Blue Bird (NASDAQ:BLBD) Q1 2020 Earnings Call

0:00 Good day and welcome to the Bluebird Corporation Fiscal 2020 First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Mark Benfield, Director of Investor Relations. Please go ahead, sir. Thank you, Nadia. Welcome to Bluebird's Fiscal 2020 First Quarter Earnings Conference Call. The audio for our call is webcast live on investors.blue-bird.com. You can access the supporting slides by clicking on the presentations portion of our IR web page. Our comments today include forward-looking statements that are subject to risks that may 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.

0:51 Bloomberg disclaims any obligation to update the information in this call. This afternoon, you'll hear from Bluebird CEO, Phil Horlock, and CFO, Phil Knight. Then we will take some questions. Let's get started. Phil? Okay. Well, thanks, Mark. Well, good afternoon, everyone, and thank you for all joining us today for our first quarter earnings call for fiscal 2020. We're continuing to make great progress at Bluebird as we strive to improve both overall profitability and margins. We always welcome the opportunity to share with you our latest quarter results, So let's start with an overview of those financial results on slide four. As we've previously explained, the school bus industry is extremely seasonal, and the first quarter is always the softest quarter of the year, with unit sales typically representing no more than 14 to 15% of the full year volume.

1:45 This is also our expectation for fiscal 2020, and so I'm pleased to report that despite the soft sales quarter, We had a really strong first quarter financial performance relative to prior years. In fact, it was the second highest profit in more than 10 years with adjusted EBITDA of $8 million, which is $8,000 or 11% over a year ago. Importantly, this was our sixth consecutive quarter where profits increased over the prior year, despite higher commodity surcharges from our suppliers to address tariffs that impacted us from the second quarter of last year. Before proceeding further, and as I mentioned on our prior earnings call, let me set the strategy that we are pursuing. Throughout this and future earnings calls, you will hear a recurring theme of how we are driving our overall profit and margin improvement through three key initiatives.

2:41 First, following the bus pricing we took in late fiscal 2018 to address the escalation in tariff-led commodity costs, we plan to price each year to recover economic increases. As you will recall, we took pricing again in July 2019 and we will see the benefits throughout this year. Second, cost reductions that we are achieving through our transformational initiatives. We began this journey two years ago and have seen significant year-over-year savings in every quarter since then and we intend to continue to do so going forward. And third, continued leadership and growth in alternative fuels. Increasing our mix of alternative fuel-powered buses as a percentage of our total sales is key to profit growth, as we earn a superior selling price and gross margin compared with conventional fuel buses.

3:35 Our growth in this segment continues to outpace the overall market by a long way, as you will hear later. Now all three of these actions improved our results over the first quarter last year and are cornerstones of our ongoing plan to increase both gross profit and EBITDA margins. So, let me get back to our first quarter results. We improved profitability despite selling 140 fewer buses than last year. Now, we mentioned on our last earnings call that first quarter volume will be down versus a year ago as we launched our new robotic paint facility, requiring additional planned downtime in October and a gradual production ramp-up. This is simply a retiming of volume for later in the year. Now, while volume was down 90% from a year ago, The fourth quarter net sales revenue of $153 million was only 1% below last year. The increased sales revenue mainly reflects a richer mix of higher priced alternative fuel powered buses and the favorable impact of our bus pricing actions that I just mentioned.

4:37 In fact, our average bus selling price was over $5,000 per unit higher than in the first quarter last year. And past sales also grew substantially. 17% over the first quarter last year. Although about half of that is explained by an additional sales week we had in the first quarter of fiscal 2020 compared to last year. So overall, we had a very strong revenue performance. Now, adjusted free cash flow was about $90 million negative for the quarter. As you know, traditionally, we're always negative in this first quarter. But this was $34 million worse than a year ago. This was largely due to higher raw inventory, have been at the end of December 2019 to address some unique circumstances, and I will describe those later.

5:25 Suffice to say, we will return to normal inventory levels as the year progresses. This is just a timing issue. Adjusted net income of $2 million and adjusted value per share of 7 cents were up $800,000 and 2 cents respectively from a year ago. Now if you look at the underlying strength of the industry, and Bluebirds Results, we remain upbeat about the business fundamentals. We are forecasting an industry of around 34,000 school buses in fiscal 2020, which is about the same as last year. And that's a near record level over the past 30 years and compares favorably with the average over that same period of 31,000 school buses.

6:10 With a strong outlook for property values and corresponding property taxes, which are the major funding sources for school buses, together with the fact that 190,000 school buses on the road today have been in service for more than 15 years and school children enrollment is increasing, we are confident that the industry outlook remaining at around this level for the foreseeable future. Bottom line, the demand for school buses is clearly very strong with funding the only limiting factor. We saw yet another record first quarter sales mix for alternative fuel powered school buses surpassing last year's previous record. At an impressive 39% mix of our total unit sales, we beat last year's first quarter mix by five points.

6:55 It's clear that we lead the industry by a long way in alternative fuel powered school buses. Now as a reminder, which I do this every earnings call, in alternative fuels we count all of our propane, compressed natural gas, electric and gasoline powered buses. As all of these are alternatives to diesel, which has been the staple fuel for years. For the last several years, we've been achieving significant growth in alternative fuel bus sales, and as I just mentioned, we have not slowed down this year. We'll cover our performance in this area in more detail a little later. All in all, I'm very pleased with our first quarter results. We increased our gross profit margin significantly versus a year ago through a richer mix of alternative fuel buses, cost reductions, and pricing.

7:42 That was the fourth consecutive quarter of gross margin growth and is the key element for improving our EBITDA margin. And we expect continued gross margin improvement from these actions as we move forward through the fiscal year. We are maintaining fiscal year 2020 guidance for all three metrics on which we report, with midpoint of range for adjusted EBITDA at 13% above fiscal 2019 at $92.5 million. Importantly, we are on the path to our stated goal for an adjusted EBDR margin run rate of at least 10% by the end of fiscal 2020. So let me now review with you our key operating achievements on slide five. We've recorded a number of significant achievements in the first quarter, and each one will make us more competitive and support our profitable growth plans going forward.

8:35 Our transformational initiatives to increase margins are on track, driving improvements in quality, cost, and efficiencies and Capacity. We have seen those results now as evidenced by our gross profit margin increase of 1.6 points in the first quarter over the last year, and there is much more to come. Following a carefully planned ramp-up in October and November, our all-new automated paint shop is fully operational, and every bus is now being painted in that facility. The painted buses look great, and we'll be able to see the quality and efficiency benefits we expected. As I will show you later, this is an important initiative to drive efficiency improvements throughout the plant. As I covered earlier, we increased our full-year school bus selling price significantly by about $5,000 a unit, representing a 6% increase.

9:27 Again, this reflects our increased mix of high-price, alternative fuel-powered buses and our recent pricing actions. Together with the favorable impact of higher option take, and standardization of selected priceable features. Now while adjusted EBITDA margin increased by six-tenths of a point in the first quarter of fiscal 2020 over the last year, which is a great result, this is on top of achieving higher margins in every single quarter of fiscal 2019. I believe that to be a strong indicator of how a consistent and effective strategy can deliver continuous improvement. As I mentioned earlier, We continue to be the undisputed leader in alternative fuel powered school buses with an impressive 46% of our total year-to-date sales and firm order backlog.

10:16 That's quite a mix and that's actually four points above the same time last year. Furthermore, the total number of alternative fuel buses sold and in our backlog are up 5% from a year ago. That's strong growth performance in an overall flat school bus industry, particularly will be considered the major sales season is ahead of us. Simply put, that's leadership and real momentum in the fastest growing segment of the school bus market. Remaining on top of the alternative fuels, we continue to see strong and growing interest in our latest product, our zero emission electric powered school bus, which is powered by a Cummins electric drive train. We delivered 24 buses in the first quarter of fiscal 2020. and all together we have more than 90 buses delivered or in our firm order backlog so far this fiscal year.

11:06 We anticipate many more orders for the year based on the course activity we are seeing. Needless to say, with the widest range of electric powered school buses on the market today covering Type A, Type C and Type D configurations, we are really excited about this opportunity. And finally, we are reaffirming guidance for fiscal 2020. and that reflects continued growth in sales and profits as we continue to deploy our three focus initiatives to drive higher gross and EBITDA margins, namely annual pricing to cover economics, structural cost reductions and increased mix of alternative fuels. It's fair to say we continue to advance the business on multiple fronts and we are focused entirely on profitable growth.

11:52 Now let's take a closer look at the third quarter financial results on slide six. I touched on many of these results earlier, and full-time I'll run through the details later. So let me just summarize the first quarter. Above sales and total net sales were down 3% and 1% from prior year respectively, which is significantly less than the planned 9% volume decline, as we achieved 6% higher average selling price per bus. Top sales were 17% higher than a year ago, although half of that growth was due to the extra sales week in the first quarter this year, compared to last year. Nevertheless, we are pleased with the 8% organic growth we achieved in the first quarter, which comes on the back of a four-year growth of 7% last year.

12:39 That's really impressive performance by the sales team. Adjusted EBITDA was $800,000 or 11% above a year ago. The end result was the second highest first quarter profit for more than 10 years and the sixth consecutive quarter that we have grown profits over the prior year. Going back to slide seven, Let's just take a closer look at our alternative fuel bus sales performance. At 2,074 units, our book sales and backlog today of alternative fuel buses is 5% higher than a year ago, and importantly, a record for this time of the year. As I mentioned earlier, alternative fuel bus sales represented 46% of our total sales, which is up again from the previous record of 42% that we set a year ago at the same time.

13:28 Significantly too, 111 customers have purchased or ordered alternative fuel powered buses from us for the first time ever this year. That's on top of more than 400 customers who tried alternative fuel options last year for the first time. Now those are compelling facts and really help drive customer loyalty and conquest business and are a great endorsement of our exclusive alternative fuel buses, the blue brand name and our franchise exclusive dealer network. So I think it's pretty evident that we aren't slowing down in this segment of the industry. No other school bus manufacturer comes close to our alternative fuel sales mix or our market share. I previously covered the fact that we now have either sold or have firm orders in hand for more than 90 electric bus orders for delivery in fiscal 2020.

14:18 And we expect more to follow with all the customer interest we're seeing for the newest addition to our alternative fuel lineup. Looking forward, the vast majority of the VW mitigation funding is still ahead of us and should support a strong industry over the next three years or so, with many states earmarking specific funds for school bus purchases. We are really pleased with the success we have had so far from the funds that have been issued. With the widest range of alternative fuel powered buses, the most modern and proven engine in the industry, which is exclusive to Bluebird through our partnership with both Fuller and Roush Cleantech and our leadership position in low NOx emissions, we are well positioned to capitalize on the VW funding and other growth opportunities going forward.

15:05 In fact, reduction in NOx gases is the major criteria in funding through the VW settlement. To this point, our new ultra-low NOx propane bus is certified at one-tenth of the NOx emissions output Thank you. So with Bluebird Propane, there's one simple message. You can have it all. The lowest operating cost and the lowest NOx emissions of any internal combustion engine in a school bus. A growing number of customers understand this, and as you can clearly see, sales are up again, and we're achieving record levels of sales so far this year.

15:57 We're also seeing continuous strong growth of our gasoline-powered bus in fiscal 2020. It is regularly stood by technicians and mechanics who really appreciate the emissions simplicity and cold weather stop capability that it shares with propane. It also has a lower price point than diesel, so it really works for those customers where acquisition price is a key concern. In summary, we're here proud of our strong leadership position in alternative fuels and the significant growth and market share we are achieving. And with less than 15% of school districts still having purchased an alternative fuel-powered school bus, we have plenty of runway ahead for continued growth. So let's take a closer look at how we are driving cost reductions throughout Bluebird, kind of the slide to take.

16:46 Now we showed you this slide at our last earnings call. and it illustrates the progression of our transformation initiatives over the past two years and into fiscal 2020. Importantly, you can see this is a cumulative approach where additional processes and tools are being added as we strive to drive down our total costs. In fiscal 2018, our initial focus was on reducing purchase material costs and services through a combination of initiatives including new commercial agreements with suppliers and resourcing with minimal product design change involved. and we worked extensively with external automotive experts to ensure best practices and processes were applied and we delivered results. In fact, you might recall that we recorded savings of over $20 million in fiscal 2018 from our transformational initiatives.

17:37 Now we continued to pursue these initiatives in fiscal 2019 and begin to add design changes to our process to reduce cost without compromising quality. In this second phase, second phase rather, we also focused heavily on the build, launch, testing, and validation of our new robotic paint facility, which also necessitated plant rearrangements to optimize our process. We achieved additional savings of $18 million in fiscal 2019, and as Phil will show you later, we continue to derive further significant savings in fiscal 2020 from these actions. As we enter fiscal 2020, Phase 3 now supplements the earlier processes by driving down the cost of production both from a fully operational robotic paint facility and from focused plant productivity actions.

18:27 Our new automated paint facility provides the opportunity to reduce rework with increased first time run capability, to reduce labor and material through robotic application of paint, and to achieve savings that weren't yet spent and to deliver higher straight time capacity. With the new paint facility attached to the exterior of our present assembly building, we freed up space in the plant to allow more efficient line rearrangement of tasks and stations, and the addition of several stations for more efficient operations and improved quality control. All these actions are designed to improve efficiencies and drive down total cost. We have deployed industrial engineering resources to optimize in-station workflow in the newly arranged production lines. We are applying engineering resources to focus on design for manufacturing capability targeted at reducing production costs and improving quality of rework. And we are confident of achieving significant efficiencies.

19:26 And we have many more actions planned over the next few years. This systemic and cumulative approach to driving down total costs over multiple years is key to delivering higher gross profit and EBITDA margins. And we'll continue to share these results with you in the Quarterly Earnings course. Let me now turn it over to Phil Tai to take you through the financials, and I'll be back later to cover the fiscal 2020 outlook and reaffirm our four-year guidance. Over to you, Phil. Thank you, Phil, and good afternoon to everyone. The next few slides are a summary of our financial performance for the first quarter of 2020. The material that we're discussing is based on a close of January 4, 2020 for the first quarter of 2020. and December 29 of 2018 for the first quarter of 2019.

20:18 Detailed material will be available in our 10K and that will be filed tomorrow, February 13. We encourage you to read the 10K and the important disclosures that it contains. There is also an appendix attached to today's presentation that deals with reconciliations between GAAP and non-GAAP measures as well as some important disclaimers already mentioned by Mark. With respect to accounting pronouncements, there was nothing significant adopted in the first quarter of fiscal year 20. We did elect to adopt ASU 2019-12, which simplifies the process for calculating interim income taxes and the accounting for deferred tax liabilities for fine equity method investments. There was no material impact to Bluebird from adopting this standard.

21:07 Now let's have a look at the summary of key results for the first quarter on slide 10. So I think you can see from this, and Phil's already mentioned a lot of it, that we had improvement versus prior year in quite a number of the items. Gross margin percent was up, net loss was down, adjusted net income was up, adjusted EBITDA was up, The adjusted EBITDA margin was up and the diluted earnings per share improved by 3 cents from a loss of 5 to a loss of 2 and the adjusted and diluted was up by about 2 cents.

21:53 So we've already talked about the fact that the volume was down and net revenue was down and we'll go into a little more detail on the net revenue when we get to the bridge so that you can perhaps have a better understanding of that. and we will spend a little bit of time talking about cash when we get to the free cash flow slide. So I think on the net revenue, we can probably talk about the 1.7 million that was down. That's about 1% down. Lower bus volumes of 140 units or 9% was worth about $12 million. Phil mentioned that bus revenues were up by over $5,000.

22:41 The higher revenues actually drove about $8 million in offset to the loss of the volume. And then, of course, parts was up by about $2.7 million or 70% which is already been mentioned. So we basically offset a large chunk of the amount that the and the volume was down through a lot of good work by the team on bus revenue and on parts revenue. Again, the bus revenue per unit increase of 6% was due to a number of factors. One was the pricing actions were taken in fiscal year 18 and 19 to offset inflation including steel and commodity prices.

23:33 as well of course as the higher mix of alternative fuels. And also our sales team has been working diligently trying to identify the best revenue we can get on every sale in every state. Gross margin at 13.9% was up 160 basis points versus a year ago. Bus gross profit was 11% which was up 130 basis points compared to a year ago. And the mix of part sales improved from 11.3% of total to 12% at an average margin of about almost 35%. Our net loss obviously reduced to about four tenths. So that was an improvement of $800,000.

24:29 Lower interest costs improved other income and JV income in lower taxes drove the improvement. On an adjusted basis, net income was $2 million positive up from eight-tenths last year. Adjusted EBITDA, we've already mentioned, was up about eight-tenths or 11%, and we'll talk more about that on the bridge. The EBITDA margin of 5.2% for the first quarter was up by half a point versus the prior year. and this is the fifth consecutive quarter with positive year-over-year margin improvement. Diluted earnings per share we've covered and we will talk a little more about the impact of cash and debt when we get to the free cash flow slide.

25:15 Slide 11 is the bridge and walks from first quarter fiscal 19 to first quarter fiscal 20. Big takeaways are volume and product mix improved by $600,000. So we know that the volume was down, but we did have favourable product mix. That is, we sold more of the buses with higher margins than we did in the prior year. In large part, that is due to alternative fuel sales and also part sales mix in total was up. which contributed to the positive news for volume and product mix.

26:00 Pricing net of economics was about a million and a half unfavorable and this was largely due to higher material costs. The higher material costs were net of some favorable movement that we're now seeing in steel and also higher tariffs. You will recall there were tariffs that were implemented in the first half of calendar 19. And so we are still seeing some flow through of those tariffs into our fiscal year 20. Transformational cost initiatives added nine-tenths, which was largely around about continued improvement in design costs and in reducing supplier costs.

26:51 Efficiencies were favourable, and this was despite the fact that we were in launch of the paint shop in the first month or so of the first quarter. So there were a lot of costs involved in getting the paint shop up and running. And so despite all of that, we were able to bring in some favourable years in efficiencies including favourable news and freight and warranty as well as manufacturing. Operating expense and other was unfavourable and that was largely due to the non-recurrence of a temporary rebate program that one of our major suppliers gave us in the first quarter of fiscal 19.

27:38 That did not carry forward into fiscal year 20 and is a large part of the deterioration for that Overall, I think profits upped by 11% in the first quarter was a good result for us. I would just say that, and I think this is reiterating things that Phil said, we continue to work on improving both the per unit revenue and the cost structure at Bluebird as key enablers for achieving our long-term objectives. We talked about bus revenue, gross margin. We are continuing to push on gross margin. and I would say that this could have been higher for the first quarter except that we did incur some costs for the paint shop launch so that dropped us back but we've seen good traction on gross margin. And finally the transformation initiative, I know you look at $900,000 and say well that wasn't very much but it is our lowest quarter in terms of volume and most of the savings are driven by bus sales so it's an important important thing in reducing the cost of each bus we sell. So if you put it in perspective, that $900,000 was worth about $600 a unit on every bus we sold in the first quarter.

28:55 And of course, that will flow through to the buses we sell in the rest of the year and provide for improving our profitability as volumes grow through the year. The next slide, slide 12, is the free cash flow. And you can see here that the free cash flow is off by around about $34 million, at least for the adapted free cash flow, and a similar number for the free cash flow. And the big issue is clearly in trade working capital. Everything else is pretty stable.

29:41 The year-over-year increase in trade working capital is fundamentally all temporary items and they will be eliminated, if not in the second quarter, at least in the balance of the year. There were four principal areas. The first is we have a number of stockpiling actions on some major powertrain components due to some supplier capacity constraints. We have stockpiled a number of engines and that stockpile will run down as we go out of this fiscal year and will be gone by the end of the fiscal year. We also had a work pattern change versus 2019 in the first quarter. Typically we bring in inventory for production in the second quarter in the first week of that quarter, which we all get confused about calendars, but basically the first week of the second quarter is just after New Year, so we tend to bring it in then. Unfortunately, due to the timing of our production pattern in fiscal year 20, we had to bring in a lot of inventory to support October production in the latter part of December.

31:11 And that caused us quite a run-up in inventory going out of the first quarter. Again, that will sort itself out as we go through the second quarter. Bloomberg has been on a major program to consolidate all of our inventory into a single major warehouse to improve load to the plant. and to improve efficiency and profitability. We did all of that move in basically the first quarter of fiscal 20. So we did build up inventory to ensure that we were protected against any glitches as we were moving parts from a number of warehouses to a central warehouse.

32:04 So we took a fairly conservative approach to protect production during this overhaul and I think that while it was a strain on our cash, it certainly paid dividends in not losing production. And finally, we did have a number of buses that were still in working process at the end of the first quarter. In other words, they were largely built but still being finished. These were the more complex buses that we build for the federal government and some buses that we were building for some major fleets that were more like transit buses than school buses and require a lot of incremental work. So those buses will all be delivered before the end of the second quarter and we'll get the majority of that stockpiling or inventory out of the way. So again, I'd say that the engine stockpiling, we'll probably run that out by the end of the fiscal year. Everything else, work pattern change, protection against the warehouse move and the buses that were still in production will be cleaned out over the next several months.

33:23 Final slide, slide 13, looks at our net debt leverage and liquidity. Debt at $215 million was up about $6 million due to the prior year, due to $15 million drawn on the revolver higher than the prior year at that time, and that was really drawn to fund some of the trade with the capital. Net leverage ratio came in at 2.5, again well below the threshold of the covenant at 3.75 and we believe our liquidity at 66 million is good for this time of year and particularly it gives us some fairly solid amount of cushion while we're carrying higher than normal inventories and we would expect to see that growth. as we run down the inventories.

34:16 So that's a brief summary for you and I'll now turn back the discussion back to Phil Holock who will describe the outlook for fiscal year 2020 in our position on governance. Over to you, Phil. Thank you, Phil. So let's now focus on the fiscal 2020 outlook, as Phil just said, and our four-year guidance. And please turn to slide 15. The headline on this slide says, we are soon to continue to follow the plan we laid out to grow margins. We started this two years ago, and we're well on track and well underway with it. Before I just get into the details of that, just a quick comment again about the industry. For three years now, we've been running at about 34,000 units, and these are really 30-year highs that we're seeing. But the great thing is when you look at the outlook here for profit taxes I mentioned before, profit values, funding available for the likes of VW funds to boost some decisions there and make them earlier in the cycle, It does give us real confidence we see in the foreseeable future of holding at this level.

35:17 And it's important also to note, as I mentioned previously, 190,000 buses in a 500,000 fleet across North America is over 15 years of age. So there's tremendous demand to buy new buses. This industry is not slowing down because of lack of demand. As we've consistently stated, our plans to continue profit growth focus on achieving Significant gross margin and EBITDA margin improvement from three key areas. I'm going to repeat myself here. I think it's worth reminding ourselves that our strategy is very straightforward, very simple, and we're executing it. First is annual cost recovery pricing. We took pricing at 18 for surcharges for steel and other commodity increases. And in late fiscal 2019, we took a further 2% price increase on all vehicles and options.

36:08 and that will have a significant annual effect in fiscal 2020 as we've seen a flow through of that late announcement back in fiscal 19. Second, our continued transformational cost reductions. I explained earlier the processes we are attacking now, the various areas we're going into all across whether it's purchasing, whether it's a plant, it's in the manufacturing situations, design. We're exploring every possible avenue. Look how we've done so far. In 18 and 19, We draw cumulative cost savings of $38 million in over those two years, and we expect significant benefits again in fiscal 2020 and beyond. Manufacturing efficiencies and quality will be a key area of focus this year and in future years. And third, as we've been doing this for several years now, we will continue to pursue growth to maintain our leadership position in alternative fuels, which command a superior margin and higher customer loyalty.

37:07 With a record year-to-date mix of 46% of book sales and firm order backlog and the main second half selling season still ahead of us, our alternative fuel leadership position will continue to be a significant boost to selling price and gross margin. Our financial targets for fiscal 2020 are on the glide path towards our previously communicated EBITDA margin goal of a run rate of at least 10% by the end of this fiscal year. Let's now take a look at what all this means for fiscal 2020 guidance to the slide 16. First, no change at all from the guidance that we announced at the December earnings call. Net sales guidance is between $1 billion and $20 million to $1 billion and $50 million, which would be between $2 to $32 million higher than fiscal 2019.

37:56 I want to stress, this is not a plan entirely based on higher volume, but rather a prudent, margin-based approach to drive higher profits and revenue. Just to keep you in our guidance, it's now between $90 to $95 million, a significant $8 to $30 million, or 11 to 16% increase over fiscal 2019. By the way, that's 13% higher at the midpoint of our guidance. As a reminder, we are in a very seasonal business, with typically two-thirds of our sales occurring in the second half of the fiscal year. That said, we expect fiscal 2020 to follow a similar pattern with a vast majority of our profits and improvement over fiscal 2019 being earned in the second half of the year as we realize that higher volume.

38:44 A justice-free cash flow is between 30 and 35 million dollars and continues to be a strong feature of our business model. While this is slightly down from our fiscal 2019 results, this is more than explained by unique standing to support plant upgrades and design changes that drive higher productivity. So in wrapping up, we had a very strong first quarter result in the softest quarter of the year, both operationally and financially. Importantly, all of our production slots are filled through the first half of our year and we are now filling slots in the second half of the year. So we have good visibility on pricing, margins, and profits through the second quarter. Our guidance for fiscal 2020 reflects significant profit and margin growth over fiscal 2019 and is supported by the continuation of the strategy and plans we've put in place and are executing over the past two years.

39:38 That concludes our formal presentation. I'm now going to pass it back to our moderator to begin the Q&A session. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. We'll first go with Justin Clare from Roth Capital Partners. Please go ahead. Hi, everyone. Thanks for taking my questions. Hi, Justin. So first off, I guess, you know, unit sales for Q1 were down, you know, 9% year over year. I was wondering if you could just give us a sense for how much of that decline was due to the extended shutdown that you took.

40:25 to ramp up the paint facility versus, you know, potentially a lower level of orders for that quarter or you being maybe more selective with customers? It was entirely due to the paint show. We took all the orders in. We just timed them out. So I'd expect, it's fair to say, you'll probably see those bouncing back in the second quarter. So it's always the paint show. Now, we're building 50 to 60 buses a day, so you can imagine, You know, you ramp it up slowly. You don't build 40, fix the 60 from the start point. You're building 15, then 20, then 30. So this is just units just into the second quarter. Okay, great. That's helpful. And then gross margins and the adjusted EBITDA margin both improved year over year, you know, despite the lower volumes that you saw. So As volumes ramp up through the year here, can we anticipate margins moving higher through the end of the year?

41:27 Well, I think if you do the math on our guidance, you'd see that. Yeah, we certainly do. I mean, as we see much more volume coming through, and we hold the pricing we put in place, and we keep the alternative fuel mix going where we need to be, yeah, we do see improving margins throughout the year. That's both the gross margin and the download. Okay, and then in terms of inventory, you know, you talked about stockpiling engines. Can you talk about what type of engines were in a shortage and, you know, what the cause was? And then, you know, has the shortage been resolved at this point or is this an issue that's ongoing? Yeah, you know, I wouldn't call it necessarily a shortage of engines that we were protecting for. This was just making sure we're ready for the second quarter start. And, you know, Phil mentioned earlier about the start.

42:23 Back in fiscal 19, you know, January, the first week was a shutdown week. Still a holiday week, actually. In fiscal 2020, January was a production week. So we brought some engines in earlier, and we contained it. But there's no shortage of engines as such. We're just being prudent. Okay, so then I guess related to that, I'm guessing that you didn't have to pay higher prices. Like prices have not gone up for engines as a result of any, you know, shortage. So we shouldn't expect any margin impact there. Is that the right way to think of it? That's the correct way, yes. There's no margin impact on that, no. Okay, great. I will pass it on. Thank you, sir. We'll next go with Eric Pine from Craig Hallam.

43:14 Please go ahead. Hi, everyone. Hi, Eric. Hey, as I always kind of focus on, I would love to chat a little bit about the 111 new alt fuel customers added. Just curious how that breaks down between existing Bluebird customers who are going that direction for the first time and, I guess, Conquest customers, as you call them, and then maybe if you could just talk about kind of the competitive environment given you've got a big lead and just, you know, what are some of the other players, you know, whether it be different technologies, product launches, what are you seeing from them? Well, first of all, your first question, yeah, it's a very good quarter actually, a very good year today with 111 new customers coming in.

44:03 I think typically all of the time, we've been about 50-50 between, you know, Conquest customers, that means people not only new to our alternative fuels but new to the Bluebird brand. And when we look at new to the Bluebird brand, we talk about in the last five years, they've come to us. They may have bought our buses previously, obviously. But when we talk about alternative fuels, we talk about specifically they're brand new to anything, whether it's gas, propane, or electric, or CNG. What's interesting for us is actually the way we count that too is If a guy bought gasoline before and now says, let me try some propane, we don't actually count that as a new customer. He's already in the family. So I think we do a very conservative view of this when we look at it. But we love getting people into alternative fuels because we find the loyalty of that customer base is very loyal because they love the product and there's nowhere else you can buy it from. You can't buy that powertrain for propane, for gasoline, and for CNG from anyone but Bluebird. In fact, you can't drive up by an electric drivetrain, which is powered by a Cummings product, Cummings drivetrain, from anyone else but Bluebird.

45:12 So we like being different. We like being in that position. It's good for us. Yep. That's a good segue to electric. I mean, obviously, another strong quarter. That was one of the big drivers of ASP, the increase there. I mean, it seems like, you know, in the past this has been more of a niche product. It's been more based on incentives and key markets. I mean, do you feel like it is kind of moving beyond that? I mean, I know it's a slow process, but moving beyond that and is becoming more of a mainstream outside of those specific examples? Well, let's put it this way. We're still in a situation where unless there are significant grants available customers cannot afford to buy an electric powered school bus.

46:00 It's anywhere from three to four times the price of a traditional combustion engine type of bus. That's a fact. But what you are seeing is a lot of states saying, let me try a few. I'm going to put some funds to all of this. Let me try a few. But they know the school districts will be so out of pocket. And everyone knows that battery technology is going to improve. They're going to come down in price. You see all of that data right there. A lot of intrigue around Vehicle to Grid at where it's going and Fast Charge and all these things. So I think what I'm telling you is that it's not, I would say it's mainstream, although probably it's in California because they are, they're so keen on zero emission in California. They put a lot of grants behind this. But they're unique. They always have been in this space. Zero emissions for them is mainstream.

46:45 But I would say that there's an incredible growing interest and fascination for trying this really across the country. and what you see, like I said before, funds are available, the VW funds. In many cases, in most cases, I would say, there's always an element portion to let you buy a few electric buses. So I think, yeah, it's picking up momentum. We just want to be there, obviously, and capitalize on these opportunities. Yep. Okay. And then last one for me, just on the parts business, I mean, that was another strong quarter, also a big driver of the margin improvement. You know, maybe just a discussion on that. I know you had the launch of the X-Parts, you know, that offering. I believe it was last fiscal year.

47:33 And so maybe just, you know, outlook in the parts business and how that's, you know, played out versus your original expectations. Yeah, well, I think, you know, I think if you look at last year, 7% growth was a nice growth in an industry that I call it was flat, right? So that was good. We grew and we continued in the first quarter. You take out the extra sales we got, Eric, I mentioned. It was still a strong 8% to 9% for the growth level we got in that first quarter. So really nicely done. I think the ex-parts program, we're stocking that every month with new SKUs. We're putting new parts in there. Our dealers are picking it up. We're nowhere near, I can't declare victory yet. There's a long, long way ahead, but it's got a lot of interest, and we're definitely picking up new business because of it, I can tell you that.

48:22 I think also, the second point is that, you know, we've been at this business with the Ford products since 2012, so what we're seeing now is more and more units are coming up warranty, and now we're into getting to the service mode, replacing parts, and we're unable to do that. Unlike other powertrains out there, in the market. We're allowed, Ford gives us the right to be very competitive on all of those parts that they put into the engine and transmission. That's also a growth we're seeing. And I guess that's in a way more access to the market. We've got a Brigger SKU base now than we have had before. And we think that's pretty important to grow in this business. And so, yeah, I think it's going well. And I think it's 7% growth in the first quarter. It's not this quarter of the year.

49:09 It's pretty good coming off a school start. OK, thanks a lot. You bet. Thanks, everybody. Thank you. We'll next go with the research. Please go ahead. Hi, everyone. I'm somewhat new to the name. Just wanted to ask about, I know you're doing a lot better in your margins. Would you say that you'd reach profitability in the next coming year? You know, could you give us an idea on that? So give me that again, reach profitability, and I want to hear what you're saying.

49:59 I missed it. You just cut that a little bit, Chris. Oh, okay. You know, it seems like things are improving. Could you give an idea about, you know, maybe about what quarter you could reach profitability? Well, I think, look, we tend not to give, we don't give guidance by quarter. We give guidance the full year. And we've certainly said that by the end of this year, we expect to be at a run rate to get to our 10% plus margin objective. That's where we want to be. So that's all we're really putting out there right now in that, you know, we'll take it as a quarter of time. See how we go. We're going to keep delivering quarter by quarter. And every margin, you know, so far we're up nicer this year in both gross margin and EBITDA margin, and we look to improve.

50:49 Okay, great. One other thing, I know you mentioned about tariffs. Do you see those improving this coming year? And will it make a big difference? Well, when I last called the president, he wasn't willing to tell me he was pulling off the tariffs yet. No, I mean, I think what's happened is we are not planning in our guidance what we're given of tariffs coming off, Chris. So if they do, obviously that would be a big boost for them. I'd like to think that over the course of time, we'll see tariffs coming down. But our guidance and our objectives we're putting out there do not reflect that. So I think we've just got to wait and see what happens. It's also worth bearing in mind, we work with many of our suppliers.

51:37 When they look at repricing, they look at what's happened to them in the last anywhere from six to 12 months. For example, one of our major suppliers last year put on tariffs in the early, I guess at the start of the second quarter, basically in 19, because they looked back on what they were doing, what had happened to them, and that's the way they worked. They looked back at the last several months and they put a surcharge on. That actually did impact us in 19. I think most people think tariffs have to work. We saw them later. But the bottom line is I think we don't plan on reducing tariffs, but I think we'd like to return this opportunity, I guess, down the road. What sort of impact did the tariffs have on your earnings per share?

52:33 Yeah, I'd have to... We'd have to get back on that. It wasn't major, but, you know, it certainly had an impact on UD's per share. And I guess you'd have to look at it over the year rather than a quarter, because it would be, you know... So, again, I mean, and I think Phil said it exactly right. We're not planning on the tariff coming off. When it does come off, it will clearly be an improvement to margin. Okay. Great. Well, thanks for taking my question. Thanks, Craig. Thank you. Thank you for your question. And just to remind everyone, if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad.

53:25 We'll next go with Lewis Moser from Massax Investments. Yes, I was wondering about the announcement you made, I believe it was yesterday afternoon and once again early this morning, about a shareholder that is selling 11 million shares. Can you talk about that? I'll let our treasurer handle that comment. Hi, Louis. This is Paul Yusuf. That free registration yesterday registered 11 million shares. We first registered those shares back in 2015 when Cerberus owned those shares. Subsequently to that, those were sold under a private transaction to American Securities. We simply re-registered those shares. They own those shares.

54:10 There'll be no proceeds to the company. That registration will be good for three years. Okay, so it's over a period of time. Yeah, all this was was good housekeeping, right? Just re-registered the shares. That's all it is. Okay. Thank you. Thanks, Louis. Thank you for your question. Once again, to remind everyone to ask a question, please signal by pressing star 1 on your telephone keypad. We'll give you a few seconds. While people are waiting, this is Phil Tai. I need to make one clarification. I believe at my opening address I referred to filing of a 10-K tomorrow.

54:55 It's actually a 10-Q, so I don't want anybody to be confused with my mistake. It's a 10-Q that will be filed tomorrow. Thank you. This concludes today's question and answer session. I'd like to give back the floor back to the moderators. Thank you. Okay. Thank you, Nadia, and thanks to all who have joined us on our call today. We appreciate your continued interest in Bluebird, and as you can see by our first quarter results and our full year outlook, we are focused on total profit growth and margin growth, and we intend to deliver on our commitments. And I believe we're well positioned for growth today and in the future. So please don't hesitate to contact our Head of Profitability and Investor Relations, Mark Benfield, if you have any follow-up questions.

55:44 Thanks again from all of us here at Bluebird, and have a great evening. This concludes today's call. Thank you all for your participation. You may now go ahead and disconnect.