Blue Bird Corporation
Q4 2020 Earnings Call Transcript

Published: 16 Dec 2020

[Operator:]

Greetings, and welcome to Blue Bird Corporation Fiscal 2020 Fourth Quarter and Full-Year Earnings Conference Call. At this time, al participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Benfield. Thank you, Mark. You may begin.

[Mark Benfield:]

Thank you. Welcome to Blue Bird's fiscal 2020 fourth 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.

[Phil Horlock:]

Thanks, Mark. Well, good afternoon, and thank you all for joining us today for our fourth quarter and full-year earnings call for fiscal 2020. Before I jump into our financial results, I'd like to give an assessment of how I see our business environment today and particularly the outlook for the school bus industry. So let's turn to Slide 4. Not surprisingly, the fourth quarter was a challenging one as we entered our second quarter of dealing with the COVID-19 pandemic. But as you'll see, we continue to improve our business structure. And while significant, the impact of the pandemic on our fourth quarter results was less severe than we experienced in the third quarter, and we are seeing positive signs that the industry recovery is on the horizon. Nonetheless, we have to deal with some significant challenges. About 50% of schools chose online teaching over classroom teaching and a significant portion of the balance like the hybrid program alternated between online and classroom teaching. This approach was deployed throughout the fourth quarter and was largely in place at the start of the new school year. However, 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. Consequently, with uncertainty over in classroom teaching, our new order intake in support of school start was slow and this was seen in our unit sales for this quarter, which were down 23% from a year ago. I believe this was a significant sales decline. It was considerably lower than the 43% reduction we saw in the third quarter. In fact, fourth quarter sales were nearly 50% higher than what we achieved in the third quarter. So the pace of decline was significantly lower than we saw in the third quarter. Our school, thus, has begun to deal with the pandemic and refocused on their school bus needs. On the supply chain front, while we did experience some late parts and shortages, this did not cause interruption of production and overall material supply was significantly better and more consistent than in the prior quarter. The outcome of all these factors is a full-year industry estimate of 28,500 school buses, reflecting new vehicle registrations compiled by R.L. Polk.

[Jeff Taylor:]

Thanks, Phil, and good afternoon. It's my pleasure to share with you the financial highlights from Blue Bird's fourth quarter and full year 2020. The quarter and year-end are based on a close date of October 3, 2020, whereas the prior year was based on a September 28, 2019 close date. We are filing the 10-K tomorrow, December 17, which 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. The appendix attached in today's presentation reconciles differences between GAAP and non-GAAP measures mentioned on this call as well as important disclaimers already mentioned by Mark. With that, please refer to Slide 10, and I will review the key results for the fourth quarter. Overall, it was a strong quarter for Blue Bird, especially considering the challenging operating environment due to the global pandemic. Let me say, first and foremost, our number one priority was and will continue to be protecting the health and safety of our employees. While operating conditions were tough, they improved significantly over the third quarter as supply shortages and disruptions lessened in the fourth quarter, and we maintained production without any unplanned plant shutdowns. Furthermore, as we discussed on our third quarter earnings call, we implemented additional cost control measures in the fourth quarter with the goal of protecting the balance sheet and liquidity while preserving the ability to recover quickly when schools reopen and school bus demand returns to pre-pandemic levels. Fourth quarter volume of 2,876 units was down 23% compared to the prior year period and lower industry volumes due to the COVID pandemic. However, it increased 48% sequentially as expected and consistent with our guidance. Net revenue of $281 million was $62 million or 18% lower year-over-year for the quarter. Bus net revenue of $269 million was down $57 million on lower volume. Bus average selling price or ASP, was $93,400 per unit, a year-over-year increase of $5,900 per unit due to pricing increases to offset inflationary cost pressures and favorable product mix, including strong growth in electric buses. Parts revenue for the quarter was $12.9 million, representing a decrease of $4.9 million as a portion of maintenance facilities were shut down due to the virus. However, parts revenue increased sequentially by $4.3 million or 50%. Gross margin was 10.5%, about 310 basis points lower than the prior year period. The decline in margin in the fourth quarter was almost entirely the result of lower efficiency due to lower volume and higher costs associated with COVID. Selling, general and administrative, or SG&A, was $16.1 million, which was down $12.1 million on reduced spending and cost control actions in our management and engineering areas. As discussed last quarter, we are targeting $15 million of annualized cost reductions and we are delivering on that commitment. GAAP net income of $11.9 million in the fourth quarter was $0.3 million higher than the prior year period. On an adjusted basis, net income was $13.3 million, down $6.7 million versus last year. Adjusted EBITDA of $21.9 million was strong, but down by $11.5 million compared to the prior year quarter which I will cover in more detail on the next slide. However, the operations group executed very well to deliver this solid fourth quarter result. Our adjusted EBITDA margin was 8%, a decrease of approximately 190 basis points. Diluted earnings per share of $0.44 was $0.01 better than the prior year, consistent with our GAAP net income as our number of diluted shares outstanding was essentially unchanged. Weighted average diluted shares were $27 million during the fourth quarter versus $26.9 million in the same period last year. Fourth quarter adjusted diluted earnings per share at $0.49 were $0.25 lower than the prior year, consistent with adjusted net income. Liquidity was approximately $180 million on October 3rd as our revolver was fully paid down from the third quarter. Note that quarter end liquidity was prior to the third amendment on our credit agreement, which I'll cover momentarily. Looking at the fourth quarter adjusted EBITDA bridge year-over-year bridge on Slide 11. Starting on the left of the chart, lower bus volume of 850 units, partially offset by mix and lower freight and warranty expense decreased adjusted EBITDA by $11.6 million. Pricing and transformational initiatives, such as strategic sourcing, added $8 million. Lastly, higher manufacturing costs due to lower efficiency and COVID specific costs, partially offset by lower SG&A expense, lowered adjusted EBITDA by $7.9 million resulting in the quarter of $21.9 million. Sequentially, adjusted EBITDA was up by $9.4 million on higher unit volume of 928, higher manufacturing efficiencies from running a single shift operation and cost control initiatives, which impacted the quarter. Slide 12 is a summary of our full year 2020 results. Overall, the 2020 year was a tale of two halves. The first half of the year started exceptionally strong with financial results higher year-over-year. And the second half of the year was negatively impacted by school closures and lower school bus demand resulting from the COVID pandemic. Full year net revenue of $879 million was down $140 million or 13.7%. Bus net revenue of $823 million was down $130 million, driven by lower volume of 2,139 units. Bus net revenue per unit, however, was 92,700, which represented a 6,200 per unit increase from the prior year due to price increases to offset inflationary cost pressures and favorable product mix including a strong year-over-year growth in electric buses, as Phil mentioned. Parts revenue for the year was $57 million, representing a decrease of $10 million. And some maintenance facilities were shut down either partially or entirely during 2022 due to schools not operating and normal schedule. Full year gross margin of 10.9%, about 220 basis points lower than the prior year. The deterioration in margin in 2020 was almost entirely the result of two items. First, onetime launch costs incurred in the first half of fiscal 2020; and second, and more notably, the impact of inefficiencies on our plant caused by COVID related items. COVID impact included a three-week unplanned shutdown, lost absorption from lower volume, supplier disruptions, higher labor costs from overtime and absenteeism and additional costs related to employee safety that we took in response to COVID. GAAP net income of $12 million in fiscal 2020 was $12 million lower than the prior year. Adjusted net income of $22.1 million was lower by $21.3 million year-over-year, largely due to lower gross profit for the year. Adjusted EBITDA of $55 million was down by $27 million compared to the prior year, which I will cover in more detail on the next slide. The EBITDA margin was 6.2%, a decrease of 180 basis points. Diluted EPS of $0.45 was $0.45 lower than the prior year, consistent with the year-over-year decline in net income. And full year adjusted diluted EPS at $0.82 and was $0.79 below the prior year, once again, consistent with the year-over-year decline in adjusted net income. Weighted average diluted shares were $27.1 million versus $27 million last year. Slide 13 shows the year-over-year change in adjusted EBITDA from 2019 to 2020. Starting on the left of the chart, lower volume of 2,139 units partially offset by favorable mix and lower freight and warranty expense decreased adjusted EBITDA by $24.9 million. Pricing and transformational initiatives combined added $20.1 million. And lastly, higher manufacturing costs were driven by impacts from COVID on operating leverage and efficiency as well as launch costs partially offset by lower SG&A expense, decreased adjusted EBITDA by $22.3 million resulting in the full year of $54.7 million. Moving on to free cash flow Slide 14, this table shows both fourth quarter and full year free cash flow in addition to adjusted free cash flow. The fourth quarter is normally a seasonally strong quarter for free cash flow due to the lowering of working capital in 2020 was no exception. I am very pleased to report that fourth quarter adjusted free cash flow was $81.3 million, driven by a $68 million reduction in working capital, largely inventory. While free cash flow was $79.6 million, as I mentioned on the third quarter call, we launched a cash conservation initiative to capture $40 million of cash by year-end, and we were successful. For the full year, adjusted free cash flow was just below breakeven and negative $0.9 million and free cash flow was negative $15.5 million. While our overall free cash flow for the year was negative, I am very pleased with the actions we took to minimize our cash use in 2020. Looking at net debt, leverage and liquidity. Net debt of $129.6 million was $17.4 million higher versus the prior year due to less cash on the balance sheet. Our net leverage ratio for the fourth quarter and year-end was 3.1 times, which was still meaningfully below the net leverage ratio covenant of less than 3.7 times in our credit agreement prior to the third amendment we announced on December 9. With our business entering the seasonally slow period and the COVID pandemic expected to persist into 2021, we felt it was prudent to seek covenant relief for our fiscal 2021 in the first half of 2022. During the relief period in fiscal 2021, the net leverage covenant is removed and replaced with a trailing 12-month EBITDA test measured quarterly and a liquidity test measured monthly. In fiscal '22, the net leverage ratio covenant is reinstituted at four times during the first two quarters. Also, our revolver availability is limited to $100 million during the relief period, along with other conditions, which are described in the 8-K that we filed on December 9. Liquidity was $179.5 million at year-end, and we have fully paid down the revolver balance since the end of the third quarter. Since completing the Credit Agreement amendment, the revolver has remained unutilized and our liquidity has remained strong. We are continuing our cost control initiatives to further protect our cash and liquidity into the foreseeable future. In conclusion, the fourth quarter was a strong finish to a tough year. The Company acted quickly and decisively to contain cost when the pandemic hit, and the results of our actions are evident. We adjusted our operations to a single shift, lowering our manufacturing cost and flexed up inventory early to protect our production plans, but flexed down later when supply stabilized in order to recover the working capital. We amended our credit agreement to provide flexibility with the covenant structure and protect liquidity. We continue to execute our margin growth strategy. And finally, there are positive trends regarding the COVID vaccine which should allow schools to reopen for a fall 2021 school start, if not sooner. So while the first half of 2021 will still be impacted by COVID, we are optimistic that the recovery will begin sometime in the second half. I will now turn the discussion back to Phil Horlock, who will describe the outlook for 2021 and give his closing remarks.

[Phil Horlock:]

Thanks, Jeff. So let me now summarize the outlook that we see for both our operating performance and the school bus industry, which are the basis for our fiscal 2021 guidance. Turning to Slide 17. Our focus at Blue Bird is on delivering superior operating performance. We can't change the industry outcome this year, but we can focus on improving every element of our business so that we are 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 fuel mix and cost structure. An example of a structural change that drives superior operating performance was our move to a single-ship production schedule in June. 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. It's proven and a fact. The next step for us was to break specific plant bottlenecks, which we started during our October shutdown and will complete in our December holiday shutdown. So from early 2021, we will be able to build as many units on one shift that we used to build on two shifts in straight time. Now that's a smart move. 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 in the classroom, school bus needed to transport children safely, and we see orders for new buses. The positive recent developments in COVID vaccine distribution and President-elect Biden's 100-day gold to open schools should impact the school bus industry favorably. Additionally, with 25% of the 600,000 unit 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 industry rebounds, but a question of when? And we expect to see improvements later in fiscal 2021 in support of the new school start. The most recent external forecast by ACT is for an industry of 29,000 buses in fiscal 2021, similar to fiscal 2020. Now this can be significantly influenced by the external initiatives that I just covered. Now with so much uncertainty and speculation on when schools will fully resume in classroom teaching, we believe it prudent to provide a wide guidance range and to be prepared for a surge in orders should the industry recover faster. Our guidance range is shown on Slide 18. This slide shows the key metrics for which we provide guidance. For net sales revenue, we are 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. 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 resumption of in classroom teaching later in fiscal 2021 and an increase in orders in support of 2022 school start. As the heading saves, we believe it's important to plan prudently and somewhat conservatively, while aggressively pursuing operational improvements. We will narrow guidance as a control of the pandemic becomes clearer. I'd now like to share our thoughts with you on when we expect to be back on track to achieve our declared goal of at least a 10% EBITDA margin in the near term. Turning to Slide 19. This slide illustrates the adjusted EBITDA impact of COVID-19 on fiscal 2020 results and on the 2021 forecast. We were on track to achieve our original guidance for fiscal 2020 until the pandemic hit in the third quarter, as Jeff told you earlier, we had a great first half for fiscal 2020, then we will hit with some bad news in the second half, caused entirely by COVID. Now 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 volume recovers, we expect 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 have lost sight of our mission to grow profitability and increase EBITDA margin to at least 10% in the near term. To this end, we'll continue to drive improvements across all elements of our business thereby improving our underlying margins, and we're reporting our progress each quarter. Well, that concludes our formal presentation. I'll now pass it back to our moderator to begin the Q&A session.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from Eric Stine with Craig-Hallum. Please proceed with your question.

[Eric Stine:]

Hi, everyone.

[Phil Horlock:]

Hi, Eric.

[Eric Stine:]

Hey, so, I mean, obviously, a lot of uncertainty here heading into fiscal year 2021. But just curious, what are you hearing from school districts related to funding availability related to release of funding, maybe purchase plans? And just what kind of confidence that it does give you that when things hopefully return to normal? And I guess, in fiscal 2022, what kind of strength that you see? I mean, is it something where you think that this industry can snap back pretty fast? Or are there factors where you think potentially it's a little more gradual than that?

[Phil Horlock:]

It's a good question, Eric. I mean, let me tell you my thoughts and let some of the best experience, too, in those schools that have reopened. The ones that are reopened, I'd say, we are seeing volumes in the region of sort of 95% of where we've previously been, maybe 90% to 95% of where we were back in 2019. So that's encouraging for us. You go back to our funding mechanism, principally, property taxes. That's a principal funding mechanism for school buses. Property value is still high. Property taxes are still robust. And so, the view is that the funding certainly for -- traditional funding for school buses looks pretty strong. And we've seen consistently over the years that when districts need to add school buses, which are all about safety of children. They'll put some bond money out there. They'll -- it will be a unique funding mechanism for doing it, and that's been successful in the past. I think the other thing to recognize, too, is, try not get political here, but we've certainly heard President-elect Biden talking about electrification of the school bus fleet. And I think certainly, he's at the top of his agenda or he's getting kids back-to-school in the classroom. And I certainly think to do that effectively, you've got to have a robust school bus fleet of safe buses that can handle it. So I guess, what I'm telling you is best experience of districts who've actually gone back-to-school were seeing orders. Do I think -- am I -- I don't necessarily think -- when I think of 2022, we're going to see, as bounce immediately back at 35,000, which is like the peak we've been running at for the last 30 years, and we have -- we enjoyed three or four years of that prior to the COVID pandemic. But I think we'll be close to that. I don't think we'll be far off that. I think we'll be in the 33,000, 34,000 sort of range when we bounce back.

[Eric Stine:]

Okay. No, that's great color. Well, maybe just turning to this fiscal year, I mean, you mentioned that first quarter was full in that context. I mean, should we think about typical seasonality this year? Or I think, could it potentially be a fair amount steeper? And I guess, in the back-half of the year, COVID has a big bearing on that, but maybe just how we should think about or get our minds around first quarter?

[Phil Horlock:]

Well, obviously, we don't give guidance by quarter. But I can tell you, when I say we're full, obviously, we are a little down from last year. But the decline from a year ago is a lot less than what we saw in the third quarter and then in the fourth quarter of fiscal 2020. We're much nearer -- just getting into double-digit decline. I mean that's where we are as we look at the 2020 -- 2021 first quarter orders versus a year ago. So I think that's a point that we've been trying to make here is that, we talk about the rate of decline, it seems to be slowing down, and certainly evidence starting in the first quarter. And when we give you those results, you'll see that in the February time.

[Jeff Taylor:]

Yes…

[Eric Stine:]

And then -- yes.

[Jeff Taylor:]

Eric, this is Jeff. I think you're going to see the first-half is going to continue to be impacted by COVID, and then obviously, we've commented that we're optimistic on the second-half. So that could play into the seasonality as we look at the full-year as well.

[Eric Stine:]

Okay. Got it. Lastly, just on the electric bus side, I know you recently up capacity by six times, I believe, over 1,000 units, and that's pretty significant. And I know you entered with, I think, 80 coming into the year. I mean, what -- you obviously didn't have that capacity thinking that you wouldn't need it soon. So is that a level that you think, whether it's in the next fiscal year or two that you could be approaching on the electric bus side?

[Phil Horlock:]

We'll be at capacity this year, but I do think you'll certainly look over the next couple of years. I think, yes, I think we'll start to see a significant piece of that capacity being used. Just to clarify, when we talk about capacity, we talk about what we facilitized to. We talk about equipment, our plant, our automation. Obviously, I'm not manning to 1,000 buses today when I’m – I got 80-unit backlog. So we're being prudent on that, but we've put the capability in place that when it's there, we can easily ramp up. So -- and I just look at, again, what I mentioned earlier, the new administration part of their campaign. And they got to get this by the way through Congress and everybody is going to approve it, but he did talk about electrifying some 500,000 school buses over the next five years. Seems phenomenal, I mean, let's be honest. It's sort of -- you can't think about putting 500,000 new school bus on the road, but I think it's indicative of maybe the support we're going to see for school buses. So it's pretty exciting. Certainly, electric buses, too.

[Eric Stine:]

Yes. Okay. Thanks, everyone.

[Operator:]

Thank you. Our next question comes from Craig Irwin with ROTH Capital Partners. Please proceed with your question.

[Craig Irwin:]

Hi, good evening, and congratulations on tight execution this quarter..

[Phil Horlock:]

Thanks, Craig.

[Craig Irwin:]

/…in the choppy environment. Yes. You guys did a great job.

[Phil Horlock:]

Thank you.

[Craig Irwin:]

So one of the things I like in your slides -- sorry, is the -- in the waterfall, you include a $7.9 million headwind stepping from 4Q 2019 to 4Q 2020. That headwind, you say, is primarily from COVID. Can you share with us what portion of that probably hit the gross margin line, given that gross margins were quite a bit lower than where things have been over the last couple of years? I know a lot of the spending for COVID does come from spacing out your employees and putting in additional hand sanitization stations and other expenses and inconveniences. But can you maybe share with us an approximation of the margin impact, either in dollars or basis points?

[Jeff Taylor:]

Yes. Hey, Craig, this is Jeff. What I would say is that $7.9 million headwind that we saw there in the fourth quarter, the vast majority of that certainly hit us in gross profit. That was in specific areas that do impact cost of goods sold. It's in labor, it's an overhead and just overall manufacturing efficiencies, including loss of operating leverage from lower volume. And so all of those impact our cost of goods sold and subsequently slowdown the gross profit. So it's certainly the largest portion of it.

[Craig Irwin:]

Great. Then the question I get in almost every phone call where someone mentions Blue Bird is, why are you guys not leaning in the way that so many of these SPAC IPO companies are laying out a growth path for investment and pursuing the explosive growth that's available in any of these from diversification. So you've got a proven technology out there with your school buses. You're one of the top two guys in the market. And your experience in alternative fuels is unsurpassed. I was talking to another leader in alternative fuels today, and they're growing 30%. They're going to grow 30% in 2021-plus with potential upside to 50%. It's got to be available to you. Why not invest for that? Why not lay that out as a plan for investors? Is this a conversation at the Board level? Or if it's not, why not?

[Phil Horlock:]

No, it's definitely a conversation we're having at the Board level, Craig. And obviously, we are investing in terms of the capacity increase we've put in place, and the products are -- we have a very robust product cycle plan, too, that sticks from our product today to a superior products for the future that I think customers are going to love and they're going to value. I can't get into it today, but certainly, it's something we recognize. And actually -- by the way, we've seen those specs out there. We've seen their projected growth rates. We know the valuations, we've seen that. So certainly, it's something we are talking to our Board about. We're just not ready at this meeting. To tell you what we're going to do or what our next steps are. But I take your point, Craig. It's a good one. And we have a great platform, a great chassis. It can apply for different applications. So, we're talking to our Board about where we take it from here.

[Craig Irwin:]

Excellent. That is a big piece of news. So, we will stay tuned and look forward to future updates. Thank you.

[Phil Horlock:]

Good bye, Craig. Thanks.

[Operator:]

There are no further questions at this time. I would like to turn the floor back over to Phil Horlock for closing comments.

[Phil Horlock:]

Okay. Thanks, Paul, and I want to thank everyone on the phone today for joining us on the call, and I really appreciate the questions there that were put to us. We do appreciate continued interest in Blue Bird, and we look forward to updating you again on our progress next quarter. Before we sign up, I just want to leave you with the final message. We do believe we're well positioned to handle this unprecedented pandemic. We've got ample liquidity, as you heard and as Jeff's talked about. We are improving our business structure. You heard about the three pronged strategy. And we're going do whatever it takes from a restructuring standpoint to make sure we get through this period. We are confident we'll see a rebound in the industry, and we want to be there to capitalize on it. I also want to give special recognition to our incredible employees for their commitment and dedication to Blue Bird during this pandemic. They have been amazing when you look at our absenteeism rate and how low that is compared to traditional manufacturing industries, so all credit to our team. So should you have any follow-up questions, don't hesitate to call our Head of Profitability and Investor Relations, Mark Benfield, who you all know well. And thanks again from all of us at Blue Bird. Have a great evening. Be safe, and have a happy holiday. Thanks.

[Operator:]

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