Blue Bird - Earnings Call - Q4 2017

Transcript

Speaker 0

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

Speaker 1

Thank you, Tiffany. Welcome to Blue Bird's fiscal fourth quarter and full year 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 press release and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird's President and CEO, Phil Horlock and CFO, Phil Tighe. Then we will take some questions. So let's get started.

Phil?

Speaker 2

Well, thanks, Mark. Good afternoon, everybody, and thank you all for joining us today for our final quarterly earnings call for fiscal twenty seventeen. It's been a busy year at Blue Bird, and we welcome this opportunity to share with you our fourth quarter and full year results. So let's start with an overview of our financial results on Slide four. Our fourth quarter results were strong.

Our bus sales were the highest in the fourth quarter since 2008 with 3,608 buses sold. This represents a strong 9% increase over last year and we saw the same 9% growth in total net sales amounted to three thirteen million dollars A picture of our business is seasonality and it's worth noting that fourth quarter net sales represented 32% of our full year sales and the second half was a substantial 65% of the full year. Adjusted EBITDA was $25100000.0.800000 dollars above last year and net income was also strong at $14500000.03800000.0 dollars higher than a year ago. So let's shift now to the full year. All three of our key financial metrics either met or exceeded guidance.

Net sales of $991,000,000 and adjusted EBITDA of about 69,000,000 were both at the midpoint of our guidance range. At $44,000,000 adjusted free cash flow beat the high end of the guidance by about $7,000,000 and remains a strong feature of our business model. Net income and adjusted diluted earnings per share were both above last year by $21,900,000 and $0.13 respectively. As we look at the underlying strength of the industry and Blue Bird's results, our view is that the outlook is positive. First, the school bus industry grew by 6% last year and with about 35,000 new type CMD school buses sold in fiscal year 'seventeen, we are now above pre recession industry levels.

In fact, this was the second highest annual industry in more than thirty years. With a strong outlook of property values and corresponding property taxes, we are bullish on the industry outlook remaining at the fiscal 'seventeen level or a little higher. Second, we sold over 11,300 buses in fiscal year twenty seventeen, an annual growth of 7%, which is slightly above the industry growth. But importantly, sales through our franchise and exclusive dealer channel grew by 9%. This is our sixth consecutive year of volume growth and we have solid momentum.

Third, we recorded our highest ever sales mix of alternative fuel powered school buses at a substantial 34% of our total bus sales. This compares with 26% mix last year. In fact, through the second half of the year, alternative fuel bus sales represented 41% of our total unit sales. That's leadership and momentum in the fastest growing segment of the business. As a reminder, in alternative fuels, we do count all of our propane, compressed natural gas and gasoline powered buses, as all of these are alternatives to diesel, which has been the staple fuel for years.

For the last several years though, we've been achieving significant growth in alternative fuel bus sales. And as just mentioned, we have not slowed down this year. We'll cover alternative fuel performance in more detail in a little while. Fourth, we are passionate about product and being first to market with vehicles and features that customers want and value. Next up for us, we are launching a complete lineup of electric powered buses next year.

These are on the road now undergoing durability and performance testing. Once again, these first to market buses are exclusive to Blue Bird through our sales and technology partnership with ADOMANI and EDI out of California. Customer reaction to date has been outstanding. We'll be ready to take orders early in the New Year. As we look now to fiscal twenty eighteen, in addition to our product leadership strategy, we are focusing on profit growth with particular emphasis on improving our EBITDA margin.

While meeting guidance, fiscal twenty seventeen achieved an adjusted EBITDA margin of 7%. For fiscal twenty eighteen, we are targeting adjusted EBITDA margin of around 8% supporting our mid term 10% margin goal. To this end, in fiscal twenty eighteen and beyond, we'll be upgrading our Fort Valley production facilities and together with a focused cost reduction program, we are driving improvements in efficiencies, quality and product cost. You will see the outcome of these actions reflected in our fiscal twenty eighteen guidance, which I will cover later. All in all, these are exciting times at Blue Bird.

Let me now review with you our full year 2017 key operating achievements on Slide 5. We recorded a number of significant achievements and each one will make us more competitive and support our growth going forward. In selling 11,317 buses last year, we achieved our highest sales volume in fifteen years. All these units were built at our Fork Valley plant on two shifts and it was a record production year. It's also worth noting that since the school bus industry trough of 2011, Blue Bird's annual sales have grown by over 70% through a combination of industry recovery and significant market share growth.

As a reminder, in the last eighteen months, we launched our latest generation propane powered bus, we call it our Gen four. And then this year, we improved it again with certification by Cobb to the lowest NOx emissions level in the industry by a factor of four. With just over a year in the market, we have the only gasoline powered largest school bus on the road today. And about a year ago, we launched our all new Type C powered bus powered by compressed natural gas. These three products, which are all exclusive to us through our contractual partnership with Ford Motor Company and Raj CleanTech together with our compressed natural gas Type D bus represented nearly 4,000 Blue Bird bus sales in fiscal twenty seventeen and importantly, grew by a substantial 41% over last year.

You'll be interested in noting I think that in fiscal twenty seventeen, five zero four customers placed their first ever orders for a specific Bluebird alternative fuel powered bus. Interestingly, 90% of those customers had no prior experience with any alternative fuel. This is not a case of customers switching from propane to gasoline. We have had a terrific customer response to our new engines and I will cover alternative fuels more in a couple of slides. As I mentioned earlier, we've unveiled a full range of electric power school buses that are under development and scheduled for launch next year.

Just this past month with the California Air Resources Board, our Type D electric bus has received the HVIP certification, which allows it to qualify immediately for the maximum grants available for zero emission vehicles in California. Next week, our Type C electric bus is heading to Florida for customer ride and drives in a number of cities. We were ready to take orders early next year. I'd like to acknowledge as well the terrific performance by our Taipei bus, Micro Bird. Our fifty-fifty joint venture in Quebec sold a record number of buses in fiscal twenty seventeen, just over 3,100 and secured market share leadership for the second year running in Taipei school buses across North America.

That's a great achievement by our MicroBird team. We're always excited to appoint new growth oriented dealers in our territories. And this year, we added two of those. Blanchard bus sales of South Carolina took over the territory in late twenty sixteen and had a great year. With the backing of being the Caterpillar distribution in South Carolina, they are well capitalized and well positioned for growth.

Our new dealer in Virginia was appointed just a few months ago, and it's great to see an existing dealer with more than forty years in the business expanding and now covering three markets, Western Pennsylvania, West Virginia and now Virginia. We love seeing an existing dealer investing in our Blue Bird brand. And finally, early in fiscal twenty seventeen, we refinanced our term loan and revolver at very competitive terms, reduced our interest rates by four points and saving about $6,000,000 in cash interest expense in fiscal twenty seventeen. And at our last earnings call, we mentioned that we were initiating a stock repurchase program, buying back up to $50,000,000 in stock over the next twenty four months. To date, we have repurchased $34,000,000 of stock and are on track to complete the program in fiscal twenty eighteen.

I think it's fair to say we've advanced the business on multiple fronts in fiscal twenty seventeen. So let's now take a closer look at our second quarter financial results on Slide six. I touched on many of these financial results earlier and Phil Taber will run through the details later. So just to summarize the fourth quarter, we exceeded our fiscal twenty sixteen results in every category. Total net sales, total bus sales, total parts sales and adjusted EBITDA.

Total net sales for the fourth quarter were up a strong 9% and adjusted EBITDA was 3% above last year. Turning to the full year, total net sales of $991,000,000 were up 6% from fiscal twenty sixteen with similar growth in both bus and part sales segments. Although meeting guidance, adjusted EBITDA of $69,000,000 was down $3,300,000 from a year ago. While bus volume was higher, this was more than offset by customer mix differences and higher operating expenses, particularly in support of new products and growth. Turning now to Slide seven, let's take a closer look at our alternative fuel bus sales performance.

At 3,888 unit sales, alternative power school buses represent slightly more than one third of our total volume. That compares with only a 17% sales mix just two years ago. Now that's exciting growth. With an impressive growth of 41% over last year, Blue Bird continues to be the undisputed leader in the fastest growing school bus segment with our market share running at over 85% in this category. With less than 15% of school districts having purchased an alternative fuel powered bus, we are well positioned for future growth.

Propane continues to be the market leader in this segment with 2027 Blue Bird propane powered bus sales in fiscal twenty seventeen and it also records the highest owner loyalty of any school bus in the market. But gasoline has quickly climbed the chart with sales of more than seventeen fifty buses in its first full year in the market. Now while propane is widely recognized as having the lowest total cost of ownership in the market and is a green engine. And as I said before, we are the cleanest product in the market by a mile. The gasoline engine is readily understood by technicians and mechanics who really appreciate the simplicity and cold weather start capability it shares with propane.

With our exclusive partnership with Ford and Rush CleanTech across all alternative fuel engines, it makes it easy for customers to grow their alternative fuel fleet With the same engine architecture, the same transmission and the same service requirements across all three products, it's an easy move for school district or a fleet operator to take the Blue Bird product range. I mentioned earlier that five zero four customers placed the first ever orders for a specific Blue Bird alternative fuel powered bus. Well importantly, two thirty eight of those customers shifted from our competitors to Blue Bird. That is a strength of having leading and unique products to offer your customers. Let me now turn it over to Phil Tighe, who will take you through the financials, then I'll be back to Blake to cover the fiscal twenty eighteen outlook and guidance.

Over to you, Phil.

Speaker 1

Thank you, Phil, and good afternoon, everyone. The next few slides that I'll take you through are a summary of our financial performance for the fourth quarter and the full year of fiscal twenty seventeen. I would point out that there is additional information in the appendix that deals with primarily reconciliations between GAAP and non GAAP measures mentioned in this review. Detailed material will be available in our 10 ks, which we expect to file later this week. The material we discuss today is based on a close of September 30 for 2017 and 10/02/2016 for fiscal year twenty sixteen.

I should report there were no new accounting pronouncements that impacted Blue Bird in this report and risk factors remain largely unchanged from the previously filed 10 ks with only minor reductions to content from prior years in a number of areas. Also, please note that there are important disclaimers at the end of the deck.

Speaker 2

So if we

Speaker 1

turn to the next slide, this slide, Slide nine covers a summary of fourth quarter results for fiscal year twenty seventeen and compares those results to the same period in fiscal year twenty sixteen. Phil has already mentioned fourth quarter volume was 3,608 units, an improvement of 9% versus prior year and the highest fourth quarter sales result in about nine years. Production volume in the fourth quarter was only about six percent lower than the record we achieved in the third quarter. And we continue to experience some production challenges caused by an extremely high mix of our popular rear engine bus. These are very complex buses and very labor intensive units.

And the high demand in the second half has presented a number of challenges in line balancing and skill management. We also had in the production area a number of issues with timeliness of deliveries and quality of some of our components. Net revenue was up by 9.2% versus fiscal year twenty sixteen. The total growth in bus net revenue was included in the net revenue number was about 9.6%, a majority of that driven by volume. Per unit revenue however was up by about zero five point due primarily to product mix and the higher alternative fuel mix.

Net revenue in the fourth quarter was also higher than the first half on a per unit basis, which was an encouraging sign. Gross profit margin was 12.6%, about 9.9 points lower than last year, driven largely by higher production costs during the peak season, a more complex build mix that resulted in lower efficiencies and some higher economics. Our net income and earnings per share, net income was about $14,500,000 or an improvement of 34% versus last year for the same period. And adjusted diluted earnings per share was $0.51 for the fourth quarter versus $0.42 last year. Net income, should point out was positively impacted by higher operating profits due in part to the non recurrence of expenses incurred in fiscal twenty sixteen with the change of control.

Lower interest expense resulting from the terms of the new loan agreement and lower debt balances as well as higher profits from our JV in Canada. We also had higher income tax expense, which partially offset the above. I'll talk about our adjusted EBITDA in a few slides. With respect to debt and cash, our cash closed out at $62,600,000 which was an improvement of about $10,000,000 versus prior year, and we'll discuss that on a later slide. The debt of $151,200,000 also reduced slightly.

I should point actual debt reduced by about $8,000,000 year over year. The reason you don't see this is due to the inclusion of net issuance costs in the debt totals in both fiscal twenty seventeen and fiscal twenty sixteen. Turning to Slide 10, which is the full year summary. Phil has already commented on volume. I would point out, I think this was our highest sales volume for Blue Bird since about 02/2003.

I think Phil talked about the continuous growth we've been having for the last few years, but this was a good achievement for Blue Bird. Net revenue was up by about 6.3% and we had increases in both bus and part revenue. The total improvement in net bus revenue was about 6.2%, although, I should report that per unit revenue for buses was down about three tenths of a point due primarily to product and customer mix. Although the per unit revenue was down, we did see a fairly good shift in per unit revenues between the first half of the year and the second half. So that's an encouraging sign.

Parts revenue was up by about 7% due to the continuing expansion of product offerings, volume incentives and improved shipping arrangements to our dealers. Our gross profit margin was 12.9% or about a point below last year. Bus gross margin within that was 11.4%, also a point below last year, driven partially by the lower unit revenue and by higher production costs and economics. Parts gross margin was down by about 2.9 points as a result of a more aggressive position that we've been taking on a selection of our parts to become more competitive out in the market and grow sales. And also we had some higher freight costs in the parts business.

As Phil pointed margins are a very key focus of our management team and we're implementing some really significant actions to improve our ability to efficiently build higher volumes and drive cost down. We will see the results from those activities over the next twelve months. Net income and EPS for the full year, net income was $28,800,000 and adjusted diluted EPS was $1.27 for the year. The net income was up by almost $22,000,000 and this was partly due to the fact that the fiscal year 'sixteen net income was impacted by costs associated with the change of control. Adjusted diluted earnings per share was up by $0.13 Again, the delta there is a little lower than you might expect given the net increase in net income, but the change of control costs are added back in the non GAAP metric of adjusted diluted earnings per share.

A comparison of the income statements that you will see when we file, will show you that operating profits were higher. Interest expenses are lower due to the new loan agreement. However, this was largely offset the savings in interest expense were largely offset due to the debt extinguishment costs that we had record. We did have higher profits from our joint venture in Canada. We also obviously had higher income tax expense.

We'll talk more about EBITDA when we get to the bridge and the cash and debt and cash numbers are the same as the prior slide and we already discussed that. Moving to Slide 11, this page briefly shows a walk between fiscal year twenty sixteen and fiscal year twenty seventeen for the fourth quarter. You can see we're up by about zero eight to a profit level of 25,000,000 Bus gross profit of just over $1,000,000 was due to higher volume of 300 units and a slightly higher average per unit revenue, and that was partially offset by the production costs that I alluded to earlier. The lower parts gross profit was $100,000 Again, we have been moving our pricing quite aggressively and we did have higher freight costs. Operating expenses and other were about equal to the prior year.

Moving to Slide 12, which is the bridge for the full year. This shows the profit at $68,900,000 versus 72,200,000.0 in fiscal year twenty sixteen, so a reduction of about 3,300,000.0 The bus gross profit was down by 1,800,000.0 despite the fact that volumes were up by 700 units. We did have a slightly lower mix. And as I said, we did have issues with efficiencies in the plant at the high production levels and the mix of production and we did have some higher economics. Parts gross margin again were due to the revised go to market structure we've got with parts.

Operating expenses and other, about $1,300,000 higher. The principal cause for these were the product spending, growth, support and economics. Partially offsetting that was equity higher equity income from our JV in Canada that we earned in fiscal year twenty seventeen versus fiscal year twenty sixteen. If we move to Slide 13, this is the free cash flow slide. And we show both the fourth quarter and the full year for both fiscal year 'sixteen and fiscal year 'seventeen.

For the full year, the adjusted free cash flow was 43,700,000.0 up about $10,000,000 versus the prior year. As you can see, the key drivers for the improvement versus 2016 were lower interest costs, lower trade working capital and lower other changes basically in the area of accrued expenses. The factors that partially offset the good news items were a reduction in EBITDA and higher income tax. We did show on the page, the walk from free cash flow to adjusted free cash flow. And you can see there that the $38,600,000 in free cash flow that we earned was just about double the result 16.

Again, was largely due to the special compensation payments with the change of control that occurred in fiscal year twenty sixteen. Moving on to Slide 14, this shows our net debt leverage and liquidity at the end of fiscal year twenty seventeen. Net debt stood at $88,600,000 including $62,000,000 of cash. This is an improvement of $11,200,000 versus the same time last year and had higher cash by $10,300,000 The net leverage ratio was 1.6 substantially below the required net leverage ratio at the end of fiscal year twenty seventeen, which was 3.75. The 1.6 also by the way is just about the same level that we had at the same time last year.

Liquidity stood at $130,600,000 There were no drawings on our revolver. Liquidity at the same time last year was about $107,000,000 I would remind everyone that we have a highly seasonal business and the year end cash level is generally the peak of our cash holdings due to the substantially higher profits generated in the second half and the low level of inventories as we come out of the fiscal year and go into the slower period of bus production, which occurs in the first quarter. The final slide from me is just a brief update on the share repurchase program. Phil already touched on this. You can see some of the details here.

I'll remind you that the Board of Directors approved a share buyback program during fiscal year twenty seventeen of up to $50,000,000 The company during fiscal year 'seventeen has paid out $34,300,000 to repurchase common stock. You can see that warrants and preferred. And as has been previously announced, the majority of the money spent in fiscal year twenty seventeen was for the repurchase of common warrants and preferred previously held by Coliseum Capital Management LLC. That was worth $32,000,000 Coliseum was one of our original investors and we wish them well in the new endeavors that they're taking. We continue to purchase shares.

I think since the end of the fiscal year, we've probably purchased about another $2,000,000 worth. And as Phil suggested, our target is to complete the purchase of the shares in fiscal year twenty eighteen. So with that, I'll thank you for your attention. And I'll now pass you back to Phil Horlock, who will discuss the outlook for fiscal year twenty eighteen, our new guidance and then wrap up for questions. Thanks, Phil.

Speaker 2

Okay. Thank you, Phil. So as Phil just said, let's now move forward and take a look at next year fiscal twenty eighteen and our outlook for that year and our full year guidance. So please let's turn to Slide 17. As the headline says, we're targeting margin growth in fiscal twenty eighteen.

With the industry at a thirty year high, we do anticipate growth slowing, although I have to say we are well positioned and ready to capitalize on any opportunities that exist. But we're not banking on an industry surge going forward. With modest Blue Bird sales growth forecast at 1% to 2%, our focus is on transforming our business structure and improving EBITDA margin toward the mid term goal of 10% EBITDA margin, up from 7% last year. To support this, we are undertaking a significant facility upgrade in fiscal twenty eighteen to drive efficiencies, higher quality and provide additional capacity. This will progressively be implemented through fiscal twenty eighteen and into the following year.

Additionally, we are partnering with industry specialists to attack all cost elements while continuing to work on our passion, providing best in class products that customers want and value. We plan to report progress throughout the year and expect to see the impact of these actions starting in the second quarter. So let's now turn to fiscal twenty eighteen guidance on Slide 18, which reflects these initiatives. Net sales guidance is between $1,000,000,000 and $1,030,000,000 up $9,000,000 to $39,000,000 from fiscal twenty seventeen, a fairly modest growth, but in line with the industry outlook. Adjusted EBITDA guidance is now between 78,000,000 to $82,000,000 a significant 9,000,000 to $30,000,000 increase over fiscal twenty seventeen as we focus on increasing efficiencies and driving down cost and letting these hit the bottom line.

Adjusted free cash flow is between 36,000,000 to $40,000,000 and continues to be a strong feature of our business model. This represents over 40% of adjusted EBITDA despite the planned facility upgrade investments in fiscal twenty eighteen. So in wrapping up, we had a strong fiscal twenty seventeen performance both operationally and financially and we met guidance. We look to profit and margin growth in fiscal twenty eighteen and our plans and guidance support this. We will continue to update you on our progress each quarter at these earnings calls.

So that concludes our formal presentation. I will now pass it back to our moderator, Tiffany, to begin the Q and A session. Over to you, Tiffany.

Speaker 0

Thank you. We'll take our first question from Matt Koranda with ROTH Capital. Please go ahead.

Speaker 3

Hey, guys. Thanks. So it sounds like the emphasis in fiscal twenty eighteen is on margin improvement and you guys are looking to track toward the 10% EBITDA margin sort of long term goal that you have. But just trying to understand how that's factoring into the outlook because it looks like at the midpoint we're only looking at about 20 basis points of EBITDA margin improvement for the year. So could you just give us sort of what are the puts and takes around the expectations that went into building that up?

And I would expect maybe some tailwinds from higher margin alt fuel powertrains, but maybe are there some headwinds that we haven't factored in yet here?

Speaker 2

Just picking up a little bit about this, Phil Hollick here. Just picking up a little bit on what you said there. I mean, what we look at the margin objective next year is about an 8% margin. I think we're about seven percent next year this in 2017. So we're looking at going to an 8% EBITDA margin.

A couple of things going on. Obviously, we're going to continue to capitalize on alternative fuel leadership. We're well established there. We're seeing new customers every day coming to us looking for that opportunity. It's a great product for us.

We like the margins of that business and we're going to continue to keep pushing that. I think the emphasis we wanted to get across today is that this is a plan for 2018 that's really we're going to focus a lot on cost efficiencies, driving quality, spending we are spending money in the plant. We've sort of if you look at this plant back in 2010, when we were building 4,000, 5,000 units here, which is significantly growing this plant. It's time to invest in it. We invest in automation, efficiencies, new processes and they'll also help to take our cost down we believe and then drive efficiencies.

We've got experts on the ground here today working with us on that. So I just want to really say to you, it's not that we sort of been somewhat prudent, think on the sales end of it, because we want to show you what our emphasis and focus is for 2018. But we are well positioned to capitalize opportunities on the sales side. But that's also realistic recognizing we just come up with 35,000 unit industry, well above anything we've seen in the last nine years or so. I think it was last the last time we saw a number that big was in 02/2007.

And then prior to that, it was way back to 1985. So I think we feel sort of pretty strong about where we are and the actions we have in place. But product for us remains critical. We're investing in product. We're not holding back on product and we believe that's the way we win over time in the marketplace.

Speaker 3

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

Speaker 1

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

Speaker 2

improvements, is that correct?

Speaker 3

Yes, that's right.

Speaker 1

Yes. So we're taking a pretty wide look at this. Again, this plant has grown by a factor of more than two. And it's been quite a while since we actually went through it and took apart pretty much every operating station and decided which is the best way to build. So we're going through a significant practice a significant set of work there.

Realistically, you won't see the full result of it until later in the year, but we will see improvements through the year as we redesign how material gets to the line and how people work. So I think that's going to deliver a lot of opportunities for us. It will also free up some bottlenecks that we have discovered as we go forward.

Speaker 2

Hey, Matt. It's Phil Holland. One way to think about this is, as Phil said correctly, that we what I said before was this has been a record production year in Fort Valley. When you hit record, sort of stress the system, you hit more and more of your bottlenecks as Phil pointed out. So one simple thing we're going do is we're going to put more stations in the production line, give us more chance to have quality checks along the line here.

What you call the stations are now less dense, less folks sitting on top of each other in the plant, which is what we've had to do. We've had to literally put more people in to build the higher demand we've had. So we're going through station by station of really laying out a better production line for us that will we know will be much more efficient for us and it's rebalancing the entire line. And now as I mentioned earlier, bringing in assisting tools to help our workers easier so they can have a faster cycle time that helps take capacity up on some of those actions they do. And then select levels of automation along the way as well will be something we're going after.

So we're taking a little bit fresh eyes look.

Speaker 3

Got it. I guess your comments imply maybe a year where we've got a little bit of a higher CapEx spend and I think that fits with sort of what you gave for free cash flow guidance. But could you break out what you expect cash flow or sorry, what do you expect CapEx to be for fiscal twenty eighteen? I guess my back of the envelope says maybe $12 plus million. Is that about right?

Speaker 1

Not sure we want to go all the way there, Matt. Let's just say that we are adding some as Phil mentioned, we're adding some automation and some improved tools. And we're also looking at what to do in some of the bigger areas of the plant where high levels of skill are required. So there's a lot going on in the plant. The good news is we will do this without losing production.

So we don't have to take the plant down based on our present plan. We will install this stuff while we're still in full production.

Speaker 2

I mean, Matt, we've traditionally spent about what $10,000,000 We sort of tell you I know previously we said we plan on $15,000,000 somewhere between 10,000,000 and $15,000,000 I think we spent about 10,000,000 this past year in 'seventeen. It's obviously going to be above that. And I think what we'll do is as we go through the year, we'll inform you more about that as we go. Just right now, these plans are sort of a little fluid towards the end of the year, but we certainly have a good action plan for good nine months out here. We know exactly what we're doing and where our plans are, but we'll sort of fill you in as the year goes along.

It will be up on the traditional level. You're right looking at it that way.

Speaker 3

Got it. Got it. Okay. Maybe one more for me. I'll squeeze one in here and then leave it to the rest of the guys.

So tax reform, I guess, there's probably some puts and takes for you guys. If it impacts housing values in some way, maybe that hurts the tax take at the local level a touch. But then obviously, the corporate rate would be a benefit for you guys in terms of the reduction in the rate. Could you talk about sort of your current views and your analysis as to sort of what the impact would be for Blue Bird and how you factored that into guidance if at all?

Speaker 1

Quite frankly, Matt, we haven't done a lot on it at the moment apart from read what everybody else is reading. I think once we get closer to some sort of agreement between the House and the Senate, we'll start doing some detailed works with some tax advisers on where it will go. I'm not sure that the housing thing is going to be a big concern for us. It looks like the people will get really hurt, other people with very expensive places. There's a lot of buses bought in areas where the houses where they the deduction will remain in place.

So it's a little bit too early for us. I would suspect that when we do our first quarter call, we probably have a much better feel of at least analytically what we think it's going to do.

Speaker 3

Got it. Thanks guys. I'll jump back in queue.

Speaker 2

Thanks, Matt.

Speaker 0

We'll go to our next question from Chris Moore with CJS Securities.

Speaker 4

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

Are they ready to go now? Shipped in Q1.

Speaker 2

About 75 of those did ship actually in Q4. We got them out, but the balance will ship in the 2018.

Speaker 4

Got you. Okay. In terms of looking at the mix for an alternative fuel, roughly 52% propane, 45 gas. Given the trajectory of gas, is it likely that that'll be more than 50% of alternative fuel sales in fiscal twenty eighteen? Is that a reasonable assumption?

Speaker 2

I think we still see propane as being the preferred choice. I mean, it's still the best TCO model for our and that's what we tell our dealers, we explain that to customers, they understand it. Obviously, think with gasoline, I think you've got the first year of it, you got the early adopters jump in, they jumped in quickly. Having said that, I'll tell you we're off to a great start this year without giving the store away. Gas orders have gone really well in what I call the quiet season, the slow season, which traditionally is.

But I still think we still expect that propane will be the number one alternative fuel for us. But we'll keep you apprised as it goes through. Frankly, do I care about it? I like propane and I like it a lot. I think it's a great product.

So we do push that hard because we believe in it. But if a customer's got his heart set on gasoline, we're going to sell him gasoline too. And actually, because he's heart set on diesel, they're selling diesel as well. So hopefully, that's helpful to you. But our priority for us is we still think that propane because we believe in it.

It's got the best installed base, and that's another important point. We sold just you know, Matt, with this last year, we sold our 10,000 propane powered school bus. And we just sold our obviously, we sold now. We got in the market over 2,000 gasoline powered school buses. But the installed base certainly helps us certainly on propane as people look to renew that business for this.

Speaker 4

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

Speaker 2

That's correct, Chris.

Speaker 4

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

Speaker 2

Well, I mean, you look at all the everything you read about battery technology. Obviously, the batteries is a key cost of an electric vehicle. You can imagine moving a 33,000 pound school bus, that's a lot of batteries and all that cost. But you read all the reports tells you in two, three years from now, the battery costs are going to halve, then they're going to come another two years, going to halve again. I mean, right now, frankly, near term, it's all about grants.

And California has certainly led the way and there's constantly some grant opportunity out there to buy electric buses in California. Obviously, they're leading the way here on zero emissions. But we've also seen other cities, other states, lower volume selectively follow, a lot of interest in Florida around electric powered school buses. So first of we want to capitalize, I think, next year, first of all, where the grants are available. But there will certainly be what I call specific opportunities that might appear where the district wants to have zero emissions, wants to show their parents, if you like, that we are going for zero emission solution, and there'll be opportunistic sales.

But we're heavily targeting, I would say first and foremost California, but also Florida is pretty close behind that is the way we look at it. But I think the real big surge is going to be two or three years down the road.

Speaker 1

Got it. I appreciate it guys.

Speaker 2

Thank you.

Speaker 0

We'll go next to Eric Stine with Craig Hallum.

Speaker 5

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

Speaker 2

Rick, that's a good question. I think look, I think on parts we've talked a lot of I think in the past about parts we think should outperform the school bus growth. I mean, and probably should accept that, obviously, we've got a great success in alternative fuels. So that's catapulted us somewhat on the growth curve. But I think on parts, the way we look at it is we've been doing all sorts of things to make us competitive.

There are a lot of players out there trying to sell parts to school districts. A lot of suppliers go directly, a lot of third party operators go, a lot of, I call, non OEM parts providers like to tap school districts because guess what, there are over 5,000,000 school buses out there. But what we have been doing is, we have been very aggressively we've been adjusting parts price and making them competitive. Doesn't mean simply mean we cut the price, we go back to a supplier and negotiate a new price in many cases. What has happened is we certainly seen a significant uptake, I'd say, in the number of parts that we're selling to our dealer channel.

Look, you see a volume of parts through our dealer channel is significantly up. But obviously, that's come down a little bit because we have lowered the revenue. But what we want do is get our installed base up. And I think we are succeeding in that regard. We've got more SKUs out there than we've never had before.

You look at alternative fuels, you probably know this, but when you look at the way that the industry goes, on the diesel side of the business, through Cummins, the transmission side to Allison, which is a big piece of a chassis, they those guys control through distributors of parts business. With the Ford products, we have exclusivity to sell those parts at very competitive prices. So we can sell Ford engines, be it propane, gas, CNG, we can sell the Ford transmission. So I do think that's a as we continue to grow disproportionately alternative fuels, we also continue to grow disproportionately the parts opportunities in those segments. But we are still very bullish on parts.

We track the units, what we call the revenue per UIO, which means we look at every single dealer. Think of it, we have 50 dealers across the country. We track every revenue on parts per unit in operation, that dealer's market area. And I can tell you, it's growing everywhere versus where it had been in prior year. So we feel very confident on the right track.

Speaker 5

That's helpful. Thanks for that. Maybe just two more quick on alternative fuels. And I appreciate you given the number of new customers from Blue Bird because of all fuels. And I don't I think that maybe it's the first time you've given that number.

But just curious, mean, a high level, if you don't want to be too specific, but break that down between propane and gasoline. I mean, are the majority of those gasoline, given that you've got a huge head start and the only one in the market? Or are some of those customers propane, given your leadership with that product?

Speaker 2

Well, they're both. I mean, you've got both in there. I'm not going to give you the breakdown. I would just say, obviously, I said earlier, we have a large installed base, a fairly large installed base of customers who are familiar with propane. So the good thing is we've a lot of repeat business.

You might recall, I said this is the highest loyalty of any product in the marketplace. So by definition, lot of customers keep coming back to us. With it being the first year of gasoline, obviously, we did grow significantly in our customer base through gas, but we also grew significantly through new propane customers. So it really was both. It wasn't that these are all gas customers and propane with all the old guys who worked with us before.

Good was blend of both.

Speaker 5

Okay. And maybe last one for me. And I mean, you touched on this relative to electric, but just curious on natural gas and some of the funding in California from the cap and trade program. If there if you're seeing any requests for demand or any thoughts that you might add the near zero Cummins Westport engines as part of your offering?

Speaker 2

Well, on the CNG situation, first of all, just stepping aside from it, I mean, the thing is CNG from a standpoint of why do we we're actually we've been over the years the market leader in compressed natural gas work sales. But when we look at it, I mean, you can see the propane that sells it over 10 to one. And the reason being because of things like infrastructure you got to put in place, the sheer cost of upgrade, the tanks for propane because they're compressed or Kevlar coated, it's a very expensive upgrade. Economically, it is tough to make it work. Now, you mentioned the cap and trade and the virtual zero emissions.

That's some product information I really don't want to get into. Put it this way, we're going to be competitive. We're going to be very

Speaker 5

competitive. And

Speaker 2

I just know

Speaker 5

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

Speaker 2

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

Thanks.

Speaker 0

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

Speaker 2

Okay. Well, you, Tiffany, and thanks to all of you for joining us on the call today. I have to say we do appreciate your continued interest in Blue Bird. We are focused on profitable growth and intend to deliver on our commitments. And I think we are very well positioned for future growth today and in the future.

And as I've said several times on this call today, we have a passion for product because in the long run product is what wins with our customers. So please don't hesitate to contact our Head of Investor Relations, Mark Benfield, if have any follow-up questions. Mark is always here to help you. Thanks again from all of at Blue Bird. Wish you a good evening and I should also add happy holidays.

Thanks everyone.

Speaker 0

This concludes today's call. Thank you for your participation.

Speaker 2

You

Speaker 0

may now disconnect.