Blue Bird Corporation
Q2 2017 Earnings Call Transcript

Published: 5 Aug 2017

[Operator:]

Good day, and welcome to the Blue Bird Corporation Fiscal Third Quarter 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Mark Benfield, Director of Investor Relations. Please go ahead, sir.

[Mark Benfield:]

Thank you, Stephanie. Welcome to Blue Bird’s fiscal third quarter 2017 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 Investor Relations landing page. Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird’s President and CEO, Phil Horlock; and CFO, Phil Tighe. Then, we will take some questions. So, let’s get started. Phil?

[Phil Horlock:]

Thanks Mark. Well, good afternoon everybody and thank you for joining us today for our fiscal 2017 third quarter earnings call. We welcome this opportunity to share with you our latest quarter results, so let’s get started with an overview of our financial results on Slide 4. We achieved the highest third-quarter bus sales for more than 10 years with 3,849 school buses sold. That was a 2% increase over last year and importantly a significant 63% increase over the second quarter. So for the first nine months of the year, our unit sales were up about 5.5% from a year ago. At $333 million, third quarter net sales grew by 3%, slightly higher than the growth in unit sales. We recorded our highest ever sales mix of alternative fuel powered school bus sales at a substantial 41% of our total bus sales. In fact this compares with a 25% mix last year and a 22% mix in the prior quarter. As a reminder, in alternative fuels we can all of our propane, compressed natural gas and gasoline-powered school buses as all of these are alternative to diesel, which has been the stable fuel for years. For the last several years, we've seen significant growth in alternative fuel bus sales of Blue Bird, and we have not slowed down this year. As you'll hear later, we expect another great year for the industry’s best-selling alternative-fuel school bus. Our net income of $20 million and earnings per share of $0.68 for the quarter were well above last year, up $23 million and $0.86 a share respectively. Last year, you might recall, we incurred significant expenses for the change in control of the company that impacted our fiscal year ’16 third quarter results, and of course, these expenses are not repeated this year. Our adjusted EBITDA of $32 million was essentially same as last year, and represents almost a 10% EBITDA margin. Compared with last year's third quarter, higher profit with additional sales and lower operations expenses were about offset by higher peak production costs, particularly over time to deliver the high volume I just reported. Going forward we will be making process changes to address the higher costs incurred during the production season. Both our cash and debt positions improved from last year, with net debt of about $10 million lower than a year ago. From a production standpoint, we've been running production on two shifts all year, and ramped up from 59 buses a day in the first quarter to 65 buses a day in the second quarter. In the third quarter we achieved our preproduction for the year of seventy units a day ensuring that we can meet customer delivery dates in time for school start. This loss to peak increase in daily production rate of only 11 buses is manageable, resulting in less seasonal hires than prior years. That's better for training, better for quality and better for employee turnover. This contract with last year’s production rate when we had to increase production by 24 units a day through the year, which was far more challenging. And finally, both industry data, and registrations and actual orders received, together with higher quote activity that we are seeing, support our position that new school bus industry should grow between 3% to 4% this year, and reach around 33,500 to 34,000 new buses. All in all, it was a strong third quarter for Blue Bird and in line with our expectations. Let me now review our third quarter key operating achievements on Slide 5. We recorded a number of significant achievements, and each one will make us more competitive and support our growth going forward. Through our dealer network, we've seen about a 7% increase in units quoted over last year. This is a really good indicator of the strength of the industry and, in particular, our customer interest in Blue Bird's unique and expansive product range, which is the broadest in the industry. While we’ve seen that translate into orders through Monday of this week, our fiscal year volume of buses already sold and delivered, plus our backlog of firm orders, is up 7% from the same time last year. I can tell you now that our fourth quarter production slots are almost completely filled with firm non-cancellable orders. That said, we are building some units in the fourth quarter for a number of key customers, who will now take delivery in the first quarter of fiscal year 2018. As an example, we have sold a significant number of buses to the government agencies this year, and about 150 of those buses are being built for the government in the fourth quarter, but they do require inspection and sign off by the government agencies before they can be delivered and booked. The timing of these inspections means that the booking and the sale will shift from fourth quarter fiscal year ’17 into the first quarter of fiscal year 2018, which of course will boost sales and earnings in the first quarter of fiscal year ‘18. This is not a loss of customer sales, just the retiming of deliveries between months, but it will impact our fiscal 2017 results, which I will cover with you a little later when I discuss guidance. As I mentioned in prior earnings calls, a corner of our product strategy is to bring to market differentiated products and features that customers want and value. While we've been working on making our class leading propane powered school bus even better. And in the third quarter we received certification from the California Air Resource Board to the lowest level of emissions of any propane school bus manufacturer. In fact, our certified NOx level is now one quarter of that of our competitor's propane buses. That's another great environmental reason for choosing Blue Bird propane over the rest of our competitors. As I mentioned earlier, our third-quarter unit sales were a ten-year Blue Bird record for that quarter and above the previous record we actually set last year. The key to this growth has been the success in alternative fuels, and we continue to see this to be the biggest area of growth in our segment of our business. As a reminder, in the last year, we launched our latest generation propane powered bus, we call it our Gen 4, an all-new and still the only gasoline powered large school bus in the market, and an all-new Type C bus powered by compressed natural gas. These three products, which I should remind you, are all exclusive to Blue Bird through our contractual relationship with Ford and ROUSH CleanTech together with our compressed natural gas Type D bus powered by a Cummins Westport engine, represents a substantial 37% increase in year-to-date orders as of Monday of this week compared with the same time last year. In the third quarter, we achieved our highest ever mix of alternative fuel vehicle sales at 41% mix of our total sales. Importantly, just this year, another 279 customers placed their first-ever orders for Blue Bird's alternative-fuel powered buses, and many of these are conquest accounts. We’ve had a terrific response to our new engines, and I'll cover alternative fuels more in a couple of slides. Staying on this topic, at the national school transportation news EXPO in Reno last month, we unveiled our all new Type D electric powered school bus chassis, the first of its kind in the industry. We also unveiled our electric powered Micro Bird Type A school bus. Both vehicles along with the Type C electric powered Blue Bird school bus are in development now, and will hit the market in mid-2018. I can tell you, I actually drove our Type D electric bus last week, and it will be an exciting new zero emissions product that Blue Bird is bringing to the market. And finally, as I indicated earlier, we are moderately lowering our full year guidance to reflect the shift of some specific customer deliveries from the fourth quarter of fiscal 2017 to the first quarter of fiscal 2018. as a result, full-year guidance for net sales has been trimmed by $10 million to the top end of the range to $1 billion. Adjusted EBITDA has been lowered by $4 million to $6 million with a new range of between $68 million to $70 million, and the similar lowering of the adjusted free cash flow guidance plus a new range of $33 million to $37 million. Just to reiterate, this is simply a shift of select customer deliveries moving into the next fiscal year, which will boost our first-quarter fiscal 2018 sales and earnings. So let's now take a closer look at our third quarter financial results on Slide 6. Third quarter net sales of $332.6 million were $9.5 million or 3% higher than the same period last year. First nine month sales of $677.9 million were up 5% from a year ago. This result was in line with our expectations. Bus and part sales grew by 3% and 12%, respectively, in the third quarter. We have seen the very strong growth in our parts business this year with sales for the first nine months up a strong 9%. At $32.2 million, our adjusted EBITDA was down just $300,000 from a year ago, essentially flat. And through the first nine months, adjusted EBITDA totaled $42.9 million, $5 million lower than last year as we have invested in our resources to drive future growth of Blue Bird. Turning now to Slide 7, let's take a closer look at our alternative-fuel bus sales performance. As of three days ago, we had 3,788 bookings and firm orders in hand for our combined propane, gasoline and CNG-powered school buses. This represents a substantial 37% increase compared with the same time last year. We are particularly pleased with our third-quarter performance where alternative fuel powered bus sales representing a strong 41% of our total bus sales. We continued to be the undisputed leader in this growing school bus segment, with our market share running at over 80%. With less than 15% of school districts haven’t still purchased an alternative-fuel powered bus, we are well-positioned for future growth. Looking to the full year based on orders in hand, and our pipeline of potential orders yet to be placed, we project full year sales of alternative fuel powered buses to be over 3,900 units, and that should represent over a third of our total bus sales. Now that compares with a mix of 17% just two years ago and that's exciting growth. So let me now turn you over to Phil Tighe, who will take you through the financials. Then I'll be back a little bit later to cover the fiscal ’17 outlook and guidance. Over to you, Phil.

[Phil Tighe:]

Thank you, Phil, and good afternoon everyone. The next few slides are a summary of our financial performance for the third quarter of fiscal year 2017. For those looking for some additional information, the appendix to this presentation deals with reconciliations between GAAP and non-GAAP measures, and there is more detailed material available in our 10-Q filing. The third quarter material that we're discussing today is based on a close of July 2, 2016 for fiscal year ’16 and July 1 of 2017 for fiscal year ’17. As a reminder, the fiscal year for Blue Bird commenced on October 2, 2016 and will complete on September 3, 2017. There were no new accounting pronouncements that impacted Blue Bird in this report. Risk factors are unchanged from the previously filed 10-K, and also please note the important disclaimers at the end of this deck. If we go to Slide 9, you will see that we have a number of the results from the third quarter summarized on this page. While I don't plan to go through each one of them, I will touch on a few that I think could be interesting. Phil has talked about the volume in the third quarter and in fact it was our highest in the last 10 years – highest third-quarter volume. In addition, the third quarter was the highest single quarter of production ever achieved in our Fort Valley assembly plant. The production team was also faced with a number of challenges beyond the volume requirement. We had a high mix of rear engine buses, type D rear engine buses. These are our most complex and labor-intensive units, and the high demand in the third quarter presented a number of challenges in line balancing and skill management. The plant also had a number of issues with component supply, including timeliness of deliveries and some quality issues where we needed to do some significant rework. So the result of all of that was we ended up working a total of 10 production overtime days in the 13 weeks in the third quarter, which did add an overtime cost burden to us during the quarter. If you look at net revenue, it was up for both bus and parts. The total improvement in bus net revenue was about 2.6%. Per unit revenue was up about 0.4%, and this was due primarily to product mix and the higher alternative fuel mix. On a year-to-date basis, bus revenue was up by 4.7%. Parts revenue was up about 12% due to continuing expansion of product offerings, and some initiatives that we have been taking to reduce overall costs to our dealers. On a year-to-date basis, parts is up by about 9%. Turning to the gross margin, you will see the gross margin for the third quarter was 13.5%, and while this result was 1 point below the third quarter last year, it was an improvement of about 1.1 points versus the first half of fiscal year ’17. Bus gross margin was 12.4% or about 1 point below prior year, and this was driven largely by the production cost during the peak season, the more complex build mix that resulted in higher levels of overtime and also economics. Parts gross margin was down about 4.5 points as a result of the more aggressive position that we are taking to improve our competitiveness, which is resulting in incremental part sales and a higher share of the total addressable parts business. Margins obviously were a key focus for the management team, and we are implementing as Phil mentioned, a number of actions to improve our ability to efficiently build higher volumes during the peak season and drive down costs. We will see results from these activities over the next 12 months. Turning to net income and earnings per share, you may recall that in the first half we recorded a net loss of $5.8 million or about $0.34 per diluted share, and this was largely due to the extinguishment of costs related to the prior loan. We're pleased to report a net income of $20 million, and a diluted earnings per share of $0.68 for the third quarter, which was about $23 million better than last year. Net income was positively impacted by higher operating profits in part due to non-recurrence of expenses incurred with the change of control in fiscal year ’16. Interest expense was lower as a result of the improved terms of the line that we renegotiated, and lower debt balance, and we also had higher profits coming in from our JV in Canada. Partially offsetting the good news, we managed to have to pay Uncle Sam more tax, and we are reflecting that in the net income. For the first nine months, our net income was $14.3 million and diluted earnings per share was about $0.46, compared with a net loss of $3.9 million for the first nine months of fiscal year ’16. We will cover adjusted EBITDA on the next page. I would then point out that both cash and debt were good stories in the third quarter. Cash ended up at $50.3 million, which was $7.6 million better than the prior year, and debt is $153 million, about $1 million down. So on the whole strong results for the quarter. Turning to slide 10. This is a bridge that looks at EBITDA walking from third quarter of ’16 to third quarter of ’17 and, as Phil has mentioned, it was down about $300,000. So we recorded an adjusted EBITDA profit of $32.2 million. The decline is really all around lower bus gross margins. That was worth about $1.7 million. On the average unit, revenue on the bus was higher. It was really in the area of production costs both overtime and economics that we struggled during the quarter. We were pleased with the fact that revenue was up a little bit in this peak selling season. Our parts was down about 1/10 of a million. Despite the higher revenue, we are becoming much more aggressive in the parts business and really getting out there and competing with some of the big players that have previously been selling parts to our dealers and customers. we experienced about $1.5 million of good news in operating expenses and other. So, we are managing to keep the operating expenses under control, and we also, part of the $1.5 million was about 3/10 improvement in the income from our Canadian joint venture. It is not shown on this slide, but the nine months results for adjusted EBITDA was just under $43 million, which is about $5 million lower than the prior year, as Phil mentioned. And we had – as you may recall, in our previous discussions we had some product and customer mix issues in the first half, and we also had higher operating expenses in the first half as we were spending more money in investments in products and structure for the future. Our prior plan did assume that we would recover that $5 million gap in the final quarter. However, with the moment of a number of sales out of the fourth quarter of fiscal year ’17 into the first quarter of ’18, and with continued overtime that we have been working to achieve the production levels, it is apparent that we won't get that $5 million back and that is causing us to advice a small adjustment to the guidance. Slide 11 is the cash flow slide. It shows both free cash flow and adjusted free cash flow. Free cash flow was $13.1 million, or $19 million lower than the same period last year. Key drivers of the slightly lower free cash flow was higher trade working capital, and that is really due to the fact that we had a higher inventory of finished goods coming out of June, which was the end of our third quarter. Those units have been delivered in July. So we will see that rundown as we go through the quarter. We also had a higher number of units in progress really due to the fact that we had very high production volumes, and those will be progressively delivered through the fourth quarter. The other thing that impacted free cash flow was – in 2016, we had a rather sizable prepayment from the government and that did not recur this year. Finally as you will see in our guidance, we had taken free cash flow guidance down into the $33 million to $37 million range as a result of the reduction in profits. The final slide for me is Slide 12. This is net debt. Net debt at the end of the third quarter stood at $102.7 million, and that included $50.3 million of cash. That compares to $116.5 million at the end of the second quarter of fiscal year ’17. The net leverage ratio was about 1.67x, substantially below the covenant. Liquidity stood at $120.2 million, and there were no drawings on the revolver at the end of the quarter. Liquidity, at the same time last year, was about $98 million. So thank you for your attention. I will pass you back to Phil Horlock, and he will discuss the outlook for ’17 and the wrap up. Thank you.

[Phil Horlock:]

Thanks, Phil. Let’s now focus on the outlook for the year and our full year guidance. First let's turn to Slide 14. As the headline says, we're forecasting continued growth in the industry and for Blue Bird. We're projecting new bus sales, as measured by industry registrations compiled by R.L. Polk to grow between 3% to 4%, reaching between 33,500 and 34,000 school buses. We are also forecasting Blue Bird unit sales growth between 6% to 8%, outpacing the industry and supported in part by the full year availability of our new engine choices. Our substantial year-to-date growth of 37% in alternative-fuel powered bus orders supports this strategy. Our total bookings and order backlog are strong at 7% above the same time last year and quote activity is higher too, and we have almost completely filled our production slots in the fourth quarter and for the full year. Looking to the fourth quarter, we expect unit sales to be above last year’s level, and profit to be about the same as last year as we continued to invest in the development of new and exciting products along with expanding customer support that will foster future growth. So let me now turn to fiscal 2017 guidance on Slide 15, which reflects these factors. As Phil and I both mentioned earlier, we are lowering our guidance in our three financial metrics, reflecting the shift of specific sales, including those of the government from the fourth quarter of fiscal 2017 to the first quarter of fiscal 2018. Unfortunately, there just aren't enough remaining production days less than fiscal 2017 to build and sell additional buses in order to hold guidance. I have told you before, we have a somewhat lumpy business here when orders can come in at different times of the year. The deliveries can flip between quarters, and here is a prime example when it happened, just delivered shipping, which is flipping between month of September to October causing us to take down our results in the fourth quarter and for the full year. That said, it is important to note these sales will book in the first quarter of fiscal 2018. so, net sales guidance for the year is now between $980 million and $1 billion, up $48 million to $68 million from fiscal 2016. Adjusted EBITDA guidance is now between $68 million to $70 million, $2 wm to $4 million lower than fiscal 2016, as we continue to invest in new products and customer support that is essential to driving future growth. Adjusted free cash flow is now between $33 million to $37 million, and continues to be a strong feature of our business model, representing over 50% of our adjusted EBITDA. Let me now turn to Slide 16, where we are announcing a new initiative to drive shareholder value. With our board of directors we have been exploring alternatives to put our free cash flow to use over the next few years in order to drive shareholder value. While I am pleased to inform you that today our board has authorized a plan to implement a stock repurchase program, and to buyback up to $50 million of stock over the next 24 months. Our strong free cash flow generation, typically running at at least 50% of our EBITDA affords us the opportunity to do this to drive incremental shareholder value, and also provide the ability to invest in growth now and into the future. We are really good at generating cash with our business model at Blue Bird. Our decision to implement this program is a reflection of the confidence we have in our future growth plans. So in wrapping up, we had a strong third quarter and first nine months, we have got sales momentum, particularly in alternative-fuel powered buses. We look forward to continued and substantial growth, and we will continue to update you on our progress each quarter. That concludes our formal presentation. I'm now going to pass it back to our moderator, Stephanie, to begin the Q&A session. Over to you, Stephanie.

[Operator:]

[Operator Instructions] And we'll take our first question from Matt Koranda from Roth Capital. Please go ahead. Your line is open.

[Bradley Noss:]

This is Brad Noss on for Matt. Just wanted to go into the reduced guidance and the $5 million of delayed sales going into fiscal '18, so for the – obviously with the $5 million delay in revenue coming along with $5 million reduced adjusted EBITDA guidance, can you just split out what is – how much of the EBITDA is coming from the delayed, forecasted delayed sales and how much was coming from the essentially lost profits and the higher production costs?

[Phil Horlock:]

I'd say virtually all of that is coming from the delayed sales. I mean, typically what's happened is Matt is…

[Bradley Noss:]

Brad.

[Phil Horlock:]

Sorry Brad, a few hundred units that where the customers want to only take the buses whenever they have a chance to inspect the buses and they can't get their inspectors there at a time early enough for us to book those sales in 2017. So that's all that's happened here, we just have a few hundred sales that literally will flip over and we'll see them turn into deliveries in the first quarter, very early in the first quarter of 2018. On the overtime days, I mean when we work our cost issues, I mean when Phil talked about the fact that we worked some more overtime, you were right, we worked a lot of overtime but we sort of planned. As we worked through the quarter, we were planning on that and we thought we could cover it in our guidance. That wasn't issue really as such as much as the volume slippage that occurred there and the push into 2018.

[Bradley Noss:]

So I guess, the only question I'm having is just considering the midpoint of revenue guidance coming down the $5 million and then also the midpoint of adjusted EBITDA guidance coming down around $5 million and that would sort of imply that there were 100% EBITDA margin in the slippage, which I obviously assume isn't the case. So I'm just trying to sort of split out why the EBITDA midpoint would come down concurrently with that $5 million revenue drop?

[Phil Tighe:]

This is Phil. Phil's exactly right that we had planned to work overtime but the overtime comes at a fairly significant cost. So it's not a one for one revenue on margin up – in revenue. So we are continuing to incur costs. We haven't really broken it out between volume and cost at this time. We'll probably have a more fulsome discussion around that when we get to the full year earnings.

[Phil Horlock:]

I think it's true to say too, I think Phil talked earlier about the fact that as we were producing units, some continued to fall through the fourth quarter too. We've had a very strong mix of the pretty rich, what we call our rear-engine units, which command a higher revenue and so they're higher profit, but a higher revenue. And that obviously was a key factor to us in boosting our revenue performance, but nevertheless the loss of units moving out to the quarter would hurt our profit performance is the way to think of it.

[Bradley Noss:]

Okay. That is helpful. Thanks for the color there. And so also just when we're looking at that – those delayed shipments going into Q1, are there any other dynamics to consider or should we essentially boost our Q1 assumptions by that full slippage from the delayed orders?

[Phil Horlock:]

Obviously, we haven't declared our guidance yet for fiscal year 2018. I think it's fair to say we expect a better performance in the first quarter, quite a bit better performance in the first quarter of '18 than '17, absolutely. We'll have more units, we'll sell more units. Those units will move over and definitely will help us in the first quarter of '18. Yes.

[Bradley Noss:]

Okay, perfect. And then just in regards to the high mix of the rear-engine buses or the Type D buses that you had in this quarter, was there anything driving that higher than the typical mix or can you just talk about the dynamics there?

[Phil Horlock:]

Yes, I think I would just say we make a great rear-engine product, and for those markets that really want a high-capacity horsepower – high horsepower vehicle, we call a pusher engine, particularly in markets where the terrain is lot of hills and tough and out west in particular. We had a nice surge in orders that we've seen in the last several weeks and months helped us bolster the third quarter and particularly the fourth quarter. So I mean to say, it's just really a strong product for those who want a bus that's, like I said, very powerful and high capacity in terms of passenger payload.

[Bradley Noss:]

Okay, but the – the way to think about it is, it can just be lumpy in regards to when you'll get a large Type D order versus trending to more Type D buses overall in the business?

[Phil Horlock:]

Yes, absolutely. I mean we have a, like Phil said, there's a lot more hours to produce a Type D rear engine bus and it can be lumpy and we have to deal with that and then in our plant, it can cause us some problems. So if we get a high order rate come in, the customer wants those buses quickly, we have to man up accordingly and hence it drove some of the overtime that Phil talked about.

[Bradley Noss:]

And then going forward, if you continue to have a higher mix than typical for the Type D's, is there anything that you are able to do proactively to help with the overtime hours in any of the other production setbacks there or is it just sort of the nature of that unit that it would require those same adjustments?

[Phil Horlock:]

Well, Phil alluded to some changes we're looking at doing, and I talked about it earlier. We are looking at process changes. For example, we basically build all that rear-engine product online in the mainline and it's tough when you have these vehicles going back to back in the assembly stations. So what we are looking at doing is take some of those unique build characteristics off-line in off-line assembly. So that we can then sequence them in better to the line and that'll help us improve really our just standard production capability performance. It should really help avoid those overtime spreads that we had to cope with where we had to add extra people and extra days on to cope with the demand we saw this year.

[Bradley Noss:]

Okay, perfect. And then just one more here for me, just in regards to the alternative fuel mix, I'm not sure if you're able to split it out specifically between gasoline and propane but can you just give a little bit of color on what you're seeing if the majority of the increase is coming from the gasoline ramping up or just what the dynamics are there?

[Phil Horlock:]

We don't share that, it's sort of competitive data. All we say is they've both been terrific products for us. Particularly the propane and the gasoline, I mean propane continues to be our leading alternative fuel powered bus, no question. It's still number one in the market by a mile, country mile and gasoline has done really well for us. Both of them have done terrifically well for us this year. We actually – by the way, one big milestone we just did last week is we – just a little tidbit here, we sold our 10,000th propane powered school bus, actually in Georgia to a Conquest customer, Fulton County, took delivery of 90 propane buses, which include our number 10,000. If you totaled up the number of buses our competitors sold, it's pretty much 10x the number of buses they have sold in this segment of the business.

[Bradley Noss:]

Thanks for that. It is helpful.

[Phil Horlock:]

You bet Brad. Thanks.

[Operator:]

We'll take our next question from Eric Stine with Craig-Hallum. Please go ahead.

[Unidentified Analyst:]

Hi, guys. This is [indiscernible] for Eric. Thanks for taking the questions, and congrats on the record quarter and the share buyback.

[Phil Horlock:]

Thanks.

[Phil Tighe:]

Thank you.

[Unidentified Analyst:]

Maybe first I guess on gross margins, you kind of touched on it a little bit with some of the process changes but I mean, where can those kind of go to here in the near term with the second shift and some of the trends you're seeing in alternative fuels and then what you're seeing on the materials cost side of things?

[Phil Horlock:]

I think what we're trying to do is when we look at the ramp-up of production we have had in the last two years, I mean 2016 was the first time we ever launched two shifts in this plant and then we launched it in January 2016. This year we kept it in all year. We produced a record number of units in our Fort Valley plant, particularly in the third quarter. Once we have sold – what we're doing is we had to really fight to get all these done, and literally it's been quite a battle for us. But we got it done. We got a record number of sales out and our team did a great job but we worked excessive overtime. We worked to make sure we have the quality on those products and part of it was a challenge for us being on that second shift, and I thought I should mention that we've hired somewhere around probably 300, 500 new and full-time employees these last three years to support the growth in volume. We are sort of a victim of our own success in a way. But we look at going forward with our manufacturing team we're looking at process changes, we're looking at selective automation that we can introduce to the line, looking at more off-line subassembly so the main assembly-line has more repeatability because that's what really we struggled with a little bit. We've got a little too much going on in all of our individuals’ workstations on the line. If you look back three years ago, we weren't building anything like propane buses, we were principally diesel. Now we're building a lot of propane. We weren't building gasoline, now we're building gasoline. The rear-engine surge we had this year has been a great success for us but dealing with that with added complexity is tough. We've built – a vehicle rolls off the Blue Bird line between every 12 and 13 minutes. So when you have these complex products that are different, you try to contain them in a standard 12 and13 minute pull-time, it's quite difficult. So we want to try and pull some of those activities out of the station, so it can present them to the line much easier and we do our plans for selective automation as well that will help speed up some of our processes and make them simpler.

[Unidentified Analyst:]

All right. Thanks for the color. And then maybe on the market, you kind of talked about 3% to 4% market growth, but can you just kind of maybe talk a little bit about when you look at school budgets and property taxes and maybe the kind of overall average age of the buses in the fleet, can you just kind of talk about what might be preventing that from being a larger number or when you might see some of that – maybe the replacement cycle really hit over the next couple of years?

[Phil Horlock:]

Yes, I think first of all, look at it, we had a trough in our business in 2011. It's nice to see we are still growing 3% to 4% some 7 years after the trough – we hit the trough. And so when you look at it, most states, and it's across the country really, housing prices have risen, there are more property taxes available, and that's a big funding mechanism for school buses. But that same money is also funding a lot of education for schoolteachers. So there's a limit of how much educational authority is going to put to school buses. Here is the good thing. I guess it's a good thing. The demand is there. The demand to actually buy more school buses there because the average age of the bus fleet is about 11.5 years across the entire industry. And a typical school bus is replaced between 12 and 15 years, so we have an aging fleet. We have roundabout 150,000 buses that are over 15 years of age in the market. Believe me, districts would love to change these buses. It's a question of them having to share the funding that's available when you put these property taxes and special bonds and [plus] funds together to help fund them. But look, it's – everyone's benefiting, I think education authorities are benefiting, there is more money available and we've been able to benefit as well. We're pretty much at 35,000 units, 34,000 or so, 35,000. We're starting to approach the peak levels of before the recession, and I still think there's a lot of runway on this. So we feel good about the outlook.

[Operator:]

We will take our next question from Chris Moore from CJS Securities. Please go ahead.

[Chris Moore:]

Great guys. Thanks for taking my questions. So just back to the 150 or so government buses that are going to ship in Q1, a couple of things. One is what percentage of the buses that you sell are to the government? It's got to be very small at this point in time, correct?

[Phil Horlock:]

Yes, it's typically less than 5% for the year. It's a small piece of the business.

[Phil Tighe:]

The issue Chris is that they were heavily focused into the third quarter. Typically, they would flow through the year but for some reason, we got a lot of orders requiring build in the third and fourth quarter and so we've struggled to meet that demand.

[Phil Horlock:]

Phil's right. We have several hundred bus orders and actually the budgets came pretty late this year, roundabout the March, April time frame. And I can tell you that we are the – we have said it before, I am not sure if you are aware of this, but we are the preferred choice for the government for school buses. We typically have 80% of all those large type of bus sales. So well they did come later in the year and the government puts a very stringent inspection process on, where an inspector will show up every month to review what was built the prior month, not what was built in the last couple of days but literally that were built in prior weeks. And they come in, they inspect them and they release a few at a time. So we're beholden to the inspector’s timeliness of getting here. I mean, for example, he was here this week. We have released a whole bunch of buses this week. But there is still a lot we are building now that have taken slots that we hoped we could get them through the process of inspection this week but unfortunately the inspectors availability pushes it into the next fiscal year.

[Chris Moore:]

My thought process was perhaps, on the government side, you might be able to spread production out a little bit more, but their fiscal year being September, and it kind of coincides with that, so most of the government orders are still going to be before the end of a given fiscal year?

[Phil Horlock:]

Yes, it is correct. Yes.

[Chris Moore:]

In terms of the makeup of those buses, are they purchasing a pretty good mix or are they focused more on the alternative fuels?

[Phil Horlock:]

They are a good mix. There's a lot of diesel engines in their mix. They tend to look at what they purchase before they understand them well. It's basically it's a pretty highly specced vehicle. It's a school bus with obviously regular different types of seats, and different windows, a lot of unique componentry in there. So many of these buses, there might be military bases in the U.S. but also overseas. Even as troop carriers in some locations. So there is a wide range of specification on these buses.

[Chris Moore:]

Got you. And just back to the overall cycle for a second, last cycle, it was 2011. You kind of lagged a couple of years. I am just – is there – I am trying to get a sense as to does this cycle look similar to the prior one to you? Does it look like it's a little bit softer and more extended – soft isn't the right word but less peaks and more kind of gradual, just trying to understand when we might wake up and say things are really starting to slow?

[Phil Horlock:]

That's a great question. I am always asked that question too. Our Board asked us that question. But actually when we look at the market out there and we research a lot of around property values and property prices and property taxes in general, most states are a lot healthier than they ever have been. Looking at the economic outlook right now, we've got a new administration and things are going pretty well since they were put in place. So, I think we're quite bullish on the outlook here. Like I said before, there is a large demand to change. And what we are excited about is what's different from the last cycle is this move to alternative fuel powered buses. They are really interested now in emissions being green and being different and doing what's right to improve the environment. I think we're well positioned for that. So I do see it is steady, which I like. I mean I don't like – sometimes when you get the 11%, 12% surges, they're one-off and then they're pulling back in the next year. We've had a nice controlled increase, literally every state with the exception of Illinois, which is going through its own problems and there's a lot of pent up demand in Illinois. But in the majority of states, we talk to state directors regularly, obviously we've dealers in every state which are our conduit to understand the environment, and I'd say virtually every market we looked at is its steady growth is where our expectation is for us.

[Chris Moore:]

Got you. Last question on the $50 million on the buyback, does that potentially extend to the repurchase of the warrants in the right circumstances? It seems like this way you're not minimizing the float at all, taking away some of the overhang and it seems like you'd be kind of accomplishing the same thing in terms of bringing back ultimately that fully diluted number?

[Phil Horlock:]

Yes, you're absolutely right. You are very spot on. It does include the warrants.

[Chris Moore:]

Okay. All right. I appreciate it guys.

[Phil Horlock:]

You bet.

[Operator:]

And we will take our next question from Michael Baudendistel from Stifel. Please go ahead.

[Michael Baudendistel:]

Thank you. I'm intrigued by this announcement that you have an electric school bus in development, I guess, a few electric buses in development and maybe you can just explain how that is going to fit into your product portfolio? I guess, currently the propane has the higher acquisition cost, but then a lower operating cost. Is that even more true with an electric, the way you see it?

[Phil Horlock:]

Here's the way I look at it. I mean today, Mike, I think you've studied us pretty well. We're pretty consistent in our message. The best total cost of ownership bus in the industry is a Blue Bird propane powered school bus. No question. The best value over 15 years without doubt. Now electric buses for those markets, and California obviously is one who puts a lot of grants on the table for folks who really want to have zero emissions. In many cases they are putting hundreds and thousands of dollars worth of grants to allow bus purchases. Recently New York has put a proposal together to providing grants to get zero emission buses on the ground. We want to be in a position to capitalize on that. And we saw it as a natural extension of what we're doing on alternative fuels. So it's not for everybody. It's obviously more expensive. We all know battery technology right now, battery costs in particular, are expensive, and to move a 33,000-pound GBW bus, you need a lot of battery. So it's an expensive product, but we want to be there for those districts that really want zero emissions and provide grants to support it and we will be.

[Michael Baudendistel:]

Great. That makes sense. I also wanted to ask you, on the propane side, you have this exclusive relationship with Ford and ROUSH and it's really given you a competitive advantage and like you said, you have way more propane school buses than anyone else, I think in large part because of that relationship. Is there an equivalent relationship with any suppliers on the electric side?

[Phil Horlock:]

Not at this stage. That doesn't mean there never will be. Doesn't mean we won't have, but I can tell you obviously at this stage there isn't, but it's early days. By the way Mike, we do like to be different and we [indiscernible] products are best in the market and differentiators. We do like to get exclusivity. It's important to us.

[Michael Baudendistel:]

Got it, and can you talk a little bit about, I guess, also sticking with electric, what kind of goes into your power train for the school bus aside from the batteries that you mentioned? Are you using different suppliers entirely there and if you could tell who those suppliers were, just any detail would be great.

[Phil Horlock:]

Well right now, our electric buses on the – I'll talk about the larger buses, so we're talking about that Type D bus that we showed in Reno at the bus show, and then the Type C, that we actually have a government grant for to build a Type C bus where the Department of Energy gave us a grant for that. Both of those buses we are developing with partners out in California, ADOMANI and EDI, which is Efficient Drive Trains, Incorporated. Specifically EDI and ADOMANI have been successful already in this electric space and we think they're great partners. We love the speed they act and respond to us. And I tell you, the pace at which we're moving here to bring the bus to market is quite impressive. From a standpoint of technology, you're right, the batteries is well on the cost line but also it's the brains in the vehicle to control the heat management systems. For example, the product we showed, the Type D, has no transmission, it's a direct drive system right from the engine powering the wheels, so the axles. So it's an exciting product for us.

[Michael Baudendistel:]

It sounds great. Thanks very much.

[Phil Horlock:]

You bet.

[Operator:]

Our next question comes from Scott Blumenthal with Emerald Advisers. Please go ahead.

[Scott Blumenthal:]

Good evening Phil, Phil and Mark.

[Phil Horlock:]

Hi Scott.

[Scott Blumenthal:]

Phil Tighe, did you give an estimate of the total cost of overtime during the quarter?

[Phil Tighe:]

No, I did not.

[Scott Blumenthal:]

Is that something that you can break out for us or are you not comfortable doing that?

[Phil Tighe:]

Yes, I'm not too comfortable doing that. I gave you the number of days we worked, so – but I don't really want to do the cost on it.

[Scott Blumenthal:]

Okay, can you remind me what the days worked were?

[Phil Tighe:]

Out of the 13 production weeks in the third quarter, we worked overtime days in 10 of those weeks.

[Phil Horlock:]

Just to give you some color how we operate here, we work four days a week, four 10 hour shifts, that is 40 hours. Monday through Thursday and typically Friday, Saturday, Sunday, are days off. In this case and that actually gives us flexibility for the surge that we have to take when we get additional volume. So this will be work in the Fridays. So then we move to work in the fifth day. So we get another 10 hours out of that fifth day.

[Scott Blumenthal:]

Okay, that's helpful. Thank you. And then Phil T. again, can we expect or should we expect maybe a little bit of a margin headwind in Q4 since we'll be under absorbing some of the SG&A due to the push-outs?

[Phil Tighe:]

Yes. I would think that's fairly astute observation.

[Scott Blumenthal:]

Now, you wouldn't be able to venture a guess on what that might be or once again that's me?

[Phil Tighe:]

No. I don't really want to get into guessing quarters with the team.

[Scott Blumenthal:]

You do provide us guidance, I just got to make a guess, right?

[Phil Tighe:]

Well, I think when we provide a guidance, I think I did say that as we look to the fourth quarter, I think we're going to see some higher sales but to your point about absorption being a little down, I did say probably the profits will be about flat versus a year ago, EBITDA, probably not a bad assumption.

[Scott Blumenthal:]

Okay, thanks for that. And Phil H., can you – I know you defined the government when you mentioned that this 150 bus block is largely or completely for the military, but can you talk about the – you mentioned premium seating and better windows. I suspect those tend to be Type D buses and is there any margin difference there between what you're building for the government and what you build for transportation companies or school districts?

[Phil Horlock:]

Well, the difference is there is typically a richer mix of options on those vehicles. The seats are not traditional school seats. They're much more – a different structure, they handle adults. So when you look at it, yes, there's more cost in that product and there's typically, as a result, a little more absolute margin in those products, yes.

[Scott Blumenthal:]

Okay, and you did say that was still a very small proportion of your overall sales, but I don't recall you saying what percentage.

[Phil Horlock:]

Typically it doesn't exceed 5%, it's 4% to 5% of our sales.

[Scott Blumenthal:]

That's really helpful, thank you. And going back to the regular diesel engine buses, which still are a little bit more than 50%, almost 60%, of what we're selling at this point. Have you ever disclosed as to what portion tends to be Type C, Type D?

[Phil Horlock:]

No, we don't really do that. Certainly, the Type C bus is the best-selling bus of the industry. I mean, it is known that, it's a long nose bus. And if you look at the industry, it's typically two-thirds to 70% between 67%, 70% of the industry and I think it's true to say, we are pretty much in that range.

[Scott Blumenthal:]

Okay, that is really helpful. Thank you. And I guess one more, if I can ask about the share repurchase program. I looked today at the trading activity and I think we traded about 27,000 shares. I am just wondering kind of what the thought process was behind the deciding to do that instead of maybe a special dividend because there's not a lot of activity going on now and to take some of that out there, you almost have to trade by appointment these days. So give us the thought process behind that.

[Phil Horlock:]

Look, with our board, we talked about special dividends and then we talked about this buyback. I think we're a pretty new public company, where we generate a lot of cash, free cash and we explored what should we do, should we pay down debt, should we pay a dividend? What's the best thing for shareholders? And we thought, it's the first time we really have done anything special beyond just a normal course of business and hopefully a rise in share prices, based on our results. We just came to this decision with our board that this was a good use, a good special one-time sort of an event to offer and obviously we put it over 24 months. You mentioned the share of 27,000, we've seen weeks where it's been 60,000 and as high as 100,000, it's a little lumpy quite frankly. We just thought from the standpoint when we met with our board, this will be a good way to help our shareholders, the best choice for us in the near term. It doesn't mean we won't rule out other things down the road but certainly for now, this was our unanimous agreement with our board to pursue this.

[Scott Blumenthal:]

Okay. Well, we do appreciate it. Thank you.

[Phil Horlock:]

Absolutely. Thank you.

[Operator:]

And there are no further questions. I'll hand it back over to Phil Horlock for any closing remarks.

[Phil Horlock:]

Okay, well, thank you, Stephanie. I want to thank all of you on the call today for joining us. We appreciate your continued interest in Blue Bird. I hope you can see we are focused on profitable growth and intend to deliver on our commitments. And I think we try and differentiate ourselves as best we can and try and make a real impact with our customers and we're certainly seeing that in the results of the third quarter. I think we're very well-positioned for growth today and in the future. Please don't hesitate to give a call to our Investor Relations Director, Mark Benfield, should you have any further questions. And thanks again from all of us at Blue Bird and wish you a very good evening.

[Operator:]

And this concludes today's presentation. We appreciate your participation. You may now disconnect.