal 2019 and is supported by the continuation of the strategy and plans we put in place and are executing over the past two years. That concludes our formal presentation. I'm now going to pass it back to our moderator to begin the Q&A session.

We'll first go with Justin Clare from ROTH Capital Partners. Please proceed.

Hi, everyone. Thanks for taking my questions.

Hi, Justin.

So first off, I guess unit sales for Q1 were down 9% year-over-year. I was wondering if you could just give us a sense for how much of that decline was due to the extended shutdown that you took to ramp up the paint facility versus potentially a lower level of orders for that quarter or you being maybe more selective with customers?

The decline was entirely due to the paint shop. We accepted all the orders but spaced them out. I expect that you will see those numbers balancing out in the second quarter. There’s always a bit of tension here. We are building 50 to 60 buses a day, but as we ramp up production, we don’t start at 40 to 60; it starts at 15, then moves to 20, and then 30. So this is what we're looking at going into the second quarter.

Okay, great. That's helpful. And then gross margins and the adjusted EBITDA margin both improved year-over-year despite the lower volumes that you saw. So as volumes ramp up through the year here, can we anticipate margins moving higher through the end of the year?

I believe if you analyze our guidance, it indicates that we do expect to see improving margins as we experience increased volume while maintaining our established pricing and adjusting our fuel mix as necessary. We anticipate that both gross margin and EBITDA will improve throughout the year.

Okay. And then in terms of inventory, you talked about stockpiling engines, can you talk about what type of engines were in a shortage and what the cause was? And then has the shortage been resolved at this point? Or is this an issue that's ongoing?

I wouldn't categorize it as a shortage of engines that we were protecting for. This was simply a measure to ensure we're prepared for the second quarter. As Phil mentioned earlier, we started back in fiscal 2019 with a shutdown during the first week of January due to a holiday. In fiscal 2020, January was a production week, so we brought in some engines earlier and managed the situation. However, there is no actual shortage of engines, and it would be unwise to suggest otherwise.

Okay. So then I guess related to that, I'm guessing that you didn't have to pay a higher price, like prices have not gone up for engines as a result of any shortage. So we shouldn't expect any margin impact there. Is that the right way to think of it?

That's correct way. Yes, there's no margin impact on that, no.

Okay. Great. I’ll pass it on.

Thanks, Justin.

We'll next go with Eric Stine from Craig-Hallum. Please go ahead.

Hi, everyone.

Hi, Eric.

Hey. I would love to chat a little bit about the 111 new alternative fuel customers added. Just curious how that breaks down between existing Blue Bird customers who are going that direction for the first time? And I guess conquest customers, as you call them. And then maybe if you could just talk about kind of the competitive environment, given you've got a big lead and just one or some of the other players whether it be different technologies, product launches, what are you seeing from them?

Well, first of all, your first question, yeah, it's a very good quarter actually. Very good. We had 111 new customers coming in, and I think typically over the time, we’ve been even about 50-50 between conquest customers and these people are new, not only new to our alternative fuels but new to the Blue Bird brand. When we look at new to the Blue Bird brand, we talk about in the last five years, they've come to us. Specific about used previously, obviously. But let me talk about alternative fuels; we talk about specifically that brand you to anything with just propane or electric or CNG. What's interesting for us? Actually, the way we count that too is if a guy bought gasoline before and now let me try some propane. We don’t actually count that as a new customer. He's already in the family. So I think we do a very conservative view of this when we look at it. But we love getting people into alternative fuels because we find the loyalty of that customer base is very loyal because they love the product and there's nowhere else you can buy from. You can't buy that powertrain, the propane, the gasoline, or the CNG from anyone but Blue Bird. In fact, you can't drive it by our electric drivetrain which is powered by a Cummins product – Cummins drivetrain from anyone else but Blue Bird. So we like being there for lifting that position. It's good for us.

Okay.

Specific about used previously obviously. But let me talk about alternative fuels, we talk about specifically that brand you to anything with just propane or electric or CNG. What's interesting for us? Actually, the way we can that too is if a guy bought gasoline before and now let me try some propane. We don’t actually count that as a new customer. He's already in the family. So I think we do a very conservative view of this when we look at it. But we love getting people into alternative fuels, because we find the loyalty of that customer base is very loyal because they love the product and there's nowhere else you can buy from. You can't buy that powertrain, the propane, the gasoline at the CNG from anyone but Blue Bird. In fact, you can't drive it by our electric drivetrain which is powered by a Cummins product – Cummins drivetrain from anyone else, but Blue Bird. So we like being there for lifting that position. It's good for us.

Yes. That's a good segue to electric, I mean, obviously another strong quarter. That was one of the big drivers of ASP, the increase there. I mean, it seems like in the past this has been more of a niche product. It's been more based on incentives in key markets. I mean do you feel like it is kind of moving beyond that? I mean I know it's a slow process, but moving beyond that and becoming more mainstream outside of those specific examples?

Yes. To put it simply, we are still in a situation where customers cannot afford electric-powered school buses unless there are significant grants available. They can cost three to four times more than traditional buses. However, many states are beginning to allocate funds to explore this option, knowing that school districts will still have expenses. I believe battery technology will improve and prices will decrease, and there is a lot of excitement around advancements like vehicle-to-grid technology and fast charging. While California stands out for its strong push for zero emissions and has implemented substantial grants, there is growing interest nationwide in trying electric buses. Funds, such as the VW funds, are often available to help purchase a few electric buses. So yes, momentum is building, and we want to be ready to take advantage of these opportunities.

Yes. Okay. And then last one for me. Just on the parts business. I mean that was another strong quarter, also a big driver of the margin improvement maybe just a discussion on that. I know you had the launch of the parts offering. I believe it was last fiscal year. And so, maybe just outlook at the parts business and how that's played out versus your original expectations?

Yes. Well, I think if you look at last year, 7% growth was a nice growth in industrial; it was flat, right? So that was good. And we grew, and we continued in the first quarter; you take out the extra sales we do, I mentioned, it was still a strong 8% to 9% growth level we got in that first quarter. So really nicely done. I think the parts program, we’re stocking that every month with new SKUs offering new parts in there. Our dealers are picking it up. We're nowhere near our company play victory yet. As a long runway ahead, but it's got a lot of interest and we're definitely picking up new business because of it. I can tell you that. I think also the second point is that we've been at this business with the Ford products since 2012. So, what we see now is, more and more units are coming off warranty. Now we're into getting to the service model, replacing parts, and were able to do that, unlike other powertrains out there in the market. We're allowed to be very competitive on all of those parts that they put into their engine and transmission. That's also a growth we're seeing. Yes, I think it's going well, and I think it's 10% growth in the first quarter. So this quarter of the year is pretty good coming off for school start.

Okay. Thanks a lot.

You bet. Thanks, Eric.

We'll next go with Research. Please go ahead.

I'm somewhat new to the names. I wanted to ask about your improvements in margins. Would you say that you will reach profitability in the coming year? Could you provide some insight on that?

So again, reach profitability and do not want to give what you're saying, I missed it out. Come back a little bit.

Okay. It seems like things are improving. So, could you give an idea about what maybe about what quarter you could reach profitability?

We typically don't provide quarterly guidance. We have given full-year guidance and expect to be on track to achieve our goal of over a 10% margin by the end of this year. That is our target. So, for now, that is the information we are sharing. We believe it has been a period of time to see how we progress and continue to deliver results each quarter. So far this year, we have seen increases in both gross margin and EBITDA margin, and we aim to improve further.

Okay, great. One other thing I know you mentioned about tariffs. Do you see those improving in this coming year? And will it make a big difference?

When I last spoke to the president, he wasn't able to disclose where he's imposing tariffs. We've not included any reduction in tariffs in our guidance. If they do decrease, it would certainly help us significantly. I believe that over time, we may see tariffs going down, but our current guidance and objectives do not take that into account. The president seems to be adopting a wait-and-see approach. It's important to remember that many of our suppliers consider recent pricing trends when they adjust their prices, typically looking back over the past six to twelve months. For instance, one of our major suppliers added tariffs at the beginning of the second quarter of 2019 based on their past experiences. They often apply a surcharge after reviewing their recent circumstances. While some may feel that the rate adjustments occurred later than expected in 2019, the fact remains that we're not anticipating a decrease in tariffs at this time. However, we remain optimistic about potential opportunities in the future.

What sort of impact did the tariffs have on your earnings per share?

Yes, I have to.

We'll have to get back to that. It wasn't major, but we certainly had an impact on earnings per share. I guess you have to look at it over the year rather than a quarter because it will be some. Again, I mean I think Phil's exactly right. We don't plan on the tariffs coming off. When it does come off, it will clearly be an improvement to margin.

Okay, great. Well, thanks for taking my question.

You bet. Thanks Chris.

Thank you for your question. We'll next go with Lewis Mosar from Investments.

Yes, I was wondering about the announcement you made, I believe it was yesterday afternoon, and once again early this morning about a shareholder that is selling 11 million shares. Can you talk about that?

Yes. Paul, I couldn't catch your last comment.

Hi Lewis, this is Paul Yousif. The registration yesterday involved 11 million shares. We initially registered those shares back in 2015 with a surplus. Subsequently, they were sold in a private transaction to American Securities. We simply registered those shares; they own them now. There will be no proceeds to the company, and their registration will remain valid for three years.

Okay. So, it's over a period of time.

Yes, I always. That was a good housekeeping, right? Just re-registering the shares.

That's right.

Okay. Thank you.

Thanks, Lewis.

Thank you for your question. This concludes today's question-and-answer session. I'd like to give back the floor back to the moderators. Thank you.

Okay. Thank you, Nadia, and thanks to all of you for joining our call today. We appreciate the continued interest in Blue Bird. As you can see by our first-quarter results and our full-year outlook, we are focused on total profit growth and margin growth, and we intend to deliver on our commitments. I believe we are well-positioned for growth today and in the future. So, please don't hesitate to contact Head of Profitability and Investor Relations, Mark Benfield, should you have any follow-up questions. Thanks again from all of us here at Blue Bird, and have a great evening.

This concludes today's call. Thank you all for your participation. You may now go ahead and disconnect.