Greetings. Welcome to the Blue Bird Corporation Fiscal 2021 Fourth Quarter and Full Year 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 will now turn the conference over to your host, Mark Benfield. You may begin.

Thank you. Welcome to Blue Bird's fiscal 2021 fourth quarter and full year 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 on the following two slides, in our latest earnings release and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird's President and CEO, Matt Stevenson; and CFO, Razvan Radulescu. Then we will take some questions. So let's get started. Matt?

Thank you, Mark. And it is a pleasure to speak with everyone today during my first earnings call here at Blue Bird. In July, I joined the company as President and assumed the CEO role on November 1. I am incredibly excited about the opportunity to lead such a great company with a phenomenal future in front of it. Overall demand for more environmentally friendly school buses is strong and our company's competitive position to provide those buses and serve those customers who operate them is unparallel. On Slide 6, you can see some of the major headlines of our fiscal year, which ended on October 2, 2021. At the beginning of our fiscal year, a large number of schools were still closed or in a hybrid learning approach. As schools started to fully reopen in the second half of our fiscal year, it reignited the replacement of demand for buses. We saw that market demand increasing through the second half to near pre-pandemic order levels. Our nation's school bus fleet continues to age and the ongoing need to upgrade a safer, lower emissions and more modern vehicles is inevitable. However, the well-documented and public sized disruptions in the global supply chain environment made it difficult to fully realize those exciting fundamental trends. As volume in the automotive and commercial vehicle sectors ramped up, many of our suppliers had trouble keeping up with our demand. Our Tier 1 suppliers face challenges, including a shortage of labor, COVID outbreaks, a scarcity of raw materials, semiconductor shortages and other impacts from their Tier 2 and Tier 3 suppliers. In many instances, we are missing over 25 parts per bus in our production. These supplier disruptions dramatically slowed down our production and caused us to take numerous unexpected down days. It also drove…

Thanks, Matt, and good afternoon. It is my pleasure to share with you the financial highlights from Blue Bird's fiscal 2021 fourth quarter and full year results. We will file the 10-K today, December 15 after the market closes. Our 10-K includes additional material and disclosures regarding our business and financial performance. We encourage you to read the 10-K and the important disclosures that it contains. Slide 10 is a summary of full year results for fiscal 2021 and fiscal 2020. It was a tough year for Blue Bird, especially in fiscal Q4 with a difficult operating environment as a result of supply chain disruptions that have impacted many industries, especially those that use microchips and resin in their products. Further compounding the challenge, raw material prices rose during 2021, especially steel up 300% and aluminum up 150%. The cost of overseas transportation increased nearly tenfold. Blue Bird's unit sales volume of 6,700 units was significantly lower than prior year. However, as Matt described, there are about 2,000 units that could not be shipped in the third and fourth quarter as a result of part shortages. Supply issues were experienced for multiple components across a number of suppliers. While the disruptions continue, our team works tirelessly on a daily basis to find alternative sources for parts where possible and to engage with all of our impacted suppliers in order to find solutions and expedite delivery of vital parts to our factory. Despite the supply disruption, there is good news, demand for our buses is up significantly versus last year and total order received in the period were for 9,700 units. If we would have had received all of the parts on a timely basis, the sales for the year would have been more than 8,500 units, almost at the same…

All right. Thank you, Razvan. I would now like to talk about the team we are building here at Blue Bird, our priorities and outlook for the company. I learned long ago the secret to success is surrounding yourself with outstanding talent. And on Slide 18, you can see two great additions to our Blue Bird leadership team. You had an opportunity to hear from Razvan today. When we conducted our search for the next CFO of Blue Bird, it was imperative we not only got an experienced results-driven CFO but they also needed to have a deep understanding of commercial vehicles. The ideal candidate had to have a great appreciation for a franchise dealer network and be incredibly passionate about taking care of employees. Razvan checks all those boxes and more and I'm proud to have him on our team. We also recently hired Vijay Boova, our new Senior Vice President of Lean Transformation & Quality. We were lucky to find someone who practices a servant leadership philosophy and has spent his entire career living lean transformations and implementing world-class production systems. We look forward to the great contributions Vijay will make to our team. Overall, I am confident that we are putting in place the right team to lead Blue Bird into an exciting future and to fully capture the exceptional opportunities ahead of us. Slide 19 covers our three foundational objectives. My personal leadership philosophy is rooted in serving leadership. So for me, everything starts with our teammates. The three core objectives for our company are Care, Delight and Deliver. Care means taking care of our employees with the goal of truly creating a premier place to work in our sector. My team is laser-focused on ensuring the safety of our employees, raising their engagement level and…

Thank you. And at this time, we'll be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Eric Stine with Craig-Hallum. Please proceed with your question.

Hi, Matt. Hi, Razvan.

Hey, Eric, how are you?

Doing well, doing well. So maybe just wanted to start with the outlook a little bit, you talked about the first half being booked. I would assume that, that is booked in the context of what you've been allocated from suppliers. And I know we're already part of the way through the first quarter here. But is that something where there is the potential for that to improve? Or when you look at it, are you basically locked in for the first half? And then second half is where -- that's where maybe the variability in the guidance might come from?

Eric, yes, thank you for the question. So when we look at that first half, I mean, we're seeing some modest improvement in the supply base. We're trying to temper our excitement around that to make sure it's consistent. But at the same time, be prepared if the supply chain improves, we're prepared to take up volume accordingly.

Got it. So there is -- I mean, there is some, but it's still probably more second half. I mean, are you able to give some thoughts? I know you can't on the first quarter, but some thoughts on maybe a split between first half, second half, whether it's revenues or EBITDA?

So on the -- this is Razvan. On the volume side, as we mentioned previously, the volumes are relatively low, even by historical standards. And our business is seasonal with Q1 and Q2 usually being around 35% of the yearly volume. And due to the supply chain constraints, we see a similar picture this year in terms of units. So our volume for the first half will be around 30% to 35%.

Okay, that's helpful. Maybe just -- you mentioned some -- that you're seeing significant interest on the chassis side. I mean, I'm just wondering if you can provide any detail there, whether it's number of people you're talking to depth of conversations, anything along those lines would be helpful?

Yes. Eric, at this point, we're not going to comment on kind of the specific conversations. But as you know, the space, there's just a lot of interest in everyone from last-mile delivery vehicles to motor homes and all through that gamut of Class 5 through 7 vehicles. And we built a great chassis with a great aftermarkets important network and people realize that.

Got it. I mean is it still -- I know it's a little bit longer-term. I mean, is this something that we should think about as more of a fiscal '23 contributor rather than later this year?

Yes, correct. Fiscal '23.

Okay. Maybe last one for me and then I'll jump back into queue. But just curious, what has the reception been to the variable pricing? I know it's different than what the market has done in the past. I would think that others are kind of moving in this direction. Any pushback there? Or is it pretty well understood that that's kind of the new reality given what's going on in the supply chain with materials?

Yes. This is Razvan. We had a very good dialogue with our dealer network in our dealer meeting a couple of weeks ago where we introduced a new concept. And also the first signs from the market are positive. I think everybody understands that in the current inflationary environment, we cannot keep the old business model. It's just not sustainable. And we try to offer a balanced approach, whereby this applies to longer-term deals or high-volume deals, while still offering a shorter-term fixed price option in desire. So we try to offer the flexibility. Early signs are positive, but it's still a bit too early to tell how it's going to play out fully.

Got it. Thanks a lot.

Thank you, Eric.

And our next question comes from the line of Jon Lopez with Vertical Group. Please proceed with your question.

Hey, thanks very much. I have a couple of quickies, if I could. The first one, I just wanted to come back to the topic of inventory. I've obviously heard you guys talk about the constraints and the tightness. I don't think that's conceptually surprising, but your finished goods inventory has like doubled in two quarters and that does surprise me. Why is that?

So coming out of the -- on the previous fiscal year, we had a large amount of work in process or what I call almost finished goods. So these are buses which are almost finished that are missing a couple of parts, for example. So in that sense, we are working through a high level of inventory, whether it's raw work in process or this type of almost finished goods. As we receive parts from the key suppliers and the strike work is down, we expect a normalization towards the end of the fiscal 2022. However, additionally, we are having to pre-buy some of the key components, some of the major components, as we expect higher growth in the second half of fiscal '22 and for 2023. As you probably imagine, we are in allocation with some major component suppliers. So therefore, it's a combination of working down the inventory, but at the same time, ensuring supply stability for the major component.

I see. Okay. So sorry, just to clarify, it sounds like that finished goods line item is actually inclusive of some buses that like aren't technically finished. They're just -- they probably graduated past the WIP stage, but you're still waiting on a handful of components to actually make them shippable.

Jon, just for clarity, when it comes to finished goods, that delta that you're seeing GSA buses, they have a lengthy inspection process and we had much more through that time period than in the previous year. So that's the delta that you're seeing.

I see. Okay, that's helpful. The second, sorry, just nick-nack one. One of the things you guys add back in the non-GAAP EBITDA is product redesign charges. That went back up above $1.5 million. I think it was last that high in like late 2019. What's driving that line item back up? And is that expected to continue? Or is there some one-time stuff at work in there?

Yes, Jon, that's mostly timing. So those are things that -- with that project, those were kind of some of the last charges that will flow through that line. As you think about 2022, you'll see very, very minor numbers there. Just some of the last work that's being completed on our new engine launch.

Gotcha. Okay. Sorry. The last one, I guess I'm just wondering if you could help us think through the market. So if you look at the registration data for 2021, it looks like the market was down very slightly, like, couple of percent low single digits. Your deliveries dropped 25%. I know there's generally some variation in those numbers, like in terms of production versus deliveries. But how do we think about that conceptually a market that was sort of unchanged, your deliveries down as much as they were?

Yes, Jon, I'll take that first. Our registration data also was in line with the industry, right? So it hasn't caught up with the way that the supplier shortages timed out in the fourth quarter, it didn't really impact the year's registrations. So you'll see that as we go into fiscal '22 with the lag that happens between bookings and registrations.

Got you, understood. Sorry. But just conceptually, does that mean -- like is the registration data then going to pull a big header in FY '22 kind of market-wide?

We expect that the other key competitors also are having supply chain constraints in the Q4 of fiscal '21. So therefore, we expect a decline across the board. Now to what extent each one was impacted, it's yet to be seen.

Okay, understood. Thanks very much for the thoughts.

Thank you, Jon.

[Operator Instructions] And it looks like we have reached the end of the question-and-answer session. And I'll turn the call back over to President and CEO, Matthew Stevenson for closing remarks.

All right. Thank you, Shamali and thank you to all those joining us on the call today. We appreciate your continued interest in Blue Bird and look forward to updating you again on our progress next quarter. As you can see, the demand for school buses is strong. And with the tailwind of the $5 billion in the infrastructure bill for environmentally friendly school buses in which we are the leader, our intermediate outlook is incredibly positive. While we face the temporary supply chain issues, we are focused on improving our operations, growing our margins and driving leadership in our alternative power as well as scaling up our electric vehicle and chassis business. I'd like to give special recognition to our incredible employees for their commitment and dedication to Blue Bird this past year. Now should you have any follow-up questions, please don't hesitate to contact our Head of Profitability and Investor Relations, Mark Benfield. Thank you again from all of us at Blue Bird and have a great evening and a wonderful and safe holiday season. Thank you.

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