Greetings. Welcome to the Blue Bird Corporation Fiscal 2022 First 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 will now turn the conference over to your host, Mark Benfield, Head of Investor Relations. You may begin.

Thank you, and welcome to Blue Bird's fiscal 2022 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 the 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 and in our latest 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, Matthew Stevenson; and CFO, Razvan Radulescu. Then we will take some questions. Let's get started. Matt?

All right. Thank you, Mark, and good afternoon, everyone. The first quarter of our fiscal year 2022 was filled with a lot of activity centered around strong demand and navigating to see a supply chain disruptions. It was also the first quarter that Razvan and I were in our respective roles. As I assumed the role of CEO on November 1, and Razvan became CFO on October 1. On Slide 6, you can see the demand for our products is now at pre-COVID levels. Our order intake for Q1 was up 18% year-over-year, supporting a record backlog of roughly $500 million. We believe there is a lot of pent-up demand out there as evidenced by the fact our dealer inventories are down 50% compared to this time last year. We are making adjustments in our operations for the second half to support higher build levels to maximize all the production our supply base can support. We would have loved to produce more buses in the first quarter, but we had a critical electrical component, sole source from a supplier that had a limited availability of microprocessors. Their inability to supply us negatively impacted our production rate and bookings. We have since engineered a second source for this critical component as well as the original supplier has improved its chip allocation. We are constantly driving engineering projects to create deviations and resource parts that are limiting production. Late in this quarter, we also saw disruptions in the supply chain driven by the Omicron variant of COVID. As we discussed during our last earnings call, the first half of this year's production is primarily comprised of units that should have been produced in fiscal year 2021, if we had access to the volume of components needed to support our production demand. Instead,…

Thanks, Matt, and good afternoon. It is my pleasure to share with you the financial highlights from Blue Bird's fiscal 2022 first quarter results. The quarter end is based on a close date of January 1, 2022, whereas the prior year was based on a January 2, 2021, close date. We will file the 10-Q today, February 9 after the market closes. Our 10-Q 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 includes reconciliations of differences between GAAP and non-GAAP measures mentioned on this call as well as important disclaimers. Slide 9 is a summary of first quarter results for fiscal 2022 and fiscal 2021. It was a very tough quarter for Blue Bird 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 continue to rise during the entire calendar year 2021, especially still up approximately 300% and aluminum up approximately 150%. The cost of overseas transportation increased nearly tenfold. Blue Bird's unit sales volume of 1,149 units was 106 units lower than prior year due to supplier constraints that limited our rate of production. Supply issues were experienced for multiple components across a number of suppliers. While the disruptions continue to impact our business through the quarter, our team has been working hard to find alternative sources for several critical parts that are constrained. In addition, Blue Bird had a backlog of over 4,800 units at quarter end or 3,700 more than at the end of the first quarter of fiscal 2021. Our definition of backlog unit is a firm order,…

Thank you, Razvan. I would now like to walk through progress on our key focus areas for fiscal 2022. Just as a reminder, on Slide 16, you can see our three foundational objectives. The first is to take care of our employees. The second is to delight our customers and dealers and the third is to deliver profitable growth. Around each of those, you can see the key metrics we track in the business. With those foundational objectives in mind, we are focused on four key areas for fiscal year 2022. The first area is our people, making Blue Bird a premier place to work, better engaging our workforce and creating an inviting environment where all our employees look forward to the opportunity to share their passion and ideas. The ultimate goals are to improve our cost and quality and reduce absenteeism and attrition. The second major focus area is on lean transformation, taking the production of Blue Bird school buses to the next level, building the foundation to implement a world-class operating system that drives our cost, improves quality, increases throughput and improves the working environment for our teammates. The third area is to expand our total addressable market. Now school buses will always be core. Yet there are some markets that take a chassis so similar to our school bus that I would call them an extension of our core competency of building great chassis rather than a market adjacency. We have excess chassis capacity, and these additional segments can help absorb overhead, offset the seasonality of the school bus business and assist us in retaining a more consistent workforce. Our final major focus area is scaling up EV. As we discussed extensively during our last earnings call, the EV market demand is heating up, and we have…

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Craig Irwin with ROTH Capital Partners. Please proceed with your question.

Hi. Good evening, gentlemen. Thanks for taking my questions. So…

Hey, Craig. How are you doing?

I'm great. So margins were actually pretty impressive given the headwinds out there, up, what, 575 basis points sequentially. Can you maybe talk us through a little bit more about what allowed you to get those margins in the quarter? I know total price is now 11% plus 4%. So that's a pretty good amount of price to put through. But what were the items that allowed you to see this short-term benefit? I mean that's a big step-up sequentially, and it was even a step-up versus last year?

Yes, Craig, thank you for the question. So on the margin side, we have a couple of elements going on. First of all, we have a higher mix of parts business relative to the bus business in this quarter versus a year ago. And as you know, the margin on the parts side is higher than on the bus side. So that mix is a favorable effect. Secondly, we managed to postpone some of the increases from our suppliers into the second half of this fiscal year. So we were able to be a little bit more favorable on that front as well. Third, we have a favorable mix from our alternative power buses that have relatively favorable margins compared to diesel as well. And we also start to see more and more EV vehicles into the mix. So between all of these factors, I think that is why our margins have been – gone up. But as I mentioned in our – it is mentioned in our 10-Q, we have one additional effect on the inventory revaluation, and it was also in the presentation earlier on. So we did get a onetime positive benefit from the inventory reval. We updated the standard cost at the beginning of October, and that gives us a onetime bump, reducing the unfavorable variances.

Just to add to that, Craig, you had mentioned the 11% in pricing. We won't see that in the units in the first half of our year. That starts to come in, in the back half.

Understood. So then you guys obviously did a really good job on expense control as well. But if we flatten out the impact of accelerated investing for executives that left, right, you're up about $2.5 million year-over-year. Can you maybe talk about what's going on with SG&A? You did mention a couple of times things you're doing for the employees and retention. But is there anything that's going to sort of structurally move this over the next couple of quarters?

Yes, I will take that question as well. Thank you. The baseline, the comparison to one year ago, it's extraordinarily low. If you remember, at that point in time, we had furloughs and we had pay cuts, and this is not a sustainable level for our business. So you have a couple of effects once we had to restore the pay to the normal levels. And in addition, we had to increase our pay for all the employees due to the inflation experienced in the economy and going forward to ensure we are competitive in the marketplace and retained our talent. So these are the two main items, I would say. In addition, we had a dealer meeting, which was canceled two years prior, and we had to take the opportunity to engage with our dealer network and align them and get them excited about the future.

Understood. So then if we could talk just a little bit about gross margins looking forward. I know you're careful about potentially giving guidance. But if we flatten the inventory revaluation impact, the benefit in the quarter, would you expect margins to continue to see a little bit of sequential pressure given the deliveries book? Or do you expect the deliveries to be incrementally favorable over the next few months?

So definitely, for the second quarter, we expect increased margin pressure because, as we mentioned in the presentation early on, we have many price increases from our suppliers becoming effective January 1, 2022. And we are still working through many units in the backlog that have prices set six to 12 months ago. So the pressure will be higher on the Q2 margins and they expect gradual improvement into Q3 and more favorable margins into Q4 fiscal 2022.

Great, thanks. I'll hop back in the queue and take my questions offline. Thank you.

All right. Thank you, Craig.

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

Hi, everyone.

Hey, Eric. Good afternoon.

Thanks, good afternoon. So I believe last quarter, you specifically called out approximately, I think, 25 parts kind of on average per bus that were causing you issues. And great to hear that you've got the one – you called out one primary where you've got a second supplier, but curious kind of as you think about those other main components, progress you're making in your presentation, you did call out that you are in the process of qualifying second suppliers and if needed, third suppliers. But would love to just hear details beyond the primary one that you called out earlier in the call.

Yes, absolutely. So just in general, to the point you brought up, like the previous quarter, we were averaging 25 plus parts a day missing. And so as I mentioned in my remarks, we have seen some material improvement of that. We're about, I'd say, 15% on average per production day, but it only takes one long pole in the tent to prevent us from setting up that chassis. So it continues to be a daily game of whack-a-mole, but we are seeing improvements and we're starting to extend further up in the supply chain to kind of look around corner, so to speak, to catch issues before they become impactful to our production. And in regards to that one component that I mentioned specifically on the call, that was an electrical component relative to our antilock braking system, and that supplier has improved their microprocessor allocation now where they're meeting our daily demand. And also, we have a Plan B should be needed that we have another supplier ready to go, so that way we're not going to lose production slots.

And if I may add, on the inventory side, we are also taking actions to pre-buy certain key components to ensure we have a little bit of safety stock or buffer so that we can react faster in case some of the shortages happen unexpectedly.

Got it. That makes sense. Maybe just to clarify, so it sounds like as you think about the cadence of the quarters here in the fiscal year that really it's going to be very weighted to the fourth quarter. And maybe I imagine this from the last quarter, but it did seem like last quarter, you thought it would be more of a 3Q, 4Q event. I mean is it fair to say that you're trying to be a little bit more cautious on that because while you're making progress, there are still issues? Or would you kind of view that view of recovery and that it's really time in the fourth quarter is basically unchanged versus last quarter?

Yes. Eric, if you're talking with regards to supply chain, I think we're just being cautiously optimistic, right? We've seen, as I mentioned, a material improvement from 25 to 15 parts per day. And if you're talking relative to pricing, we have this first half of the year where we don't have really any of that impact of 11%, and we gradually start to pick that up through the third quarter and then, of course, in the fourth, we start to fully realize that. And then we'll pick up some units, but it will be marginal relative to that additional 4% we just announced.

Okay. All right. Now that makes sense. Maybe a good segue to the pricing. I know you did last quarter kind of unveiled the variable price model. But I know you're also obviously increasing prices for the fixed price option. Just curious kind of what you're hearing from your dealers, what's going into that decision, given all the moving parts?

Yes. Thank you for the question. So we introduced the concept of the variable pricing at dealer network at the end of last year, and they put it in effect early this year. The initial reaction is positive. So some dealer appreciated the opportunity to have a locked fixed price. And some appreciate the opportunity to have a bit more flexibility into the future. It's a bit early to call it. So I think we need a couple more months to have a more statistical relevant base, let's say. But overall, I would say the message was clearly understood by our dealer network, and it's something that we absolutely have to do in order to align the equation on the pricing and costing given the current inflationary environment.

Okay. I will take the rest offline. Thanks.

All right. Thank you, Eric.

We have reached the end of the question-and-answer session, and I will now turn the call over to Matthew Stevenson for closing remarks.

All right. Thank you, Kyle, and thank you to all those joining us on the call today. As you heard during our prepared remarks, incoming orders for our school buses continue to trend at pre-COVID levels and our backlog is at a record $500 million, and we are continuing our dominance in alternative power buses. Plus we are making progress on our key focus areas, improving the workplace for our teammates, transforming our processes, scaling operations for the growth in EV and expanding our total addressable market. The supply chain disruptions we have seen over the last few quarters appear to be moderating, and we expect recovery to support ramping up production significantly in the second half of this fiscal year. We look forward to updating you again on our progress next quarter and appreciate your continued interest in Blue Bird. Should you have any follow-up questions, please don't hesitate to contact our Head of Profitability and Investor Relations, Mark Benfield. And thank you, again, from all of us here at Blue Bird.

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