Blue Bird - Earnings Call - Q3 2016

Transcript

Speaker 0

and welcome to the Blue Bird Corporation Third Quarter Fiscal Year twenty sixteen Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like turn the conference over to your host, Mr.

Mark Benfield, Manager of Investor Relations. Thank you, Mr. Benfield. You may begin.

Speaker 1

Thank you, Manny. Welcome to Blue Bird's fiscal third quarter twenty sixteen earnings conference call. The audio for our call is webcast live on bluebird.com under the Investor Relations tab. You can access the supporting slides on our website by clicking on the Presentations box on the Investor Relations 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 in our latest earnings release and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This morning, you will hear from Bluebird's President and CEO, Phil Horlock and CFO, Phil Tighe. Then we will take some questions.

Speaker 2

So let's get started. Phil? Well, thanks, Mark. Good morning, and thank you all for joining us today for our third quarter earnings call. We welcome this opportunity to take you through our latest quarter results.

It's been a very busy third quarter for us, and we've achieved significant progress. So let's take a look at our key results on Slide four. As the headline says, we had a really strong third quarter. We sold almost 3,800 buses, representing a substantial 26% increase over last year's third quarter with net sales correspondingly up 23. And year to date, our unit sales are up 6%.

As we have mentioned in all of our earnings calls and conferences this year, the school bus industry is a seasonal business with sales heavily weighted to the second half of the year. To put this into perspective, our third quarter unit sales were 77% higher than our second quarter. In support of the surge in third quarter bus demand, we added a second shift early this year as we reached our production capacity of 70 units a day in June. Our propane bus momentum continues to be very strong with propane sales representing about a quarter of our total third quarter unit sales. In fact, year to date, propane bus sales were up 70% from a year ago, and I'll be discussing that propane performance in more detail a little later.

Continuing along the engine front, we opened customer ordering in the third quarter for our new small V eight diesel and gasoline powered buses, both of which I should remind you are exclusive to us. With the high volume and continued focus on driving down costs, we achieved adjusted EBITDA of 32,500,000 in the quarter, $9,100,000 above last year. And year to date, we are now $7,000,000 ahead of last year's results. Our cash at the end of the third quarter was nearly $43,000,000 over 50% higher than the same time last year, and that was after voluntarily paying down $25,000,000 of our term loan in June. Our ability to generate free cash flow through the year remains a strong feature of Blue Bird's business model.

And finally, as I'm sure you're all aware, in June, American Securities acquired Cerberus' entire stake in Bluebird and became our principal shareholder with 57% ownership. I'd be remiss if I didn't thank Cerberus for all the support over the years since acquiring Bluebird in 02/2007. So overall, I am very pleased with our progress in the third quarter. Now let's take a look at some of the key operating achievements on Slide five. With a typical school bus life of fifteen years or more in some states, service and maintenance capability in the field is vital.

Our parts and service team trained around 200 dealer and end customer technicians this past quarter in both classroom and on vehicle, and we plan to keep that pace going through the year. Our dealers are expanding their sales and service capabilities too, as evidenced by our market share leading Arizona dealer, Canyon State Bus Sales, whose brand new dealership facility opened this past quarter, providing 60% more service capacity than before. And in the second quarter, our leading New York dealer, Bird Bus Sales, opened their own new facility too. Our dealers are investing in us because they see the growth potential with Blue Bird. Year to date quote volume is translating to real customer interest in our buses, has been consistently and significantly higher than last year.

And we began production of three major powertrain programs in the third quarter, our fourth generation propane bus, our all new v eight diesel bus, and our all new Eaton Precision transmission offering. We believe in providing customers with affordable product choices that they want and value, and these powertrains do just that. We rolled out our private intranet portal to our dealers and customers. We call it Vantage. This provides all of our partners with instant access to online training tools, marketing programs, and importantly, VIN specific detailed product and service data in all of their bus purchases for life.

As I mentioned earlier, we achieved peak production of 17 units a day in June supported by our second shift. That's an increase of more than 50% over last year's peak production. In addition to school buses, we are moving ahead with our plans to grow our North American commercial bus and our international bus businesses by showcasing our new products in these segments. All of these initiatives are targeted at driving long term growth. Now let's briefly cover our financial highlights on Slide six.

Driven by higher bus sales, total third quarter net sales of $323,000,000 were about $60,000,000 higher than a year ago. That's a 23% increase, as I mentioned earlier. In fact, year to date net sales of $646,000,000 are now about $34,000,000 higher than a year ago as we see the impact of demand surge we have been projecting materializing in the third quarter. Now the third quarter adjusted EBITDA of 32,500,000 was the highest third quarter result for Blue Bird for more than ten years. And importantly, year to date adjusted EBITDA of $47,800,000 is now $7,000,000 ahead of the same time last year.

Our CFO, Phil Tighe, will cover the financial results in more detail in a little while, but we're very pleased with them. I'd now like to take a closer look at our propane results to date on Slide seven. Blue Bird's propane powered vision bus continues to be our number one product differentiator in the market with 10x more propane buses registered than all of our competitors combined. Our propane vision bus also registers the highest on our loyalty in the industry. Year to date, propane bus sales of 1,547 units are 70% above the level of the same time last year.

And we're also selling propane buses to many customers who are new to propane this year. As mentioned earlier, at 24% of unit sales, we had a very strong mix of propane bus sales in the third quarter. These are significant results that we're very pleased with. As a reminder, our proven, modern and efficient propane engine is contractually exclusive to us, developed and supported by our partnership with Ford and Raj CleanTech. This exclusivity also applies to the same family of engines we are bringing to the market this year, namely our gasoline and compressed natural gas engines using our type c vision bus.

At Blue Bird, we strongly believe in being first to market with differentiated products that customers want and value. And where we can, we strive for exclusivity. Our propane success is a great example of this, and I can confirm that we're on track to deliver more than 2,000 propane buses this year, more than 25% higher than fiscal twenty fifteen. Let me now turn it over to Phil Tighe, who will take you through the financials, then I'll be back later to cover the full year outlook and wrap up. Phil?

Thanks, Phil. Good morning, everyone. It's my pleasure to present to you the third quarter results for fiscal year twenty sixteen for Blue Bird Corporation. Third quarter closing date for fiscal year twenty sixteen was July 2, and comparisons in this presentation are made to the same period in 2015, which closed on 07/04/2015. As you've heard from Phil Horlock, and we'll see in the next few slides, we've experienced a very strong third quarter.

Before we do go through these slides, there is an item that I need to cover with you. We have not filed our 10 Q at this time. It will likely be filed Monday or Tuesday next week. The holdup is that we're working through one last element of a component of the special compensation payment related to the Phantom equity, which existed under Cerberus. That may result in an additional noncash expense in the third quarter.

We estimate that the maximum pretax impact of the expense could be about $1,400,000 This would impact operating expenses, operating profit, PBT and on an after tax basis, it would increase the net loss. Obviously, it would not impact any of the non GAAP measures that we generally talk about such as adjusted EBITDA or adjusted net income. If this potential adjustment is made in the 10 Q, we will issue a press announcement to update every one of the impact. We apologize for the potential confusion. We'll try to limit it.

So if we can go to the next slide and look at a summary of the third quarter results. Phil has already mentioned the absolute volume for the third quarter was 3,768 units. It's up 26% versus the prior year. Importantly, that result included a 92% increase in propane sales versus the prior year. An important side note on the propane sales is that in the third quarter, we sold propane buses to more than 90 customers.

And the majority of those customers bought 10 units or less. So this result on propane was not built on one large deal. And I think it's a further indicator of the fact that propane is becoming a mainstream product for us and the appeal of propane is growing across the customer network. Our revenue in the quarter of three twenty three million dollars was up 23%. Bus was actually up about 24.5%.

Parts was down marginally about $500,000 Average bus revenue on a per unit basis was down about 1% compared with last year due to an increased mix of sales to Canada. And as you know, the Canadian dollar has been struggling a little, so revenues were depressed there. And a number of other markets where competition is traditionally very aggressive. We expect this aggressive competition to continue, but we also expect that our new low priced products, particularly the gas engine bus and the V eight diesel, will help us in competing in these very aggressive sections of the industry. Our gross margin was 14.5%, about 50 basis points better than last year.

Bus gross margins improved by about 70 basis points versus prior year despite the lower unit revenue. The margin increase was due to a higher mix of propane and improvements in vehicle cost, which more than offset the increased sales in Canada and the competitive markets that I discussed above. Parts gross margin improved by about $200,000 due to a stronger mix of their sales. Adjusted EBITDA of $32,500,000 as you can see, was up 9.1% versus last year. Importantly, the EBITDA margin was 10.1% compared to 8.9% last year.

This was a good result for us on EBITDA. Net income, as reflected here, was a loss of $1,800,000 And as I've mentioned at the start of this presentation, that number is subject to change. The net income was impacted by $26,000,000 of expenses related to special compensation payments, basically the wind up of Phantom Equity and then stock based compensation, including the fact that with the change of control moving from Cerberus to American Securities, the existing stock options and grants were brought to full account. And there was also about two tenths of some residual costs for business combination. On an adjusted basis, therefore, we've shown net income at 16,200,000.0 which is up about $4,500,000 And on an adjusted basis, diluted earnings per share were $0.64 versus $0.46 So I think good results there both for adjusted net income and adjusted earnings per share.

Cash, we had a very good result. We ended the quarter with $42,700,000 which was up by a little over 50% versus the prior year. And debt, I think Phil has already mentioned that. We ended with $154,000,000 That's down $62,000,000 or almost 30% versus the same period last year. And again, we did prepay $25,000,000 against the debt in the third quarter.

So if we move to the next slide, Slide 10. This looks at sort of the key trends and really is a reinforcement of what we've been talking to you about in prior calls on seasonality. We think this is probably a good way to look at it. As you can see, third quarter sales exceeded the total sales for the first half. In fact, they're up about 6.4% versus the total of the first half.

Third quarter revenue, again, exceeded the first half. Third quarter adjusted EBITDA is more than double the adjusted EBITDA we experienced in the first half. And obviously, on an adjusted basis, net income was about 16,200,000.0 versus roughly about $1,000,000 in the first half. So obviously, a very good third quarter. And again, you see the strength of seasonality in this industry and the power of the volumes that we put through in the third and fourth quarter when it comes to profits and also, by definition, generation.

Phil Hawak will take you through the outlook for the full year and the fourth quarter results. We're still expecting a good fourth quarter, but it could be lower than the results in the third quarter due to lower volumes and margin pressure. The next slide, which is Slide 11, shows the bridge from third quarter 'fifteen to the same period in 2016. And you can see we walked from $23,400,000 up to $32,500,000 Volume and product mix improvements were $9,000,000 higher volumes, obviously, and also the higher propane mix. Propane mix was 24% of our total, and that's up about eight points.

Net cost reductions worth about 7 and a half million. Put in perspective, that's almost $2,000 a bus. They they were driven by improved material costs, freight performance and warranty drove the cost reductions. Our customer mix on the other hand and other costs were a struggle. We talked about the fact of the mix of sales in Canada in the low margin markets.

That certainly caused us some higher costs in the quarter. In addition, we did have higher cost of sales for some of the launch activities with respect to the new bus launches with gasoline and the V eight engine and some pretty extensive marketing programs that our marketing and sales team with the help of the technical folks did, as Phil mentioned, to go out and train people on the new buses and do a and do some road shows to to get customers familiar with what we're doing. So there some expense involved in that. I'll move on to Slide 12, and that looks at our free cash flow. We showed our free cash flow and adjusted free cash flow.

The free cash flow in the third quarter was $32,000,000 which is about $24,000,000 better than the same period last year. Improvement is obviously driven by higher EBITDA, improved trade working capital and other items. Included in the other items was a cash dividend from MicroBird. And the offset there to the good news was obviously the special compensation payment. I would point out that the special compensation payment is largely cash neutral.

Service provides us the cash to pay that and that goes into paying capital. On an adjusted basis, the free cash flow was $48,100,000 for the quarter, almost $40,000,000 better than the prior year. And you can see that the year to date adjusted free cash flow is just about 31,000,000 again, an improvement of almost $40,000,000 And I would point out that the $31,000,000 on a year to date basis is just over the bottom end of the range of the guidance that we gave for adjusted free cash flow. So a strong performance on cash. My final slide is around debt, leverage and liquidity.

We already talked about the fact that debt is at about $154,000,000 Cash was at 42,000,000 So net debt is 111 You can see the ratios, very strong. The net leverage ratio, which is the covenant, was 1.7, and the covenant for net, for for that ratio is, 4.5. So a lot of room in there. And then liquidity at the end of the third quarter was 97,600,000.0, which was very strong result for us. So I thank you for your attention.

Again, I apologize if we have to make some changes and for the delay in the queue, but we wanna get make sure things are absolutely correct, and and we will show you any changes in a release. So now I'll pass it back to Phil Horwock to discuss the outlook for 2016 and to wrap up. Okay. Thanks, Phil. So let's now focus on the balance of the year and our full year guidance.

Please turn to Slide 15. As we look at the full year forecast, we for volume, we are lowering our outlook slightly from what we have previously advised by between 200 to 400 units, resulting in our latest full year sales outlook now in the range of 10,600 to 10,800 buses. This can be largely attributed to one single factor. We have been working with the California Air Resources Board, or CAB as they are known, on emission certification for our new gasoline engine. Based on our standard prior experience with CARB and with the EPA, we were confident of achieving certification in time to support vehicle shipments in July, well ahead of school start.

However, Carbon's expanded certification processes earlier this year, requiring submission and analysis of more emissions test data. So we are now forecasting, as a result, earlier shipment of gasoline engine buses to customers in September, so a delay of about three months. We are still waiting on CARB and EPA certification approval and have complete confidence that we will be compliant based on our test results. I would just say this is simply a timing delay that we have to deal with. It is nothing more.

Consequently, we have reduced our volume forecast for gasoline bus shipments in this fiscal year, primarily because of the risk of missing school staff in some instances. Nevertheless, I should say customer interest in our gasoline powered school buses remains extremely high as evidenced by firm orders in hand for a launch so late in the year. And we plan to deliver a significant number of gasoline powered buses in September, assuming we have CARB and EPA certification in hand. The result of this change means that our total fourth quarter volume should be between 300 to 500 units lower than our third quarter volume. So let me now turn to the impact of financial guidance for the year on Slide 16.

First, we are adjusting downward our net sales forecast by about 3.5% to between $930,000,000 to $950,000,000 reflecting the change in volume. Because of the lower volume, we are lowering and narrowing our adjusted EBITDA range slightly to between 70,000,000 to $72,000,000 In fact, the high end of the new range is equal to the lower end of our prior guidance, and our team is focused on achieving this objective. Despite the lower volume, we are maintaining our free cash flow guidance ranging from 30,000,000 to $35,000,000 As you know, we have a strong focus on generating cash in Blue Bird as it can be seen by the ratio of adjusted free cash flow to adjusted EBITDA. And we are still increasing our investment in new products, infrastructure upgrades and growth initiatives in fiscal twenty sixteen. So let me now turn to a wrap up slide on Slide 17.

We had a great result in the third quarter with volume, net sales, gross margins, profitability and free cash flow, all well above last year. We fully launched our second shift, allowing us to handle a significant surge in volume that we saw in the third quarter. Our propane leadership position continues to be strong, and we expect at least 25% growth in the full year with more than 2,000 propane buses sold in our fiscal two thousand sixteen. We are bringing to market four all new powertrains this year, providing customers with the broadest array of products in the industry. And our gasoline bus orders, they are off to a good start.

The unforeseen timing delay in carbon EPA certification for our all new gasoline bus has caused us to reduce our volume forecast slightly. Consequently, we are issuing slightly lower guidance for net sales and adjusted EBITDA while maintaining guidance for adjusted free cash flow. Overall, a strong third quarter and a strong outlook for Blue Bird. That concludes our formal presentation. I will now pass it back to our moderator, Manny, to begin the Q and A session.

Speaker 0

Thank you. We will now be conducting a question and answer session. Our first question is from Eric Stine of Craig Hallum.

Speaker 3

Just wanted to start with propane. I know 24% of the mix in the quarter. Just curious your thoughts as you look forward, where you think that can go, I guess, specific to propane. But then as you also think about the gasoline bus and CNG, I mean, how do you think about just your overall alternative fuel offering as part of your overall mix?

Speaker 2

Yes. It's a good question, Eric. I mean, obviously, we feel very good about giving customers a lot of range of choices. And I think at propane, we sort of proven over the last several years that we are well and truly the leader of that machine. We're proud of that fact.

Now I mentioned we should be up more than 25% this year, which is basically when you look at the an industry going up 3% to 4%, that's a pretty impressive growth on one particular segment that we're dominant in. I think we look to continue seeing that grow. I mean, we will set a plan next year. I'm not going to give you the number right now, but you can bet that we're looking to continue to grow that business. We barely there's a lot of customers out there that haven't tried propane still.

It's not like we've tapped the whole market out there. We're very aggressive on giving people demonstration units through our dealer network. All of our dealers have demonstration buses that bought into it. They believe in it. So I think propane has a great future.

And it's in my opinion, it provides the best total cost of ownership of any product in the market today and we continue do so for many years. Gasoline. You know, gasoline is a great a really interesting product. I mean, the real values of gasoline are around the acquisition price. For those markets, particularly who are struggling with capital, they have to take a low priced product.

The gasoline is our entry vehicle. It's lower it's lowest priced product that we offer. Simple to maintain, great in cold weather that drives really well. I mean, we had a ride and drive last week at our there's an annual bus show in Reno. We call it it's called SPN, and we gave a ride and drive there with all of our products.

Have seven buses on display to ride and drive. And we had an overwhelming positive response on gasoline. Now recognizing that we're gonna stay we're gonna only deliver buses in the month of September. That's really one month of deliveries for us. We sold we've already we'll be selling seven several 100 buses this year of gasoline powered buses.

This is a pretty easy step for people. You know, it's not the people understand gasoline. They get it. Technicians love it. So I think it's gonna be a terrific product for us.

Our compressed natural gas bus, we're very excited about because we're putting this in our type c bus. Previously, the CNG product has been only offered in our most expensive rear engine bus. We call it the pusher bus. The cost comes at a lot more cost. Now putting in our more for more cost conscious buyers, this product will, I think, will be a terrific product for those.

Visa partners already have CMT infrastructure in place. That's the way we look at this. It'll launch later this year, so we haven't seen that yet in the marketplace. We've got a lot of interest. We've quoted business.

We have a few orders in our system for it. We won't we won't be shipping out buses till towards the end of this year, early next year on the compressed natural gas product. But, again, the nice thing is for us is when you look at our offerings of propane, gasoline, compressed natural gas, it's all the same architecture for an engine. It's the same at Ford engine block, the same Ford transmission. So it's a technician's dream, actually.

It's a great product. And we we we like I said before, we are excited about what we have. All those three products are exclusive to us, and we're excited about that. So we're we're looking to to grow that business significantly moving forward.

Speaker 3

It. Thanks for that. And then maybe just on the gasoline bus and the the the timing issue here. So you're expecting a few 100, it sounds like, in September. I mean is this something that you do expect to ship the remainder in the first quarter of next year?

I mean or is it something that's timed at the start of the school year? And if that passes, then maybe those shipments are to the levels you thought. How should we

Speaker 2

think

Speaker 3

about maybe that the seasonality is not as steep as it typically is in the first quarter because of that gasoline bus?

Speaker 2

Yes. So it's a little bit of both, actually. Obviously, we've got some customers who will be coming back to us for their buses in October, November, December time frame. But obviously, you're right. Most folks want their buses for school start.

Actually, why we took the the numbers down because when you deliver in September, you there are several states where you actually miss school start. But but we're we're confident of of as the next fiscal year takes place, get a lot of demo buses out there, get them in the hands of customers, get them used to it. See how terrific this product is. So I think we'll see pretty nice volume in that all through next year. I mean, obviously, the peak volume again will be in the second half.

So it's a little bit of both. It's not that every single unit we're going see just flipping over that we took our numbers down by into October, November, but we will see a nice volume tick up, I think, in the first quarter, would guess.

Speaker 3

Got it. Okay. Maybe last one for me. Just turning to the second shift. It's been great to have that in place here back half of the year.

Just maybe talk through some of the things that you need to deal with as you flex that while still maintaining your capabilities? And then, I mean, is transit or getting into international markets, are those things that you can take advantage of now that you have the second shift and again kind of smooth out that seasonality?

Speaker 2

Yeah. You know, dealing with seasonality has always been, you know, one of our issues that we've dealt with pretty successfully. I mean, we we traditionally, we do bring on temporary labor, as we ramp up our volume. We ramped up our volume this year. From January onwards, when we moved into second shift, we brought on several 100 employees, which we do every year, temporary employees.

And come late September, early October, we those October employees go back to their other jobs that they do in the off season. So that's worked very well for us. And we've got a way of handling that. We handle it pretty well. I think you're right.

I mean, we look for the commercial bus and the international as being, they don't have the same seasonality issues, so it can be nice offsets to us. And at the same time too, you know, we we we wanna sell where we can. We'd like to sell more units in some of the off season. And sometimes you gotta go look a little harder on that to make it happen up there. And I do think, you know, the broader array of products you have, the more chance you have doing that, you get it in the hands of customers in the October through federal, let's say, time frame.

I didn't have a chance to really ship seat on a little bit. But we're able to handle this, like I said, through our temporary labor patent that we utilize.

Speaker 0

The next question is from John Wolf of Argan Capital.

Speaker 4

A couple of questions for you. First, the share based comp expense in the quarter was much higher than you've been running at. And I'm not talking about the special comp payment, just the typical share based comp expense. What should we be sort of modeling for an ongoing reasonable rate there? I was surprised it was so high.

I mean the stock price over the course of the fiscal quarter was only up about 10%. So how should I be thinking about that?

Speaker 2

So John, this is Phil Tye. It's a good question. With the transfer of the service equity to American Securities, that triggered a vesting of all of the share based comp that had been awarded to date. And that's what you see in the third quarter is the vesting of the whole thing. It's it's really unclear.

For now, for your model, you can't assume anything going forward until until there is there there is some agreement formed with the compensation committee of the board on what our future plan might be. May maybe, John, you know, I I don't know. You you'll have to make your own decisions on what you assume, but but right now, we don't have a a plan going forward.

Speaker 4

Okay. Okay. Okay. And then secondly, I guess the elephant in the room is obviously the outstanding offer from American Securities. And I know you guys can't or are not going to comment on that further than what you said in your press release yesterday.

I guess from a minority shareholder's perspective, though, I guess the desire or the concern is that as a minority shareholder, I and others can make the same or have the same information that enables us to assess what we think Blue Bird equity is worth and that we can make that assessment the same way that American Securities is able to make that as a Board member with access to your projections going forward. So I guess my question is in that regard, look, I know that typically you don't provide guidance until your fourth fiscal quarter. But could you perhaps provide any sort of soft directional guidance as we look into fiscal twenty seventeen for volumes or for top line growth or anything along those lines so that we could sort of get some comfort with where we think the business is heading as we go into next year?

Speaker 2

I appreciate your questions, John. Unfortunately, where we are right now, we cannot provide that. We have a especially with this process that's underway with our special committee that's been signed by the Board to look at this American Securities Office. And also, we haven't got the board's agreement to release anything on that. So so this time, unfortunately, we can't give you any information.

But soon I recognize your concern, we can we can talk about it here. But at this time, we can't release any information beyond what we've already done on guidance for this year.

Speaker 4

Okay. Well, let me ask the question another way. You've talked about sort of 3% to 4% industry growth. You guys are obviously more heavily levered towards the higher growth propane piece of that. You've got some shipments on the gasoline powered units moving into next year.

I mean is it fair to assume that we should see unit growth for next year that is significantly above what the industry is growing at? Is that a reasonable expectation?

Speaker 2

Well, know what, Jerome? I mean, again, you're asking me significantly. I mean, what's significant? I don't know if we're ready to put a number I would just tell you what I said before on the when Eric asked that.

We're looking to grow the propane mix. We've got a full year volume of gasoline. It should be exciting for us. We have consistently said that we're in a nice position, we think, in the industry recovery cycle. I think it's maybe a 3% industry growth next year at this point, probably something we've been looking at.

So I think you look at that 3% of growth, we're coming out with a full array of new products next year, full year's worth of them. And we have momentum, obviously. I think it's true to say we expect and we would hope that we'd grow volume again next year. Yes, I think it's just like this year. We'd hope to grow it a little bit more than the industry.

The

Speaker 0

next question is from Mike Baudenstein of Stifel.

Speaker 5

Just wanted to ask you, a lot of the other companies we cover this quarter in truck manufacturing have had a favorable gross margin impact in the quarter from favorable material costs. And know Sears is up, I think you said 70 basis points. Was a big part of that just favorable material costs?

Speaker 2

Mike, this is Phil Todd. We had favorable material costs in there. And it's sort of a combination of things. Obviously, there's some commodity good news, but also we have we have agreements over the majority of our suppliers with annual improvements in cost. And we we track those pretty closely, and the suppliers have been performing well.

So in addition, we we continue to to make design changes to our bus to reduce costs. And we've we we have so we had some favorable design changes in the bus this year. And finally, the plant continues to find ways to use to be to use material better as they build the bus. And by that, I mean, the the the sort of things like glues and paints and rivets and all that stuff, which adds up to a lot of money. And so they they've they've been very effective in improving the the usage of material.

So it really is a combination. Don't look at it as just just economics. It's or just commodity prices. There there's a lot of good hard work that's that's going on to take the cost of the bus down long term.

Speaker 5

Okay. Good. I also wanted to ask on propane. You're getting a lot of good growth there. And could you just give us a sense of how much of that growth with the propane has been driven by the contractors like student transportation or versus getting more traction from the school districts?

Speaker 2

It's been heavily driven this year by school districts. So we look we sell through our dealer channel, I mean, heavily weighted. In fact, yes, I mean, the budget all the significant growth you're seeing is the school district business. So they're are really embracing this product. I mean, the first move is no question where the fleet, particularly SGI, as you mentioned, have been a tremendous advocate for our propane product and a terrific partner of ours.

And they believe in it, they love it, and they definitely helped to get the word out about it. But now we're seeing school districts really embracing this. The growth is really coming to school district business. Mike. This is Phil.

Ty again. As I sort of mentioned and you probably I glossed over it a bit quickly, but in the first quarter, we had over 90 customers for propane buses, which is a lot for us. And the majority of those customers bought 10 units or less. Mhmm. So there were there are a couple of big buys, but nothing significant.

So what what we see, as Phil said, is just school districts right across the country regularly buying propane buses now.

Speaker 0

Thank you. Our next question is from Sigfried Eggert of GEO Investing. Please go ahead.

Speaker 6

Yes. Thanks for taking my call. My question relates to the open letter from Spitfire Management, Capital Management. Could you guys give us a reaction to this letter and what you feel about it?

Speaker 2

Well, secretly, I've read it to and I have no comment to make. Mean that's in the hands of the special committee. They have it now, and they're looking at that and a bunch of other things too. Yes.

Speaker 6

Okay. Could you give me a little background on the thought process that led to the formation of the independent committee?

Speaker 2

Well, that's a that's a typical typically what a board does. I mean, we when when a board receives an offer such as this, we look for an independent the the independent members of our board who, obviously, that means they're not affiliated with American Securities. We formed a three person board, who we mentioned, Dan Hennessy, Gaminda Betty, Alan Schumacher, all independents. And Dan is the chairman of that special committee, and then that's and he's got the ability, as the press release said yesterday, that committee has the ability to go out and review and assess the American Securities offer. Also, obviously, they'll contemplate this lease fire response, and it's all part of the process.

Speaker 6

Okay. My last question relates to that matter too. When can we expect further developments or news from your side in this matter?

Speaker 2

Well, Ken Siegfried, I mean, it's you saw the press release yesterday. I'm sure you saw it. They're just the special committee just appointed their attorney and their investment banker who's going work with them. So I mean, the process is just starting here. I think it's a little open ended.

We don't have any date. There's no definitive date on this. It's a process a special committee will go through, and I'm sure at the appropriate time, they'll want to announce publicly at some point where they are and what their position is.

Speaker 6

All right. Thank you very much for taking my questions.

Speaker 2

Thanks, Ikrit.

Speaker 0

Thank you. The next question is from Scott Blumenthal of Emerald Advisers. Please go ahead.

Speaker 7

Good morning, gentlemen.

Speaker 2

Hi, Scott.

Speaker 7

Phil, whichever one wants to answer this, when did you realize that you were not going to get the CARB EPA certification in time to ship buses this year? And what's the feedback that you have received from both of those regulatory agencies with regard to when to expect it?

Speaker 2

Well, we are going to ship this year. I mean, first of let me tell you. We are we plan on shipping this year because we're on the assumption, of course, that in the next month, let's say, we receive certification from Carbon EPA. I'd say it's been over the last couple of months, you know, with and by the way, just so you know that, this product is a is a product that's that's developed by RAV. RAVCleetec is the sort of manufacturer of record for this engine.

So they're the ones who deal all the time with carbon EPS. They're on the phone every day, where are we, answering the questions, dealing with them. And so, you know, along those last couple of months, we sort of continually revised our delivery date sort of schedule. And where we are now is, being this should be the earnings call, we're letting folks know that as we reassess where we are, it caused us to it caused us to know that the volume commitment we thought we'd have because we've been able to have a little longer period in which to deliver buses to school staff has been reduced. But we will.

We will, as I said earlier, we expect, unless we don't get the carbon EPS certification before the September, which we really don't expect, but we expect to get it based on our deals with Raj CleanTech. We expect to deliver, as I said, several 100 units in the month of September. I'll be Okay. We're

Speaker 7

we're talking about the gasoline engine. Right?

Speaker 2

Yes. The gasoline.

Speaker 7

Okay. And Rausch Cleantech is the manufacturer of record, I think you said. Is that correct?

Speaker 2

Yes.

Speaker 7

Okay.

Speaker 2

As as they are on the pro as they are on the propane bus. Got it. Got it. And since it's exclusive This is just on the engine. You understand that?

Just on the engine. Yep. Not on the block. It's it shipped an engine to us. Yep.

Speaker 7

Yep. Absolutely. Okay. Is there any certification process that we might need to know about with regard to CNG at this point? Or is that a nonissue with that platform?

Speaker 2

We believe it's a nonissue on that platform. Okay. And And then what I said like I say, Scott, I just wanna write emphasize, you know, this this is I I might when I give my presentation, I said, it's a timing delay. There's no there's there's no structural issue here that's going on here. It's purely a time we are extremely confident of this product based on all of our results.

It's just we're just dealing with the, you know, the questions that Carb is Carb EPA, as they show, they're doing a very thorough job of evaluating this product.

Speaker 7

Yep. Understood. Thank you.

Speaker 2

Thanks, Scott.

Speaker 0

Thank you. The next question is from Chris Moore of CJS Securities. Please go ahead.

Speaker 8

All right. Good morning, guys. Thanks. Just looking at Slide 10, the EBITDA walk. So maybe could you just go through again the negative $7,500,000 on the customer mix?

Speaker 2

Yeah. Sure. So a couple of things went on in there. We had quite a few there was a big a big bid in Canada in this in the province of Ontario, and we won quite a few buses in in there. The the margins were pretty low.

Two reasons they were low. One is one is that our competitors were bidding very aggressively to win that business because because you like to get the big volume business. And secondly, of course, you know, as we convert from US dollars to Canadian dollars, it hurts a little bit in Canada these days. And so we to pay attention to the fact that the Canadian dollar buys less, that caused us to reduce the margins further in there. So the good news was we won a large piece of the Ontario business.

The bad news was the margins weren't as great as we would have liked. We we also won business in in a number of other states that, you know, in past years, Blue Bird struggled with. But but we we are as we as we are more competitive now, we're we're really starting to make inroads in a lot of them a lot of the lower margin states. And so we we we had quite an impressive mix of business in some of the states that we we normally are pretty low share. And so so so that that's good news for the for us in that we're getting traction there.

And so as I commented, I think, in the presentation, you know, as we do get things like the gasoline bus and the v eight diesel out on the road, those bus bus those buses are naturally at a lower price point with good margins, which should enable us to compete much more effectively in some of the more challenging markets and give us an opportunity, in fact, versus our competition. So that drove really the majority of the $7,500,000 on a year over year basis. There was maybe about 1,000,000 point dollars sitting in there, as I said, where we spent more money getting the new products out into the market potential customers and dealers and training people on it. And as Phil suggested, we gave them rides and drives and all that sort of good stuff. So that program was pretty successful.

We got a lot of very positive feedback from it. So I think that's a good investment. And there was a little bit of structural personnel cost in there, but not very much. So that's largely the $7,500,000, Chris. Got you.

Okay. Terrific.

Speaker 8

American Securities, I know you can't opine on the outcome. Just in terms of the mechanics, I know that the kind of non aligned shareholders are important component here. The the preferred shareholders, can they vote without converting?

Speaker 2

To our knowledge, no.

Speaker 8

Okay.

Speaker 2

But they do I'm I'm I'm taking legal advice here on the on the background, Chris. My understanding is they have to consent on the merger, though. So so I don't understand the ins and outs of that completely, way beyond me, but the the the the preferreds do have a a consent clause.

Speaker 8

Okay. And then in terms of just the the special committee, at the end of the day, do they need to take the advice of the shareholders or they ultimately have the final decision on which way to go?

Speaker 2

Just one second, Chris. Chris, so so I according to according to learning council here, they they can either reject or approve. Okay. So But they can only recommend another transaction. Or or or they can Recommend a different transaction.

Oh, yeah. So they can reject, they can approve, or they can recommend a different transaction. That covers the Waterfront near as I can tell. We

Speaker 0

have no further questions in queue at this time. I 'd like to turn the conference back over to management for closing remarks.

Speaker 2

Okay. Thank you, Manny. And thanks to all of you for joining us on our call today. This is still Hollick, by the way. We appreciate your continued interest in Blue Bird.

I think you can see we are focused on profitable growth. We had a really strong, we believe, third quarter. And we do intend to deliver on our commitments. That's what we do at Blue Bird. I think we're well positioned for growth today and in the future.

Please don't hesitate to contact our Head of Investor Relations, Mark Benfield, should you have any follow-up questions. So thanks again from all of us at Blue Bird, and we wish you a good day.

Speaker 0

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.