Blue Bird - Earnings Call - Q4 2015

Transcript

Speaker 0

and welcome to the Blue Bird Corporation Fiscal twenty fifteen Fourth Quarter and Full Year Earnings Call. At this time, all participants are in a listen only mode. A brief 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, Mr.

Jeff Merton, Director of Investor Relations for Blue Bird. Thank you. You may begin.

Speaker 1

Well, you, Melissa. Welcome to Blue Bird Corporation's fiscal twenty fifteen fourth quarter and full year earnings conference call. The audio for our call is webcast live on bluebird.com under the Investor Relations tab. You can access a PDF version of the slides we'll be covering today in the Events box in the lower right corner of the Investor Relations landing page of our website. Our comments include forward looking statements that are subject to risks that could cause actual results to be materially different.

Those risks include among other matters we have noted in our latest earnings release and filings with the SEC. Blue Bird disclaims any obligation to update information in this call. This morning, 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

Well, thanks, Jeff. Well, good morning and thank you all for joining us today for our fourth quarter earnings call. It's been an extremely busy and exciting time at Blue Bird since it became a publicly traded company in February 2015 and we do welcome this opportunity to share with you our fourth quarter and full year results today. So let's start with a summary of our accomplishments on Slide four. We're very pleased with our achievements in our first year operating as a publicly traded company.

Since we went public, our stock prices outperformed both the peer group we track and also the Russell three thousand Index despite the overall stock market volatility we've seen in the 2015. Our unit bus sales grew at a faster rate than the industry and both sales revenue and adjusted EBITDA results were strong and in line with guidance. At 14% growth, sales of Blue Bird's propane powered buses far exceeded the industry growth of 5% and we also increased number of customers new to propane by a third. And we showcased our upcoming new products at two major national school bus shows, including our investment in four all new and exciting powertrain programs that will be launched in 2016. We also worked with our suppliers to launch new and innovative features such as electronic stability control with Bendix, which is first to market in the school bus industry.

And we also saw a record pace of dealer facility upgrades including new locations, added service base and hiring of salespeople and technicians by our dealers. Overall, 2014 was an exciting and eventful year at Blue Bird. So let me now turn to specific fourth quarter financial results on Slide five. On our fourth quarter earnings call, we provided a forecast of the key financial metrics for the fourth quarter. Essentially, this reflected the difference between our results for the first nine months of fiscal twenty fifteen and the full year guidance that we have been consistently providing.

As you can see on the slide, we met or exceeded guidance on all three metrics. We achieved net sales revenue of $3.00 $8,000,000 for the quarter. We achieved adjusted EBITDA of 30,000,000 Just a reminder, guidance for adjusted EBITDA specifically excludes the ongoing costs of becoming a public company. Including these costs, EBITDA would be about a would be $1,000,000 less at $29,000,000 And in the remainder of the presentation, we will focus on the $29,000,000 profit level. At $53,000,000 the fourth quarter free cash flow was very strong and exceeded guidance.

Now let me provide a little more detail beyond the fourth quarter results. Turning to Slide six. With unit sales of nearly 3,500 buses, we had a very strong fourth quarter, up 13% or about 400 units from last year. This was our best fourth quarter volume since fiscal two thousand and eight. It's worth reminding too that at our prior earnings calls, we spent some time explaining the seasonality of our business.

Well, the fourth quarter volume represented 33% of our full year unit sales, while the second half accounted for substantial 62% of our full year unit sales. As we have mentioned previously, we handle the volume surge in the second half of the year very effectively through the hiring of temporary labor. From a sales revenue standpoint, we grew by healthy 12% in the quarter comprising of bus sales growth of 13% and part sales growth of 5%. As I discussed on the last slide, including ongoing public company costs, adjusted EBITDA was very strong for the quarter of $29,000,000 which was $10,000,000 above the same period last year. Phil Tighe will cover the year to year change in more detail later.

On the back of the high fourth quarter volume, we generated a significant $53,000,000 in free cash flow in the quarter and elected to voluntarily pay down $25,000,000 of debt in September. Overall, we delivered a very strong fourth quarter. Turning now to Slide seven, we'll cover the full year results compared with guidance. As was evident in reviewing the fourth quarter results, we met or exceeded the full year guidance on each of our three financial metrics. Net sales revenue was $919,000,000 within the guidance range.

Adjusted EBITDA, again excluding ongoing public company costs was $73,000,000 in line with guidance. Including public company costs of $3,000,000 the adjusted EBITDA was $70,000,000 In the remainder of this call, we will focus on the $70,000,000 level when discussing full year results. And finally, adjusted free cash flow, which excludes all one time expenses and payments pertaining to the business combination was $45,000,000 for the full year, exceeding guidance. Turning to Slide eight, I will now cover some of the full year highlights. Based on still maturing registration data, the school bus industry for fiscal twenty fifteen is estimated to be at 29,900 buses, up about 5% from last year and about what we expected.

But importantly, we believe we have a nice runway to further industry growth as we are still well below the industry average for the past thirty years of 30,500 buses. Blue Bird sales of nearly 10,400 buses outpaced the industry with growth of 8% or almost 800 buses over last year. And at nearly 1,700 buses, Blue Bird's propane powered division sales grew by a substantial 14% in fiscal twenty fifteen. And I will cover proppant in more detail a little later. Net sales revenue of $919,000,000 was up 7% from a year ago.

Incidentally, since the industry trough in fiscal twenty eleven, Blue Bird's unit sales have grown by 59% and net sales revenue by 62%. Those are very strong growth numbers over a four year period. And adjusted EBITDA of $70,000,000 was up about $3,000,000 over prior year despite incurring $3,000,000 in fiscal 'fifteen for the ongoing cost of becoming a public company. Let's continue now to Slide nine. Net income of $15,000,000 for the year was $12,000,000 above last year, with adjusted net income of $28,000,000 The adjustment primarily reflects the elimination of one time expenses and payments pertaining to the business combination.

Diluted earnings per share were $0.59 up $0.46 last year. On an adjusted basis, EPS was $1.11 per share. As I mentioned earlier, the strong full year adjusted free cash flow of $45,000,000 which is a feature of Blue Bird's business model, enable us to accelerate payment of our debt by $25,000,000 in September. And finally, we invested in and announced four new major powertrain programs that will differentiate us further in 2006 as they are launched. I will cover these in more detail later.

Now let's turn to Slide 10, where we'll cover our propane powered bus performance. Blue Bird's propane powered vision bus continues to be our number one product differentiator in the market with six times more propane buses registered than all of our competitors combined. Our propane vision bus also scores the highest order loyalty in the industry. Our propane powered bus is the fastest growing segment in our business with fiscal twenty fifteen unit sales up 14% to sixteen eighty eight buses. Importantly, we saw a 33% increase in our customer base to four seventy eight customers.

To put this in perspective, there are approximately 10,000 school districts that buy and operate buses. So we have tremendous potential to further grow the volume of propane powered buses across the nation. The advantages of propane over other fuels are clearly understood and market acceptance is growing as customer testimonials confirm the total cost of ownership and other key benefits. For example, Broward County School District in Florida took delivery of its first Blue Bird propane buses in 2014 and expanded its fleet in 2015. They are realizing over $600,000 annually in fuel cost and maintenance savings, a saving of over $4,000 a bus.

DeKalb County in Georgia took its first delivery of Blue Bird propane powered buses in 2015 and locked in propane fuel costs at $0.89 a gallon. The goal now is to transition their entire bus fleet to Blue Bird propane. These are just a couple of examples of many customers touting the environmental and cost of ownership benefits from operating Blue Bird propane buses. And as a reminder, our proven, modern and efficient propane engine is exclusive to Blue Bird, developed and supported by our partnership with Ford and Rausch Cleantech. At Blue Bird, we believe in being first to market with differentiated products that customers want and value.

And where we can, we strive for exclusivity. Our propane success is a great example of this. Let's now turn to the other innovative new powertrains we have coming in 2016, starting on Slide 11. At the School Transportation News Export Conference and Trade Show in Reno in July 2015, we unveiled our all new Blue Bird gasoline powered division school bus. We are the first and only manufacturer to offer a gasoline powered bus in the school bus segment.

Mechanics and technicians understand gasoline engines, they're simple to maintain, servicing costs are lower and they perform exceptionally well in cold climate conditions. The customer response we've received at the bus show and since has been outstanding. The bus will utilize the same proven engine and transmission using our propane powered bus and another product from our exclusive partnership with Ford and Raj CleanTech. Same as propane, the product is backed by Ford and Raj CleanTech with the best powertrain warranty in the market, five years and unlimited mileage. As you can imagine, that commonality of powertrain architecture is great news for the mechanics who work on the engine.

The bus will be a great choice of customers who want the lowest acquisition price of any fuel type and simpler maintenance for their technicians. Let's now turn to Slide 12, a look at our new CNG powered Vision bus. At the North American Pupil Transportation Conference in Richmond, Virginia, just last month, we announced the launch in 2016 of our all new compressed natural gas powered Blue Bird Vision bus. This product will provide a lower price Type C bus option compared with today's CNG powered Type D bus option. The Type C is a smaller bus than our largest transit bus we call the Type D.

Again, this was developed by our exclusive partnership with Ford and Roche Cleantech, deploying Ford 6.8 liter V10 engine and a fuel system developed uniquely by the Rausch team. With this engine, along with our propane and gasoline offerings, we will have three distinct powertrains using that same Ford engine and transmission architecture. This is great news for the mechanics who work on the engine and its simplification for everyone involved. Now let's look at our new diesel offering from Cummins on Slide 13. Our all new Cummins five liter V eight diesel powered Blue Bird Vision was also unveiled at the North American Fuel Transportation Conference last month.

This is a new lightweight engine from Cummins, offering a lower acquisition price than other diesel options while delivering improved fuel economy. Blue Bird is the only school bus manufacturer currently offering this all new modern, efficient and quiet powertrain and bus deliveries with this engine configuration will commence in 2016. Let's now turn to our fourth and final new powertrain offering for 2016, our new Eaton Precision Transmission on Slide 14. Also unveiled at the North American People Transportation Conference last month, our new Eaton Precision Transmission option will be available on most diesel engines in 2016. This transmission is the first dual clutch seven speed automatic available on school buses in North America.

It provides efficient acceleration, optimized shift points and improved fuel economy and a host of features that make the bus easier to drive. As I mentioned earlier, we are committed to providing innovative and differentiated products that customers want and value. And based on feedback to date, I can tell you that our dealers and customers are really excited about these all new products that are coming in 2016. Let's now turn to Slide 15. So how do all these products fit together?

Well, each one has a unique price point and its own value proposition for the customer. Starting from the left, we will have our Type C bus value models. The lowest price point will be our gasoline entry. Alternatively, should diesel be more desirable to the customer, we will have the new V eight diesel entry from Cummins to offer. And sitting along the price ladder, we will have our traditional ISB diesel engines from Cummins, our alternative fuel offerings with Ford and Ranch Cleantech propane and CNG models ending with our highest passenger capacity Type D rear engine model powered by either a Cummins diesel or CNG engine.

Bottom line, in 2016, Blue Bird will have the broadest array of product offerings in the market, no question, with differing value propositions and that's great news for our customers. With that, I'd now like to turn it over to Phil Tighe, who will cover our financial results.

Speaker 3

Phil? Thanks, Phil. Good morning, everyone. It's a pleasure to talk to you again and present you the fiscal year twenty fifteen fourth quarter and full year results for Blue Bird Corporation. Just a reminder for everyone, we run our fiscal year, which is a fifty two-fifty three week period.

It ends on the Saturday closest to the last calendar day of each quarter. For the fourth quarter and full year, we our closing dates for 2014 was September 27 and for 2015 was October 3. Let's talk to Slide 17. You haven't seen this slide before. We thought we'd put it in for you.

This shows the starting from the top left box, sales volume on a quarter by quarter basis and full year. And it compares both it shows you both the fiscal year twenty fifteen and the fiscal year twenty fourteen material. The other boxes are revenue, adjusted EBITDA and the EBITDA margin. Phil's already talked to a lot of the numbers on this, so I won't sort of drag you through all that again, except you will be able to see the fourth quarter data, the 3,468 units, which is up about 400 units versus the prior year. You can see the full year data of 10,378.

Again, the same thing for revenue. You'll see the increase year over year of revenue in the fourth quarter and in the third quarter and the total revenue of $919,000,000 Profits, again, we will the profit discussions we will have going forward, the $70,000,000 includes the ongoing public company costs. As Phil mentioned, when we did the original guidance, we did not include that number. So there's about $3,000,000 of ongoing public company costs, and our resultant EBITDA for the full year was $70,000,000 with 29,000,000 of that in the fourth quarter. I think it's worth looking at this slide for one minute with respect to seasonality.

We've talked a lot about seasonality in our prior calls, but this slide sort of shows it fairly clearly. As Phil mentioned, if you look at first and second quarter, the first half volume and do the math, about 38% of our volume is in the first half, 62% in the second half. Our revenue works out at exactly the same ratios. If you go down to the profits, we actually made 26% of our profits in the first half, 74% in the second half. So you can see how dependent we are on delivering buses in the peak season in the second half of the year.

This is when we make our money and generate cash. Margins follow the same pattern. If you look at the margin story, it's sort of a story of two halves with an average of about five points of margin in the first half and nine points of margin in the second half. Let's move on to Slide 18. Slide 18 is the bridge, which shows the walk of profits from the 2014 to the 2015, a walk from $19,000,000 up to 29 We've kept this reasonably brief, but I think it gives you the highlights.

Cost reductions were about $2,000,000 of the walk. This was more than accounted for by the continuing work we've been doing to reduce material costs in the bus. Material cost performance was very strong. There was a bit of an offset with labor and overhead as we were working towards delivering a high quantity of buses in the fourth quarter, had to work some level of overtime. But generally, we walked in with about $2,000,000 favorable material cost.

If you annualize that, it's about $200 a bus. Volume and mix at $6,000,000 favorable. So we had obviously about 400 additional bus deliveries in the fourth quarter. And we had higher margins. The margins were up about five points on our buses year over year.

Parts profit also improved within that $6,000,000 in the fourth quarter. Ongoing public company costs were $1,000,000 in the fourth quarter. Obviously, we didn't have any of those costs in the 2014. Majority of the $1,000,000 was for activities related to the higher costs of auditing the public company, tax work that had to be done and, of course, a little bit of legal work. So there's $1,000,000 in there.

Finally, growth initiatives in Other. There's a lot of stuff going on in here. There's support for the powertrain programs that Phil was talking about and other product initiatives. That's a cost obviously. The good news that offset all that was we did have some lower product recall costs than the prior year, and that was favorable for us.

So all in all, a very good fourth quarter, very strong. You can also see down below, the net loss was $1,000,000 in the fourth quarter of the prior year. Net income grew to $16,000,000 in the 2015. If we move to Slide 19, this bridge looks at the walk of full year 'fourteen to full year 'fifteen, dollars 67,000,000 to $70,000,000 Again, basically the same factors that you saw in the prior walk. Full year cost reductions was $4,000,000 Again, this was material driven.

So a lot of positive work around material. And so that $4,000,000 is worth about $400 a bus. Volume and mix is $3,000,000 Now the volumes were higher at about seven seventy additional units versus last year. However, as you might recall from the discussions we had in prior quarters, we did have customer mix issues in the first half where we had some relatively lower margin deals. We managed to offset some of that in the full year, but not all.

So in summary, the volume and mix is a combination of higher volume offset by some margin and mix issues, but still positive at an incremental $3,000,000 And the margins going out of the year were quite strong. Ongoing public company costs, we've got about $3,000,000 worth in the full year. We'll continue to work this down. I think this was our first year at it. So we'll continue to work this down.

But we expect public company costs to range somewhere over $2,000,000 as we go forward. And finally, growth initiatives and other. The biggest number in here was engineering costs, developing new product with some offsets for lower recall costs and some efficiencies year over year in G and A spending. Again, down below, you see for the full year, net income was $3,000,000 in fiscal year twenty fourteen and grew to $15,000,000 in fiscal year twenty fifteen. And the details of that are all up in the appendix.

Slide 20 looks at free cash flow history. And I would point out to you that there is a significant amount of detail on the free cash flow included in the appendices for those who want to take a look at the elements of the free cash flow. But you can see on this one that as Phil mentioned, our free cash flow adjusted free cash flow in fiscal year 'fifteen was $45,000,000 That was very strong. It's down a bit from fiscal year 'fourteen, which was at $59,000,000 And the two major issues there is those of you who have been on the prior calls might remember that we took a loan in June 2014. So in 2015, we picked up the full year of interest burden on that loan.

That's a major reason for the reduction in free cash flow. Additionally, we had very minimal taxes due to carryforward losses in fiscal year 'fourteen. We started paying cash taxes in fiscal year 'fifteen. And that was really the other piece that explains the difference between the two periods. So we are quite pleased with the adjusted free cash flow story.

And Phil will talk to you about the outlook for that number in fiscal year 'sixteen. I would remind you as we walk into fiscal year 'sixteen, of course, we will continue to pay interest and taxes. And we are planning with higher volume and with the product programs that our CapEx will be somewhat higher. Go to Slide 21, which is my last slide for this presentation and you can see net debt leverage and liquidity. Debt at October 3 stood at $188,000,000 cash was at 53,000,000 Again, at the end of the year is at its peak due to the deliveries.

So our net debt ended the year at $135,000,000 If you go down to the net leverage ratio of 2.3, our covenant with the banks for the loan was to be at 4.5. So at 2.3, we had a pretty healthy cushion versus covenant. And our liquidity was at $108,000,000 And just as a reminder, the debt was at 188,000,000 after we paid down in September a prepayment of $25,000,000 on the loan. So again, I think we beat the covenant and ended the year with very strong liquidity. That's it for me.

I'll pass it back to Phil, who will talk to you about the 2016 outlook, our guidance and then wrap up the formal presentation part of the proceedings.

Speaker 2

Thanks, Phil. Appreciate that. So let's turn down to Slide 23, and we'll talk about the outlook for fiscal year 'sixteen. So on an interest standpoint, we estimate fiscal 'sixteen school bus industry growing a little bit slower than in fiscal twenty fifteen, but nevertheless, still a solid 4% growth of 31,000 new buses. We are projecting Blue Bird's unit sales to grow by between 4% to 6% next year supported by continued higher than industry growth in propane powered bus sales and of course our new product entrants.

So how is it going so far in fiscal 'sixteen? Well, we are seeing a very high level of quote activity for new buses. In fact, it's about 50% higher than a year ago so far our fiscal year. However, we are seeing municipalities being slower to convert quotes into firm orders and indicating their intention to delay orders until later in the year. We saw the shift towards customer sales within the year in fiscal 'fifteen as well.

It's not surprising because the customers want their buses for school staff and they don't really want them earlier in the year. So longer they can wait, the better off they feel. Consequently, we are forecasting that first quarter sales that is from October to December and adjusted EBITDA will be lower than last year, while the first half results will essentially be flat versus a year ago. I should also add that the first quarter is also impacted by five fewer production days than last year, primarily due to the timing of the holiday shutdown. So we're forecasting the vast majority of the industry growth and Blue Bird growth to be in the second half of the year when seasonal peak demand naturally occurs to meet timing of school start and of course that's supported by the New Year municipal budget funding.

To this end and supporting this, we'll be launching a second shift to meet the anticipated demand surge later in the year. Turning to Slide four, let me talk about the seasonality we've seen in our business. Seasonality is driven by the buying pattern of school districts. We traditionally emphasize the delivery and preparation of new buses for the start of the new school year and by release of municipal budgets. Usually those occur in the May through July period.

This leads to much higher volume in the second half of our fiscal year of April through September. Registrations shown in the right hand chart on this slide indicate when buses are placed in service by the customers. As you can see, about two thirds of new vehicles sold are placed in service in the second half of the year. This contrast with Blue Bird's unit sales were in recent years slightly over 60% of our full year bus sales have been in the second half of the year. We anticipate though with the delays that we're seeing from our customer ordering pattern this year that the second half volume could represent around 65% of our full year sales in fiscal twenty sixteen.

So turning now to Slide '25, with a more pronounced seasonality anticipated in fiscal 'sixteen, we will begin a smooth ramp up to a second shift commencing actually in late January. This will align production better with the higher customer demand later in the year, allowing for an orderly fulfillment of orders within straight time during the peak season. So now let's turn to the guidance of fiscal 'sixteen on Slide 26. Our guidance reflects the increased growth in bus sales that we are planning to achieve. First, net sales revenue between $960,000,000 to $985,000,000 representing an increase of 4% to 7% over fiscal twenty fifteen.

Adjusted EBITDA, which includes ongoing public company costs of between 72,000,000 to $75,000,000 a 2,000,000 to $5,000,000 increase over fiscal 'fifteen or 3% to 7% growth in adjusted EBITDA. Adjusted free cash flow is guidance is between 30,000,000 to $35,000,000 for fiscal year twenty sixteen. While still strong as a plenty of adjusted EBITDA, this is down from fiscal twenty fifteen as we are increasing our investment in new products, infrastructure upgrades and growth initiatives in fiscal twenty sixteen, key to our future. Now let me turn to the wrap up Slide 27. So we grew our business and we met or exceeded all of our guidance targets in fiscal twenty fifteen.

Bottom line, it was a great year for Blue Bird and we're very proud of our results. In fiscal twenty sixteen, we are launching several new major powertrains and are projecting further growth, which will be realized in the second half of the year. And we are adding a second shift progressively from the second quarter to provide orderly production capability to meet the anticipated higher demand later in the year. We are investing in new products and growth initiatives that are key to our future. And we also plan to continue to pay down our debt supported by a strong free cash flow.

And finally, we're providing fiscal twenty sixteen guidance consistent with our plans to grow the business profitably, and we intend to deliver on it. That ends the formal presentation. I'll now pass it back to our moderator, Melissa, to begin the Q and A session. Melissa?

Speaker 0

Thank Thank you. Our first question comes from the line of Richard Fehlinger with BMO Capital Markets. Please proceed with your question.

Speaker 4

Hi, good morning.

Speaker 2

Good morning, Richard.

Speaker 4

So based on your sales, it sounds like you guys are doing a good job growing the industry. I was wondering if you could just put some numbers around that on market share and then maybe just talk about the competitive landscape in general and what you're seeing out there? Thanks.

Speaker 2

Well, it's a little early days yet. We do this RL port registrations, which is somewhat there was a delay in these things even though fiscal year ended at the September, even believe it or not, even in December, you don't really get the data still being somewhat refined. But I think we're probably going to be around 30%, possibly 31% market share, that's sort of range we're looking at in terms of registration data. I'll tell you one thing to probably recognize that is we had a fixed surge in sales in that fourth quarter, which you saw, very successful fourth quarter. What we've learned is that all those units actually that we sold got registered in September.

Many of them got I mean, for example, a customer can take a product that we sell to him in September, put temporary registration plates on it, use it till it gets a permanent place the following month. So I think what I'm really getting to is, I think our 30% to 31% share that I think we're probably going to see when the fiscal year 'fifteen shapes out, We're going to see quite a carryover of that turning into registrations early in our new fiscal year, if that helps. On the competitive landscape, I don't it's really up to me to say what's going on there. I think IC has got some earnings result. Navistar is reporting earlier this year.

So I think obviously, we're sort of flat. So I mean between the two of those guys, they're going to be fairly flat, I'm guessing, is the way I look at it.

Speaker 4

Okay. Appreciate the color. Thanks, guys.

Speaker 3

Thanks.

Speaker 0

Thank you. Our next question comes from the line of John Rolfe with Argan Capital. Please proceed with your question.

Speaker 5

Hey, guys. First question I had, I'm a little bit confused in terms of the reconciliations with the public company expenses. In one of the tables in the press release where you're reconciling net income to adjusted EBITDA, you're adding back $1,400,000 in public company expenses to get to that $69,800,000 of adjusted EBITDA. But then in the verbiage in the press release, talk about adding back another 2,900,000.0 to get to the 73,000,000 in adjusted EBITDA, that's apples to apples with the guidance you were giving. So on its face, it seems like there's some double counting there, but I'm guessing there's something else going on.

Hopefully, you can clarify that for me.

Speaker 3

Yes. Apologize for the confusion. This is something we've worked hard to try and demystify. There's two elements of this. Because it was our launch year as a public company, there were a number of onetime costs, and that's what you see in the adjustment thing in the earnings release.

We don't view those as ongoing costs. For instance, we had a significant amount of onetime costs going towards registration, setting up the initial proxy. I would hate to take you through the whole list of sorrows in there. But those onetime costs are behind us. What we talk about in this presentation are the ongoing costs, which, as you would recognize, the difference from a private company to a public company, there is a much more stringent audit process.

There are issues around more legal expense, D and O, etcetera. So these are the things that we would expect to see going forward that we're really talking about in the $2,900,000 Again, I would emphasize that we expect to bring the $2,900,000 down over time as well as we become more efficient as a company in preparations for meeting our filing responsibilities.

Speaker 5

Okay. A handful of modeling questions. You guys had a decent bump in your equity and income from unconsolidated affiliates. I think it was up to $2,600,000 for the year. I mean, just order of magnitude, is that sort of level something reasonable to assume going forward or was there anything unique about this year that would cause that to fluctuate markedly going forward?

Speaker 2

No, I think this is Phil Holik. I think I look at that as something that's probably reasonable at

Speaker 3

this point to model going forward.

Speaker 2

That was essentially was the MicroBurg joint venture that we have, which were And fifty-fifty we had a very good year last year, record sales levels for them, about 2,500 units they sold. So they did a terrific year. So I think certainly going forward, it's probably something, yes, it uses a baseline is pretty good for modeling. Yes.

Speaker 5

Okay. Okay. And what's a reasonable rate to use on your debt going forward?

Speaker 3

6.5%. It seems to be reasonable. Yes, I think as long as the Fed stays reasonably modest in what they're going to do going forward, I don't see any reason to move away from 6.5%.

Speaker 5

Okay, got it. And I think you guys have talked in the past, if I recall, there's been a lot of puts and takes that have kind of caused your tax rate to jump around and obviously the change in corporate structure, etcetera. I think you've talked about sort of a mid 30% range for reporting purposes once things sort of normalize. Is that still reasonable to assume?

Speaker 3

Yes, I think that's a very reasonable assumption to make. We see that coming through as we've dug a lot further into the tax structure. And so we think in the mid-30s. Of course, we're all hoping for a change in tax rates, but we can't influence that.

Speaker 2

Right.

Speaker 5

Okay. Okay. And my last question, you guys have talked about or you've just talked about sort of continuing to reduce debt in the near term. Looking a little farther out, I mean, what is sort of a target level of leverage that you'd be comfortable with? When do you think you might be able to reach that given current cash flow trends?

And once you reach that, has the Board at any level started thinking about other sorts of capital allocation alternatives once you're able to get to a leverage level that you're comfortable with?

Speaker 3

Yes. We've been doing some work. I mean, it's we've had at least an initial discussion with the Board, John. We sort of like to get the debt down to roughly around about $100,000,000 You saw we paid down 25,000,000 in September. We plan in our internal budgeting to do that again this year.

So if you model that forward, we'll probably get to 100 in a couple of years, three years. After that, we'll be throwing good free cash flow. Once you've got that sort of cash flow and a pretty containable debt level, you've really got two options. One is, are you reinvesting cash or are you paying dividends? And what's the mix of the two?

We've started those discussions with the Board, but we've couple of years before we have to finalize that. We do recognize that there are investors out there who would like to make a return. So that's pretty high on our priority list, but we're a little away from declaring it at this time.

Speaker 2

I think we can provide the Board, and I think we're still spot on with what he just said.

Speaker 0

You. Mr. Horlick, there are no further questions at this time. I'd like to turn the floor back to you for any final concluding remarks.

Speaker 2

Okay. Well, Melissa. Well, I want to thank everybody for joining us today on the call. We appreciate your continued interest in Blue Bird. And I want to tell you we're excited to be a public company.

We're focused on profitable growth and we intend to deliver on our commitments. That's the Blue Bird way. So please don't hesitate to contact our Head of Investor Relations, Jeff Merton, if you have any follow-up questions. And again, thanks from all of us at Blue Bird and we wish you a good day. Goodbye.

Speaker 0

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.