Blue Bird Corp

NASDAQ:BLBD

Earnings Call Analysis

Blue Bird Achieves Record Profit and Increases Guidance

Blue Bird achieved a record quarterly profit in Q3 fiscal 2024, with adjusted EBITDA reaching $48 million and a 14.5% margin. The company sold 2,151 buses, resulting in $333 million in revenue, a 13% increase year-over-year. Electric vehicle (EV) sales surged by 38%, contributing to a robust order backlog of 5,200 buses worth $775 million. Despite minor cash flow challenges, the company’s liquidity remains strong at $232 million. Following these results, Blue Bird raised its full-year guidance, forecasting $1.315 billion in revenue and an adjusted EBITDA of $175 million, doubling the previous year.

A Record-Breaking Quarter

Blue Bird has delivered outstanding results in the third quarter of fiscal 2024, achieving record profits that surpassed any previous quarter in its history. The company reported an adjusted EBITDA of $48 million, marking a 70% increase compared to the previous year, and resulting in an incredible adjusted EBITDA margin of 14.5%, which is over four percentage points higher than last year's performance.

Revenue Growth Driven by Pricing and Product Mix

Despite unit sales remaining relatively flat, with 2,151 buses sold—just 14 units more than last year—Blue Bird saw a significant increase in revenue. The company reported net revenue of $333 million, a 13% increase year-over-year. This growth can be attributed to higher pricing and a richer mix of electric and alternative-powered buses, with average selling prices per bus up 13% from $127,000 to $143,000.

Strong Demand and a Solid Backlog

The firm order backlog grew to about $775 million, which translates into over 5,200 buses, equating to nearly seven months of sales at current rates. This reflects strong customer demand. Importantly, the company has raised prices significantly over the past two years, signaling that they are competitively positioned in today’s market.

Transformational Shift Towards Alternative Fuels

Approximately 59% of Blue Bird's unit sales in the most recent quarter were alternative-powered buses, with electric vehicles (EVs) comprising a significant portion. The bookings for EVs surged by 38% year-over-year, with over 200 units sold during the quarter. The backlog for EVs alone reached 567 units, representing 11% of the total backlog, further establishing Blue Bird's leadership in this growing market segment.

Expanded Guidance for Future Growth

The company has updated its guidance for the full fiscal year 2024. Blue Bird now expects net revenue to reach $1.3 billion, marking a 15% increase year-over-year. The adjusted EBITDA guidance was also raised by $20 million to a record of $175 million, which translates to a 13.3% margin—5.5 percentage points higher than the prior year.

Upcoming Market Opportunities and Grant Funding

Blue Bird is poised to benefit from the ongoing $5 billion Clean School Bus Program from the EPA. There are plans to deploy $2.6 billion over the next two years funding around 8,600 EV and propane school buses, with an expectation to secure approximately 30% of these orders. The company also received an $80 million grant from the Department of Energy, which will help expand production capabilities significantly.

Strategic Labor Developments

Blue Bird successfully completed a collective bargaining agreement with hourly employees, ensuring stability and an encouraged labor environment. This agreement will result in an average wage increase of 12% in the first year and then 4% in subsequent years, along with profits sharing mechanisms for employees.

Looking Forward to Fiscal 2025 and Beyond

For fiscal 2025, Blue Bird is poised for continued growth, with guidance predicting adjusted EBITDA to reach between $190 million, doubling compared to fiscal 2024. Expected revenues range from $1.4 billion to $1.5 billion, reflecting a 10% increase. The company anticipates achieving a 14% adjusted EBITDA margin within the next couple of years, with long-term goals of reaching margins between 14.5% and 15%.

Conclusion: A Bright Future Ahead

Overall, the earnings report indicates that Blue Bird's operational transformations and strategic focus on electric and alternative-powered vehicles are paving the way for robust revenue growth and expanded profitability. With significant financial backing and an increasing order backlog, the company is well-positioned to capitalize on the evolving transportation landscape in future years.

Earnings Call Transcript 2024-Q3

[Operator]

" Hello all. And welcome to Blue Bird's Fiscal 2024 Third Quarter Earnings Conference call. My name is Lydia and I'll be your operator today. After the prepared remarks, there will be an opportunity to ask questions. [Operator Instructions] I now hand you over to Mark Benfield, Head of Investor Relations to begin.

[Mark Benfield, executive]

Thank you. And welcome to Blue Bird's Fiscal 2024 Third 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'll hear from Blue Bird's CEO, Phil Horlock and CFO, Razvan Radulescu. Then we will take some questions. So let's get started. Phil?

[Philip Horlock, executive]

Thanks, Mark, and good afternoon to everyone on our call today. It's great to be here and to share with you our results for our fiscal 2024 third quarter. You'll recall that on our last earnings call, we reported an all-time record profit for a second quarter. Well, I'm very pleased to tell you that our momentum has not slowed down at all with the Blue Bird team doing a fantastic job and delivering a third quarter profit. That is an all-time record for any quarter in our history. That surpasses our previous quarterly record that we achieved in the first quarter of this year.





Razvan will be taking you through the details of our financial results shortly. So let me get started with the key takeaways for the third quarter on slide 6. As a headline says, we recorded the best ever profit for a quarter. I am particularly proud of this achievement after breaking profit records for each of the past two quarters, and we have much more to come. Regarding the first line in the box, I'm very pleased to report that we achieved an astounding adjusted EBITDA margin of 14.5% in the third quarter. That's more than 4 percentage points higher than the year ago. And once again, we are increasing full year guidance in all three metrics that we provide and we are also increasing our long-term financial outlook, as Razvan will show you later.





As we look at the drivers of this terrific progress in Q3, it really is about maintaining and delivering the plan we laid out last year. We, which focuses on making significant improvements across every piece of our business. Market demand for school buses continues to be very strong. Our quarter-end backlog of firm orders for Blue Bird buses stood at just over 5,200 units. That's a little more than at the same time last year. But importantly, our net orders for Blue Bird buses through the first three quarters of this year were 10% higher than for the same period last year. Now, that's a great endorsement to the strength of the industry and the customer demand for Blue Bird buses. And this bodes well for pricing, production, stability and profit margins.





Now, while supply chain issues are undoubtedly easing, as we have reported throughout this year, we do have select constraints in a couple of chassis components across the truck and bus industry that are limiting industry production and deliveries. But we're very engaged with those constrained suppliers and with additional capacity being added in the balance of this calendar year, we should see some easing of those constraints as we move through the end of this year and into 2025. Every bus we are selling today and those in our order backlog reflect current pricing and we are price competitively, which we can tell from our, quote win rate and our incoming orders. This is an entirely different Blue Bird bus revenue and gross margin structure compared with just a year ago, with bus prices up significantly.





On the EV front, thanks largely to the first round of $1 billion of funding from the EPA's unprecedented $5 billion Clean School Bus Program our third quarter delivered electric buses were again over 200 units, at nearly 40% more than last year, and represented 9% of our unit sales for the quarter. And we ended the quarter with a record backlog of EV buses. This is particularly impressive as we're approaching the end of deliveries for the first round of the Clean School Bus Program and are just beginning to see orders from the second and third round of the EPAs program. These will really impact fiscal '25 and '26 and I will cover the timing of deliveries in more detail a little later. We also maintained our very strong mix of alternative-powered vehicles and further strengthened our leadership position in this segment. The higher margins and higher owner loyalty from these products contributed to our profit improvement in the third quarter.





We are continuing to invest back into the business by selectively upgrading facilities and installing lean manufacturing processes. And we are enhancing the plant-working environment. Through the efforts of the best workforce in the business, strong leadership, lean process improvements and just sheer hard work, we have been achieving some of the best manufacturing performance the company has ever seen. Bottom line, we are performing extremely well in a strong market. We are delivering a richer mix rich mix of higher margin alternative powered vehicles. We are priced competitively and appropriately for today's economic environment and manufacturing efficiencies are improving. As a result of all these accomplished means we achieved an outstanding third quarter adjusted EBITDA of $48 million with a margin of 14.5%.





Now let's take a closer look at the financial and key operating highlights for the third quarter on slide 7. As I have said on previous earnings calls, our present year financial performance is transformed from a year ago, with many record highs reported. We sold 2,151 buses in the third quarter fiscal '24, which is very slightly above last year. However, those unit sales drove a strong third quarter net revenue of $333 million, which is a very impressive 13% increase over last year. So with essentially flat volume compared with a year ago, up by only 14 buses and net revenue up 13% the impact of higher pricing and a richer mix of EVs is clearly evident in the revenue growth.





Our record third quarter adjusted EBITDA of $48 million was $19 million above last year. That's almost 70% higher and well above the $25 million to $35 million general guidance range for quarterly profits that we showed at our last earnings call. And finally, while adjusted free cash flow for the quarter was slightly negative, that was more than explained by significant sales to the national fleets where we provide extended payment terms. We won this business earlier in fiscal '24 and these orders were delivered late in the third quarter and are now being paid for in the fourth quarter. They are recognized as receivables in Q3. Overall, we had exceptional third quarter financial results and achieved transformational improvements over the last year. We are on a great trajectory.





On the right hand side of the slide, you can see some of the operating highlights for the business. As I mentioned earlier, demand continues to be very strong with our firm order backlog at the end of the third quarter worth about $775 million in revenue, reflecting a backlog of over 5,200 buses. That's almost seven months of firm order backlog at our current sales rate. We raised prices considerably over the last 2 years and the average third quarter selling price per bus in fiscal '24 was an outstanding 13% higher than the year ago. That's about a $17,000 increase in average selling price per bus. Parts sales total $25 million in Q3, representing a strong 6% growth over last year. And that's also consistent with the growth we saw in the first half of '24.





Turning to alternative-powered buses, they represented about 59% of our total unit sales in the third quarter. And we are running at a very strong 60% of sales mix through the first nine months of the fiscal year. We continue to be the clear leader in this space. No other major school bus manufacturer comes even close to those numbers. Even EV bus is a part of the alternative-power mix. And in the third quarter EV bookings increased by 38% over last year. Once again, we sold over 200 EVs in a quarter. That represents a very strong mix of 9% of our total sales, compared with 7% in last year's third quarter. Additionally, we left the quarter with a record Q3 backlog of 567 EVs, which is a very strong 11% share of our total backlog.





Now that's worth more than $180 million in revenue and an impressive 17% higher than the backlog we had at the end of the second quarter. Clearly, we're benefiting substantially from the first year of funding from the EPAs $5 billion Clean School Bus Program. I'll cover later the status of the second year of this program, which comprises of two rounds, and we expect significant orders and deliveries from those two rounds in fiscal '25 and fiscal '26. On the labor front, I am really pleased with the outcome of our first collective bargaining agreement with the United Steelworkers Union, which now represents our hourly employees and was completed in just less than a year.





Razvan will summarize the details of the program a little later. But this is truly a win-win for Blue Bird and for our employees. And we look forward to a collaborative and stable partnership that benefits all. In regard to future investment expansion plans I'm very excited with being awarded an $80 million grant by the Department of Energy to increase EV and overall production of our Type D bus, allowing us to expand single shift capacity of school buses from 10,000 buses annually to 14,000 buses. I will cover the significant growth initiative in more detail a little later.





And finally, on the back of our third quarter results, we are once again raising full year guidance for adjusted EBITDA, net sales revenue and adjusted free cash flow. Most notably, we're increasing adjusted EBITDA at the midpoint of range by $20 million with guidance now at $175 million for the full year. That represents a really strong margin of 13.3%, which is an astounding 5.5 percentage points higher than last year. This is our six quarters obsession in succession that we have beaten and raised our guidance with the expected outcome being a record full year result in fiscal '24.





In fact, at midpoint of guidance, we are now at double the profit we achieved in 2023, which was a then record. Importantly, too, we have raised our longer-term margin outlook from 14% to 15% as we continue to solidify and build on our recent operating and financial performance with an all-time quarterly record profit in the third quarter reflecting a 14.5% adjusted EBITDA margin, I'm incredibly proud of our team's accomplishments.





Let me now walk you through the highlights of our plans for the $80 million DOE grant that we were awarded just last month. Turning on to slide 8, Blue Bird is one of 11 companies to be awarded a grant by the DOE under the MESC program that is the Manufacturing and Energy Supply Chains Office of the DOE. Awards were based on converting a facility that produced combustion engine based products to one that produces EV products. In our case, we're converting our former [ Wanderlodge ] RV production site. The grant award of $80 million represents 50% of the capital required to build a 600,000 square foot Type D and EV production facility located right across the street from our existing plant.





So the total investment is around $160 million, with Blue Bird funding the other 50%. The build out will span around 2 years, with production launch expected by the end of '26 or early '27. Adding this facility would raise our total production capacity to around 14,000 buses on one shift and would provide for increased volume upside for the commercial chassis production when needed. The new plant would create approximately 400 new jobs and the project includes a number of community benefits. The project generates a great return on investment with a projected IRR of 28% and payback less than 2 years after start of production. Now, grand grant deployment is subject to finalized contract negotiations with the DOE through December this year, which are underway today and final board approval.





We are very excited about the opportunities that this award presents as another pillar for our long-term profitable growth outlook. We will apprise of our progress at our next earnings call. I'd now like to hand it over to Razvan to walk through our fiscal '24 third quarter financial results and updated guidance in more detail. We'll also be providing our first look at guidance for fiscal '25. Over to you, Razvan.

[Razvan Radulescu, executive]

Thanks, Phil, and good afternoon. It's my pleasure to share with you the financial highlights from Blue Bird's fiscal 2024 third quarter record results. The quarter end is based on a close date of June 29, 2024. Whereas the prior year was based on a close date of July 1, 2023. We will file the 10-Q today, August 7, after market close. Our 10-Q includes additional material and disclosures regarding our business and financial performance. We encourage you to read our 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 other important disclaimers.





Slide 10 is a summary of the fiscal '24 third quarter and year-to-date record results. It was another outstanding operating quarter for Blue Bird with somewhat limited and very well managed supply chain and labor challenges and with high margin units driving both our top line and our bottom line results. We significantly beat the adjusted EBITDA general quarterly guidance provided in the last earnings call and in fact, we delivered the best quarter ever for Blue Bird with $48.2 million adjusted EBITDA margin. Additionally, on a year-to-date basis, we tripled the results of last year for our new record year-to-date of $141.6 million. The team continued to push hard and did again a fantastic job and generated 2,151-unit sales volume, which was just above prior year Q3 volumes, but with a more complex Type D and a higher number of EV buses.





Record Q3 consolidated net revenue of $333 million was $39 million or 13% higher than prior year, driven by a slightly higher number of units, higher parts sales, improved mix of Type D and electric buses and pricing actions that continued to materialize also in this quarter as expected. Adjusted EBITDA was an all-time quarterly record of $48 million, driven by high margins, increased part sales and margins partly offset by increased labor and material costs. The adjusted free cash flow was negative $4 million, a $46 million reduction versus the prior year's third quarter. This was due to increasing investment in working capital, mainly finished goods and accounts receivable as we sold a larger number of buses to Fleets and GSA in this quarter.





We expect many of these units to turn into cash by the end of fiscal '24. Our liquidity position at the end of this quarter was also at a record Q3 level with $232 million. And we have close to zero net debt position. On a year-to-date basis in nine months we generated revenues close to $1 billion, tripled the prior year-to-date adjusted EBITDA result of $142 million. And we delivered significant steps forward on our profitable growth path.







Moving on to slide 11, as mentioned before by Phil, our backlog at the end of Q3 has grown and continues to be very strong at over 5,200 units, including over 11% EV. Breaking down the Q3 record $333 million in revenue into our two business segments the bus net revenue was $308 million, up by $38 million versus prior year. Our average bus revenue per unit increased from $127,000 to $143,000 or 13%, which was largely the result of pricing actions taken over the past year, as well as a higher mix of Type D and electric buses. EV sales in Q3 were also strong at 204 units or 56 more than last year, a 38% increase year-over-year. Parts revenue for the quarter was $25 million, representing a growth of $1 million or 5% compared to the already very strong prior year levels. This great performance was in part due to increased demand for our parts of the 350 [indiscernible] as well as supply chain driven pricing actions and throughput improvements. Gross margin for the quarter was a record of 20.8% or 5.3 percentage points higher than last year due to our sustained operational performance and our pricing overtaking the inflationary cost in the last four quarters.





In fiscal '24 Q3, adjusted net income was a record $31 million, double the level of the prior year, a $16 million improvement year-over-year. Adjusted EBITDA of $48 million or 14.5% was up compared with the prior year by $19 million, an increase of over 4 percentage points. Record adjusted diluted earnings per shares of $0.91 was up $0.47 versus the prior year more than doubled.





Slide 12, shows the walk from fiscal '23 Q3 adjusted EBITDA to the fiscal '24 Q3 EBITDA. Starting on the left, the $29.7 million, the impact of the bus segment gross profit in total was $22.3 million, specific in volume and pricing effects net of material cost increases of $25 million, offset by labor cost increases of negative $2.7 million. The favorable development in the parts segment gross profit was $1.2 million, driven by higher sales and very good margins as mentioned earlier in the call. These great improvements were slightly offset by increases in our other expenses and fixed cost, mainly engineering and personnel related of negative $5 million as discussed in the last earnings call. The sum of all of the above-mentioned development drives our record fiscal '24 Q3 reported adjusted EBITDA result of $48.2 million or 14.5%.





Moving on to slide 13, we have extremely positive developments year-over-year also on the balance sheet. We ended the quarter with $88 million in cash and reduced our debt significantly by $39 million over the last four quarters. In fact, our net debt position was once again close to zero at the end of this quarter. Our liquidity stood very strong at $232 million at the end of fiscal '24 Q3, a $98 million increase compared to a year ago. The operating cash flow was $1 million in this quarter, driven by an improvement in operations and margins, offset by an increase in finished goods and account receivables due to the large number of fleets and GSA units built this quarter.





For the fleet and the government GSA units the working capital flow is different than the dealer business in two main ways. First, the boxes are in finished goods inventory for an additional two to six weeks where they are transported and inspected for delivery before they get into customer's hands, which is when we recognize the sale. Second fleet and GSA buses generally have longer payment terms than our dealer business, which could be 30 days or more depending on the contract. A detailed comparison chart of these flows is available in the appendix of today's presentation.





Slide 14 shows the sustainable results achieved by our team over the last four quarters, generating over $180 million in adjusted EBITDA or 14%. Our revenues have been consistently above $300 million every quarter, partially due to pricing realizations combined with a strong increase in EV sales versus last year. We have beat and raised our conservative guidance for the last six quarters in a row due to the outstanding execution of our plans by our team and despite a still difficult supply chain environment with select suppliers. The last four quarters have been in the 13% to 15% adjusted EBITDA range, demonstrating that we are delivering now consistently double-digit performance and at the best-in-class levels.





Finally, it is important to note that our pricing curve has been ahead of our costing curve in the last four quarters. Preparing us for the significant investments lined up for 2025 and to the contractual inflation factors expected ahead of us, some of which already impacted our margin in fiscal '24 Q3 as expected. Before we talk about the updated guidance for fiscal '24 and our updated mid and long-term outlook on slide 15, we wanted to share with you the results of our year-long negotiations with the UAW on our first collective bargaining agreement. Overall, we believe we have achieved a win-win result, which makes Blue Bird an even more attractive place to work in middle Georgia and will give us the talented and stable workforce required for our profitable growth plan. We have now a 3 years contract from June 2024 to June 2027 with approximately 1,500 people in scope. The average wage increase in the first year is 12%, followed by 4% in year two and another 4% in year 3.





We are also introducing profit sharing of 4% of net income on certain thresholds for profitability are met each year. We also strengthened the company 401(k) contributions for the employees. In total, the increased cost equals approximately 1% of the company revenues on a run rate go forward basis and we intend to pass this to our customers over time through pricing actions. In Q3, we recorded a number of one-time expenses, including the ratification bonus of $750 per employee paid in June and the true up of our profit sharing accrual. In summary, we believe our CBA provides us with the necessary workforce and stability to continue to grow profitably in the years to come.





On slide 16, we want to share with you our updated fiscal '24 guidance. We are increasing our revenue to $1.315 billion and we are significantly increasing our adjusted EBITDA by $20 million to $175 million or 13% with a range of $170 million to $180 million. This is an increase of 100% over the prior year record results doubling our prior best year ever. We are reducing our EV sales outlook for the year by about 100 units due to the timing of EPA order and requested delivery timing. Phil will cover this in more detail in the outlook. Given this and growth factor headwinds anticipating anticipated in Q4, we expect in the last quarter revenues of $300 million to $330 million and increased adjusted EBITDA in the range of $30 million to $40 million or 10% to 12%.





Moving to Slide 17 in summary, we are forecasting a significant improvement year-over-year with revenue up 16% to over $1.3 billion adjusted EBITDA in the range of $170 million to $180 million and adjusted free cash flow of $80 million to $90 million in line with our typical target of approximately 50% of adjusted EBITDA. As a reminder, we are moving from accelerated filer to a large accelerated filer status by the end of fiscal year 2024, which will reduce our Form 10-K filing requirement from 75 to 60 days. As a result, we plan to file our 10-K and hold our fiscal year-end earnings call on Monday, November 25, 2024 as announced in the last earnings call.





On Slide 18, we wanted to give you a first look at fiscal '25 in terms of preliminary guidance. We have a number of both tailwinds and headwinds, and we maintain a cautious stance yet may be a bit less conservative than in the prior 2 years. As tailwinds, we have strong demand, stable pricing and still very high industry backlog. We have now the only propane-fueled school bus in the industry with clean fuel and best-in-class total cost of ownership. We are also leading in the EV segment with close to 2,000 buses on the road and the orders from round two and three of the EPA Clean School Bus Program will significantly improve our sales mix in the second half of fiscal '25. As headwinds, supply chain is still fragile at times while improving overall and we have made great progress in removing bottlenecks for some key components. The material cost and supplier inflation pressures are still present.





And finally, we expect still relatively low EV production and sales for the first half of fiscal '25 as the infrastructure plans are being worked on. And there is many customers requesting EV delivery before school starts in the summer of 2025. While it's still very early, we are modelling a range of scenarios as follows, units in the range of 9,000 to 9,500 units. EV sales in the range of 1,000 to 1,300 units back-end loaded in the second half. Revenues in the $1.4 billion to $1.5 billion or approximately 10% increase over fiscal '24 also backend loaded and adjusted EBITDA approximately 13% and in the range of $180 million to $200 million, approximately 10 10% year-over-year over year improvement. We'll provide more insight into fiscal '25 during our next earnings call on November 25.





On slide 19, we wanted to also update you on our raised long-term outlook and our expected path to get there. Looking at fiscal '24 updated guidance through hard work from all our teams and great execution of our strategy, we already delivered way ahead schedule on the 13% adjusted EBITDA margin we had highlighted in the past as our long-term aspiration. Therefore, today we are raising the bar again for our outlook as follows. Fiscal '25 shows $190 million and 13% plus adjusted EBITDA margin and replaces the previous short-term outlook. Looking to the medium term in fiscal '26 or fiscal '27 our EV growth and operational improvements on one shift with the existing plan can support volumes of up to 10,000 units, including EV of 2,500 units, generating revenues of $1.6 billion, and with adjusted EBITDA of $225 million or 14%.





Beyond 2027, our long-term target remains to drive profitable growth. Now to even higher levels. Towards $1.25 billion to $2 billion in revenue, comprising of 11,000 to 12,000 units, of which 4,000 to 5,000 are EVs and generate EBITDA of $270 million to $300 million or 14.5% to 15% at best-in-class levels. We are incredibly excited about our future and Blue Bird's future and now I will turn it back over to Phil.

[Philip Horlock, executive]

Well, thanks, Rasvan. As usual, that was a great explanation of our quarterly results and our full year outlook. So let's move on to slide 21 -- I could've put this followed at two prior earnings calls, so I won't spend much time on it today as our priorities and our strategy are unchanged as they should be. The chart on the left illustrates the three priorities that continue to drive us taking care of our employees, delighting our customers and our dealers, and delivering profitable growth. The chart on the right provides more texture around the specific strategies that we are pursuing, that both align with our priorities and drive our forward year growth plans. At the center is our ultimate objective to drive sustained profitable growth. As you look at the margin accomplishments in fiscal '23, we transformed the business from losses in fiscal '22 to record profitability in '23, achieving a full year margin of 8%.





For fiscal '24, we just increased our full year earnings guidance, midpoint of the range to a 13% adjusted EBITDA margin. Then over the next few years, we plan to grow the margin to 14% and then to 15% and beyond. Following these core strategies has been key to our margin transformation and will continue to drive our forward year plans. On this point, we have highlighted our leadership and safety strategy on this slide in recognition of the significant move we announced just a couple of months ago to make three-point seat belt, a standard feature on all of our Type C and Type D school buses. This will take effect in the fourth quarter of this calendar year, and we will be the first school bus manufacturer to provide three-point seat belts, a standard equipment. Now we are following this with a standardization of a driver's airbag mid-2025 on our Type C bus with the Type D bus coming a little later. We will be first to market with this safety feature and both actions show our commitment to the safety of our children and the safety of our drivers. We intend to lead and we have many more safety initiatives in our product development pipeline that will differentiate us.





Let's now turn to slide 22, and look at the latest status of federal funding for clean school buses, which is so important in helping us accelerate the adoption of electric and propane vehicles in fiscal '24 and beyond. As a reminder, we are just starting the second year of this bipartisan five-year program, which provides $5 billion of funding of electric and propane powered school buses. There are still the $4 billion to be deployed after the first year of funding, the second year, which is referred to by the EPA as a 2023 program, provides for two more rounds of funding totaling almost $2 billion. That's close to $1 billion more than was anticipated and appears to be an acceleration by the EPA to deploy the $5 billion in total funding. As the left chart, shows round two awards of the 2023 grant program are confirmed at $965 million. In fact, that's a $565 million increase from the original plan due to the high level of grant applications submitted.





Now, about 2,700 electric and propane buses were awarded these grants earlier this year, which cover type A, C and D school buses. And the winners will have until April 2026 to take delivery of the buses using these awards. Looking now at the middle chart immediately after announcing the round two award results, the EPA announced its round three rebate program, which is also part of the 2023 program, totaling $940 million, and again, about $500 million more than had been anticipated due to the sheer volume of applications. Approximately 3,600 school buses will be awarded these rebates, which covers all body types again. And the winners will have until June 2026 to take delivery of these buses. So in total, rounds two and three will help to fund around 6,300 EV and propane powered buses. And virtually all this is ahead of us in terms of orders and deliveries. Now, our expectation that Blue Bird should win approximately 30% of these bus orders totaling around 1,900 buses with deliveries in fiscal '25 and fiscal '26.





Now, with the deadline for bus deliveries from these two rounds being as late as June 2026, significant deliveries likely won't begin until the second quarter of '25 calendar year, as many customers deal first with finalizing the charging and utility infrastructure needs prior to ordering. However, the EPA's timing plan indicates that purchase orders for the round three rebates must be placed by year-end 2024. So we are expecting an order surge late this calendar year.





Finally looking to the right hand chart at our last earnings call, I introduced the 2024 clean, heavy-duty vehicles program, which amounts to $932 million. Now, this is funded by the Inflation Reduction Act and the great news is that 2% of our EV funding is being allocated to school buses. That's up to $650 million of additional to accelerate the adoption of EV school buses. And that's beyond the $5 billion from the EPA's Clean School Bus Program. Now, we estimate that orders from this program should total around 2,300 EV School Buses. Awards should be announced in February 2025, with the winners having until January 2027 to take delivery of their buses. The EPA's focus on school buses is great news for our industry.





Great news for our customers and great news for our school children. With school buses recognized as having the perfect duty cycle for EV adoption. So we have a total of $2.6 billion approved and about to be deployed over the next 2 years to fund around 8,600 EV and propane school buses with our expectation of winning around 30% of these orders these programs represent a great opportunity for Blue Bird totaling around 2,600 EV school buses of all body types over the next 2 years or so. Beyond that, we have another $2 billion, including bus funding still to go and state and local funding too to accelerate the adoption of clean EV and propane-powered school buses. And let's remember the mission. The Clean School Bus act was a bipartisan agreement signed in 2021, designed to keep our children and communities safe from air pollution by removing harmful, older emissions of diesel-powered buses from the road and replacing them with clean powered buses. What can be more important than safe student transportation? So let me now wrap up the earnings call and our outlook for the business on slide 23.





Razvan took you through the raised guidance for fiscal '24, and I'm showing you some of those key metrics at the midpoint of guidance here. Our volume outlook of 83 buses is 3% over fiscal '23. Net revenue at $1.3 billion will be a new record for Blue Bird, up 15% from fiscal '23 adjusted EBITDA guidance $175 million is double the $88 million profit we made last year, which was a record at that time. Importantly, we are planning on a 13% EBITDA margin in fiscal '24 up 5.5 percentage points from fiscal '23, which is several years ahead of the plan we had been sharing with you just a couple of years ago. We have confidence in achieving this margin after recording an impressive 14% adjusted EBITDA margin in the first three quarters of fiscal '24. Now, it should be noted that the first nine months did benefit from an exceptional mix of EVs at 9% of unit sales within a strong total mix of alternative fuel vehicles at 60% of sales. The extended time granted by the EPA for customers to deploy buses from the new round two and three funding awards has slowed the recent pace of orders and is impacting deliveries late in fiscal '24.





Consequently, we have lowered our forecast for EV bookings this year from 800 buses to 700 buses. This is purely due to order timing with 800 deliveries now being moved from fiscal '24 to fiscal '25 and still represents a healthy 28% growth over last year. As I mentioned earlier, however, we do expect an order surge towards the end of this year as round three rebate bus orders must be submitted by December 2024 for the EPA's timing plan. As you can see on the right chart, there is a lot of pent-up demand following the low end of the sales in 2020, 2021 and 2022. And the bus fleet has aged by a couple of years over that period. ACT is forecasting a compound annual industry growth rate of 7% from the end of fiscal '23 through fiscal '27. And that's great news for our business and great news for our profit outlook. With residual supply chain challenges still impacting the auto industry, the ability to build all these units near-term is not a given. But clearly, the demand is there. After executing a substantial transformation across our business, the company is performing exceptionally well.







We'll continue to improve operating performance and look forward to sustained profitable growth in the robust market ahead. You will recall that just a couple of years ago our stated long-term objective was to achieve 12% EBITDA margin. Well, with guidance for fiscal '24 now reflecting a margin of 13%, we have updated our long-term outlook to reflect an EBITDA margin at least 2 percentage points higher than this year at 15%. I want to thank our nearly 2,000 employees for all their hard work and dedication in delivering an all-time record profit in the third quarter, as well as our outstanding dealer partners who are critical to our success.





Now, before I pass you back to our moderator for the Q&A session, I would like to move to slide 24 and briefly cover the CEO and Chairman Transition plan that we announced at the market close today. After 14 years as CEO of Blue Bird, I will be stepping down at the end of this fiscal year. It's been an honor and a privilege to lead this great company for so long and to work with the best team in the business. Now, I'm very pleased to confirm that our President, Britton Smith, will be taking over from me as CEO with his appointment effective September 29, which is the start of our new fiscal year. We have been working together on a very thorough transition plan over the past year, with Britton taking on increasing responsibilities during that time. Britton will be joining the board immediately and I will also be staying on the board. I have to say this is how a leadership transition should be run promoting from within with a leader who knows the business and ensuring continuity.





Also transitioning is our Chairman after almost 9 years in the seat, Kevin finally stepping down and will be succeeded by Doug Grimm effective immediately. Now, Doug knows our company very well, having been on the board since 2017 and will be a great success for Kevin, who will be staying on the board as a director. From a personal standpoint, I like to thank Kevin for all the support he has given me during my time as CEO and for the great friendship, we have built over those years. Again, the Chairman's transition couldn't be better coming from within the board and ensuring continuity. So this will be my last earnings call, as Blue Bird CEO. And I'd now like to hand it back to our moderator for one final Q&A session.

[Operator]

Thank you. [Operator Instructions] Our first question today comes from Mike Shlisky with D.A. Davidson.

[Michael Shlisky, analyst]

Good afternoon and thanks for taking my questions. Of course and of course, Phil, congrats on the retirement.

[Philip Horlock, executive]

Thanks Mike.

[Michael Shlisky, analyst]

Hey, there's a lot to cover here. Sure, of course. Hey. There's a lot to cover here. But I'll start with the question or two about the long-term guidance. I think looking at what you're doing now, and what your long-term guidance it implies almost $100 million worth of additional revenues, but EBITDA of about $125 million, and that's less than 20% incremental margins, actually about 18%. This past quarter, you just did 50%, five-zero percent. I guess I would have expected more in EBITDA, given the EV mix going forward, the 50% higher revenues on the top line and in general, I'm sure the fixed cost base won't grow anywhere near that much. So I guess I'm curious, you know, I know you just put this guidance out, but do you think there's potential to go above 15% if you do get that hit $2 billion and the EV mix plays out as you expect.

[Razvan Radulescu, executive]

Yes, Mike, thanks for the question. This is Razvan. So as Phil alluded in his comments, he mentioned 15% and beyond and obviously as we are executing on this journey, as we firm our plans for the future, we are going to look potentially at hard numbers. However, there are also factors that are part of this strategic long-term plan. We are modeling over time a lower price for the EV parties in conjunction with lower cost, which in the end will drive a lower margin per bus compared to what we are making today. And definitely, this will drive the adoption and increase the mix, which then goes hand-in-hand with our increased mix of EVs. So we are working on that journey and as we have, more updates that we can give you and I'll be happy to share those with you at that time.

[Michael Shlisky, analyst]

Okay. Sure. So what's on a somewhat similar note looking at the 4Q outlook and getting into the first three quarters, just backing into it, you're suggesting that the revenues maybe down from the 3Q that you just put up here. Outside of the pandemic does a lower 4Q than 3Q really have any precedent, is there may be just a mix again of the EVs being a little bit lower or I just having a hard time figuring out how you can have lower revenues just before school starts? Everyone wants their deliveries than you did in the previous quarter.

[Razvan Radulescu, executive]

Yes. So the fourth quarter, Mike, has one less workweek than the third quarter because of the July 4 shutdown, which we put in place 2 years ago. So there is less number of workdays. However, this particular fourth quarter, as mentioned, both by me and Phil, has a lower number of EV units by about 100, and that financially drives significantly lower revenues given the average selling price for EV buses.

[Michael Shlisky, analyst]

Got it. Got it. Maybe one last one for me, and that's on the political environment. Can the EPA or other federal funding for buses be reversed or taken away starting January 2025? If a certain candidate wins, the presidency or you feel like what has been passed, is passed and will be allocated? I'm just kind of trying to going to out whether there's any kind of risk to some of the EV programs that are out there today.

[Philip Horlock, executive]

Yes. Mike well, it's Phil here. I mean, a lot of things can happen, obviously, but you know, we look at it this way. I mean, those amounts have already been awarded. They've actually allocated them. So in one of the second round where I talked about having allocated the customers it's right out there, they know what they're getting. They just finalize their infrastructure plans. Remember, that was a bipartisan agreement in '21, both parts, there was no objection to it. It went through pretty easily. And, you know, I think it was all around the fact talking about school children and school transportation. So I think it would be very difficult to - so we feel very difficult for that to be reversed. There's so much support for it and it's been so much good for the environment for our children.

[Michael Shlisky, analyst]

Okay. Well, thanks for that answer. And again, congrats. I will leave it there.

[Philip Horlock, executive]

Thanks Mike.

[Operator]

Our next question comes from Craig Irwin with Roth Capital Partners.

[Craig Irwin, analyst]

Hi, guys. It's actually Andrew on for Craig. And so congrats on the retirement.

[Philip Horlock, executive]

Thanks, Andrew.

[Craig Irwin, analyst]

First question is on gross. Yes. First question on gross margins, you posted some -- some really strong margins in the quarter with the with the strong revenue. You guys are still kind of seeing cost inflation and you guys are engaged with your suppliers and are kind of seeing some constraints here. So just any update you can provide on the cost inflation and kind of where you can see long-term margins going would be great.

[Razvan Radulescu, executive]

Andrew, this is Razvan. I'll take this one. So in terms of gross margins, we highlighted some of the tail - headwinds that we are seeing into fiscal '25. We have just finalized a new collective bargaining agreement with the USW and that is going to cost us about 1% of revenues on a run rate basis going forward. We do see continued inflation pressures from our suppliers in terms of material cost, also driven by some labor factors, but also the general economic environment that is still not entirely stable at this point in time. So we have material inflation and we have labor inflation that will put pressure on margins. At the same time, we are continuing to on a regular cadence, increase our prices to the market and we're trying to balance the two factors there. So at this point in time, we provided the general guidance for fiscal '25 with a range and we'll be happy to provide more insight in the next earnings call when we have more visibility into our existing exact deals and backlog for the entire fiscal '25.

[Craig Irwin, analyst]

Great. Thank you. And second one for me. I know we're kind of still early days in the tracking business, but I think you said last quarter you had you had one on the ground. We're engaging some customers there. So is there any kind of update now after the fiscal third quarter?

[Philip Horlock, executive]

Not, not really, Andrew. I think what we said last quarter is still the same. We're in development mode now developing a prototype. We have a prototype we showed at the ACT show, Big Truck show back in May, well received, well recognized with a very active customer group come and walk through that and see that chassis. So right now, our goal is that we want to get this product in the hands of customers later this year. We got several customers extremely interested who want that product. They do their own validation test. They feedback, give feedback to us, and then we're looking it into later into '25 to really getting a commercial product out on the road to those customers. But I'll say we're very optimistic about it. We like what we're doing and it's going be a great chassis when it comes to market, that's for sure.

[Craig Irwin, analyst]

Awesome. Well, that's great to hear. Congrats on the strong results and I'll hop back in the queue.

[Philip Horlock, executive]

Thank you.

[Operator]

Our next question comes from Chris Pierce with Needham.

[Christopher Pierce, analyst]

Hey, good afternoon, everyone. I just wanted to ask on the national fleet business, you talked you know, we had this bump up in accounts receivable that we don't see in prior years. But admittedly, my model doesn't go back that far. So I'm just curious, are you winning more business with these national fleets and is EV and propane driving that or are you winning your share of diesel engines as well. Like, what's the right way to think about, you know, the national fleet business for Blue Bird.

[Philip Horlock, executive]

Yes. I mean, it's really all of the above. We are definitely participating more in national fleet business than we have recently. Propane has been a fantastic product for us this year. As we said before, in prior earnings calls, our competitors don't have a propane product. It's a fantastic total cost of ownership vehicle for these fleet operators and they know that. So we've had great success there. Electric is the same thing, very excited about our product. I think the third thing is we have a very good delivery time versus the rest of the market in terms of getting products back in customer's hands. And that's been that's been great news for us for fleets who want those products for school start. So I think we're doing very well with that. And by the way, we intend to keep this business.

[Christopher Pierce, analyst]

And then...

[Philip Horlock, executive]

We intend to keep this with a reasonable amount of interest. I said, this isn't a one off year for us and that we've turned up the capability this year for us. We intend to retain this business going forward as it's good business for us.

[Christopher Pierce, analyst]

Perfect. You just answered my follow-up because I know one of the three players in the market has had trouble delivering diesel bus at this point in time. Okay, perfect. And then I was at ACT Expo recently and I sat in on a presentation, comments and talked to some of the other competitors. Can you talk about your, you know, you guys in there talking about diesel emissions and, you know, I just didn't pick up the same level of concern from other players in the industry. But I just didn't know if that's something that, you know, I didn't know how to frame that from not having looked at the industry for a long time. Is it just that diesel emissions get tighter over time and everyone sort of adjusts or is there something specific to these 2027 diesel emissions that gives you confidence in alternative fuel buses taking increased share?

[Philip Horlock, executive]

It's absolutely the second one you raise there. In 2027, the emissions get very stringent on the requirements such that it's very difficult for diesel engine to meet it without a lot of hardware support, very costly. It will significantly increase the cost of the diesel engine. Now, our propane product today meets the 2027 emissions engine. Even our gasoline engine is quite a small part, I'll call it, trying to get there to meet the emissions requirements. Obviously, electric is zero emissions and fully meets all those requirements. Our competitors don't have a propane engine. They don't have a gasoline engine. All they have is a diesel engine, an electric vehicle.



So I think you're going to get a different comment from them. And when I talk about our leadership, just remind I mean, 60% of the vehicles that we sell today are essentially non-diesel. That's quite a different story for our competitors who are up at the -- they're up at the 90% level of diesel sales, diesel mix for their business. So it's 10% non-diesel. So to speak. So for them, it's quite a different story. For us we're very excited about it. We're well positioned for it. We have exclusive products in propane and gasoline and even electric. We have exclusivity by default because we're getting from Cummins and the only one good variety by Cummins. So I think we're in very good position.

[Christopher Pierce, analyst]

Good. I appreciate the detail, talk soon.

[Philip Horlock, executive]

You bet. Thank you.

[Operator]

The next question comes from Eric Stine with Craig-Hallum.

[Eric Stine, analyst]

Hi, everyone. I've been on multiple calls jumping around, so I apologize if I repeat any questions. Just curious, you mentioned for Q4 or just that you're tempering your outlook for electric buses, you know, just given some of the funding push out or the dates being pushed out for the clean school bus funding, you wondering, have you given an update on the timing of the labor agreement? Is that also a reason for the EBITDA I guess implied EBITDA guide to be down versus the first three quarters of the year?

[Razvan Radulescu, executive]

Hi Eric. This is Razvan. I'll take that. So for Q4 guidance, in addition to having lower EV units as mentioned several times, by me and Phil in the prepared remarks, we have also the USW, which concluded in June. So we will have the full impact of the USW agreement starting to hit in Q4 and the run rate impact is above 1% of revenue. So indeed, there will be an impact for the run rate in Q4 from that.

[Eric Stine, analyst]

Okay. Yes. There is an example of me asking a question you'd already - that you'd already addressed. So sorry for that. Well, maybe this one for fiscal '25, your run rate the last three quarters would put you above where you're guiding for fiscal '25. And I know the headwinds, you know, just curious, are you also being conservative on the EV side simply because of what you talked about, even though you're going to see or expect an order pick up here before December of this year, but those buses likely wouldn't be deliveries for you until late fiscal '25 or early fiscal '26. Is that the right way to think about it?

[Razvan Radulescu, executive]

Yes, Eric. So definitely, we will see lower EV volumes in the first half of fiscal '25, as we indicated, with a higher, more back-end loaded for the second half. We provided a range for guidance of 1,000 to 1,300. And as we said, going forward, we're becoming a bit less conservative in our guidance that we give. So right now, we feel pretty good about the ranges we preliminarily put out for fiscal '25, both in terms of units, EV and revenues and EBITDA. But obviously, as things develop, we'll give you an update in the next earnings call. And we'll fine-tune the outlook for fiscal '25 there.

[Eric Stine, analyst]

Okay. Thank you.

[Operator]

Our next question is from Sherif El-Sabbahy with Bank of America.

[Sherif El-Sabbahy, analyst]

Hi. Good afternoon. Just given...

[Philip Horlock, executive]

Hi, Sherif.

[Sherif El-Sabbahy, analyst]

Much of the significant balance sheet optionality that you now have, how should we think about capital allocation going forward?

[Razvan Radulescu, executive]

Hi, Sherif. This is Razvan. So we outlined our capital allocation strategies two earnings calls ago. However, since then, we've been awarded the Department of Energy Mesc Grant for $80 million. And once it's approved by the board and finally negotiated with the DOE, we will fund $80 million over the next 2 years from that. So we are - we will evaluate all the opportunity to deploy capital. This project has a great internal rate of return, so we have a great opportunity to deploy that for our long-term growth. But at the same time, we expect to continue to generate significant free cash flow. And as we fine-tune our capital allocation strategy, we will give you an update in the next earnings call and probably the following as well.

[Philip Horlock, executive]

You're still online Sherif?

[Sherif El-Sabbahy, analyst]

Thank you.

[Philip Horlock, executive]

Okay.

[Operator]

We have no further questions, so I'll turn the call back over to Phil Horlock for any closing comments.

[Philip Horlock, executive]

Okay. Well, thank you, Lydia, and thanks to all of you for joining us on the call today. Before I close this earnings call for my final time, I like to summarize where I believe we are today, where we stand today and where we are going. When we last year, you saw a momentum growing throughout the year, profitability increasing as we move through each of the quarters and we've continued to be on the same path this year, delivering an impressive all-time quarterly record profit in the third quarter with a 14.5% margin. With this very strong base behind us, we've raised guidance for the sixth quarter in a row and are guiding to a full year adjusted EBITDA of $175 million and a margin of 13.3%.





And as I mentioned earlier, that's a full 5.5 percentage points above last year's then record profitability. In fact, it's worth pointing out and remembering and running it again that our absolute EBITDA is double last year's result, which was then a record for the company. And as we look to going forward from here, I mean, we've outlined for you our full forward year financial plan, but I think it's worthwhile just reminding ourselves of the extremely favorable factors we have right now. These tailwinds we have that help and drive profitability and grow shareholder value that we're seeing right now and we think we'll see moving ahead. Number one, we've got an unprecedented backlog of firm orders and a strong market demand ahead of us with an aging bus fleet that's shown by the ACT data and confirmed by all the industry experts that are out there. Supply chain constraints are easing and we're seeing that a little bit, albeit there's still some way to go.





And again, that's why you see the increasing trend on the ACT volumes we showed you the industry projections growing. Upcoming 2027 emission standards will definitely increase the need for alternative-powered vehicles and is our sweet spot. We can deliver on that. Number four; we have strong bipartisan federal and state support and customer demand for electric buses. The demand is there. Look at the applications that we received for round two and round three of these grants by customers who never had electric bus before. They want electric powered buses. That's our sweet spot.





Number five, we've been awarded a significant investment grant by the DOE that will allow us to increase our Type D EV production capacity and importantly, our total capacity to 14,000 units on a single shift. That's fantastic opportunity for us to improve our sales outlook in the following forward years and obviously build very competitively as we move forward. And number six, the base we have, we're achieving record profits, record margins, record cash and record liquidity today. And these are structural improvements we've made that will stay with us as a great baseline as we move forward. So with these positive, very positive tailwinds, we provided our first look at guidance for fiscal '25.





We took our EBITDA midpoint of a range of $190 million, and that's $50 million higher than fiscal '24. And we are confident in achieving a 14% margin in a couple of years as the industry supply chain constraints ease. And then go on to 15% in the long-term. Bottom line, I have to say, the Blue Bird has never been stronger and we have great momentum. So we appreciate your continued interest in Blue Bird and Britton and Razvan look forward to taking you to update you all again on our progress on the next earnings call. Should you have any follow-up questions, please don't hesitate to contact our Head of Investor Relations, Mark Benfield. And thanks again from all of us at Blue Bird. Have a great evening.

[Operator]

This concludes today's call. Thank you for joining. You may now disconnect your line.