Greetings, and welcome to Blue Bird Corporation Fiscal 2021 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mark Benfield. You may begin.

Thank you. Welcome to Blue Bird's fiscal 2021 second quarter 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 information on this call. This afternoon, you will hear from Blue Bird's President and CEO, Phil Horlock; and CFO, Jeff Taylor. Then we will take some questions. So, let's get started. Phil?

Well, thanks Mark. So, good afternoon everybody and thanks for joining us today for our fiscal 2021 second quarter earnings call. Now, before I jump into the actual presentation, I would like to set the stage by giving you the themes you are going to hear about consistently on this call today, as they really define our business and where we are heading. So, let’s start with that. Second quarter volume was down versus last year's pre-COVID quarter. That shouldn't be a surprise to anyone. We really didn't see the impact of COVID until the third quarter last year. Schools are reopening and the industries are recovering. And as a consequence, second-half volumes is expected to be up significantly from last year. Our gross margin percentage is up despite significantly lower second quarter volume. And I know that's a key factor you'll all be interested in. Average bus selling price is up again. We have a strong alternative fuel mix, and we are the clear leader. We’re the market share leader in electric and propane on a trailing 12-month basis through March. And our second quarter electric bus sales were up a significant 50%. Our manufacturing efficiencies were up. Our structural cost savings were up. And we're very excited about new administration stance on electrification of the school bus fleet. This will be transformational. In summary, we’re well-positioned for bottom line profit and margin growth as the industry recovers. So with that introduction, let's turn to Slide 4 for an update on how we see our business environment today and importantly, how we're dealing with a school bus market conditions. As the headline says, in a challenging market, we're continuing to drive business structure improvements, and importantly for our future, substantially increasing our focus on the growing electric vehicle business.…

Thanks Phil and good afternoon. It's my pleasure to share with you the financial highlights from Blue Bird’s second fiscal quarter of 2021. The quarter-end is based on a close date of April 3, 2021 whereas the prior year second quarter was based on an April 4, 2020 close date. We will file the 10-Q today, May 12 after the market closes, 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. Let’s move to Slide 10, and I will review the second quarter key results. Overall, it was a solid quarter for Blue Bird with volume increasing sequentially as expected, but down year-over-year. As I mentioned on the earnings call, the supply chain environment became more choppy, which persisted throughout the quarter. Our supply chain team is actively managing this situation and has done a tremendous job. Second quarter volume of 1,489 units was down 43% year-over-year as the 2020 second quarter was minimally impacted by the pandemic and as we discussed a year ago included some pull ahead of the units from the 2020 third quarter. While the 2021 second quarter was more significantly impacted by the pandemic with only 36% of schools operating in-person at the start of the quarter, resulting in lower demand for new school buses. Additionally, we had 200 plus buses that were in inventory at the end of the quarter, which we did not book due to delayed certification of the new engines. Consolidated net revenue of $165 million was 91 million or 36% lower year-over-year for the quarter, primarily due to lower bus…

Thanks, Jeff. So, let's now summarize the outlook that we see for the balance of this year and beyond. Turning to Slide 15, as we have consistently stated on prior earnings calls, our emphasis of Blue Bird is on delivering superior operating performance in order to drive margin growth. After a tough first half of the fiscal year, the industry is beginning to recover. Now, we can't change the industry outcome this year, but we can focus on improving every element of our business so that we're well-positioned as schools will be resuming classroom teaching, and the industry fully recovers. That means executing our margin growth strategies by improving bus selling price, alternative-powered bus mix, and cost structure. As Jeff discussed, along with many other industries, we're seeing rising commodity costs and supply chain disruption. As we've done for the past several years, we will be taking pricing to recover our increased costs. And we expect to do this within the next 45 days. As I mentioned earlier, an example of the 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 have organized the EV business as a focused, dedicated team within Blue Bird. I’m working with a number of commercial vehicle customers on the opportunity to supply them with an electric powered chassis built fully at our Blue Bird plant in Fort Valley. We are in early stage of discussion, but it's clear their interest lies in receiving an OEM electric powered chassis, and not…

[Operator Instructions] Our first question is from Eric Stein with Craig-Hallum. Please proceed with your question.

Hi, everyone. Thanks for taking the questions.

Hi, Eric.

Hi. So maybe, I mean, I know you spent a lot of time on the guide and I can certainly appreciate the reasons why you would have it quite wide, but just thinking about it, I mean, is it fair that the supply chain issues are the bigger reason of the two rather than COVID? Because it certainly sounds like your order book, you know, would support whether it means the, you know without supply chain issues would be high-end of the range? I mean, is that a fair assumption and also knowing, I mean when do you expect? I would assume you'd have a pretty decent visibility soon into that given you need some time to fill in those slots and get deliveries done by the end of the fiscal year?

Yeah, Eric, I think it’s a great point. And you’re absolutely right. I mean, there's no question, between last earnings call and this call, we feel a lot more confident in schools opening and then the order rates coming in from our customers no question. The real reason we've got this wide guidance now is all about supply chain. You know, another weekday goes and go by, you hear about Ford Motor Company of GM and all these guys having issues. PACCAR, I saw their earnings call. I think on our side, like I said, we are working this every day, I can tell. We meet on this constantly to see where we are. And so far we've been getting through it, but it's a challenge. And that's why we keep in the wide guidance at this point. I expect next earnings call. I do expect we'll – with one more quarter to go, we’ll narrow that significantly and give you a better update.

Okay, that's great. Maybe then just turn into electrification in vehicle to grid, I mean clearly an area that you are very focused in every bus enabled with that, do you feel like the market understands that, I mean understands the – how that's a key piece to the solution on the cost side? And, you know, does the market understand that there are third party financing structures starting to pop-up? Because I would think that that would greatly accelerate adoption in that area?

You know, I don't think they do yet. I think that's one of the things we have to do get out and teach and train and educate. And I honestly think if you go back on the – government talk about propane and our experience, you know, we have to do that then, I mean, we have to pioneer propane by teaching, educating, talking about TCO, and we're doing that now on this point. You know, this is a brand new product. Obviously, we launched our first, you know, high energy and it is really important by the way, when I talk about a 60 kilowatt because while there have been demos out there in the past by other manufacturers, no one has done it in the 60 kilowatt level. And I think that's the exciting thing. So, you know, we want to show the districts, you know, over time that reliance on grants is going to reduce, because this service will come into the equation. They can make serious money off this, and certainly help reduce the TCO along the way. So, it's something we've got to do. We're excited about it. And we've got partners who are also pretty skilled in this, but it's certainly how you reduce over time, one of the, you know, the reliance on requiring hefty, sort of grants to help you afford the initial acquisition price.

Yes, no helpful. Last one from me, just on the electric powertrain outside the plans, I mean, I can appreciate you certainly can't give details at all, but maybe just in terms of a revenue contribution, is it fair to think that this is, I mean will there be any revenue contribution or do you think or anticipate in fiscal 2021 or is this more of a fiscal 2022 event?

From a fiscal 2022 item, really, any here is why? I mean, I think obviously, there's a lot of excitement around this, not just from us, but from other parties who see us, hey why aren’t you selling these chassis to third parties? Well, you know, we have to meet the specifications of a customer wants to. I mean, they have their own desired needs. So, whatever we end up doing here, when we do get into the business that we're ready to pull the trigger, and sell. To get to that point, we've got to make some tweaks, some modifications, customize it for their need, which is what we're very good at doing. That's what we do every day on school buses. You know, no school bus is the same. We’ve customized these for every school district. That's one of the things I think that's why we excel in this space. But we will have to do that as we work through customers. They're going to see a prototype, when they put a body on it, when we try it out. When they make sure I like it, that’s going to take a few months, but I’m really encouraged by the discussion we're having so far. And I can't tell you enough about how we get this comment that we're tired of buying from a modifier. And we want this from a real OEM, who builds that chassis in the plant from the ground up with an electric drivetrain. So, we feel good about it, but I think you're right, it’s going to be more of a 2022 type of thing than in the same result in 2021.

Okay, thanks a lot.

You bet. Thanks, Eric.

[Operator Instructions] Our next question is from Craig Irwin with Roth Capital Partners. Please proceed with your question.

H, good evening. And thanks for taking my questions. So, I should apologize up front. I've been juggling a couple of earnings calls. So, I might have missed this if it was addressed. But the impact of commodities, particularly steel, and the running steel prices, is a question that a number of your shareholders have brought up and the number of people looking at potentially becoming holders of equity have brought up. Can you remind us how you purchase your major commodities? How you look to lock in price, and what the potential impact could be with the options to offset that as far as profitability?

Yeah, thanks, Craig and good afternoon. We didn't get into that in detail. I'll give a little more color on that, and so in regards to the way we purchase steel, I mean, we have our supply partners that we purchase steel from. Those agreements allow us to purchase from them. And there's generally a lag from the spot pricing that you see in the market and when that price flows through to us. So, we're a little bit delayed by about a quarter, when you see the pricing in the marketplace. We do hedge a portion of our steel position. We don't hedge all of it. And, so to that extent, you know, we've got some exposure there. On raw steel, we only buy 60 million to 70 million a year of raw steel, most of the steel cost that we incur comes through the components that we purchase. And so, it's driven more on the component side than it is on the raw steel side.

And in your confidence in passing through that that increased cost to end customers, can you maybe talk about, you know, obviously, you had great pricing this quarter, but do you see this is something that's manageable as far as, you know, the profit impact over the next number?

Yeah, let me talk about that Craig. It’s absolutely – yeah, I do. Because actually, we've already talked to our dealer council about that, and, you know, they understand that prices are going out there, read the newspapers, they know what's happening. And, you know, we've been successful in the last few years. And in passing that through, just like every other business does, right. The truck business, the car business, and we're in the automotive business too. And yeah, we plan on doing that. So, we feel really confident. You know, just want to just cover just a little bit to what Jeff said, you know, I think it is important to mention that when we buy, we buy raw steel, it's a fully modest amount. That's what you see on the sheet metal on the product that we bend, and we put on our products, most by far the measure – and we’d actually do hedge that, or we buy a – we agree in a volume quantity right at the beginning of the year with our providers. And we looked up pricing. And we've been very successful in doing that. And the second thing is, you know, you think about was our steel come from its engines transmissions, its frame rails, which we all buy from our supply base, you know, and that's always a, that's all based on a bunch of indices that they have, and typically looking back. So, you know, you get these adjustments once or twice a year. And, that's still a negotiation for us to have with many of those folks. So, I think we have a good process for handling that.

Understood, understood. Thank you for that. So then, my other question is a very big picture, right? You've got a couple dozen companies out there that are going to produce vehicles. Many of them have never produced anything before. And you know, Blue Bird is out there with an iconic brand that a lot of us have written on our way to school back in the day, executing well in the EV bus market, you know, from the perspective of manufacturing, do you feel that many of the new entrants out there underestimate the challenges in manufacturing and things like commodity pass through we've just covered? Do you feel that maybe there's more to be said for experience, then, you know, then the quality of a marketing plan or the number of press releases? You know, how would you position yourself versus this new crop of so-called competitors?

Yeah, that's a great question. And I hate to put a remark out there about folks who are sort of trying to enter this business, but I actually look back to what Elon Musk said about Tesla. When he said, you know, we had a great idea and a great vision. He didn't realize the art of manufacturing was going to be so difficult. It took them a while to, you know, convince everybody that was a real business here in the attraction. And there were a lot of problems. I mean, I've heard Elon Musk talk about it at length. He said, I completely underestimated what it took to manufacture vehicles. Sure. I got the team in place. I got the drawings ready for my buses, like cars in his case. So, yeah, I think it is, and I think selling school buses. I mean, you know, a school bus has somewhere between 9,000 to 12,000 parts on it. We have a [parts bin] of 23,000 parts, which we call from. You know, the actual customization of a school bus is incredible at the school district, rightly so, you know, they drive a different topography, their weather conditions are different, they want the unique requirements. So, we have a federal level of standard, we have a state level of standards, and we have a school district level of standard. That is a lot to handle. And, you know, even after all these years, we sometimes can stumble from time to time, but we get through it because we've been doing it a long time. But yeah, I think it's – I think that's the biggest challenge for any of these startup companies are out there, who have sold a few 100 vehicles or actually not even sold any, when they say we're going to sell several thousand in the next few years. That's a big challenge. So yeah, I would agree. I think it's probably the biggest hurdle any of these folks have got. I'm just pleased that we can. You know, we built 11,000 units in the year before COVID and we've been doing that on a regular basis. And we feel good about our capabilities.

Great. Well, thanks for taking my questions. I'll bring the rest offline.

Okay, you bet. Thanks, Craig. Good to talk to you.

And we have reached the end of the question-and-answer session. I'll now turn the call over to our President and CEO, Phil Horlock for closing remarks.

Thank you, [indiscernible] passing it back to me. And thanks for everyone for joining us on our call today. I hope if you believe like we do that our results clearly demonstrate we'll focus on driving business structure improvements, and really with the ultimate goal of improving our margins. And I feel really good about – I keep coming back to that point that second quarter results, you know, we're seeing the full impact of things here. Now, the nice impact of what we've done on the shift change, what we've done in terms of improving our operating efficiencies, we've got a fully a brand new paint shop in operation by 18 months now, all delivering, and guess what you're seeing is a significant improvement in gross margin despite a substantial drop in volume. And that's when I think you're sure that things are working. Secondarily is, I think, as you know, we're intent on maintaining our leadership in alternative power. We are the leader, we intend to stay the leader or especially excited obviously, about the interests and the opportunities that the EV affords us in the years ahead. So, you know, the bottom line is, I want to thank you all for joining us today. Appreciate your interest in Blue Bird and obviously will update you on the progress every quarter. I do want to say, always on these calls, I want to give special recognition to our incredible team of our employees here for the commitment and dedication, particularly of achieving these results during a pandemic. Now, if you have any follow-up questions, don't hesitate to give a call to our Heads of Profitability and Investor Relations, that's Mark Benfield, and I thank you all again from all of us here at Blue Bird. Have a great evening.

And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.