Blue Bird - Earnings Call - Q1 2020

Transcript

Speaker 0

Good day, and welcome to the Blue Bird Corporation Fiscal twenty twenty 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 Benfeld, Director of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Nadia. Welcome to Blue Bird's fiscal twenty twenty first quarter earnings conference call. The audio for our call is webcast live on investors.bluebird.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. Bluebird Bluebird disclaims any obligation to update the information in this call. This afternoon, you'll hear from Blue Bird CEO, Phil Horlock, and CFO, Phil Tighe. Then we will take some questions. Let's get started.

Phil?

Speaker 2

Okay. Well, thanks, Mark. Well, good afternoon, everyone, and thank you all for joining us today for our first quarter earnings call for fiscal twenty twenty. We'll continue to make great progress at Blue Bird as we strive to improve both overall profitability and margins. We always welcome the opportunity to share with you our latest quarterly results.

So let's start with an overview of those financial results on slide four. 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 twenty twenty, and so I'm pleased to report that despite the soft sales quarter, we had a really strong first quarter financial performance relative to prior years. In fact, it was the second highest profit in more than ten years with adjusted EBITDA of $8,000,000, which is $800,000 or 11% over a year ago. Importantly, this is 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.

Speaker 1

Before proceeding further, and as I mentioned on

Speaker 2

our prior earnings call, let me 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 three key initiatives. First, following the bus pricing we took in late fiscal twenty eighteen 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 will 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 earn 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'll 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 a 140 fewer buses than last year. Now we mentioned on our last earnings call that first quarter volume will 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 retargeting of volume to later in the year. Now while volume was down 9% from a year ago, fourth quarter net sales revenue of 153,000,000 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 about half of that is explained by the additional sales week we had in the 2020 compared to last year. So overall, we had a very strong revenue performance.

Now adjusted free cash flow was about $90,000,000 negative for the quarter. As you know, traditionally, we are always negative in this first quarter, but this was 34,000,000 worse than a year ago. This was largely due to higher raw inventory carried at the December 2019 to address some unique circumstances, and Folktale will describe those later. Suffice to say, we will we will return to normal inventory levels as the year progressive progresses. This is just a timing issue.

Adjusted net income of $2,000,000 and adjusted diluted earnings per share of 7¢ were up $800,000 and 2¢, respectively, from a year ago. Now as 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 of around 34,000 school buses in fiscal twenty twenty, which is about the same as last year. And that's a near record level over the past thirty 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

Speaker 1

the major funding sources for

Speaker 2

school buses, together with the fact that a 190,000 school buses on the road today have been in service for more than fifteen years and school children enrollment is increasing, we are confident that the industry outlook remaining at around this level for the foreseeable future. Bottom line, the demand for school bus is clearly very strong with funding the only limiting factor. We saw it as 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 powered alternative fuel powered school buses.

Now as a reminder, which I I I do this every every earnings call, in alternative fuels, can all of our propane, compressed natural gas, electric, and gasoline powered buses, as all of these are alternatives to diesel, which has been the 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 twenty twenty guidance for all three metrics on which we report, with midpoint of range for adjusted EBITDA at 13% above fiscal twenty nineteen and ninety two point five million dollars. 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 twenty twenty. So let me now review with you our key operating achievements on slide five.

We recall a number of 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, and 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 over last year, and there is much more to come. Following the carefully planned 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 the efficiency benefits we expected.

As I will show you later, this is an important initiative to drive efficiency improvements throughout the plan. 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. Now while adjusted EBITDA margin increased by six tenths of a point in the 2020 over last year, which is a great result, this is on top of achieving higher margins in every single quarter of fiscal twenty nineteen. I believe that to be a strong indicator of how a 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 that's actually four 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. That 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 of the 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 2020, and altogether, we have more than 90 buses delivered or in our firm order backlog so far this fiscal year. We anticipate many more orders for the year based on the cost 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 twenty twenty, and that reflects continued growth in sales and profits as we continue to deploy our three focus initiatives to drive higher gross and EBITDA margins, namely annual pricing to cover economics, structural cost reductions, and increased mix of 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 six. I touched on many of these results earlier, and full time, I'll run through the details later. So let me just summarize the first quarter. Bus sales and total net sales were down 31% from prior year, respectively, which is significantly less than the planned 9% volume decline as we achieved 6% higher average selling price per bus.

Top sales was 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 with 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 ten years and the sixth consecutive quarter that we have grown profits over the prior year.

Turning now to slide seven. 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, 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, a 111 customers have purchased or ordered 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 helped drive customer loyalty and conquest business, and they're a great endorsement of our of our exclusive alternative fuel buses, the blue brand name, and our franchise exclusive dealer network. So I think it's pretty evident that we are 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 we are now either sold or have firm orders in hand for more than 90 electric bus orders for delivery in fiscal twenty twenty, and we expect more to follow with all the customer interest we're seeing for the newest addition to our alternative fuel lineup.

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, the most modern and proven engine in the industry, which is exclusive to Blue Bird through our partnership with both Ford and Roche 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, 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 to the EPA standard.

Plus, our propane bus is widely recognized having the lowest operating cost of any other 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, there's one simple message. You can have it all. The lowest operating cost and the lowest NOx emissions of any internal combustion engine in the school bus. Our growing number of customers understand this.

As you can clearly see, 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 twenty twenty. It's readily listed by technicians and mechanics who really appreciate the emission simplicity and cold weather start capability that it shares in 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 proud of our strong leadership position in alternative fuels and the significant growth and market share we are 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 now take a closer look at how we are driving cost reductions throughout Blue Bird, turning to slide eight. Now we've shown you this slide in our last earnings call, and it illustrates the progression of our transformation initiatives over the past two years and into fiscal twenty twenty. Importantly, you can see this is a cumulative approach where additional processes and tools are being added as we strive to drive down our total cost. In fiscal twenty eighteen, our initial focus was on reducing purchase material costs and services through a combination of initiatives, including new commercial agreements with suppliers and resourcing with minimal product design change involved.

And we worked extensively with 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 $20,000,000 in fiscal twenty eighteen from our transformational initiatives. Now we continue to pursue these initiatives in fiscal twenty nineteen and begin to add design changes to our process to reduce cost without compromising quality. In this second phase second phase, rather, we also focused heavily on the build, launch, testing, and validation of our new robotic paint facility, which also necessitated plant rearrangements to optimize our process. We achieved additional savings of $18,000,000 in fiscal twenty nineteen, and as Phil will show you later, we continue to drive further significant savings in fiscal twenty twenty from these actions.

As we enter fiscal twenty twenty, phase three now supplements the earlier processes by driving down the cost of production, both from a fully operational robotic pay facility and from focused plant productivity actions. Our new automated paint facility provides the opportunity to reduce rework with increased first time run capability, to reduce labor and material through robotic application of paint, and to achieve savings and warranty expense and to deliver higher straight time capacity. Importantly, with the new paint facility attached to the exterior of our press Assembly Building, we freed up space in the plant to allow more efficient line rearrangement attached to 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 total cost. We're deploying industrial engineering resources to optimize in station workflow flow in the newly arranged production line.

We are applying engineering resources to focus on design for manufacturing capability targeted at 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 of driving down total cost over multiple years is key to delivering higher gross profit and EBITDA margins. Will continue to share these results with you in the in the quarterly earnings calls. Let me now turn it over to Phil Tighe, who'll take you through the financials, and I'll then have it back later to cover the fiscal twenty twenty outlook and reaffirm our full year guidance.

Over to you, Phil.

Speaker 3

Thank you, Phil, and good afternoon to everyone. The next few slides are a summary of our financial performance for the 2020. The material that we are discussing is based on the close of 01/04/2020, for the 2020 and 12/29/2018 for the 2019. Detailed material will be available in our 10 k, and that will be filed tomorrow, February 13. We encourage you to read 10 k and important disclosures that it contains.

There is also an appendix attached to today's presentation that deals with reconciliations between GAAP and non GAAP measures as well as some important disclaimers already mentioned by Mark. With respect to accounting pronouncements, there was nothing significant adopted in the '20. We did elect to adopt ASU two thousand nineteen twelve, which simplifies the process for calculating inter interim income taxes and the accounting for deferred tax liabilities for foreign equity method investments. There was no material impact to Blue Bird from adopting this standard. Now let's have a look at the summary of key results for the first quarter on slide 10.

So I think you you can see from this, and Phil's already mentioned a lot of it, that we we had improvement versus prior year in quite a number of the items. So gross margin percent was up. Net loss was down. Adjusted net income was up. Adjusted EBITDA was up.

The adjusted EBITDA margin was up, and the diluted earnings per share improved by 3¢ from a loss of five to a loss of two, and the adjusted diluted was up by about 2¢. So we've already talked about the fact that the volume was down and net revenue was down, and we'll go into a little more detail on the net revenue when we get to the bridge so that you can perhaps have a better understanding of that. And and we will spend a little bit of time talking about about cash when we get to the free cash flow slide. So I think on the net revenue, we can probably talk about the 1,700,000.0, that that it was down. That's about 1% down.

Lower bus volumes of 140 units or 9% was worth about 12,000,000. Phil mentioned that bus revenues were up by over $5,000. The higher revenues actually drove about 8,000,000 in offset to the loss of the volume. And then, of course, parts was up by about 2,700,000.0 or 70%, which has already been mentioned. So we we basically, offset a large chunk of the of the amount that the the of the volume was down through a lot of good work by by the team on on bus revenue and on parts revenue.

The again, the bus revenue per per unit increase of 6%, and it was due to a number of factors. One was the pricing actions we've taken in fiscal year eighteen and nineteen to offset inflation, steel and commodity prices, as well, of course, as the, higher mix of alternative fuels. And and, also, our sales team has been working diligently trying to, identify the best revenue we can get on every sale in every state. Gross margin at 13.9% was up a 160 basis points versus a year ago. Bus gross profit was 11%, which was up a 130 basis points compared to a year ago.

And the mix of part sales improved from 11.3% of total to 12% at an average margin of about almost 35%. Our net loss, obviously, reduced to to about four tenths, so that was an improvement of $800,000. Lower interest cost improved other income and JV income and lower taxes drove the improvement. On an adjusted basis, net income was 2,000,000 positive, up from eight tenths last year. Adjusted EBITDA, as already mentioned, was up eight tenths or 11%, and we'll talk more about that on the bridge.

The EBITDA margin margin of 5.2% for the first quarter was up by a half a point versus the prior year, and this is the fifth consecutive quarter with positive year over year margin improvement. Diluted earnings per share, we've covered, and we we will talk a little more about the impact of cash and debt when we get to the free cash flow slide. Slide 11 is the bridge, and and walks from first quarter fiscal nineteen to first quarter fiscal twenty. Key takeaways are, volume and product mix improved by $600,000. So we we know that the volume was down, but we did have favorable product mix.

That is the we sold more of the fuel sales and also part sales mix in total was up, which contributed to the positive news for volume and product mix. Pricing net of economics was about a million and a half unfavorable, and this was largely due to higher material costs. The the higher material costs were net of some favorable movement that we're now seeing in steel and also higher tariffs. You will recall there were tariffs that were implemented in in in the first half of calendar nineteen, and so we are we are still seeing some some flow through of those tariffs into our fiscal year twenty. Transformational cost initiatives added nine tenths, which was largely around about continued improvement in design cost and in reducing supplier costs.

Efficiencies were favorable, and this was despite the fact that we we were in in in launch of the paint shop in the in the first half in the first month or so of of the first quarter. So there were a lot of a lot of costs involved in getting the paint shop up and running. And so just despite despite all of that, we were able to bring in some favorable news and efficiencies, including favorable news and freight and warranty as well as manufacturing. Operating expense and other was was was unfavorable, and that was largely due to a nonrecurrence of a temporary rebate program that one of their major suppliers gave us in the '19. That did not carry forward into fiscal year twenty and is is a large part of the deterioration for that.

Overall, I think profits up in by 11% in the first quarter was a good result for us. I would just say that, and I and I think this is reiterating, things that Phil said. We continue to work on improving both the per unit revenue and the cost structure at Blue Bird as key enable key enablers for achieving our long term objectives. We talked about bus revenue, gross margin. We we are continuing to push on gross margin.

And I would say that this could have been higher for the first quarter, except that we we did incur some costs for the paint shop launch. So so that dropped us back, but, we've seen good traction on gross margin. And and finally, the transformation initiatives. I know you look at $900,000 and say, well, that wasn't very much, but it is our lowest quarter in terms of volume, and and most of the savings are driven by bus sales. So it's it's an important important thing on the in in reducing the cost of each bus we sell.

So if you put it into perspective, that 900,000 was worth about $600 a unit on every bus we sold in the first quarter. And, of course, that will flow through to the buses we sell in the in the rest of the year and and provide for improving our profitability as volumes grow through the year. The next slide, slide 12, is the free cash flow. And you can see here that the free cash flow is off by around about 34,000,000, at least for the adjusted free cash flow and similar number for the free cash flow. And the big the big issue is is clearly in trade working capital.

Everything else is pretty stable. The year over year, increasing trade working capital is is fundamentally all temporary items, and they will be eliminated, if if not in the second quarter, at least in the balance of the year. And and there were four principal areas. The first is we had a number of we have a number of stockpiling actions on some major powertrain components due to to some supplier capacity constraints. We we had stockpiled a number of engines, and that stockpile will run down as we as we go out of this fiscal year and and will be gone by the end of fiscal year.

We also had a work pattern change versus 2019 in in the first quarter. Typically, we we bring in inventory for production in in the second quarter, in the first week of that quarter, which we all get confused about calendars. But, basically, the first week of the second quarter is just after New Year, so we tend to bring it in there. Unfortunately, due to the timing of the timing of our production pattern in fiscal year twenty, we would had to bring in a lot of inventory to support support October production in the latter December, and that that caused us quite a run up in inventory going out of out of the first quarter. Again, that will sort itself out as we go through the second quarter.

Blue Bird has been on a major program to consolidate all of that inventory into a single major warehouse to improve flow to the plant, and to improve efficiency and profitability. We moved we did all of that move in basically the the the '20. So we did build up inventory to ensure that we will protect project protected against any any glitches as we were moving parts from a number of warehouses to a central warehouse. So we we took a fairly conservative approach to protect production during this overhead overhaul, and I think that while it while it was a strain on our cash, it certainly paid dividends in not losing production. And finally, we did have a number of buses that were still in work in process at the end of the first quarter.

In other words, they were largely built but still being finished. These were the the more complex buses that we built for the federal government and and and some buses that we were building for some major fleets that were were more like transit buses than school buses and and and require a lot of incremental work. So they those buses will all be delivered before the end of the second quarter, and we'll get we'll get the majority of that stockpiling or or inventory out of the way. So so, again, I I'd say that the engine stockpiling will probably run that out by the end of we will run that out by the end of the fiscal year. Everything else, work patent change, protection against the warehouse move, and the the wood the buses that are still in production will be cleaned out over the next several months.

Final slide, slide 13, looks at our net debt leverage and liquidity. Debt at $2,215,000,000 was up about 6,000,000 due due to prior year due to 15,000,000 drawn on the revolver higher than the prior year at that time, and that was really drawn to fund some of the trade working capital. Our net leverage ratio came in at 2.5, again, well below the threshold of the covenant at 3.75, and we believe our our liquidity at 66,000,000 is good for this time of year. And, particularly, it it gives us some some fairly solid amount of cushion while we're carrying higher higher than normal inventories, and we would expect to see that grow as we run down the inventories. So that's a brief summary for you, and I'll now turn back the discussion back to Phil Hallock, who will describe the outlook for fiscal year twenty twenty and our position on guidance.

Over to you, Phil. Thank

Speaker 2

you, Phil. So let's now focus on the fiscal twenty twenty outlook, as Phil just said, in our full year guidance. And please turn to Slide 15. The headline on this slide says, we are simply continuing to follow the plan we laid out to grow margins. We started this two years ago, and we're well on track and well underway with it.

But before I just get into the details of that, just a quick comment beginning about the industry. For three years now, we've been running at about 34,000 units, and these are really thirty year highs that we're seeing. But the great thing is when you look at the outlook here for profit factors I mentioned before, profit values, funding available, and the likes of VW funds to boost to boost some decisions there and make them an earlier insightful, it does give us real confidence we see in the foreseeable future holding at this level. And it's important also to note, as I mentioned previously, a 190,000 buses in a 500,000 fleet across North America is over 15 years of age. So there's tremendous demand to buy new buses.

This this industry is not slowing down because of lack of demand. As we consistently stated, our plans for continued profit growth focus on achieving significant gross margin and EBITDA margin improvement from three key areas. I'm gonna repeat myself to you, but I think it's supposed to remind ourselves that our strategy is very straightforward, very simple, and we're executing it. First is annual cost recovery pricing. We took pricing at 18 for surcharges for steel and other commodities commodity increases.

And in late fiscal twenty nineteen, we took a further 2% price increase on all vehicles and options, and that will have a significant annual effect in fiscal twenty twenty as we see the flow through of that late announcement back in fiscal nineteen. 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 a plant, it's in the manufacturing situations, design. We're exploring every possible avenue. Look how we've done so far.

In 09/1819, we drove cumulative cost savings of $38,000,000 in over those two years, and we expect significant benefits again in fiscal twenty twenty and beyond. Manufacturing efficiencies and quality will be a key area of focus this year and in future years.

Speaker 1

And third, as we've been doing

Speaker 2

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 booked 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 twenty twenty are on the 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 of fiscal twenty twenty 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 a billion and 20,000,000 to a billion and 50,000,000, which is which would be between 2 to $32,000,000 higher than fiscal twenty nineteen. 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 to $95,000,000, a significant 8 to $13,000,000 or 11 to 16% increase over fiscal twenty nineteen. And 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 twenty twenty to follow a similar pattern with the vast majority of our profits and improvements over fiscal twenty nineteen being earned in the second half of the year as we realize that higher volume. Adjusted free cash flow is between $30,000,000 to $35,000,000 and continues to be a strong feature of our business model. While this is slightly down from our fiscal twenty nineteen 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 result in the softest quarter of the year, both operationally and financially. Importantly, all of our production slots are filled for the first half of our year, and we are now filling slots 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 twenty twenty reflects significant profit and margin growth over fiscal twenty nineteen and is supported by the continuation of the strategy and plans we put in place and are executing over the past two years. Well, that concludes our formal presentation. I'm now gonna pass it back to our moderator to begin the q and a session.

Speaker 0

If you'd like to ask a question, please signal by pressing star one on your telephone keypad. We'll first go with Justin Clare from ROTH Capital Partners. Please go ahead.

Speaker 4

Hi, everyone. Thanks for taking my questions.

Speaker 2

Hi, Justin.

Speaker 4

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?

Speaker 2

It was entirely due to the paint shop. We took all the orders in. We just timed them out. So, I'd expect it's fair to say you probably see those bouncing back in the second quarter. So it's all due to the paint shop.

We're building 50 to 60 buses a day. So you can imagine, you know, you ramp it up slowly. You don't build 40 50 to 60 from the start point. You're building 15, then 20, then 30. So this is just units, Justin, into the second quarter.

Speaker 4

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?

Speaker 2

Well, I think yes, I think if you do the math with our guidance, you'd see that. Yes, we certainly do. Mean, as we see much more volume coming through and we hold the pricing we put in place and we keep the alternative mix, alternative fuel mix going where we need to be, yeah, we do see, improving margins throughout the year, both the gross margin and EBITDA margin.

Speaker 4

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

Speaker 2

Yeah. You know, I wouldn't call it necessarily a shortage of engines that we were protecting for. This was just making sure, we're ready for the second quarter start. And then, you know, we mentioned Phil mentioned earlier about the we started the like, back in fiscal nineteen. You know, January the first week was a shutdown week, still a holiday week, actually.

In fiscal twenty twenty, January was a production week. So we brought some engines in earlier, and then we contained it. But there's no there's no shortage of engines as such. We're just being prudent. Okay.

So so then I

Speaker 4

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

Speaker 2

That's the correct way. Yes. There's no there's no margin impact on that. No.

Speaker 4

Okay. Great. I will pass it on.

Speaker 2

Thanks, Christian.

Speaker 0

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

Speaker 2

Hi, everyone. Hi, Eric.

Speaker 5

What's as I always kind of focus on, I'm just would love to chat a little bit about the 111 new old 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 what are some of the other players, whether it be different technologies, product launches, what are you seeing from them?

Speaker 2

Well, first of all, your first question, yeah, it's a very good quarter, actually.

Speaker 3

Very good year to date

Speaker 2

position with 111 new customers coming in. And I think, typically, over the time, we've been we've been about fifty fifty between conquest customers. Obviously, people new not only new to our alternative deals, but new to the Blue Bird brand. And when we look at new to the Blue Bird brand, we talked about in the last five years, they've come to us. Okay.

Because they may have bought a bus previously, obviously. But when we talk about alternative fuels, we talk about specifically the brand new to anything, whether it's gas, propane, or electric, or CNG. What's interesting for us is, actually, the way we count that too is if a guy bought gasoline before and now 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 it from. You can't buy that powertrain for propane, for gasoline, at the CNG from anyone but Blue Bird. In fact, you can't drive up by an electric drivetrain, which is powered by a Cummins product Cummins drivetrain from anyone else but Blue Bird. So we like being different.

We like being in that position. It's good for us.

Speaker 5

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, 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 is becoming more of a mainstream outside of those specific, you know, examples. Well,

Speaker 2

I I I let's put it this way. We're still in a situation where unless there are significant grants available, the customers cannot afford to buy an electric powered school bus. You know, it's anywhere from three to four times the price of a traditional combustion engine type of bus. That that's a fact. So but what you are seeing is a lot of states saying, let me try a few.

I'm gonna put some funds to all of this. Let me try a few. But they know the school district will be so out of pocket. And then everyone knows the battery technology is gonna improve. They're gonna come down in price.

You see all of that data right there. A lot of intrigue around vehicle to grid and where it's going and fast charge and all these things. So I think what I'm telling you is that it's not I would say it's mainstream, although it's probably in California because they are they're so keen on zero emission in California. They put a lot of grants behind this. But they're unique.

They always have been in this space. Zero emissions for them is is mainstream. But I would say that the there's a incredible growing interest and fascination for trying this really across the country. And, you know, the the what we see, like I said before, funds are available. The VW funds, in many cases in most cases, I would say, there's always an element portion to let you buy a few electric buses.

So I think, yeah, it's it's it's picking up momentum. We just wanna be there, obviously, and capitalize on these opportunities.

Speaker 5

Yep. 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 X Parts, that offering. I believe it was last fiscal year. And so maybe just outlook in the parts business and how that's played out versus your original expectations.

Speaker 2

Yeah. Well, I if you look at last year, 7% growth was a nice growth in an industry that we're not calling. It was flat. Right? So that was good.

We grew, and we continued in the first quarter with you take out the extra sales we we got, Eric, I mentioned, it was still a strong 8% eight to nine percent for the growth level we got in that first quarter. So really nicely done. I think the the, you know, the XParts program, we're stocking that every month with new SKUs. We're putting new parts in there. Our dealers are our dealers are picking it up.

We're nowhere near our company, clear victory yet. There's 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, you know, we've been at this business with the Ford products since 2012.

So what we're seeing now is more and more units are coming off warranty. And now we're into getting to the service mode, replacing parts, and we weren't weren't able to do that. Unlike other powertrains out there in the market, we're allowed Ford gives us the right to be very competitive on all of those parts that they put into the engine engine and transmission. That's also a growth we're seeing. So and I guess that's in a way, like, more access to to to the market, and we're gonna bring our SKU base now than we have had before.

And we think that's pretty important to grow in this business. And so, yeah, I think it's it's going well, and I think it's it's 10% growth in the first quarter. So this quarter of year is is pretty good coming off the school start.

Speaker 5

Okay. Thanks a lot.

Speaker 2

You bet. Thanks, Eric.

Speaker 0

Thank you. We'll next go with research. Please go ahead.

Speaker 2

Hi, everyone.

Speaker 1

Some I'm somewhat new to new to the name.

Speaker 3

Just wanted to ask about

Speaker 1

I know you you're doing a lot better in your margins. Would you say that you'd reach profitability in the next in the next coming year? You know, could you give us an idea on that?

Speaker 2

So give me that again. Reach profitability and and what I wanna hear what you're saying. Missed it. Give us cut down a little bit. Oh, Chris.

Speaker 1

Oh, okay. You know, it it seems like things are improving. So what what could you give an idea about, you know, what maybe about what quarter you could reach profitability?

Speaker 2

Well, I think look. I I we we tend not to give we don't give guidance by quarter. We gave guidance the full year. And we certainly said that by the end of this year, we expect to be in a run rate to get to our 10% plus margin objective. That's where we wanna be.

So that's all

Speaker 4

we're really putting out there

Speaker 2

right now in that. You know, we'll we'll take this a quarter of time, see how we go, and keep delivering quarter by quarter. And every margin, you know, so far, we're up nicer this year in both gross margin and EBITDA margin, and we look to improve.

Speaker 1

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?

Speaker 2

Well, when I last called the president, he wasn't willing to tell me he was pulling off the tariffs yet. No. I mean, I think what's happened is we we are not planning in our guidance what we've given of tariffs coming off, Chris. So if they do, obviously, that'll be a big boost for I'd like to think that over the course of time, we'll see tariffs coming down. But we have not with our guidance, our objectives we're putting out there do not reflect that.

So I think we're just gonna wait and see what happens. It's also worth bearing in mind, you know, we work with many of our suppliers. They they back when they look at repricing, they they look at what's happened to them in the last anywhere from six to twelve months. So for example, you know, one of our major suppliers last year put on tariffs in in early guess, it's the start of second quarter, basically, in '19 because they look back on what they would do or what happened to them, and that's the way they would. They look back at the last several months, and they put a surcharge on.

So that actually did impacted in in '19. I think most people think tariff has it was. We saw them later. But the bottom line is, I think the bottom line is, I think, we had so we don't we don't plan on reducing tariffs, but I think we'd like to return this opportunity, I guess, down the road.

Speaker 1

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

Speaker 2

Oh, yeah. That's the funny is I think it's really We'd have to get

Speaker 3

we'd have to get back on that. It it wasn't it wasn't major, but, know, certainly had a an impact on earnings per share. And and I guess you'd have to look at it over the year rather than a quarter because it it would be, you know so, again, I mean, I I think Phil said it exactly right. We're not planning on the tariff coming off. When it does come off, it will it will clearly, be an improvement to margin.

Speaker 1

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

Speaker 2

You bet. Thanks, Chris.

Speaker 3

Thank you.

Speaker 0

Thank you for your question. And just to remind everyone, if you'd like to ask a question, please We'll next go with Lewis Moser from MassTax Investments.

Speaker 1

Yes. I was wondering about the, announcement you made, I believe it was yesterday afternoon and and once again early this morning about a shareholder that is selling 11,000,000 shares.

Speaker 2

Can you talk about that? Yeah. Paul, I'm gonna transfer around the left comment. Hi, Louis. This is Paul Yusuf.

Speaker 1

They had pre registration yesterday registered 11,000,000 shares. We we first registered those shares back in 2015 when Cerberus sold those shares. Subsequent to that, those were just sold under under a private transaction to American Securities. We we simply reregistered those shares. They own those shares.

There'll be no proceeds to the company. That registration will be good for three years. Okay. So it's over a period of time?

Speaker 2

Yeah. All all this all this was is, I thought, good housekeeping. Right? Just reregistering the shares. That's right.

That's that's all it is. Okay. Thank you. Thanks. Thanks, Louis.

Speaker 0

Thank you for your question.

Speaker 3

While while while people are waiting, this is Phil Tighe. I I need to make one clarification. I believe in my opening address, referred to filing of a 10 k tomorrow. It's actually a 10 q, so I don't want anybody to, be confused between my with my mistake. It's a 10 q that will be filed tomorrow.

Thank you.

Speaker 0

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

Speaker 1

Okay. Thank you, Nadia, and thanks to

Speaker 2

all who's joining us on our call today. We appreciate your continued interest in Blue Bird. And as I 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. And I believe we are well positioned for growth today and in the future. So please don't hesitate to contact our head of profitability and investor relations, Mark Benfield, should you have any follow-up questions.

Thanks again, Roland, from all of us here at Blue Bird, and have a great evening.