2023-07-13 07:17:47 ET
Summary
- Investors love turnaround stories and there is every reason to do so.
- During the fiscal second quarter earnings call, Blue Bird management referred to the success of its turnaround strategy three times.
- With the management suggesting the turnaround is ahead of schedule, a closer look at the company should reveal whether Blue Bird is strategically well-positioned to grow.
- The second quarter of fiscal 2023 was a pivotal period for Blue Bird Corporation from a financial performance perspective.
- Blue Bird's recent operating performance, the outlook for the school bus market, recent government initiatives, and the company's market position will be discussed in this article.
Investors love turnaround stories. There is every reason to do so, given that identifying a company with the potential to dramatically improve its prospects after being backed into a corner could potentially lead to multibagger returns. There is a massive downside risk too - many companies do not make it out of the woods despite promising to do so. This brings us to Blue Bird Corporation ( BLBD ), a company that has come up with a turnaround strategy and executed it commendably so far. During the fiscal second-quarter earnings call , Blue Bird management referred to the success of its turnaround strategy three times.
The business is performing well and the turnaround is ahead of schedule.
In summary, our operating performance and financial results demonstrated in this quarter are evidence that our turnaround is working.
We are very happy about the results of our turnaround taking hold and our prospects ahead.
With the management suggesting the turnaround is ahead of schedule, a closer look at the company should reveal whether Blue Bird is strategically well-positioned to grow.
The Business
Blue Bird Corporation is a company that specializes in making buses for various purposes, such as school transportation, recreation, and public transit. The company was founded in 1932 by Albert L. Luce Sr., who started making steel-bodied buses as a side project in his Ford dealership in Georgia. Since then, Blue Bird has become the leading manufacturer of school buses in North America and has also expanded its product line to include alternative fuel buses, motorhomes, and specialty vehicles.
Improving Operating Performance
The second quarter of fiscal 2023 was a pivotal period for Blue Bird Corporation. The industry demand remained robust and the positive financial results of the recent quarter provide evidence of Blue Bird's successful turnaround, setting a new foundation for future performance and supporting the company's long-term goal of profitable growth. Blue Bird made strategic investments by reinvesting over $3 million in wage increases for their frontline teammates and implementing operational improvements. These efforts included upgrading facilities, opening a new EV center, and enhancing processes throughout their operations.
In terms of financial performance, Blue Bird witnessed a significant improvement by selling over 2,300 units in Q2, leading to record second-quarter revenue of $299.8 million, a 44% YoY increase. Blue Bird's backlog remained robust, consisting of approximately 5,800 units worth over $775 million in revenue. Notably, the backlog included $200 million in firm orders for 621 electric school buses, indicating a substantial uptick attributed to the success of the EPA's Clean School Bus Program.
The EPA Clean School Bus Rebate Program has had a significant impact on Blue Bird Corporation, providing substantial opportunities for revenue growth in the short and long term. The program, with $5 billion in funding over five years, released approximately $1 billion in 2022. In the 2022 lottery results, Blue Bird secured a notable number of buses, with around 300 units awarded to Blue Bird and Dealers, and an additional 200-400 units granted to loyal Blue Bird customers and channel partners. These results indicate the early success of Blue Bird in the program, solidifying its position as a leading provider of clean and efficient school buses. The short-term impact of the program for Blue Bird translates to approximately $200 million in revenue and a total of 500-700 orders. Looking at the long-term prospects, through the five-year program, Blue Bird anticipates a potential revenue of over $1 billion.
Exhibit 1: Financial highlights
Blue Bird remains on track to secure over 500 orders from Phase I of the program, demonstrating its ability to meet the demands and requirements of the EPA Clean School Bus Rebate Program. The upcoming Phase II of the program presents further opportunities for Blue Bird and its partners. This phase consists of a $400 million competitive grant program to support approximately 900 buses. Orders resulting from Phase II are expected to be placed between January and March 2024. Blue Bird, along with its dealers and channel partners, is actively involved in the application process for Phase II. The company's strong performance in Phase I and its active involvement in Phase II position Blue Bird as a key player in America's transition to cleaner and more sustainable school transportation.
The company's Q2 sales growth demonstrated leadership in the alternative power sector, with 63% of sales being alternative power units, including a remarkable 175% year-over-year growth in EV sales. The aftermarket parts sales also exhibited strong performance, witnessing a 37% year-over-year increase. The aging school bus fleet contributed to this growth, driving demand for parts. To meet the high demand for EV chassis and accommodate the impact of the Clean School Bus Program, Blue Bird established a new EV buildup center, which positions the company well to capture future demand.
Blue Bird's operational performance improved significantly, with several critical areas achieving the best performance in nearly two years. Set-ups and throughput saw a notable increase, and material flow to the plant improved through adjustments in warehousing strategy, supplier sourcing, and production constraints. This resulted in the lowest number of hours per bus and enhanced manufacturing efficiency.
The company also implemented a new self-manufacturing organizational structure aimed at providing more resources and support for frontline teammates. Lean transformation efforts contributed to improvements in quality and throughput despite the ongoing challenges in the supply chain environment. The company also renovated its 40,000-square-foot coating facility into a modern EV commissioning center. The EV center will play a crucial role in meeting the projected rise in demand for EVs in the next five years, allowing for increased EV production from four to 12 units per day.
Blue Bird's financial results showcased an impressive surge in adjusted EBITDA, surpassing the previous year by almost $31 million. Q2 adjusted EBITDA soared to $20 million. Additionally, adjusted free cash flow experienced a positive upswing, climbing by $2 million and reaching $23 million in the second quarter. These figures not only signify a triumphant turnaround for Blue Bird but also establish a solid foundation for future performance and profitable growth. The company also achieved positive developments on the balance sheet, reducing debt and maintaining strong liquidity above $100 million. The improvements in operating cash flow and adjusted free cash flow were driven by enhanced operations, higher margins, and better working capital management.
Looking ahead, Blue Bird expects to benefit from pricing and product mix improvements based on the age and price level of its current backlog. The production schedule is nearly full for the rest of the fiscal year 2023, and the company has already announced a model year price increase of $2,500 per bus net for all bus types built after October 1, 2023, to account for expected raw material cost increases.
Exhibit 2: Backlog status
While the steel market has experienced fluctuations, Blue Bird has implemented a comprehensive steel buying strategy, including locked contracts for certain tonnages up to 12 months in advance to minimize its exposure to price volatility. These efforts are paying off with the company expecting to book at least 8,350 units in fiscal year 2023, a 22% increase compared to the previous year, driving a top line of $1.1 billion, a 37% increase year-over-year. Parts sales are also expected to exceed expectations, delivering at least $88 million in revenue, a 15% increase.
Exhibit 3: Growth projections
Adjusted EBITDA, an important measure that highlights how the company's cash flow is behaving, is projected to reach approximately $60 million, nearly a fivefold increase compared to fiscal year 2022. Additionally, EV bookings are on track to more than double year-over-year, reflecting the company's strong growth trajectory in the electric vehicle segment.
Maintaining Market Leadership Despite Supply Chain Challenges
The school bus industry is facing supply chain constraints that have had a significant impact on retail sales for the past three years. Despite these challenges, Blue Bird Corporation remains confident in maintaining its market position and targeted bookings, aiming to maintain a 30% market share. Unlike other industries experiencing slowdowns, the demand for school buses is expected to rise due to the aging national school bus fleet that needs to be replaced. This presents a tremendous opportunity for Blue Bird to capitalize on and fuel its future growth. The promising market outlook positions Blue Bird as a countercyclical player, benefitting from the strong fundamentals of the industry despite macroeconomic pressures. The company's commitment to alternative-powered school buses, including electric buses, aligns perfectly with the government's push to electrify the school bus fleet. With $10 billion in funding from federal, state, provincial, and local programs, Blue Bird's exclusive partnerships with Ford Motor Company ( F ), ROUSH, and Cummins give them a distinct advantage in the market.
The adoption of electric school buses is on the rise in the United States, with a significant increase in commitments and orders. The U.S. Environmental Protection Agency's Clean School Bus Rebate Program has played a pivotal role in accelerating this transition. As of December 2022, there were 5,612 committed electric school buses, almost double the number recorded in September 2022. This program has garnered commitments from school districts in all 50 states, as well as Washington, D.C., American Samoa, Guam, Puerto Rico, the U.S. Virgin Islands, and four tribal nations. Blue Bird stands to benefit from this program as it has been awarded contracts for over 500 electric buses, contributing to an estimated revenue of $200 million.
Exhibit 4: The number of committed electric school buses
California leads the way in electric school bus adoption, with over 1,800 committed electric buses, followed by Maryland with 361 commitments. However, the distribution of electric school buses is becoming more balanced across regions, with the South now accounting for a significant share of commitments. The Clean School Bus Program, with 2,451 awarded electric buses, stands out as the largest funding source, surpassing other programs such as California's Hybrid and Zero-Emission Truck and Bus Voucher Incentive Program.
Blue Bird, along with Thomas Built Buses and The Lion Electric Company ( LEV ), dominates the electric school bus market, particularly in the Type C bus category, which is the most common bus type.
Exhibit 5: Electric school buses by manufacturer
This market dominance is reflective of the preference for larger buses, as Type C and Type D electric school buses account for the majority of commitments. Blue Bird is already a leader in alternative power, holding the top position in the electric and propane school bus market.
To further solidify its position, Blue Bird is set to unveil its next-generation Vision electric school bus at STN Expo West, a prominent industry event in North America. The state-of-the-art zero-emission vehicle, developed in collaboration with Accelera by Cummins, will make its debut between July 14 and 19. The new Type C electric school bus boasts an upgraded powertrain and a next-generation battery with a capacity of 196kWh, representing a more than 25% increase compared to the current model. This enhanced battery allows for a single-charge range of up to 130 miles, and it can be fully recharged in just three hours with a fast-charging rate of 80kW.
Furthermore, Blue Bird has improved the warranty on the upgraded system, enabling it to handle 360 MWh of energy throughput, more than double the capacity of the standard battery offering. This is particularly advantageous for Blue Bird customers utilizing the batteries' vehicle-to-grid capabilities, allowing them to sell excess energy back to power companies, generating additional revenue. The next-generation Vision electric school bus also features compact and lightweight batteries, contributing to improved efficiency and a reduction in vehicle weight by approximately 1,000 lbs. As a result, the seating capacity of the new Vision electric bus has been increased to accommodate 77 passengers, up from the previous capacity of 72 passengers. Blue Bird has also focused on improving the performance of the Vision electric bus in cold weather climates. The engineering design has been enhanced, incorporating internally insulated batteries to minimize heat loss in the vehicle's energy storage system. Additionally, a new optional fuel-fired heating system generates over 20% more cabin heat compared to the existing solution.
The company will manufacture the next-generation electric school buses at its production facility in Fort Valley, Georgia. The recently opened Electric Vehicle Build-Up Center at the facility allows Blue Bird to expand its production capacity to 5,000 electric school buses per year. The company's expansion of its electric school bus production capacity aligns with the increasing demand driven by the U.S. government's Clean School Bus Scheme, which aims to transform the nation's fleet of school buses. The company anticipates significant growth in electric school bus orders, with expectations of thousands of additional orders valued at an estimated $1 billion over the next five years. This growth is further supported by the EPA's projection that 45% of all school buses produced by 2032 will be electric-powered.
With approximately 60% of Blue Bird's sales coming from non-diesel buses, the company outpaces its competitors who have a much lower share of non-diesel sales, typically ranging from 10% to 20%. In addition to its expertise in alternative power, Blue Bird strategically positions its manufacturing footprint to effectively serve the entire U.S. market. This strategic positioning allows the company to meet the demands and specific needs of customers across the country.
Exhibit 6: School buses by energy source
While the outlook for the school bus market is already impressive, Blue Bird is actively seeking additional growth opportunities to expand its total addressable market. The Commercial Stripped Chassis offering has the potential to add a few thousand units per year on top of its existing forecast. The company's lean transformation efforts aim to remove non-value-added processes and reduce production hours per bus, resulting in cost savings and improved quality. Further, Blue Bird has aligned its pricing with market economics and has transitioned away from legacy-priced buses. These factors, combined with ongoing cost reduction efforts and focus on quality, are expected to contribute to adjusted EBITDA margins of 10% or higher in the mid-term normalized operating environment.
Takeaway
Blue Bird Corporation is successfully executing its turnaround strategy and is well-positioned for future growth in the school bus industry. Blue Bird is primed to capitalize on the expected increase in demand for school buses driven by the aging fleet of existing buses. The company's prospects are further strengthened by the commitment to electrify the school bus fleet, backed by substantial government funding. Blue Bird's leadership in alternative-powered buses, including electric buses, positions the company to benefit directly from this initiative. The company's partnerships with leading manufacturers in the industry give it a distinct advantage as well. The adoption of electric school buses is on the rise, with Blue Bird playing a significant role in this transition. Despite supply chain challenges, the school bus industry's strong fundamentals and Blue Bird's strategic market positioning are likely to drive earnings growth in the next 5 years.
For further details see:
An Evaluation Of Blue Bird's Turnaround Efforts