BLBD - NASDAQ

Good afternoon. Thank you for attending the Blue Bird Fiscal 2025 Third Quarter Earnings Call. My name is Matt, and I'll be the moderator for today's call. [Operation Instructions] I would now like to pass the conference over to our host, Mark Benfield, Head of Investor Relations. Mark, please go ahead.

Thank you, and welcome to Blue Bird's Fiscal 2025 Third Quarter Earnings Conference Call. The audio for our call is webcast live on blue-bird.com under the Investor Relations tab. You can access the supporting slides on our website by clicking on the Presentations box on the IR landing page. Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted on the following 2 slides and in our 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 President and CEO, John Wyskiel; and CFO, Razvan Radulescu. Then we will take some questions. Let's get started. John?

Thanks, Mark, and good afternoon, everyone, and thanks for joining us today. It's great to be here, and we're excited to share with you our financial results for our fiscal 2025 third quarter. Once again, the momentum continues, and the Blue Bird team is doing a fantastic job and delivered record sales and adjusted EBITDA in the third quarter of fiscal 2025. Razvan will be taking you through the details of our financial results shortly. So let me get started with the key takeaways for the third quarter on Slide 6. As shown in the first box, with record sales and adjusted EBITDA, we beat our Q3 guidance and increased our full year guidance as well. And this is despite the impact and challenges associated with the administration's policy on tariffs, which is currently creating some uncertainty in the overall market. The uncertainty in pricing translated into an overall reduction in industry backlog, including ours. We will talk more to this, but despite the drop in orders, our backlog at 3,900 units is still at what we describe as, 'in the sweet spot.' During the quarter, we had strong operational execution and performance, which is a testimony to the team's dedication. But we also took the quarter to deep dive our long-term manufacturing strategy. As we've communicated prior, we are slated to build a new factory to support forecasted volume. But we're using this period to challenge our detailed plans and to ensure we can be even more competitive. We are looking at where we can apply production automation, automated material movement and manufacturing execution systems, systems which bring shop floor connectivity and ease of data collection. The objective is to build steps of cost reduction and a manufacturing road map into the future. This area of the business really excites me. In terms of pricing, we remain disciplined. Bus prices remain higher than the previous year and the previous quarter, and we remain competitive as we continue to see from our bid results and overall win rate. Our track record of dominance in alternative powered vehicles continues. While EV demand softened again with all the tariff uncertainty, the outlook in this area remains strong. Alt Power is a segment we created more than 15 years ago, and we remain in the lead position. Earlier, I spoke about further developing our manufacturing strategy. As we develop that strategy, we will invest in projects that have clear and strong returns. But we also will be reinvesting back into the business by developing new product features and differentiated products that will hit the market next year, and the years to come. We recognize targeted investment in our operations will lead to better performance on the manufacturing side of the business, and investment in our product portfolio will grow the top line. Consistent with what I've communicated in the last call, it is our objective to position this business to be a strong long-term investment. And similar to almost every business in the country, we are also dealing with the impacts of the administration's executive orders and tariff volatility. We are fortunate to be well positioned to navigate this situation to a margin-neutral outcome. Overall, adjusted EBITDA for the quarter came in at $58 million or 14.7%. That's over $10 million better than compared to last year's third quarter. Now let's turn the page and take a closer look at the financial and key business highlights for the third quarter on Slide 7. We sold 2,467 buses in the third quarter and recorded revenue of $398 million, a quarterly record and almost $65 million ahead of last year. On the EV side, we sold 271 vehicles, 11% of our volume, and our long-term outlook for EVs remains optimistic. As already mentioned, adjusted EBITDA for the quarter came in at $58 million, $10 million stronger than last year, and free cash flow came in at $52 million. Razvan will talk more to this and our outlook later in this call. Turning to the right side of the page, I will start with backlog. Backlog, of course, is a function of orders and build rate, and there is no question the volatility in tariffs is having an impact on orders. The consistent movement in tariffs just creates uncertainty. It puts school districts in the mindset to purchase when things just settle down. So with that, we have taken action to offer some certainty in our pricing in to next year. Razvan will talk to that further. But I will qualify a couple of other things. We can see that our order decrease between Q3 and the previous quarter matched the industry. So this is not a performance issue. And our orders for the quarter were 1% stronger when compared to last year's orders for the same Q3 period. More importantly, the fundamentals are still there. The fleet is aging. We're coming into a heavy replacement cycle, and there has been an industry supply issue in the last few years, leaving pent-up demand. So all of this points towards this situation being temporary rather than long-lasting or structural. And to put it in context, we have consistently said that our sweet spot is in the 4,000 unit range for backlog. Third quarter average selling price for buses was up almost $7,700 per unit. But of course, this includes the tariff recovery as part of our margin-neutral tariff strategy. And with tariffs excluded, pricing was still up quarter-over-quarter, and part sales totaled $26 million in Q3. Alt powered buses represented a strong 61% of unit mix in Q3. Again, this compares with a typically less than 10% to 15% mix for our major competitors. And we benefit from higher margins and higher owner loyalty with our gas and propane products, as we are the exclusive supplier to the industry today. At the end of the quarter, we had a combined 1,200 EVs either booked or in our order backlog. Our latest forecast reflects approximately 900 EV unit sales for the full year. Overall, we remain optimistic on EVs in the bus sector. EVs are a perfect fit for the school bus market when you look at the duty cycle, available charging intervals, range and the proven health benefits to our children. The current EV backlog is over 500 buses and represents $174 million in revenue. Throughout the quarter, it was very encouraging to see rounds 2 and 3 of the EPA Clean School Bus program continuing to flow to our end customers. And we are seeing rounds 4 and 5 are still in play. We are hopeful to soon hear when and how these funds will be administered. And reimbursement funds continue to flow for our $80 million MESC grant with the DOE. This is for further funding towards our new plant in Fort Valley. As a reminder, this project adds 400 well-paying American jobs to a century-old American company and an iconic brand to build school buses, providing our children with the benefits of clean air. As I said in our prior earnings call, it really is a great story. As a special note, during the quarter, we started production in our Micro Bird, Plattsburg, New York plant. Micro Bird is a joint venture between Blue Bird and Girardin. The new plant manufactures small buses, primarily targeting the Buy America U.S. shuttle bus market. As a reminder, this new segment entry was announced in December 2024 and will double our small bus capacity. I would like to congratulate the entire Micro Bird team for doing an outstanding job. Similarly, we've continued to make progress on our, which I spoke to last quarter. We are entering the final testing phase now, and we will be moving into production in 2026. This chassis is targeted to be best-in-class, and we are excited about the opportunity. Back to the overall business. We beat our guidance for the 11th consecutive quarter and are increasing our full year guidance. With a 14.7% adjusted EBITDA margin and record profits in Q3, I'm very proud of our team's accomplishments. So I'd like to now hand it over to Razvan to walk you through our fiscal 2025 third quarter financial results and full year guidance in more detail. Razvan?

Thanks, John, and good afternoon. It's my pleasure to share with you the financial highlights from Blue Bird's fiscal 2025 third quarter and year-to-date results. The quarter end is based on a close date of June 28, 2025, whereas the prior year was based on a close date of June 29, 2024. We will file the 10-Q today, August 6, after market close. 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 to today's presentation includes reconciliations of differences between GAAP and non-GAAP measures mentioned on this call as well as other important disclaimers. Slide 9 is a summary of the fiscal '25 third quarter record financial results. It was another great operating quarter for Blue Bird with highest ever EV volume, and we beat our guidance provided in the last earnings call. In fact, we delivered again the best quarter ever in terms of both top line and bottom line as a testament of our continued profitable growth journey. The team pushed hard and did a fantastic job generating 2,467 unit sales volume, which was 15% above prior year level. All-time quarterly record net revenue of $398 million was $65 million or 20% higher than prior year, driven by product mix and pricing actions that materialized in this quarter. Adjusted EBITDA for the quarter was an all-time record $58 million, driven by improved bus margins, partially offset by increased investments in headcount, engineering and business growth areas. The quarterly adjusted free cash flow was very strong at $52 million and $56 million higher than the prior year. This result was due to continued strong profitability across all bus and powertrain types, strategic cost management and small improvements in working capital. Looking on the right side at the first 9 months of the fiscal year, we crossed already the $1 billion mark and posted all-time record revenue of $1.071 billion and all-time record adjusted EBITDA of $153 million, both improved versus then record last year's first 9 months. Moving on to Slide 10. As mentioned before by John, our backlog at the end of Q3 is just under our sweet spot at almost 4,000 units. While the tariff uncertainty significantly reduced orders in Q3, based on discussions with our dealers and customers and fundamental industry dynamics, we believe that this is temporary, and we expect the pace of orders to pick up in the rest of calendar 2025. Actually, with many trade deals already completed, for example, China and the European Union and with USMCA still in effect, our line of sight to our cost has improved and we implemented in July pricing actions that provide stability through the end of March. Our backlog at the end of Q3 includes over 500 EVs. Rounds 2 and 3 of the Clean School Bus program are flowing again as confirmed by the EPA in April, and the funding for rounds 4 and 5 is still in play in the future. Breaking down the Q3 $398 million in revenue into our 2 business segments. The bus net revenue was $372 million, up by $64 million or 17% versus prior year due to higher EV mix and improved pricing across non-EV products. As a result, our average bus revenue per unit increased from $143,000 to $151,000 or approximately 5%, of which approximately 2% is related to tariffs pass- through. EV sales in Q3 were a record 271 units, which is 67 units or 33% higher than last year. Parts revenue for the quarter was flat year- over-year at $26 million. Gross margin for the quarter was 21.6% or 80 basis points higher than last year, in line with our targets. Also, the team has done a great job managing the tariffs with our supplier partners and with our customers. And as a result, our margins have not been negatively impacted during this quarter. Adjusted EBITDA of $58.5 million or 14.7% was higher by $10 million compared with the prior year and showed a 20 basis point improvement. In fiscal '25, Q3 adjusted net income was a record $39 million or $8 million higher than last year. Adjusted diluted earnings per share of $1.19 was up by $0.28 versus the prior year. Slide 11 shows the walk from fiscal '24, Q3 adjusted EBITDA to the fiscal '25, Q3 results. Starting on the left at $48.2 million, the impact of the Bus segment gross profit in total was $16.7 million with volume, EV mix and pricing effects, net of material cost increases of $14.3 million and operational improvements of $2.4 million. Those include the USW labor agreement wage increases now in full effect, which were more than offset by other efficiency improvements, lower freight costs and quality improvements. The Parts segment gross profit was flat year-over-year, staying at a very strong level. Our fixed costs and other income were unfavorable year-over-year by $6.4 million due to increased headcount and investments into our growth areas. The sum total of all of the above-mentioned developments drives our all-time record fiscal '25, Q3 reported adjusted EBITDA result of $58.5 million or 14.7%. Moving on to Slide 12. We have extremely positive developments year-over-year also on the balance sheet. We ended the quarter with a record $173 million in cash and further reduced our debt by $5 million over the last year. Our liquidity is very strong at a record $315 million at the end of fiscal '25 Q3, an increase of $83 million compared to a year ago. Additionally, we have executed another $9 million tranche of share repurchases, which brings us to $49 million completed over the last 12 months with another $11 million left to go on the existing program. More good news on this on the next slide. The operating cash flow was very strong at $57 million, driven by great operational execution and margins and small improvements in working capital. On Slide 13, we would like to give you an update of our capital allocation strategy for the next 2 years, fiscal '26 and fiscal '27 and the new exciting share repurchase program recently approved by our Board. Our capital allocation strategy balances investments for long- term profitable growth, return of value to our shareholders and maintains a conservative cash position. On the left side, our $475 million sources of cash consists of very strong cash flow from operations after tax and interest of $300 million over 2 years, plus existing cash of approximately $175 million. We do not expect, at this point, to add new debt over this period. However, we do have borrowing capacity, both on the revolver and in our long-term debt agreement, should this become necessary. On the right side, we have 3 uses of cash: organic and inorganic growth, shareholders, and small debt repayments. As far as growth is concerned, we plan to invest approximately $150 million over 2 years with the MESC program for the new plant and other manufacturing expansion and automation projects. And we have a not to exceed $50 million over 2 years in each of these categories, R&D and engineering expenses, CapEx for growth and maintenance and potentially small M&A activities. Moving on to shareholders category. We are very happy to announce our next stock buyback program for up to $100 million over the next 2 years. This is supported by our strong existing cash position and free cash flow generation, and we believe it is the best way at this point to return value to our shareholders in parallel with our profitable growth investments. Finally, in addition to the required term loan principal payment of $5 million per year, we plan to maintain a conservative cash balance at each year-end in excess of $50 million. On Slide 14, given our strong performance year-to-date, today, we are raising our full year guidance for fiscal '25 to $210 million adjusted EBITDA and 14.5%. But first, looking at Q3 actuals, we have beat once again our guidance this past quarter. So we had a very strong and record-breaking first 9 months for the fiscal year. On the Q4 adjusted EBITDA side, we are increasing the bottom end and midpoint of our guidance given the higher certainty on tariffs. For the total year, we are tightening our revenue guidance to approximately $1.45 billion, and we are raising our adjusted EBITDA to $210 million or 14.5% with a narrowed range of $205 million to $215 million. Moving to Slide 15. In summary, we are forecasting an improvement year-over-year with revenue up to approximately $1.45 billion, adjusted EBITDA in the range of $205 million to $215 million or 14.5% and improved adjusted free cash flow of $90 million to $100 million. The free cash flow guidance is in line with our typical target of approximately 50% of adjusted EBITDA, and it includes on top the extraordinary CapEx of now up to $10 million with our 50% fiscal '25 portion of the new plant investment funded by the DOE MESC grant, which is currently proceeding, albeit slower than initially planned. The delay in spending is due to the comprehensive review of our manufacturing long-term strategy, conducted by the team this summer under the leadership of our new CEO. We are reevaluating our strategy and its supporting manufacturing footprint for long- term success. Some new elements we are considering, for example, are opportunities for automation in the new plant, which could reduce our costs and make us even more competitive in the marketplace. On Slide 16, we want to share with you our initial thoughts on fiscal '26 business environment and preliminary guidance. We continue to have a number of both tailwinds and headwinds at play this year. As tailwinds, we have strong bus demand, stable pricing and a solid industry backlog. We offer not only diesel and gasoline school buses, but we have the only propane fuel school bus in the industry, with clean fuel and best-in-class total cost of ownership. We are also leading in the EV segment with over 2,000 EV buses on the road. The state subsidies continue to be strong. EV pure-play competitors have gone out of business in the U.S., and we have already over 1,200 EVs sold and in backlog at the end of June. As headwinds, there is still some demand uncertainty driven by tariffs. However, the situation has been improving, and it appears to be stabilizing at reasonable levels. On the labor front, our second year of the USW union contract provides for predictable wage increases. However, our health care and insurance costs continue to increase year-over-year. The material cost and supplier inflation pressures are still present, and the newly implemented tariffs are impacting our cost of goods sold over time, with bus pricing countermeasures already announced, driving to a margin-neutral outcome. In summary, we are preliminary guiding units to 9,500, including 750 EV buses and approximately 100 propane commercial chassis, driving revenue to $1.5 billion and adjusted EBITDA of $220 million or 14.5%. Moving on to Slide 17. Given our strong business momentum, today, we are raising the medium-term outlook to 15% margin with volumes of up to 10,500 units, including 500 commercial chassis, generating revenue around $1.6 billion, and with adjusted EBITDA of approximately $240 million. Starting in 2029 and beyond, our long-term target remains to drive profitable growth to now even higher levels, towards $1.8 billion to $2 billion in revenue, comprising of 12,000 to 13,500 units, including 1,000 to 1,500 units commercial chassis and generate EBITDA of $280 million to $320-plus million or 15.5% to 16% plus at best-in-class levels. The profitable growth comes not only from improved EV mix driven by sustained state funding and improved EV total cost of ownership over time, but also from our new Blue Bird commercial chassis addressable market expansion as well as our Micro Bird joint venture new plant expansion in the U.S. We continue to be incredibly excited about Blue Bird's future. And now I'll turn it back over to John.

Thank you, Razvan. Let's move on to Slide 19. We have shown this slide on several earnings calls, so I won't spend too much time on it today, as the priorities remain consistent. The chart on the left side of the page outlines our Blue Bird value system as a company, taking care of our employees, delighting our customers and our dealers and delivering profitable growth. And the right side of the page shows how we get there. And of course, the objective of delivering sustained profitable growth for our investors is at the center of it all. When you turn to Page 20, I want to remind everyone again of Blue Bird's history and resilience. Over its history and more recently, after the COVID and inflationary period that affected the entire industry, we restructured our commercial and manufacturing practices to improve our business. So looking at 2025 and beyond, we are really coming into our moment. Razvan took you through the guidance for fiscal '25, and I'm showing you some of those key metrics at the midpoint guidance on this page. First, our bookings outlook shows volume increasing 3% over fiscal 2024. Consistent with the last call, net revenue at $1.45 billion will be a new record for Blue Bird, up 8% from fiscal 2024. And adjusted EBITDA guidance of $210 million is just under 15% higher than our fiscal '24 results. Importantly, we are planning on a strong 14.5% adjusted EBITDA margin in fiscal '25, up 90 basis points from fiscal '24. And finally, we are forecasting to grow EV unit sales to 900 buses in fiscal '25, up 28% from last year. On the right chart, you'll see there's a lot of pent-up demand following the low industry sales over the last 5 years, and the bus fleet has continued to age. I spoke to the fundamentals when discussing the backlog at the beginning of the call, and ACT is forecasting a 6% compounded annual growth rate through 2030. So again, we believe the data points towards strong long-term demand, which is great for us and the industry. So I'll wrap up with Slide 21. First, this great company and iconic brand is almost 100 years old. Blue Bird has stood the test of time, and it continues to be poised for an exciting future. We remain confident that the Clean School Bus Funding program will continue. It's a bipartisan initiative. It's 100% appropriated with rounds 4 and 5 still in play, and it eliminates harmful tailpipe toxins, benefiting our children and our communities. And we also remain optimistic on overall near-term and long-term school bus demand. Again, we delivered record results for the quarter, increased our full year guidance and announced a $100 million share repurchase program coming off our previous $60 million program. And this kind of performance has put Blue Bird in a position to really look long term, as we invest and enter new segments and upgrade our operations. As always, I want to thank our employees, our dealer network and our supply partners. All are critical to our success. Similar to my message in the last call, I'm excited to be back at Blue Bird Corporation. 2025 has been an incredible year with record results, increased guidance, a great history and an exciting future. Thank you. So that concludes our formal presentation today, and I'd like to now hand it back over to our moderator for the Q&A session.

[Operator Instructions] First question is from the line of Mike Shlisky with D.A. Davidson.

Maybe you could touch first on the order and backlog commentary that you've given us. I guess it's a 2-part question. I mean, first, I mean, doesn't order season doesn't it start until after the holidays, after like January or so, when folks plan for next year. It's usually a pretty slow season in summer. So I was just kind of curious, first, if there's any seasonality we should be thinking about here? And we're not going to know what's going to -- what's kind of really happening until January, February. Maybe I'll just start with that as my first question.

Yes. Thanks, Mike. Look, maybe I'll just touch on a couple of things in general on the backlog side, just for some data points. So first of all, I want to just compare Q2 to Q3 and just put it in context. The drop -- if you compare Blue Bird to the industry, the drop was within 0.3% of each other. So really, it means Blue Bird and the industry came down. And then if you look at the backlog across the year, and you go to March, we were within 3% of where we were at the start of the year. The backlog really dropped in April, and that coincides with liberation Day and the tariff announcements. And I think our perspective is that the districts just don't know how to deal with the uncertainty due to tariffs. And a bit of an analogy, but it's a bit like being on a plane during turbulence. The passengers put on their seatbelts, they buckle up and they sit down because they just don't know what's going to happen next. And the pricing certainty that we've extended into next year is like coming into smooth air. So the passengers or in our case, the school districts, can unbuckle and begin to move around. So we see this as something positive. Now again, a couple of other things here, just more on the fundamentals. We have an aging fleet. We're coming into a heavy replacement cycle. The prior year supply was pent-up because of supply issues. And then the budgets haven't disappeared. So I think from our take, it's dropped, but it's temporary. We don't view this as something long term.

Great. Just to follow up on the other part of my question then. I appreciate the aged fleet out there, but are the districts actually on the phone telling you and the dealerships, we're just going to hold off temporarily for the orders until we figure out the tariff situation. Is that verbally what they're saying? Or are you making -- is that what the timing of the orders kind of suggest that there's no actual evidence from calls or discussions with your customers?

Yes, Mike, this is Razvan. So we are working very closely with our dealers and with the school district. So we know firsthand that the reason why they were not placing orders is because of the uncertainty on tariffs or -- and pricing relates to tariffs, which we could not provide in the past due to the volatility. Now that the tariffs are stabilizing at somewhat reasonable levels, we have a better line of sight to our cost. And therefore, we extended certain pricing, at least all the way through March. And therefore, the schools are now feeling more comfortable to start to put again orders and know what the final price of the bus is going to be at delivery.

Then just turning to the operational side. Can you maybe comment on the range of operational improvements that have been made over the last bunch of quarters here? I think folks want to make sure that the margin tailwinds that you've got that appear to be continuing are the result largely of the operational improvements and not simply a change in the mix to higher EV. Just some thoughts as to how, just kind of -- how sustainable are the current margins even if the EV volumes change up or down from here?

Yes, Mike, this is Razvan. So we are working in the operations and with the entire team to identify opportunities for continuous cost improvement for efficiencies. We are tweaking the operations of the plant to lean manufacturing principles. So many of the improvements over time and not just this year, but over the last couple of years come from that angle of stabilizing operations and improving efficiency. In terms of product mix, we are less sensitive than in the past to product mix. As we said multiple times, our gross margins are roughly the same percentage point, percentages across all powertrain types. So therefore, we are very confident that our margins are sustainable, and we are projecting same or improving slightly in the near future.

Yes. And Mike, just a couple of things to add, too. I think if you look at the historical improvement we've had, say, the last couple of years, it's been on the lean manufacturing or the elimination of waste side. And I think if we look ahead, based on the initiative we're kicking off now, the benefits we'll see in the future are more through automation. We definitely have some opportunities in that area when we look at our manufacturing processes. So I think looking back and then looking ahead, it will be 2 different sources in terms of improvements.

Yes, John, I was going to ask that question last, and I'll kind of leave it here. Do you -- as you look at the automation that's available to you and the possibilities, the margin upside from here in your outlook is 1%, 2%. Do you feel like what you could bring with automation might be the entire 1%, 2%, and then we can add margins on top of that? It just sounds like the opportunities are much more than just 1 point.

Yes. I think it's -- listen, Mike, it's John again. I think it's early, and we're still quantifying things. So right now, we're at the point where we're working with automation integrators, and we're working on the business cases. What that adds up to just yet, we don't know. But I do think there'll be some margin expansion opportunities.

And Mike, this is Razvan. So if you noticed on our long-term outlook, we went straight to 16% plus. We skip the 16% step, which we've done in the past. So there is definitely some more upside to our long-term outlook. But as John said, it's still early. We're still evaluating. So as things become clearer, we may update it in the future.

Next question is from the line of Greg Lewis with BTIG.

First one is a quick one. As I look at the -- you did a good job of laying out the backlog and the EV backlog. As I kind of look at -- kind of what is expected in the final quarter of the fiscal year and looking now at next year, I guess, as we think about projected EV sales, how much visibility do we have to that related to backlog?

Greg, it's Razvan. Thanks for the question. So where we sit today at the end of Q3, we have 500 units in the backlog at that point in time, and we are projecting to sell about 200 units in Q4. So -- we have 300 units surplus for next year if we don't get any orders, which is not the case. We still have rounds 2 and 3 flowing. So we are continuing to receive orders from those. We will have, at some point, rounds 4 and 5 coming into play. We don't know yet exactly when, but we are expecting that from the EPA. We are working on a couple of discrete opportunities for certain fleets, for example, EV business that each one in itself could be more than 100 units or a couple of hundred units. So it's -- while there is a range, and we put a wide range there between 500 to 1,000 for next year, we are working on opportunities to go to the upper end. So we feel very good about the 750 midpoint right now.

Great. And then as I think about the EPA school bus program, beyond that, it does seem like states like, I guess, New York and California are kind of still coming -- have their own incentive programs. Is that kind of where -- when we think about on the EV side deliveries, is that kind of -- as we look at it beyond the EPA, which we'll see how, I guess, Phases 4 and 5 come in the market. But beyond that, is there any other states we should be thinking about other than California and New York to really drive EV momentum here over the next kind of 12 to 18 months, exclusive of EPA?

Yes. No, it's a great question. So -- of course, we talked about rounds 4 and 5, and then you have state funding as well. There's about $1 billion plus approved there. And some of the states we've already touched on, New York, California, Oregon, Illinois, Michigan, I mean those are the prime states. And then as well, as Razvan mentioned, some discrete opportunities as well. So I think there's definitely opportunity looking at that when you boil it down to the state side.

Great. And then just one more for me. Kind of on the small scale, maybe looked like some working capital was freed up with some inventories coming lower here. Should we be thinking about any seasonality around inventories just as we move into the final quarter of the fiscal year?

Yes, Greg, this is Razvan. Thanks for the question. So at this point, we have a fairly constant level of production that we are keeping. We don't expect significant movement in working capital. I would say there are 2 exceptions to that, that might come into play. One is to the extent that we will sell a higher number of either fleet or GSA units, that creates an account receivable that takes more than normal to collect the cash. So that may carry from one quarter to the other. Then secondly, to the extent that we decide is necessary from a supply chain, either stability or tariff play, we might do some prebuy of inventory to ensure we can produce and we can lock in certain prices. So those are the 2 things. But again, they come throughout the normal course of business. And to the extent that they happen, we will inform you about them in our next quarterly earnings call.

Congrats on the great quarter.

Next question is from the line of Eric Stine with Craig-Hallum.

So when we think about the electric school buses and obviously, given battery prices and prices higher and the funding uncertainty, although reasons to be cautiously optimistic. Just curious, I mean, are you seeing school districts opt to go propane? Maybe if you are the extent of that and any potential share gains or conquest wins from other OEMs?

This is Razvan. Thanks for the question. So at this point, we haven't seen a direct substitution from EV to propane. However, we know our propane offers the lowest total cost of ownership for the school district. So those that are focused on that aspect choose to go the propane way. And then on the EV side, it's still at this point related to the level of subsidies that are available. And those who choose to go that route usually have significant subsidies behind them. So there isn't a lot of direct crossover at this point in time.

And then maybe if we could just touch on pricing. As I think about COVID and coming out of COVID and all the supply chain challenges and the different pricing structure and mechanisms you had to put in your contracts to protect the company. I'm thinking about that and also thinking about that you've put in stable pricing through, I believe, March. And I know that the tariff situation has calmed down a little bit, but also know that -- I mean, that can turn with a tweet. So just curious kind of the protections that you have in place or maybe a different approach to be able to do that to your customers while still protecting margins.

Yes, Eric, thank you. This is Razvan. So definitely, we have been working a lot over the last few years to restructure the way we go to market, our pricing strategy and our contract and we've demonstrated through our results that we are able to work with our customers and pass through certain increases when they happen. In terms of tariffs, we are fortunate that we are not that exposed to tariffs. Majority of our sourcing comes from North America. And with USMCA still in place, so Canada and Mexico are in a good spot for us. Where we had higher exposure was on the EV, especially from China, that seems to have stabilized at a 30% level. And also recently, the European Union at 15% seems to have stabilized as well. So working together with our supply chain partners and through different negotiations, we have a good line of sight to a majority of the tariff impact, at least through March. And therefore, we offered a certain certainty of pricing through March for our customers. We are obviously monitoring the situation to the extent that something catastrophic happens, we may have to revisit one or the other thing. But in general, we believe we can navigate this to a margin-neutral outcome for us.

And then maybe last one for me. Just on pricing. I mean, I guess my question was going to be or always curious if there's any pushback because obviously, given tariffs and everything going on, you have had to raise prices quite a bit and push on price. Do you still feel like pricing increases kind of understood by the industry that not necessarily pushback on those increases, but it's just more about the volatility than anything else?

Yes. So our position is very clear. Tariffs are a form of tax imposed by the government, and therefore, it doesn't necessarily have something to do with us or neither of the major players in the industry. And therefore, the customers understand that we do have to pass this on when they happen.

Yes. And maybe just one other point, when you talk about pricing because one of the things we took a look at was how the sources of funding come in, which is really through property taxes. And we did a study looking back basically from 2020 to current. And what we found is our pricing has not outrun property taxes. So it means that from our perspective, there's room and this thing isn't fatigued.

Yes. Maybe one more thing to add quickly. In terms of the pushback, it has more to do with the timing and the uncertainty than the level of tariffs that we have put in place, and this is what created a bit of a slowdown in the order intake. But again, with our countermeasures, they believe now we can unlock that, and they expect orders to pick up through the end of 2025 calendar year.

Next question is from the line of Chris Pierce with Needham.

On the pricing action that you're taking, is this something you're seeing across the industry? Or is this offensive to take share, defensive to hold share or that sort of need here or there?

Chris, this is Razvan. So, so far, we have been seeing similar actions from our competitors as far as the initial level of tariffs that were put in place from what we can see from different bid steps. Our latest move was fairly recent to basically give stability through March, and we have to see what the competitors will do regarding that. But overall, we feel pretty good that we continue to remain competitive and at the same time, able to protect our margin and be neutral on the tariff.

And if I look at the long-term slide, you guys consistently update, you used to have EVs and those are sort of the thought was that those were additive to margins, but you sort of swapped out EVs for now a low level of chassis. Is chassis additive to margins? Or is that not the right way to think about it? It's just the consistency you've shown that you're able to get on pricing and manufacturing gains, and that's what's driving margins? And is there a chassis order book that gives you confidence in these numbers? Or like I'm just kind of curious what happens or what gives you confidence to put these numbers out for the first time?

Yes. So this is Razvan. So in terms of the EV projection in terms of mix for the medium to long term, obviously, with the recent changes, both at the EPA and in the administration, we are not able to put fixed numbers out there that we can commit to. So however, what we said in the last couple of earnings call is we have had other engines of growth, especially on the top line that are offsetting a potential reduction in the growth of EV that we were previously forecasting. Chassis being one of them, this brings both revenue enhancement and it comes with good margins. So it's profitable growth. Then secondly, from the Micro Bird, our expansion in the U.S., especially now with the new plant acquired in Plattsburg, New York and addressing the shuttle bus Buy America segment, that will bring us additional net income, so addition to the bottom line. So overall, we have now different engines of growth that we are folding in. In terms of the confidence for the volumes for the commercial chassis, we have been talking with several customers at different ratios, and we have strong interest from many of them regarding our products. We are coming first to market with the propane option, and we also have the EV option we have been working on for quite some time now. So definitely, we see strong interest. And therefore, we are able now for the first time to put some directional numbers in our medium- and long-term outlook.

Perfect. And just lastly, if round 4 and Round 5 money does come back, is that thought of as a mix shift within units and that goes back to you guys were able to drive the same margin by engine type? Or is that additive to units, additive to margins? Like what's the right way to think about that?

Yes. So rounds 4 and 5 didn't really go anywhere. There was just some question about are they still in play? And so far, the answer is yes, they are. In terms of total units, at this point, we maintain our stance that we want to operate on one shift. and we will be able to expand our production capacity with the new plant under the MESC program that we are continuing to refine the planning of. And therefore, for the midterm, NEV will be more of a mix change. However, for the long term and with the new plant, it could also represent an addition to the total volume.

Next question is from the line of Craig Irwin with ROTH Capital Partners.

Congratulations first on a really solid quarter here. Again, impressive execution. Definitely appreciate the discussion around pricing and parsing out the impact of tariffs and how you're able to successfully offset that. Can you maybe give us a little bit more color or remind us on your general pricing strategy? A lot of companies have a set amount of price they like to put through each year, and then they add or factor in significant changes in cost of materials or tariffs or other items. Can you maybe just walk us through your general pricing strategy and what we're likely to see out of Blue Bird in the next couple of quarters?

Yes. Craig, this is Razvan. Thanks for the question. So -- we have been on a pricing strategy that has a cadence of every 6 months, so 2 price increases per year over the last -- more than 2 years right now. And the level of price increase was roughly 2% each time, give or take, a little bit. And this was in line with our forecasted economics, inflation, different cost of goods sold, increases that we see either from our own labor or with the USW contract or from our suppliers. So this is the normal level that we've put in place. In terms of tariffs, we announced at the end of March, we had roughly a 2% tariff-related pricing action. And now we have put another announcement in place coming October 1. We are adding another roughly 1 to 1.5 percentage points to that. So tariffs will go up in October. And then therefore, they will also be constant through March. So that's where we are right now.

And then another product that's of significant interest right now is your Class 5, 6 strip chassis truck. Can you maybe talk about the potential there to pull it forward as far as volumes? You put in a very light number as far as commitments for this next fiscal year of just 100 units. You're making it on the exact same line that you're making -- or I guess you've got 2 lines where, one, you can run it through on the production cells. And there's a hunger out there for propane, right? Your success in the school bus market has educated the broad trucking industry on the benefits, the economic benefits of that spark spread. Can you maybe talk a little bit about the ability to pull forward some of those volumes versus what you have in your forecast?

Yes, Craig. So a couple of things. So yes, I mean, admittedly, we took a cautious view on it. But right now, we're building demos, and we're going to get those demos in the hands of people and then they go through some mileage accumulation. And of course, we're doing testing on the front half of the year. As Razvan mentioned earlier, all the feedback is very positive. We believe it's a best-in- class product. And then just as you mentioned, the differentiator being propane. So we think there's opportunity. But quite honestly, I think we'll -- let's get this thing launched, let's get it out in the field. And then if there's more demand, then we certainly have capacity and we have the opportunity to support that.

And then last question, if I may. SG&A has seen some growth over the course of the last year. Now everyone understands that the business is tracking really well. You've got a bunch of initiatives that you're executing on. Can you maybe frame out for us what a fair expectation is on SG&A proportionate to revenue growth over the next year? Should we keep -- should this keep climbing at a similar clip as it has in the last year? Or should we see this growth rate maybe taper off in the next couple of quarters?

Craig, this is Razvan. So definitely, the growth in SG&A will taper off. We have been investing heavily in the last couple of years in adding some headcount in strategic areas, also in engineering. We have invested in different powertrain projects that are coming still with 2027. So I would say for '25, '26, you can expect some low single-digit growth in SG&A. But definitely, the revenue growth should outpace the SG&A growth.

Congratulations again on another really solid quarter.

There are no additional questions waiting at this time. So I'll pass the call back to John Wyskiel for any closing remarks.

Thank you, Matt, and thanks to each of you for joining us on the call today. So just as last year, you saw our momentum increasing throughout the year with profitability improving quarter-over-quarter. And while the environment may have changed for 2025, we have continued on that same theme. I remain very optimistic and enthusiastic for Blue Bird and its future, and we look forward to updating you on our progress next quarter. Should you have any follow-up questions, please do not hesitate to contact our Head of Investor Relations, Mark Benfield. And finally, Blue Bird continues to be stronger than ever and has an amazing future ahead as we approach our 100th anniversary in a couple of years. Thanks again from all of us at Blue Bird, and have a great evening.