Blue Bird - Earnings Call - Q3 2017
August 3, 2017
Transcript
Speaker 0
Good day, and welcome to the Blue Bird Corporation Fiscal Third Quarter twenty seventeen 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.
Speaker 1
Thank you, Stephanie, and welcome to Blue Bird's fiscal third 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 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?
Speaker 2
Thanks, Mark. Well, good afternoon, everybody, and thank you for joining us today for our fiscal twenty seventeen third quarter earnings call. We welcome this opportunity to share with you our latest quarterly results. So let's get started with an overview of our financial results on Slide four. We achieved the highest third quarter bus sales for more than ten 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 $333,000,000 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, count all of our propane, compressed natural gas and gasoline powered buses as all of these are alternatives to diesel, which has been the staple fuel for years. For the last several years, we've seen significant growth in alternative fuel bus sales at 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 $20,000,000 and earnings per share of $0.68 for the quarter were well above last year, up $23,000,000 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 twenty sixteen third quarter results.
And of course, these expenses have not repeated this year. Our adjusted EBITDAR of $32,000,000 was essentially the same as last year and represents almost a 10% EBITDAR margin. Compared with last year's third quarter, higher profit from 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 peak production season. Both our cash and debt positions improved from last year with net debt about $10,000,000 lower than a year ago.
From a production standpoint, we have 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 at 70 units a day, ensuring that we can meet customer delivery dates in time for school start. This trough to peak increase in dealer 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 contrasts 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 quota activity that we are seeing support our position as newer school bus industry should grow by between 3% to 4% this year and reach around 33,500 to 34,000 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 five. 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 of customer interest in Blue Bird's unique and expansive product range, which is the broadest in the industry. While we have seen that translate into orders, as 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 cancelable 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 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 those government agencies before they can be delivered and booked.
The timing of these inspections means that the booking booking of the sale will shift from 2017 into the 2018, which of course will boost sales and earnings in the 2018. This is not a loss of customer sales, just a retiming of deliveries between months, but it will impact our fiscal twenty seventeen 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 competitors' 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 was a ten year Blue Bird record for that quarter and above the previous record we actually set last year. Key to this growth have 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 four, 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 Raj 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 two seventy nine customers placed their first ever orders for Blue Bird alternative fuel powered buses and many of these are conquest accounts. We've had a terrific response to our new engines and I will 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 MicroBird Type A school bus. Both vehicles along with a Type C electric powered Bluebird school bus are in development now and will hit the market in mid-twenty eighteen. I can tell you, I actually drove our Type 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 2017 to the 2018. As a result, full year guidance for net sales has been trimmed by $10,000,000 at the top end of the range to $1,000,000,000 Adjusted EBITDA has been lowered by 4,000,000 to $6,000,000 with a new range of between 68,000,000 to $70,000,000 and a similar lowering of the adjusted free cash flow guidance plus the new range of $33,000,000 to $37,000,000 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 twenty eighteen sales earnings.
So let's now take a closer look at our second quarter financial results on Slide six. Third quarter net sales of 3 and $32,600,000 were $9,500,000 or 3% higher than the same period last First nine months sales of 6 and $77,900,000 were up 5% from a year ago. This result was in line with our expectations. Bus and parts sales grew by 312% respectively in the third quarter. We have seen a very strong growth in our parts business this year with sales for the first nine months up a strong 9%.
At $32,200,000 our adjusted EBITDA was down just $300,000 from a year ago, essentially flat. And through the first nine months, adjusted EBITDA totaled $42,900,000 $5,000,000 lower than last year as we have invested in resources to drive future growth of Blue Bird. Turning now to Slide seven, let's take a closer look 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 represented a strong 41% of our total bus sales. We continue 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 having 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 onethree 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 over to Phil Tighe, will take you through the financials, then I'll be back a little later to cover the fiscal twenty seventeen outlook and guidance. Over to you, Phil.
Speaker 3
Thank you, Phil, and good afternoon, everyone. The next few slides are a summary of our financial performance for the 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 07/02/2016, for fiscal year 2016 and 07/01/2017 for fiscal year twenty seventeen. As a reminder, the fiscal year for Blue Bird commenced on 10/02/2016 and will complete on 09/30/2017.
There were no new accounting pronouncements that impacted Bluebird in this report. Risk factors are unchanged from the previously filed 10 ks. And also please note the important disclaimers at the end of the deck. If we go to Slide nine, 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'll touch on a few that I think could be interesting.
Phil has talked about the volume in the third quarter and the fact that it was our highest in the last ten 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. Our production team was also faced with a number of challenges beyond the volume requirement. We had a high mix of rear engine buses, our 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 that where we did need 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 thirteen 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 parts 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 cost to our dealers. On a year to date basis, parts is up by about 9%. Turning to the gross margins, you see the gross margin for the third quarter was 13.5%. And while this result was one point below the third quarter of last year, it was an improvement of about 1.1 points versus the first half fiscal year twenty seventeen.
BOSS gross margin was 12.4% or about one point below prior year, and this was driven largely by the production costs during the peak season, the more complex build mix that resulted in higher levels of over time 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 are a key focus for management team and we're 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 twelve months. Turning to net income and earnings per share, you may recall that in the first half, we recorded a net loss of $5,800,000 or about $0.03 $40 per diluted earnings per diluted share, and this was largely due to the extinguishment of costs related to the prior loan.
We are pleased to report a net income of $20,000,000 and a diluted earnings per share of $0.68 for the third quarter, which was about $23,000,000 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 twenty sixteen. Interest expense was lower as a result of the improved terms of the loan 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 so we're reflecting that in the net income.
For the first nine months, our net income was $14,300,000 and diluted earnings per share was about $0.46 compared with a net loss of $3,900,000 for the first nine months of fiscal year twenty sixteen. We'll cover adjusted EBITDA on the next page. I would then point out that both cash and debt were good stories in the third quarter. Our cash ended up at $50,300,000 which was $7,600,000 better than the prior year. And debt is at $153,000,000 about $1,000,000 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 twenty sixteen to 2017. And then as Phil has mentioned, it was down about $300,000 So we recorded an adjusted EBITDA profit of $32,200,000 The decline is really all around lower bus gross margins. That was worth about $1,700,000 Revenue on average unit revenue on the bus was higher.
It was really in the area of production costs, both over time 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. Parts was down about $100,000 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 $1,000,000 of good news in operating expenses and other.
So we're managing to keep the operating expenses under control. And we also part of the 1,500,000.0 about 03% improvement in the income from our Canadian joint venture. It's not shown on this slide, but the nine months result for adjusted EBITDA was just under $43,000,000 which is about $5,000,000 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 investment in products and structure for the future. Our prior plan did assume that we would recover that $5,000,000 gap in the final quarter.
However, with the movement of a number of sales out of the '17 into the 2018 and with the continued overtime that we've been working to achieve the production levels, it is apparent that we won't get that $5,000,000 back and that's causing us to
Speaker 2
advise of a small adjustment to the guidance.
Speaker 3
Slide 11 is the cash flow slide. It shows both free cash flow and adjusted free cash flow. Free cash flow was $13,100,000 or $19,000,000 lower than the same period last year. Key drivers of the slightly lower free cash flow were was higher trade working capital. And that's 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 run down 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 pre payment from the government and that did not reoccur this year. So and finally, as you will see in our guidance, we have taken free cash flow guidance down into the thirty three million to $37,000,000 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 $102,700,000 and that included $50,300,000 of cash. That compares to $116,500,000 at the end of the 2017. The net leverage ratio was 1.67, substantially below the covenant.
Liquidity stood at 120,200,000 and there were no drawings on the revolver at the end of the quarter. Liquidity at the same time last year was about $98,000,000 So thank you for your attention. I will pass you back to Phil Horlock, and he will discuss the outlook for 2017 and the wrap up. Thank you.
Speaker 2
Thanks, Phil. So 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 are forecasting continued growth in the industry and for Blue Bird. We are projecting new bus sales as measured by industry registrations compiled by RL Polk to grow between 3% to 4% reaching between 33,534 school buses.
We're also 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. 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 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 profitability to be about the same as last year as we continue to invest in the development of new and exciting products along with expanded customer support that will foster future growth.
So let me now turn to fiscal twenty seventeen 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 2017 to the 2018. Unfortunately, there just aren't enough remaining production days left in fiscal twenty seventeen to build and sell additional buses in order to hold guidance. I told you before, we have a somewhat lumpy business here when orders can come in at different times of the year, they can the deliveries can flip between quarters. Here's a prime example happened.
Just delivery shipping which is flipping between month of September to October causes us to take down our results in the fourth quarter and for the full year. That said, it's important to note these sales will book in the 2018. So net sales guidance for the year is now between 180,000,000 and $1,000,000,000 up $48,000,000 to $68,000,000 from fiscal twenty sixteen. Adjusted EBITDA guidance is now between 68,000,000 to $70,000,000 2,000,000 to $4,000,000 lower than fiscal twenty sixteen as we continue to invest in new products and customer support that's essential to driving future growth. Adjusted free cash flow is now between 33,000,000 to $37,000,000 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. Well, I'm pleased to inform you that today our Board has authorized the company to implement a stock repurchase program and to buy back up to $50,000,000 of stock over the next twenty four months. Our strong typically running 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, and we've 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 and A session.
Over to you, Stephanie.
Speaker 0
Thank And we'll take our first question from Matt Koranda with ROTH Capital. Your line is open.
Speaker 4
Hey, guys. This is Brad Noss on for Matt. I just wanted to go into the reduced guidance and the $5,000,000 of delayed sales going into fiscal twenty eighteen. So for the obviously, with the $5,000,000 delay in revenue coming along with $5,000,000 reduced adjusted EBITDA guidance, can you just split out sort of what is how much of the EBITDA is coming from the delayed the forecasted delayed sales? And how much was coming from the essentially lost profit from the higher production costs?
Speaker 2
I'd say virtually all of that is coming from the delayed sales. I mean, typically, what's happened is, Matt, we've had Brad. Sorry, Brad. A few 100 units that have that where the customers want to really only take the buses when they've had a chance to inspect the buses, and they can't get the 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 100 sales that literally will flip over and we'll see them turn into deliveries in the first quarter, very early in the 2018. Yes. On the overtime days, I mean, we work our cost issues, I mean, when Phil talked about the fact that we work some more overtime, you're right, we worked a lot of overtime, but we sort of planned we said as we work through the quarter, we were planning on that and we know we could we thought we could cover it in our guidance. That wasn't really an issue as such as much as the volume slippage that occurred there and the push into 2018.
Speaker 4
Okay. So I guess the only question I'm having is just considering the midpoint of the revenue guidance coming down the $5,000,000 and then also the midpoint of the adjusted EBITDA guidance coming down around $5,000,000 that would sort of imply that they 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 what why the EBITDA midpoint would come concurrently with that $5,000,000 revenue drop?
Speaker 3
This is Phil. Phil is 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 and margin revenue. And 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.
Speaker 2
I think it's true to say, too, I think Phil talked earlier about the fact that as were producing units, certainly continued through the fourth quarter too, we've had a very strong mix of the pretty rich, what we call our Rio engine units, which command a higher revenue, not only a higher profit but a higher revenue. And that obviously was a key factor too in sort of boosting our revenue performance. But nevertheless, the loss of units moving out to the quarter will hurt our profit performance.
Speaker 4
Okay. That's helpful. Thanks for the color there. And so also just when we're looking at that those delayed shipments going into Q1, should I mean, is there are there any other dynamics to consider? Or should we essentially boost our Q1 assumptions by that full slippage from the delayed orders?
Speaker 2
Yes. We obviously, we haven't declared our guidance yet for fiscal year twenty eighteen. But I think it's fair to say, yes, we expect a better performance in the first quarter, quite a bit better performance in the 2018 and 2017, absolutely. We'll have more units. We'll sell more units.
Those units will move over and definitely will help us in the 2018, yes.
Speaker 4
Okay. Perfect. And then just in regards to the high mix of the rearrange buses or the Type D buses that you had in this quarter? I mean was there anything driving that higher than typical mix? Or can you just talk about the dynamics there?
Speaker 2
Yes. I think we make I mean, I would just say we make a great rearranging product. And for those markets that really want a high capacity horsepower high horsepower vehicle, we call it pusher engine, particularly in markets where the terrain is a 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 both in the third quarter and particularly in the fourth quarter. So I need to say it's just a really strong product for those who want a bus that's, like I said, very powerful and high capacity in terms of passenger payload.
Speaker 4
Okay. But the sort of 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 sort of trending to more Type D buses overall in the business?
Speaker 2
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. We have to deal with that. And in our plant, it can cause us some problems. Get a high order rate come in.
The customer wants those buses quickly. We have to man up a corridor and hence it drove some of the overtime that Phil talked about.
Speaker 4
Okay. And then going forward, if you continue to have a higher mix than typical for the Type Ds, is there anything that you're able to do sort of proactively to help with the overtime hours and 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?
Speaker 2
Well, Phil alluded to some changes we're looking to do, and I talked about it earlier. We are looking at process changes. For example, we've basically built 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 offline in offline assembly so that we can then sequence them in better to the line.
That will help us improve really our just standard production capability performance. It should really help avoid those overtime spurts 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.
Speaker 4
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 it's the majority of the increase is coming from the gasoline ramping up? Or just what the dynamics are there?
Speaker 2
Know what, we sort of don't share any 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.
Mean both have done terrifically well for us this year. For that. And we also appreciate it. The way, we just one of milestone we just did last week is we just a little tidbit here, but we launched or we sold our 10,000 propane powered school bus actually in Georgia to a conquest customer, Fulton County, to 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 than they've sold in this segment of the business.
Speaker 4
All right. Thanks for that. That's helpful.
Speaker 2
Bet, Brad. Thanks.
Speaker 0
We'll take our next question from Eric Stine with Craig Hallum. Please go ahead.
Speaker 5
Yes. Hi, guys. It's Aaron Spahala on for Eric. Congrats on the record quarter and the share buyback. 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?
Speaker 2
Yes. I think what we're trying to do is when we look at the ramp up of production we've had in the last two years, remember, 2016 was the first time we'd ever launched two shifts in this plant. And this then we launched we launched in January 2016. This year, we kept it an all year. We produced a record number of units in our Fort Valley plant, particularly in the third quarter.
What we so what we're doing is it's we've had to really fight to get all these done. Mean, literally, it's been quite a battle for us, but we got it done. We got a record number of sales out, and the team did a great job. But we worked excessive overtime. We worked to make sure we had the quality on those products.
And part of it was, I think, the challenge for us being on that second shift. And I thought I should mention that we've hired somewhere around up to about three hundred five hundred new full time employees this last three years to support the growth in volume. We're sort of a victim of our own success in a way. When 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.
We're looking at more offline subassemblers so that the main assembly line has more repeatability because that's what really struggled we struggle with a little bit. We've got a little too much going on in all of our individual workstations on the line. If you look back, I I mean, three years ago,
Speaker 6
we weren't building anything like the number
Speaker 2
of propane buses. We're 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 without complexity, it's tough. We built a vehicle rolls up the bluebird line between every twelve and thirteen minutes. So when you have these complex products that are different, they you're trying to contain them in a standard twelve and thirteen minute pull time, it's quite difficult. So we want to try and pull some of those activities out of the station so we can present them to the line much easier. And we do have plans for selective automation as well that will help speed up some of our processes and make it simpler.
Speaker 5
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 like school budgets and property taxes and maybe the kind of overall average age of the buses in the fleet, I mean, 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?
Speaker 2
Yes. I think first of all, I mean, at it, we are troughed our business in 2011. It's nice to see what the industry is still growing 3% to 4%, some seven years after the trough, we hit the trough. And so and when you look at it, I mean, most states, it's and across the country, really, housing prices have risen, there's more public taxes available, and that's a big funding mechanism for school buses. But that same money is also funding a lot of is funding education of school teachers.
So it's sort of there's a limit to how much an education authority is going to put to school buses. Here's a good thing. I guess it's a good thing. The demand is there. The demand to actually buy more school bus is there because the average age of the bus fleet is about eleven point five years across the entire industry.
And a typical school bus is replaced between twelve and fifteen years. So we have an aging fleet. We have around about 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 SPLOS funds together to help fund them.
But look, it's everyone's benefiting. I think education authorities are benefiting. There's more money available. And, we've been able to benefit as well. I mean, we're pretty much at 35,000 units, 34,000 or so, 35,000.
We're starting to approach the peak levels of the before the recession. So and I still think there's a lot of runway on this. So we feel good about the outlook, Aaron.
Speaker 0
We'll take our next question from Chris Moore with CJS Securities. Please go ahead.
Speaker 7
Great, guys. Thanks for taking my questions. So yes, just back to the, I guess, 150 or so government buses that are going to ship in Q1, a couple of things. One is, how 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?
Speaker 2
Yes. It's typically less than 5% a year. It's a small piece of the business.
Speaker 3
The issue, Chris, is that they were heavily focused into the third quarter. Typically, they flow through the year, but for some reason, got a lot of orders requiring build in the third and fourth quarter. And so we've struggled to meet that demand.
Speaker 2
Yes. Bill is right. We have several 100 bus orders. And actually, the budgets came pretty late this year, around about the March, April time frame. And I can tell you that we are the we've said it before, I'm not sure of this, if you're aware of this, but we are the preferred choice for the government for school bus.
We typically have 80% of all those large type of bus sales. So but 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, they were built in prior weeks. And they come in, they inspect them, and they release a few at a time. And so you're sort of beholden to the inspectors' timeliness of getting here.
And he's been here. I mean, for example, he was here this week. We released a whole bunch of buses this week, but there's still a lot we are building now that have taken slots so 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.
Speaker 7
Got you. No, my thought process was perhaps on the government side, you might be able to spread production out a little bit more. But I guess, I mean, their fiscal year being September kind of coincides with that. So most of the government orders are still going to be before the end of a given fiscal year?
Speaker 2
Yes. Correct. Yes.
Speaker 7
And in terms of the makeup of those buses, are they purchasing pretty good mix? Or are they focused more on the alternative fuels?
Speaker 2
They're a good mix. There are a lot of diesel engines in their mix. They tend to be they tend to look at what they purchased before. They understand them well. It's basically it's a pretty highly spec vehicle.
It's a school bus with obviously regular different types of seats and different windows in, a lot of unique componentry in there. So many of these buses, they might be military bases in The U. S, but also overseas, even as troop carriers in some locations. So there's a wide range of specification on these buses.
Speaker 7
Got you. Got And just back to the kind of the overall cycle for a second. Last cycle, it was 2011, you kind of lagged a couple of years. Is there I'm 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 or softer 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 really starting to slow.
Speaker 2
That's a great question. I'm always asked that question to our Board ask us that question. But I'll tell you, when we look at the market out there and we research a lot around property values and property prices and property taxes in general, most states are a lot healthier than they ever have been. I mean, look at the economic outlook right now. We've a new administration in, and things have gone pretty well since they were put in place.
So I think we're quite bullish on the outlook here. Like I said before, there's a large demand to change. And what we're excited about is what's different in last cycle is this move to alternative fuel powered buses. There's a really interest in now in emissions and 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 the steady, which I like. I mean, I don't like the sometimes I think when you get this 11%, 12% surges, the one off and then they're pulling back in the next year, We've got a nice controlled increase, literally every state, with the exception probably of Illinois, which has gone through its own problems, and there's some a lot of pent up demand in Illinois. But in the majority of states, I mean, we talk to the state directors regularly. Obviously, we have dealers in every state, which is our conduit to understand some of the environment. And I'd say virtually every market we look at is steady growth that we're our expectation is for.
Speaker 7
Got you. Last question on the $50,000,000 on the buyback. Does that potentially extend to a repurchase of the warrants in the right circumstances? It seems like it would this way, you're not minimizing the float at all, taking away some of the overhang. And it seem like you'd be kind of accomplishing the same thing in terms of bringing back ultimately that fully diluted number.
Speaker 2
Yes, you're absolutely right. You're very spot on it does. It does include the warrants.
Speaker 7
Okay. All right. Appreciate it guys.
Speaker 2
You bet. Thanks, Fred.
Speaker 0
And we'll take our next question from Mike Bodendistel with Stifel. Please go ahead.
Speaker 8
Thank you. I'm intrigued by this announcement that you have an electric school bus in development, I guess a few electric school buses in development. And maybe you can just explain how that is going to fit into your product portfolio. I mean, I guess currently the propane is the higher acquisition cost, but then a lower operating cost. Is that even more true with an electric the way you see it?
Speaker 2
Well, I think so here's the way I look at I mean today, Micah, I think you know you believe studied us pretty well. I think we're pretty consistent in our message. The best total cost ownership bus in the industry is a Blue Bird propane powered school bus. No question. The best value over fifteen years without doubt.
Now electric buses, for those markets, some 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're putting hundreds of 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 natural extension of what we've been doing on alternative fuels.
So it's not for everybody. It's obviously more expensive. I mean, we all know battery technology right now, battery costs in particular are expensive. And so you to move a 33,000 pounds GVW bus, you need a lot of batteries. So it's an expensive product, but we want to be there for those districts who really want zero emissions and provide grants to support it, and we will be.
Speaker 8
Great. That makes sense. I wanted to ask you, I mean, on the propane side, you have this exclusive relationship with Ford and Rausch, and that's really given you a competitive advantage. And like you said, I mean, you have way more propane school buses than anyone else, I think, a large part because of that relationship. Is there an equivalent relationship with any suppliers on the electric side?
Speaker 2
Not at this stage. Doesn't mean there never will be, doesn't mean we won't have, but I can tell you I'll just tell you at this stage, there isn't, but it's early days.
Speaker 8
Got it. By
Speaker 2
the way, Mike, we do like to be different. And we sort of like we know products are the best in the market and differentiators. We do like to get exclusivity. It's important to us.
Speaker 8
Got it. And can you talk just a little bit about, I guess, also sticking with electric, just what kind of goes into powertrain for the school bus aside from the batteries that you mentioned? I mean, are you using different suppliers entirely there? And if you could tell who those suppliers were, just any detail would be great.
Speaker 2
Yes. Well, look, well, right now, our electric buses on the I'll keep talking about the larger buses because we're talking about the 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 with 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. And they have particularly EDI and Edimani 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 that 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. I mean the batteries is well on the cost side, but also it's the brains in the vehicle that are controlling the heat management systems. For example, the product we show, the Type D has no transmission. It's a direct drive system right from the engine to the powering the wheels, so the axle.
So it's an exciting product for us.
Speaker 8
Our
Speaker 0
next question comes from Scott Blumenthal with Emerald Advisers. Please go ahead.
Speaker 6
Good evening, Phil, Phil and Mark.
Speaker 2
Thanks, Phil. Hi, Scott.
Speaker 6
Phil T, did you give an estimate of the total cost of overtime during the quarter?
Speaker 3
No, I did not.
Speaker 6
Is that something that you can break out for us? Or are you not comfortable doing that?
Speaker 3
Yes, sort of 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.
Speaker 6
Okay. Can you go can you remind me what the days worked
Speaker 3
We out the 13 production weeks in the third quarter, we worked overtime days in 10 of those weeks.
Speaker 2
For that, so just to give you some color of how we operate here, we run we work four days a week, four-ten hour shifts. That's the forty hours, Monday through Thursday. And typically, Friday, Saturday, Sunday are days off. In this case, we that actually gives us flexibility to the surge that we have to take where we get additional volume. So this will be working the Fridays.
So then we're moving into working the fifth day. So we have another ten hours after that fifth day.
Speaker 6
Okay. That's helpful. Thank you. And then Filthy 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 and A due to the pushouts?
Speaker 3
Yes, I would think that's a fairly astute observation, yes.
Speaker 6
No, you wouldn't be able to venture a guess on what that might be or once again, that's me.
Speaker 3
No, I don't really want to get into guessing quarters with the team.
Speaker 6
You do provide us guidance and and make a guess, right?
Speaker 2
Yes. Well, I think when we provided guidance, I think I did say that as I look to the fourth quarter, I mean, I think we're going to see some higher sales. But to your point about over 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.
Speaker 6
Okay. 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. The do those 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?
Speaker 2
Well, the difference is that there's typically a richer mix of options on those vehicles. I mean the seats are not traditional school seats, they're much more they're all a different structure, they handle an adult. 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.
Speaker 6
Okay. And you did say that, that was still a very small proportion of your overall sales, but I don't recall you saying what percentage?
Speaker 2
Said typically it doesn't exceed 5%, it's 4% to 5% of our sales.
Speaker 6
Okay. That's really helpful. Thank you. And going back to the regular the 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?
Speaker 2
No, we don't really do that. I mean, the Type C bus is the best selling bus in the industry. I mean, it's known that. That's a long nose bus. And if you look at the industry, it's typically two thirds to 70% between 6770% of the industry.
And I think it's true to say we're pretty much in that range.
Speaker 6
Okay. That's 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 I was 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. To take some of that out there, you almost have to trade by appointment these days. So give us the thought process behind that.
Speaker 2
Well, look, I mean, with our Board, we talked about special dividends and then we talked about this buyback. And I think we're a pretty new public company. We're generating 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've really ever done anything special beyond just the normal course of business and hopefully a rise in share prices based on our results. We just came to a decision with our Board, this was a good use of a good special onetime sort of event to offer. And obviously, we've put it over twenty four months. And even you mentioned the share, the 27,000, we've seen weeks when it's been 60,000 and as high as 100,000.
It's a little lumpy, quite frankly. And so we felt we just saw from the standpoint of 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 is a unanimous agreement with our Board to pursue this.
Speaker 6
Okay. Well, we do appreciate it. Thank you.
Speaker 2
Absolutely. Thank you.
Speaker 0
And there are no further questions. I'll hand it back over to Phil Horlock for any closing remarks.
Speaker 2
Okay. Well, 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, if you have any further questions. And thanks again from all of us at Blue Bird.
Wish you a very good evening.
Speaker 0
And this concludes today's presentation. We appreciate your participation. You may now disconnect.