Blue Bird Corporation
Q4 2017 Earnings Call Transcript

Published: 7 Dec 2017

[Operator:]

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

[Mark Benfield:]

Thank you, Stephanie. Welcome to Blue Bird's fiscal fourth quarter and full year 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 press 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:]

Well thanks Mark. Well, good afternoon everybody and thank you all joining us today for our final quarterly earnings call for fiscal 2017. It's been a busy year at Blue Bird and we welcome this opportunity to share with you our fourth quarter and full year results. So let's start with an overview of our financial results on Slide 4. Our fourth quarter results were strong. Our bus sales were the highest in the fourth quarter since 2008 with 3,608 buses sold. This represents a strong 9% increase over last year and we saw the same 9% growth in total net sales, amounting to $313 million. A feature of our business is seasonality and it's worth noting that fourth quarter net sales represented 32% of our full year sales and the second half was a substantial 65% of the full year. Adjusted EBITDA was $25.1 million $0.8 million above last year and net income was also strong at $14.5 million, $3.8 million higher than the year ago. So let's shift now to the full year. All three of our key financial metrics either met or exceeded guidance. Net sales at $991 million and adjusted EBITDA at about $69 million were both at the mid-point of our guidance range. At $44 million adjusted free cash flow beat the high-end of the guidance by about $7 million and remains a strong feature of our business model. Net income and adjusted diluted earnings per share were both above last year by $21.9 million and $0.13 respectively. As we look at the underlying strength of the industry and Blue Bird's results our view is that the outlook is positive. First, the school bus industry grew by 6% last year and with about 35,000 new Type C and D school buses sold in fiscal year 2017 we are now above pre-recession industry levels. In fact this was the second highest annual industry in more than 30 years. With a strong outlook of property values and corresponding property taxes we are bullish on the industry outlook remaining at the fiscal 2017 level or a little higher. Second, we sold over 11,300 buses in fiscal year 2017, an annual growth of 7% which is slightly above the industry growth. But importantly sales through our [franchise] [ph] and exclusive dealer channel grew by 9%. This is our sixth consecutive year of volume growth and we have solid momentum. Third, we recorded our highest ever sales of mix of alternative-fuel powered school buses at a substantial 34% of our total bus sales. This compares with 26% mix last year. In fact through the second half of the year alternative-fuel bus sales represented 41% of our total unit sales; that’s leadership and momentum in the fastest growing segment of the business. As a reminder in alternative-fuels, we do count all of our propane, compressed natural gas and gasoline powered buses as all of these are alternatives of diesel, which has been the staple fuel for years. For the last several years though we have been achieving significant growth in alternative fuel bus sales and as I just mentioned we have not slowed down this year. We'll cover alternative-fuel performance in more detail in a little while. Fourth, we are passionate about product and being first to market with vehicles and features that customers want and value. Next up for us we are launching a complete line-up of electric powered buses next year. These are on the road now undergoing durability and performance testing. Once again these first to market buses are exclusive to Blue Bird through our sales and technology partnership with ADOMANI and EDI out of California. Customer reaction to date has been outstanding. We will be ready to take orders early in the New Year. As we look now to fiscal 2018, in addition to our product leadership strategy we are focusing on profit growth with particular emphasis on improving our EBITDA margin. While meeting guidance fiscal 2017 achieved an adjusted EBITDA margin of 7%. So fiscal 2018 we are in target of adjusted EBITDA margin of around 8% supporting our mid-term 10% margin goal. To this end in fiscal 2018 and beyond we will be upgrading our Fort Valley production facilities and together with the focused cost reduction program we are driving improvements in efficiencies, quality and product cost. You will see the outcome of these actions reflect in our fiscal 2018 guidance which I will cover later. All in all these are exciting times at Blue Bird. Let me now review with you our full year 2017 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. In selling 11,317 buses last year we achieved our highest sales volumes in 15 years. All these units were built at our Fort Valley plant on two shifts and it was a record production year. It's also worth noting that since the school bus industry trough of 2011, Blue Bird's annual sales have grown by over 70% through a combination of industry recovery and significant market share growth. As a reminder, in the last 18 months we launched our latest generation of propane powered bus we call it our Gen 4 and then this year we improved it again with certification by CARB to the lowest NOx emissions level in the industry by a factor of 4. With just over a year in the market, we are the only gasoline powered largest school bus on the road today and about a year ago we launched our all new Type C powered bus powered by compressed natural gas. These three products which are all exclusive to us for our contractual partnership with Ford Motor Company and ROUSH CleanTech together with our compressed natural gas Type D bus represented nearly 4,000 Blue Bird bus sales in fiscal 2017 and importantly grew by a substantial 41% over last year. It would be interesting to note a thing that in fiscal 2017 504 customers placed their first ever orders for a specific Blue Bird alternative-fuel powered bus. Interestingly 90% of those customers have no prior experience with any alternative-fuel. This is not a case of customer switching from propane to gasoline. We have had a terrific customer response to our new engines and I will cover alternative-fuels more in a couple of slides. As I mentioned earlier, we’ve unveiled a full range of electric powered school buses that are under development and scheduled for launch next year. Just this past month with the California Air Resources Board our Type D electric bus has received the HVIP certification, which allows it qualify immediately for the maximum grants available for zero emission vehicles in California. Next week our Type C electric bus is heading to Florida, the customer ride and drives at a number of cities. We will be ready to take orders early next year. I would like to acknowledge as well, the terrific performance by our Type A bus Micro Bird. Our 50-50 joint venture in Quebec sold a record number of buses in fiscal 2017 just over 3,100 and secured market share leadership in the second year running in Type A school buses across North America, that's a great achievement by our Micro Bird team. We're always excited to appoint new growth oriented dealers in our territories and this year we added two of those. Blanchard bus sales of South Carolina took over the territory in late 2016 and it has had a great year with the backing of being the Caterpillar distributor in South Carolina, they are well capitalized and well positioned for growth. Our new dealer in Virginia was appointed just a few months ago and it's great to see an existing dealer with more than 40 years in the business expanding and now covering three markets, Western Pennsylvania, West Virginia and now Virginia. We love seeing an existing dealer investigating our Blue Bird brand. And finally, early in fiscal 2017 we refinanced our term loan and revolver at very competitive terms, reducing our interest rates by 4 points and saving about $6 million in cash interest expense in fiscal 2017. And at the last earnings call we mentioned that we were initiating a stock repurchase program buying back up to $50 million in stock over the next 24 months. To-date we have repurchased $34 million of stock and are on-track to complete the program in fiscal 2018. I think it's fair to say we've advanced our business on multiple fronts in fiscal 2017. Let's now take a close look at our second quarter financial results on Slide 6. I touched on many of these financial results earlier and Phil Tighe will run through the details later. So just to summarize the fourth quarter, we exceeded our fiscal 2016 results in every category. Total net sales, total bus sales, total parts sales and adjusted EBITDA. Total net sales for the fourth quarter were up strong 9% and adjusted EBITDA was 3% above last year. Turning to the full year, total net sales at $191 million were up 6% from fiscal 2016 with similar growth in both bus and parts sales segments. Although meeting guidance, adjusted EBITDA of $69 million was down $3.3 million from a year ago. While bus volume was higher this was more than offset by custom mix differences and higher operating expenses particularly in support of new products and growth. Turning now to Slide 7, let's take a close look at our alternative-fuel bus sales performance. At 3,888 units sales alternative-powered school buses represent slightly more than 1/3rd of our total volume. And that compared with only 17% sales mix just two years ago, now that's exciting growth. With an impressive growth of 41% over last year Blue Bird continues to be the undisputed leader in the fastest growing school bus segment with our market share running at over 85% in this category. With less than 15% of school districts having purchased an alternative-fuel powered bus we are well positioned for future growth. Propane continues to be the market leader in this segment with 2027 Blue Bird propane-powered bus sales in fiscal 2017 and it also records the highest owner loyalty of any school bus in the market. But gasoline has quickly climbed the chart with sales of more than 1,750 buses in its first full year in the market. Now while propane is widely recognized as having the lowest total cost of ownership in the market and is a green engine and as I said before we have the cleanest product in the market by a mile, the gasoline engine is readily understood by technicians and mechanics who really appreciate the simplicity on cold weather start capabilities it shares with propane. With our exclusive partnership with Ford and ROUSH CleanTech across all alternative-fuel engines it makes it easier for customers to go over alternative-fuel fleet with the same engine architecture, the same transmission and the same service requirements across all three products it's an easy move for school district or a fleet operator to take the Blue Bird product range. I mentioned earlier that 504 customers placed their first ever orders for a specific Blue Bird alternative-fuel powered bus. While importantly 238 of those customers shifted from our competitors to Blue Bird that is the strength of having leading and unique products to offer your customers. Let me now turn it over to Phil Tighe, who will take us through the financials and then I will be back later to cover the fiscal 2018 outlook and guidance. Over to you Phil.

[Phil Tighe:]

Thank you, Phil and good afternoon everyone. The next few slides that I'll take you through our summary of the financial performance for the fourth quarter and the full year of fiscal 2017. I would point out that there is additional information in the appendix the deals was primarily reconciliations between GAAP and non-GAAP measures mentioned in this review. Detailed material will be available in our 10-K which we expect to file later this week. The material we discussed today is by somewhere close of September 30, for 2017 and October 2 of 2016 for fiscal year 2016. I should report that there were no new accounting pronouncements that impacted Blue Bird in this report and risk factors remain largely unchanged from the previously filed 10-K with only minor reductions to content from prior years in a number of areas. Also please note that there are important disclaimers at the end of the deck. So if we turn to the next slide, this Slide 9 covers summary of fourth quarter results for fiscal year 2017 and compares those results to the same period in fiscal year 2016. Phil as already mentioned, fourth quarter volume was 3,608 units an improvement of 9% versus prior year and the highest fourth quarter sales result in about nine years. Production volume in the fourth was only about 6% lower than the record we achieved in the third quarter and we continue to experience some production challenges caused by an extremely high mix of our popular rear engine bus; these are very complex buses and very labor intensive units. And the high demand in the second half has represented a number of challenges in line balancing and skill management. We also had in the production area a number of issues with timeliness of deliveries and quality of some of their components. Net revenue was up by 9.2% versus fiscal year 2016, the total growth in bus net revenue was included in the net revenue number was about 9.6%, a majority of that driven by volume. Per unit revenue however was up by about a 0.5 point due primarily to product mix and the higher alternative-fuel mix. Net revenue in the fourth quarter was also higher than the first half on a pre-unit basis, which is an encouraging sign. Gross profit margin was 12.6% about 9 points lower than last year driven largely by higher production cost during the peak season, a more complex build mix that resulted in lower efficiencies and some higher economics. Net income and earnings per share, net income was about $14.5 million or an improvement of 34% versus last year for the same period and adjusted diluted earnings per share was $0.51 for the fourth quarter versus $0.42 last year. Net income I should point out was positively impacted by higher operating profits due in part to the non-recurrence of expenses incurred in fiscal 2016 with the change of control. Lower interest expense resulting from the terms of the new loan agreement and lower debt balances as well as higher profits to manage JV in Canada. We also had higher income tax expense which partially offset the above. I'll talk about our adjusted EBITDA in a few slides. With respect to debt and cash, our cash closed out at $62.6 million which was an improvement of about $10 million versus prior year and we will discuss that on a later slide. The debt of the $151.2 million also reduced slightly, I should point out that actual debt reduced by about $8 million year-over-year, the reason you don't see this is due to the inclusion of net issuance caused in the debt total been about in fiscal 2017 and fiscal 2016. Now turning to Slide 10, which is the full year summary. Phil as already commented on volume, I would point out, I think this was our highest sales volume for Blue Bird since about 2003, I think Phil talked about the continues growth we've been having for the last few years, but this was a good achievement for Blue Bird. Net revenue was up by about 6.3% and we had increases in both bus and parts revenue. The total improvement in net bus revenue was about 6.2%; although I should report that per unit revenue for buses was down about 0.03 of a point due primarily to product and customer mix. Although that per unit revenue was down we did see a fairly good shift in per unit revenues between the first half of the year and the second half. So that's an encouraging sign. Parts revenue was up by about 7% due to the continuing expansion of product offerings volume incentive and improved shipping arrangements to our dealers. Our gross profit margin was 12.9% about a point below last year, bus gross margin within that was 11.4% also a point below last year driven partially by the lower unit revenue and by higher production costs and economics. Parts gross margin was down by about 2.9 points as a result of a more aggressive positive that we've been taking on a selection of our parts to become more competitive add in the market and grow sales and also we had some higher freight cost in the parts business. As Phil pointed out margins are a very key focus for the management team and we are implementing some really significant actions to improve our ability to efficiently build higher volumes and drive cost down. We will see the results from those activities over the next 12 months. Net income and EPS for the full year, net income was $28.8 million and adjusted diluted EPS was $1.27 for the year. The net income was up by almost $22 million and this was partly due to the fact that the fiscal year 2016 net income was impacted by cost associated with the change of control. Adjusted diluted earnings per share was up by $0.13, again the delta there is a little lower than you might expect given the net increase in net income, but the change of control costs are added back in the non-GAAP metric of adjusted diluted earnings per share. Comparison of the income statements that you will see when that we file, we'll show you that operating profits were higher. Interest expenses are lower due to the new loan agreement, however this was largely offset the savings in interest expense were largely offset due to the debt extinguishment costs that we had to report. We did have higher profits from our joint venture in Canada; we also obviously had higher income tax expense. We'll talk more about EBITDA when we get to the bridge and the cash, debt and cash numbers of the same as the prior slide and we already discussed that. Moving to Slide 11, this page briefly shows a walk between fiscal year 2016 and 2017 for the fourth quarter. You can see we are up by 2018 to a profit level of $25 million, bus gross profit of just over $1 million was due to higher volume of 300 units and a slightly higher average per unit revenue and that was partially offset by the production cost that I alluded to earlier. The lower parts gross profit was $300,000 again we have been moving our pricing quite aggressively and we did have a higher freight cost. Operating expenses and other were about equal to the prior year. Moving to Slide 12, which is the bridge for the full year; this shows the profit that $68.9 million versus $72.2 million in the fiscal year 2016, so our reduction was about 3.3. The bus gross profit was down by $1.8 million, despite the fact that volumes were up by 700 units. We did have a slightly lower mix and as I said we did have issues with efficiencies in the plant at the high production levels and the mix of production and we did have some higher economics. Parts gross margin again were due to the revised go-to-market structure we've got with parts. Operating expenses and now that about $1.3 million higher the principal course for this was a product spending growth support and economics partially offsetting that was equity, higher equity income from that JV in Canada that we owned in fiscal year 2017 versus fiscal year 2016. We move to Slide 13, this is the free cash flow slide, and we show both the fourth quarter and the full year for both fiscal year 2016 and fiscal year 2017. For the full year the adjusted free cash flow was $43.7 million up about $10 million versus the prior year. As you can see the key drivers for the improvement versus 2016 were lower interest costs, lower trade working capital and lower other changes basically in the area of accrued expenses. The fact is that this is partially offset the good news items were a reduction in EBITDA and higher income tax. We did show on the page the walk from free cash flow to adjusted free cash flow and you can see there that, the $38.6 million in free cash flow that we owned was just about double the result in 2016. Again that was largely due to the special compensation payments with the change of control that occurred in fiscal year 2016. Moving on to Slide 14, this shows net debt leverage and liquidity at the end of fiscal year 2017. Net debt stood at $88.6 million including $62 million of cash. This is an improvement of 411.2 million versus the same time last year and had higher cash by $10.3 million. The net leverage ratio was 1.6 substantially below the required net leverage ratio at the end of fiscal year 2017 which was 3.75. The 1.6 also by the way is just about the same level that we had at the same time last year. Liquidity stood at a $130.6 million; there were no drawings on our revolver. Liquidity at the same time last year was about $107 million. I would remind everyone that, we have a highly seasonal business and the year-end cash level is generally the peak of that cash holdings due to the substantially higher profits generated in the second half and the low level of inventories as we come out of the fiscal year and going to the slower period of bus production which was in the first quarter. The final slide for me is just a brief update on the share repurchase program Phil already touched on this, you can see some of the details here. I remind you that the Board of Directors approved a share buyback program during fiscal year 2017 of up to $50 million. The company during fiscal year 2017 has paid out $34.3 million to repurchase common stock, you can see that warrants and preferred and as that's been previously announced, the majority of the money spent in fiscal year 2017 was for the repurchase of common warrants and preferred previously held by Coliseum Capital Management LLC and that was worth $32 million. Coliseum was one of the original investors and we wish them well in the new endeavors that they are taking. We continue to purchase shares, I think since the end of the fiscal year we have probably purchased about another $2 million worth and as Phil suggested our target is to complete the purchase of the shares in fiscal 2018. So with that, I'll thank you for your attention. And I'll now pass you back to Phil Horlock, who will discuss the outlook for fiscal year 2018, and new guidance and then wrap up for questions. Thanks Phil.

[Phil Horlock:]

Okay thank you, Phil. So as Phil just said let's now move forward and take a look at next year fiscal 2018 and our outlook for that year and our full year guidance. So please let's turn to Slide 17. As the headlines says we are targeting margin growth in fiscal 2018. With the industry of 30 year high, we do anticipate growth slowing, although I have to say we are well positioned and ready to capitalize any opportunity that exist. But we are not banking on the industry surge going forward. With modest Blue Bird sales growth focus at 1% to 2% our focus is on transforming our business structure and improving EBITDA margin to all the mid-term goal of 10% EBITDA margin up from 7% last year. To support this, we are undertaking a significant facility upgrade in fiscal 2018 to derive efficiencies, higher quality and provide additional capacity. This will progress the implemented through fiscal 2018 and into the following year. Additionally we are partnering with insist specialist to attack all cost elements while continuing to work on our passion providing best in class products that want in value. We plan to report progress throughout the year and expect to see the impact of these actions starting in the second quarter. So let's now turn to fiscal 2018 guidance on Slide 18 which reflects these initiatives. Net sales guidance is between $1 billion and $1.30 billion up $9 million to $39 million from fiscal 2017, a fairly modest growth but aligned with the industry outlook. Adjusted EBITDA guidance is now between $78 million to $82 million a significant $9 million to $13 million increase over fiscal 2017 as we focus increasing efficiencies and driving down cost when these hit the bottom line. Adjusted free cash flow is between $36 million to $40 million and continues to be a strong feature of our business model. This represents over 40% of adjusted EBITDA despite the plant facility upgrade investments in fiscal 2018. So wrapping up with the strong fiscal 2017 performance both operationally and financially and we met guidance. We look to profit and margin growth in fiscal 2018 and our plans and guidance support this. We will continue to update on our progress each quarter at these earnings calls. So that concludes our formal presentation. I will now pass it back to our moderator Stephanie to begin the Q&A session. Over to you Stephanie.

[Operator:]

Thank you. [Operator Instructions] We'll take our first question from Matt Koranda with Roth Capital. Please go ahead.

[Matt Koranda:]

Hey guys. Thanks. So it sounds like the emphasis in fiscal 2018 is on margin improvement and you guys are looking to track toward the 10% EBITDA margin sort of long term goal that you have. But just trying to understand how that's factoring into the outlook, because it looks like at the midpoint we're only looking at about 20 basis points of EBITDA margin improvement for the year. So, can you just give us sort of what are the puts and takes around the expectations that went into to building that up and I would expect maybe some tailwinds from higher margin in our fuel power trains but maybe are there some headwinds that we haven't factored in yet here?

[Phil Horlock:]

Just picking up a little bit, this is Phil Horlock. Just picking a little bit on what you said there, I mean what we look at the margin objective next year is about an 8% margin, I think we were about 7% next year this is in 2017, so we are looking to go into an 8% EBITDA margin. Couple of things going on, obviously we are going to continue to capitalize on alternative-fuel leadership, we're well established there, we'll see new customers everyday coming to us looking for that opportunity, it's a great product for us. We like the margin of that business, and we are going to continue to keep pushing that. I think the emphasis we wanted to get across today is that, this is a plan for 2018 that's really, we're going to focus a lot on cost efficiencies, driving quality, spending, we are spending money in the plant we sort of - if you look at this plant back in 2010 when we were building four or five thousand units a year, we've significantly grown this plant, it's time to invest in it, invest in automation, efficiencies, new processes and they'll also help to take our cost down we believe and then drive efficiencies, we got experts on the ground here today working with us on that. And so I just want to really say to you, it's not that we sort of been somewhat prudent I think on the sales end of it, because I want to show what our emphasis and focus is for 2018, but we are well positioned to capitalize opportunities on the sales side, but that's also realistic recognizing we just come up a 35,000 unit industry well above anything we've seen in the last nine years or so, I think the last time we saw a number that big was in 2007 and then prior to that it was way back to 1985. So, I think we feel pretty strong about where we are and the actions we have in place. But product for us remains critical, we're investing in product, we are not holding back on product and that's the way we win over time in the marketplace.

[Matt Koranda:]

Okay. Got it. Can you guys quantify the cost that are associated with the production challenges on the Type D units that you've referenced in the prepared remarks and then maybe could you talk in a little bit more detail about the operational improvements that you've made to address the inefficiencies there?

[Phil Tighe:]

Hey. Matt. This is Phil. The Type D unit efficiency level was probably running in the mid, roundabout the mid 80s percent versus a target of 100. These things can be somewhat difficult to build and we have put a lot of time into training some people to deal with the increased capacity in that area. We did have to spend a lot of overtime work building those units because of the lower efficiency levels. The second part of your question dealt with operational improvements, is that correct?

[Matt Koranda:]

Yes, that's right.

[Phil Tighe:]

So, we have taken a pretty wide look at this, again this plant has grown by a factor more than two and it's been quite a while since we actually went through it and took apart pretty much every operating station and decided which is the best way to build. So, we've gone through a significant practice, a significant set of work there. Realistically, you won’t to see the full result of it until later in the year, but we will see improvements through the year as we redesign how material gets to the line and how people work. So, I think that's going to deliver a lot of opportunities for us and it will also free up some bottlenecks that we have discovered as we go forward.

[Phil Horlock:]

Hey, Matt. This is Phil Horlock. One way to think about this is, as Phil said correctly that when I said before was this has been record production year in Fort Valley, when you hit records you sort of stress the system, you hit more and more of your bottlenecks as Phil pointed out. So one simple thing we're going to do is we are going to put more stations in the production line, give us more chance to have quality checks along the line here, the stations are now less dense, less folks sitting on top of each other in the plant which is what we have had to do, we have got to literally put more people in to build the high demand we've had. So we're going through station by station, with a laying out to better production line for us that we know will be much more efficient for us and it’s rebalancing the entire line and now as I mentioned earlier bring it in assisting tools to help our workers easier so they can have a faster cycle time that helps take capacity up on some of those actions they do. And then select levels of automation along the way as well would be something we're going after. So, we're taking a [Indiscernible] look.

[Matt Koranda:]

Got it, got it. I guess your comments imply maybe a year where we got a little bit of a higher CapEx spend and I think that foots with sort of what you gave for free cash flow guidance, but could you break out what you expect CapEx to be for fiscal 2018, I guess my back of the envelope says maybe 12 plus million, is that about right?

[Phil Tighe:]

Not sure we want to go all the way there, Matt, let's just say that we are adding some as Phil just mentioned we are adding some automation and some improved tools and we're also looking at what to do in some of the bigger areas of the plant where high levels of skill are required. There is a lot going on in the plant. The good news is we will do this without losing production. So, we don't have to take the plant down based on our present plan and we will install this stuff while we are still in full production.

[Phil Horlock:]

I mean Matt, we've spent about $10 million, we sort of tell you I know previously we said we plan on 15, somewhere between 10 and 15, I think we spent about 10 this past year in 2017, it’s obviously going to be above that and I think that will do is as we go through the year we'll inform you more about as we go. Just right now these plans are sort of little fluid towards the end of the year, but we still had a good action plan for the good nine months so we know exactly what we're doing and what are plans are. But we'll sort of fill you in as the year goes along, it will be up on [traditional] [ph] level, you are right looking at that way.

[Matt Koranda:]

Got it, got it, okay. Maybe one more from me I will squeeze on here and then I'll leave it to the rest of the guys. So the tax reform, I guess there is probably some puts and takes for you guys, if it impacts housing values in some way maybe that hurts the tax take at the local level touch, but then obviously the corporate would be a benefit for you guys in terms of the reduction in the rate. Could you talk about sort of your current views and your analysis as to sort of what the impact would be for Blue Bird and how you factored that into guidance if at all?

[Phil Tighe:]

Quite frankly Matt. We haven't done a lot on our department apart from REIT what everybody else is reading, I think once we get closer to some sort of agreement between the have sent the Senate, we'll start doing some detailed works with some tax advices on where we'll go. I'm not sure that the housing thing is going to be a big concern for us. It looks like the people who will get really hurt, the people with very expensive places. There is a lot of buses both in areas where the houses where they have, they the deduction will still remain in place. So, it's a little bit too early for us, I would suspect that when we do our first quarter call, we'd probably have a much better feel of at least analytically what we think it's going to do.

[Matt Koranda:]

Got it, thanks guys. I'll jump back in queue.

[Phil Horlock:]

Thanks Matt.

[Operator:]

[Operator Instructions] We'll go to our next question from Chris Moore with CJS Securities.

[Chris Moore:]

Hey, guys. Thanks for taking my questions. So, at the Q3 call, you talked about that there was roughly 200 buses that were going to be built in Q4, not likely shipped until Q1. Can you just -- maybe I missed, give us an update in terms of those buses, did they ship in Q4, are they ready to go now.

[Phil Horlock:]

About 75 of those did ship actually in Q4. We got them out. But, the balance we will ship in the first quarter of fiscal 2018.

[Chris Moore:]

Got you. Okay. In terms of looking at the mix for -- and they will turn to fuel, roughly 52% propane, 45% gas, given trajectory of gas, is it likely that will be more than 50% of alternative fuel sales in fiscal 2018? Is that a reasonable assumption?

[Phil Horlock:]

I think we still see propane is being the preferred choice, I mean it's still the best TCL model for our enough retailer dealers. We explain that to customers. They understand it. Obviously, I think with gasoline, I think they got the first year of it, you got the early adapters jump in; they jump in quickly. Having said that, I will tell you, we are off to a great start this year without giving the store away. The gas holders have gone really well and what I call the quiet season, the slow season which is traditionally. But, I still think we still expect the propane will be the number one alternative fuel for us. But, we will keep you posted as where it goes through, frankly do I care about it. I like propane. And I liked it a lot. I think it's a great product. So, we do push that hard, because we believe in it. But, if a customers got it is heart set on gasoline, we are going to sell him gasoline too. And actually if we got his heart set on diesel, we will sell him diesel as well. So, I guess hopefully that's helpful to you. But, then the priority for us is, we still think that propane because we believe in it. It's got the best installed base. And that's another important point. We sold just -- last year we sold our 10,000th propane powered school bus. And we just sold our -- obviously, we sold now; we got in the market over 2000 gasoline powered school bus. But, the installed base certainly helped us certainly on propane as people are to renew that business for this.

[Chris Moore:]

Got it. Thank you. On the -- skipping a little bit, on the -- so, you just said EBITDA margins mid-point is just about 8% up -- about 100 basis points, is most or all of that soon to be coming from improved gross margins?

[Phil Horlock:]

That's correct, Chris.

[Chris Moore:]

Got it. And last question, just in terms of -- on the electric vehicle side, my understanding is that, at least at this point in time, they are extremely expensive. Just trying to get a feel for, what would have to happen for that to be an important part of the revenue mix a few years down the line?

[Phil Horlock:]

Well, I mean, you look at -- everything to read about bus and technology. Obviously, the bus is a T-cost of an electric vehicle, you can imagine moving up 33,000 pound school bus that's a lot of buses and the cars. But, with all the reports tells you, in two, three years from now, the buses costs are going to be hard, and then, they are going to come in -- another two years, we are going to have again. I mean, right now, frankly, near-term, it's all about grants and California has certainly led the way and this constantly some grant opportunity as there are to buy electric buses in California, obviously, they are leading the way here on zero emissions. But, we have always seen other cities, other states lower volume selectively follow, lot of interest in Florida around electric powered school buses. So, that's how we want to capitalize I think next year, first of all, where the grants are available. But, we will be selling, what I call specific opportunities that might appear where there is district, once we have zero emissions, wants to show their [indiscernible] that we are going for zero emission solution, and there will be opportunistic sales. But, we are heavily targeting, let's say, first and foremost California, but also Florida is pretty close behind there, is the way they look at it. I think the real big surge is going to be two or three years down the road.

[Chris Moore:]

Got it. I appreciate it, guys.

[Phil Horlock:]

You bet. Thank you.

[Operator:]

[Operator Instructions] We will go next to Eric Stine with Craig-Hallum.

[Eric Stine:]

Hi, everyone. First, I just wanted to start with the parts business, I know that in fiscal 2017, it's a big initiative and it continues to be in your pricing. Lot of your parts aggressively try to gain share versus incumbents. I mean is there anyway to maybe quantify or talk a little more in detail about the progress made there maybe the share across your dealer network that you've seen, you got with your parts and where you think that can go?

[Phil Horlock:]

Yes. That's a good question. I think on parts we talked a lot, I think in the past about, parts we think should outperform the school bus growth. I mean, probably should say, obviously we've got a great success in alternative fuel, so that's kind of focus us somewhat on the growth curve. But, I think on parts, the way we look at it is, we also did some things to make us competitive. There are a lot of players out there trying to sell parts to school districts. Lot of suppliers go directly, lot of third-party operators go. Lot of, I call it, no, no, the end parts provide us, like to tap school districts, because guess what, there are over half a million school buses out there. But, we have been doing is, we have been very aggressively -- we have been adjusting parts price and make them competitive. Doesn't it simply mean, we cut the price with a lot of supplier, negotiate a new price in many cases. What has happened is, we certainly seen a significant up tick, I would say in the number of parts that we are selling through our dealer channel. If you see a volume apart through our dealer channel, it's significantly up. Obviously, that comes out a little bit, because we have lowered the revenue. But, what we're going to do, get our installed base. And I think we will succeed in that regard. We got more SKUs out there that we've never had before. You look to alternative fuel. You probably know this, but, when you look at the way that the industry goes, on the diesel side of the business through Cummins, the transmission are through Allison, which is the big piece of a chassis. Those guys control the distributors, the parts business. With the four products, we have exclusivity and sell those products, at a very competitive prices, so we can sell Ford engines, be it propane, gas, CNG, we can sell the Ford transmission. So, I do think that's a -- as we continue to grow this proportion on alternative fuels, we also continue this to grow disproportionately, the parts opted in those segments. But, we are still very bullish on parts, we track the revenue per UIO, which means we look at every single dealer, think of it, we have 50 of those dealers across this country. We track every revenue on part or unit in operation that dealers market area and I can tell you, it's growing everywhere versus where it has been in the prior years, so we feel very comfortable on the right track.

[Eric Stine:]

Okay. That's helpful. Thanks for that. Maybe just two more quick on alternative fuels, I appreciate you've given the number of new customer for Blue Bird because of all fuels, I don't -- I think that maybe the first time you have given that number. But, just curious, I mean from a high-level, if you don't want to be too specific, but break that down between propane and gasoline, I mean, are the majority of those gasoline given that you've got a huge head start, the only one in the market or are some of those customers propane, given your leadership with that product?

[Phil Horlock:]

Well, there is both. I mean, you got both in there. I'm not going to give you the break. I would just say obviously, I said earlier we have a large installed base -- a fairly large installed base of customers who are still with propane. So, it's a good thing as we've got a lot of repeat business, you might recall, I said this is the highest loyalty of any product to the marketplace. So, by definition, loyal customers keep coming back to us. Would it been the first year of gasoline, obviously, we did grow significantly, customer base through gas, but we also grew significantly through new propane customers. So, it really was bolt, and these are all gas customers. And talked with all the old guys, what it has been before, it was a good blend of both.

[Eric Stine:]

Okay. And maybe last one from me, you touched on this relative to electric, but just curious on natural gas and some of the funding in California from the cap and trade program, if you are seeing any request or demand, or any thoughts that you might have the near zero Cummins less part engines is part of your offering?

[Phil Horlock:]

Well, on the CNG situation, first of all, just stepping aside from it, I mean the thing is CNG from a standpoint of -- we are actually -- we have been over the years the market leader in compressed natural gas. But, when we look at it, I mean, you can see the propane that sells it over 10 to 1 and the reason being because of things like infrastructure you got to put in place, the sheer cost of upgrade, the tanks, for propane it was compressed or Kevlar-coated, it's a very expensive upgrade. Economically it is tough to make it work. Now, you mentioned the cap and trade and the virtual zero emissions, that's some product information, I really don't want to get into. But, put it this way, we are going to be competitive; we are going to be very competitive.

[Eric Stine:]

Yes. I just know, I mean, yes, it's a very small part of the market, but it is an area that I have been keeping snaps on, and there is some potentially some very significant money, so just wondering, I mean it seems like that could be a bigger part of your mix going forward so. Okay, thank you.

[Phil Horlock:]

We will be competitive. I can tell you that. Yes, absolutely. Thanks.

[Operator:]

With no further questions, I would like to turn the call back over to Phil Horlock for any additional or closing remarks.

[Phil Horlock:]

Okay. Well, thank you, Stephanie, and thanks to all of you for joining us on the call today. I have to say, we do appreciate your continuing interest in Blue Bird. We are focused on profitable growth and intend to deliver on our commitments. And I think we are very well positioned for future growth today and in the future. I've said several times in this call today. We have a passion for product because in the long run, products are what wins with our customers. So, please don't hesitate to contact our Head of Investor Relations, Mark Benfield, should you have any follow-up questions. Mark is always here to help you. And thanks again for [voting] [ph] to Blue Bird and wish you a good evening and I should also add happy holiday. Thanks everyone.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.