Blue Bird Corp (BLBD) Q2 2024 Earnings Call Transcript

Hello, and welcome to Blue Bird Corporation's Fiscal 2024 Second Quarter Earnings Call. My name is Natasha, and I will be your moderator for today. If you would like to ask a question, please follow the instructions provided. I now have the pleasure of handing you over to your host, Mark Benfield. Mark, please go ahead.

Thank you, and welcome to Blue Bird's Fiscal 2024 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 our 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 our filings with the SEC. Bluebird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird's CEO, Phil Horlock; and CFO, Razvan Radulescu. Then we will take some questions. Let's get started. Phil?

Thanks, Mark, and good afternoon, everybody. It's great to be here to share with you our results through our fiscal 2024 second quarter. You'll recall that in our first quarter earnings call, we reported an all-time record profit for the quarter. Well, I'm pleased to tell you that our momentum has not slowed down at all with the Bluebird team doing a great job in delivering an all-time record profit for any second quarter in our history and our second best quarter ever after the last quarter. Razvan will be taking you through the details of our financial results shortly. So let me get started with the key takeaways for the second quarter on Slide 6. As the headline says, we achieved best ever financial results for the second quarter only surpassed by our 2024 first quarter profit performance. As shown in the first line in the box, while we achieved a second quarter record for adjusted EBITDA, our net sales revenue was a record for any quarter. So with record profits and record revenue, I am very pleased to tell you that we achieved an outstanding adjusted EBITDA margin of 13% in the second quarter and importantly, we are once again increasing our full year guidance. As we look at the drivers for this terrific progress in Q2, it really is about maintaining and delivering the plan we laid out last year, which focused on making significant improvements across our entire business. Market demand for school buses continues to be very strong. Our quarter end backlog of firm orders for Blue Bird buses grew by nearly 30% from the first quarter to an outstanding 5,900 units. Now that's a great endorsement of the strength of the industry and the customer demand for Blue Bird buses. This bodes well for pricing, production stability, and profit margins. Now while supply chain issues are undoubtedly easing, there are still select constraints on a couple of key components across the truck and bus industry that are limiting industry production and deliveries. But we are very engaged with those constrained suppliers and with additional capacity being installed through the second half of this year, we expect some easing of those constraints as we move through this year and beyond. As I mentioned last quarter, the legacy price backlog, which hurt us in fiscal '22 and partially in the second quarter of last year, is fully behind us. All those low-margin units have been sold. Every bus we are selling today and those in our order backlog reflect current pricing, and we are priced competitively, which you can tell from our quote win rate and the incoming orders. This is an entirely different Bluebird bus revenue and gross margin structure compared with just a year ago with bus prices up significantly. On the EV front, thanks largely to the first phase of $1 billion of funding from the EPA's unprecedented $5 billion clean school bus program, our second quarter deliveries of electric buses were our best ever result in a quarter, more than 50% higher than last year and represented 9% of unit sales, and we ended the second quarter with a very strong backlog of EV orders. We maintained our strong mix of alternative-powered vehicles and further strengthened our leadership position in this segment. The higher margins and higher contributions on these products contributed to our profit improvement in the second quarter. We'll continue to reinvest back into the business by selectively upgrading facilities and installing lean manufacturing processes and enhancing the plant working environment. And as Razvan will show you later, we're nearly doubling our engineering spending this year as we focus on several exciting new product programs that will hit the market in the next 2 to 3 years. Through the efforts of the best workforce in the business, strong leadership, lean process improvements, and sheer hard work, we have been achieving some of the best manufacturing performance that the company has ever achieved. Bottom line, we are performing extremely well in a strong market. We're delivering a greater mix of higher-margin alternative-powered vehicles, we are priced competitively and appropriately for today's academic environment, and manufacturing businesses are improving. As a result of all these accomplishments, we achieved an outstanding second quarter profit for Blue Bird of $46 million with an adjusted EBITDA margin of 13%. Now let's take a closer look at the financial and key operating highlights for the second quarter on Slide 7. I want to begin by saying that our second quarter financial performance is transformed from just 1 year ago with many record highs reported. We sold 2,254 buses in the second quarter of fiscal '24, which is down slightly from last year and 6% above last quarter. Those unit sales drove second quarter net revenue of $346 million. That's an all-time quarterly sales record for Bluebird and a very impressive 15% increase over last year. So with essentially flat unit sales a year ago, down only 50 buses and net revenue up 15%, the impact of higher pricing and a richer mix of EVs is clearly evident in the revenue growth. Quarter 2 adjusted EBITDA of $46 million was $25 million above last year, almost double and well above the $25 million to $35 million general guidance range for corporate profits that we set in our last earnings call. And finally, adjusted free cash flow for the second quarter was an outstanding $54 million as we drove trade working capital improvements, along with strong profits for the quarter. That's impressive $30 million improvement compared with the same quarter last year. Overall, we had exceptional second quarter financial results and made transformational gains from last year. We are on a great trajectory. On the right-hand side of the slide, you can see some of the operating highlights for the business. As I mentioned earlier, demand continues to be exceptionally strong, with our firm order backlog at the end of the second quarter worth about $850 million in revenue, reflecting a backlog of over 5,900 buses. Importantly, that's almost 30% higher than the backlog we had at the end of the first quarter. Now as an indication of the strength of the industry and the strength of our brand, we measured a ratio of incoming orders against our units sold for the quarter. This year's second quarter was a great quarter for us with our incoming orders exceeding units sold by 60%, and that compares to 20% at the same time last year. That's great confirmation of the strength of our audit pipeline and again, illustrates our confidence in the continuing order and sales momentum we're experiencing. We raised prices considerably over the past 2 years, and the average second quarter selling price per bus in fiscal '24 was an outstanding 19% higher than a year ago. That's worth about $22,000 per bus. Part sales totaled $28 million in Q2, representing a strong 6% growth over last year and were up 7% through the first half. Turning to alternative powered buses. We represented about 55% of total unit sales in the second quarter, and we are running at a very strong 60% of sales mix through the first 6 months of the fiscal year. We continue to be the clear leader in this space. No other school bus manufacturer comes close to these numbers. EV buses are part of that alternative power mix. And in Q2, EV bookings increased by 56% over last year as we saw a quarterly record of 210 electric school buses. That represents a very strong mix at 9% of our total sales compared with 6% in last year's second quarter. Additionally, we left the second quarter this year with almost 500 firm EV orders in our backlog, which is around an 8% share of our total backlog. That's worth approximately $155 million in revenue and 17% higher than a year ago. Incidentally, it's also 15% higher than the end of the first quarter. Clearly, we're benefiting substantially from the first year of funding from the EPA's $5 billion clean school bus program. I'll cover the status of the second year of this program, which comprises of 2 rounds. We also have some very exciting news regarding additional funding from the Inflation Reduction Act, which will significantly benefit EV adoption in the school bus industry. Continuing with our clean school bus successes, I am proud to report that during the second quarter, we received the second largest single order ever of propane-powered school buses. That's 255 units for Omaha public schools. We will build and deliver these in time for the start of the new school year later this summer. Incidentally, the largest propane order ever was also for Omaha Public Schools where we delivered 440 propane buses back in 2013. It's great to see repeat business of this magnitude, and it's also and importantly, a great endorsement of the performance over time of our propane-powered buses. Staying with propane. I'm also very pleased to announce that in Q2, we renewed our exclusive engine contracts with both Ford and Roush until 2030. By that time, we will have partnered exclusively for almost 20 years, providing our industry-leading propane and gasoline engines. Bluebird introduced these products for school bus market and throughout that time, we have been the undisputed market leader. We have fast approached 40,000 propane and gasoline-powered school buses deployed, which is a testament to an exceptionally successful partnership. And finally, on the back of our second quarter results, we are once again raising full year guidance for net revenue, adjusted EBITDA, and adjusted free cash flow. This will be the fifth quarter in succession that we have beaten and raised our guidance. Importantly, too, we have raised our longer-term margin outlook from 12% plus to more than 14% as we continue to solidify and build on our recent operating and financial performance. With an all-time record profit for the second quarter, reflecting a 13% adjusted EBITDA margin, I'm very proud of our team's accomplishments. I'd now like to hand it over to Razvan to walk through our fiscal '24 second quarter financial results and updated guidance in more detail. Over to you, Razvan.

Thanks, Phil, and good afternoon. It's my pleasure to share with you the financial highlights from Blue Bird's fiscal 2024 second quarter record results. The quarter end is based on a close date of March 30, 2024, whereas the prior year was based on a close date of April 1, 2023. We will file the 10-Q today, May 8, after market close. Our 10-Q includes additional material and disclosures regarding our business and financial performance. We encourage you to read the 10-Q and the important disclosures that it contains. The appendix attached to today's presentation includes reconciliations of differences between GAAP and non-GAAP measures mentioned on this call as well as other important disclaimers. Slide 9 is a summary of the fiscal '24 second quarter and first half record results. It was another outstanding operating quarter for Blue Bird with somewhat limited and well-managed supply chain challenges and with high-margin units driving both our top-line and bottom-line results. We significantly beat the adjusted EBITDA general guidance provided in the last earnings call. And in fact, we delivered the best second quarter ever for Blue Bird with a 13% adjusted EBITDA margin and the second best ever quarter only after fiscal '24 Q1. The team continued to push hard and did again a fantastic job and generated 2,254 unit sales volume, which was just shy of prior year Q2 volumes, but with more type D and EV buses. All-time record consolidated net revenue of $346 million was $46 million or 15% higher than prior year, driven by a high number of units, higher part sales, improved mix of type D and electric buses, and pricing actions that materialized in this quarter as expected. Adjusted EBITDA for the quarter was a Q2 record of $46 million, driven by high margins, increased part sales, and margins, partly offset by increased labor and material costs as expected and mentioned in our previous earnings call. The adjusted free cash flow was very strong at $54 million and $30 million higher than the prior year second quarter. This result was due to increased profitability and improved working capital. Our liquidity position at the end of this quarter was also at a record level with $236 million and almost 0 net debt. This performance was outstanding for both the top line and the bottom line. All-time record for quarterly revenue of $346 million, all-time record for quarterly sales with 210 units, record Q2 adjusted EBITDA of $46 million and 13%. On a year-to-date basis, in only 6 months, we already exceeded the entire adjusted EBITDA of last year, which was the best year ever, and we delivered significant steps forward on our profitable growth path. Moving on to Slide 10. As mentioned before by Phil, our backlog at the end of Q2 has grown and continues to be very strong at over 5,900 units and $850 million, including 8% EV. Breaking down the record Q2, $346 million in revenue into our two business segments. The bus net revenue was $380 million, up by $45 million versus prior year. Our average bus revenue per unit increased from $119,000 to $141,000 or 19%, which was largely the result of pricing actions taken over the past 12 to 18 months as well as a higher mix of type D and electric buses. EV sales in Q2 are also at a record level of 210 units or 75 more than last year, a 55% increase year-over-year. We would like to remind you that we have announced in this fiscal year two price increases for new orders, one in last October and one for the end of March of $2,500 net per bus each in order to cover inflationary cost factors and significant long-term strategic investments. This price increase will start to materialize mainly in fiscal 2025, given the timing of orders received and our current production backlog. Parts revenue for the quarter was $28 million, representing a growth of $2 million or plus 6% compared to the already very strong prior year level. This great performance was in part due to increased demand for our parts as the fleet is still aging as well as supply chain-driven pricing actions and throughput improvement. Gross margin for the quarter was a very strong 18.4% or 6.5 percentage points higher than last year due to our sustained operational performance and our pricing overtaken in the last two quarters, the experienced inflationary costs. In fiscal 2024, adjusted net income was $29 million or $21 million higher than last year. Adjusted EBITDA of approximately $46 million or 13% was up compared with prior year by $25 million and 6 percentage points. Adjusted diluted earnings per share of $0.89 was up $0.62 versus the prior year. Slide 11 shows the walk from fiscal '23 Q2 adjusted EBITDA to the fiscal '24 Q2 results. Starting on the left, the $21.1 million. The impact of the bus segment gross profit in total was $26.5 million. Split between volume and pricing effects, net of material cost increases of $33.1 million, offset by labor cost increases of negative $6.6 million. The favorable development in the parts segment gross profit was $1.5 million, driven by higher sales and improved margins as mentioned earlier in the call. These great improvements were slightly offset by increases in our other expenses and fixed costs, mainly engineering and personnel-related of negative $3.3 million as discussed in the last earnings call and with more to come in the second half of fiscal '24. The timing of all the above-mentioned developments drives our record fiscal '24 Q2 reported adjusted EBITDA result of $45.8 million or 13%. Moving on to Slide 12. We have extremely positive development year-over-year also on the balance sheet. We ended the quarter with $93 million in cash and reduced our debt significantly by $42 million over the last four quarters. In fact, our net debt position was close to 0 at the end of this quarter. Our liquidity stood very strong at a record $236 million at the end of fiscal '24 Q2, a $135 million increase compared to a year ago. We also paid down the revolver balance to $0 during this quarter, following our capital allocation strategy outlined in our previous earnings call. The operating cash flow was very strong at $55 million in this quarter, driven by an improvement in operations and margins and an improvement in our working capital of $22 million. Slide 13 shows the sustainable results achieved by our team over the last four quarters, generating almost $165 million in adjusted EBITDA or 13%. Our revenues have been growing every quarter, partially due to pricing realization, combined with a quarter-by-quarter increase in EV sales. We have beat and raised our conservative guidance for the last five quarters in a row due to the outstanding execution of our plans by our team and despite a still difficult supply chain environment with select suppliers. The last four quarters have been in the 10% to 15% adjusted EBITDA range, demonstrating that we are now delivering consistently double-digit performance. Finally, it is important to note that our pricing curve has been ahead of our costing curve in the last three quarters, preparing us for the significant investments lined up for 2024 and the contractual inflation factors expected ahead of us, some of which already impacted our margins in fiscal 2024 as expected. Before we talk about the updated guidance for fiscal '24 and our updated mid- and long-term outlook, on Slide 14, we wanted to remind you about some significant investments that we have started in fiscal '24 to ensure that our profitable growth strategy is successful. Our updated engineering expenses planned for fiscal '24 are approximately 1.5 times the level of fiscal '23, and we expect them now to be at the level of approximately $20 million in fiscal '24 as we began the integration work for the next generation of Ford gas and propane engines for the next level of emission regulations. We also expanded our exclusive partnership with Ford and Roush to 2030 as announced last quarter. We also continue to evolve our EV offering and plan new product safety enhancement features across our product lines, stay tuned for exciting news this summer. Finally, we will continue to ramp up our investment in bringing to market the commercial EV chassis by the end of calendar 2024. We are also expecting now to more than double year-over-year our capital investments into capacity expansion, production facility upgrades, quality improvement, and our supply chain capability and tooling towards our target of 50 buses per day or 12,000 buses per year. Expected CapEx is now approximately $20 million for this year. On the people side, we experienced inflationary pressures, both externally from our supply base and internally, and we continue to provide very competitive benefits to our employees. We are also launching in June a complexity reduction initiative and have begun the update of our ERP system as well as modernization of our business intelligence and financial planning and analysis tools. All these costs combined can add up to 3% of our revenue on a run rate basis later in fiscal '24 and beyond. On Slide 15, we wanted to share with you our updated fiscal '24 guidance. As a reminder, we are continuing to take a transparent and conservative approach also this year, but it is still a somewhat uncertain supply chain environment we are facing. Looking forward to fiscal '24, we are increasing our revenue to approximately $1.3 billion, and we are significantly increasing our adjusted EBITDA to $155 million or 12% with a range of $145 million to $165 million. This is an increase of 75% over the prior year record results. Due to supply chain volatility, at this point, we are only providing general quarterly ranges with every remaining fiscal '24 fourth quarter expected now to have higher revenue between $300 million and $350 million and maintained adjusted EBITDA in the range of $25 million to $35 million or 9% to 11%. We will provide further updates in the beginning of August after we close the fiscal Q3 and gather further insight into our supply chain capabilities to support our strong backlog and increasing Type D and EV. Moving to Slide 16. In summary, we are forecasting a significant improvement year-over-year, with revenue up 15% to approximately $1.3 billion, adjusted EBITDA in the range of $145 million to $165 million, and adjusted free cash flow of $70 million to $80 million, in line with our typical target of approximately 50% of adjusted EBITDA. At a timing update, based on public flow tests that are required to be performed as of the end of Q2, we will move from accelerated filer to a large accelerated filer status at the end of fiscal year 2024, which will reduce our form take filing requirement from 75 to 60 days. As a result, we plan to file our 10-K and hold our fiscal year-end earnings call on Monday, November 25, 2024. On Slide 17, we wanted to also update you on our significant long-term outlook and our expected path to get there. First of all, we updated the slide layout as we believe the recent sustained performance and profitable growth demonstrated in the last several quarters is more relevant for the type of company we are today and as a baseline from where we are planning to go forward. Second, through hard work from all of our teams and great execution of our strategy, we already delivered way ahead of schedule the 12% adjusted EBITDA margin we had previously highlighted as our long-term aspiration. Therefore, today, we are significantly raising the bar for our outlook as follows. The 12.5% adjusted EBITDA margin is now in our updated short-term outlook, and once the supply chain further normalizes, we expect to sell approximately 9,500 units, including 1,500 unit EVs and generate $180 million adjusted EBITDA on $1.45 billion in revenue. Looking to the medium term, our EV growth and operational improvements on one shift can support volumes of up to 10,000 units, including at least 2,500 units, generating revenues of $1.6 billion and with adjusted EBITDA of $210 million or 13%. Our long-term target remains to drive profitable growth now to even higher levels towards $1.85 billion to $2 billion in revenue, comprising of 11,000 to 12,000 units, of which 4,000 to 5,000 units EV and generate EBITDA of $250 million to $280-plus million or 13.5% to 14% through.

Thank you, Razvan. That was an excellent overview of our Q2 results and financial outlook. Let’s move on to Slide 19. I presented this slide in our last two earnings calls, so I won’t dwell on it today since our priorities and strategy remain the same. The chart on the left shows the three priorities that guide us daily: taking care of our employees, delighting our customers and dealers, and achieving profitable growth. The chart on the right outlines the specific strategies we are implementing that align with these priorities and support our four-year growth plans. At the core is our ultimate goal of driving sustained profitable growth. In fiscal '23, we shifted from losses to record profitability, achieving a profit margin of 8%. For fiscal '24, we have raised our full-year earnings guidance to a midpoint of a 12% adjusted EBITDA margin, which is up 4 percentage points from last year. Over the next few years, we aim to increase the margin to 13% and subsequently to 14% and higher in the long term. Our strategy to reach these financial targets is detailed in this chart. Leadership in safety, both in the workplace and with our products, is critical, and we are making investments in engineering and capital expenditures in these areas in fiscal '24. We are continually striving to differentiate ourselves by offering the best products and features, providing more value to our customers. Our buses are specifically designed from the ground up for safe transportation of children, incorporating many unique features. Our customers recognize this value, which is why we were the first among major competitors to adopt propane, gasoline, and electric vehicle power. Our focus is entirely on school buses; we've recognized the demand in this market and responded accordingly. Emphasizing quality, durability, and alternative power is fundamental to our product planning and development, and we will keep setting ourselves apart. Maintaining competitive costs through lean manufacturing, efficient throughput, strong supplier relationships, and smart product design is vital in an industry that requires competitive bids. Additionally, we need to ensure excellent service post-sale to keep our buses running for 15 years or more. This involves collaborating with our dedicated dealer network that spans the United States and Canada, where dealers have an average tenure of over 30 years. As I have mentioned repeatedly in this earnings call and at various conferences, success in the school bus business relies heavily on a capable and experienced dealer network that can serve over 10,000 school districts managing their own bus fleets and 3,400 independent school bus operators. Adhering to these core strategies has been essential to our transformation and will continue to inform our four-year plans. Let's now turn to Slide 20 and look at the latest status of federal funding for clean school buses, which is so important as it helps accelerate the adoption of electric and propane vehicles in fiscal 2024 and beyond. As a reminder, we are just starting the second year of this five-year program, which provides $5 billion of funding for electric and propane-powered school buses, but there are still over $4 billion available after the first year of funding. The second year, which is referred to by the EPA as a 2023 program, provides for 2 rounds of funding totaling at least $1.5 billion. That's about $500 million more than was anticipated and appears to an acceleration by the EPA to deploy the $5 billion in total funding. As the left chart shows, Round 2 awards of the 2023 Grant program were increased from $400 million to $965 million due to the high level of grant applications submitted. A total of 2,737 electric and propane buses received grants early this year and the winners who have until December '25 to purchase their buses using these awards. We expect Blue Bird buses to represent around 30% of the ultimate orders amounting to approximately 800 electric and propane school buses. Looking at the middle chart, immediately after announcing the Round 2 award results, the EPA launched Round 3 rebate program, which is also part of the 2023 program, totaling at least $500 million and potentially much higher based on the number of applications. A world with us should be notified later this month and will have until April '26 to purchase their buses and close out their awards. If our win rate holds at about 30%, Bluebird can expect to receive at least 450 electric and propane school bus orders from this third round. Together, both of these funding rounds would generate orders through 2025 for at least 4,300 electric and propane school buses and assorted infrastructure, which is great for the industry and particularly for Bluebird with about 1,250 orders anticipated. With the deadline for bus purchase from these 2 rounds being as late as April 2026, orders and corresponding deliveries could be pushed back to 2025 as end customers deal first with finalizing charging and utility infrastructure requirements prior to ordering. Now let me turn to the exciting new news shown in the right-hand chart. On April 24 this year, the EPA announced the all-new 2024 clean heavy-duty vehicles program, which is being funded by the Inflation Reduction Act. Funding for classic and electric vehicles is up to $1 billion, and the outstanding use is that 70% of the funding is being allocated to school buses. That's up to $700 million of additional funding to accelerate the adoption of electric school buses, which goes beyond the $5 billion from the EPA's clean school bus program. Applications have been accepted through July 26 of this year, and awards are expected to be announced in February '25, followed by up to 2 years to purchase the buses. The EPA's focus on school buses is great news for our industry, our customers, and our school children, with school buses recognized as having the perfect duty cycle for EV adoption. So let me now wrap up the earnings call and outlook for the business on Slide 21. Razvan took you through the raised guidance of fiscal '24, and I'm showing some of those key metrics at the midpoint of guidance here. We have been prudent in our bookings outlook. We're only increasing volume by 3% over fiscal '23 at this time. As I mentioned earlier, we're still dealing with 2 specific suppliers of constrained components that are impacting the broader truck and bus industries. But we did manage them very well in the first half of this year, and we have line of sight to additional capacity from them later this year. And if we can build more in fiscal '24, we will just as we did last year. Net revenue of $1.3 billion will be a new record for Bluebird, up 15% from fiscal '23. Adjusted EBITDA guidance of $155 million is a 75% increase from last year's then-record $88 million. Importantly, we're planning on a 12% EBITDA margin in fiscal '24, up 4 percentage points from fiscal '23, which is at least a couple of years ahead of the plan we have been sharing with you. We have confidence in achieving this margin after recalling an impressive 14% adjusted EBITDA margin in the first half of this year. It should be noted that the first half benefited from an exceptional mix of EVs at 9% of unit sales within a strong total mix of alternative-fuel vehicles at 60% of sales. This mix may not repeat through all quarters, especially with the extended time granted by the EPA for customers to complete their purchase and deployment of the new EV funding award. If you recall that as late as April 2026. Further, as Razvan pointed out, we are nearly doubling our engineering work in fiscal '24 in support of many new product programs, which is contained within a 12% margin outlook for fiscal '24 full year, along with the potential economic impact of our very first collective bargaining agreement with the United Steel Workers later in the year. Finally, as I mentioned earlier, we are looking to grow EV unit sales to 800 buses in fiscal '24. That's a 47% increase over fiscal '23 sales, similar to growth we saw in Q2. As you can see on the right chart, there's a lot of pent-up demand following the low industry sales in 2020, '21, and '22, and the bus fleet has aged by a couple of years. ACT is forecasting a compound annual industry growth rate of 7% from the end of fiscal '23 through fiscal '27, and that's great news for our business and great news for our profit outlook. With residual supply chain challenges still impacting the auto industry today, the ability to build all these units near-term is not a given, but importantly, the demand for school buses is clearly there. After executing a substantial transformation across our business, the company is performing exceptionally well. We'll continue to improve operating performance and look forward to sustained profitable growth in the robust market ahead. The future is incredibly bright for Blue Bird, and we're confident in achieving this year what have been our longer-term goal of a 12% EBITDA margin. Consequently, we have updated our longer-term outlook to reflect an EBITDA margin at least 2 points higher with a minimum of 14%. I want to thank our nearly 2,000 employees for all their hard work and their dedication in delivering a record profit for the second quarter of Blue Bird on top of an all-time record profit that we delivered in the first quarter. I also want to recognize our outstanding dealer partners who are critical to our success. That concludes our formal presentation today, and I'd now like to hand it back to our moderator for the Q&A session.

Thank you. If you would like to ask a question, we will take our first question from Eric Stine of Craig-Hallum.

So last quarter, you talked about pricing being ahead of material prices and that you thought you might have a step down sequentially in EBITDA, which did not come to fruition. Curious, did you see that and that was offset by, as you said, high mix of EVs and type D school buses? Or is that something that, for whatever reason, that's more of a second half rather than the second quarter?

Eric, thank you for the question. This is Razvan. So definitely, as I mentioned, we have been much more proactive in our pricing actions in the last several quarters than we were in the past. We started to see some inflation factors into our costs, both in the cost of goods sold from the material costs as well as in our SG&A through labor inflation. But definitely, we expect more increases in the second half of this year. So overall, yes, we saw a bit of margin compression in the end, but in the end, the bulk of it is still to come in the second half of fiscal '24.

Got it. You're not necessarily suggesting a lower or significantly lower mix of EV, but rather guiding in that direction without being overly cautious given the ongoing uncertainties in the supply chain and other factors.

Yes. So we are maintaining our guidance of approximately 800 EVs for this year. But yes, in any given quarter, the mix can vary a little bit, but overall, yes, we are confident and our guidance continues to remain conservative.

Okay. Great. Turning to federal funding, I know that the deadlines have been extended compared to the first round of clean school bus funding. I'm curious about the strong order trends you've mentioned. Are you seeing anything from Round 2 yet, or do you anticipate experiencing that throughout this year and into 2025?

Eric, it's Phil here. When you receive grant awards, it's clear that you're on the right track. They take the necessary time to understand the infrastructure required from utility companies, including the charging infrastructure. This is progressing as they work on the initial phase of the second year. We are starting to get orders, with more than 50 already received from the second round of our overall program. This is encouraging, and I anticipate that as the year goes on, we will see an increase in orders as customers identify their charging infrastructure needs. We collaborate with many of these customers to help accelerate our orders. We are optimistic about maintaining a strong order book throughout this year and achieving the record sales numbers I previously mentioned.

Yes, it's good to hear that you're starting to see progress, although it's still early days. My last question is about the EV chassis business. You hinted at some developments, and I would like to know if we should expect more information as we move through 2024, or if it's something we need to wait for.

Yes. Okay. So obviously, we haven't gone public in this yet, but I can tell you that we're in the pilot stage of that program. We have chassis on the ground here that we're working with, testing out some to put through their rigors, and we will, at a future date this year, bring customers in to take a look at it, give us feedback, and I think there are a couple of shows down the road that we've probably exhibited that, too. So yes, it's well under development, and we're already generating customer interest, and we'll take that further this year.

We take our next question from Mike Shlisky of D.A. Davidson.

I want to start by discussing our market share for the quarter. Seeing relatively stable shipments is quite positive, especially considering that the overall industry is expected to decline significantly, by over 20%. I am curious about how you would characterize our market share gains this quarter. Have you managed to work more effectively with suppliers facing difficulties? Do you think other competitors are struggling due to their own challenges this quarter? Lastly, can you explain how you achieved such strong results during this fiscal period?

Mike, this is Razvan. So thanks for the question and good to hear from you today. So at this point, we are focusing on our deliveries, and we managed to maintain the pace of deliveries despite still some select supply challenges that we see in the market. I can't speak for the other competitors; you have to ask them. But from our point of view, we maintain the speed, and we improve profitability, and that's what we are focusing on.

At this stage in May, do you believe that the supply chain issues you experienced by year-end have improved at all? Or do you think that conditions are worsening, to the point where this quarter might see a 20% decline, despite being closer to the beginning of the upcoming years?

Yes. Let me address that. When you mention a 20% decline, I don't recognize that figure. I can assure you that our orders for the past quarter were excellent, and we exceeded the targets we set. We beat our plan, and our orders increased by 60% compared to our bookings for the quarter. This serves as a strong indicator of future bookings. Some of the vehicles will be produced in 2025, while others will be completed this year, so we're feeling positive about our outlook. I don't anticipate any negative developments for us, and that is reflected in our guidance.

Well, guidance reflects a 5% downturn, at least in this quarter or next quarter. I'm surprised that would be possible with what you just said. I want to understand how revenues could be down 20% when it was down by such a significant amount despite what seems like a relatively stable environment. Are there other issues or supply chain challenges that have arisen recently? I'm trying to figure out how you can guide to a lower number in any quarter based on what we just saw.

Yes. So in terms of revenue guidance, again, we are not giving specific quarterly guidance at this point in time for the remaining two quarters, but we raised the range from $300 million to $350 million, which is in line with the recent performance on the revenue that we had for the quarter. In terms of EBITDA, it is a conservative guidance, as I said also in the prepared remarks. And we expect to have some more inflationary cost factors hitting the second half with increased engineering expenses, additional labor inflation cost factors, as well as some contractual price increases from select suppliers. So overall, that is what drives the EBITDA guidance for the second half, but the revenue as well as the units at 8,800 units for the year essentially modeled maintained speed of our throughput right now.

Great, I think it sounds fantastic. Maybe one last question for Phil about the EPA program. One other EV maker earlier today mentioned that most of their activity with the EPA has come to a halt or is progressing very slowly because their customers are unable to obtain the complete package of the charger and electricity, which affects when they can receive their full payment from the EPA. Have you determined that this is not the correct approach? I'm just curious if you could share whether you're experiencing any delays due to similar factors.

Yes. Obviously, I'm not going to comment on what someone else in our industry told you or what the other point of view is, but I can tell you this that we obviously know this system works, right? We've been through the first round, and now we got the second round for 2024. And when I look at this, we know for a fact that when an order is granted to someone then people start to work to finalize their infrastructure requirements, charging infrastructure requirements. And we work with our customers on that. I mean we don't put an application in unless that cost we believe is extremely well-qualified. We showed that in the first year when we did this for the first round of the program. So we do that, we ensure it, and we're confident that during this year, we'll start getting orders. And I think I mentioned earlier, we've already got over 50 from the one that was just announced, what, 2 to 3 months ago, and that's pretty good, and it's on track with the first year we had. So we expect to continue to receive that and continue to see it grow with orders coming through from our customers throughout the year.

Thank you. We now take our next question from Chris Pierce of Needham.

Just on the doubling of engineering spend that you had mentioned on new products, are these new products or new iterations of existing fuel types that you have? And is the chassis that you referred to the EV chassis part of that? And I'm kind of just curious how to think about the net benefits from the spend?

Yes. Let me quickly address that, and Razvan can contribute as well. We are looking at our engineering expenditures, and there are new features we will be introducing that we haven't disclosed yet as we prefer to announce them closer to their launch. These will bring new innovations for us. Additionally, we are focused on supporting the emissions program, especially with significant emissions trends expected in 2027, necessitating modifications to some of our product's emission controls. I want to emphasize that our propane product currently meets the 2027 requirements without any changes, thanks to our advanced control systems as we advance. While some work is needed, we are on track. We are also enhancing our diesel engine offerings. Overall, we have a substantial amount of work ahead of us. We are also implementing new features, along with some cosmetic and functional changes, in our buses, all of which are factored into our engineering expenses.

Okay. Does that help you ease the price increases you've implemented, or is this just how the industry functions with ongoing upgrades to bus features similar to those in consumer cars?

We obviously account for inflation in our pricing. Our material and labor costs increase, so we need to adjust our prices to recover those expenses, as is standard practice in any industry. Additionally, when we introduce new features that our customers value, we also incorporate pricing for those features based on the benefit they provide. Sometimes this is included in an annual price increase, while other times it may be implemented separately during the model year. We will determine the best approach as necessary.

Okay. Perfect. And then on the EPA timeline, can you just talk about the right way to think about this? Because we're talking about a 2023 grant, but the final application was just put through. There was an increase of over $500 million, but those orders don't come until 2025. So on the surface level, it might look like we're halfway through the program dollar-wise, but the amount of buses that have hit your income statement is not close to halfway through. Is that the right way to think about it?

Yes, that's correct. Given the long time frame, the EPA is aware that a significant number of buses are being sold through these grants, and they understand that customers need to stagger their implementation over time to establish the necessary charging and utility infrastructure. We have adapted to the timing of funding and the EPA's distribution process. Our goal is to install these systems as quickly as possible and to collaborate with our customers on this. The extended timelines acknowledge that there's substantial preparation work to be done. For a new customer acquiring a fleet of electric buses, there is a considerable amount of groundwork required, such as setting up the bus depot to ensure everything operates correctly. This timeline allows them the necessary time to prepare.

Maybe just to build on that, what Phil said, and looking at Slide 20 of our presentation. So for example, on the Round 2 2023 grant program on the left, December 2025 is the deadline for these buses to be on the ground and put into operation. So deliveries will be between now and then as the order comes in as our backlog develops. So those dates are kind of the endpoints for the buses to be up and running on the ground.

Perfect. And then just lastly, on Michael Shlisky question, I just want to understand, we're talking about cost increases in the second half of the year, but as someone newer to the story, is it correct that the second half of the year tends to be the seasonally strongest time of the year from a revenue perspective as well?

Yes. So before COVID, for sure, there was a cyclicality into the production levels, where two-thirds of the volume was done in the second half of the fiscal year and about one-third in the first half. However, after several years of undersupply and we're still being constrained on our supply chain at this point in time, we are now at a much more steady state. So that is not a factor anymore, a sort of number of weeks and a few holidays here and there. So we don't see the big gaps anymore.

As a reminder, to ask a question. We have no further questions, so I would like to turn the call back to Phil Horlock for closing remarks.

Well, thank you, Natasha, and thanks, everyone, for joining us on the call today. Before I close this call, I would like to summarize where I believe we stand today and also where we are going in the years ahead. As far as I can say last year, you saw and we saw our momentum growing throughout the year with profitability increasing as we move through every quarter. And we've continued on the same path by delivering impressive record profit for the second quarter with a 13% margin. That's on top of an all-time record profit for any quarter that we delivered in Q1. So with this solid base behind us, we raised guidance once again, projecting a full year adjusted EBITDA margin of 12% for the fiscal year, which, as we know, is a full 4 percentage points above last year. So we're in a very, very strong position when we look at it versus a year ago and certainly 2 years ago. Going forward from here, our plan to drive profitability and grow shareholder value is due to a number of extremely favorable factors. One, we have an unprecedented backlog of firm orders and strong market demand ahead of us with an aging bus fleet out there. Two, supply chain constraints are easing, albeit there's still some way to go but nevertheless, we'll start to see what I call a light at the end of the tunnel, at least on some near-term issues that we were experiencing. Three, upcoming 2027 emission standards will increase the need for alternative-powered vehicles. There is no question of that, in our mind, which is our sweet spot. Four, we have strong federal and state support and customer demand for electric school buses. As I said before, this is a perfect industry for deploying school buses. Our duty cycle is absolutely perfect for it, and that's one of our sweet spots as well. And five, we're achieving record profits, margins, cash, and liquidity today, and that's a really strong base to grow from. So with these very positive tailwinds, we're confident in achieving a 13% margin within a couple of years and then getting to 14% and beyond in the longer term. So we appreciate your continued interest in Blue Bird, and we look forward to updating you again on our progress next quarter. If you do have any follow-up questions, please don't hesitate to reach out to us or contact our Head of Investor Relations, Mark Benfield. Thanks again from all of us here at Blue Bird, and have a great evening.

This concludes today's call. Thank you for joining. You may now disconnect your lines.