Blue Bird Corp (BLBD) Q2 2022 Earnings Call Transcript

Hello, and welcome to the Blue Bird Corporation Fiscal 2022 Second Quarter Earnings Conference Call. Please note, today's event is being recorded. I would now like to turn the conference over to Mark Benfield, Head of Investor Relations. Sir, please go ahead.

Thank you. Welcome to Blue Bird's Fiscal 2022 Second Quarter Earnings Conference Call. The audio for our call is webcast live on blue-bird.com under the Investor Relations tab. You can access the supporting slides on 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 on the following two slides and in our filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird's President and CEO, Matthew Stevenson; and CFO, Razvan Radulescu. Then we will take some questions. So let's get started. Matt?

Thank you, Mark, and good afternoon, everyone. The second quarter of our fiscal year 2022 began on a positive note with an improving supply chain environment and softening futures on commodities. But these early gains were disrupted by world events in Ukraine and China, which led to considerable disruptions in our supply base and higher material cost inflation. Overall, it continues to be a challenging environment, but the team is still making considerable improvements in our operations as well as our strategic initiatives to drive the company forward. The overall fundamentals of our customer base remain strong and the new grant funding mechanism for clean emission school buses is creating a very exciting future for us. On Slide 6, you can see that demand remains high for our products. Our order intake for Q2 was up 30% year-over-year, supporting a record backlog of approximately 6,600 units worth over $700 million. Given the supply chain is limiting our production, we price-protected units we built and delivered in Q2 in order to safeguard our dealer and customer relationships. Many of these buses were priced and ordered prior to June of 2021. We continue to make improvements in our underlying operations to prepare for higher throughput when supply chain disruptions ease and look forward to reaping the benefits of these improvements in the future. We are hopeful that in the quarter, we would see improvements in the supply base, but numerous shortages and delays in critical parts impacted production. Throughout the quarter, we saw part shortages worsen, and although we built an annual run rate of nearly 10,000 buses in the month of March, it came at a high cost in labor, rework, and expedited freight. Many suppliers continue to have labor shortages at their facilities, which seem to grow as gas prices soared in the quarter, and many employees decided they could no longer afford to commute to their jobs. The supply base is generally fatigued as it's been a long two years with numerous challenges. We drive deviations or source parts wherever possible to maintain production capacity, but in many cases, there are limited viable suppliers for key components. Previously, we were forecasting material improvement in the supply base in the back half of our fiscal year. Given the world events, we no longer see these improvements coming in the near term and now expect to see stability in the supply chain pushed out into our fiscal year 2023. As I mentioned, we price-protected customer orders placed in the middle of 2021 that were delayed due to supply constraints. Given the delayed production and the inflationary environment on materials and labor and inefficiencies due to part shortages, our margins were compressed in our second quarter. Previously, we were forecasting a softening commodity market, but due to the Russian invasion of Ukraine, we saw commodity prices again spike impacting our cost base, specifically including freight, driven by record prices of diesel fuel. We are aligning pricing to future costs and proactively have taken numerous price increases, including an additional 10% we announced this week for a total of 25% since June of 2021. However, you do not fully see these actions in our results yet as the majority of what we are currently producing was priced prior to June of '21. However, the average revenue per unit in our backlog has increased nearly $9,000 since the start of our fiscal year as we burn off the old backlog and the new pricing takes hold. On Slide 7, you can see many of the challenges I just referenced. However, our team is tenacious and the mentality we have is that we can always improve and adapt to the current situation. On the supply chain side, we hired a new leader for the group and increased resources in the purchasing, materials, and warehousing teams. We've also hired an outside firm to assist the team during this tumultuous environment to improve processes and eliminate waste. We are putting more boots on the ground at problematic suppliers to ensure they are bringing the same intensity to these issues as we are in delivering on their promises. Regarding the inflation we are seeing in our cost base, we are passing along significant price increases to align to our current and future build costs. We are also continuing to adjust our steel hedging strategy. Additionally, due to the push to get last-minute parts for production, premium freight was increasing, and we have developed better insights into the financial trade-offs of those decisions. There is great work being done at the manufacturing facility to adjust to the constant reality of parts not being available when we start production. We have made considerable changes to our manufacturing footprint to improve offline throughput and reduce the number of hours per bus. Offline is where we put on the majority of the parts that we're missing throughout the normal production process. We are also adjusting our labor model accordingly based on the limitations of our supply base to support production and are now switching to a six-day, eight-hour shift pattern to allow an extra day for the supply base to produce parts versus the normal four- or five-day patterns we would typically run. Overall, I'm very proud of the team and the improvements in the operations we are making in a very difficult environment. Slide 8 contains our financial results and our ongoing business highlights. In the second quarter, we booked 1,931 units with sales of $208 million. This was 443 units more than the second quarter of fiscal year '21 and $43 million more in revenue. However, producing those buses came at a high cost due to the increasing material costs, rapidly rising freight costs, and production inefficiencies due to the part shortages, as well as being compounded by buses priced in the first half of the calendar year '21, but built nearly a year later. Now, we consciously chose to price protect the contracts our dealers have with our customers to preserve these long-standing relationships. Our adjusted EBITDA was negative $11 million, $18 million less than the second quarter of fiscal year '21, and our adjusted free cash flow was positive $22 million, $23 million better than the prior year. In the quarter and since our last earnings call, a number of key programs and initiatives have moved forward to continue our leadership in alternative powertrains. In late April, the EPA announced the details surrounding the release of the first $500 million of the $5 billion clean school bus rebate program, which is part of the infrastructure spending bill. This first tranche should fund approximately 1,200 to 1,600 school buses. This is a great opportunity for Blue Bird, and we intend to get our full share of these buses. We will touch on this program more in a few minutes. We just debuted our prototype electric commercial chassis at the Advanced Clean Transportation Expo, which will open up new markets for the company. We also continue to build the backlog of Type C and D EV school buses with over 360 on order. In the quarter, we also received CARB vehicle certification for our gasoline engine bus. Blue Bird is the only CARB compliant gasoline school bus today in the industry, giving us a competitive advantage in states such as California. Our alternative power presence continues to grow with 62% of our backlog now comprised of non-diesel powertrains, and given our dominance in propane, we are well positioned for the clean school bus rebate program, which also applies to buses powered by propane, in which we are the market leader. Overall, despite a difficult quarter, we are still finding ways to drive operational improvements as well as new strategic initiatives to propel the company forward. I will discuss additional programs in our focus areas later in the call, but first, I'll hand it over to Razvan to walk through our financials in more detail. Razvan?

Thanks, Matt, and good afternoon. I am pleased to share the financial highlights from Blue Bird's Fiscal 2022 second quarter results, which ended on April 2, 2022, compared to our previous year's close on April 3, 2021. We will file the 10-Q later today, May 12, after the market closes. This report includes further details and disclosures related to our business and financial performance, and we encourage you to review it along with the important information it contains. The appendix in today’s presentation features reconciliations of the differences between GAAP and non-GAAP measures discussed in this call, along with significant disclaimers. Slide 10 summarizes our second quarter results for fiscal 2022 and fiscal 2021. This quarter was challenging for Blue Bird due to ongoing supply chain disruptions affecting many manufacturing sectors. However, our global unit sales volume reached 1,931 units, 442 units higher than last year, thanks to the hard work of our supply chain and manufacturing teams. As Matt mentioned, the positive trend we noted in January and February unfortunately reversed in March due to the onset of the war in Ukraine, leading to supply issues for numerous components from various suppliers. By the end of the quarter, Blue Bird had a backlog of over 6,600 units, 4,000 more than the same time last year. Moving forward, our production capacity will remain limited for the rest of the fiscal year as we work to fill Q1 slots for fiscal 2023, and our ability to complete and deliver these units on time hinges on the stable supply of key components. Consolidated net revenue amounted to $208 million, reflecting an increase of $43 million compared to the prior year, with bus net revenue accounting for $188 million, up by $38 million. On average, bus revenue per unit decreased from $101,000 to $98,000, largely due to a higher proportion of gasoline-powered buses this year at 29%, compared to 11% last year. EV sales faced supply constraints, totaling 49 units less than last year. Parts revenue for the quarter reached $19 million, showing an improvement of $5 million from the prior year’s second quarter. Over the past several quarters, we have noted enhancements in parts sales, indicating a return to pre-COVID workforce levels in school districts, although our parts business has also faced disruptions from supplier shortages. Gross margin for the quarter was 1.5%, which is 970 basis points lower than the same quarter last year. We anticipated substantial margin compression in the second quarter due to rising raw material costs, pressures on component pricing, and low-margin backlog units that were priced nearly a year ago. I will provide more details on this later in the presentation. For the second quarter of fiscal 2022, adjusted net income was a loss of $10 million, or $12 million lower than the previous year. Adjusted EBITDA was approximately negative $11 million, down by $18 million from the prior year. Adjusted diluted earnings per share was negative $0.51, a decline of $0.36 from last year. Slide 11 illustrates the transition from adjusted EBITDA for the second quarter of fiscal 2021 to the results for fiscal 2022's second quarter. Starting with $7.5 million, higher bus volume in this period accounted for an additional 442 units and a higher parts margin of $2.6 million, leading to a favorable impact of $6.5 million. Pricing, net of economics, was negative $12.1 million for the quarter due to the rise in steel and commodity costs and margin pressure as we addressed the backlog. As we look ahead to the rest of the year, the effects of higher commodity costs will become clearer. Plant efficiencies declined by $9.7 million from last year, due to increased freight costs of around $1,000 per bus, supply disruptions, and shortages of parts. SG&A and engineering expenses were nearly $3 million higher than last year, mainly due to rising wages. Recall that during the second quarter of fiscal 2021, we had laid off workers and imposed furloughs due to a drop in demand caused by COVID-19, and key engineering projects were put on hold. Since then, these have been reinstated and increased due to rising inflation, as essential engineering projects have resumed. Additionally, in the other category, our joint venture results from Micro Bird were almost $1 million lower compared to last year, adversely affected by supply chain shortages, particularly a microchip shortage impacting chassis allocation. Moving to Slide 12, we wanted to provide an overview of what normalized results for Q2 would have looked like without the supply chain constraints and margin compression from the prior fiscal year’s backlog. Our current capacity is nearly 3,000 units per quarter, meaning we could have built and sold an additional 1,000 units, equating to about a $30 million net margin opportunity. As discussed in earlier calls, we are still working through the backlog of units ordered almost a year ago. Had our current pricing been fully effective during Q2, we would have gained an additional $12 million from net pricing benefits. Lastly, the supply chain shortages have led to significant inefficiencies in our manufacturing operations due to increased rework, offline hours, and multiple schedule changes. Without these issues and operating at historical efficiency, we could have avoided $11 million in operational variances. Operating expenses are reflective of current wage rates and fixed costs for SG&A and engineering, so no adjustments are necessary there. Overall, our underlying operating performance would have produced roughly $25 million of adjusted EBITDA on 3,000 units, assuming close price-cost performance and effective supply chain and operations. This level is also our target for the midterm in a normal year once the supply chain stabilizes, and our teams are making continuous progress toward that goal. This was also our original expectation for fiscal Q4 at our last earnings call. However, many of the assumptions we had did not materialize due to external geopolitical and macroeconomic factors. On Slide 13, reviewing our balance sheet and liquidity, we concluded the quarter with cash of $15 million, down from $167 million and $12 million lower than the previous year. Net debt was $142 million, an $8 million reduction from a year ago, and we have no outstanding balance on our revolver. Importantly, we are in compliance with all covenants at the end of the quarter. We have two active financial covenants in our credit agreement. The trailing 12 months EBITDA stood at $12.3 million, exceeding the minimum requirement of negative $4.5 million. Additionally, liquidity, as defined in the credit agreement, was $108.3 million against a covenant of $5 million, allowing us to maintain compliance. Moving on to Slide 14, we previously discussed cash and debt. The improvement in operating cash flow and adjusted free cash flow primarily stemmed from trade working capital due to increased production levels throughout the quarter. On Slide 15, we want to transparently outline our plan to address the backlog, likening it to a snake eating an elephant, which can be slow and painful but we are making steady progress. The area sections in the graph represent monthly unit volumes on the left axis. In white, you’ll notice that roughly half of the volume we are building and selling in fiscal 2022 comes from fiscal 2021 orders, which yield very low and sometimes negative margins in today’s inflationary environment. In light blue, we are accumulating unit orders during Q1 of fiscal 2022, although some were quoted in the latter half of fiscal 2021. On the right axis, the horizontal lines display improvements in standard gross margin per unit, reflecting the 5% price increases initiated in July 2021. Starting in June, we plan to build and sell the initial units ordered in Q2 of fiscal 2022, adopting an 11% price increase. It is important to highlight that the additional 4% price increase implemented in March is only beginning to affect future orders made during Q3 of fiscal 2022 for production later in the year. The factors mentioned, together with minor supply chain improvements noted in January and February and decreasing costs for steel and other raw materials, gave us confidence in a strong recovery for the second half of fiscal 2022. However, the situation changed drastically on February 24, when Russia invaded Ukraine, leading to a significant humanitarian crisis and severe economic repercussions worldwide. This conflict affects the interconnected global economy. Ukraine is a key supplier of gas for chip production, and iron from the region is critical in steel manufacturing. Oil and gas markets have also been shaken by the resulting trade war. On Slide 16, you can see our key raw material assumptions as of February. Steel prices were on a downward trend, and diesel prices were stable around $3.50 per gallon in the U.S. However, by Slide 17, steel prices surged back to $300 to $500 per ton, while diesel prices exceeded $5 per gallon. While we are locking in prices for 20% of the steel used in our own fabrication, our suppliers are largely on a quarterly raw material pricing escalator, which will negatively impact our results in Q4 of fiscal 2022. These changes have quickly affected our shipping costs and created disruptions throughout the Tier 2, 3, and 4 supply chain, resulting in increased air freight and expedited shipments. The recent COVID lockdown in China has exacerbated these supply chain challenges. All of these circumstances are delaying and hindering the recovery we anticipated in the second half of fiscal 2022. Sadly, we have also had to slow our production growth rate for the remainder of this fiscal year. To counter these challenges, we are implementing several measures, including announcing an additional 10% price increase for new orders scheduled for production before June 31, 2022. We are collaborating with our dealer partners to enhance backlog margins and optimize the production mix and delivery schedules. Our focus is on improving plant efficiency in this tough environment and adjusting our production pace to align with current supply chain capabilities. We are also maintaining stringent control over fixed costs, cutting back where feasible while still investing in critical growth areas such as electric vehicles and chassis, to prepare for success once the supply chain stabilizes. We plan to introduce further pricing models and management strategies for production swaps during fiscal Q3 to mitigate our margin exposure in the future. More details will be shared at our next earnings call. Now, looking at fiscal 2022 on Slide 18, as mentioned earlier, we faced a tough first half due to supply constraints and margin compression. We are still anticipating gradual relief in Q3, with the 11% price increase beginning to take effect. By Q4, we expect the situation to improve further, although we still face volume risks, and margins will continue to be pressured from accelerating inflation. As a result, we are revising our adjusted EBITDA guidance for fiscal 2022 to a range of $20 million to $30 million, with increased revenues projected between $800 million and $900 million. Positive adjusted free cash flow is expected within a range of $15 million to $25 million. With that, I will now turn the discussion back to Matt for updates on our business.

Thank you, Razvan. I would now like to walk through progress on our key focus areas for fiscal year '22. Just as a reminder, on Slide 20, our three foundational objectives: the first is to take care of employees, the second to delight our customers and dealers, and the third is to deliver profitable growth. Surrounding those objectives, you can see the key metrics that we track in the business. Within those foundational objectives, there are four key focus areas for fiscal '22. The first area is people. We are making Blue Bird a premier place to work, better engaging our workforce, and creating a vibrant environment where our employees look forward to sharing their passion and ideas. The ultimate goals are to improve our cost, quality, and reduce absenteeism and attrition. The second major focus area is our lean transformation, aiming to implement a world-class operating system that eliminates costs, improves quality, increases throughput, and enhances the working environment for our teammates. The third area is to expand our total addressable market. School buses are core; however, there are markets that take a chassis so similar to our school bus that I would consider them an extension of our core competency of building great chassis rather than a market adjacency. We have excess chassis capacity, and these additional segments can help absorb overhead, offset the seasonality of the school bus business, and assist us in retaining a more consistent workforce. Our final major focus area is scaling up EV. The beginning of the $5 billion in incentives recently approved in the infrastructure spending bill is here and will dramatically increase the demand for electric school buses. This increased EV demand affects everything from our sales strategy, sourcing, production, transportation, and infrastructure. We have a dedicated cross-functional team focused on preparing Blue Bird for this bright future in electrification and reinforcing our leadership position. Now let's take a look at some of the progress on Slide 21. Regarding our people, we are nearing completion of transforming the leadership team at Blue Bird, greatly increasing the capabilities and energy within the team. Two new additions to the team were made in the quarter. Britton Smith joined us from Kate BMG as Senior Vice President of Electrification and our Chief Strategy Officer. Britton has over 20 years of leadership experience across multiple industries and earlier spent time at McKinsey. Jim Nelles also joined as our Senior Vice President of Supply Chain. Jim has excelled in supply chain leadership, whether at large corporations like LG or consulting for many industrial Fortune 500s to enhance their operations. Jim will lead purchasing, logistics, warehousing, and materials functions. We also launched a comprehensive hourly and salaried employee engagement survey and developed an action plan to address areas of opportunity in the early stages to become a premier place to work. Upgrades in our facilities aimed at boosting employee morale continue, and we are also improving the span of control of our frontline leaders to hourly teammates to ensure those leaders have the appropriate time to provide coaching, training, scheduling, and drive accountability and engagement. Our lean transformation and facility progress continue to advance. As I mentioned, over the quarter, we spent considerable time redesigning our offline processes, which yielded benefits. As seen in the picture here, we set up 17 offline days with assigned tag time monitors and supported by parts kitting. The result was a 40% reduction in offline hours and doubled throughput in the process, eliminating the need for a two-shift offline operation. We've also reduced overall defects per unit by 40% compared to our first quarter. On our last earnings call, we discussed our long-term goal of reducing the hours per bus in our standard by 30%, and we have clear deliverables to tackle that. In the quarter, we reduced 15 hours from our standard through process improvement and paint touchup by eliminating unnecessary rework and improving our paint masking process. When the supply chain normalizes, we will see the benefits of this hard work. Slide 22 focuses on our progress in expanding our total addressable market and scaling EV. As I mentioned earlier, we debuted our electric commercial chassis at the Advanced Clean Transportation Expo this week. This product is targeted at Class 5 and 6 last-mile vans and high-end motorhomes. These two market segments present an opportunity to nearly double Blue Bird's total addressable market. Our product launch garnered significant interest as it is an OEM-engineered electric chassis with the after-sales support of a nearly 100-year-old company with a strong dealer network throughout the United States and Canada. We partnered with Lightning E-motors to develop the powertrain for this market segment and expect sales in the second half of calendar year 2023. On the EV front, construction began on an existing 40,000 square foot facility on our campus for final EV powertrain installation. It will enable us to scale up to 12 units per day by the end of fiscal year '22 and 20 units per day by the end of fiscal year '23, equating to 4,000 units of annual production for electric. Our goal for this facility is to showcase world-class manufacturing and vision for what we want to accomplish with all Blue Bird assembly operations. Long term, our goal will be to add an additional 2,000 units of capacity beyond this, supporting volume for our long-term outlook. Now moving to Slide 23 and another exciting topic. As I mentioned earlier in the call, in late April, the EPA released details around the clean school bus rebate program. It is the first $500 million of a $5 billion program, and we expect this first round to fund 1,200 to 1,600 EV buses. We are currently in the application process. We have provided substantial resources to our dealers and end customers to assist them in applying for this funding. The application period is from May through August of this year. The amount of funding varies greatly depending on whether the customer is applying in a priority zone. A priority zone is defined as a disadvantaged community with a greater need. Our priority zone can receive $375,000 for full funding of the EV school bus, and a non-priority zone can receive up to $250,000, which typically covers the premium over a conventional internal combustion school bus. Let us not forget the importance of propane in this program, as it can also qualify for up to half of this total funding. In that instance, propane can receive $15,000 to $25,000 per bus, depending on whether it belongs in a priority or non-priority zone. A single end customer cannot receive funding for more than 25 school buses and no single state can consume more than 10% of the overall funding. 40% of this funding will be targeted toward priority districts, and a lottery will be conducted to pick the winners. The results of the lottery will occur in October of 2022, and we expect orders in the first quarter of our fiscal 2023, impacting our financials in the second half of 2023. We are very excited about this opportunity and believe we can take advantage of this program and secure our fair share of new bus orders. Slide 24 reinforces the fact that Blue Bird's outlook is incredibly positive. We are aligning the pricing of our units to the costs required to produce units in the future and are seeing a material increase in revenue per unit in the backlog, with prices raised by a total of 25% in the last year. While we expect the supply chain environment to be bumpy for the remainder of the year, we have made substantial operational improvements to manage the situation. The lean transformation programs continue to yield an impact, and we are reducing standard hours off our production process through limiting waste and creating more streamlined methodologies. We continue to hold our position as the alternative power leader and are the only manufacturer currently with a CARB-certified gasoline school bus product. Our backlog now stands at over 60% alternative power. The clean school bus rebate program is starting, and our goal is to maintain our leadership in EV school buses, given our proven track record in electric and the substantial resources we are putting in place for our dealers and customers to assist in securing funding. In addition to this exciting $5 billion program being released over the next five years, many states and provinces are announcing plans to become completely electric with school buses in their state or province. The most recent announcement is from New York state, which plans to have every school bus on the road electric by 2035. Boston has also made a similar announcement, aiming to have all school buses electrified by 2030. Furthermore, Quebec has a similar timeline, with all new school buses purchased in the province transitioning to electric going forward. We are making progress on our electric commercial chassis and have garnered strong interest from numerous potential customers. It's important to note that the impact of our commercial chassis was not even included in the long-term outlook presented in previous earnings calls. Overall, Blue Bird's fundamentals are strong. Market demand is robust. We are making operational improvements in the business. Clean school bus funding is being released, and we are preparing for large-scale growth in EV while simultaneously working on expanding our total addressable market. We look forward to continuing to update you on our progress and remain laser-focused on our priorities and deliverables. We would now like to open up the line for questions. Thank you.

The first question comes from Eric Stine with Craig-Hallum.

So maybe just on the supply side, I know each bus has over 1,000 components, and I think you said that on average, 24 were an issue. I know last quarter you thought you kind of had your arms around it or had some visibility. So I'm looking for some details on these new issues that have emerged with specific parts potentially. And then, obviously, you've pushed out the timing of recovery or when things start to normalize, but just curious about your confidence levels that you can get ahead of it.

Yes, Eric. Thanks for the question. In general, there aren't any specific components we have faced issues with in the past. However, we had an issue with an ABS module that was limiting production. Our goal is to mitigate any supply disruptions as much as possible, whether that's looking at dual or triple sourcing options. Right now, we're mainly seeing Tier 2 and Tier 3 type components being slowed down coming out of China, along with general domestic supply base shortages due to labor issues related to general economic dynamics and inflation.

Got it. Okay. But I guess you've delayed it. It remains somewhat uncertain, but that's fine. Maybe turning to the infrastructure funding, you've clearly seen strong orders ahead of that. I know this is for 1,200 to 1,600 buses, but I'm just wondering if you think people are waiting on this. Where do you see the market expectation: whether this would cover the additional cost over a diesel bus or the full price of a diesel bus?

Yes, Eric. There are two ways of looking at it. If it's a priority school district, it will be up to $375,000 for a Type C or D bus, which usually covers the full cost of an EV bus. For a non-priority district, it's $250,000, which would cover the delta over an ICE engine. 40% of the overall funding is targeted to priority districts.

Okay. Understood. One last thing regarding the supply chain. Are you confident that, despite the challenges, you can meet the demand for the upcoming EV ramp of 1,200 to 1,600 units in this initial phase, as well as in the subsequent phases over the coming years?

Yes, we're working hard with our key partner in this, Cummins, along with our battery supplier, EXALT, to ensure we're prepared for the increases, both from a supply perspective and the operational improvements we're making to handle the production capacity.

At this time, I would like to turn the floor back over to Matthew Stevenson, CEO, for any closing comments.

Thank you, Keith. I appreciate it, and thank you to all those joining us on the call today. As you heard during our prepared remarks, demand for our buses remains strong. We've got a record backlog of over 6,000 units worth over $700 million. We're continuing our dominance in alternative powered buses and making significant improvements in our operations through our lean transformation initiatives. We're incredibly excited about our growth potential in EV through the Clean School Bus Act and our recently debuted EV chassis, which effectively is doubling our total addressable market. Although supply chain disruptions are continuing, we are adapting our business to be more agile and allocating more resources to mitigate these impacts wherever possible. We have raised prices accordingly to existing and expected costs, and our margins will improve as we work through the backlog that was ordered prior to the majority of the price increases taking place. We look forward to updating you again on our progress next quarter and appreciate your continued interest in Blue Bird. Should you have any follow-up questions, please don't hesitate to contact our Head of Investor Relations, Mark Benfield. Thank you again from all of us at Blue Bird. Have a great afternoon.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.