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Edited Transcript of BLBD.OQ earnings conference call or presentation 10-Feb-21 9:30pm GMT

·51 min read

Q1 2021 Blue Bird Corp Earnings Call FORT VALLEY Feb 11, 2021 (Thomson StreetEvents) -- Edited Transcript of Blue Bird Corp earnings conference call or presentation Wednesday, February 10, 2021 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jeffery L. Taylor Blue Bird Corporation - CFO * Mark R. Benfield Blue Bird Corporation - Executive Director of Profitability & IR * Philip Horlock Blue Bird Corporation - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Craig Edward Irwin ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst * Eric Andrew Stine Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst * Jonathan Doherty Lopez The Vertical Trading Group, LLC, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to Blue Bird Corporation's Fiscal 2021 First Quarter Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mark Benfield, Executive Director, Profitability and Investor Relations. Thank you. You may begin. -------------------------------------------------------------------------------- Mark R. Benfield, Blue Bird Corporation - Executive Director of Profitability & IR [2] -------------------------------------------------------------------------------- Thank you, and welcome to Blue Bird's Fiscal 2021 First Quarter Earnings Conference Call. The audio for our call is webcast live on blue-bird.com under the Investor Relations tab. You can access the supporting slides on our website by clicking on the Presentations box on our IR landing page. Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Blue Bird disclaims any obligation to update the information on this call. This afternoon, you will hear from Blue Bird's President and CEO, Phil Horlock; and CFO, Jeff Taylor. Then we'll take some questions. So let's get started. Phil? -------------------------------------------------------------------------------- Philip Horlock, Blue Bird Corporation - President, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Mark. Well, good afternoon, everybody, and thanks for joining us today for our first earnings call for fiscal 2021 where we'll cover our first quarter results. Before I jump into our financial performance, I'd like to give you an assessment of how I see our business environment today and importantly, how we are adapting to the market conditions and prioritizing our plans going forward. So let's turn to Slide 4. As the headline says, in a challenging market, we continue to drive business structure improvements and importantly, for our future, substantially increasing our focus on the growing electric vehicle business. From an industry standpoint, not surprisingly, the first quarter was another challenging one, as we dealt with about 40% of students attending only virtual classes with the balance split fairly evenly between in-classroom teaching and the hybrid program. As I have stated on previous earnings calls, 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. That's great for us to know as we move forward. Following the recent holiday break, however, we have been seeing more schools resuming in-classroom teaching, and that's led to increased quote activity for our new buses. This is a leading indicator that industry recovery is on the horizon. Bolstered by increasing deployment of the COVID vaccine and the new administration's declared intent to open all schools within the first 100 days of its term. As we've consistently stated, it's our expectation that the industry recovery will begin in the second half of fiscal 2021 in support of the next school year start. Shifting now to Blue Bird. Our first quarter results were solid despite dealing with COVID as we continue to improve our business structure and underlying margins. We significantly improved working capital in the quarter compared with last year as we drove down inventory, operating at much leaner levels than in prior years. At 46% of total sales, we had another first quarter record mix of alternative powered bus sales, maintaining our strong leadership position, and we were #1 in trailing 12 months market share for both the electric and propane-powered buses. Now today, you're going to hear a lot about our electric vehicle results and our plans on this earnings call. But needless to say, we're excited with the comments made by the new administration on supporting electrification of 500,000 school buses that transport our children every day. We are significantly increasing our focus on resources in the electric bus segment, where we are the market leader. As customer interest and percentage growth in zero-emissions vehicles is outpacing every other segment of our business. In this regard, I'm pleased to announce today, it's our intention to offer Blue Bird electric chassis to the Class 3 through 7 truck market. Now this is a new business opportunity for us that we will launch later in 2021 and is an obvious outcome from having the broadest range of alternative powered chassis in the business, led by our zero-emissions electric and low-emissions propane products. All of which, I should remind you, are built in our factory. So overall, Blue Bird is well positioned for profitable growth, as schools resuming classroom teaching and the industry recovery begins, and we plan to remain at the forefront of the inevitable and exciting industry shift towards zero-emission student transportation. Let's now turn to Slide 5, and I'll cover the first quarter financial highlights. Our first quarter is always a seasonally low quarter of the year, following school start in the prior quarter. Now despite this fact and the impact of COVID-19, our financial results were solid. At 1,255 buses, our unit sales were down 205 from last year, representing a decline of 14%, entirely due to the pandemic, but well below the 23% volume decline we saw in the fourth quarter of fiscal 2020. Similarly, net sales of $130 million were 15% below last year. Adjusted EBITDA of $5.8 million was $2.2 million below the same period last year, more than explained by the lower unit sales. Now while adjusted free cash flow was $13.9 million negative in the quarter, which reflects seasonality of our business. This was a substantial $77 million improvement over last year. We certainly saw the benefits of our stringent inventory and cash management control that we've been deploying, which we've now institutionalized in our company. All 3 of these financial results, in which we provide guidance, namely, net sales, adjusted EBITDA and adjusted free cash flow were in line with our plan. As I talked earlier about improving our business structure and underlying margins, we delivered on many operational fronts, which are summarized on the lower half of this slide. As you can see, these achievements reflect our 3-pronged margin growth strategy that we have communicated consistently on prior earnings calls, namely improving bus selling price, increasing mix of alternative powered vehicles and reducing structural costs. So let's now turn to Slide 6 and review our major operating achievements to date and importantly, see the specific results of the margin growth initiatives that I just mentioned. We continue to drive transformational initiatives to improve efficiencies, quality and capacity. Let me give you a great example of this. By the end of the first quarter, we substantially completed all of our plant upgrade actions necessary to ensure we can build as many vehicles on a single production shift that we used to build on 2 shifts. That's great for efficiency, quality and gross margins, especially as industry volume recovers. As a reminder, we have now delivered more than $50 million savings from these transformational initiatives since we started 3.5 years ago. Next, we increased our average selling price a bus by about $2,000 or 2% over last year, primarily reflecting the impact of the annual pricing to recover economics that we took late in fiscal 2020. I'm particularly pleased with this accomplishment in the lowest volume quarter of the year. Now we have a lot of activity going on in alternative powered vehicles. Just announced publicly today, we've just renewed our exclusive partnership with Ford Motor Company for several more years for the supply of our market-leading gasoline and propane engines. With Ford and ROUSH, we are enjoying an exclusive and successful 3-way partnerships that's lasted more than 10 years, and we see no sign of it ending. In early spring, as I mentioned on our prior earnings call, we'll be launching our next-generation exclusive propane and gasoline engine for Ford and ROUSH, the all-new 7.3 liter V8 engine. It brings more power, it's more compact, it's got more torque, and it delivers more fuel economy. As our tagline says, the best just got better. Our combined alternative power mix was a record 46% of unit sales for the first quarter, that's 7% above last year. And with the higher owner loyalty and margin we generate from these unique products, it's great business for Blue Bird. As I covered earlier, the rapidly growing interest for electric buses is a very exciting opportunity for us and will generate significant growth in the years to come. On a trailing 12 months basis, which in this case, covers calender year 2020, and our electric bus market share was an outstanding 63%. This compares with 25% market share in 2019. So I'm really pleased with this growth trajectory. Fiscal year-to-date, we now have 107 electric buses either sold or in our firm order backlog, and that number is up 24% from the same time last year. That's really nice growth in a down industry, and it's just the beginning for electric vehicles. And finally, when you look at the total number of electric vehicles that we have either sold on our firm order spot since we started EV production just 3 years ago. It's more than 400 buses. That covers all school bus configurations, Type A, Type C and Type D. No one matches our breadth of EV products and market leadership in the school bus industry. In summarizing our operating achievements in one word, I would say that we have momentum even in an industry significantly impacted today by COVID-19. Costs are down, average selling price is up, alternative fuel mix is higher, and we have exciting new growth opportunities ahead with electric vehicles and chassis. Let's now take a quick look at where I think we are heading on alternative powered vehicles on Slide 7. On the previous slide, I mentioned that our alternative powered bus mix in the first quarter was a record 46% of total sales. While that's growing, it's now at 50%, reflecting second quarter bookings to date and our firm order backlog. That's another record mix for Blue Bird at this time of the year, 5 points above a year ago. But it's all the more impressive when it's achieved during the pandemic that's impacting an entire industry. As we've covered on prior earnings calls, our range of buses attracts new customers who have never tried an alternative powered bus and many are new to the Blue Bird family. We saw this feature yet again in the first quarter. These are compelling facts. And with the higher customer loyalty we enjoy from these products, it's a great endorsement of our exclusive alternative powered buses, the Blue Bird brand and our great dealer network. And we're off to a terrific start with our electric buses this year. As a reminder, we're not new at the EV business, nor are we a start-up that's achieved on a handful of deliveries. We've been building and delivering zero-emission school buses for nearly 3 years now, we have the broadest EV range in the industry with Type A, Type C and Type D offerings on the road today. We're #1 in market share and are preparing to deliver our 400th electric bus in the coming months. From a grant funding standpoint, the vast majority of the VW mitigation funding is still ahead of us, and will help us boost sales over the next 3 years or so, with many states earmarking specific funds for school bus purchases. We've had great results so far with our propane and electric buses from the funds that have been issued. And the recently announced $100 million Bezos Earth Fund grant to the World Research (sic) [Resources] 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 position in alternative powered bus sales. We have the best partners, the best products, and they're exclusive to Blue Bird. And with less than 20% of school districts having purchased an alternative powered school bus today, we have plenty of runway ahead for continued growth. Now I showed the right-hand box in our last earnings call, and you can see how far we've come in the last 4 years. And looking ahead, we don't see this growth stopping. We project that 4 years from now, between 60% to 70% of all Blue buses sold will be powered by a fuel that's an alternative of diesel. That's an increase of up to 3,000 alternative powered buses over this year. We're bullish about this growth opportunity and are investing in the business, and we see electric and propane powers the way forward in alternative power as we drive towards low and zero-emission products. Because of its outstanding growth potential, however, and the unprecedented interest in zero-emission transportation, electric power is a priority focus for us. So let's take a deeper look at our EV strategy and plan. Turning to Slide 8. As we learned from our propane success, when we bring an entirely new product to market, it takes more than just a great product win year after year. Customers want turnkey solutions that take care of their issues and their questions. In the case of propane, it was, where do we buy propane fuel? How do we lock in the fuel price? What fueling infrastructure is required? What's the best vehicle configuration for my (inaudible)? What are the TCO benefits and so on? In the case of electric vehicles, we call this the EV ecosystem. Carefully selecting the best partners in the business, working with us to handle each aspect of the acquisition and ownership experience to make it easy for our customers. As a graphic in the left-hand box shows, we are well on our way to confirming our EV ecosystem, our partners and their participation with us. We'll be sharing this with you at upcoming earnings calls and EV conferences. Turning to the right side of the slide, we show our key growth initiatives: first, continued leadership in delivering electric-powered school buses. With more than 500,000 school buses down the road, that's an addressable market at more than $100 billion in the years ahead as we move along the inevitable journey to zero-emissions. You may have seen recently, both the state of California and General Motors have recently declared their intent to phase out combustion engines by 2035. Those are bold statements, but the shift is happening. Second, using our strengths in chassis manufacturing and breadth of powertrain choices, we can provide EV chassis to producers of commercial vehicles who seek a proven OEM chassis and factory installed electric powertrain. With more than 150,000 buses on the road today, Blue Bird buses and chassis cover about 1.5 billion miles annually, and we are now accumulating over 2 million miles each year with our EV buses. That experience and know-how gives confidence to our customers. We're looking forward to our EV growth journey, and we'll fill you in on our progress as we move ahead. As we look to expand beyond school buses, let me just show you how we match up against the truck industry classification for chassis. Turning to Slide 9. From our large to small buses, our chassis fit the requirements of truck classifications 3 through 7. That covers GVWR demand from 10,000 pounds to 33,000 pounds which is an extensive range. And with our factory installed electric powertrain addressing every one of these truck classes today, we're well positioned for this growth opportunity in chassis sales. I would also be remised if I didn't mention that we can also provide propane, CNG, gasoline and diesel power for these classifications. We're in a great position. I'll now turn it over to our CFO, Jeff Taylor, who will take you through the financial results in more detail, and I'll be back later to cover our outlook and fiscal 2021 guidance. Over to you, Jeff. -------------------------------------------------------------------------------- Jeffery L. Taylor, Blue Bird Corporation - CFO [4] -------------------------------------------------------------------------------- Thanks, Phil, and good afternoon, everyone. It's my pleasure to share with you the financial highlights from Blue Bird's first quarter of fiscal 2021. The quarter end is based on a close date of January 2, 2021, whereas the prior year first quarter was based on the January 4, 2020 close date. We will file the 10-Q tomorrow, February 11, which includes additional material and disclosures regarding our business and financial performance. We encourage you to read the 10-Q and the important disclosures that it contains. The appendix attached to today's presentation reconciles differences between GAAP and non-GAAP measures mentioned on this call as well as other important disclaimers already mentioned. With that, please refer to Slide 11, and I will review the key results for the quarter. Overall, it was a solid quarter for Blue Bird, especially considering it was a seasonally slow quarter, which was further impacted by lower demand due to the global pandemic. Everyone across the company executed well, but our operations areas deserve to be highlighted for their outstanding performance. First quarter volume of 1,255 units was down 14% compared to the prior year period on lower industry volumes due entirely to the COVID pandemic. Net revenue of $130 million was $23 million or 15% lower year-over-year for the quarter. Bus net revenue of $118 million was down $17 million on lower volume. Bus average selling price, or ASP, was $93,900 per unit, a year-over-year increase of $1,600 per unit due to favorable product mix and option content in addition to price increases to offset inflationary cost pressures. Our alternative fuel mix was 46% in the first quarter, which is up 7 percentage points over the same quarter last year. Very strong performance. Parts revenue for the quarter was $12.6 million, representing a decrease of $5.8 million year-over-year as many maintenance facilities were shut down due to the virus and consistent with lack of in-person schooling. Gross margin of 11.1% was 280 basis points lower than the prior year period. The deterioration in margin in the first quarter was almost entirely the result of lower fixed cost absorption due to lower volume, higher costs associated with COVID and lower mix from the parts segment. Selling, general and administrative was $14.7 million, which was down $5.8 million on reduced spending and cost control actions in our management and engineering areas, once again, very strong performance. GAAP net loss was $1.6 million as compared with $0.4 million for the first quarter of 2020. On an adjusted basis, net income was $0.1 million, down approximately $2 million versus last year. Adjusted EBITDA of $5.8 million was down by $2.2 million compared with the prior year quarter, which I will cover in more detail on the next slide. Our adjusted EBITDA margin was 4.4%, a decrease of approximately 80 basis points. Diluted EPS of negative $0.06 per share was $0.04 per share lower than prior year. While adjusted diluted EPS was $0.00 per share or $0.07 per share lower than the prior year quarter. Weighted average diluted shares were $27.1 million during the first quarter versus $26.5 million in the same period last year. Liquidity was approximately $121 million as our revolver balance was untapped and fully available at quarter end. Looking at the first quarter on Slide 12. Year-over-year adjusted EBITDA bridge, starting on the left of the chart. Lower bus volume of 205 units and lower parts volume of approximately 32% were partially offset by favorable mix and lower freight and warranty expense. All of these factors combined to decrease adjusted EBITDA by $4.2 million, with volume being the primary factor. Pricing and transformational initiatives, such as strategic sourcing, and product redesign projects, added $1.8 million combined. Lastly, operating expenses were lower due to cost controls, while manufacturing costs were unfavorably impacted by lower fixed cost absorption on lower volume, partially offset by improved efficiency that resulted in adjusted EBITDA of $5.8 million for the quarter. Moving on to free cash flow, Slide 13. The table shows both first quarter free cash flow in addition to adjusted free cash flow. The first quarter is normally a seasonally low quarter for free cash flow due to low demand and building working capital. First quarter adjusted free cash flow was negative $13.9 million, a year-over-year improvement of $77 million, largely on $64 million lower trade working capital. While free cash flow was negative $14.8 million and $80 million improvement year-over-year. I couldn't be happier with the control of trade working capital this quarter. In particularly the supply chain organization managing inventory in a difficult environment. Looking at net debt and leverage and liquidity on Slide 14. Net debt of $147 million was $61 million lower versus prior year due to lower borrowing on the revolver, approximately $35 million, significantly improved trade working capital, required term loan payments over the past year, approximately $10 million, and increased cash balances year-over-year, approximately $16 million. Our net leverage ratio for the first quarter was 3.1x. While the net leverage covenant is suspended for 2021 under the amended credit agreement, it is still relevant to set the rate of interest on our outstanding borrowings. We have 2 active financial covenants for the period. First, the trailing 12-month EBITDA as defined under the credit agreement, was $48.7 million versus a minimum requirement of $24.5 million. Second, liquidity was $121 million at quarter end versus a minimum covenant of $15 million. Our liquidity continues to remain strong as our cost controls, working capital discipline and structural margin improvements are clearly paying dividends. Furthermore, we are continuing all of these activities for the foreseeable future to further protect our cash and liquidity. In conclusion, the first quarter was a good start to the year and a smooth quarter from the perspective of supplier disruptions and COVID impacts. However, the operating environment has gotten more choppy in the second quarter with a higher level of supplier issues and disruptions as well as high levels of absenteeism. However, our team is rising to the challenge in addressing these on a daily basis. We continue to execute our margin growth strategy, as Phil discussed. And finally, there are positive trends regarding COVID vaccinations that should allow schools to reopen for a fall 2021 school start, if not sooner. We continue to be optimistic that school bus demand will recover in the second half of the year. I will now turn the discussion back to Phil, who will describe the outlook for the second quarter and give his closing remarks. Phil? -------------------------------------------------------------------------------- Philip Horlock, Blue Bird Corporation - President, CEO & Director [5] -------------------------------------------------------------------------------- Thanks, Jeff. So let me now summarize the outlook that we see for the balance of this year and beyond. Turning to Slide 16. We all want to see the resumption of safe in-classroom teaching. It's good for students, it's good for parents, and it's good for our industry. We have the vaccine being distributed, and we are seeing more schools gradually reopening. These are great signs of the industry recovery is beginning. I thought it will be worth reminding all of us, however, of the new administration's stance on this topic. You can see the supportive comments highlighted from various speeches given by President Biden in recent weeks. It's clear that the administration's commitment to reopening schools safely within 100 days and converting America's largest mass transportation system of more than 500,000 buses to electric power is great news for our industry and for our business. So now let's turn to the outlook for Blue Bird's business on Slide 17. Our emphasis at Blue Bird is on delivering superior operating performance. We can't change industry outcome this year, but we can focus on improving every element of our business so that we're 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 powered bus mix and cost structure. As I mentioned earlier, an example of structural change that drives superior operating performance was our move to a single shift production schedule. 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. That's great news for us as the industry recovers. We have established electric vehicle leadership and growth as a top priority and are organizing the EV business as a unique division within Blue Bird. We'll be offering our chassis to the commercial vehicle industry later this year with our factory installed electric powertrain at the forefront. 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 bus are needed to transport children safely and we see orders for new buses. The positive recent developments in COVID vaccine distribution and President Biden's 100-day goal to open schools should impact the school bus industry favorably. Additionally, with 25% of the North American school bus fleet being 15 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 2021. With so much uncertainty and speculation on when schools will fully resume in-classroom teaching, however, we are maintaining the wide guidance range we provided in the last earnings call. We are prepared, however, for a surge in orders should the industry recover faster. Let's turn to our guidance range now on Slide 18. This slide shows the key metrics on which we provide guidance and is unchanged. For net sales revenue, we're forecasting a range of between $750 million and $975 million. Adjusted EBITDA between $40 million and $65 million, and adjusted free cash flow between $5 million negative and $20 million positive. Now 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 and minimal industry recovery in the second half of fiscal 2021. The higher industry outlook of 30,000 units reflects the resumption of in-classroom teaching later in fiscal 2021 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'll narrow guidance as the control of the pandemic becomes clearer and keep you informed. As I did on the prior earnings call, I'd now like to share our view on when we expect to be back on track to achieving our goal of at least a 10% EBITDA margin. Let's turn to Slide 19. This slide illustrates adjusted EBITDA impact of COVID-19 on fiscal 2020 and 2021. We were on track to achieve our original guidance last year until the pandemic hit in the third quarter. While we do expect some industry recovery in the second half of fiscal 2021, we expect a significant industry rebound toward pre-COVID levels in fiscal 2022, commencing with school start. And as the volume recovers, we plan to resume our glide path towards at least a 10% adjusted EBITDA margin in the fiscal 2022 and 2023 time frame. 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 increased EBITDA margin to at least 10% in the near term. To this end, we'll continue to drive improvements across all the elements of our business, thereby improving our underlying margins, and we report in our progress to you each quarter. That concludes our formal presentation. I'm now going to pass it back to our moderator to begin the Q&A session. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Eric Stine with Craig-Hallum. -------------------------------------------------------------------------------- Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2] -------------------------------------------------------------------------------- Maybe just starting on the commercial truck opportunity. I mean, clearly, you're making this move with insight into the market opportunity. Curious what kind of interest levels you're seeing from OEMs and maybe how the pipeline is developing in various end markets? And curious, I mean, is this -- because this is chassis only, is this kind of above and beyond the 1,000 or so electric buses that you can produce a year? -------------------------------------------------------------------------------- Philip Horlock, Blue Bird Corporation - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes. Good questions, Eric. This is early days yet. So I want to let you know what (inaudible) telling you it's late 2020, 2021. When you look at the class through 7 entire industry. You're looking at 250,000 vehicles and more. And obviously, a lot of those complete OEMs who provide their own chassis they put it into their products. They may or may not have electric powered drivetrains. So we're looking at a subset of that. Obviously, not the 250,000 level, but something significantly lower. In the discussion we've had with a number of potential customers, and I'm not telling you that, yes, I'm going to ride the robust pipeline that I can share with you. But what we're hearing is they really want, what I call an OEM solution for an electric drivetrain, fully installed by an OEM. Too many conversions are taking place. I mean you got a lot of relative small companies taking the gasoline chassis, taking the engine out, putting electric drivetrain. And they're saying to us, look, we'd like -- we're interested in talking to you, in meeting with you because we think -- we know it's going to be robust and it's built in the factory, and you certainly got the chassis business figured out with all the buses you have the road today. And obviously, we've done a significant number of electric vehicles on the road today. So I think what I'm telling you is, Eric, at this point, it's a little early to be sharing pipelines with you. Like I said, we've specifically said -- I said specifically, we're looking at launching this later in the year, soon I will have more to tell you on the next earnings call. But we're optimistic about it. Now when it comes to our capacity, we can scale up pretty easily. The 1,000 units I talked about before are very much -- it was school buses in mind, but we have a lot of chassis capacity. And we're able to ramp up very easily with well over that number If we got the demand for it. So I'm trying to go wherever. -------------------------------------------------------------------------------- Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4] -------------------------------------------------------------------------------- Okay. So that's great. And I realize it is early, but maybe just on the topic of -- on that capacity number just for school buses. I mean, I know it's another quarter that has gone by. And as you look at whether it's developments in vehicle to grid or third-party ownership potentially of buses, who would then lease to a school district at the same price as diesel, are utility doing that? I mean when you add all that up, I mean, any thoughts on when the time frame might come where you would reach that level? Or kind of how you're thinking about it maybe from a high level. -------------------------------------------------------------------------------- Philip Horlock, Blue Bird Corporation - President, CEO & Director [5] -------------------------------------------------------------------------------- Well, certainly, look, the chart I showed earlier on our EV ecosystem, shown with Blue Bird in center. I mean we are heavily looking on that with a lot of different partners. Now you touched on like B2G. I mean virtually every bus we sold, for example, in the state of California is B2G capable. So us working with the utility companies take advantage of that, whether it's for the benefit of the school district or a third-party or all things we are working on with those partners in our ecosystem. Financing is shown on there. Obviously, right now today, electric buses are sold when grants are available. There are significant grants being provided, particularly in California, but all across the nation. And people getting a chance to get into an electric vehicle, they want it, especially when there's a nice grant support behind it. But on the financing side, too, we're talking with several different partners who we want to align with, who can maybe have a creative way of reducing upfront acquisition price by taking some risk on some of the assets that are in that vehicle. And I'm excited by it. I mean when you look at B2G opportunities, the financing opportunities, to try and take the acquisition sticker shock a little bit of where right now before battery costs do come down to levels we expect to do in the next 5, 6, 7 or so years. We're excited about those opportunities that we can bring. So we're going to keep working with those partners. We're going to solidify relationships with them. I expect some will be exclusive to us. We like being have exclusivity. It's good for us and good for our customers, and we'll keep you apprised as we move along. -------------------------------------------------------------------------------- Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6] -------------------------------------------------------------------------------- Got it. No, that's great. And then maybe just the last one for me. I do want to drill down a little bit into Jeff's comment about -- in the second quarter, you've seen higher levels of supplier disruptions and absenteeism at the plant. I mean, is this something you can give some color where it stands today? I mean, do you feel like it's something that you've got your arms around? Or is it something that might be a factor in that wide guidance range? -------------------------------------------------------------------------------- Philip Horlock, Blue Bird Corporation - President, CEO & Director [7] -------------------------------------------------------------------------------- I don't think it's something we can put our arms around. And maybe Jeff can speak, why don't I give you the high level to you and Jeff can sort of tell you what was behind his specific comment there. Look, I think we all know that the COVID cases across the country, they escalated later in the fall, right? I mean through November, December, we came back after Christmas. After the holidays when people got together, we saw COVID cases peak. We see not enough supplies. But we're also seeing some of them getting over that peak. We've seen as things have settled down, they had a problem. And what I mean by problem is we're watching these. We watch who our problem suppliers are. We talk to these guys every day. We're constantly in discussion to make sure they can supplies and get parts to them. It might mean expedite freight. We've got to use to get a part to it because it's the allocation got cut down for a couple of days in their production site. But we've been able to work our way through that with minimal interruptions so far, but I think the term that Jeff used was choppy, because that's what it is. Ourselves, even we saw quite a spike initially in the first week after we got back after the holidays, which has significantly subsided, but we had higher absenteeism for the first 2 weeks in January, and now we're back down to what I'd call a much more normal level. So it was a choppy period for us. I think Jeff was just highlighted. We're not out of this yet. I mean, no one is. COVID is still around it, but I think our team has done a great job in dealing with it. Jeff, do you want to give any more commentary on that? -------------------------------------------------------------------------------- Jeffery L. Taylor, Blue Bird Corporation - CFO [8] -------------------------------------------------------------------------------- Phil, I think you hit all of the key points there. The first quarter, which was October through December was actually pretty smooth for us, and it was really when we returned from the holidays that we did see some choppiness increase. So I think you covered all of the parts there. I mean, suppliers are seeing the same things we're seeing. And so there are things that we do to keep our plant running, and we've been able to effectively do that up to this point. But we will expedite parts, which increases our cost. We do add rework from time to time when things like that happen. And then obviously, absenteeism is a direct hit on our manufacturing cost when it slows down our production a little bit. So the team has done a fantastic job managing through it, like I said on the call. We deal with these issues every day. But just certainly wanted to put that out there that the second quarter has been a little more choppy than what we saw in the first quarter. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from the line of Craig Irwin with ROTH Capital Partners. -------------------------------------------------------------------------------- Craig Edward Irwin, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [10] -------------------------------------------------------------------------------- So your Class 3 to Class 7 chassis you're going to supply into the market with Cummins efficient drivetrain -- drivetrain in the right, the electric drivetrain. Can you maybe frame out for us what you've been doing on the marketing side to launch this into the market? And what are the types of customers that you're directly marketing these 2? And a lot of EV companies out there are getting really granular around expectations in EVs. Can you maybe share with us boundaries that would be reasonable for short-term and maybe long-term volumes of these chassis? And then also on the traditional electric school buses, 400 is a great number. But can you maybe set some boundaries on electric school bus deliveries in your fiscal '21 versus last year, what are the growth rates? What are the units that we should be looking for? -------------------------------------------------------------------------------- Philip Horlock, Blue Bird Corporation - President, CEO & Director [11] -------------------------------------------------------------------------------- Yes. Let me start out with that first. I mean, I think we're up about 24% right now year-to-year in our bookings that I called the backlog for the year. And here we are in just the middle of February. I think that sort of number of maybe being 25% up is sort of a good number to plan on right now. As we look forward this year, and we had 158 last year of our large buses Type Cs and Ds, smaller number for our Type As, but I'd expect that to be in that region. I don't know why it wouldn't be the region like 25% up versus where it was last year. The first part of the question, you're asking for more granularity. I sort of said, Craig, right now, we're putting out -- we've done a lot of research in terms of looking at the industry, looking at who is providing -- what are these -- where are folks getting those chassis from these days, electric powered chassis, as I mentioned before, many of them today happen to be conversions. There are a lot of smaller companies out there doing these conversions. You can be talking about step in vans, you could be talking about standard commercial delivery vehicles. There are some pretty good players out there. I think we all know who they are. But what we've heard from our research is gosh, can we find an OEM that would do this and stand by it. He's got a lot of experience in building the chassis that's tough and robust. Now one thing we don't have to do in Blue Bird is built a pretty tough chassis. I mean, I mentioned before, there's 150,000 school bus on the road. And many of them are 15, 20 years old, with 300,000 miles on them and more. And we don't have to do that. We're 3 years since electric business. I love the fact we have Type A electric product. We have a Type C and we have a Type D. So we meet a lot of those requirements that those operators might want. Prior to COVID, in fact, and prior to electric, we -- we did a lot of research around this particular area with some more conventional products like our gasoline and our -- to a less extent, propane. And I've got a lot of accept as we did sell a few in the market. And it's just given us an optimism that we think we can take this now across a lot of different industries in the commercial world. I think one thing I would -- last thing I would point it's about us the way we build our chassis. Our chassis has a lot of complexity in it. I mean, a lot of people tell you, we've got a lot of truck customers tell you that. We have a lot of complexity. It's federal complexity, state complexity, and then it's down at the school district level. And I think we've shown an ability to be able to modify change, make quick changes, satisfy unique customers' needs through many, many years. And I think that's why we feel confident that we can really do a good job in this in alternative industries because we're very adaptable. And we're able to do give a customer what they want and what they see. And the parallels of this truck classification 3 through 7 against the Type A, Type C and Type B is remarkable. It's right on the money. I mean it's just -- it's a direct comparison to 2 different industries. -------------------------------------------------------------------------------- Craig Edward Irwin, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [12] -------------------------------------------------------------------------------- Okay. Can you maybe talk about what your capacity would be if we really did see the Blue Sky scenario where we have an aggressive change out of the legacy school bus fleet how many units of electric drivetrains can you produce a year? How many can Cummins EDI supply to you so that you can deliver finished electric school buses into the market? Are we talking in the range of maybe several hundred? Do we have the opportunity maybe to flex into the thousands? And what sort of commitments do you have around capacity from your primary battery supplier? -------------------------------------------------------------------------------- Philip Horlock, Blue Bird Corporation - President, CEO & Director [13] -------------------------------------------------------------------------------- Well, I think we have plenty of capacity up front with battery supplier. I mean, we just -- we -- obviously, I think when you look at what we sold, it's a fairly -- it's a nice number, the way it's growing in the scheme of things. It's still relatively small, clearly for the rest of our business. So from a Blue Bird standpoint, and when I talk about chassis and school buses, I mean, if you come to our plant, you'll see we're a very manual operating plant. That's why we have a pretty good free cash flow model, we don't spend a lot of money every year on CapEx. We're -- bear in mind, that's our flexibility. So in all cases, a lot of the time when we want to increase capacity or one particular product line. It's a case of putting men in the plant, manning it and getting it moving. The movement just made to single shift to be able to build significantly more units on one shift than we built prior to COVID. I think it's a good testament to that. We're in a very good shape in our ability to be able to build chassis and install electric drivetrains in it. And to be able to build bodies, too, for those school bus. When you talk about our Cummins partnership, they're in the same boat. Cummins is a terrific organization, they scale for demand. The demand is where it is right now, they scale for it. But they are ready and willing when we sort of put in orders and start to put orders their way, they'll step up and it's a case of just bring in more resources. Again, what they do on that drivetrain. They're buying a lot of assembled, a lot of components you're prebuying, as you know, in electric vehicle business. It's a case of putting it all together and putting a control system to handle it all. And they have lots of capacity to do that. So what do I think going forward, I think we're talking -- I mentioned before, we have 1,000 unit capacity right now that's regularly available for us to build buses, we could easily flex up, we think, to a few thousand above that and several thousand chassis above. It's a chassis-only site. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Our next question comes from the line of Jon Lopez with Vertical Group. -------------------------------------------------------------------------------- Jonathan Doherty Lopez, The Vertical Trading Group, LLC, Research Division - Research Analyst [15] -------------------------------------------------------------------------------- Can you guys hear me all right? -------------------------------------------------------------------------------- Philip Horlock, Blue Bird Corporation - President, CEO & Director [16] -------------------------------------------------------------------------------- Yes, John, we're able to hear you. -------------------------------------------------------------------------------- Jonathan Doherty Lopez, The Vertical Trading Group, LLC, Research Division - Research Analyst [17] -------------------------------------------------------------------------------- Great. I have 3 questions. I just want to do them one at a time, if that's okay. The first one is, I'm just wondering if you guys can talk a second about what a market recovery could look like. And I guess what I mean when I say that is, obviously, the industry was doing a couple of thousand buses more per year pre-COVID. So on the one hand, it would seem like kind of a natural upward tendency when COVID clears. But on the other hand, just between budgeting cycles and sort of any other logistical issues I would imagine like a direct snapback is somewhat more complicated than that. So could you just talk for a second about like as the market comes back, just kind of how quickly would you think we can get back to kind of, I don't know, 2017, 2018 levels, just procedurally? -------------------------------------------------------------------------------- Philip Horlock, Blue Bird Corporation - President, CEO & Director [18] -------------------------------------------------------------------------------- Yes. Look, I think the snapback later this year, which I do expect as we get into 2022 school start. I mean as we think about more vaccinations being available, schools reopening. Protocols are really in place to handle this. I do think we're going to see quite a surge in orders and anticipated 2022 school start. I give an industry range, look, I think it was 26,000 to 30,000. So that's quite a bit below the 35,000 we've been running at for about 3 years prior to COVID. I mean that's really about right. That's about the peak I could see this year. There probably -- there just isn't enough time, frankly, I don't think, to get everything back in order to get much above that 30,000 level. That would be great. Now when you look into '22. You get the buses, the schools are open. You have to remember that major funding mechanism with school buses is property taxes in municipalities. So if property values remain high, which they are, they're still not falling, those property buys remain high. That's the funding mechanism for school bus than for education. I think I mentioned on a couple of other calls that people -- when we look at the average number of buses bought by a school district. Now there are 14,000 school districts. There are 35,000 in the industry. It's sort of 2 to 3 buses a year is the average. So there's big difference by 100. But in most cases, these are 3 buys, I want 4 buses. I'll take 2 buses. And affordability is not as typical as probably people think because in this context of the total education budget for -- across North America, it's about 0.3% of the total education capital expense budget is spent each year on school buses. 0.3%. So it often -- and I think what I would say is you look at it, still must be getting a year older. There's a lot of interest, a lot of excitement. And as we come out of this pandemic making sure our children are safe. There is no safer method of transportation than the school bus. It's a fact. It's proven. It's 50x safer than any other method of transportation. Look at accidents, injuries and so on. In the midst of all of this we just got confirmation this week. This was a great -- I'll use as an example, I think, of a stage step a [Technical Difficulty] being proposed to accelerate the replacement of all school bus in the state of Georgia. That's on top of the property taxes that typically funds most of the replacements. And that's about 30% more -- actually, 100% more than it was a year ago, funding more than 500 buses on top of the traditional sort of level of changeover. So what I'm telling you is there's a lot of excitement, I think, about getting kids back in school. And I think there's a lot of desire and interest to upgrade that school bus fleet, which is a very resilient industry when you look over long cycle. -------------------------------------------------------------------------------- Jonathan Doherty Lopez, The Vertical Trading Group, LLC, Research Division - Research Analyst [19] -------------------------------------------------------------------------------- Got you. That's really helpful. I had further real quick ones, if you wouldn't mind. The first one is, I'm wondering the sort of Biden stuff is relatively recent. I mean I know conceptually, it's been discussed for a couple of months, but I think it probably has more force now. And I think the thing I'm wondering is as you're engaging with customers, is there perhaps a rethink that's happening as people are thinking about a recovery, i.e., we thought we were going to do some portion, diesel, some portion propane. Now we're thinking a different portion EV. Is that a potential -- I don't want to say impediment, but does that complicate the recovery to any great degree? -------------------------------------------------------------------------------- Philip Horlock, Blue Bird Corporation - President, CEO & Director [20] -------------------------------------------------------------------------------- No, I don't think so. I think -- look, in the near term, there's still a lot of funding available for EV. I mean VW grants. There's a site, of course, there, quality management group in California is making grant money available. They have the CEC grants, I think they're wrapping up right now. There is a lot of unique funding available. We're talking every day the prospects of all across the country who are interested in being able to utilize that VW grant. And I think there's still something like -- there's at least, I think, about $400 million left, about $63 million has been carved out for school buses to apply to low-emission type vehicles, which we can... When it comes to the first quarter, what I was pleased about, and I think this is -- I'll try to answer your question here is, we still had a terrific -- we have a terrific quarter for all fuel vehicles. And obviously, (inaudible) propane in there, our low emissions product, which is incredibly affordable product from a TCO standpoint from a school district. And the fact that it held up at a time when people are probably scrutinizing what they're spending money on, thinking pay us about the resources before classrooms and we're fully back in the classroom. I think it just bodes well for the success of that business. I mean what we're seeing right now is we're seeing increased demand from quote activity. As you said, we're seeing increased quote activity. We have seen some increased demand. We're seeing pockets that when schools are going back, yes, we're clearly seeing increased orders coming in. So I think there's an excitement about what President Biden has said, on 2 points, right? School is reopening, but also this electrification of the school bus fleet. I think we all heard that. When I first heard it during the campaign trial, I thought that's pretty impressive. And he's reiterated it since. I think it's exciting for everybody. But it's a journey. I mean, it's not going to happen overnight. I mean that is a multiyear journey, I think, that we can all enjoy. -------------------------------------------------------------------------------- Jonathan Doherty Lopez, The Vertical Trading Group, LLC, Research Division - Research Analyst [21] -------------------------------------------------------------------------------- Got you. Okay. Sorry, the last one, I hope I have these numbers right. And if I'm wrong, please forgive me and correct me. But I think 2 years ago, in your fiscal '19, you did something in the order of 50 electric buses delivered. Last year, I think you're in the ballpark of 150. So you did about an incremental 100 buses. If you were to do 25% more this year, kind of 200 buses in that ballpark, that will only be sort of an incremental 40. It seems like not a particularly large step-up relative to some of the things you've discussed before. I'm wondering if I'm processing that number right, are there other complications, whether this be supplier-related, manufacturing-related? Is it just time to sort of educate the ecosystem? Like why -- I guess my question here is, why wouldn't you do kind of at least as many incremental buses, EV buses as you did last year in the context of the environment? -------------------------------------------------------------------------------- Philip Horlock, Blue Bird Corporation - President, CEO & Director [22] -------------------------------------------------------------------------------- Well, I think that's nice. You summed it up in the context of the environment. When you look at the 100 buses we got last year, we got a lot of those in the first half of last year. So we're actually expecting more, but what happened is COVID definitely put a little damper on the back end of our year. Running from the -- middle of March onwards, that really put a damper on. We already have very much in hand that book -- the backlog of orders already where it happen for the most of that year. So actually, (inaudible). It slowed down a little bit towards the back end of last year as people were dealing with COVID and classrooms were closed. So I think we're seeing, for me, it's a little bit like I'm being a little bit prudent, being aggressive on the business and on the cost side, but being prudent on my -- on our volume projections. Here we are in the first half of the year, which is heavily influenced by COVID. And the 24% above last year, first half, when it wasn't influenced by COVID. But the big thing is what's going to happen in the second half. I think -- look, I think what you said is a great point. It's something -- I was -- obviously a question there, what I think the numbers are going to be. I think we sort of said in our mind, 25%, since we're up about 25% now. But I think it's possible we could be seeing us break well through to 200. Let's just see how it goes. I'll keep updating everybody on that. Each quarter. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- And with that, we reached the end of our question-and-answer session. And I would like to turn the call back over to Phil Horlock for any closing remarks. -------------------------------------------------------------------------------- Philip Horlock, Blue Bird Corporation - President, CEO & Director [24] -------------------------------------------------------------------------------- Okay. Well, thanks, Devin, and I want thank everybody for joining us on the call today. There were great questions, by the way, to get us open and really appreciate your interest. I look forward updating you too on our progress next quarter. I certainly can see what you're interested in and so we'll make sure we cover as best we can the topics that are on your mind. And I hope you can see, we are dealing really well, I think, with this unprecedented pandemic. And there's no question, I think it's inevitable. Industry will rebound, it will rebound. There are a lot of school we've said they've their own fleets. Kids have to get to school. Mom and dad have to get to work. They need those school buses. It's just a temporary blip, if you like. It's a temporary blip we're going through that we will recover from. In the meantime, just remind of what we do. We're improving our business structure. We are growing what I call our underlying margin. You don't see it yet because the volume is low and we have the overhead absorption issue that Jeff mentioned. But believe me, our real underlying margins are improving, and we'll capitalize on that as the volume bounces back. And I think we're driving leadership in alternative power, that's exciting for us. We've been -- we've led this race for the last 10 years, and we aren't stopping. We've got a new tool now in our tool set is the way I look at it. We've led on propane. We've led on gasoline. You might say, what's gasoline, I'll buy the alternative power. It's an alternative to diesel. It's an alternative to diesel. That's what we've been focused on. Now we're looking at zero-emissions in electric vehicles, and electric chassis they are top of mind for us now as we see the incredible growth potential that has on the changing aspect of our landscape of transportation. That's what we're going to focus on and what we're going to talk about in the next earnings call to you. I just to -- I want to give -- you always a expect a recognition to our incredible employees in Fort Valley, in Macon, in Drummondville in Québec. In Columbus, Ohio, where in the past we had a great set of folks, and we couldn't be where we are without them. So if you have any follow-up questions, please don't hesitate and give a call to our Head of Profitability and Investor Relations, Mark Benfield, you know him well. And thanks again from all of us at Blue Bird. Have a great evening. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.