Blue Bird Corp (BLBD) 2021 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Blue Bird Corporation Fiscal 2021 Third Quarter Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to your host, Mark Benfield. You may begin.

Good afternoon, everyone. Welcome to Blue Bird's Fiscal 2021 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 for 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 in our latest earnings release and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call.

This afternoon, you will hear from Blue Bird's CEO, Phil Horlock; and CFO, Phil Tai. Then we will take some questions. So let's get started. Phil?

Thanks, Mark. Well, good afternoon, everybody, and thanks for joining us today for our fiscal 2021 third quarter earnings call. Now before I jump into the actual financial results, I'd like to set the stage by giving you the themes you're going to hear about consistently on this call today as they really define our business and where we're heading.

So let's now turn to Slide 4. As you can see from this slide, we're making great progress in improving our business and growing margins, but our bottom line profits are being impacted by supply chain disruptions, which has caused delays in our bookings as we had to slow down production because of part shortages. Now this shouldn't come as a surprise to anyone as a signal that last quarter is our biggest headwind. And throughout this quarterly reporting period in these past few weeks, we've heard every automotive OEM and supplier mention exactly the same issues that we're dealing with, namely semiconductor shortages, resin shortages, capacity issues in global shipping, lingering impacts from the storms in Texas earlier this year and labor shortages at many suppliers.

The result of all these issues is that we have many key suppliers placing their customers, including Blue Bird on component allocation, impacting engines, transmissions, axles, brake systems, wiring harnesses and more. So the volume impact of these headwinds resulted in us moving 550 units out of the third quarter to later in the year, and we have slowed down our production rate in the fourth quarter too in order to handle these parts shortages. We know these supply chain disruptions are temporary, and we're going to work through them. But I can tell you, we haven't lost a single unit sale because of supply chain disruptions, we just pushed the production of those units until later in the year.

So let's look at the real business structure progress that we're now seeing. First, our industry is definitely bouncing back. Present demand, as measured by incoming orders, is about 8% to 10% below the record levels we saw pre-COVID back in 2019, but well above last year's levels. The good news is that because of the high demand and by pushing out some production, we have now at a record level of firm bus orders in our backlog.

Our gross margin percentage was up again in the third quarter, despite dealing with part shortages that cause excessive reworking costs. That's a really strong result and bodes well for when the headwinds subside. We price 5% on all vehicles in 2, 2.5% tranches in early July and again just last week. Of course, there is a lag before we see this hitting the top line as it applies to new orders after that date and as active quotes are price protected for a period of time. But the full annual effect of that pricing to recover economics will be realized in fiscal 2022.

Real underlying manufacturing efficiencies were up too from a year ago. That means higher productivity after adjusting out the additional labor time we incurred in reworking vehicles off-line to add missing parts. In fact, Phil Tighe will show you more about this later and discuss the financial impact that cost us in the quarter.

Free cash flow was well above last year's third quarter, about $24 million higher, and we had another record mix of alternative powered buses and remain the undisputed market share leader in electric and propane as measured by R.L. Polk registrations on a trailing 12-month basis through May. And today, we have our highest ever backlog of firm electric bus orders.

On that point, we continue to be excited by the new administration's stance on electrification of the school bus fleet, providing unprecedented funding support. This will be transformational. And we're becoming increasingly engaged in discussions with end vehicle customers, body builders and EV drive train suppliers who are keenly interested in using our proprietary chassis to meet their needs.

So overall, our business fundamentals are strong, and you'll hear these consistent themes throughout this earnings call just as you have in prior calls. So the bottom line message is this. Despite dealing with significant supply chain headwinds that will inevitably pass, they're temporary, no other way of looking at it. Bus demand is strong and at the current order rate is at near pre-COVID levels. We have a great, strong, healthy backlog of orders. We're making terrific progress in improving our business fundamentals. We're increasing gross margins through revenue and cost improvements, while leading alternative power segments, and we have a record backlog of EV orders.

So let's now move to Slide 5 for a summary of the third quarter financial results. I'm really pleased with our third quarter results, which were above last year's levels when you consider that we have been significantly impacted by supply chain disruptions, which are far worse than at the same time last year. We sold 2,024 buses, 76 units higher than a year ago, representing a 4% increase. Incidentally, had we not been forced to shift those 550 units out to the third quarter, unit sales would have been 32% higher in the third quarter this year. That's a great indicator of the industry recovery that we are now seeing. Net sales at just under $200 million were also 4% higher than last year's same quarter. Adjusted EBITDA of $13.2 million was $700,000 higher than last year, but was significantly impacted by supply of part shortages that drove higher labor costs for rework. Paul would cover the impact that these costs had on our profitability a little later.

Adjusted free cash flow for the quarter was negative at $6.4 million, but a substantial $24 million better than a year ago as we operate at much lower inventory levels this year. As I mentioned on the last slide, we continue to improve our gross margins by delivering on our operating commitments despite supply chain disruptions. This improvement reflects our 3 pronged margin growth strategy, which is communicated consistently on prior earnings calls, namely, improving bus selling price, increasing mix of alternative powered vehicles and reducing structural costs.

Finally, it's worth pointing yet that the 550 units that were pushed out of the third quarter to later in the year, represent a deferred profit of almost $9 million out of the third quarter. That's a significant impact on our third quarter results caused by supply chain disruptions, and Phil will show you later the total profit that could have been achieved, have we not been impacted by those supplier part shortages.

So let's now turn to Slide 6 and review our major operating achievements this quarter and importantly, see the specific results of the margin growth initiatives that I just mentioned. We continue to drive transformational initiatives to improve quality, efficiencies and capacity. As you'll recall, in the second quarter, we completed all our plant upgrade actions necessary to ensure we can now build as many vehicles on a single production shift that we used to build on 2 shifts. That's great for efficiency, great for quality and it's great for our gross margins. In fact, the resulting gross margin in the third quarter of 13.3% was 220 basis points above last year's result. And importantly, 210 basis points higher than the second quarter. That bodes well for bottom line margins as the industry and supply chain recover.

As a reminder, we have delivered more than $50 million in savings from these initiatives since we started almost 4 years ago. Now with the school bus into recovering and the supply shortages causing us to defer some production and sales, we have a firm backlog of more than 4,000 school buses at this time. I can tell you, during my time at Blue Bird, I've never seen such a strong backlog of orders, which is about 2,000 units higher than the same time last year. In fact, we are now filling fiscal 2022 second quarter production slots.

I mentioned earlier the improved underlying productivity from our manufacturing team when we exclude the excessive rework cost caused by supply of part shortages. Well that translates into $7 million from higher efficiencies in the third quarter.

We have a lot of activity going in alternative powered vehicles. We launched our new and exclusive propane and gasoline engines from Ford and ROUSH in March. The all-new 7.3 liter V8 engine has more power. It's got more torque, it's more compact and has better fuel economy. Well, we sold 1,100 of those engines in the third quarter, well above our launch target, which is a key contributor to the record 56% mix of alternative powered vehicles that we achieved in the third quarter. That's a substantial 10 points above a year ago, and none of our competitors come even close to our mix of non-diesel business.

More good news. Our order backlog is running at over 50% mix of alternative powered buses. And with the higher owner loyalty and margin we generate from these unique products, it's great business for Blue Bird. As I covered earlier, the rapidly growing interest for electric buses is a very exciting opportunity for us and will generate significant growth in the years to come. While on a trailing 12 months basis through May, based on R.L. Polk registrations, electric school bus market share in North America was an outstanding 68%. This compared to 37% market share just last year.

So I'm really pleased with our growth trajectory. Electric vehicle sales were relatively flat in the third quarter and fiscal year-to-date through June, sales were 15% higher than a year ago. However, this reflects timing of orders and is not a true reflection of the interest and demand activity that we're seeing.

In fact, our order backlog for electric-powered buses in all configurations, Type A, C and D totals nearly 400 buses today. The majority of these will be delivered in fiscal 2022, but it's more than 3x the backlog we've held in any other quarter, and it's just the beginning for Blue Bird electric vehicles. Just to clarify, these are firm orders supported by customers' purchase orders. In addition, we're carrying a pipeline of anticipated new EV orders today in excess of 200 additional units.

Finally, when you look at the total number of electric buses that we have either sold or have orders for since we started EV production only 3 years ago, it's now more than 750 buses. That covers all school bus configurations: Type A, Type C and Type D. No one matches our breadth of EV products and market leadership in the school bus industry. In summarizing our operating achievements in one word, I would say that we have momentum, even in an industry impacted by COVID and supply chain disruption.

Let's take a quick look now at where we think we're heading in alternative powered vehicles on Slide 7. On the previous slide, I mentioned that alternative powered bus mix in the third quarter was 56% of total sales. While our year-to-date mix of total sales and order backlog is 52%, which is another record for Blue Bird at this time of the year, 2 points above a year ago. But it's all the more impressive when it's achieved during a pandemic that's impacting an entire industry. On prior earnings calls, we have covered the point that our best-in-class range of buses attracts new customers who have never tried an alternative powered bus and many are new to the Blue Bird family.

While we're seeing this feature again this year with 178 new alternative fuel customers and 88 conquest customers, who are new to the Blue Bird brand. These are compelling facts. And with the high customer loyalty we enjoy from these products, it's a great endorsement of our exclusive alternative powered buses, the Blue Bird brand and our exclusive dealer network.

On the EV front, as I've said before, we're not a start-up company with a PowerPoint presentation and unrealistic goals. We've been building and delivering zero-emission school buses for nearly 3 years now. We have the broadest EV range in the industry with Type A, Type C and Type D offerings all on the road today. We're #1 in market share with sales in 19 states and will deliver our 750th electric school bus and more in fiscal 2022.

Every Blue Bird electric bus comes standard with a vehicle to grid, known as V2G and DC fast charge capability, allowing energy to be transferred back to the power company's grid from its battery storage system at a high-power of 60 kilowatts. This innovation provides customers with the opportunity to generate revenue by selling power back to the grid at times of peak usage when school buses arrive. It's a significant total cost of ownership benefit for school districts and operators, and it comes standard on every single Blue Bird electric bus.

Well, yesterday, we announced that in collaboration with Levo Mobility, a $750 million backed lease financing joint venture between our V2G partner, Nuvve and Stonepeak partners we'll be rolling out an electric vehicle leasing program across our nationwide dealer network later this year. This will provide customers with an attractive and affordable monthly lease price that incorporates electric school bus and charging infrastructure, along with the benefits of lower operating and service costs and the addition of V2G revenue. This is an exciting and innovative lease financing program to drive electric vehicle adoption. One monthly payment, no upfront costs that's comparable with a monthly cost of operating a diesel bus over its lifetime.

From a grant funding standpoint, the vast majority of the VW mitigation funding is still ahead of us and will help us boost sales over the next 3 years or so, with many states earmarking specific funds for school bus purchases. We've had great results so far with our electric and propane buses from the funds that have been issued. And of course, the new administration's plan to accelerate electrification of the school bus fleet will be transformative.

First, we have the bipartisan Infrastructure Bill that contains an unprecedented $5 billion for clean school bus replacement, of which $2.5 billion is dedicated 100% to electric-powered buses. This could fund between 25,000 to 30,000 electric school buses over the next few years. Second, we have the $3.5 trillion reconciliation bill scheduled for the fall of 2021, which is being developed and has included between $20 billion and $25 billion in electric school bus funding in initial drafts.

This could fund between 120,000 to 150,000 electric school buses within the 600,000 unit school bus fleet. This opportunity afforded by the proposed bill to electrify the school bus fleet just cannot be overstated. It's a huge opportunity for us and our industry.

In summary, I'm very proud of our strong and undisputed leadership position in alternative powered school buses. We have the best partners, the best products and they're exclusive to Blue Bird. And with less than 20% of school districts having purchased an alternative powered school bus, we have plenty of runway ahead for continued growth.

I showed the right-hand box on prior earnings calls, and you can see how far we've come in the last 4 years. Looking ahead, we don't see this growth stopping. In fact, we project in about 3 years from now, between 60% to 70% of all Blue Bird buses will be powered by a fuel that's an alternative to diesel. And with the support of the administration, our expectation is that this will grow to 100% by 2030, virtually all being zero-emission buses by then.

Now with over 7,000 customers actively purchasing our Blue Bird school buses today, supported by a first-class franchise dealer network that's built relationships with every one of those customers, we are bullish about this growth opportunity and are investing in the business. The shift to 0 emissions is a top priority for us.

I'll now turn it over to our CFO, Phil Tighe, who will take you through the financial results in more detail, and I'll be back later to cover our outlook in fiscal 2021 guidance. Over to you, Phil.

Well, thank you, Phil, and good afternoon, everyone. It's my pleasure to share with you the financial highlights from Blue Bird's third fiscal quarter of 2021. This quarter end is based on a close date of July 3, 2021, whereas the prior-year third quarter was based on a July 4, 2020, close date. We will file the 10-Q today, August 12, 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 in today's presentation includes reconciliations of differences between GAAP and non-GAAP measures mentioned on this call as well as important disclaimers.

Now let's turn to Slide 9, which is a summary of third quarter results. Phil has covered a lot about the volumes, so I won't spend too much time on that. I will just point out that the backlog that we're carrying forward of 4,000 units puts us in very good shape for finishing out this year. And more importantly, perhaps a strong start to fiscal year 2022, where we've already filled the first quarter, and we are now scheduling units into the second quarter.

Consolidated net revenue of $197 million was $8 million or 4% year-over-year, better than the prior third quarter. This was primarily due to higher parts volume. Bus net revenue of $182 million was up about 1% versus last year, but favorable bus volume was largely offset by a year-over-year decline in bus revenue per unit from about 93,000 to about 90,000, which was largely the result of a significantly higher mix of our most economically priced bus, which is the gasoline-powered bus.

The gasoline-powered bus was up year-over-year in volume terms by about 80%. Alternative fuel vehicles, as Phil mentioned, comprised about 56% of our sales in the third quarter; due to the outstanding success of the new 7.3 liter engine and the growing demand for our EV buses.

Parts revenue for the quarter was $15 million, representing an improvement of $6 million or 74% compared to the prior quarter when many school districts were closed. This is an indicator that the normal work for school districts is starting to get back to pre-COVID levels. Although we are still about 10% lower than our normal sales for the third quarter for parts. And this can be largely attributed to the shortages driven by supplier disruption, which we have already mentioned.

Turning to GAAP net income. This was $4 million, an improvement of $3 million or about 4x on a year-over-year basis. On an adjusted basis, net income was $5 million, up approximately $1 million versus last year. Adjusted EBITDA of $13 million was up by about $1 million compared to the prior year quarter. And I will cover this in more detail on the next slide. Our adjusted EBITDA margin was 6.7%, which was a slight improvement compared to last year.

Diluted earnings per share of $0.16 per share was up by about $0.11 per share compared with prior year, while adjusted diluted earnings per share of $0.19 was up by about 3% per share versus the prior year quarter. There were weighted average diluted shares of $27.4 million in the third quarter versus $27.1 million in the same period last year. Liquidity was strong at approximately $104 million at the end of the third quarter, and we had no borrowings on our revolver. Overall, as you can see on this page, we exceeded most of the metrics, and that is a pleasing result for a quarter where we had very difficult headwinds from the serious supplier disruptions and the continuation of the global freight issues.

We'll now turn to the next slide where we look at the third quarter of fiscal 2020 to the third quarter of fiscal 2021. Starting on the left side of this chart, higher bus volume of 76 units and higher parts volume of approximately 74% more than last year account for the year-over-year increase in adjusted EBITDA. Net economics is mainly the result of higher steel and commodity costs as well as higher cost of resins as a result of the winter storms in Texas. The good news was that our ongoing procurement initiative continues to show positive results and offset negative impact of economics in the period.

Efficiencies in operating expenses partially offset the positive volume results. Efficiencies would have been positive in the third quarter if we were able to produce to our plan. On the box shown to the right on the slide, we have shown that the impact that we calculated for the temporary issues with supply disruption and freight problems. You can see there that we, as discussed, have moved about 550 units out of the third quarter at an approximate profit impact of $8.8 million. And efficiency impacts from part shortages, labor disruption and freight costs, cost us another $5.5 million in the quarter.

So the bottom line there is that had we been able to operate to our plan, our profits would, in fact, have been around $28 million or more than double what we have achieved in the quarter. We expect that the continuing supply disruption will not cease by the end of September, the end of our fiscal year. And therefore, we expect that the fourth quarter will not improve significantly versus the third.

We also expect to see raw material and component inflationary cost pressure increase in the fourth quarter due to the significant increases in steel and other commodities as well as a continuation of higher costs that are being experienced in all modes of freight. As Phil mentioned, we have implemented about 5% pricing to offset these headwinds, and we'll continue to monitor that situation to determine when and how much pricing we have to take to offset any further increase.

The next slide looks at free cash flow. Free cash flow in the third quarter was negative $6 million. However, this was a $26 million improvement versus the same period last year. And as you can see from the slide, this was largely the result of lower inventories, that $26 million. We reduced both raw material inventory and finished goods inventory. Work in process inventory was actually higher year-over-year as a result of the units that could not be completed or booked due to part shortages.

For the quarter, the ending inventory was actually $22 million lower this year as compared to last year, consistent with our revised production outlook. Adjusted free cash flow was also negative $6 million and was $24 million better than the same period last year. If you go back and look at what I would consider our last 2 normal years, fiscal year '19 and fiscal year '18, free cash flow was positive in the third quarter in both of those years. And significantly higher profits were largely the result of that cash flow position. So we are confident that as the industry starts to return to normal and the supply situation returns to normal, our cash-generating ability will again be observable.

Net debt is dealt with on the next slide. Net debt was $155 million, which was $53 million lower than the same period last year due to lower total debt of $55 million, resulting from lower borrowings on the revolver and required payments on term debt. We have 2 active financial covenants in our credit agreement for the period. First, the trailing 12 months EBITDA, as defined under the credit agreement was $45 million versus a minimum requirement of $25 million. So we had a comfortable cushion on this one. The second is liquidity. As defined under the credit agreement, our liquidity was $104 million at quarter end versus a minimum covenant of $15 million. Therefore, we remain in compliance with our credit agreement covenants.

In conclusion, the third quarter included many positive signs, as Phil Horlock has described earlier in the presentation. We strongly believe we are making significant structural progress that sets Blue Bird up well once the temporary headwinds that many companies are experiencing cease. Looking to the fourth quarter, we do not see significant improvement in the supplier or freight issues in only 6 or 7 weeks left in the period. And therefore, do not expect to see the strong profits that we typically have in the fourth quarter of our fiscal year.

With that, I will now turn the discussion back to Phil, who will describe the outlook look and give his closing remarks.

Thanks, Phil. So let me now summarize the outlook that we see for the balance of this year and beyond. Let's turn to Slide 14. As we consistently stated on prior earnings calls, our emphasis at Blue Bird is on delivering superior operating performance to drive margin growth. After a really tough first half of the fiscal year, the industry is beginning to recover, but now we have supply chain disruption to deal with. Now we can't change the external factors, but we can focus on improving every element of our business so that we are well positioned as schools fully resume in-classroom teaching and the industry fully recovers. That means executing our margin growth strategy by improving bus selling price, alternative powered bus mix and improving cost structure.

As Phil and I discussed, along with many other industries, we're seeing rising commodity costs and supply chain disruption. As we have done for the past several years, we took pricing recently to cover those higher costs, 5% across all vehicle lines, and we may take another increase later this year if costs escalate further. As I mentioned earlier, an example of a structural change that drives superior operating performance was our move to a single shift production schedule. 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. That's great news for us as the industry and supply chain recover.

We have established electric vehicle leadership and growth as a top priority and are organizing the EV business as a focused, dedicated team within Blue Bird. We are working with a number of commercial vehicle customers on the opportunity to supply them an electric-powered chassis. Now we're in early stages of discussion, but it's clear their interest lies in receiving an OEM electric-powered chassis, just like we have and not a modification of a combustion engine chassis, which has been the norm to date.

On the topic of electric vehicles, we made an important strategic announcement early today that is very exciting for us. Our Micro Bird joint venture has just acquired a controlling stake in Ecotuned, a Quebec based electric drive train integrator and assembler that's been Micro Bird's Type A electric vehicle partner for the past 5 years.

With this product, Micro Bird has become the market leader in Type A electric school buses with 80% market share across the U.S. and Canada this past 12 months, and more than 150 units sold are in its firm order backlog. We are delighted with this acquisition, which brings significant expertise in electric vehicle integration into the Blue Bird family, providing support and application across the entire Blue Bird electric vehicle product range, Type A, Type C and Type D.

In terms of the external environment, I've mentioned at great length today that until resolved, the supply chain disruption that are affecting virtually all global industries and increasing concerns over rising COVID Delta variant cases will continue to impact our production plans and delay deliveries. Again, the emphasis I want to make is on delayed deliveries and not lost sales. Needless to say, we're aggressively following up on these issues and intend to fulfill every order. Now we estimate that the customer demand for new school buses in fiscal 2021 is in the 29,000 to 30,000 unit range compared with 34,000 to 35,000 in units we saw in the recent pre-COVID years. However, we estimate that the inability of the supply chain to provide parts consistently on time will reduce the actual production based deliveries by about 5,000 buses this year, resulting in 24,000 to 25,000 customer deliveries in fiscal 2021. This 5,000 unit shortfall has been pushed into early fiscal 2022 for fulfillment.

Importantly, however, the current rate of incoming orders clearly shows that the industry is recovering, indicating current demand to be around 8% to 10% below the 30-year record level of 34,000 to 35,000 units that we've been experiencing prior to COVID. This suggests, with a run rate presently of around 31,000 to 32,000 annual units. The demand fundamentals for the industry are favorable, with property values and property taxes remaining strong. 25% of the North American school bus fleet being over 15 years of age and the Biden administration supporting electrification of the school bus fleet. Overall, the current demand for new school buses is healthy, it's strong and it's robust.

Let's now turn to our guidance range on Slide 15. This slide shows the key metrics which we provide guidance. We have lowered the low end of the range, and we reduced the range in recognition of the production shortfalls caused by second half supply chain disruption and consequent part shortages. While demand remains strong and we'll fulfill all deferred orders, we have no ability to slot these units in fiscal 2021 production with less than 7 weeks until the fiscal year ends. For net sales revenue, we now forecast a range of between $730 million and $780 million. Adjusted EBITDA between $37 million and $43 million and adjusted free cash flow between $30 million negative and $10 million negative.

Our guidance reflects the industry for delivered vehicles -- I should stress, delivered vehicles, ranging from 24,000 to 25,000 buses; 5,000 units lower than our assessment last quarter as production levels were cut and sales delayed because of those supply issues I've talked about on this call today. As the heading says, I believe it's important to plan prudently and somewhat conservatively while aggressively pursuing operational improvements. As I did on prior earnings calls, I'd now like to share our view on when we expect to be back on track to achieving our goal of at least a 10% EBITDA margin.

Let's turn to Slide 16. This slide illustrates the adjusted EBITDA impact of COVID-19 on fiscal 2020 and the additional impact of supply chain disruption on 2021 and 2022. We were on track to achieve our original guidance for fiscal 2020 until the pandemic hit in the third quarter of last year. While we are seeing strong industry demand recovery from COVID beginning in the second half of fiscal 2021, following a very low first half, we now have the supply chain disruption and resurgence of COVID cases that is expected to carry into fiscal '22, at least through the first half of the year. As you saw, we achieved a significant increase in gross margin of 220 basis points in the third quarter, and we continue to see strong growth in alternative powered vehicles and our record EV backlog. As Phil showed you earlier, without those supply chain shortages that hit us in the third quarter, our adjusted EBITDA would have been about $28 million on 2,600 unit sales. Importantly, this would have represented an adjusted EBITDA margin of 11%.

Now these facts bode well for our future financial performance. And as the industry recovers and supply chain recovers, we plan to resume our glide path towards at least a 10% adjusted EBITDA margin, likely later now in fiscal '22 and fully on track in the fiscal 2023 time frame. So despite the COVID and supply chain challenges and its impact on today's school bus industry, we haven't lost sight of our mission to grow profitability and increase our 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 report out our progress each quarter. That concludes our formal presentation. I'm now going to pass it back to our moderator to begin the Q&A session.

(Operator Instructions) Our first question comes from the line of Eric Stine with Craig-Hallum.

It's Aaron Spychalla on for Eric. Maybe first on the Levo JV. Can you kind of give some more color on the type of education that the market kind of needs as this gets deployed? And then just any thoughts on timing for deployment of that $750 million. And then at a high level, just talk about other types of financing structures that you think are kind of out there in the market as well?

Yes. Sure, Aaron. It's Phil here. Phil Horlock Let me take a crack at that question. I think when you look at this, first of all, it's an education, right? I mean, you have to -- what we learned, I often talk about what we learned through propane, which is a premium-priced product over diesel, you have to educate the value. So this starts with talking about the fact that service costs are going to be so much lower than the RE diesel engine.

I mean several thousand dollars a year lower on diesel engine. You have to talk about the fact that when we hook you up through Nuvve to the utility companies, you're going to be able to generate grid revenue, significant earnings potential. I mean it is significant. And all that helps to reduce when you put it into a lease price, you look at pricing for the price of a bus, the infrastructure charging station offset it against the -- compared with a conventional combustion engine, the benefits of that lower service and the V2G opportunity.

We can, with that venture with Levo, we could put together a really attractive package on the lease cost that's very comparable, actually, it gets very close to what people are paying today to run their diesel engine units. And that's the premise. We worked a lot with Nuvve on this and with the guys at Stonepeak, Levo, the joint venture to make that happen.

What we're going to do is off the track we're going on now is rolling this out through our dealer network, educating our dealers, they able to teach customers about this, what it means. Because the big change will be, many of our school districts they are used to a capital budget. They own the buses, they buy the bus. They got a capital budget released. We want to change that model, obviously, and think about how about leasing the bus. Don’t put that bus on your balance sheet. It will be held by this entity Levo, much like a financing, any financing credit company for an automotive OEM, for example. So it's about educating, teaching, training and of course, what they get is they get a fantastic modern technology, 0 emissions, perfectly suited. I mean, there's nothing better than the school bus.

When you look at -- sorry, utilization of electric bus, we're the best segment of the business for it, nothing better than the school bus. It's -- the range is perfect. It ties in. So we've got to educate on that. I mean other messages of obviously financing our -- it's when we go out here and someone says, "I have the capital budget", and we try and think how can we help you buy that down a little bit and reduce that cost.

Obviously, there are grants. We're very good at accessing grants. We've done a terrific job in the likes of California and doing that through our -- we have a top notch dealer A-Z Bus Sales, who handles that sort of work. But it's hard to sell when you, you have sort of -- the district has to figure out V2G itself, how do I collect that revenue? How do I make sure I get my service costs down. So I really think this Levo opportunity with us. Just remember, Nuvve is our partner on V2G. Every bus is enabled V2G capable, provided technology it comes from Nuvve. So we feel really good about driving that as a really attractive and a breakthrough product actually for us through our network.

Maybe second on the EV capacity. Can you just kind of talk a little bit about the next steps there and timing to get to that? And then just given the legislation and this financing package that you talked about, just what would trigger and what other steps would be needed to kind of expand that?

Yes. I mean, obviously, when you look at our electric system, right, we buy batteries. We're buying a motor. We're buying through Cummins. We buy the sort of software system, like the brains of it, and we assemble that. So it's up to us to make sure that we have all that capacity in place through the likes of Cummins, through our electric -- through our battery supplies and so on. That's what we work through.

I mean in case of -- then we've got our own capacity, where we assemble all this in our plant. And our -- right now, because volume has been so relatively low, it's sort of an off-line activity when we put all that kit together on a chassis, and then we bring it on the production line, and then we run it just like a normal bus. But it is an offline activity today. What we'll be doing in '22 is that we are bringing it up online, and that will give us much more capable capacity.

So we're looking at getting up to -- certainly during the next -- this next fiscal year, we'll get to the point where our run rate of capacity in Blue Bird will be up to about 3,000 units, which I've signaled previously. And beyond that, each year, we'll progressively increase the capabilities there. And we're doing the same in terms of pressing our supply chain, obviously, support us to make sure they have it.

And we do that by making sure we give them volume projections and demand projections. So they know it's real. We're going to need those units. Nice thing is with our backlog we have right now, almost 400 buses. Those are already in our supply chain. We've already informed our suppliers, that's what we're going to need going into '22. So I think that bodes well for us.

When you talk about the Biden Administration, look, that's not going to happen overnight. We've seen this. We saw this with the VW money, for example, the EPA administered. It took a while for that to get out because some of the factors they consider are disadvantaged state or counties across the U.S. who they want to really prioritize these buses in.

How do you prioritize that? What's the ground rules for it and so on and so forth. So I don't think -- I think we might see some of that personally. We view this as reaching customers towards the end of '22, but probably more likely in 2023 fiscal before they figured out the true allocation of that. In the meantime, we're keeping what we're doing, pushing our dealers, getting out there, working with customers, use this Levo model to try and grow the business organically like we have done to date.

Maybe last question from me, just on the chassis, any more color that you can provide there on just how those early conversations are going, how you're differentiated in the market versus other solutions today? And then just any thoughts on kind of targets or when we might see some competition from that?

Yes. Look, you're not going to see anything promise, particularly, I think, until 2022, fiscal 2022. I mean I can tell you this, if fact I had a team yesterday meeting with customers, meeting -- I mentioned, I think on my call, and when we did it, we talked about the 3 elements. Now we got the end customer who drives a delivery van, let's take that for example. And then we have a body builder who puts a body on the chassis. And you have folks who provide chassis.

Today with an electric vehicle, electric drive, it's been a conversion job, right? Let's throw the gasoline engine away put a electric drive train in. We're talking to all 3 of those. In fact, my electric [dictation] team I meet with yesterday, I can't tell you where because of confidentiality reasons, but they met with all 3 of those constituents to talk about what they want from us.

Now what we have to do is we have a fantastic chassis don't -- we have basically a Class 7 solid chassis, I'll put Class 6 to Class 7. What many of these folks would like is a Class 5 chassis. So we start going to look at what we do, it's similar to the design, what we got, we have to sit down and erase everything. We've got a chassis that is designed for a school bus. But it's not a big step for us to take our design and sort of drop it lower, bring it down, lighten it up.

And we -- what we will be looking to do in the next 9 months or so is developing a prototype chassis that we can then show to these guys, let them -- we put a drive train in it, obviously, and we'll prove the product out. So I think this next year, you'll see us talking more about where we are on that, talking more about the customers as we get into next fiscal, which customers are we talking to and what we -- certainly, we've got some initial orders in there to talk to you about.

But I'd look to sort of mid-2022, I would say, for us to really unveil, if you like, our product plans and our real customer plans on that. But I can tell you we're working on it. We're not doing this in isolation. We are talking right now to those customers and partners that we intend to work with.

(Operator Instructions) Our next question comes from the line of Jon Lopez with Vertical Group.

I apologize, I cut over a little bit late. So I'm guessing you might have covered this, but if you did, we can take it offline. When I look at the -- so on the one hand, I hear you're describing the supply chain complications. On the other hand, your inventory has increased quite a bit for the last couple of quarters. And it looks like your raw material inventory, in particular, has like doubled in about 6 months. So can you just maybe talk through like the puts and takes here, if things are so tight, and logistics is so problematic, like why are you able to build inventory, yet ultimately, not fulfill deliveries?

Well, I think you've got to look at the type of inventory that we're doing. I think we used the words on this call that, frankly, going into the third quarter, we didn't anticipate this level of supply chain disruption. There weren't too many signals from our suppliers that this was -- they were going to run into these problems. I don't think they knew about it, to be frank with you.

So when we sort of entered into the third quarter, we had a much higher level. I mean, obviously, at least 550 units higher than we intended to be at. And so we were out there at that time, we entered the quarter with a much higher production plan. Obviously, we've got to give lead time to our suppliers, typically 6 weeks, 10 weeks on some components. And we were doing that a margin level towards a higher volume level.

And then what happened is, the supplies that I mentioned -- on the critical thing, when I talk about allocation on engines and transmissions, axles, harnesses, these are sort of big deals, right? And so we have to do have a high level of -- and we're going to exhaust that. It's not how we're going to sit here and just say, let's keep the high inventory level going. What we wanted to make sure is we're going to burn that off. We're going to burn that off through the next few months and get it down to a level.

But that takes a while to readjust down to this pretty quick change in capability of the supply chain on certain components. So we'll work it down, but it's -- yes, the inventory is high, we want it to be. Had we sold the engine -- the vehicles we planned on selling, got the products we wanted, we would have been sitting here saying inventory looks in great shape. But we'll just burn it off and we're not -- obviously, we are fighting and working hard to get a better allocation or more, if you like, on the things we're short of. But I'm not obviously doubling down on the things we've got, so to speak. I mean the parts we have, we'll just burn off.

And I'm sorry, it sounds like you did cover this earlier, but the parts that you're sort of having the most acute problem with, are what?

Well, I don't want to get into saying ones in particular, but I was just -- obviously, here's the way we work. If we can have a line of sight to get in some parts that might be later than we need, and we can drive the vehicle off the line, we'll build a bus. We can build a bus and put the parts on later. And that's what Phil Tighe, when he talked about some of those rework costs, that it costs us in the quarter is absolutely what that is. That's -- we've taken the bus off-line, got as far as we can. We drove it off, and then we put the part on.

Now if it's an engine, we can't build a bus without an engine. We can't build a bus without a wiring harness. We can't build a bus without transmission. And those are the ones -- when those don't come in, we get allocation on that, that means we have to stop production. And so if you think about -- 550 buses for us is just over 2 weeks of downtime in the plan. Think of it that way. And that's what we have to do. We have to (inaudible) essentially. And it's not consistently. It wasn't like I took a nice 2 weeks down to recover. It was more sporadic than that. Because that's the way the supply chain was handling it.

Just last question on this topic. And I apologize, but the -- like are you sitting on significantly more inventory than you normally would? Like it almost seems like you have to be, like more inventory of certain things. And is that intentional?

Jon, this is Phil Tighe. We have one pre-buy of some inventory that we did, and it's an expensive part, and that is intentional. But let me just supplement Phil's comment to you about inventory a bit. If you're looking at the press release and the balance sheet, note that the inventory level that's shown for '21 is the July 3 level. The comparison is October 3, 2020 on that balance sheet.

And remember that the first -- October is the inventory to support the first quarter of the year, and that's our lowest volume in any quarter. The July inventory is typically to support our highest volume of any quarter in the year. So basically, we're sitting on inventory that was supposed to support the highest quarter. And unfortunately, we've talked about the deferral. The other thing I would say is if you compare the July inventory of this year to July inventory of last year, it's down by -- I believe it's about $22 million, maybe more -- 26.

If I could just sneak one more in just about thinking through next steps. I think I heard you guys talk in some detail just about the sort of jam up in the system, if you will. People want buses. They can't get buses that starts getting pushed into your next fiscal year. I suppose the 2 questions I have are, one, does that alter in any way, in your view, the seasonal -- traditional seasonal pattern, will school districts and fleet operators be more willing to take buses at spots in the year than they -- where they historically would not be?

And then secondly, does this impact, in your view, electrification at all? Like in other words, are people going to delay electrification, as an example, delay electrification because they just have this kind of the pig moving to the python, and they have to deal with that first.

Yes. Let me take the second question -- the second part this electrification. Talk to you about -- we're bullish about. It doesn't impact that at all. I mean, we are actually, from a standpoint of what are we doing. If I could prioritize what I build, obviously, we're going to prioritize electrified vehicles. And we can do that. It’s a different -- a different supply chain we're dealing with, not the same levels of issues.

With diesel engines, we always said, it's much more complex, if you like, a diesel combustion engine has more complexity actually than the electric vehicle has, in summary. Technology is smarter. But -- so we don't see anything adverse at all in electrified vehicles in that case.

Now your first part of the question, which is, when you look at the industry. The great thing is, the good thing about having a dealer network is that we have dealers out -- yes, a lot of these what we call, promised days for school start.

But we informed our dealers and customers very early on in the quarter that we were running into some of headwinds here, and that we'd have to push some back. And that's where our dealers are extremely use -- that's why you have a great dealer network. What they use is, so what they did is, they go after -- they loan their vehicles, they've got to those school districts. When a school district require -- are retiring their old buses, they lend them on what's called a loan a bus, and they keep them going, and they keep them working.

And so we -- and I think as we went out upfront with customers, they understand what's happening here. You understand there's a supply chain issue, a global supply chain issue around the world. And they've given us a bit of a pass, I guess, this year in terms of letting -- recognizing, "I'm going to get my buses after school start." But our dealers are really helping them make it through the year, so they're ready when those schools do start, they've usually got a full school bus fleet.

But I do expect that when we get -- when we get through '22, and hopefully, we get through all this, the pandemic is out of the way and we can put it behind us, and the supply chain is out of the way. We'll be looking at the end of next year to do it in more of a normalized sort of school delivery basis, absolutely. It will be schools buses for school start because that's the most important value we think we can give to those customers.

We are showing no further questions on the audio lines at this time. I will turn the conference back over to you.

Okay. Well, thanks, Jennifer. And I want to thank everyone on the call for joining us today. We do appreciate, as I say every quarter, your interest in Blue Bird, and we look forward to update you all again next quarter.

I just want to leave you a couple of thoughts. As you can see, I mean, the great news is, the industry is really bouncing back. And in fact, when I talked about being 9% to 10% under the record levels of 34 -- pre-COVID of 2019. Frankly, if you look -- also we were a little bit higher than that, I'd say, more recently. So again, I think it really bodes well for our industry and what we're seeing out there.

Supply chain issues. I want to make it really clear. They are temporary. That is not structural. Those are going to get fixed. And every supplier that we're dealing with is intent on fixing them. They want to fix them. It is a labor issue. They're bringing on labor where they can. They're handling that. If it's a Tier 2, Tier 3 supplier for them, they're addressing that. So this is all -- it's a temporary thing. We're going to make -- we're going to get through it.

Want to give you a sense of what we're doing. I'm being somewhat repetitive here, but we're all about making ourselves have a stronger business. That's why, even in these tough times, we tell you of improved gross margin. We priced again for the fourth year in the same time frame aggressively to help our margins and help our profitability.

Alternative fuels, I mean, we're at our best ever position in our history in terms of alternative fuel percentages. And obviously, you can see the growth in EV that we're seeing. We're incredibly excited about, and it's a great recognition of the Blue Bird product out there and our partners.

So that's what we're going to keep doing. Keep doing what we can do and keep driving this, improve our business. And I tell you, I mean, the point I made about when you do adjust for the issues that impact us in the third quarter, those supply chain issues where we push volume of 550 buses out, we incurred costs, as Phil mentioned, for reworking and for dealing with that material shortage in our plant. When you adjust for that, and these -- the profits boost up to about $28 million, we had an 11% EBITDA margin. And that really is a strong margin for a third quarter. And it's what we've been trying to demonstrate that we'll be -- we are on track when we get into a more normalized supply chain situation, you're going to see our margins really pop. And so I'm going to leave you that message.

So thanks again for your support for us. Any follow-up questions, please don't hesitate to contact any of us. Obviously, Mark's the #1 content, their Head of Investor Relations. And again, we thank you all here from Blue Bird. Have a great evening.

This does conclude today's conference call. We thank you for your participation and ask that you kindly disconnect your lines. Have a great rest of your day, everybody.