Hello, everyone and a warm welcome to the Blue Bird Corporation Fiscal 2023 Second Quarter Earnings Call. My name is Emily and I'll be coordinating your call today. [Operator Instructions] I will now turn the call over to our host, Mark Benfield, Head of Investor Relations at Blue Bird Corporation. Please go ahead.

Thank you. And welcome to Blue Bird's fiscal 2023 second 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 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, Matthew Stevenson; and CFO, Razvan Radulescu. Then we will take some questions. Let's get started. Matt?

Thank you, Mark and good afternoon everyone. Razvan and I are extremely excited to update you on our results for quarter two which was probably the most pivotal quarter for the company in years and begins to highlight the real potential of our business. This quarter we're going to show a 180-degree turn in our financials as we've been forecasting for some time. I'm pleased to say that we not only delivered as promised, but once again delivered results ahead of schedule a testament to the hard work that our teammates have been doing every day. On side 6 you can see some of the key takeaways for the quarter. Overall, industry demand continues to be robust and the backlog for Blue Bird school buses is at nearly 5800 units. We are now through most of the legacy priced buses in our backlog. As a reminder, we define these legacy priced units as those at price levels prior to October of 2021. This along with operational improvements drove the significant inflection in our financials. We also reinvested back into the business putting in over $3 million in wage increases for our frontline teammates this year starting this quarter, while continuing to improve processes throughout our operations upgrading our facilities and even opening an all-new EV center, which we will talk about in detail during the call. Through the efforts of the best workforce in the business, strong leadership, lean process improvements and just playing hardcore tenacity we are seeing some of the best performance the company has ever seen in a second quarter. And let us not forget the EPA's fantastic Clean School Bus Program that recently closed its first phase and announced its direction for Phase 2. The success of this program has led to a staggering number of…

Thanks, Matt. And good afternoon. It's my pleasure to share with you the financial highlights from Blue Bird's fiscal 2023 second quarter results. The quarter end is based on a close date of April 1, 2023 whereas the prior year was based on a close date of April 2, 2022. We will file the 10-Q today May 11, 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 14 is a summary of the second quarter and year-to-date results for fiscal 2023. It was an excellent operating quarter for Blue Bird with somewhat reduced supply chain disruptions and with an increased number of higher-margin units driving both our top line and our bottom line results. We have exceeded the revenues and adjusted EBITDA of our conservative quarterly guidance provided in the last earnings call, and in fact, we delivered the Q4 expected results two quarters earlier. The team has done a fantastic job and generated 2,304 unit sales volume, which was 373 units or 19% higher than prior year. Consolidated net revenue of $300 million was $92 million or 44% higher than prior year driven by higher units, higher parts sales, improved mix of electric buses and pricing actions that took hold significantly in this quarter. The adjusted free cash flow was positive at $23 million and $2 million higher than the prior year second quarter. This outstanding performance was driven by the increased profitability combined with strong working capital management; and supports our great liquidity position at the end of this quarter, which…

All right. Thank you, Razvan. On to slide 24, as detailed in the fiscal year 2023 guidance that Razvan just walked through, we are again now raising guidance based on the strong performance of the business. All the hard work the Blue Bird team has put in for nearly two years is paying off. We plan on booking at least 8,350 units, a 22% increase over fiscal year 2022 and driving a top line of $1.1 billion. That's a 37% increase year-over-year. Parts sales will be ahead of plan, delivering at least $88 million in revenue, up 15%. We now expect the adjusted EBITDA performance to be approximately $60 million up nearly fivefold compared to fiscal year 2022. EV bookings continue to be on plan. And we expect those to more than double year-over-year. Now there have been no significant changes in the ACT Retail Sales forecast for fiscal year 2023. It continues to be supply chain constrained across the industry. And our targeted bookings will put us right where we want to be, around that 30% market share. As other industries are slowing down, we are just heating up with incredible demand in front of us. As we have touched on in past calls, industry retail sales have been off from their average of 32,000 units per year for the past three years in a row. And the national school bus fleet is aging. The market was first constrained by COVID and school closures and it has been held up more recently by the supply chain. This aging fleet must be replaced. And we expect substantially robust years ahead of us to address this pent-up demand. ACT is forecasting a compound annual growth rate of 10% from our fiscal year 2023 through our fiscal year 2027. Our business is…

Thank you. [Operator Instructions] The first question today comes from the line of Eric Stine with Craig-Hallum. Eric, please go ahead.

Hi, everyone. Great to see the results.

Thank you, Eric. Appreciate it.

Just curious – yeah, yeah. And just curious, I mean, obviously supply chain is still an issue. Seeing it ease a little bit, I mean, I guess, I'll start with probably a near-impossible question to answer but I mean is there -- do you have any thoughts about this kind of seeing the light at the end of the tunnel, or is this kind of a new norm? It's just going to drag on and it's something you're expecting to have to deal with yes for a long time.

Yes thanks for the question Eric. This is Matt Stevenson. I mean, we definitely are seeing some improvements. And some of it is moderating but there still is volatility in the supply chain; and really it isn't one specific component. It's kind of across the board. Of course, as you know, we use the same set of suppliers the commercial truck industry uses. And that industry is still going pretty strong. And most of the challenges reside around our Tier 1s and Tier 2s getting frontline labor. So we as a team have just gotten a lot better dealing with it so we remain optimistic on our ability to continue to deliver.

I guess, kind of a follow-up on that, if I look back think back a couple of years. I mean, the norm was certainly not to carry this much backlog which obviously is related to the supply chain. I mean, do you envision a scenario where -- if you'd play this out a while that you'd kind of catch up and you will get back to more normal levels, or again, I mean is this -- do you kind of think that this is the norm where you've got this elevated level of backlog? Which I mean I guess is a good problem to have but it would also be nice to be able to work that down.

Yeah. Based on sort of pent-up demand that we reviewed there and what ACT is forecasting and a lot of robust years in front of us, we expect to still have a healthy backlog. We of course monitor the situation weekly if not daily in terms of our ability to ramp up production, but we continue to be conservative and ramping up our production to make sure we're watching all of inbound material and getting buses out the door.

And do you feel -- I mean, obviously, you're almost through the low-price backlog and you're putting through the price increases for fiscal 2024. Do you feel like I mean the market is basically conditioned for that? I mean, are you sensing any pushback? I know steel prices have started to turn higher again. I mean, what's your thought on price going forward?

Eric, this is Razvan. Thank you for the question. We are monitoring carefully the cost development. And as long as there is still inflationary pressure whether it's from labor costs or steel prices going back up, we will consider pricing actions to offset for these upcoming increasing costs. So it's a bit too early to know very long term how the situation will develop, but at least for fiscal 2024 we took the first step in order to cover for these inflationary costs.

Yes. Okay. That's great. I'll take the rest offline. Thanks.

Thank you, Eric.

Our next question comes from Mike Shlisky with D.A. Davidson. Mike, please go ahead.

Hell, good afternoon. Thanks for taking my questions. I guess, I wanted to ask first about some comments you made on EV Matt and the EPA awards. I guess, I'm -- some of your comments around for example the 2022 awards. You mentioned you're getting at least 500 out of the full amount. And for the 2023 awards that are already out there so far you think you can get about 200. And it just sounded like that's below the historical 30% share you had on the overall school bus market, so could you comment on what might be driving your market share there, or is it just conceptionism or just like rounding? I'm just kind of curious whether you all confident you can actually match or beat your share on EVs that you have on the overall bus market?

Hey, Mike in -- this is Matt. Thank you for the question. Really it's just our conservative nature much like you'd probably recall on the first phase of the program the 2022 program we said 500 to 700. We're just taking a very conservative approach here when we look at the 2023 grant -- or the grant program for Phase 2. And that has a reduced amount of money. That's anticipated to be only $400 million versus the roughly $1 billion that was in the first phase, but still again, it's really just the conservative nature of our approach. And our target is to go after and get at least that 30% or more, but for these purposes we say 200 or more.

Great. Can you guys hear me okay?

Yes.

Yeah, we got you Mike.

Great. Sorry. Next question, I want to ask about, kind of, the last two weeks we had an announcement out in California an advanced clean fleet rule where private fleets of all types and that includes buses have to be 10% EV by the end of next year. I assume that it includes school buses because you confirmed that one. And maybe secondly, you have a lot of private fleets that you work with in California, or is it almost all public over there at this point?

Mike that does include school buses. And we do have some private fleets that we work with in California. And that market was one of the first movers on EV. So we don't see that being difficult for the customers or that market out there just given how they had first-mover advantage in putting EVs in for well over -- or close to five years now.

Great. And just as a quick follow-up there. I think in your comments you had mentioned the coming non-bus products the Class 5-6 stripped chassis. I'm curious, if you can give us an update as to some of the time lines specific there, because obviously there's a big opportunity coming in California; and possibly 12, 13 and 14 other states. Curious if you'll have something that could be sellable by the first part of next calendar year?

Our goal Mike as we've stated previously is to have prototypes by the end of this calendar year on the road. And so that's where our focus is right now.

Okay, sure. Appreciate that. I’ll pass it along. Thank you.

Thanks Mike.

[Operator Instructions] Our next question comes from Craig Irwin with ROTH MKM. Craig, please go ahead.

Good evening. Thanks for taking my question. So first congratulations on the solid results. It's really nice to see that pricing working so well for you guys. Slide 11 where you gave some details about the 2022 lottery results: It's nice to see you guys tracking this very, very closely. I wanted to just dig in if we can a little bit on these 1,200 unallocated units. Can you talk about the different parties that maybe received these vouchers when they needed to place their orders by and whether or not any of them actually have prior experience with Blue Bird and the alternative fuels markets, and whether or not there is a potential for some of these to land as customers for Blue Bird and obviously the mechanics of how they need to issue those RFPs and ink the necessary contracts to book that -- for you to book that as an order?

Thank you for the question Craig. It's Matt Stevenson. So on that graph on 11, you see that kind of top right corner is approximately that 500 to 700 of ones we either had a hand in and directly working with our dealers and the customers on applying for the rebate or were loyal Blue Bird customers or channel partners. So that is there on that top right. And then relative to your specific question on those 1,200 that are unallocated, we've worked with a number of customers there to target those rebates. One of the things that we have found and we have a few customers that did this as well is they submitted for an extension, some of them 60 days, some of them 90 days as they're waiting for the final quotes to their infrastructure, because the infrastructure and the buses have been submitted together. So we're still hopeful there's opportunity on those unallocated ones as well. And there's still a lot left up for grabs here over the next 30 to 60 days.

Okay, excellent. So if I could ask another question related to the EPA vouchers. Last year, they started off saying that they were going to do $500 million. The chatter that we were getting from talking to a bunch of people at ACT Expo was it could be increased to $750 million. Some people are saying it could be increased to $1 billion; and then lo and behold they gave us just under $1 billion in vouchers, which was a fantastic move. The official number is $400 million. We were hearing potential that this could be upped, but would you be surprised if EPA maybe went to a bigger voucher at least this year and maybe did more than those 25 to 50 awards and we saw materially more than $400 million in vouchers issued?

Yes, Craig. I mean, that's quite possible. I mean the -- well the EPA, we think has done a great job with this program. And I think if they get a lot of high-quality applications here, that can be quite possible that they up that amount. And we're also -- there's potential for more of a rebate program for that other roughly half of the $1 billion per year that they're allocating for this year. So, we just stay in close contact with the EPA and work closely with our dealers and customers in anticipation of what may happen.

Got it. Got it. And then, as we look sort of out on the horizon, you've had 22% price. You did put through 25% with your new price increase of $2,500 for fiscal '24. It looks like we'll be back to pretty much normalized margins. What do you see as the biggest risk to gross margin and cash flow outside of the steel items that you identified in your presentation and on the call?

Hi Craig, this is Razvan. I will take this question. So, we addressed a lot of levers on the pricing side as far as the -- derisking the margin profile going forward for the quotes that we have out there. And there is, as you mentioned some uptick risk on raw material prices; and we are controlling that as well to the -- in the best way possible. So, I think in terms of margins, we have pretty good visibility on the backlog and the -- probably the short to mid-term horizon. And we are going to watch closely and take another appropriate pricing measure, if it's necessary at the right point in time.

Got it. Got it. That makes complete sense. All right, I'll take the rest of my questions offline. Congratulations on the progress here. We look forward to a successful execution on President Biden's priority on EV school bus.

All right. Thank you Craig. We appreciate it.

At this time, we have no further questions registered. So I'll turn the call back over to Matthew Stevenson for closing remarks.

All right. Thank you, Emily. And thank you to all those joining us on the call today. As you heard during our prepared remarks, Blue Bird is in a great position with extremely positive momentum. Through massive improvements in how we operate this business across the board, we closed Q2 with record revenue and adjusted EBITDA and have again raised our full year guidance. As we have forecasted for nearly a year, the Clean School Bus Program is generating meaningful orders for us, and has produced a large backlog of EVs. To capitalize on this demand, we recently opened our new EV center to fuel our growth now and into the future. And we are doing all this, while investing back in our most important asset, our teammates. For nearly two years, we have focused on our first pillar, taking care of teammates. We did this through increasing communication, transparency, leadership visibility on the floor, and listening more, all while making facility improvements and increasing wages and benefits. We are reinvigorating our frontline teammates. The future is electric for Blue Bird in more ways than one. Should you have any follow-up questions, please do not hesitate to contact our Head of Investor Relations, Mark Benfield. Thank you, again, for your time and we look forward to updating you on the continued progress of Blue Bird next quarter. Have a great evening.

Thank you, everyone for joining us today. This concludes our call and you may now disconnect your lines.