Blue Bird Corp (BLBD) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Blue Bird Corporation Fiscal 2018 First Quarter Earnings Conference Call and Webcast.

Today's presentation is being recorded.

At this time, I'd like to turn the conference over to Mr. Mark Benfield, Director of Investor Relations.

Please go ahead, sir.

Thank you, Catherine.

Welcome to Blue Bird's Fiscal First Quarter 2018 Earnings Conference Call.

The audio for our call is webcast live on blue-bird.com under the Investor Relations tab.

You can access the supporting slides on our website by clicking on the Presentations box on the Investor Relations landing page.

Our comments today include forward-looking statement 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 earning release and filings with the SEC.

Blue Bird disclaims any obligation to update the 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?

Well, thanks, Mark.

Well, good morning, everybody, and thank you for joining us today for our First Quarter Earnings Call for Fiscal 2018.

We welcome this opportunity to share our latest quarter results with you.

So let's get started with an overview of our performance on Slide 4. As we have previously explained, the school bus industry is extremely seasonal, and the first quarter is always the softest quarter of the year with unit sales typically representing no more than 15% of the full year volume.

This is also our expectation for fiscal 2018, and so I am pleased to report that our sales and potential results were strong, coming in well above last year's levels.

We sold just over 1,700 buses, which is 14% higher than a year ago.

Net sales of $162.5 million showed even stronger growth and 19% above last year, buoyed by significant higher volume of our All American Rear Engine bus, which is our highest priced body style.

We recorded our highest ever first quarter sales mix of alternative fuel-powered school bus sales at a healthy 31% of our total bus sales, and that compares with the 23% mix last year.

In fact, our volume of alternative fuel buses were substantial, 49% higher from the first quarter last year.

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, we've been achieving significant growth in alternative fuel bus sales, and I just mentioned, we have not slowed down this year.

We'll cover alternative fuel performance in more detail a little later.

At $5.3 million, first quarter adjusted EBITDA was above double last year's level and is the fifth consecutive year in which we have achieved positive EBITDA in the lowest volume quarter.

Net income was a loss of $7.8 million, which was about $700,000 better than a year ago.

Now the net loss does include certain nonrecurring expenses in support of delivering our transformational initiatives that I'll discuss later.

Both our cash and debt positions improved from last year with net debt $17.5 million lower than a year ago.

Looking at the overall industry, although still early in the fiscal year, order intake and quote activities support our position that the industry should again exceed 35,000 units and will likely be the highest industry since 1985.

That's a strong market that we're playing in.

As I mentioned on our prior earnings call, we are embarking on a number of transformational initiatives to accelerate our profitable growth, and these all kicked off in the first quarter.

First, we have a cross-functional project well underway to drive down the direct cost of our buses with significant savings projected in the second half of this year as production is impacted.

We have contracted with automotive process experts to assist us in this regard and, importantly, to ensure the learnings become the norm within Blue Bird.

Second, we'll be significantly upgrading our Fort Valley assembly plant to drive improvements in efficiency, quality and capacity.

As a reminder, prior to 2010, we had never produced more than 5,000 buses in Fort Valley.

And following the closure of our second assembly plant in North Georgia in 2010, each year, we significantly increased Fort Valley's production and its capacity.

In fact, it's grown to over 11,000 buses last year with minimal capital investment.

With the increasing demand we are seeing for our products and our desire to continuously build a better bus, supported by a strong balance sheet and liquidity, we will be significantly upgrading our plant facilities and production processes, including the construction of an all-new paint shop in Fort Valley.

We have already moved almost 200 salaried personnel from Fort Valley to a new corporate office in Macon, just 30 miles away, to make room for the new paint shop.

We're planning a minimal disruption in production as the paint shop will be an addition to the existing building located at the exterior.

Other upgrades will be handled during production hours or in typical scheduled downtime during the year.

Completion of this program of ours is scheduled for early 2019.

And third, we are developing a major product program with significant upgrades to bring to the market in the coming years.

The outcome of these actions are, in part, reflected in our fiscal 2018 guidance, which I will cover later, and a key to future profit growth.

All in all, these are exciting times at Blue Bird.

Let me now review our year-to-date 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.

I just covered the Fort Valley transformational initiatives we kicked off in the first quarter to drive improvements in quality, efficiency and capacity, including the construction of a new paint shop.

These actions are key to improving EBITDA margin towards our goal of 10% to 12%.

Beginning this year, we will project a one point improvement in adjusted EBITDA margin, going from 7% to 8% in fiscal 2018.

While we achieved 14% growth in the first quarter, importantly, 21% of our customers were new to the Blue Bird brand of buses, and that's a positive endorsement of our products and our dealers.

In fact, through our dealer network, we saw an increase in units quarter-to-date of about 5% over last year.

That's a good indicator of the strength of the industry and of customer interest in Blue Bird.

As of Monday this week, our fiscal year volume of buses delivered, plus our backlog of firm orders, is up about 3% from last year, and our production slots are now full through the second quarter.

With our seasonality, the major ordering period is still ahead of us, and we are seeing a recent increase in daily quote activity as we expected.

Not surprisingly, we're again seeing the biggest growth in orders in our alternative fuel-powered school buses with a 13% increase in fiscal year orders through Monday this week compared with the same time last year.

We continue to lead the market in this key segment, and I will cover alternative fuel performance and full year outlook in more detail in just a couple of slides.

In 2017, we unveiled a new range of electric-powered school buses, which are another Blue Bird product exclusive and that we're bringing them to the market in 2018.

In the first quarter, our Type D electric bus qualified for CARB's HVIP voucher program in both California and New York, and we expect our Type C electric bus to be qualified shortly.

This provides customers with grants of $220,000 for electric bus, representing a significant contribution to the acquisition price.

Our dealers have been actively quoting electric buses with school districts in recent weeks following several successful ride-and-drive events that we held, and we anticipate receiving significant orders in the coming weeks and months, which I'll report on.

And finally, based on our first quarter performance and outlook for the balance of the year, I am pleased to announce that we are increasing guidance for all the metrics in which we report.

I will cover these in more detail toward the end of the call.

It's fair to say that we continue to advance the business on multiple fronts, and we are focused on profitable growth.

Let's now take a closer look at our second quarter financial results on Slide 6. I touched on many of these financial results earlier, and Phil Tighe will run through the details later.

So just to summarize the first quarter, we exceeded our fiscal 2017 results in every category.

Total net sales, bus sales, parts sales and adjusted EBITDA were all higher.

Total net sales for the first quarter were up a strong 19%, and adjusted EBITDA was about double last year's result.

Turning now to Slide 7, let's take a closer look at our alternative fuel bus sales performance.

With almost 1,500 units booked or in the order backlog as of Monday this week, we are running at about 13% above last year's volume.

As I mentioned earlier, in the first quarter, we saw growth of 49% with alternative fuel buses being a strong 31% mix of total sales, a new record for the first quarter.

We continue to be the undisputed leader in the fastest-growing school bus segment with our market share running at over 85% last year, particularly buoyed by propane, when we sold our 10,000th propane bus in 2017.

No one else comes close to that number.

With less than 15% of school districts having purchased an alternative fuel-powered bus, we are well positioned for future growth.

As a reminder, we offer the widest range of alternative fuel-powered buses and the most modern and proven engine in the industry.

With our exclusive partnership with Ford and ROUSH CleanTech across all alternative fuel engines, it makes it easy for Blue Bird's customers to grow their alternative fuel fleet.

With the same engine architecture, the same transmission and the same service we provide across all 3 products, it's an easy move for school district or a fleet operator to select the Blue Bird bus.

Propane is widely recognized as having the lowest total cost of ownership in the market and is a true green engine.

In fact, the Blue Bird level of NOx emissions of 0.5 grams per brake horsepower per hour is 1/4 of other manufacturers' buses.

That's another great reason for choosing Blue Bird propane.

Our new gasoline engine is readily understood by technicians and mechanics, who really appreciate the emission's simplicity and cold weather start capability it shares with propane.

It also has a lower price point than diesel, so it really works for those customers where acquisition price is a concerned.

And sales were off to a great start this year.

With the first quarter behind us and a strong backlog of orders ahead of us, we are on track once again to deliver a record number of alternative fuel-powered buses this year at more than 4,000 units.

Let me now turn it over to Phil Tighe, who will take you through the financials.

Then I'll be back later to cover the fiscal 2018 outlook and guidance.

Phil, over to you.

Thank you, Phil.

Good morning, everyone.

The next few slides are a summary of our financial performance for the first quarter of fiscal year '18.

Additional information in the Appendix will deal with reconciliations between GAAP and non-GAAP measures mentioned in the review.

Detailed material will be available today.

We will file our 10-Q today.

The material we are discussing today is based on a close of December 30, 2017, for the fiscal year '18 year and December 31, 2016, for fiscal year '17.

We had no new accounting pronouncements that impacted Blue Bird's financial results in this report.

Risk factors are basically unchanged from the previously filed 10-K.

Also, please note there are some important disclaimers at the end of this deck.

So if you want to go to Slide 8, which is a summary -- Slide 9, I should say, a summary of the first quarter results.

Obviously, as you can see from this slide, it's lined up, the number of key statistics for fiscal year '18 first quarter versus '17.

It was a fairly strong quarter for us.

Volume, as Phil Horlock has already expressed, was an improvement of 14% versus prior year.

It was our best first quarter since 2015, and that's encouraging in that we're starting to get some momentum back into the first quarter.

Phil's already talked about propane being up.

It was 31% of our sales, up about 12 points versus the prior year.

Also in the first quarter, importantly, and you'll hear a bit more about this later, we saw a 10 point mix improvement in our larger All American buses at a 30% total mix versus 20%.

Net revenue was up by $26 million or about 21%.

The majority of this growth was due to volume.

Per unit revenue on buses, however, was up by about 6%, and this was due primarily to product mix, as I mentioned.

The higher revenue All American bus -- the All American buses, the flat front bus, it comes in a Front Engine and Rear Engine version and that has additional passenger capacity, so we sold a lot more of those through both our dealers and also non-dealer sales, which was principally through the government.

Our gross margin, gross margin was down about 6/10 of 1 point at 12.7%.

Bus margin declined by about 4/10 of 1 point, and the balance of the decline was actually due to a lower mix of parts sales.

Parts sales revenue was about flat versus prior year.

But as you saw, bus revenue went up significantly.

So parts went down, and parts have a higher margin.

So that managed to rewrite the margin by a couple of tenths of 1 point.

With respect to the bus, the average cost of goods sold of the bus did increase, and that was basically due to a combination of the specification levels that were required by some of our more competitively priced school districts.

They -- there seem to be a higher level of expensive equipment, like lift buses, which added costs to both of our diesel and our gasoline buses sold to the schools.

Revenue did not go in here with the cost on some of those.

And also there was a higher mix of the government units, as I mentioned.

These are expensive buses, and the margins are a bit thinner than the revenue, perhaps, should indicate they would be.

Also included in the margin change, we did see higher freight costs in the first quarter.

There were 2 issues around freight.

One was -- there were actually a lack of available trucks due to a change in the e-log system, I believe it's called, which kept 7 trucks off the road.

And secondly, fuel costs were up about 16% versus last year.

I think this last year first quarter might have been about a low point on diesel, and fuel costs have been up substantially.

In addition to that, we continue to have some higher production overhead costs.

We did get hit with some higher health care costs in the first quarter that year, which is the last year, the last quarter of the claim year for our participants and we had a couple of very high claims, which we should see some of that money come back through insurance through the balance of the year.

The net loss and earnings per share, let me turn to that.

You can see that we did lose $7.8 million, as Phil has previously mentioned.

That's about $700,000 better than last year.

The adjusted diluted earnings per share was a loss of $0.10 versus a loss of $0.13 last year.

Our net loss position, the positive impacts were higher gross profit, obviously, lower interest expense as well as non-recurrence of the extinguishment of the debt charge that we had at the same time last year.

The negative impacts were higher operating expenses.

We did incur a cost upfront for the operational transformation initiatives that we're undertaking, and we did have higher taxes.

Let me pause for one minute on the higher taxes because that might confuse everybody.

The taxes were a $3.7 million benefit in the first quarter of fiscal year '17 and a $1.4 million expense for the first quarter of fiscal year '18, a change of $4.1 million on a year-over-year basis.

The majority of the change and the reason for the negative rates is the result of the new tax legislation, which causes us to remeasure our deferred accounts and other balance sheet tax items.

In effect, we were required to revalue our net deferred tax asset position at the lower tax rate, and we reflected that change in the first quarter provision.

So that drove us into a higher -- much higher tax position than we otherwise would have had for the first quarter.

Adjusted EBITDA, we'll take you briefly through a bridge on the next page, it is worth pointing out the margin.

The 3.3% was up by about 140 basis points or 1.4 points versus the prior year.

Debt and cash, cash is $10 million higher than last year.

I would point out to you that we have continued to progress our share buyback program, and to date, we have spent $38 million on that program.

So that has used up some cash, but it's a very successful program.

And we get -- we think we will continue to buy back to the authorized level, and, so we're continuing to spend cash on that.

Debt was reduced by $7.3 million, which is consistent with the amortization schedule.

The next slide is the bridge.

And you'll see that the whole discussion really is around the fact that bus gross profit grew based on an additional 212 units, and that was the large part of the walk from prior year.

You can see parts gross profit was up a touch at $200,000.

The parts margin was 36.5% versus 35% last year.

Operating expenses and other were about $200,000 better than the prior year, which was a good result for us.

So the result at $5.3 million, as Phil mentioned, was about 2x better than the prior year and was ahead of our internal plan with volume as the principal driver.

I'll turn now to Slide #11, which is the discussion of free cash flow.

This slide shows free cash flow and adjusted free cash flow for both fiscal year '18 and fiscal year '17 first quarters.

The fiscal year -- the first quarter for fiscal year '18 of $31.8 million is about $3 million better than the prior year.

This page does highlight the seasonality of our business.

As volume drops, we see a significant working capital during the first quarter, although we did do, I think, a very good job in the first quarter of '18 and you see that there was an improvement in trade working capital year-over-year.

So the key absolute drivers for fiscal year '18 were, obviously, higher adjusted EBITDA of $2.7 million.

Interest costs were down by 7/10, and of course, trade working capital requirements reduced by about $6.9 million.

The offset was in the euphemistically called other, which basically is changes to accruals and prepayments.

Much of that will be a timing issue, which will smooth out over the year.

We have shown on the page, the walk to free cash flow from adjusted cash flow.

On a free cash flow basis, our result was $37.3 million, which was $1.2 million unfavorable, and this is more than explained by the cash paid for the operational transformation initiatives.

As we speak about those initiatives, there is a very large activity going on in the company, and you will really see some of the benefits of that coming to the bottom line as we get into the second half of the fiscal year.

Moving ahead to my final slide, we'll talk about net debt liquidity and leverage.

You can see here that net debt at the end of first quarter '18 stood at $126 million, including $23 million of cash.

This is an improvement of $17.5 million, as previously mentioned, versus the end of fiscal year '17.

The higher year-end cash and lower debt accounted for the improvement.

As I mentioned earlier, this is net of about $38 million in stock buyback payments.

The net leverage ratio of $1.5 million is substantially below the requirement of $3.75 million.

So we continue to maintain a very good cushion there.

Liquidity stood at about $90 million.

There were no drawings on the revolver.

Liquidity at the same time last year, by the way, was about $83 million.

So we're marginally ahead there.

So I thank you for your attention.

And now, I hand you back to Phil Horlock, who'll talk about the outlook for 2018.

Thank you, Phil.

Okay.

Thanks, Phil.

So let's now focus on the outlook for the year and our full year guidance.

So let's turn to Slide 14.

As the headline states, we're targeting margin growth in fiscal 2018.

With the industry in a 30-year high last year, we do anticipate another record year in fiscal 2018.

Now the last earnings call, I indicated a flat to slightly higher industry.

But based on the market activity we are seeing, we do foresee a potential for about a 2% to 3% growth in the industry, even this early stage in the year.

Importantly, at Blue Bird, we are well positioned to capitalize on these opportunities.

We now anticipate Blue Bird's sales growth in the 3% to 4% range, slightly higher than projected in the last earnings call.

But our focus on fiscal 2018 is on transforming our business structure as we seek to drive EBITDA margin improvement in the coming years toward our desired range of 10% to 12%, up from 7% last year.

As I explained earlier, we're excited about our plans underway on several fronts to drive efficiencies, higher quality and provide additional capacity.

This work will progressively be implemented through fiscal 2018, and as Phil and I both mentioned, we expect to see results, particularly in the second half of fiscal 2018 and into the following year.

Additionally, we're continuing to work on our passion to provide best-in-class and differentiated products that customers want and value.

That's how you win in the market.

So let's now turn to fiscal 2018 guidance on Slide 15, which reflects these initiatives.

Based on first quarter results, the outlook for the remainder of the year and the favorable impact of the new tax regulations, we are raising our guidance on all 3 reported metrics.

Net sales guidance is now between $1,010,000,000 to $1,040,000,000, up $10 million from the prior range.

Adjusted EBITDA guidance is now between $80 million to $85 million, about a $3 million increase over prior guidance at the midpoint of the range and a significant $11 million to $16 million increase over fiscal 2017 as we focus on driving down costs and improving EBITDA margin.

So our outlook for the full year adjusted EBITDA margin is about 8%, a full point higher than last year.

Adjusted free cash flow is now between $40 million to $45 million, up about $45 million from prior guidance, reflecting the new combined federal and state tax rate of 28% to 29% compared with the prior assumption of 36%.

For fiscal 2019 and beyond, tax rate should normalize at around 25%.

That's really going to help our adjusted free cash flow, obviously, and our overall cash position.

Adjusted free cash flow continues to be a strong feature of our business model and now represent at least 50% of adjusted EBITDA in fiscal 2018, despite the plant facility upgrade investments we have planned and in place.

So in wrapping up, we had a strong fiscal 2018 first quarter performance, both operationally and financially, and we are increasing our full year guidance.

We look to profit and margin growth in fiscal 2018, and our plans and guidance support this.

We'll continue to update you on our progress each quarter.

That concludes our formal presentation, and I'll now pass it back to our moderator, Catherine, to begin the Q&A session.

Over to you, Catherine.

(Operator Instructions) And we'll hear first from Matt Koranda with Roth Capital Partners.

Just wanted to start off with the revenue guidance and the raise there.

I wanted to clarify, are you raising revenue because you saw strength in your fiscal Q1 deliveries or it's essentially more of an outlook for industry strength ahead?

I think it's a combination of both.

I mean, obviously, we've seen a slightly stronger industry, but we're also seeing a nice first quarter for us.

And obviously, our -- as we look and look at the business we're quoting on, the backlog we have today and what we call -- if you don't talk about it on the call today, what we call our pipeline of activity that we're working on, we feel good about it.

So I think it's a combination of both, I would say, Matt.

Okay.

And then the 1 to 2 points of share gain that you guys had provided before and it looks like that's sort of implied in the guidance here, but do you still view 1 to 2 points of share take as feasible?

And I was curious, I mean, the -- in one of the slides, you highlight 21% of customers or new customers are conquest accounts.

It seems like a large portion of customers are conquest accounts.

Why wouldn't we expect -- or why shouldn't we expect more share take, just given those dynamics and the favorable alternative fuel mix that you've got?

Well, a couple of things, really, Matt -- it's a great question.

But a couple of things I would say, first of all, the first quarter is relatively low volume, 15% typically of our full year.

So it's obviously fairly small in the full scheme of the full year.

What tends to happen when you conquest an account often is they try you out, they test you.

They come out and buy us.

They don't vet everything that year on you.

They might just try it.

We'll take a few of your buses, see what we think of them.

And then we like to grow into that the years ahead.

So I don't think you can take it that when I say 21% of customers doesn't necessarily mean 21% of our volume.

That's the important distinction there.

But it bodes well, and I think we do look to grow our market share.

And when you talk about 1 or 2 points, that's probably a good ballpark to be in at this early stage of the year for our growth plans.

Turning to gross margins for a moment, just with the mix of alternative fuel and then also you guys called out sort of a mix of favorable Type D buses.

Was there any element in gross margins or in your cost of good in terms of overtime?

What were the inefficiencies that held it back?

I mean, I guess Phil Tighe mentioned there was some element of sort of unfavorable mix, just given some of the custom work you did.

But is that everything that drove the margins?

Or was there overtime that you didn't call out in the prepared remarks?

Yes.

This is Phil, Matt.

We were doing -- we had a quite high mix of the government buses, which are the Rear Engine All American buses in the first quarter.

Those things require a lot of preparation and quite a lot of work to get them ready for inspections, and so there was some overtime in there that I didn't specifically called out.

The government is a demanding customer and we love having them, but there's a lot of work done to get the buses ready.

And given the lower volumes in the first quarter, they represented quite a high mix and substantially higher than the first quarter of last year.

So that contributed to it.

I think some of the other things were more driven around some of the type of -- some of the specific markets that bought buses in the first quarter.

We had quite a few of the alternative fuel buses going up to Canada, and that also complicates some of the costs.

So yes, there were a few things going on.

We see the margins being increasingly better than last year as we move through the year.

Got it.

And in terms of freight costs, I think you had called out that out as well, Phil, in your prepared remarks.

Could you just -- is there a way to quantify that in terms of the drag that have presented this quarter?

And do you expect that to continue?

If so, how do you offset it?

Well, it was a little hard to estimate the pieces of it.

We think that the cause for some of the trucks being off the road has been resolved over the last couple of months, and the drivers are back on the road.

The fuel cost one will continue to be up, I think.

Diesel fuel seems to be holding up at its cost level.

We are -- as part of that transformational initiative, we are working hard with some logistics providers, and we're actually looking at alternative routes and more full-load trucking to spread some of the increase in fuel costs.

So we don't expect to see the level of impact as we go through the rest of the year.

Okay.

And maybe one more for me, just when I look at the incremental margins on your revised guidance, it looks like, essentially, the implied drop-through on the incremental dollar revenue is about 25% incremental EBITDA.

Am I getting that right?

And then I guess does that hold true if the industry growth drives your revenue higher than expected for the rest of the year?

Maybe don't go as high as 25%.

I'd have to think about that one, Matt.

Our next question comes from Eric Stine with Craig Hallum.

Just wondering, you mentioned some major product upgrades, and it seems like that is different than just typical coming out with your next generation of your current products.

So maybe just some details on what that's referring to or as much detail as you can share on that going forward.

Yes.

Eric, it's Phil Horlock.

So unfortunately, I can't share that.

That's competitive information.

I just -- we -- just to let you know we have a considerable amount of resources for our engineering team.

We're expending on that.

If you look at what we talked about, which is a major product upgrade, look at our bus fleet, where we are, I mean, we know these are the things I want to do.

I mean, other than that, I really don't want to get into it.

But we're excited about it.

We'll -- as we ready for the course of year, next year, we'll sort of -- probably more when we feel it's the right time.

Yes, understood, okay.

Maybe just turn into alternative fuels and I guess trying to get at maybe thoughts about ASP or average ASP going forward.

I know last year, gasoline and propane volumes were pretty equal, but I also know the gasoline, you had some pent-up demand.

So how do you think about that mix going forward, mix between gasoline and propane?

Yes, it's a great question.

I mean, both are doing very well.

Again, I'm always reluctant this early in the year to tell you what's -- to (inaudible) declare.

Obviously, overall, a great performance.

They've both been what we expected.

Propane has been our -- what I call our lead alternative fuel vehicle.

It continues to be so for us, continues to be what I still believe best call (inaudible) cost of ownership product in the marketplace.

But obviously, gasoline, it's a really easy proposition for other customers.

They understand the technology.

Refueling's really straightforward.

So is propane, by the way, but everyone's perspective, gasoline is even easier.

So it works really well.

So they're off -- both off to great start.

But I still look at as our lead is propane and -- but gasoline is extremely well for us.

Okay.

Maybe last one for me, this is more big picture.

But I know as you look out a few years, 2021, you've got the Phase 2 greenhouse gas standards coming, and I know that's going to have an impact to diesel, the cost of diesel.

So just thoughts on, potentially, what you think that does for your business?

And do you think that the market fully appreciates the impact that, that is going to have?

Okay.

Let me take the last part of the question first.

I don't think necessarily the market is really focused on that.

I -- certainly, when you're involved.

But when you look at the truck industry, look at whatever OEMs, big automotive OEMs are talking about, they do talk about the cost of transporting -- I mean, vehicles that are powered by diesel is getting more and more costly and more and more difficult for customers to afford.

I'm just looking at the fact that we're in a great position.

It's not often you're in a business that's been around such a long time, and you see things like 13% growth or 49% growth in a quarter for a particular segment.

So what we're seeing, I think, is we're seeing customers now really saying, "Hey, I see it.

This is no longer a fashionable boutique, small product.

This is mainstream." Propane, now with gasoline being added for us too, but particularly on the alternative fuels, the traditional ones, propane, I do think it's -- puts us in a great position.

And by the way, we're not stopping there.

You're going to see more coming from us.

I can tell you that.

That's one product little tip I'll give you.

You're going to see more coming from us in the propane front to further our advantage in the coming months.

And we're excited about that.

I think we're now actually positioned.

Of course, now (inaudible), we've got -- now we got the 0 emission solution, and we've given out -- we're going to be in both Type C, Type D, and I didn't mention today, but, well, our Micro Bird Type A electric later this year.

So for those folks who've got grants, California, New York, I mean, these are markets where we hear a lot about interest in 0 emissions, they step up to the play with grants, we're going to be very well positioned for those businesses, those customers.

We'll now hear from Chris Moore with CJS Securities.

Maybe just start kind of bigger picture, too.

From a kind of overall dynamics of the big 3 players from a pricing standpoint, what are you seeing for 2018?

Is pricing pretty much flat?

Is there -- you anticipate a little bit more aggressive stance, going after market share from the other 2?

Or kind of how are you looking at that?

Well, first of all, I don't really want to talk about the other 2. I'll talk about what we're seeing.

Actually, it's fairly flat right now.

I mean, that's -- it's a good market.

It's similar to last year.

It's looking a little bit up, as we said, in the industry outlook, but a lot of interest in our products.

And certainly, it's flat to -- and if I can -- if we can get more pricing where we can, we're going to take it.

But I wouldn't say there's been any real change, dynamic change or anything out there in the marketplace from what we can see, certainly from our customer base.

There have to be a little bit position, yes.

Maybe just switch to the alternative fuel for a second.

So just in terms of the average expected life of the alternative fuel buses and maybe we need to break it down between the 3, but is it similar to diesel?

Or how do you look at that?

Absolutely.

The life of the school bus typically -- the average life of a school bus in most districts are between 12 and 15 years, that's a guideline.

Some states will run their buses for 20 years or more.

Absolutely, there are alternative fuel buses to propane, gasoline and the CNG can handle that completely.

I mean, we -- there's no issue there.

I think it's pretty proven.

I mean, you look at that -- I talk about this a lot, but that Ford engine out there is powering a whole bunch of F-series trucks.

There's about 1.5 million of them on the road.

Believe me, that's a tough durable engine that's proven many hundreds of millions of miles of experience from that product and putting it through its bases So no, we are very confident.

And by the way, we do back up that one, because I mean, we have the best warranty in the business.

We offer 5 years unlimited mileage warranty on that product across the full range of those.

So it's -- we don't see any issue at all on longevity of that product.

Especially with diesel.

Got it, got it.

And so the point being -- I mean, we talked to -- you talked last quarter in terms of potentially bigger opportunity on the parts and service side from the alternative fuel because of the ability to -- relationship with Ford and ROUSH.

So if I'm looking at the potential for parts and service revenue over the lifetime of alternative fuel bus, I mean, what's a reasonable estimate for revenue as a percentage of the upfront cost of the bus?

I mean, is it 10%, 20%, 30%?

I'm just trying to get a feel for -- from a modeling standpoint, what's possible moving forward, given that upside on the parts and service.

So are you specifically talking about the Ford-ROUSH parts and service opportunity while I get this?

Yes, right.

So what I 'm trying to understand, kind of -- or is that -- while there's more opportunity in parts and service on the Ford and ROUSH, I don't have a good sense as to -- let's just assume it's on the propane bus.

What percentage of that, whatever that might be, $85,000 or $90,000 could you generate in parts and service over the lifetime of that bus?

Yes.

I mean, obviously, when you look at parts and service, the parts and service opportunity varies.

They are called to the age of the bus.

When you need older bus, more service it needs, more work it needs, more things exchange.

They have to change things out.

That's part of the life.

I don't really want to get into sort of dropping a number on the table.

What I really mean -- because here's why.

We're just -- we're now in our sixth year of selling the Ford-ROUSH product.

First 5 years were all covered by warranty.

I mean, there's minor service work, routine service.

Now we'll see the benefits going.

But relatively speaking, it's still a fairly small part, isn't it?

There's still -- we have 150,000 school buses on the road that are Blue Bird branded, right, running across North America right now, and which we said before, we sold our 10,000th propane last year and that's -- so it's 10,000 of the whole 150,000 network.

It is fairly small in the scheme of things, but obviously, we'll grow going forward.

Bit of a long-winded answer, but I mean -- I guess to try and think of what I could tell you is, there's probably -- when you look at oil filters and routine maintenance and, occasionally, as the bus ages, year 8, 9, 10, there may be some bigger service item, probably $300 a unit, something like that in the parts and service -- in the parts opportunity, something like that, I would say, going forward, that we don't have today that we could capture.

Got it.

Yes, that's what I was after.

So my assumption was the back half of the life of these buses is when that part of the revenue probably would kick in.

So all right.

I appreciate it, guys.

(Operator Instructions) We'll go to Mike Baudendistel with Stifel.

Just wanted to ask you, I guess in your adjusted EBITDA guidance, how much is included for transformational costs and product redesign costs?

In adjusted EBITDA guidance, there is nothing included because we've adjusted out.

Because what -- the -- I want to make sure we've got this right.

There's a unique cost we're paying today.

We mentioned about we brought some expert partners we are working with nonrecurring.

Once we're done with this, they'll be gone.

We get the benefits of the savings.

So in adjusted EBITDA margin, there is nothing in for that.

In fact, there's a reconciliation page towards the back of the material, and you'll see what we spell out there in the first quarter, that we specifically excluded from adjusted EBITDA, but obviously, it's in the net income number.

Okay, yes.

I was just asking more for how much you're planning to adjust out.

I got that it was adjusted out or even if you think that's a relevant number.

You can see the number on Slide 18, that's -- it was about $7 million.

Okay.

And then maybe just another question while on that topic of adjustments.

I mean, I guess -- can you just explain why you feel that stock-based compensation and product redesign costs should be adjusted out from adjusted EBITDA?

I mean, both of those things, at least to me, seem like they should be just costs that are from the regular course of doing business.

Well, the product rate is on -- is probably -- there is some history to this.

We did it previously.

These school buses don't get redesigned terribly often.

The bus -- the average life of these buses is like 15 to 20 years before you do anything major to them.

So it's a little hard to call it normal operations.

If you look at the automotive industry, where they're doing a minor or a moderate or a major change on every -- on a 2-year cycle with vehicles, 2 for minor and 4 for moderate and 8 for major, the school bus industry is nowhere near that.

We're talking 15 to 20 years between any sort of model change.

So we concluded that it was appropriate to deal with it this way because we will spend the money over the next 12 to 18 months and then you probably will not see that sort of money spent again on a bus for 10 years or more.

So you don't really want to skew your ongoing profitability with that sort of large cycle spend.

Stock-based compensation, this is really, I think, a pretty common practice, that we're saying that stock-based compensation would come out on an adjusted EBITDA basis.

It's clearly not -- it's a reflection of valuation of the stock.

Be more than happy to talk to you about that off-line, if you want.

Yes.

The only thing on stock-based -- I think there's been a stock-based compensation.

It's a non-cash item.

So therefore, that's one (inaudible) is a noncash item and, therefore, would -- is appropriate to pull it out.

That's the rationale that most companies use.

Got it, understood.

And then I guess the other question, just from covering some other manufacturing companies, I mean, some of those other companies are having difficulty with input cost.

I know you talked about transportation cost, but I mean, I think some of these others were having difficulty with rising commodity prices and then difficulty with labor.

And I guess it gets us to different labor pool.

It's local to that Georgia area.

But I just -- you talked about running some overtime hours, but are you having difficulty finding and retaining employees with the stronger industrial economy?

Yes, let me take that.

I'd say, we're doing extremely good job here.

We are here in what we call Middle Georgia.

We're the largest public company out here, largest manufacturer, and we do a great job.

In fact, we run a job fair about a year ago when we had literally thousands of folks fill up, interested a job with Blue Bird.

So I think we do a very good job of retaining our employees.

We've always had this seasonal employee base too that, typically, we're able to access, just the nature of the farming work around here and it [generally] works well with us.

That's a good counterbalance for us.

So we've been able to bring some of those folks in full time too as we grow in the business, and we're successful.

So I think that works really well for us.

Sorry, what was your second question?

You had a second point to that one.

Yes.

Anything on commodity price increases that you're seeing that could impact margins?

Let me take that.

We -- our biggest commodity by far is steel purchase, a lot of steel goes into a school bus.

Our guys have done a lot of work with the mills.

And then actually as part of our transformational initiative, we've done a serious amount of work with the mills that supply us and other people we work with on steel.

We think we're -- we do see steel going up.

We've seen it, but we think we're in a position where the steel pricing is something that we can contain with our margin -- within our present -- within our margin projection for these year.

We buy selectively in advance to take advantage of spot rates, and we do buy, we believe, at a pretty good rate from the folks that we do business with.

So we're conscious of the commodity change.

We're conscious of the fact that steel has risen quite a bit, but we have provided for it as we planned our margins going forward.

Our next question comes from Scott Blumenthal with Emerald Advisors.

I'm going to follow up on one of Mike's questions here.

I don't know if we -- maybe he -- if I asked it a different way.

And I guess this is a question for Phil Tighe.

The product redesign costs that were adjusted as part of the adjusted EBITDA, do we expect that same type of run rate per quarter?

And for how long should we expect that?

It looked like it was about $750,000.

Yes.

It'll move around a little bit by quarter, but -- and I would expect that you will see it for about 12 months.

The -- you go through cycles with these development projects.

And so we'll see some of it for about 12 months as we go through the complete engineering and testing cycles.

We noticed that most school buses, regardless of brand, look very similar.

So are these redesign changes mandated by new regulations?

Or is this something that Blue Bird is undertaking themselves to maybe make the bus more easily producible, more efficient or for some other reason?

Well, I think if I could just mention this.

I think it's what Phil touched on earlier.

We talked about the fact that -- you're right, the buses, they look somewhat the same in all regards, right, and they've been around -- they have 15 to 20 year life.

But after 15 to 20 years, they need -- you need to do something to them.

So we are -- this is our initiative we're embarking on, to do something that will obviously extend the life.

We'll bring to the market, it'll be exciting, customers are going to love it, bring new features that'll help us look in -- run this bus out into the future.

So that's the best I can give you.

It'll meet all the regulatory requirements like -- as Blue Bird tries to do, exceed them, in many cases, and we'll also provide the customers with incredible value.

Okay, great.

Now Phil, you said that you expect -- or that the production slots are full through Q2.

And are -- you are still running 2 shifts currently, correct?

Yes, we are.

And certainly plan to do that through Q2.

Yes.

Through the rest of this fiscal year, we'll run 2 shifts, yes.

Okay.

And also you mentioned that alternative fuel buses were 31% of sales.

Is that dollars or units?

Units.

Okay.

And I guess my last one to clean things up.

I guess this would be for Phil Tighe.

Phil, could you give us a number of shares or average price per share in the share repurchase number?

I think you mentioned $38 million to date.

Yes.

It is to date, I don't have the number of shares only.

We can certainly get it to you.

But -- is there someone in the room that can do it?

Yes.

It'll be in the 10-Q filing later today, in the item (inaudible).

We'll hear now from [Prasad Pratak] with [Japan Street Partners].

Just a quick question for you.

It looks like the next sort of 9 months, the free cash flow generation could be in the -- just kind of doing the math on the adjusted free cash flow, could be as high as kind of $70 million, which kind of puts you in the net debt position at year end at -- as sub-1x levered.

Just kind of curious, with your cash flow hopefully even growing into next year with tax reform and then hopefully some margin improvement, is there any plan for some kind of regular dividend or maybe even like a floating dividend at year-end, where you pay some percentage of yearly cash flows, something like that?

Because at some point, we obviously don't want you to pay off debt, and at some point, your cash balance is just growing so much.

Well, look, I think you've raised some good questions.

These are all I could tell you.

These -- at this point, these are things we discussed with the board, and we always thought, well, where are we going to use our cash flow, what's the best use of it.

Obviously, we elected to do a share buyback program at the end of last year.

I think it's gone very well for so far.

We're excited about and that.

We just had a board meeting just last week, and what do we do?

We talked about cash and how we're going to use it, and we'll just let you know as we go forward here.

But you raised some great points there, great (inaudible).

We just want to make sure we do the best things to drive shareholder value, and we'll let you know some of the details.

And no additional questions in the queue, I'll turn the floor back over to our speakers.

Okay.

Well, thank you, Catherine, and thanks to all of you for joining us on the call today.

We do appreciate your continued interest in Blue Bird.

I really love the questions you asked.

I think you've got a sense, I hope, that we are focused on profitable growth, and we intend to deliver on our commitments.

And I think we are really well positioned for growth today and well into the future.

Please don't hesitate to call our Head of Investor Relations, Mark Benfield, should you have any follow-up questions.

Once again, thanks again from all of us at Blue Bird.

Have a great day.

Again, ladies and gentlemen, that does conclude today's conference.

Thank you all again for your participation.

You may now disconnect.