Blue Bird - Earnings Call - Q4 2020

Transcript

Speaker 0

Greetings, and welcome to the Blue Bird Corporation Fiscal twenty twenty Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Benfield.

Thank you, Mark. You may begin.

Speaker 1

Thank you, and welcome to Blue Bird's fiscal twenty twenty fourth quarter 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 our IR landing page. Our comments today include forward looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC.

Blue Bird disclaims any obligation to update information on this call. This afternoon, you will hear from Bluebird's President and CEO, Phil Horlock and CFO, Jeff Taylor. Then we will

Speaker 2

take some questions. So let's get started. Phil? Thanks, Mark. Well, good afternoon and thank you all for joining us today for our fourth quarter and full year earnings call for fiscal twenty twenty.

Before I jump into our financial results, I'd like to give an assessment of how I see our business environment today, and particularly the outlook for the school bus industry. So let's turn to slide four. Not surprisingly, the fourth quarter was a challenging one as we entered our second quarter of dealing with the COVID-nineteen pandemic. But as you'll see, we continue to improve our business structure. And while significant, the impact of the pandemic on our fourth quarter results was less severe than we experienced in the third quarter.

And we are seeing positive signs that the industry recovery is on the horizon. Nonetheless, we had to deal with some significant challenges. About 50% of schools chose online teaching over classroom teaching, and a significant portion of the balance selected the hybrid program, alternating between online and classroom teaching. This approach was deployed throughout the fourth quarter, and was largely in place at the start of the new school year. However, one fact is clear and obvious.

When schools are closed, buses aren't being ordered. The good news is that when schools are open, it's business as usual with school bus orders being placed. Consequently, with uncertainty over in classroom teaching, our new order intake in support of school start was slow, And this was seen in our unit sales for this quarter, which were down 23% from a year ago. Although this was a significant sales decline, it was considerably lower than the 43% reduction we saw in the third quarter. In fact, fourth quarter sales were nearly 50% higher than what we achieved in the third quarter.

So the pace of decline was significantly lower than we saw in the third quarter as school district began to deal with the pandemic and refocused on their school bus needs. On the supply chain front, while we did experience some late parts and shortages, this did not cause interruption of production, and overall material supply was significantly better and more consistent than in the prior quarter. The outcome of all these factors is a full year industry estimate of 28,500 school buses, reflecting new vehicle registrations compiled by RL Polk. That's a 17% decline from fiscal twenty nineteen, and more than a 30% decline in the second half of the year. But we are seeing some positive trends and news that indicate an industry recovery and profitability rebound that should be ahead of us later in fiscal twenty twenty one, in support of 2022 school start.

From a Blue Bird performance standpoint, there are several factors worth noting. Since suspending production for two weeks in April, we have had uninterrupted production with a rigorous deployment of COVID-nineteen safety measures throughout the company, and a significantly improved supply chain. We successfully moved to a single shift in June, restructuring our workforce and support teams and are seeing efficiency and quality gains, particularly evident in the 2021. Turning to the three pronged margin improvement strategy that I've covered in detail in prior earnings calls. Despite the lower industry, we increased our average bus selling price over fiscal twenty nineteen by 7% in both the fourth quarter and the full year.

That's a significant increase and a strong endorsement of our products. It was another very strong year in alternative fuels, with 53% mix of sales in the fourth quarter and a 48% mix for the full year, equaling last year's record. And finally, our third focus, lowering structural costs through our transformational initiatives delivered almost $15,000,000 of savings in the full year. So despite the severe volume impact of COVID-nineteen, we've continued to improve our business structure, ensuring we are well positioned for when the industry rebounds. Now on the external front, President-elect Biden has declared school opening as one of three key one hundred day deliverables being targeted by the new administration.

And together with the rollout of the COVID-nineteen vaccines, we have increased optimism about the industry outlook. And finally, we have been seeing increased quote activity in recent weeks, and our first quarter fiscal twenty twenty one production slots are all filled. All these factors suggest that we should see an industry recovery as we move through the 2021, particularly in support of 2022 school year. Let's now turn to slide five and cover the fourth quarter and full year financial highlights. Our fourth quarter financial results were significantly impacted by COVID-nineteen, although we still made a solid profit.

At about 2,900 buses, our unit sales were down eight fifty units from last year, representing a decline of 23%. This compares favorably, however, with a 43% decline that we saw in the third quarter. Similarly, net sales of $281,000,000 for the quarter were 18% below last year. The lower decline in net sales revenue than unit sales reflects the 7% increase in average bus selling price that I mentioned earlier. This result is a really positive aspect of our fourth quarter performance and the cornerstone of our margin growth strategy that's clearly working.

Adjusted EBITDA of $21,900,000 was $11,500,000 below the same period of last year, fully explained by the lower unit sales of eight fifty buses. Turning to the full year, I'm pleased to say that our financial results were either better than guidance or at the high end of the guidance range that we provided to you at the last earnings call. We sold just under 8,900 school buses in fiscal twenty twenty, representing a 19% reduction from last year. Incidentally, prior to the COVID-nineteen impact, we were on track to sell at least 11,000 buses this year. Net sales of $879,000,000 and adjusted EBITDA of about $55,000,000 were both above guidance, although $140,000,000 and $27,000,000 below last year respectively.

Adjusted free cash flow for the year was slightly negative and at the high end of the guidance range. Now on the previous slide, I covered the operational improvements we continue to make to improve business structure and drive ongoing margin growth, namely higher prices, increased mix of alternative fuels, and lower structural costs. We also continue to drive efficiencies and quality improvements through our move to a single shift in the summer, and we'll be expanding our single shift capacity in early twenty twenty one. I'll cover that more in detail later. We consistently have strong liquidity and at $180,000,000 at the end of the fourth quarter, we can handle a difficult environment in which we are operating today.

And we continue to drive crash improvements in the 2021. And finally, as announced last week, as many companies have done, we successfully amended our loan agreement with our banks, providing covenant relief over the next six quarters. This provides us with the financial flexibility to operate our business during this unprecedented pandemic, while preserving future growth opportunities. Overall, despite very tough business conditions, I'm really pleased with our focus and our progress this year. Now let's go to slide six and review our major operating achievements in fiscal twenty twenty.

First is the safety and well-being of our employees. We've taken significant measures to protect our employees from COVID-nineteen and have established a rigid protocol that has served us well to date. Needless to say, a safe and healthy workforce is key to our business continuity, and we have an incredibly loyal and dedicated team of professionals. Second is annual pricing to recover economics and the introduction of new products and features. With a 7% increase in average bus selling price in the last year, which includes pure pricing, a richer vehicle mix and higher option take, we are confident in annual pricing capability.

Third is our relentless focus on driving down structural costs through our transformational cost initiatives, which delivered nearly 50,000,000 in savings in fiscal twenty twenty, and more than $50,000,000 in savings since we started three years ago. We also supplemented this program with targeted reductions in SG and A, specifically in the area of organizational structure. And fourth, our continued growth in a mix of alternative fuel powered school buses, where we benefit from higher margins and increased owner loyalty compared with conventional fuels. Our leadership position across all of these fuel types, but particularly in propane, where we achieved a 76% market share and the electric at 59% share indicates that our strategy is working, and we look forward to continued strong growth in this area. The rapidly growing interest for electric buses are really exciting opportunity for us and should generate significant growth in the years ahead.

Now pursuing these priorities is fundamental to achieving our EBITDA margin target of at least 10% in the near term. And we're setting the foundation to achieve this target, despite the unprecedented impact of COVID-nineteen today. So it's timely to take a closer look at our alternative fuel bus sales performance on slide seven. And we also have an exciting new product announcement to make in this space. Despite the slowdown in bus orders, our mix of alternative fuel powered buses remains as strong as ever, at 48% of our unit sales in fiscal twenty twenty.

This was a record mix for Blue Bird, tying last year's result. But it's all the more impressive when it's achieved during a pandemic that's impacting an entire industry. Our North American market share in alternative fuels was 58% for the full fiscal year. As a measure of our strength in this area, let me give you some details. We were number one in propane with 76% market share.

We were number one in electric, growing from 15% market share last year to 59% in fiscal twenty twenty. Importantly, our electric bus share in The United States was a substantial 77%. And we were number one in compressed natural gas bus sales with 50% market share. Now that's leadership across the board. Significantly, three zero nine customers purchased new types of alternative fuel buses from us for the first time in 2020.

That's on top of more than 400 customers who tried our alternative fuel options last year for the first time. Importantly, these alternative fuel choices have enabled us to conquest new business from our competitors, bringing in 157 new customers to the Blue Bird family this year. These are compelling facts. And with a higher customer loyalty we enjoy from these products, it's a great endorsement of our exclusive alternative fuel buses, the Bluebird brand, and our dealer network. And we sold and delivered 158 electric powered school buses compared with 56 last year, and are off to a great start in fiscal twenty twenty one with more than 80 orders in our backlog.

Now we're not new with this electric business. We're not a startup that's achieved only a handful of deliveries. We've been building and delivering zero emission school buses for over two years now, and announced early this quarter that we had expanded our electric bus capacity six fold to 1,000 buses a year in anticipation of meeting the growing demand. We have the broadest EV range in the industry with Type A, Type C and Type D offerings on the road today. And we're number one in market share this year and are preparing to deliver our three hundredth electrical school bus in the coming weeks.

We're very excited about our EV growth opportunities going forward, and we'll keep you posted on our progress. Looking ahead, the vast majority of the VW mitigation funding is still ahead of us too, and will help us to boost sales over the next three years or so, with many states earmarking specific funds for school bus purchases. We've had really good results so far with our propane electric buses from this program based on the funds that have been issued. And the recently announced $100,000,000 Bezos Earth Fund grant to the World Research Institute also provides a boost with its unique carve out for zero emission school buses. In summary, I'm very proud of our strong and undisputed leadership in alternative fuels.

We have the best partners, we have the best products, and they're exclusive to Blue Bird. And with less than 20% of school districts having purchased an alternative fuel powered school bus today, we have plenty of runway ahead for continued growth. So as we look ahead, where do we see this segment going for Blue Bird? As the right hand box shows, you can see how far we've come in the last four years. From a 26% mix of Blue Bird sales to a 48% mix this year.

That's outstanding growth, any way you look at it. But looking ahead, we don't see this growth stopping. In fact, we project that four years from now, between 60% to 70% of all Bluebird buses sold will be powered by a fuel that's an alternative to diesel. That's an increase of up to 3,000 alternative fuel powered buses over this year. We are bullish about this growth opportunity and we're investing in the business.

And we see electric and propane power as the way forward in alternative segment. We have some really exciting news to tell you. We're bringing yet another alternative fuel engine to the school bus market. Let's turn to slide eight. I'm pleased to announce for the first time in public, that we will be launching a brand new propane and gasoline engine in the Blue Bird vision.

After nine amazing years of growth using our 6.8 liter propane and gasoline engine, that have defined alternative fuels in the school bus industry, we are replacing it with an all new 7.3 liter eight cylinder engine. This engine was introduced by Ford in its F Series lineup just over a year ago, and already has tens of millions of miles of experience on the road. It's class leading and a winner. Now working with our partners at Ford and Roush, we've been developing a school bus application for this engine over the past two years, and we'll be launching a new product in early twenty twenty one. Once again, it's a unique offering by Blue Bird, thanks to an exclusive three way partnership that's now approaching ten years.

The new engine brings a lot of great attributes. Best horsepower and torque in the industry, improved fuel economy, better quality and ease of service, and a smaller dimensional package, so it's easy to work on in the engine compartment. As the tagline says, the best just got better, and we'll be open for orders in the next few days. This is just another example of our commitment to best in class alternative fuel products, focusing on zero emissions and low NOx engines. And we have much more to come in this space.

Stay tuned. I'll now turn it over to our CFO, Jeff Taylor, who'll take you through the financial results in more detail. Then I'll be back later to cover our outlook and fiscal twenty twenty one guidance. Over to you, Jeff.

Speaker 3

Thanks, Phil, and good afternoon. It's my pleasure to share with you the financial highlights from Blue Bird's fourth quarter and full year 2020. The quarter and year end are based on a close date of 10/03/2020, whereas the prior year was based on a September 2839 close date. We are filing the 10 ks tomorrow, December 17, which includes additional material and disclosures regarding our business and financial performance. We encourage you to read the 10 ks and the important disclosures that it contains.

The appendix attached in today's presentation reconciles differences between GAAP and non GAAP measures mentioned on this call as well as important disclaimers already mentioned by Mark. With that, please refer to slide 10, and I will review the key results for the fourth quarter. Overall, it was a strong quarter for Blue Bird, especially considering the challenging operating environment due to the global pandemic. Let me say first and foremost, our number one priority was and will continue to be protecting the health and safety of our employees. While operating conditions were tough, they improved significantly over the third quarter as supply shortages and disruptions lessened in the fourth quarter, and we maintained production without any unplanned plant shutdowns.

Furthermore, as we discussed on our third quarter earnings call, we implemented additional cost control measures in the fourth quarter with the goal of protecting the balance sheet and liquidity, while preserving the ability to recover quickly when schools reopen and school bus demand returns to pre pandemic levels. Fourth quarter volume of 2,876 units was down 23% compared to the prior year period, and lower industry volumes due to the COVID pandemic. However, it increased 48 sequentially, as expected and consistent with our guidance. Net revenue of $281,000,000 was $62,000,000 or 18% lower year over year for the quarter. Bus net revenue of $269,000,000 was down $57,000,000 on lower volume.

Bus average selling price, or ASP, was $93,400 per unit, a year over year increase of $5,900 per unit due to pricing increases to offset inflationary cost pressures and favorable product mix, including strong growth in electric buses. Parts revenue for the quarter was $12,900,000 representing a decrease of $4,900,000 as a portion of maintenance facilities were shut down due to the virus. However, parts revenue increased sequentially by $4,300,000 or 50%. Gross margin was 10.5, about three ten basis points lower than the prior year period. The decline in margin in the fourth quarter was almost entirely the result of lower efficiency due to lower volume and higher costs associated with COVID.

Selling, general and administrative, or SG and A, was 16,100,000 which was down 12,100,000.0 on reduced spending and cost control actions in our management and engineering areas. As discussed last quarter, we are targeting $15,000,000 of annualized cost reductions, and we are delivering on that commitment. GAAP net income of $11,900,000 in the fourth quarter was $300,000 higher than the prior year period. On an adjusted basis, net income was $13,300,000 down $6,700,000 versus last year. Adjusted EBITDA of $21,900,000 was strong, but down by $11,500,000 compared to the prior year quarter, which I will cover in more detail on the next slide.

However, the operations group executed very well to deliver this solid fourth quarter result. Our adjusted EBITDA margin was 8%, a decrease of approximately 190 basis points. Diluted earnings per share of $0.44 was $01 better than the prior year, consistent with our GAAP net income as our number of diluted shares outstanding was essentially unchanged. Weighted average diluted shares were 27,000,000 during the fourth quarter versus 26,900,000.0 in the same period last year. Fourth quarter adjusted diluted earnings per share at $0.49 were $0.25 lower than the prior year, consistent with adjusted net income.

Liquidity was approximately $180,000,000 on October 3, as our revolver was fully paid down from the third quarter. Note that quarter end liquidity was prior to the third amendment on our credit agreement, which I'll cover momentarily. Looking at the fourth quarter adjusted EBITDA bridge, year over year bridge on slide 11. Starting on the left of the chart, lower bus volume of eight fifty units partially offset by mix and lower freight and warranty expense decreased adjusted EBITDA by $11,600,000 Pricing and transformational initiatives such as strategic sourcing added $8,000,000 Lastly, higher manufacturing costs due to lower efficiency and COVID specific costs, partially offset by lower SG and A expense, lowered adjusted EBITDA by $7,900,000 resulting in the quarter of $21,900,000 Sequentially, adjusted EBITDA was up by $9,400,000 on higher unit volume of nine twenty eight, higher manufacturing efficiencies from running a single shift operation, and cost control initiatives, which impacted the quarter. Slide 12 is a summary of our full year 2020 results.

Overall, the 2020 year was a tale of two halves. The first half of the year started exceptionally strong with financial results higher year over year, and the second half of the year was negatively impacted by school closures and lower school bus demand resulting from the COVID pandemic. Full year net revenue of $879,000,000 was down a 140,000,000 or 13.7. Bus net revenue of $823,000,000 was down $130,000,000 driven by lower volume of 2,139 units. Bus net revenue per unit, however, was $92,700 which represented a 6,200 per unit increase from the prior year due to price increases to offset inflationary cost pressures and favorable product mix, including a strong year over year growth in electric buses, as Phil mentioned.

Parts revenue for the year was $57,000,000 representing a decrease of $10,000,000 as some maintenance facilities were shut down either partially or entirely during 2022 due to schools not operating a normal schedule. Full year gross margin of 10.9%, about two twenty basis points lower than the prior year. The deterioration in margin in 2020 was almost entirely the result of two items. First, one time launch costs incurred in the 2020. And second, and more notably, the impact of inefficiencies on our plant caused by COVID related items.

COVID impact included a three week unplanned shutdown, lost absorption from lower volume, supplier disruptions, higher labor costs from overtime and absenteeism, and additional costs related to employee safety that we took in response to COVID. GAAP net income of $12,000,000 in fiscal twenty twenty was $12,000,000 lower than the prior year. Adjusted net income of $22,100,000 was lower by $21,300,000 year over year, largely due to lower gross profit for the year. Adjusted EBITDA of $55,000,000 was down by $27,000,000 compared to the prior year, which I will cover in more detail on the next slide. The EBITDA margin was 6.2%, a decrease of 180 basis points.

Diluted EPS of $0.45 was $0.45 lower than the prior year, consistent with the year over year decline in net income. And full year adjusted diluted EPS at $0.82 was $0.79 below the prior year, once again consistent with the year over year decline in adjusted net income. Weighted average diluted shares were 27,100,000.0 versus 27,000,000 last year. Slide 13 shows the year over year change in adjusted EBITDA from 2019 to 2020. Starting on the left of the chart, lower volume of 2,139 units, partially offset by favorable mix and lower freight and warranty expense decreased adjusted EBITDA by $24,900,000 Pricing and transformational initiatives combined added $20,100,000 And lastly, higher manufacturing costs were driven by impacts from COVID on operating leverage and efficiency, as well as launch costs, partially offset by lower SG and A expense, decreased adjusted EBITDA by $22,300,000 resulting in the full year of 54,700,000.0 Moving on to free cash flow, slide 14.

This table shows both fourth quarter and full year free cash flow in addition to adjusted free cash flow. The fourth quarter is normally a seasonally strong quarter for free cash flow due to the lowering of working capital and 2020 was no exception. I am very pleased to report that fourth quarter adjusted free cash flow was $81,300,000 driven by a $68,000,000 reduction in working capital, largely inventory. While free cash flow was $79,600,000 as I mentioned on the third quarter call, we launched a cash conservation initiative to capture $40,000,000 of cash by year end, and we were successful. For the full year, adjusted free cash flow was just below breakeven at negative $900,000 and free cash flow was negative $15,500,000 While our overall free cash flow for the year was negative, I am very pleased with the actions we took to minimize our cash use in 2020.

Looking at net debt leverage and liquidity. Net debt of $129,600,000 was $17,400,000 higher versus the prior year due to less cash on the balance sheet. Our net leverage ratio for the fourth quarter and year end was 3.1 times, which was still meaningfully below the net leverage ratio covenant of less than 3.7 times in our credit agreement prior to the third amendment we announced on December 9. With our business entering the seasonally slow period and the COVID pandemic expected to persist into 2021, we felt it was prudent to seek covenant relief for our fiscal twenty twenty one and the 2022. During the relief period in fiscal twenty twenty one, the net leverage covenant is removed and replaced with a trailing 12 EBITDA test measured quarterly and a liquidity test measured monthly.

In fiscal 'twenty two, the net leverage ratio covenant is reinstituted at four times during the first two quarters. Also, our revolver availability is limited to $100,000,000 during the relief period, along with other conditions, which are described in the eight ks that we filed on December 9. Liquidity was $179,500,000 at year end, and we have fully paid down the revolver balance since the end of the third quarter. Since completing the credit agreement amendment, the revolver has remained unutilized, and our liquidity has remained strong. We are continuing our cost control initiatives to further protect our cash and liquidity into the foreseeable future.

In conclusion, the fourth quarter was a strong finish to a tough year. The company acted quickly and decisively to contain costs when the pandemic hit, and the results of our actions are evident. We adjusted our operations to a single shift, lowering our manufacturing cost and flexed up inventory early to protect our production plans, but flexed down later when supply stabilized in order to recover the working capital. We amended our credit agreement to provide flexibility with the covenant structure and protect liquidity. We continue to execute our margin growth strategy.

And finally, there are positive trends regarding the COVID vaccine, which should allow schools to reopen for a fall twenty twenty one school start, if not sooner. So while the 2021 will still be impacted by COVID, we are optimistic that the recovery will begin sometime in the second half. I will now turn the discussion back to Phil Horlock, who will describe the outlook for 2021 and give his closing remarks.

Speaker 2

Thanks, Jeff. So let me now summarize the outlook that we see for both our operating performance and the school bus industry, which are the basis for our fiscal twenty twenty one guidance. Turning to slide 17. Our focus at Blue Bird is on delivering superior operating performance. We can't change the industry outcome this year, but we can focus on improving every element of our business, so that we are well positioned when the industry rebounds as it inevitably will, so that we also rebound.

That means executing our margin growth strategy by improving bus selling price, alternative fuel mix, and cost structure. An example of a structural change that drives superior operating performance was our move to a single shift production schedule in June. We know we build a bus more efficiently and with better quality when all of our team is working together on the same single shift. It's proven and a fact. The next step for us was to break specific plant bottlenecks, which we started during our October shutdown and will complete in our December holiday shutdown.

So from early twenty twenty one, we will be able to build as many units on one shift that we used to build on two shifts in straight time. Now that's a smart move. Turning to the external environment, there are a number of factors that will influence the industry outlook. The most important being the return to in classroom teaching. We know that when children are in the classroom, school buses are needed to transport children safely, and we see orders for new buses.

The positive recent developments in COVID vaccine distribution and President-elect Biden's one hundred day goal to open schools should impact the school bus industry favorably. Additionally, with 25% of the 600,000 unit North American school bus fleet being fifteen years or older, and aging more when schools are closed, there is great demand for new buses from school districts. It's not a question of if the industry rebounds, but a question of when, and we expect to see improvements later in fiscal twenty twenty one in support of the new school start. The most recent external forecast by ACT is for an industry of 29,000 buses in fiscal twenty twenty one, similar to fiscal twenty twenty. Now this can be significantly influenced by the external initiatives that I just covered.

Now with so much uncertainty and speculation on when schools will fully resume in classroom teaching, we believe it prudent to provide a wide guidance range and to be prepared for a surge in orders should the industry recover faster. Our guidance range is shown on slide 18. This slide shows the key metrics, which we provide guidance. For net sales revenue, we are forecasting a range of between $750,000,000 and $975,000,000 Adjusted EBITDA between 40,000,000 and $65,000,000 and adjusted free cash flow between $5,000,000 negative and $20,000,000 positive. Our guidance reflects industry assumptions ranging from 26,000 to 30,000 buses, with the lower end assuming COVID causes increased disruption to classroom teaching, a minimal industry recovery in the 2021.

The higher industry outlook of 30,000 units reflects resumption of in classroom teaching later in fiscal twenty twenty one and an increase in orders in support of 2022 school start. As the heading says, we believe it's important to plan prudently and somewhat conservatively, while aggressively pursuing operational improvements. We will narrow guidance as a control of the pandemic becomes clearer. I'd like to share our thoughts with you on when we expect to be back on track to achieve our declared goal of at least a 10% EBITDA margin in the near term. Turning to slide 19.

This slide illustrates the adjusted EBITDA impact of COVID-nineteen on fiscal twenty twenty results and on the 2021 forecast. We were on track to achieve our original guidance fiscal twenty twenty until the pandemic hit in the third quarter. As Jeff told you earlier, we had a great first half for fiscal twenty twenty, then we were hit with some bad news in the second half caused entirely by COVID. Now, while we do expect some industry recovery in the 2021, we expect a significant industry rebound toward pre COVID levels in fiscal twenty twenty two commencing with school start. And as volume recovers, we expect to resume our glide path towards at least a 10% adjusted EBITDA margin in the fiscal twenty twenty two and 2023 timeframe.

So despite the COVID challenges and its impact on today's school bus industry, we haven't lost sight of our mission. To grow profitability and increase EBITDA margin to at least 10% of the near term. To this end, we'll continue to drive improvements across all elements of our business, thereby improving our underlying margins, and we report on our progress each quarter. Well, concludes our formal presentation. I'll now pass it back to our moderator to begin the Q and A session.

Speaker 0

Thank you. We will now be conducting a question and answer session. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Our first question comes from Eric Stine with Craig Hallum. Please proceed with your question.

Speaker 4

Hi, everyone.

so I mean, obviously, a lot of uncertainty here heading into fiscal year twenty twenty one. But just curious, what are you hearing from school districts related to funding availability, related to release of funding, maybe purchase plans? And just what kind of confidence that it does give that when things hopefully return to normal, I guess, in fiscal twenty twenty two, what kind of strength that you see? I mean, is it something where you think that this industry can snap back pretty fast? Or are there factors where you think potentially it's a little more gradual than that?

Speaker 2

It's a good question, Eric. Mean, let me tell you my thoughts and some of the best experience too in those schools that have reopened. The ones that have reopened, I'd say we are seeing volumes in the region of sort of 95% of where we previously been, maybe 90% to 95% of where we were back in 2019. So that's encouraging for us. You go back to our funding mechanism principally, property taxes.

That's the principal funding mechanism for school buses. Property values are still high, property taxes are still robust. And so the view is that the funding certainly for traditional funding for school buses looks pretty strong. And we've seen consistently over the years that when districts need to add school buses, which are all about safety of children, they'll put some bond money out there. It'll be a unique funding mechanism for doing it.

And that's been successful in the past. I think the other thing to recognize too is try not get political here, but we certainly heard President-elect Biden talking about electrification of the school bus fleet. I think certainly he's top of his agenda is getting kids back to school in the classroom. And I certainly think to do that effectively, you've got to have a robust school bus fleet of state buses that can handle it. So I guess what I'm telling you is best experience of districts who've actually gone back to school, we're seeing orders.

I don't necessarily think when I think of 2022, we're going to see us bounce immediately back at 35,000, which is like the peak we've been running at for the last thirty years. And we have, we enjoyed three or four years of that prior to the COVID pandemic. But I think we'll be close to that. I don't think we'll be far off it. I think we'll be in the 33,000, 34,000 sort of range when we bounce back.

Speaker 4

Okay. That's great color. Well, maybe just turning to this fiscal year. I mean, you mentioned that first quarter was full in that context. I mean, should we think about typical seasonality this year?

Or I mean, could it potentially be a fair amount steeper? And I guess in the back half of the year, COVID has a big bearing on that. But maybe just how we should think about or get our minds around first quarter?

Speaker 2

Well, obviously we don't give guidance by quarter, but I can tell you when I say we're full, obviously we are a little down from last year. But the decline from a year ago is a lot less than what we saw in the third quarter and then in the 2020. We're much near just getting into double digit decline. I mean, that's where we are as we look at the twenty twenty one first quarter orders versus a year ago. So I think that's a point we've been trying to make here is that we talk about the rate of decline is seems to be slowing down and certainly evidence that in the first quarter.

And when we give you those results, you'll see that.

Speaker 4

Got it. Then yes?

Speaker 3

Kirk, this is Jeff. I think you're going to see the first half is going to continue to be impacted by COVID. And then obviously, we've commented that we're optimistic on the second half. So that could play into the seasonality as we look at the full year as well.

Speaker 4

Okay. Got it. Lastly, just on the electric bus side, I know you recently upped capacity by six times, I believe, 1,000 units, and that's pretty significant. And I know you enter with, I think, 80 coming into the year. I mean, what you obviously didn't have that capacity thinking that you wouldn't need it soon.

So is that a level that you think, whether it's in the next fiscal year or two that you could be approaching on the electric bus side?

Speaker 2

We'll be at capacity this year, but I do think you certainly look over the next couple of years. Think, yes, I think we'll start to see a significant piece of that capacity being used. Just to clarify too, when we talk about capacity, we talk about what we facilitate to, we talk about equipment, our plant, our automation. Obviously, I'm not manning to a thousand buses today when I'm going need to unit backlog. So we'll be imprudent on that.

But we put the capability in place that when it's there, we can easily ramp up. And I just look at, again, when I mentioned earlier, the new administration, part of their campaign. Now they got to get this by the way through Congress and everybody's got to approve it. But he did talk about electrifying some 500,000 school buses over the next five years. It seems phenomenal.

I mean, let's be honest. It's sort of you can't think about putting 500,000 new school buses on the road. But I think it's indicative of maybe the support we're going to see for school buses. So it's pretty exciting. Certainly electric buses too.

Speaker 0

Thank you. Our next question comes from Craig Irwin with ROTH Capital Partners. Please proceed with your question.

Speaker 5

Good evening and congratulations on tight execution this quarter in the Yeah. Choppy You guys did a great job.

Speaker 2

Thank you.

Speaker 5

So one of the things I liked in your slides, sorry, is the, in the waterfall you include a $7,900,000 headwind stepping from 4Q nineteen to 4Q twenty. That headwind you say is primarily from COVID. Can you share with us, what portion of that, probably hit the gross margin line given that gross margins were quite a bit lower, than where things have been over the last couple of years? I know a lot of the spending for COVID does come from spacing out your employees and putting in additional hand sanitization stations and other expenses and inconveniences. But can you maybe share with us an approximation of the margin impact either in dollars or basis points?

Speaker 3

Yes. Hey, Craig, this is Jeff. What I would say is that $7,900,000 headwind that we saw there in the fourth quarter, the vast majority of that certainly hit us in gross profit. That was in specific areas that do impact cost of goods sold. It's in labor, it's in overhead and just overall manufacturing efficiencies, including loss of operating leverage from lower volume.

And so all of those impact our cost of goods sold and subsequently slow down the gross profit. So it's certainly the largest portion of it.

Speaker 5

Great. Then the question I get in almost every phone call where someone mentions Bluebird is, why are you guys not leaning in the way that so many of these SPAC IPO companies are? Laying out a growth path for investment and pursuing the explosive growth that's available in EVs from diversification. So you've got a proven technology out there with your school buses. You know, you're one of the top two guys in the market.

And your experience in alternative fuels is unsurpassed. You know, I was talking to another leader in alternative fuels today and they're growing 30%. They're gonna grow 30% in 2021 plus with potential upside to 50. It's gotta be available to you. Why not invest for that?

Why not lay that out as a plan for investors? Is this a conversation at the board level? Or if it's not, why not?

Speaker 2

No, it's definitely a conversation we're having at the board level, Craig. And obviously we are investing in terms of the capacity increase we've put in place and the products that we have a very robust product cycle plan too that takes from our product today to a superior products for the future that I think customers are going to love and are going to value. I can't get into it today, but certainly it's something we recognize. The way, we've seen those specs out there. We've seen their projected growth rates.

We know the valuations, we've seen that. So certainly it's something we are talking to our board about. We're just not ready at this meeting to tell you what we're going to do or what our next steps are. But I take your point, Craig. It's a good one.

And we a great platform, a great chassis. It can apply to different applications. So we're talking to our board about where we take it from here.

Speaker 5

Excellent. That is a big piece of news. So we will stay tuned and look forward to future updates. Thank you.

Speaker 2

You bet, Craig. Thanks.

Speaker 0

There are no further questions at this time. I would like to turn the floor back over to Phil Horlock for closing comments.

Speaker 2

Okay. Thanks, Paul. And I want to thank everyone on the phone today for joining us on the call. And I really appreciate the questions there that were put to us. We do appreciate your continued interest in Blue Bird and we look forward to updating you again on our progress next quarter.

Before we sign off, I just want to leave you with a final message. We do believe we're well positioned to handle this unprecedented pandemic. We've got ample liquidity as you heard and as Jeff's talked about. We are improving our business structure. You heard about the three pronged strategy.

And we're do whatever it takes from a restructuring standpoint to make sure we get through this period. We are confident we'll see a rebound in the industry and we want to be there to capitalize on it. I also want to give special recognition to our incredible employees for their commitment and dedication to Blue Bird during this pandemic. They have been amazing when you look at our absenteeism rate and how low that is compared to traditional manufacturing industry. All credit to our team.

So if you have any follow-up questions, don't hesitate to call our Head of Profitability Investor Relations, Mark Benthel, who you all know well. And thanks again from all of us at Blue Bird. Have a great evening, be safe and have a happy holiday. Thanks.

Speaker 0

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.