Blue Bird - Earnings Call - Q1 2017
February 9, 2017
Transcript
Speaker 0
Greetings, and welcome to the Blue Bird Corporation's twenty seventeen First Quarter Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mark Benfield, Director of Investor Relations.
Thank you. You may begin.
Speaker 1
Thank you, Audrey. Welcome to Blue Bird's fiscal first quarter twenty seventeen earnings conference call. The audio for our call is webcast live on bluebird.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 Cai. Then we will take some questions.
Speaker 2
So let's get started. Phil? Thanks, Mark. Well, good afternoon and thank you all for joining us today for our fiscal twenty seventeen first quarter earnings call. We welcome this opportunity to share with you our latest quarter results.
Let's get started with an overview of our financial results on Slide four of the presentation. As we've previously explained, the school bus industry is extremely seasonal and we achieved solid results in the softest quarter of the year. The first quarter is a softest quarter as it covers the three months immediately following the start of the new school year and consequently is a slowest quarter for new school bus sales. We plan for this by taking our annual shutdown, vacation shutdown for our employees in October. And of course, we have the holiday shutdown periods over Thanksgiving and the December holiday period.
This means that typically first quarter unit sales represent no more than 15% of the full year volume. And this is also our expectation for fiscal twenty seventeen. So we sold just on the 1,500 buses in the first quarter, which is 6% higher than last year. At $137,000,000 net sales were four percent higher than last year's first quarter. So the net sales revenue growth was a little lower than the unit sales growth, which we expected as we saw a number of specific customers shipping their new bus purchases from the first quarter to later in the year.
Our alternative fuel powered school bus sales mix was strong at 23%, although it was a little bit lower than last year's mix because of later order timing by specific customers that I just mentioned. However, since the first quarter, we've experienced a surge in alternative fuel bus orders such that as a close of business just two days ago, our year to date Blue Bird propane bus orders are 29% higher than the same time last year. We expect another great year for the industry's best selling alternative fuel school bus. Our adjusted EBITDA of 2,600,000 was down about $2,700,000 from last year, but represents the fourth consecutive year in which we've achieved positive EBITDA in the lowest volume quarter of the year. The profit decline from last year reflects the change in customer mix and timing of engineering expenses, purely a timing issue.
This was a solid result and consistent with our full year plan. We ramped production on two shifts through the first quarter, ramping up to 59 buses a day and we'll continue to increase production until we hit seven units a day in support of the peak season demand likely around May. This trough to peak increase in daily production rate of only 11 buses is manageable, resulting in less seasonal hires than in prior years. That's better for training, better for quality and better for employee turnover. In fact, this contract with last year's first quarter when we ran one shift, picking at only 46 buses a day.
So the climb to the summer peak of 70 units a day last year was more challenging. We refinanced our term loan and revolver as well at a much lower interest rate providing about 5,000,000 this full year in interest savings. And finally, early industry data on registrations and actual orders received together with higher court activity that we are seeing support our position of new school bus industry should grow by between 3% to 4% this year and reach around 33,500 to 34,000 buses this year. All in all, a solid first quarter for Blue Bird and in line with our expectations. Let me now review our first quarter operating achievements on Slide five.
We recorded a number of significant achievements since the start of the fiscal year and each one will make us more competitive and support our growth going forward. On the sales front, we won business with several new customers, including school districts in South Carolina, the Canadian Maritimes, Fulton County in our home state of Georgia and Hawaii. In total, these new customers have ordered around 500 buses this year, a combination of both diesel and propane powertrains and are key to growing overall volume market share for Blue Bird. We recently welcomed a new dealer to our family, Blanchard Bus Centers of South Carolina. Blanchard is also the Caterpillar distributor in South Carolina and has an outstanding reputation for customer service and we are utilizing the many service centers across the state.
Blanchard's appointment and the service footprint were instrumental in winning the new business in South Carolina that I just mentioned. We're delighted to have them on board as our newest Blue Bird dealer. As I mentioned in prior earnings calls, a cornerstone of our product strategy is to bring to market differentiated products and features that customers want and value. Well, just two weeks ago, we released exciting news that we have been awarded a grant by the Department of Energy for $4,400,000 to develop 80 electric school buses for deployment in California with vehicle to grid capability. Working with our electric vehicle partner, TransPower, our goal is to develop a high performing product with best in class range between charging at the most affordable price point.
We are already clearly established as a leader in alternative fuel powered school buses and this initiative will further strengthen that position. To showcase all of our products and features to our dealers and customers, we recently held three ride and drive events in Quebec, Georgia and California. I can tell you feedback from dealers and customers to these product immersion tours or pit stops as we call them was outstanding and there's real excitement around all the new powertrains that we recently launched. We have another four planned through the spring this year. This is a great initiative of building customer interest and excitement in our products.
Through our dealer network, we've seen an increase in units quoted about 6% over last year. This is a good indicator of the strength of the industry and in particular of customer interest in Blue Bird. While we've seen that translate into orders too, as through Wednesday of this week, our fiscal year volume of buses already sold and delivered plus our backlog of firm orders that we have in hand is up 22% from the same time last year. I can tell you now that our second quarter production slots are completely filled and we are well on our way to fill in the third quarter slots with firm non cancelable orders. Not surprisingly, we are seeing the biggest growth in orders in our alternative fuel powered school bus sales.
As a reminder, in the last year, we launched our latest generation propane powered bus, we call it our Gen four model, an all new and first to market gasoline powered bus and an all new Type C bus powered by compressed natural gas. These three products, which by the way are all exclusive to us through our contractual partnership with Ford Motor Company and Roche CleanTech together with our compressed natural gas Type D bus powered by a Cummins Westport engine represents a substantial 75% increase in orders compared with the same time last year. We are very excited with this customer response to our new engines and I will cover alternative fuels more in a couple of slides. And finally, we are reaffirming our full year guidance for our key financial metrics. So a lot of good achievements we believe early in our fiscal twenty seventeen.
So let's now take a closer look at our second quarter financial results on Slide six. First quarter net sales of $136,700,000 were $5,300,000 or 4% higher than the same period last year. This result was in line with our expectations. Now while bus sales grew by 3.3% to $122,400,000 we saw a substantial growth in parts sales of nearly 11% to $14,400,000 This was a particularly strong performance by our parts and service team as we successfully launched several seasonal product programs to drive additional sales through the first quarter. At $2,600,000 adjusted EBITDA was down $2,700,000 from a year ago, which is explained by retiming the specific customer orders later in the year and timing of engineering expenses.
As an example of the retiming of orders, last year we had six specific propane school bus customers who purchased nearly 300 propane buses in the 2016. Now one of these customers switched their entire 75 unit fleet of propane last year, so they will roll with purchasing again in fiscal twenty seventeen, While the six other customers have either submitted orders in the second quarter or plan to do so in the second half of the year. We deal with this quarterly lumpiness in orders throughout the year. It's a regular thing we experienced at Blue Bird, but are well positioned to meet our full year objectives because throughout the full year, all these customers come back into the market to buy our buses. Turning now to Slide seven, let's take a closer look at our alternative fuel bus sales performance.
As of two days ago, we had thirteen twenty one bookings and firm orders in hand for our combined propane, gasoline and CNG powered school buses. As I mentioned earlier, this represents a substantial 75% increase in orders compared with the same time last year. That is a very strong customer endorsement of our new alternative fuel powered buses and we're particularly pleased with the continued growth in propane and the acceptance of our new gasoline engine. We continue to be the undisputed leader in this growing school bus segment with our market share running at over 80% and with still only 10% of school districts having 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 that our full year sales of alternative fuel powered buses will be over 3,000 units and could represent more than 30% mix of our total sales.
That compared to the mix of just 17%, still a good number, but only two years ago. So we are looking at growing from 17% mix of alternative fuel powered buses to 30% in two years. That's exciting growth for Blue Bird. So let me now turn it over to Phil Tighe, who will take you through the financials, then I will be back later to cover the fiscal twenty seventeen outlook and our guidance. Over to you, Phil.
Speaker 3
Good afternoon. Thanks, Phil. Good afternoon, everyone. It's my pleasure to present to you some further detail on the twenty sixteen first quarter results for Blue Bird. On Slide nine, you will see a summary of the results for the first quarter.
I won't go through all the data on this page, but we'll call out a few areas of interest. Phil has already covered some discussion around the volumes. You can see we're up by about 6% in the first quarter. This achievement was better than our internal plan, which is a good result for us. I would comment too that our dealers are doing extremely well in the first quarter and dealers and sales to our export markets were up about 12%.
Government and direct fleets were a bit slower than last year, but we expect that the government sales will start to increase as we move forward. Net revenue again was $136,700,000 up about 4% with both higher bus and park sales, but there obviously was a lower mix propane, which drove the average revenue down. And also we had an increased mix of the value price gasoline bus, which has an impact on our average revenue as well. Gross margin at 13.3%, this was down about one point versus the last quarter versus last year. The decline was driven largely by propane.
Propane mix was about 11% in the first quarter versus over 20% in the first quarter of last year and Phil's already talked you through some of that customer issues there. We also had some higher labor costs in the first quarter and this was basically due to carrying the second shift right through the first quarter. And so we had some excess manning there, but I'll talk a little later about what we see the impact of that as being. On parts, we did improve the revenue on parts, and that was due to growing our competitiveness as we target some areas where we're trying to grow volume in our parts business, which is a very positive thing for the future. I briefly mentioned net loss and diluted earnings per share.
The net loss of $8,500,000 and the diluted earnings per share of zero four two dollars in the 2017. This result is largely influenced by the extinguishment of costs related to the prior loan. It's about $10,100,000 of before tax costs that had to be written off with the closure of the prior loan and the adoption of our new loan. If you excluded these items, you would expect that our net loss and our earnings per share would have been just right around the levels that we achieved in the 2016. Lastly, on this page, mentioned that the debt is now at $156,700,000 That's an improvement of $38,000,000 versus the same time last year.
That includes we've made a prepayment of $25,000,000 which I think we referenced in our year end call and also the regular amortization of the debt. We're pleased that we're down around 156,000,000 and we'll continue reducing our debt going forward. Slide 10 is the walk from fiscal year 'sixteen at $5,300,000 to the profit of $2,600,000 in fiscal year 'seventeen. Again, the profit level for the first quarter of fiscal year 'seventeen, dollars 2,600,000.0. This was also slightly ahead of our internal plan, and we do not see any risk from that result with our full year guidance.
You can see on the bridge that bus gross profit was down about $500,000 Again, propane was a big factor in this with the lower mix. It was partially offset by increased sales of diesel and gas buses as well as some favorable customer mix. As discussed previously, we also experienced some higher labor costs in the first quarter due to maintaining the second shift. Operating expenses were higher. Phil mentioned product development spend in the 2017 and I'll discuss that in a minute.
And then we had some one time expenses in sales in general. So we've taken a good look at what happened in the first quarter to convince ourselves that our guidance is still on track. And I'll just take you through a few comments there. With respect to propane, I think we'll have a very positive outlook there. And while the mix was down in the first quarter, as Phil Horlock commented, our backlog at the moment is up 29% versus the same period last year.
So we think we're on a very good track with propane and we see ourselves at least achieving the expectations that we had when we set our guidance. With respect to labor, it did cost us some money to carry labor through the first quarter and keep the second shift going. We felt that this was appropriate to get our people fully trained and to maintain the skilled people that we had hired last year and invested in. So our view is that when we hit the peak season and we to hire less temporary workers and we have a stronger mix of skilled workers, we will see a payback in increased efficiencies in the plant, which will more than offset the cost of the first quarter. The product development costs that occurred in the first quarter had been included in our plan for later in the year, but a change in the program timing requirements caused us to pull this work ahead and so it will be offset as we go through the year.
This was not incremental cost, it's just purely moving the timing of the spending. Similarly, the SG and A costs had been included in the plan for later in the year and we don't see a risk there. Moving to Slide 11, free cash flow. This shows free cash flow and adjusted free cash flow for 2016 and 2017. For 2017, you see the free cash flow was $35,100,000 34,700,000.0 on an adjusted basis.
It's about $8,500,000 better than the previous year, which we felt was a good result. The key drivers for the change, obviously, was lower. We got some benefit from the new loan, although not the full benefit because the loan was only in for part of the quarter. We also saw favorable trade working capital. It was down about $5,700,000 versus the prior quarter.
Part of this was due to the fact that going into the first quarter, we had an inventory task force and we and the team did a very good job in minimizing the traditional run up we have in inventories in the first quarter. So that was a good job by that team and gave us some positive news in trade working capital. Lower EBITDA obviously and higher CapEx were partial offsets. I will say, again, the CapEx was very much in line with our plan
Speaker 2
for the year. Finally, I'll take
Speaker 3
you to Slide 12. This looks at our debt, leverage and liquidity. Net debt stood at $143,700,000 that's 156,700,000.0 of debt, net of $13,000,000 of cash. And this compares to about $178,000,000 in the same period last year. The net leverage ratio of 1.76 is substantially below the covenant of four.
So we feel in a very good position there. Liquidity of 82,700,000.0 there were no drawings on the revolver. I believe the liquidity in the same time last year was just over $61,000,000 so substantial improvement there. Basically, we also get the benefit of having an increased revolver with the new loan agreement, so that helps us out. So that's it for me.
Thank you for your attention. I'll pass you back to Phil Horlock, and he'll talk about the wrap up, things that are looking forward and confirm our guidance for fiscal year 'seventeen.
Speaker 2
Okay. Thanks for that, Phil. So let's now focus on the outlook for the year and our full year guidance. And please turn to Slide 14. As the headline says, we are forecasting continued growth in both the industry and for Blue Bird.
We're projecting new bus sales as measured by industry registrations compiled by ROPoke to grow between 3% to 4%. So we'll reach around 33,534 new buses this year. That's our expectation. Now we're forecasting Blue Bird unit sales growth of between 6% to 8% outpacing the industry and supported in part by the full year availability of our new engine choices that we introduced last year and of course our CNG that we introduced just late in the last fiscal quarter. Our substantial year to date growth of 75% in alternative fuel powered bus orders clearly supports this strategy.
We believe it's working. Our total bookings and order backlog are strong at 22% above the same time last year and quant activity is higher too. Again, all bodes well for our volume growth plans for the year. Now with the seatbelt of our business, we project growth in financial performance in the second half of the year as we will then see the peak demand come in, in support of school start. So I just want to stress that it will be second half of the year where we think that we will see the growth in financial performance versus 2016.
That said, we are continuing to invest in the development of new and exciting products that will foster future growth and we are mindful of potentially increasing commodity prices, particularly reflected in our EBITDA forecast or guidance that we provide. So let's now turn to fiscal twenty seventeen guidance on Slide 15, which reflects all of these factors. So we are reaffirming the full year guidance we provided on our last earnings call with growth projected in each of the three metrics. Net sales between $980,000,000 and $1,010,000,000 up $48,000,000 to $78,000,000 from fiscal twenty sixteen. Adjusted EBITDA of between $72,000,000 to $76,000,000 that's flat to an increase of $4,000,000 over last year as we continue to invest in new products to drive future growth.
And adjusted free cash flow continues to be a strong feature of our business model representing over 50% of our adjusted EBITDA. We're guidance for adjusted free cash flow of between 38,000,000 to $42,000,000 an increase of between 5,000,000 to $9,000,000 over fiscal 'sixteen. So in wrapping up, we believe we had a solid first quarter performance in the softest and slowest quarter of the year and we look to continue growth in fiscal twenty seventeen, particularly the second half as demand increases and our guidance supports this. We'll continue to update you on our progress each quarter towards those guidance numbers. So that concludes our formal presentation.
I'll now pass it back to our moderator, Audrey to begin the Q and A session.
Speaker 0
Our first question comes from the line of Matt Koranda with ROTH Capital. Please proceed with your question.
Speaker 4
Hey, good afternoon, guys. Thanks for taking the questions. I think you guys did a good job explaining some of the customer order timing in the prepared remarks. But I wondered if you could just get into a little bit more detail around the engineering expenses that happened in the quarter, specifically what those are for? And then maybe just how you expect those to kind of trend through the rest of fiscal twenty seventeen?
Speaker 3
Yes. The engineering expense in the first quarter, Matt, this is Phil. Hi, Matt. Good to talk to you. The engineering expense was largely around testing and validation of some changes in regulations on the propane engines.
There's a fair lead time getting all that through CAB and then the EPA. Some of you may recall that we had some timing challenges getting the gas engines done last year. So we elected to go fairly conservative and pull ahead the testing so we could get our submissions in well ahead of time and make sure those make sure we did not miss any production on the propane as we enter into the peak season. And as you can see from what we've told people about where the propane backlog stands, we really need to be able to push those buses out pretty quickly through the second half. And so that's the story, Matt.
It was basically protecting ourselves for the peak.
Speaker 4
Got it. So those aren't really expected to be recurring throughout the year. It was kind of a one time thing in the quarter then?
Speaker 2
Yes. Yes, there's about $1,000,000 to match Phil Holicky in the quarter that we incurred. And like I said, like Phil said, we plan to spend that later in the year and put our plan together, which is purely timing, no repeat of that.
Speaker 4
Got it. Okay, helpful guys. Thank you. Then when I look at the backlog of alternative fuel buses, obviously very impressive, up 75% year over year. Just wanted to see if you could speak to kind of the relative strength between propane, CNG, gas.
I mean, our checks have indicated that there's definitely a lot of appetite for the gas engine, especially in certain regions. But wondered if you could maybe speak to the mix in there and the relative strength?
Speaker 2
Yes. Well, this is Phil Horlick again, Matt. So not surprisingly, propane is still the leader in those. The 1,300 or so units we talked about in our backlog there and the orders that the deliveries already made, the predominant product in there is still propane. It's run about just over 800 of those units are actually propane powered school buses.
Propane continues to be, I believe, and we firmly believe, the flagship engine for the school bus industry. It's the best cost of ownership of any product in the marketplace. In addition to that, it's clean, it's green, you get all the benefits of cold weather start that diesel doesn't have. It's easy to maintain. It's very efficient.
So it's a very attractive product. Gasoline was also very good for us in the quarter. Year to date, we have around 400 or so just over 400 of those engines right now, which is very good when you think about it. We only really launched that to our customers in September. So this has been a really nice quarter for us in the slowest quarter of the year and obviously a little bit further than that as we look into the orders that come in January and February.
Gasoline, as Phil called it earlier, this is our value entry. The thinking about gasoline engine is simple. You'll have all the emissions hardware that diesel engine has. And consequently, it's easy to maintain. Everyone's used to gasoline.
Most people have gasoline vehicles. Technicians understand it. So from a simplicity standpoint, it's easy to work on. And again, you get the benefits of great cold weather start. It's like I said, very understandable, easy to maintain, it's quiet and it drives very well.
I I'll tell you, we have I think you've seen our annual report that we just issued last week. We had a first testimonial there from one of our first customers here in Georgia, Cobb County and they were absolutely ecstatic about the product in terms of performance, its fuel economy and the drivers love it. Mean, so we feel we're off to a great start with that. Now compressed natural gas, obviously, is a smallest element of our products, our 30 fuel products there. And that always comes down to fuel filling capability.
It's expensive to install a compressed natural gas filling station. Typically, you will sell a compressed natural gas bus where the municipality has already installed a fueling facility. They typically start at $1,000,000 and go as high 2,000,000 or $3,000,000 depending on the size. You contrast that with gasoline and propane, it's a very simple installation above ground tank, very easy. So we sell compressed natural gas typically where there's already fuel availability.
It's a more expensive product than either the propane or gasoline because because it is compressed, the fuel tanks have to handle incredible pressure of that fuel. There are Kevlar coated tanks that cost more money. So while that has grown, it's up year to year. It's certainly up. Our alternative fuel performance is dominated by propane and gasoline.
But we're just delighted to offer all three. And as you probably saw in our announcement, we just got a grant there for our electric bus, which will be we're looking to have that ready sometime early, I think, 2019, and that will give us a real nice rounding here on all the alternative fuel solutions that we can offer other than diesel.
Speaker 4
Great. Very helpful, Phil. Maybe one more, just on the alternative fuel front. I noticed that a supplier of your competitors that typically provides alternative fuel engines have been going through some issues. And just wondering if any of that filtered through to sort of end customers yet and sort of are you guys in a position to capitalize on being able to fulfill immediate demand for certain school districts that are looking to get into propane or gas sooner than later?
Speaker 2
I think the thing is I expect to me to comment on PSI and which obviously is who you're referring to there. And I respect them and they're trying to do a good job there, so I'm not going to comment on that. I will just tell you this. We will build up 10,000 propane engines shortly. No one has the coverage we've got.
We're in virtually every state of North America or The U. S. I should say and Canada and province of Canada have received our buses at some point. So we have probably I think six to seven times more alternative fuel powered buses on the road than all of our competitors combined. The whole market understands our product, the Ford Roush product that we offer.
We've had it on the market since 2012. It's exclusive to us. We know how to sell it. We know how to maintain it. We have to look after it.
I think I just think it's a recognition when I talk about our propane being up some 29% and it's in the eighth year of us producing propane. We're just growing right now by twenty nine percent. That's pretty impressive. I think people just know and understand our product very well. We're much better known than anybody else in the marketplace.
And we play to those strengths.
Speaker 0
Thank you. Our next question comes from the line of Eric Stine with Craig Hallum. Please proceed with your question.
Speaker 5
Hi, everyone. Thanks for all the details there on alt fuels. I was wondering if we could just talk a little bit about the overall market. You gave your view of the current year. But when you think about the health of the market, maybe where we are in the cycle, I believe the last peak it was 37,000 buses.
Are there trends in your markets or in the industry that that 37,000 that maybe that's a higher number? Or how do you see that playing out? Where do you think we are in the cycle?
Speaker 2
Well, I think we've still got some good runway, Eric. I really do because you're right, the last cycle, it was a nice peak that ended up and we're last year we ended just under $33,000 like $32,900 probably kept a little bit quicker than we thought actually to that level. I will tell you this though, the correlation for business, as we looked at year after year, we correlate so closely to housing prices since property taxes is the major funding mechanism. And you still look at housing prices, they're still going up. I think that's our 5.5% growth in housing prices year over year in the month of December, I just recently saw.
And that bodes well for us. I think the new administration, I don't see anything I don't really see anything on the horizon that would threaten that. I can tell you, so talking to our dealers, we look at our dealers as they understand what's going on in the state, they understand the funding capabilities and availability and the planned budgets. I would say it's a pretty good outlook right now that we have. I mean, I don't see any market particularly saying things are looking terrible versus a year ago.
Basically, everything is at least as good as if not better than a year ago. So we just want to keep giving everybody great products so they choose those and that's why we strive at the broadest range in the market. But I think we're in a good point in the cycle. Now I will say that when the last recession hit, there was no question there was a weed out to sort of old buses out there. There were probably about 40,000, 50,000 buses were taken off the road.
Now when we look at those buses, most of those are what we call spares. They weren't doing a whole lot of work anyway. So they were being registered and prepped for use. Those sort of been weeded out. So there's a little less on the road.
But I can tell you, over there are 130,000, 140,000, actually near 150,000 I'm being told, 150,000 school buses on the road today that are over 15 years of age. So there's still a lot of demand and desire by districts to upgrade their fleet. It's a question of the only thing that presents more being sold is the funding availability. And as I said, I think when you look at the housing price situation and what's going on in the housing market, we feel quite bullish still about it. I think we've got a nice runway ahead.
Speaker 5
Yes. Okay. Thanks for that. And I know clearly expecting to gain share and a lot of that's alternative fuels regardless of what the market does. But maybe just talk about some of the growth initiatives, I believe last quarter, you're talking a little bit about commercial buses, transit buses that you were starting to see pretty solid quote activity, testing activity, maybe characterize how that has progressed?
And do you see or maybe when do you see commercial and transit being a more meaningful contributor to results?
Speaker 2
Okay. So when I look at the commercial bus business, I think when I talked in the last quarter, we mentioned that we've been to the Buscon show in Kansas City earlier in the year and we presented our Bluebird range of products and the Microbird range of products too, by the way, the smaller buses are very well received. And we've going on a roadshow around the country visiting customers led by our dealer network on the products that we developed. Where are we at the stage of that? I think we're looking at a few 100 units this year of commercial buses.
It's probably more than a couple of 100, less than 500 is the way I would look at it. And it will be up from last year. So we're still in the early stages here. This is our first year of saying we want to be in the commercial bus space. We think we offer a very compelling, very attractive price point.
Do we offer every bell and whistle of the other transit bus company? Answer is no, we don't. But we offer a very attractive price point product that's going to be last is lasting and durable. It's got all the specific all the required, the testing requirements the commercial bus require, Altoona testing, Colorado Racket is the call, the two major things that transit buses have to have. We have all of our buses meet those requirements.
So I think again, I'm looking to I think we're in a nice runway. I can see us but it's going be a few 100 units, I think, the way I think of it and year after year, growing a few 100 units more. Same with international. I mean, we've been successful internationally in Central America, particularly with Colombia in recent years and we brought on a new dealer in El Salvador. Working in other markets right now and we've been tendering for business there.
And I think we'll have some success in that later in the fiscal year. So I think all bodes well, but look, I want to be clear that the predominant business we have, we want to grow with is our North American school bus, that's our priority.
Speaker 5
Understood. Maybe last one for me, just given the health of the balance sheet, your free cash flow expectations, just maybe thoughts on the capital allocation strategy? I would assume debt repayment is top of the list, but maybe just some of the other things under consideration.
Speaker 3
Yes, Eric, this is Phil Tighe. We continue to look at our debt. It's at 150,000,000 and change, and we'll have the discussion with the Board in a few months' time on whether we want to make another payment this year. We're also starting to think about whether we should perhaps provide for some of what we're seeing is our upside by adding a little bit more efficiency into the plant. So that might take a little bit of cash.
I wouldn't see it taking major chunks, but a little bit of cash. We could certainly use some more productivity age in the plant, I think, at this at the present time, because the volume is there. And the plants are fine old lady, but we could do with a bit of mobilization, I suspect. Beyond that, we're approaching this discussion with the Board about what we do. It's a little bit early for us to say.
Speaker 2
I think it's fair to say, just echo what Phil said, we have reviewed this with the Board. We're talking about this with the Board. We're talking about the use of cash. And the Board's challenges, which is a great one to have, is there something we should do in regarding automation from upgrading our facilities? We launched a second shift just only this last year.
So we still got the same, if you like, facility support system here and footprint here that we have when we're doing one shift and we've decreased the volume dramatically. So I think it's something we're definitely going to look at. One way to think about it is, obviously, we just talked about the fact that the new refinancing generated some interest payment savings of some $5,000,000 this year. And we haven't flowed that through yet. I haven't we haven't changed anything on our free cash flow, obviously, to reflect that in our guidance to you because we're looking at maybe we got a good use of that, maybe we can make some good use of that to help us in some automation on select facility upgrades.
Speaker 5
Okay, got it. Thanks for the color.
Speaker 2
You bet. You.
Speaker 0
Question comes from the line of Chris Moore with CJS. Please proceed with your question.
Speaker 6
Hey, guys. Thanks for taking the question. Most have been answered, but I wanted to talk a little bit more on alternative fuels. Just in terms of the purchasing decision, is there any cannibalism between the propane and the gas? Is it I know the gas is kind of earlier, less expensive version, but do customers typically choose between the two or is this just a diesel customer that's going to try something on gas side, for example?
Speaker 2
Hi, Chris. It's Phil here. Phil Holicky here. Yes, good I think what we've seen so far and again, it's early stage really for gas. I know we've gone into the market just live, if you like, for about five or six months now.
But I'd say what we're seeing is, we're seeing both those products still replacing diesel. When you look at those 500,000 or so school buses in the industry, 95% of those are diesel engines. So what we're seeing is as folks come in and look at propane, look at gasoline, they're doing it for sort of different reasons. Propane, we talk about the total cost of ownership value. You do pay a little bit more for it, but you get a very quick payback because of the TCO value.
Gasoline is all about that low price. So what we've seen so far is that they've really gone and been great products to replace diesel still. Diesel is still they've had their issues. You still get just the whole working on the engine, the complexity of it. It's a workhorse product.
Look, I'm not knocking diesel because they're great products. I just think these other products right now where we are today offer alternatives that make it easier for operators to work with. I will say what we have seen though, I'll say that because of the propane product and the diesel and our new gasoline and our new CNG have what we call the same architecture. It's the same Ford engine, it's the same Ford transmission. The systems developed by Roche CleanTech, that's the delivery fuel delivery system.
So we're seeing that once you've sold a customer on propane, they really get gasoline very easily. They understand it. And similarly, if you never saw a problem to anybody, gosh, when you talk about gasoline, they get gasoline. It's a really easy sell, really easy to understand. So but again, would say it's only been our experience so far.
It's they've been replacing diesel with those products.
Speaker 6
And can you just refresh me the relative kind of gross margins between the propane and gasoline?
Speaker 2
Yes. Well, we don't declare that. I mean, I would just say that propane is a lot of new technology in that product. It's a higher price product, has a tends to have the higher margin has a higher margin for us absolutely. And gasoline also has a good margin for us.
It's but we give a good value for both products to our customers. They understand the value proposition.
Speaker 6
Got you. All right, guys. I appreciate it.
Speaker 2
Okay. Thanks, Eric. Thanks, Chris.
Speaker 0
Thank you. Our next question comes from Mike Balajasol with Stifel. Please proceed with your question.
Speaker 7
Thank you. Good afternoon. I just wanted to ask a question. I was looking through my notes and some of the other companies we cover and a couple of days ago Allison Transmission was talking about school bus production being down in 2017 and calling that out as a headwind. And just trying to reconcile that with, I think you said school bus production of three or 4% a year.
They may have just been talking about diesel only. Is that how you would interpret that, that diesel is going to be down in 2017 and it's sort of this all these alternative fuels that make it up 3% to 4%?
Speaker 3
Mike, this is Phil Tighe. I suspect I don't know. I didn't see the Allison thing. I suspect I might have been talking about the diesel mix of it. The closest we come to seeing a view at the moment of production is through the material published by ACT Research.
And my understanding for the first quarter is they're showing the school bus production is up. Now they don't obviously get into powertrain mixes or anything like that, but they're showing it as up. I think they also showed that there was pretty strong orders coming in, in the last couple of months of the prior year as well.
Speaker 2
So
Speaker 3
the other thing and I'm not sure, Mike, whether this has got any impact, but you did know that Eaton, who's Allison's competitor in the truck segments in the higher levels, did come in with that medium use transmission, and that could influencing Allison as well. But again, not completely clear to me what their reference was. The only one I could suggest to you is ACT Research, and that's showing the volumes is up.
Speaker 7
Okay. Got it. And then you mentioned in the press release that you won some first time accounts during the quarter. Who were those? Were those school districts or contractors?
And what enabled you to win that business?
Speaker 2
Yes, they were school districts. I mean, it's a combination actually. They're all school districts. What enabled us to win it? I think we went out and met with those guys, demoed our buses, a good probably half of those customers propane was a product of choice.
So we showed them our propane bus, they tried it out, they tested it, liked what they saw and ordered that. But we went out there and we showed them what we could do and they in many cases, often they'll come to our plants here, meet us, walk the production line and we worked hard to win that business. But I'd say it was based on relationships with our dealers, technology we offer and we offer a good value too, good value for the customer. So but like I said before, it's a combination of both the diesel engine and the propane product were the winners of those new customers for us.
Speaker 7
Okay, good. And just wanted to ask you also about the parts revenue. I mean that was more on a percent basis than the bus revenue. Just you talked about you had some initiatives in parts and maybe you could just explain those a little bit more?
Speaker 2
Yes. Well, we've been bringing on a lot of new, what we call, SKUs, a lot of new parts in our parts bin. I think traditionally Blue Bird is if you go back, what we sell is what we put on a new bus. Well, we've actually been expanding that because often when you get a five, six, seven year old bus, ten year old bus, the the guys bus buying those parts might necessarily want an original equipment part, might have more of a will fit sort of part. So we've been able to go out and really utilize the fact we've got a lot of school buses out there, Blue Bird has many buses out there.
We are the major provider of parts through our dealer channel that we have been able to expand our portfolio of parts that we've offered customers. We've also been caring a lot for the season. You get into the winter season, in sort of that cold climate and you talk about stainless steel packages, things that really does help a customer in the winter conditions, anticorrosion sort of products and features and we sort of really got out to market that and put some really nice package together to be successful there. And really going out and challenging all of our dealers to really get out there and sell to customers. Don't wait for an order to come in.
Get out there and visit school districts, sell to them short, we've got because we have a tremendous range of parts in the Blue Bird portfolio. So I think it's been a combination of all those things, just being aggressive and going out and marketing ourselves with a broader range of products.
Speaker 7
Got it. Thank you.
Speaker 2
You bet, Mike. Thanks.
Speaker 0
Ladies and gentlemen, we have reached the end of the question and answer session. At this time, I would like to turn the call back to Phil Horlock for closing remarks.
Speaker 2
Yeah. Well, you, Audrey, and thanks to everyone for joining us on the call today. We do appreciate your continued interest in Blue Bird. We have lots of exciting things going on. I think you can see that we are focused on profitable growth and intend to deliver on our commitments, and we believe we're well positioned for growth both today and in the future.
So I'm pleased to have the day to contact our Head of Investor Relations, Mark Benfield, should you have any follow-up questions. So again, thanks from all of us here at Blue Bird and wish you a good evening. Thanks very much.
Speaker 0
This concludes today's conference. You may disconnect your lines at this time.