Blue Bird - Q2 2023

Transcript

Operator (participant)

Hello everyone, a warm welcome to the Blue Bird Corporation Fiscal 2023 second quarter earnings call. My name is Emily, I'll be coordinating your call today. After the prepared remarks, there'll be the opportunity for any questions, which you can ask by pressing star one on your telephone keypads. I will now turn the call over to our host, Mark Benfield, Head of Investor Relations at Blue Bird Corporation. Please go ahead.

Mark Benfield (Head of Investor Relations)

Thank you, and welcome to Blue Bird's Fiscal 2023 second quarter earnings conference call. The audio for our call is webcast live on blue-bird.com under the Investor Relations tab. You can access the supporting slides on our website by clicking on the Presentations box on the IR landing page. Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted on the following two slides and in our filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird's President and CEO, Matthew Stevenson, and CFO, Razvan Radulescu. We will take some questions. Let's get started. Matt?

Matthew Stevenson (President and CEO)

Thank you, Mark. Good afternoon, everyone. Razvan and I are extremely excited to update you on our results for quarter two, which was probably the most pivotal quarter for the company in years and begins to highlight the real potential of our business. This quarter, we're to show a 180-degree turn in our financials as we've been forecasting for some time. I'm pleased to say that we not only delivered as promised, but once again delivered results ahead of schedule, a testament to the hard work that our teammates have been doing every day. On slide six, you can see some of the key takeaways for the quarter. Overall, industry demand continues to be robust and the backlog for Blue Bird school buses is at nearly 5,800 units. We are now through most of the legacy priced buses in our backlog.

As a reminder, we define these legacy priced units at those at price levels prior to October of 2021. This, along with operational improvements, drove the significant inflection in our financials. We also reinvested back into the business, putting in over $3 million in wage increases for our frontline teammates this year starting this quarter, while continuing to improve processes throughout our operation, upgrading our facilities, and even opening an all-new EV center, which we will talk about in detail during the call. Through the efforts of the best workforce in the business, strong leadership, lean process improvement, and just plain hardcore tenacity, we are seeing some of the best performance the company has ever seen in the second quarter. Let us not forget the EPA's fantastic Clean School Bus Program that recently closed its phase I and announced its direction for phase II.

The success of this program has led to a staggering number of EVs in our backlog. The business is performing well and the turnaround is ahead of schedule. Now let's take a look at some of the highlights from the second quarter. The financial performance for fiscal year 2023 quarter two shows a massive improvement from a year ago. Our units sold were over 2,300, which drove record second quarter revenue for Blue Bird, up over $90 million from fiscal year 2022. This was a 373 unit increase from the same time period last year. Adjusted EBITDA was $31 million better than this time last year, and we posted $20 million for the quarter. As a result, Adjusted Free Cash Flow for the quarter was $23 million, up $2 million compared to the second quarter of fiscal year 2022.

Overall, a fantastic second quarter for Blue Bird. On the right-hand side of the slide, you can see some of the ongoing highlights for the business. As I mentioned, demand continues to be strong. Our backlog is incredibly robust at roughly 5,800 units worth over $775 million in revenue. Included in that backlog is $200 million of firm orders for 621 electric school buses, a large uptick from last quarter due to the impact of the EPA's Clean School Bus Program. In fact, we're incredibly proud of some of the recent large EV deployments, including Broward County in South Florida and the city of Boston. As we've discussed in previous quarters, we have raised pricing considerably since July of 2021. Our average selling price for the quarter is up 22% year-over-year.

Our sales for the quarter were 63% alternative power, demonstrating our continued leadership in the space. Part of that was our EV growth, up 175% year-over-year. Part sales continues to be another bright spot for us, up 37% year-over-year. The increasing average age of school buses on the road is having a material effect on our aftermarket sales. With our EV demand so high and more coming from the EPA's Clean School Bus Program, we had to increase EV chassis capacity. We recently opened up our new EV build-up center, which we are thrilled about. We are ready for the increasing demand as the EPA's recently announced phase II of their program, which is another $400 million, this time through a grant program.

As you can see on slide eight, we are delivering some of the best operational performance in nearly two years in several critical areas. Setups and throughput are up significantly as missing parts are down due to our efforts to improve material flow to the plant. Those have included adjusting our warehousing strategy, resourcing numerous problematic suppliers, and revising production constraints. This has also contributed to the lowest number of hours per bus and the best manufacturing efficiency in two years. In turn, this generated a number of all-time records for quarter two, including revenue, EV bookings, part sales, and Adjusted EBITDA. Not only does this prove the company is back on track, but we are now exceeding some historic financial benchmarks for the organization. Slide nine is a reminder of our key pillars around care, delight, and deliver.

Our focus areas within those pillars include our people, lean transformation, expanding our total addressable market, and scaling EV. I want to briefly touch on the progress of each of those since our last call. Regarding our teammates, in January, a large-scale wage increase took effect for our hourly teammates. We also increased our paid vacation days to 14 this year, unheard of in most manufacturing environments. We also continue to update our facilities to enhance the working environment, including putting massive air chillers into our facility for the summer months. We are also in the final phase of rolling out a new cell manufacturing organizational structure designed to provide more resources for our frontline teammates by narrowing the span of control and offering essential support.

Through continued focus on our lean transformation, we are seeing improvements in quality and throughput, even while the supply chain environment is still far from normal. The commercial chassis continues to progress while we stay focused on ramping up our EV school bus production. On this call, we really want to focus on highlighting our all-new EV center. A lot of great work went into this and is core to our future. On slide 10, you can see photos of our new 40,000 sq ft EV center. Previously, this was actually an old paint facility on the Blue Bird campus. Through relatively minimal investment and a lot of hard work by our team, we turned it into a modern EV commissioning center.

It's where we install the EV batteries along with some of the final components on the thermal management system and bring up the state of charge for the batteries. This new facility will help us meet the EV demand forecasted over the next five years. As we've mentioned in previous earnings calls, this will allow us to take EV production from 4-12 units per day by the middle of this year, with the ultimate goal of 20 units per day whenever demand warrants it. Plus, it is a great example of where we are headed with our entire production footprint, rooted in the foundational principles of the Blue Bird Production System in lean. Slide 11 is again a reminder of the EPA's Clean School Bus Rebate Program. This program allocates $5 billion over five years for clean and cleaner emission school buses.

Approximately 2,500 buses were funded in the phase I of this program with an average rebate of $375,000 per electric bus. Customers had until the end of April to submit payment request forms to the EPA demonstrating that new buses as well as eligible infrastructure had been ordered. Some of our customers have asked for an extension beyond the 30th April deadline due to delays on the final quotes for their charging infrastructure. We have already seen many orders come in for this program and fully expect to garner well over 500 orders for the phase I whenever it is all said and done. The long-term impact of this program will be well over $1 billion in revenue to our organization. The EPA recently launched phase II of their program, and on slide 12, you can see the details.

As we expected in phase II, announced in late April, it is a competitive grant program with an anticipated $400 million to be awarded in this round. Applications will be taken from now through the end of August. We can expect those grant award winners to be announced in late 2023, with orders in the first calendar quarter of 2024. We have established substantial resources, both internally and externally, to work closely with our dealers and end customers in supporting them in this grant writing process. The focus of this grant program will be larger deployments. We expect the EPA to fund only 25-50 awards. The applications will have a scoring process. Priority districts will be given preference in the evaluation criteria.

We expect this phase II to fund 900 electric buses. We conservatively estimate that we will get at least 200 of these. We continue to remain excited about the Clean School Bus Program and look forward to working with our dealers and customers on phase II to deploy more industry-leading electric buses. I would now like to hand it over to Razvan to walk through our fiscal year 2023, quarter 2 financial results in more detail, as well as our updated fiscal year 2023 guidance.

Razvan Radulescu (CFO)

Thanks, Matt, and good afternoon. It's my pleasure to share with you the financial highlights from Blue Bird's fiscal 2023 second quarter results. The quarter end is based on a close date of April 1st, 2023, whereas the prior year was based on a close date of April 2nd, 2022. We will file the 10-Q today, May 11, after the market closes. 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 this presentation includes reconciliations of differences between GAAP and non-GAAP measures mentioned on this call, as well as important disclaimers. Slide 14 is a summary of the second quarter and year-to-date results for fiscal 2023. It was an excellent operating quarter for Blue Bird.

We somewhat reduced supply chain disruptions and with an increased number of higher margin units driving both our top line and our bottom line results. We have exceeded the revenues and Adjusted EBITDA of our conservative quarterly guidance provided in the last earnings call. In fact, we delivered the Q4 expected results two quarters earlier. The team has done a fantastic job and generated 2,304 unit sales volume, which was 373 units or 19% higher than prior year. Consolidated net revenue of $300 million was $92 million, or 44% higher than prior year, driven by higher units, higher parts sales, improved mix of electric buses and pricing actions that took hold significantly in this quarter. The Adjusted Free Cash Flow was positive at $23 million and $2 million higher than the prior year's second quarter.

This outstanding performance was driven by the increased profitability combined with strong working capital management and supports our great liquidity position at the end of this quarter, which was over $100 million. Adjusted EBITDA for the quarter was $20 million, given our high volume of now profitable buses, increased parts sales and margins offset by increased labor costs. Given the transitional nature of our fiscal 2023 Q1 results, which included still a large portion of all backlog low-margin buses, our year-to-date performance is still solid at 4,261 units sold, thereof 227 EVs, with $536 million in revenues, Adjusted EBITDA of $16 million and excellent free cash flow of $43 million. Moving on to slide 15.

As mentioned before by Matt, our backlog at the end of Q2 continues to be extremely strong at nearly 5,800 units, with the vast majority of these units at much higher price levels compared to the fiscal 2022 built units. Breaking down the second quarter, $300 million in revenues into our two business segments. The bus net revenue was $273 million, up by $85 million versus prior year. Our average bus revenue per unit increased from $98,000-$119,000, or 22%, which was largely the result of pricing actions taken over the past 18 months, as well as the higher mix of electric buses. EV sales in the second quarter were at a level of 135 units or 86 more than last year for 176% increase.

Parts revenue for the quarter was $26 million, representing a growth of $7 million or 37% compared to the prior year. This extraordinary performance was in part due to a large parts backlog reduction due to improved supply chain in aftermarket, and we expect the future fiscal 2023 quarters to be in the low $20 million. Gross margin for the quarter was approximately 12% or 10.4 percentage points higher than last year due to our improved operational performance and our pricing catching up with the inflationary costs over the last 18 months. In fiscal 2023 second quarter, Adjusted net income was positive $9 million or $19 million higher than last year. Adjusted EBITDA of approximately $20 million or 7% was up compared with prior year by $30 million and 11.7 percentage points.

Adjusted diluted earnings per share of positive $0.27 was up $0.58 versus the prior year. In summary, our operating performance and financial results demonstrated in this quarter are evidence that our turnaround is working and it sets a new base for our future performance towards our long-term goal of profitable growth. Moving on to slide 16. We have positive developments year-over-year also on the balance sheet. We ended the quarter roughly with $18 million in cash and reduced our debt significantly by $17 million. Our liquidity sat strong above $100 million at the end of fiscal 2023 Q2 with a zero balance on our revolver. The improvement in operating cash flow and Adjusted Free Cash Flow were primarily driven by improved operations and margins and were supported by only a small improvement in trade working capital in this quarter.

As a reminder, at the end of November 2022, we entered into the Sixth Amendment to our credit facility, extended the maturity date to December 31st, 2024. The Sixth Amendment provides for revised covenants, modifications to the revolving credit facility and a new pricing grid. The amended covenants and the extended maturity of our loan provide Blue Bird with both flexibility and stability as our business continues to recover from the COVID-19 pandemic and the associated global supply chain disruptions. Slide 17 shows the work from fiscal 22 Q-two Adjusted EBITDA to the fiscal 23 Q-two result. Starting on the left at -$10.7 million. The impact of the bus segment gross profit in total was $27.1 million, split between volume and pricing effects, net of material cost increases of $23.3 million and operational improvements of $3.8 million.

The operational improvements consist of year-over-year manufacturing efficiency improvements and lower freight in cost. The favorable development in the parts segment gross profit was $5.4 million, driven by higher sales and improved margins. Additionally, our Micro Bird joint venture results improvements were more than offset by increases in our fixed costs, mainly personnel related, for a net of negative $2 million compared to Q2 a year ago when very tight cash conservation measures were in effect. The sum total of all of the above-mentioned developments drives our strong fiscal 23 Q2 reported Adjusted EBITDA results of $20 million or 7%. On to slide 18. Looking ahead, we are happy to reiterate that we are now largely past most of the old backlog units with fixed pricing from fiscal 21 orders.

We will continue to benefit in the second half of fiscal 2023 from pricing mix improvement based on the age and price level of our current backlog. Our production schedule is now virtually full for the rest of fiscal 2023, with some models, Type D, for example, going already into fiscal 2024. However, supply chain and labor inflationary cost pressures still exist, and not all of the upcoming price increases will flow to the bottom line in fiscal 2023. Given our large backlog, we already announced for fiscal 2024 a model year price increase of $2,500 per bus net for all bus types built after October 1, 2023 to cover expected inflationary and raw materials cost increases. On slide 19, you can see the spot market development for steel prices over the last two years.

After the initial reduction in early 2022, steel spot prices shot back up in March and April after the Ukraine war started. However, that bubble reversed itself by August. The favorable trend continued through December 2022, and we benefited from this in fiscal 23 Q2. However, the steel prices started to increase again all the way through the end of April, and this will offset a portion of our pricing realization for the remainder of calendar year 2023, as mentioned on the previous slide. Please keep in mind that we have now a comprehensive steel buying strategy, and we are entering in future locked contracts for steel prices with certain tonnages up to 12 months forward, minimizing our exposure.

On slide 20, looking at fiscal year 2023, we want to share with you our updated forecast by quarter, which serves as basis for our fiscal 2023 total year guidance. As a reminder, we are taking a more transparent and conservative approach this year, as it will still be a somewhat uncertain year from a supply chain perspective. However, we have improved already all the other business levers that we could address, as now demonstrated by our very strong fiscal 2023 Q2 actual results. Looking forward at fiscal 2023 Q3, and Q4, we are increasing our forecasted revenues in the range of $275 million-$300 million for each quarter, as well as increasing our EBITDA margins by approximately 1 percentage point each quarter. For Q3, we are projecting Adjusted EBITDA of $21 million, with a range of $19 million-$23 million.

For Q4, we are projecting Adjusted EBITDA of $23 million with a range of $20 million-$26 million. Putting it all together, for the total year, we expect revenues in excess of $1.1 billion and an increased midpoint Adjusted EBITDA of $60 million with a range of $55 million-$65 million. Moving to slide 21. In summary, we are forecasting a significant improvement year-over-year in all aspects, with revenues up more than 35% to approximately $1.1 billion, Adjusted EBITDA in the range of $55 million-$65 million, and positive free cash flow of $30 million-$40 million. On slide 22, we wanted to reiterate our long-term outlook.

We are very happy about the results of our turnaround taking hold and our prospects ahead, and we are looking forward to share with you in our next earnings call our first indications regarding fiscal year 2024. Looking a bit beyond that, once the supply chain normalizes, which has not happened yet, we expect to sell 9,500 units, including 1,500 units EVs, and generate $100 million or 8% Adjusted EBITDA on $1.25 billion in revenues. Looking farther to the medium term, our EV growth and operational improvement can support volumes of 10,500-11,000 units, including EVs in the range of 2,500-3,500 units, generating revenues of $1.5 billion-$1.75 billion with Adjusted EBITDA of $150 million-$200 million or 10%-11%.

Our long-term target remains to drive profitable growth towards $2 billion in revenues comprising of 12,000 units of which 5,000 are EVs and generate EBITDA of $250 million or 12%.

We are incredibly excited about Blue Bird's future. Now I will turn it over back to Matt to further expand on this.

Matthew Stevenson (President and CEO)

All right. Thank you, Razvan. On to slide 24. As detailed in the fiscal year 2023 guidance that Razvan just walked through, we are again now raising guidance based on the strong performance of the business. All the hard work the Blue Bird team has put in for nearly two years is paying off. We plan on booking at least 8,350 units, a 22% increase over fiscal year 2022, and driving a top line of $1.1 billion. That's a 37% increase year-over-year. Part sales will be ahead of plan, delivering at least $88 million in revenue, up 15%. We now expect the Adjusted EBITDA performance to be approximately $60 million, up nearly five-fold compared to fiscal year 2022. EV bookings continue to be on plan, and we expect those to more than double year-over-year.

There have been no significant changes in the ACT retail sales forecast for fiscal year 23. It continues to be supply chain constrained across the industry, and our targeted bookings will put us right where we want to be around that 30% market share. As other industries are slowing down, we're just heating up with incredible demand in front of us. As we have touched on in past calls, industry retail sales have been off from their average of 32,000 units per year for the past three years in a row, and the national school bus fleet is aging. The market was first constrained by COVID and school closures, and it has been held up more recently by the supply chain. This aging fleet must be replaced, and we expect substantially robust years ahead of us to address this pent-up demand.

ACT is forecasting a compound annual growth rate of 10% from our fiscal year 2023 to our fiscal year 2027. Our business is performing well after two long years, and we look forward to executing on the robust market ahead. The future is incredibly bright for Blue Bird, so let's turn to slide 25 as a summary reminder of the strong investment highlights around our company. We are a great countercyclical play to many companies and industries being affected by the slowdown in consumer spending. Plus, not only are the fundamentals of our industry strong, it is just starting to heat up with this 10% compound annual growth rate expected over the next five years. Second, there is commitment from the highest level of government to electrify this country's school bus fleet.

In addition to the $5 billion from the federal government, there's another $5 billion in other federal, state, provincial, and local programs. $10 billion in total to accelerate this transition to electric school buses. Blue Bird will be a direct beneficiary of this, as we have more electric school buses on the road today than anyone. We also have a proven reputation as a leader in alternative power school buses for over a decade, as evidenced by the 20,000+ propane-powered Blue Birds on the road today. Our exclusive partnership with Ford and ROUSH offers us a distinct performance advantage no one else has with propane. On EV, our collaboration with Cummins offers a proven partner invested billions in alternative fuel solutions, something no other electric school bus manufacturer has to offer.

As impressive as the outlook is for school buses, we are still looking for more growth opportunities and want to expand our total addressable market. The commercial strip chassis offering could eventually add a few thousand units per year on top of our projected long-term forecast. With our lean transformation efforts, we're removing non-value-added processes and reducing standard production hours per bus. We are continuously looking for ways to take out costs and at the same time increase quality. As we touched on today, our pricing is now aligned to market economics, and we are through the majority of legacy price buses. All these factors will provide us with 10%+ Adjusted EBITDA margins in the midterm normalized operating environment.

As you saw in the guidance we provided for the fourth quarter of fiscal year 2023, we get to approximately 9% Adjusted EBITDA on supply-constrained volume, proving that in a normalized operating environment, double-digit Adjusted EBITDA margin will be in a reach. As I mentioned at the beginning of this call, the hard work by the Blue Bird team has paid off. The business is ahead of plan and even exceeding historical performance benchmarks. I want to thank the nearly 1,800 teammates for all their hard work, as well as our outstanding dealer body who sacrificed with us over the last two years. We couldn't have done it without them. They are and will always be critical to our success. We now would like to open up the line for questions. Thank you.

Operator (participant)

Thank you. If you would like to ask a question today, please do so now by pressing star followed by the number one on your telephone keypads. If you change your mind and would like to be removed from the queue, that's star followed by two. When preparing to ask your question, please ensure that your device is unmuted locally. We will just take a brief pause to compile our Q&A roster. The first question today comes from the line of Eric Stine with Craig-Hallum. Eric, please go ahead.

Eric Stine (Senior Research Analyst)

Hi, everyone. Great to see the results.

Matthew Stevenson (President and CEO)

Thank you, Eric. Appreciate it.

Eric Stine (Senior Research Analyst)

Just curious. Yep. Yep. I'm just curious, I mean, obviously, supply chain is still an issue

Seeing it ease a little bit, I mean, I guess I'll start with probably a near impossible question to answer. I mean, do you have any thoughts about, you know, this kind of seeing the light at the end of the tunnel, or is this kind of a new norm? It's just going to drag on and it's something, you know, you're expecting to have to deal with, you know, for a long time.

Matthew Stevenson (President and CEO)

Yeah. Thanks for the question, Eric. This is Matt Stevenson. I mean, we definitely are seeing some improvements and some of the, some of it's moderating, but there still is, you know, volatility in the supply chain. Really, it isn't one specific component. It's kind of across the board. Of course, as you know, we use the same set of suppliers the commercial truck industry uses, and that industry is still going pretty strong. Most of the challenges reside around our tier ones and tier twos getting frontline labor. You know, we as a team have just gotten a lot better dealing with it. We remain optimistic on our ability, you know, to continue to deliver.

Eric Stine (Senior Research Analyst)

I guess kind of follow up on that. You know, if I look back, think back a couple years, I mean, the norm was certainly not to carry this much backlog, which obviously is related to supply chain. I mean, do you envision a scenario where, you know, if you play this out a while, that you kind of catch up and you get back to more normal levels? Or again, I mean, is this do you kind of think that this is the norm where you've got this elevated level of backlog? Which, I mean, I guess is a good problem to have, you know, but it'd also be nice to be able to work that down.

Matthew Stevenson (President and CEO)

Yeah. You know, based on the pent-up demand that we reviewed there, what ACT is forecasting, a lot of robust years in front of us, you know, we expect to still have a healthy backlog. We, of course, monitor the situation, you know, weekly, if not daily, in terms of our ability to ramp up production. You know, we continue to be conservative in ramping up our production to make sure, you know, we're watching all the inbound material and getting buses out the door.

Eric Stine (Senior Research Analyst)

Do you feel, I mean, obviously, you know, you're almost through the low price backlog, and you're putting through the price increase for fiscal 2024. Do you feel like, I mean, the market's basically conditioned for that? I mean, are you sensing any pushback? I know steel prices have, you know, started to turn higher again. I mean, what's your thought on price going forward?

Razvan Radulescu (CFO)

Hi, Eric, this is Razvan. Thank you for the question. We are monitoring carefully the cost development. As long as there is still inflationary pressure, whether it's from labor costs or steel prices going back up, we will consider pricing actions to offset for this upcoming increase in cost. It's a bit too early to know very long term how the situation will develop, but at least for fiscal 2024, we took the first step in order to cover for this inflationary cost.

Eric Stine (Senior Research Analyst)

Yep. Okay, that's great. I'll take the rest offline. Thanks.

Matthew Stevenson (President and CEO)

Thank you, Eric.

Operator (participant)

Our next question comes from Michael Shlisky with D.A. Davidson. Mike, please go ahead.

Michael Shlisky (Managing Director and Senior Research Analyst)

Hello, good afternoon, and thanks for taking my questions. I guess I wanna ask first about some of the comments you made on EV, Matt, and the EPA awards. I guess some of your comments around, for example, the 2022 awards, you mentioned you were getting at least 500 out of the full amount. The 2023 awards that are already out there so far, you think you can get about 200. It just sounded like that's below the historical 30% share you had of the overall school bus market. Could you comment on what might be driving your market share there, or is it just conservatism or just, like, rounding?

Just kinda curious whether you're all confident you can actually match or beat your share on EVs that you have on the overall bus market?

Matthew Stevenson (President and CEO)

Hey, Mike, this is Matt. Thank you for the question. You know, really, it's just our conservative nature. Much like, you probably recall on the phase I of the program, the 2022 program, we said 500-700. We're just taking a very conservative approach here when we look at, you know, the 2023 grant program for phase II, and that has a reduced amount of money. You know, that's anticipated to be only $400 million versus the roughly $1 billion that was in the phase I. Still, again, it's really just the conservative nature of our approach. You know, our target is to go after and get at least that 30% or more. You know, for these purposes, we say, you know, 200 or more.

Michael Shlisky (Managing Director and Senior Research Analyst)

Great. Can you guys just hear me okay?

Matthew Stevenson (President and CEO)

Yep.

Eric Stine (Senior Research Analyst)

Yep. We got you, Mike.

Michael Shlisky (Managing Director and Senior Research Analyst)

Oh, got it. Great. Sorry. Next question I wanted to ask about kind of the last two weeks, you had an announcement out of California, the Advanced Clean Fleets rule, where private fleets of all types, so that includes buses, have to be 10% EV by the end of next year. I assume that includes school buses. Could you confirm that, one? Maybe secondly, you know, do you have a lot of private fleets that you work with in California, or is it almost all public, over there at this point?

Matthew Stevenson (President and CEO)

Yeah. Hey, Mike, that does include school buses, and we do have some private fleets that we work with in California. That market, you know, was one of the first movers on EVs. You know, we don't see that being difficult for the customers or that market out there, just given how they had first mover advantage and, you know, putting EVs in for well over close to five years now.

Michael Shlisky (Managing Director and Senior Research Analyst)

Great. Just as a quick follow-up there, I think in your comments you had mentioned the coming non-bus products, the Class 5-6 strip chassis. I'm curious if you can give us an update as to some of the timeline specifics there, because obviously there's a big opportunity coming in California and possibly 12, 13, and 14 other states. I'm curious if you'll have something that could be sellable by the first part of next calendar year.

Matthew Stevenson (President and CEO)

You know, our goal, Mike, as we've stated previously, is to have prototypes by the end of this calendar year on the road. That's, you know, that's where our focus is right now.

Michael Shlisky (Managing Director and Senior Research Analyst)

Okay. Sure. appreciate that. I'll pass it along. Thank you.

Matthew Stevenson (President and CEO)

All right. Thanks, Mike.

Operator (participant)

As a reminder, if you would like to ask any questions today, please do so now by pressing star followed by the number one on your telephone keypad. Our next question comes from Craig Irwin with ROTH MKM. Craig, please go ahead.

Craig Irwin (Managing Director and Senior Research Analyst)

Good evening. Thanks for taking my question. First, congratulations on the solid result. It's really nice to see that pricing working so well for you guys. slide 11, where you give some details about the 2022 lottery results. you know, it's nice to see you guys tracking this very closely. I wanted to just dig in, if we can, a little bit on this 1,200 unallocated units.

You know, can you talk about the different parties that maybe received these vouchers, when they need to place their orders by, and, you know, whether or not any of them actually have prior experience with, you know, Blue Bird and the alternative fuels markets, and, you know, whether or not there is a potential for some of these to land as customers for Blue Bird, and obviously the mechanics of how they need to issue those RFPs and ink the necessary contracts to book that for you to book that as an order?

Matthew Stevenson (President and CEO)

Thank you for the question, Craig. It's Matt Stevenson. On that graph on 11, you see that kinda top right corner is approximately that, you know, 500-700 of ones we either had a hand in directly working with our dealers and the customers on applying for the rebate or were loyal Blue Bird customers or channel partners. That is there on that top right. Relative to your specific question on those 1,200 that are unallocated, you know, we've worked with a number of customers there to, you know, target those rebates.

One of the things that we have found, and we have a few customers that did this as well, is they submitted for an extension, some of them 60 days, some of them 90 days, as they're waiting for the final quotes of their infrastructure, because the infrastructure and the buses have been submitted together. You know, we're still hopeful there's opportunity on those unallocated ones as well, and there's still a lot left up for grabs here over the next, you know, 30-60 days.

Craig Irwin (Managing Director and Senior Research Analyst)

Okay. Excellent. If I could ask another question, related to the EPA vouchers. Last year, they started off saying that they were gonna do $500 million. The chatter that we were getting from talking to a bunch of people at ACT Expo was, you know, could be increased to $750 million. Some people were saying could be increased to $1 billion. Then lo and behold, you know, they gave us just under $1 billion in vouchers, which was a fantastic move. You know, the official number is $400 million. We were hearing potential that this could be upped.

Would you be surprised if EPA maybe went to a bigger voucher list this year, maybe did more than those 25-50 awards and we saw materially more than $400 million in vouchers issued?

Matthew Stevenson (President and CEO)

Yes, Craig. I mean, the EPA, we think, has done a great job with this program. I think if they get a lot of high-quality applications here, you know, that could be quite possible they up that amount. You know, there's potential for more of a rebate program for that other, you know, roughly half of the billion per year that they're allocating for this year. You know, we just stay in close contact with the EPA and work closely with our dealers and customers in anticipation of what may happen.

Craig Irwin (Managing Director and Senior Research Analyst)

Got it. Got it. You know, as we look sort of, you know, out on the horizon, you've had, you know, 22% price. You know, you did put through 25% with your new price increase of $2,500 for fiscal 2024. You know, it looks like we'll be back to pretty much normalized margins. What do you see as the biggest risk to gross margin and cash flow outside of, you know, the steel items that you identified in your presentation on the call?

Razvan Radulescu (CFO)

Hi, Craig. This is Razvan. I'll take this question. We addressed a lot of levers on the pricing side as far as de-risking the margin profile going forward for the quotes that we have out there. There is, as you mentioned, some uptick risk on raw material prices, and we are controlling that as well in the best way possible. I think in terms of margins, we have pretty good visibility on the backlog and call it the short to mid-term horizon, and we are gonna watch closely and take another appropriate pricing measure if it's necessary at the right point in time.

Craig Irwin (Managing Director and Senior Research Analyst)

Got it. That makes complete sense. All right. I'll take the rest of my questions offline. Congratulations on the progress here. We look forward to successful execution on President Biden's priority on EV school bus.

Matthew Stevenson (President and CEO)

All right. Thank you, Craig. We appreciate it.

Operator (participant)

At this time, we have no further questions registered, so I'll turn the call back over to Matthew Stevenson for closing remarks.

Matthew Stevenson (President and CEO)

All right. Thank you, Emily. Thank you to all those joining us on the call today. As you heard during our prepared remarks, Blue Bird is in a great position with extremely positive momentum. Through massive improvements in how we operate this business across the board, we closed Q2 with record revenue and Adjusted EBITDA, and have again raised our full year guidance. As we have forecasted for nearly a year, the Clean School Bus Program is generating meaningful orders for us and has produced a large backlog of EVs. To capitalize on this demand, we recently opened our new EV center to fuel our growth now and into the future. We are doing all this while investing back in our most important asset, our teammates. For nearly two years, we have focused on our first pillar, taking care of teammates.

We did this through increasing communication, transparency, leadership visibility on the floor, and listening more, all while making facility improvements and increasing wages and benefits. We are reinvigorating our frontline teammates. The future is electric for Blue Bird in more ways than one. Should you have any follow-up questions, please do not hesitate to contact our Head of Investor Relations, Mark Benfield. Thank you again for your time, and we look forward to updating you on the continued progress of Blue Bird next quarter. Have a great evening.

Operator (participant)

Thank you everyone for joining us today. This concludes our call, and you may now disconnect your line.