Blue bird continues to cut cost

Being and investment invested in Blue Bird Corp at below 18 USD per share earlier this year, after two years of following the company. On December 12, Blue Bird reported its Q4 and end of year report. This is a short summary of the investment thesis and an update of the latest quarterly report. A great stable company... Blue Bird is one of three school bus manufacturers in the US, commanding ~30% of the market, a market that is practically an oligopoly. The Company is also the clear leader of the market for alternative fuel buses (about 50% of the Company's sales), commanding more than 70% share of this segment which is growing at double digits (albeit mostly driven by converting existing customers, so far). The demand for buses is stable and relatively predictable, as the age distribution and lifetime of the existing bus fleet is transparent. ...with potential to increase margins... The market is characterized by a high degree of customization and manual labour (COGS almost 90% of sales), as each municipality has its own regulations, standards and tastes, that drive bus specifications. With a stable competitive environment, and hence stable gross margins, the competing school bus manufacturers have historically not seen an urgency to increase production efficiency. Being the sole pure-play player in the market, we believe Blue Bird is best positioned to invest for increased efficiency, as the other two competing companies should be more restricted in their ability to invest capital to drive efficiencies of what historically has been a steady cash-cow subsidiary (this is the same rationale for why conglomerates at times split up into its distinctive parts). On top of this, a few quarters before our entry, the tariff increases on steel prices (in the wake of the trade negotiations between the US and China), hit the company margins - and the stock - as steel became more expensive overnight. At the time of our investments, the first results from the cost initiatives had started to flow through, and a new paint facility (yellow paint!) was about to be commissioned. Also, the steel cost increases had been matched by price increases, in a (oligopoly) market which should be able to absorb these price-hikes without losing volumes. Our estimation is that the company will be able to increase gross margins from about 10% to about 14-15% (EBITDA margin from 8% to 10-11%) in matter of one to two years, as already existing implemented levers (cost and price) flow through the higher volume quarters, new paint facility is utilized and leveraged, further design-to-cost initiatives are implemented, and continued product mix shift towards higher margin alternative fuel buses. ...and further upside optionality Also, we could potentially see increased market shares (due to increased share of alternative fuel buses) and a trade sale, at a premium to current valuation (Company traded at EV/LTMEBITDA of 8,7 with ~2x net debt, and 6-7x 2020/2021 expected EBITDA, at entry) as American Securities, a US Private Equity firm who owns 40%+ of the company, should be looking for an exit soon. Latest quarterly report encouraging The latest report exhibited continued progress on the cost initiatives, and full effect of the price increases. Guidance for the next year were in line with our expectations. We believe the stock is being held back by the communicated downtime days during the next quarter (which will affect comps), driven by the ongoing ramp up of the new paint facility (next quarter only comprises about 15/10 percent of full year sales/EBITDA). If you which to learn more or invest behind the strategy, please contact us here. We are raising capital with closing every two quarters, our next closing is planned for February 2020. NOTE: Historic returns are no guarantee for future returns. The value of the fund units may fall as well as rise.


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