Student Transportation Management Discusses Q2 2014 Results - Earnings Call Transcript

Feb.13.14 | About: Student Transportation (STB)

Student Transportation (NASDAQ:STB)

Q2 2014 Earnings Call

February 13, 2014 11:00 am ET

Executives

Keith P. Engelbert - Chief Technology Officer and Director of Investor Relations

Denis J. Gallagher - Founder, Chairman, Chief Executive Officer, Chairman of Student Transportation of America Holdings Inc and Chief Executive Officer of Student Transportation of America Holdings Inc

Patrick J. Walker - Chief Financial Officer and Executive Vice President

Analysts

Greg Colman - National Bank Financial, Inc., Research Division

Brady Cox - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Student Transportation Inc. Fiscal 2014 Second Quarter Results Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I'll now introduce your host for today's conference, Keith Engelbert, Director of Investor Relations. You may begin.

Keith P. Engelbert

Thank you, Ashley. Good morning, everyone, and thank you for joining us to discuss our second quarter fiscal 2014 results, which ended December 31, 2013. Joining me today on the call are Denis Gallagher, Chief Executive Officer; and Pat Walker, Executive Vice President and Chief Financial Officer.

Yesterday, the earnings release, MD&A and financials were disseminated. The release, MD&A and financials are accessible on SEDAR, EDGAR and our website at ridestbus.com.

In addition to our standard disclaimer about forward-looking statements, please also note that all figures are in U.S. dollars, unless otherwise specified.

I will also remind you that this conference call is being webcast live.

With that, I'll turn the call over to Denis Gallagher.

Denis J. Gallagher

Thank you, Keith. Good morning, everyone, and thanks again for joining us. I'm pleased to report that our operating results for the first 6 months of fiscal year 2014 have improved over the same period last year despite the effects of the bone-chilling cold and severe ice storms that hit much of the North -- hit much of North America this past November and December.

As I've stated in previous calls, based on the net new business we secured for fiscal 2014, we entered in the year anticipating an approximate 11% to 12% increase in our annualized revenues. While the quarter was not as good as we anticipated, it is nothing we haven't seen before and/or something we have not recuperated from in the past. We know the uncertainty of the weather on a monthly or quarterly basis is something we cannot predict. However, our performance, by historical standards, has been pretty much consistent.

We're also off to a very good start for fiscal 2015 with a very busy bid season underway and some exciting opportunities that we've realized, thanks to the quality of our service and the strength of our reputation. Pat Walker, our CFO, will review our complete financial results for the second quarter and year-to-date positions of 2014 in detail in a few minutes, but first, let me give you the highlights and some perspective on how Old Man Winter impacted our second quarter results.

Let me summarize the results for the quarter. Revenue for the second quarter of fiscal 2014 increased 13.5% to $135.5 million from $119.4 million in the second quarter of fiscal '13. Adjusted EBITDA for the quarter was $30.9 million, up 8.7% over the $28.4 million recorded for the same period last year, which included some increased costs associated with the winter. Net income from the quarter was just under $3 million at $2.9 million on par with the $3 million we reported in the second quarter of fiscal '13.

Looking at the first 6 months of fiscal 2014, the year-to-date numbers are still tracking well through our internal expectations despite some tougher conditions. For the year-to-date, revenue is up 15.3% compared to the same period last year, while adjusted EBITDA is up 18.2% year-over-year. Our adjusted EBITDA margin was 14.1% compared to 13.8% for the first 6 months over last year.

Winter weather did hit a bit early again this year resulting in a number of school delays and closings in late November and December in places like Texas and the Midwest and also in Ontario, where we had severe ice and snow storms.

What's most notable about this year, however, is not the number of school days deferred, but the severity of the ice and cold, and below-freezing temperatures and the impact, quite frankly, that, that's had on our labor and maintenance expenses, as well as on our customers, our children that we transport. We will continue to make sure our fleet is safe, that our buses are cleaned off, started, warm and running properly before we pick up our first child on that bus.

In the case of this quarter, it meant added overtime and increased cost, but we will not jeopardize safety in anything we do. It costs more in weather like this -- in the weather like this we've had, but we see it as an investment in safety, and it's a cost we will bear because it's our culture and it's our reputation. As you know, in most areas, we operate or contracted for 180 days of school service, so we will make up for any school closings later in the year, but what we don't directly recover are the increased expenses that go along with maintaining our service during the severe cold.

So here we go again. In many places, winter has been like Groundhog Day, stubbornly cold day after day, requiring us to bring in our mechanics in on some days this year at 4 a.m., and drivers as early as 5 and 6 a.m. to clear away snow, warm up the buses so we're ready to roll when our school administrators make that important call for the day. On days like this, I'm sure all of you realize, as you do with your own cars, you just can't start it up and drive away. With weather like this, it can increase wages, fuel and maintenance expenses. It's not unusual for us. I've been in this business 38 years and we've learned to deal with it. Being prepared, though, is what we do. And quite frankly, it's just good business. It's the reason our customers trust us, renew and stay with us.

Some of our competitors were caught unprepared this winter and as a result, schools had to close because of the -- because the buses couldn't run. In fact, we're in discussions with 2 districts right now, which are fed up with the inability of their contractor to get the fleet operational. Who knows? It may lead to some new business for us.

I expect we'll see similar disruptions to the school calendar in the current quarter as we did last year, as the cold and snow isn't over yet. But as we have noted many times, and many times in our history will show you, we do recoup those revenue days, as I've said before, in the third and definitely in the fourth quarter as schools adjust their calendars to make up, which will give us a strong finish again, for the 2014 fiscal year.

We'll be working hard also in other areas to offset some of the weather-related expenses. So the good news is that although Punxsutawny Phil may have seen a shadow on one of our many buses we operate in that Pennsylvania town, spring is on their rise and then we will soon be rolling our buses out with all the contracted days again this year.

Moving to the fuel side. On the fuel side, propane is another area that has seen a lot of press lately, and has been a bit of a mixed bag this past quarter. The new propane buses don't require the same cold weather warm-up time as our diesel fleet, so they help keep our expenses down in that regard. We are very pleased with the way our propane fleet is performing and we've had no maintenance issues with them. Our propane fleet represents about 10%, though, of our total vehicles we operate today.

On the other hand, you may be wondering how the widely reported propane shortages and price increases in the Midwest are impacting our fleets in Omaha and in other locations. Well, fortunately, a portion of our propane fuel costs were locked in so the recent spikes in prices has not had much as -- had not had -- has much of an impact as it could have had, and many of our other contracts with propane fleets provide for customer-paid fuel, which protects us from spikes like these. In fact, our fuel expense is actually down as a percentage of revenue for the 6-month period from 8.8% last year to 8.4%. Slow and steady, we're working to reduce our fuel cost.

Another highlight of the second quarter was the addition of Wendi Sturgis to our STI board. Wendi is an accomplished corporate executive with 20 years experience working with diverse global technology, media and Internet companies. In addition to expanding our board's gender diversity, Wendi brings a diversity of ideas. Her fresh unique perspective is already bringing valuable insight into our company. She is a solid technology executive, and will be adding a new complement to the collective nature of a good whose interest is in creating shareholder value. We're delighted to have her, and we plan to continue to review the board effectiveness to bring on talented new members with diverse ideas and backgrounds to our ever-changing industry.

I'll talk about some of the other news and the evolution of our company's new vision in my closing remarks, but now I'd like to turn it over to Pat Walker for a full review of the second quarter financials. Pat?

Patrick J. Walker

Thank you, Denis. Good morning, everyone, and thank you for attending our Q2 conference call for fiscal '14. We released our Q2 results yesterday, as Keith had mentioned. We also filed the quarter financial statements and the MD&A for the second quarter ended December 31, 2013, on SEDAR and EDGAR yesterday. Those will include more detailed information. And unless otherwise noted, all financial information discussed is in U.S. dollars.

The operating results summarized in the press release include revenue and adjusted EBITDA for the second quarter and first 6 months of fiscal 2014. We use adjusted EBITDA internally as a useful measure for tracking performance. And as previously noted on other calls, adjusted EBITDA is a non-cap -- non-GAAP measure.

Before turning to a discussion of the operating results for the second quarter and first 6 months of fiscal '14, I'd like to again note the seasonality of the school bus transportation industry and, thus, the company's operations, as noted on previous calls. Based on the seasonality of the financial results of the company for any one quarter are not indicative of the financial results for a full fiscal year.

The company's second quarter and first 6 months results for fiscal '14 reflect the continued growth of the company through the execution of our ABC growth strategy. The company started operations on 9 new bid contracts in July for the 2014 fiscal year. Three of those were tuck-ins to our existing operations. We also closed 2 acquisitions during the first quarter of fiscal '14. We did not have any acquisitions closed during the 2013 fiscal year.

As such, the second quarter and first 6 months of the prior fiscal year do not include any of the operations for the new bid wins secured for '14 and the 2 acquisitions that we completed in the first quarter of 2014.

And looking at the results for the second quarter and first 6 months of fiscal '14, revenue for the second quarter totaled $135.5 million, an increase of $16.2 million, or 13.6%, over the second quarter of fiscal 2013. The change in exchange rates between the Canadian dollar and the U.S. dollar from the second quarter of fiscal '13 to the second quarter of fiscal '14, in connection with the translation of our Canadian operations into U.S. dollars, had a negative $1.3 million impact on the period-over-period change in revenues. $11.9 million and $5.6 million of the revenue increase for the second quarter of fiscal '14 are primarily attributable to the net new business noted along with same terminal operations, respectively.

Revenue for the first 6 months of fiscal 2014 totaled $208.7 million, an increase of $27.7 million, or 15.3%, over the first 6 months of fiscal '13. And again, the change in exchange rates had a negative impact of $1.8 million on the period-over-period change for the first 6 months. $18.2 million and $11.3 million of the revenue increase for the first 6 months are primarily attributable to the net new business noted along with the same terminal operations, respectively.

Adjusted EBITDA for the second quarter of fiscal '14 totaled $30.9 million, an increase of $2.5 million, or 8.7%, over adjusted EBITDA for the second quarter of fiscal '13. The change in exchange rates had an impact of approximately $300,000, which was negative on the period-over-period change in adjusted EBITDA. $2.6 million of the net increase in adjusted EBITDA for the second quarter of fiscal '14 is attributable to the net new business noted earlier. Same terminal operations reflect the adjusted EBITDA contribution associated with the same terminal revenue increase previously noted, combined with reductions in fuel expense of $0.3 million and fringe benefits of $0.4 million, all of which was partially offset by increases in wages, insurance expense, operating expense and maintenance costs.

The improvement in fringe benefits includes an approximately $1 million favorable claims development, our workers' compensation insurance, which was partially offset by increased fringe benefits associated with the higher level of wages. Wage increases primarily reflected higher driver wages and maintenance wages of approximately $2.1 million, while the increase in insurance was due to some unfavorable claims development. The increase on operating expense reflects another year of equal lease costs, and the increase in maintenance costs resulted from some higher tire and repair maintenance costs.

Insurance expense for the second quarter increased by $1.4 million compared to the second quarter of fiscal 2013 due to unfavorable claims development after several quarters of positive claims development. The increase here was partially offset by the $1 million reduction in the workers' comp insurance claims development that I just mentioned.

On the fuel side, with the growth secured for fiscal 2014, we have maintained fuel mitigation in our contracts in the 60% range, with the majority of that coming from customer-paid fuel. While we -- while this contract has -- while this has contract fuel mitigation, I would continue to note that we are still exposed to the impacts of some higher fuel cost under some of those mitigation features. In addition, we also locked in approximately 13% to 15% of our fuel exposure with fixed price contracts through the end of the current fiscal year. The pricing under these lock-ins for the first half of fiscal 2014 increased slightly about 1.5% year-over-year. We continue to review fixed-price contracts for an additional 5% to 10% of our fuel exposure for the remainder of 2014. The increase in fuel mitigation combined with some fuel-saving strategies associated with idling and the deployment of some alternative fuel vehicles has helped us lower fuel expense compared with prior year second quarter.

Same terminal fuel expense for school bus transportation segment decreased for the second quarter of fiscal '14 by $300,000 compared to the second quarter of fiscal 2013. As a percentage of revenue, same terminal fuel was 8% of revenue for the second quarter of fiscal '14 compared to 8.6% of revenue for the second quarter of fiscal '13.

Adjusted EBITDA for the first 6 months of fiscal year 2014 totaled $29.5 million, an increase of $4.5 million, or 18.2%, over the adjusted EBITDA for the first 6 months of fiscal '13. The increase for the first 6 months of 2014 primarily results from the net new business identified, the adjusted EBIT contribution associated with the same terminal revenue increase and the $300,000 fuel expense reduction, partially offset by wages. Increases in wages, insurance expense, operating expenses and maintenance expense all summed into the second quarter increase as just discussed.

Net income for the second quarter of fiscal '14 was $2.9 million, reflecting net income per share of $0.04 compared to net income of $3 million, reflecting a similar net income per share of $0.04 for the second quarter of 2013.

While the net income for the current year -- for the current year's second quarter is basically similar to the prior year's second quarter. The $2.5 million increase in adjusted EBITDA, combined with a $1.4 million lower tax provision and a $700,000 reduction in unrealized remeasurement loss on our 6.25% convertible debentures, were offset by a $1.5 million increase in operating lease expense; a $1.1 million reduction in the noncash gain on a conversion feature; the $0.8 million increase in depreciation, depletion and amortization expense; a $600,000 increase in noncash stock-based compensation; a $300,000 reduction in other income; and then a $200,000 increase in interest expense.

Net income (sic) [loss] for the first 6 months of fiscal '14 totaled $5.9 million compared to a net loss of $4.6 million for the first 6 months of fiscal '13. The $1.3 million increase in net loss for the first 6 months resulted primarily from the $4.5 million increase in adjusted EBITDA combined with a $1 million increase in our tax benefit for the 6-month period, both of which were partially offset by $1.9 million in increased operating lease expense; $900,000 increase in depreciation, depletion and amortization expense; a $1.4 million reduction in unrealized remeasurement gain; a $1 million increase in other expense; a $500,000 increase in noncash stock-based compensation; $200,000 increase in interest expense; a $300,000 reduction in noncash gain on the conversion feature; and a $300,000 increase in FX losses.

Turning to the cash flow statement. As reflected in the investing activities, purchases of property and equipment totaled $3.3 million and $33.3 million for the second quarter and first 6 months of fiscal 2014, respectively, while proceeds from equipment sales totaled $500,000 and $600,000 in each of those periods, respectively. Of the $33.1 million in year-to-date net capital expenditures for fiscal '14, $29.5 million relates to the 9 new bid contracts and additional routes secured for fiscal '14. $2.3 million reflects net replacement CapEx -- capital expenditure spending, and $1.3 million relates to oil & gas investments.

In regards to the fiscal 2014 growth and replacement CapEx, in addition to the $29.5 million and a $2.3 million in growth and net replacement CapEx just noted that's reflected in the cash flow statement, in fiscal 2014, in the first quarter, we also financed approximately $20.2 million in growth CapEx and $22.6 million in replacement CapEx under operating leases. Those operating leases have 6-year terms with effective rates in the 2.3% to 4.5% range, thus, combined, purchased and leased growth and replacement CapEx deployed totaled approximately $49.7 million and $24.9 million, respectively. In regards to the total deployed replacement CapEx, the combined amounts purchased and leased represent approximately 6% of the anticipated full year revenue for 2014.

As discussed on prior calls, the company finances the replacement fleet value through purchases of buses where we own them and through operating lease financing where the lessor owns the bus. Buses purchased by the company are included as assets in the balance sheet and included in the replacement capital spending on the cash flow statement. The buses leased are not included as assets, as the lessor retains ownership of the buses. The operating lease payments are included in operating expense on the income statement and thus, are reflected as cash outflows in the cash flow provided by -- used in operating activities line for the cash flow statement.

Included in our net replacement CapEx purchase for fiscal '14 is approximately $1 million in lease buyouts for leases that are into in the fiscal 2009 year. We purchased approximately 98 vehicles related to those lease buyouts. Those vehicles have an approximate fair market value of about $3.2 million and a remaining life of 6 to 7 years. We will most likely continue to purchase these vehicles at the end of their lease term to benefit from the remaining 6 to 7 years of their asset life. We continue to view leasing as a financing option available to us as we look to increase our retained cash for growth.

Included in the financing activities, you will see cash dividends associated with the second quarter and the first 6 months for fiscal '14 were $8.8 million and $17.4 million, respectively. With respect to the currency exposure on future proposed dividends going forward, we have hedged approximately 33% of such dividends for the next 14 months based on the current dividend rate in effect for the past year. Additionally, our Canadian dollar operating cash flow serves as a natural hedge against currency fluctuations.

And looking at our balance sheet, at December 31, our outstanding debt balance has totaled approximately $274 million, which included $177 million in convertible debentures, $35 million of senior secured notes, $62 million in credit agreement debt and $200,000 in seller and other debt. The company's credit agreement currently provides for $165 million in commitments and includes a $90 million accordion feature for additional capacity when needed. The current credit agreement has a maturity date of February 27, 2018. The $35 million in senior notes has a fixed rate of 4.24% and a maturity date of November 10, 2016.

On November 12, 2013, during the second quarter, the company closed the offering of Canadian dollar-denominated 6.25% convertible debentures through June 2019. Net proceeds from the issuance of the Canadian dollar-denominated 6.25% convertible debentures amounted to approximately $68 million. Those net proceeds were used to repay and reload borrowing availability on the company's credit agreement. This is the first market offering we've completed in over 18 months since the issuance of the common shares we did back in March 2012. The other convertible debt we currently have outstanding includes the Canadian dollar-denominated 6.75% convertible debentures that were issued in June 2010 and the U.S. dollar-denominated 6.25% convertible debentures that were issued in June 2011.

Subsequent to the end of the second quarter, we closed an asset purchase agreement with Atlantic Express, purchasing 425 vehicles and school district contracts associated with their Southern California operations. We anticipate that the school district contracts on the Southern California operations will reflect an approximately $26 million in annual revenues.

Before I turn it back over to Denis, I would like to conclude with the following thoughts. We entered fiscal '14, and as Denis had mentioned, with an estimated 11% to 12% growth in year-on-year revenues, and those -- that growth was associated with the 9 new bids for fiscal '14 and the 2 acquisitions completed in the first quarter of fiscal '14. To that, we have now added the midyear asset acquisition in California. With the acquisition of the ANE [ph] assets and the customer contracts on February 9, we anticipate partial year revenues from the Amy operations to be in the $13 million range. So with the partial year ANE [ph] revenues, our anticipated revenue growth increases from the 11% to 12% up to about 14% for fiscal '14.

We have been and continue to review additional bid opportunities for fiscal '15 as well. We continue to explore ways to improve and expand our debt financing availability. We continue to review and monitor the senior debt agreements, as well as exploring new lease financing proposals.

We have -- in the last couple of years, we've had $80 million to $90 million in leasing available to us, and we would expect these similar level proposals for fiscal 2015, which we'll utilize to some extent, for part of the fiscal 2015 growth and replacement CapEx deployment. We also have $80 million to $90 million of availability under the credit agreement commitments subsequent to the ANE [ph] asset deal. We currently anticipate approximately $30 million to $35 million in replacement CapEx deployment for fiscal '15, a portion of which we will finance on the operating leases as I just mentioned, which is consistent with our prior year. Growth CapEx will be dependent on the final outcome of the current bid season, which we are currently in the middle of. With the financing availability under the current credit agreement and the lease financing proposals, we recovered the purchase of the ANE [ph] California assets, and are in good shape to cover the potential additional bid opportunities along with the initial range of replacement CapEx to be deployed for fiscal '15.

Now I will turn it back over to Denis for some concluding remarks.

Denis J. Gallagher

Thanks, Pat. As I said earlier, we're off to a very good start for the first half of fiscal 2014, and we'll see the full impact of the new business secured for the school year when the lost days are made up in the fourth quarter. I'm also pleased to say that our SchoolWheels and SchoolWheels Direct business, which are still in their infancy, are starting to gain more and more traction. In December near Christmas, when bankruptcy forced the fourth largest player in the business, Atlantic Express of New York, to shut its California operations, we decided we were interested in acquiring those assets and contracts. However, the short time frame and required extensive negotiations with lenders, which needed to take place over the Christmas holidays, to see if there actually was a deal that we -- that could be done, we knew that it was obviously going to be a challenge. We concluded that we were interested in continuing to negotiate the deal, however, it would not be done in time for the start-up and back-to-school on January 6. So we suggested an alternative idea and petitioned the court to accept the solution that our subsidiary, SchoolWheels, and its management services group would step in under a court-approved management services agreement to keep the buses rolling in several California cities and towns without a hitch.

We actually were concerned that thousands of children could not have -- could have been affected if not for us with the action. The management contract allowed us to have continuity of operations with no disruption of service. We received enormous help from the California Highway Patrol, the state Department of Education and many local customers and of course, a great group of dedicated employees. The management contract, which began on January 10, included last Friday when we received the required school districts' consents. Negotiations were also finalized between the various parties including the Atlantic Express, debtors -- our debtors and creditors and the lease companies, and a contract was signed allowing for the transfer of vehicles to our STA subsidiary.

We currently have extensive operations throughout California and this will increase that by 50%, our total fleet size there. That's more assets under management, and our existing team in California is excellent at what they do. Our service reputation is actually what led the deal to be completed in such a short time period. Since January 10, our SchoolWheels team has done a great job providing management and other services to maintain the Atlantic Express contracts, mostly covering the Los Angeles and the Long Beach unified school districts, as well, though, as many private and charter schools throughout Southern California. This is a great opportunity for us to showcase that SchoolWheels can do a job like this. We came in, we were able to put a lot of new programs in place, which paved the way for a seamless transition when the deal closed. The purchase is a good deal for us with margins consistent with other acquisitions we have closed in the past on an annualized basis, and in the region where we've been successfully operating since my first acquisition in 1997. The deal includes 425 school vehicles and leverages the expertise of the management team we have in place.

Now we've been servicing the LAUSD, the Los Angeles school district for the past 4.5 years, and they recently also agreed to an extension of our current contract for another 5-year period. We will increase our presence here, serving special-needs students in environmentally-friendly propane vehicles. Customers in this area are very excited about us coming in and expanding our services throughout Southern California.

All in all, as Pat said, we anticipate the deal will add about $26 million on an annualized basis and about $13 million, which will be booked for the second half of the fiscal year. SchoolWheels is a key element in our overall vision to expand STI into logistics and management services business, one that is not an asset or asset-light, it's agile and it leverages our expertise and purchasing power to serve school districts and families in new ways. As I've said before, this is not your old school bus company anymore.

Our new municipal tax lease program is a perfect example of one of these transformation programs, and one that is getting some interest this year. This program will help school districts take advantage of a lower cost of capital to replace aging school bus fleets. We help them arrange financing while our team provides the operation and management expertise needed to run the buses efficiently. We're in discussions right now with a number of school districts that are very interested in this option, and we're hoping to have some news on this front to announce very soon. This program, also, is tailored to the 66% of school districts who own and want to continue to own and operate their own fleets. We have various ways to work with them now in lowering their cost and improving their service and operations. We're also well into the bid season for fiscal 2015 with contracts, and continue to use our disciplined approach to choose customers who have similar values that we have. We've secured a number of new contracts, which we are negotiating currently, and many long-term renewals of existing contracts, which we are extremely proud of. We will be announcing these shortly after they are finalized and voted upon by the local school boards.

Our contract renewal rate is, again, approaching 97% this year. Some contract renewals now stretch out as far as 15 years, which lower our replacement capital cost and further maintain our stable contracted revenue visibility going forward. Our dedicated staff, drivers, mechanics and managers continue to work hard and remain focused on our #1 priority, which is safety. Our job for the remainder of fiscal '14 is to stay safe, continue to treat our customers and our people right. Our family atmosphere is an important part of our success and we'll preserve it as we move in new and exciting directions.

And with that, this concludes our remarks. We'll now take a few questions from our analysts, and Ashley, please, go ahead and open up the lines for some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mark Neville of Scotiabank.

Unknown Analyst

It's Michael [ph] stepping in for Mark. I'll start with a quick one. For the quarter, could you provide us with an estimate of the deferred revenues and the additional expenses, which came as a result of the difficult weather conditions in December? And could you do the same maybe for January and February?

Denis J. Gallagher

Pat?

Patrick J. Walker

What's that? Yes, Denis, deferred revenues for the -- in December related to the snow is probably about $900,000 to $1 million. The additional expenses, that one's a little harder, Michael [ph] to quantify but through all the driver wages, the fuel and the maintenance cost, it probably could total $400,000 to $500,000 of additional expenses in that period. January and February, I cannot give you a right -- an amount there for that. I mean, in January and February we probably have had 5 or 6, maybe as high as 7, snow days or cold weather days, literally where school were -- was closed because of the cold weather in different areas, as Denis had mentioned.

Unknown Analyst

Okay, perfect. Really helpful. So just another question, I believe you recently launched SafeStop in some districts, I was wondering if you could maybe speak to the enrollment and the potential goals or timelines that you have for this program?

Denis J. Gallagher

Well, currently what we have is we've got -- we started off, Michael, [ph] with our pilot program that we've got down in Florida. It's going actually very well. We've run into some issues on routing with the GPS systems. We're working with various manufacturers and technology companies. We're in discussions right now with, I think, the last note I saw was about 10 to 12 school districts that are interested in having us come in and do this. We're using it as a way to gain longer-term renewals. Our goal is to literally beat this thing up, make it not work, make it work, make it not work and continue to get it so we can perfect it. I can tell you that most recently, we've also added on our own routing and scheduling person in our technology office, which has really made the program move a lot faster. It's a lot of information we're working with. As I said, like 10 to 12 school districts right now. So I think you're going to be hearing some good things about it. We've got some districts that actually want to purchase it, where our plan was literally to do more of a retail with parents direct and try to market it direct. Some of the school district customers we've talked to in the Midwest and certainly in the Northeast are interested in picking it up in bulk, where they would literally purchase it on a discount from us, but we get 100% participation from it.

Unknown Analyst

Is it maybe too early to sort of give guidance on how much you expect in terms of penetration, I think you've got 1 million students, if the adoption rate 10% to 20% or anything of that sort?

Denis J. Gallagher

I think it is early to say that right now, but I mean, when we looked at this initially, our goal was to again, build it in numbers. If we could get about 10% of the folks getting started with this program, that would be, on a percentage basis, that's a -- 100,000 kids is a lot. 100,000 parents or so. We're also doing some other kind of programs with sponsorship programs that are tying into that, too. We've got a long way to go on this, but we are making very fast progress.

Operator

[Operator Instructions] Our next question comes from Greg Colman of National Bank Financial.

Greg Colman - National Bank Financial, Inc., Research Division

Just a couple of questions. To follow up on that first one there, Pat, regarding your January/February potential revenue deferral due to weather, you mentioned 5 to 7 days, could you put that in context for us? What did you -- How many days did you lose in December?

Patrick J. Walker

February, probably 2 or 3.

Greg Colman - National Bank Financial, Inc., Research Division

Okay, so it's been a little bit heavier in fiscal Q3 so far?

Patrick J. Walker

Yes, it has been heavier in fiscal Q3 so far.

Greg Colman - National Bank Financial, Inc., Research Division

Okay, great.

Denis J. Gallagher

And just, I think that -- and Greg, I think that's going to be consistent with about where we were last year, in the number of days between the 2 quarters.

Patrick J. Walker

Yes, between the 2 quarters, yes.

Greg Colman - National Bank Financial, Inc., Research Division

Sounds good. Just a question on the vehicles that you're buying out from the leases as they come up, you mentioned 98 vehicles were bought last year, I believe. What's on the slate for this year, vehicles coming off lease you're going to be able to purchase?

Patrick J. Walker

It will probably be -- I'm not sure of the exact number, Greg, on top of my head but, it's probably about 150 to 170.

Greg Colman - National Bank Financial, Inc., Research Division

Okay. And does your...

Denis J. Gallagher

I would purchase those probably in July -- they'd be coming off in July of 2000 -- yes, July 2015.

Greg Colman - National Bank Financial, Inc., Research Division

Okay, and does this $30 million to ...

Patrick J. Walker

I'm sorry July 2014.

Denis J. Gallagher

Yes.

Greg Colman - National Bank Financial, Inc., Research Division

Yes, July 2014. Does this $30 million to $35 million of replacement capital include the impact of those vehicles, or no?

Patrick J. Walker

Yes, it does.

Greg Colman - National Bank Financial, Inc., Research Division

Oh, it does. Okay, excellent. And then just to finish up, can you remind us again when you start to enter into discussions with your leasing companies? When does that dialogue start happen?

Patrick J. Walker

Well I mean, Greg, we are -- we've been in continual discussion with them. But I mean in terms of rounding up, we're finalizing our replacement CapEx listing right now, I mean, so it comes from the ground up. It comes from -- through all of the maintenance departments across all of our regions. So we literally had just gotten that about 2 weeks ago. So we're sitting here, and we're going through it and we're scrubbing it and ensuring that there's agreement there, and probably, within the next week or 2, we will start asking all of our banks and we'll probably use 7 or 8 different lessors to provide leasing proposals based upon certain dollar levels. We're usually fairly consistent in terms of the terms that we use, so we ask them all to provide the same terms and then literally compare the rates as we start to get them.

Denis J. Gallagher

I mean, Greg, we're getting -- we're still getting quotes today of 2.5% on the tax lease basis and about 4% to 4.5% in that kind of range where -- on the straight financing. So if we give up the depreciation of, which, by the way, we have plenty of NOLs to go around and we can do, we can still probably be in the 2.5% financing range.

Greg Colman - National Bank Financial, Inc., Research Division

That's great. That's what I was driving for, Denis, and then just one more, Denis, in your final prepared remarks, you mentioned some of your longer-term contracts up to 15 years and then after that, you said that this could -- this can lower replacement capital cost. I was just wondering if you could give us a little bit of color as to how exactly that works?

Denis J. Gallagher

Well, one of the things that's happening in a few districts is they're looking for a longer-term visibility themselves, and they're looking for more planning from an expense point of view. So for us to go in, we were able to get a couple of contracts. One in California, one in Pennsylvania, very decent size, $5-plus million in annualized revenues, where we literally got a 10-year contract with a 5-year renewal. So -- and what we've got in those is we've got the ability to -- as the new vehicles come on, and again, it's not like taking a 2005 and running it for the next 15 years, but as the 2014 and 2015 buses come online, 2015 buses will be starting to put online. The newer engines, the newer technology, we got the availability to use those assets for 15 years, if we choose.

Operator

Our next question comes from Edward Goodwill [ph] of Raymond James.

Unknown Analyst

Good improvement on the fuel cost. I recall, the goal is to get to 6% of revenue at some point, is that going to be through less of the propane initiatives or is that going to be customer-paid fuel contracts? Just want to get an idea on that.

Denis J. Gallagher

Yes, it's really, Ed, just it's a combination of both, and with propane, we've got 2 things going. Right now, we've got a propane cost that is probably between the $1.60 and $2 a gallon equivalent in U.S. dollars. And we've got lesser MPG with the propane. So where we would get maybe 8 miles to a gallon with diesel on average, we're getting about 4 to 4.5. So you've got almost -- you've got -- we've got to weigh the difference right now. Propane is still a little bit -- when you do the math, the propane is still a better deal. It's obviously, also the cleaner environment vehicle. So there's a lot that goes into that. But with about 10% of our fleet in propane, we are constantly offering new customers the ability to flip into the propane buses, and our goal is to try to keep pushing the propane and get it upwards of about 20% to 25% of our fleet. We were, as I said before, very pleased with the way it actually performed in the winter. I mean, Omaha had minus 10- and minus 15-degree temperatures, and that's on Fahrenheit not on Celsius. It was literally starting up 450 buses and rolling. So we were very pleased with how that goes. We were running them in Pennsylvania where we've seen similar below-freezing weather. So the operational performance was something we were keyed in on. We're not quite -- we're not excited about the lower MPG that we're getting. We have seen the spike that went up and we saw actually propane double in what was called a scarcity, but it's now literally back into the $2 range again. I think the more propane that we put on, you're going to be -- you heard me comment that we've got some additional bid wins that, I think, are coming. We're in negotiations with those, they're not a win until we've signed a deal, and those, I think almost every one of those, or at least 90% of those, are customer-paid fuel contracts. So we're going to be -- our goal is to get fuel down into the 6% to 6.5% range. We've got a little bit to go, but a couple of big deals where it's customer-paid fuel, a couple of -- more pushes on the propane, and I think those 2 things are going to be going. They're also, by the way -- is really tied in to the municipal lease program where we're getting some traction and some interest from existing customers who had diesel fleets that want to flip, what I call flip. They want to flip into a brand new fleet of propane and they'll pay the fuel. So those are all good marketing things that we're doing. I realize that our competitors are listening to the call as well, so I don't want to give away the entire secret sauce of how we do things, but again, I think when we kind of told Steve and Fiona Willard [ph] and the rest of the market where we were headed with this, it was at least a 2- to 3-year program to get that back down.

Unknown Analyst

Okay, so it will gradually drop over the next couple of years?

Denis J. Gallagher

Absolutely. When seasonal fuel diesel drops, and then it even drops that much more because it's such a bigger part of our fuel usage.

Operator

Our next question comes from Brady Cox of Stifel.

Brady Cox - Stifel, Nicolaus & Co., Inc., Research Division

Just a quick question. A couple of mine were addressed earlier, but I had a question about the business, I guess, from acquisitions and new bidding contracts. If I'm backing into the number on sort of the cost of operations as a percentage of revenue on there, it looks like it's actually a little bit higher than some of your legacy business, which typically hasn't been the case when you brought in new business. Can you speak to sort of what the story is there, whether it's a lower margin business or what's driving that?

Patrick J. Walker

Sorry, Brady, can you ask that again? I didn't quite understand it.

Brady Cox - Stifel, Nicolaus & Co., Inc., Research Division

Yes, sure, so if I'm looking, backing into the numbers you guys gave on cost of operations as a percentage of revenue on the acquisitions and the new bidding contracts, it looks like that percentage is actually a little bit higher than the rest of your business was for the quarter, whereas typically the acquisitions you guys are bringing in, new bidding contracts have had sort of a lower percentage cost. So I'm wondering, was that sort of a one-off thing or what is that business -- is that sort of a higher expense profile or what's driving that?

Patrick J. Walker

Brady, I will tell you, the new business we brought in I don't think has a higher cost component than our base business.

Brady Cox - Stifel, Nicolaus & Co., Inc., Research Division

Okay, I guess just the numbers I'm looking at if I'm backing into it from what you guys gave, it looks like it's about 76%, whereas the total business is about 73% as a percentage of revenues on cost of operations, that's what I'm just trying to figure out, the -- just right there.

Denis J. Gallagher

Again, I'd say, Pat, I'd say just Omaha right now, which, because of the extreme cold, we've had some of the increased wages and increased maintenance cost there, but again, I think that -- I don't think we see any reason why that's not going to level back out at the end -- by the end of the school year.

Patrick J. Walker

That's a very good point.

Denis J. Gallagher

I mean, that's a large contract of the new business, but it's probably 60% of the new business.

Operator

I'm not showing any other questions in the queue. I'd like to turn the call back over to management.

Denis J. Gallagher

Okay. Thank you, all, for joining us on the call and stay safe and enjoy the rest of the winter, and it will end soon. That concludes our call. Have a safe day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

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