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Student Transportation Inc (NASDAQ:STB)

F4Q12 Earnings Conference Call

September 27, 2012 11:00 AM ET

Executives

Keith Engelbert - Director, IR

Denis Gallagher - Founder, Chairman & CEO

Pat Walker - EVP & CFO

Analysts

Greg Colman - National Bank Financial

Tony Polak – Maxim Group

David Tamberrino – Stifel Nicolaus & Company,Inc.

Theoni Pilarinos – Raymond James & Associates

Operator

Good day, Ladies and Gentlemen, and welcome to STI Fiscal 2012 Year end Results Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct the question-and-answer session with instructions following at that time. (Operator instructions).

Now, I’ll turn the conference over to Keith Engelbert, Director of Investor Relations. Please begin.

Keith Engelbert

Thank you, Tyrone. Good morning, everyone. Thank you for joining us to discuss the fourth quarter and fiscal 2012 results which ended June 30, 2012. Joining me today on the call are Denis Gallagher, Chief Executive Officer and Pat Walker, Executive Vice President and Chief Financial Officer.

I expect that you’ve all seen the earnings news release, MD&A and financials that have been disseminated. The news release, MD&A and financials are accessible on SEDAR, EDGAR and our website at www.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 Gallagher

Thank you, Keith, and good morning everyone and thanks for joining us again. Fiscal 2012 was another important and a very strong year for us in our company’s development. Our disciplined growth strategy continued with seven key acquisitions and nine new bid wins in targeted areas. Pat Walker, our CFO will review our complete financial results for fiscal ’12 in detail in a few minutes, but first let me review some of our financial and operational highlights.

Revenues and EBITDA for the fiscal year each increased by 20% over last year. Our 19% margin was consistent with our historic performance of the last few years despite a 1.5% higher fuel expense year-over-year. We completed the fiscal year with a 79.9% pay-out ratio, which is below our target of 82% to 85%. We remain focused this fiscal year on lowering that even further.

I would like to point out some things important to the folks who ask how can you pay dividends when you had net income of $0.03 per share. First of all net income is an accounting term which includes various non-cash items in the calculation. Our financial statements are extremely transparent and include many non-cash items such as variable paper swings and currencies and derivatives. Cash dividends are paid out of operating cash flows and not net income. Pat will expound on that a little further in his comments.

Our success in achieving the results we had despite continued economic uncertainty is largely due to the strength of our business model and our management. It’s a proven model which during our eight years as a public company has produced steady, predictable cash flows and allowed us to pay attractive dividends to our shareholders.

In regards to fuel cost, approximately 80% of our fuel cost are protected, some form or another by a combination of either customer paid fuel and contractual fuel price escalation clauses. These clauses were key components of many of this fiscal year’s new bidding contracts in Connecticut, New Hampshire and Ontario.

Our skilled and experienced operations team continued to implement new cost savings programs including expanding the installation of GPS units on board with new technology and idling programs that will help us better manage our fuel usage.

We also took advantage of the continued lower rates in fiscal ’12 and further expanded our leasing program to keep our fleet the youngest of the major national players in the industry. Maintaining a young fleet allows us to keep up with new vehicle technology, lower our operating cost and improves passenger safety. Leasing is a great financing option for us and will continue to be in the future. It is low cost debt fixed for six years.

As I mentioned earlier, we completed seven acquisitions this past year including the purchase of new assets and eight contracts in Texas and Washington, two new States for us. These contracts became available as a result of a required divestiture in connection with the merger of two of our competitors; it was a tremendous deal for us. Dairyland Bus in Wisconsin was another important acquisition for us in fiscal ’12. The deal added another new State to our STI service map and positioned us for further expansion in the upper Midwest. This area is consistent with our focus on raw and suburban markets and we are excited about its prospects for growth in the future. In all, our fiscal ’12 acquisitions added 17 locations over 1,500 vehicles and annualized revenues of nearly $68 million. More importantly, these acquisitions came with experienced operation teams that know their markets in their respective States and they each present tremendous platforms for growth.

The potential for what we call managed contracts in Texas are great. In managed contracts, the schools converts to a private contractor model but retains ownership of the vehicles and are responsible for the replacements but we as the contractor operate them. There are approximately 1,600 school districts in the State of Texas and yet only 65 Contractor Transportation and roughly half of those are managed. Texas is also a right-to-work State, that is pro-business and our local operators have built a stellar reputation there. Many school boards are looking for creative ways to cut non-instructional costs and we feel we have a big solution for Texas. Our business development team is active in the State and I expect some very good things to happen there.

We also continue to make progress in North and South Carolina, Georgia and Florida where opportunities for conversions are also very promising. The South Carolina legislature recently move legislation and has formed the study commission and is expected to present the recommendation and support for bidding of local contracts for possibly the 2014 school season. That has never been done before in the State of South Carolina.

Earlier this year, we enhanced our D direct apparent business with a rollout of our pilot program in Florida and now in California. While these are small beta sites, we are working out all kinds of details and backroom technology that will allow us to learn what works and how best to expand these business.

Our new subscription service we branded called SafeStop for $4.99 a month is a new security feature that allows parents in our pilot areas to monitor their child’s bus everyday via their computer or receive a text via their mobile device. SafeStop email and text notifications can pinpoint where the bus is along its route, signal when it’s approaching a child’s school or a bus stop and alert parents to unexpected changes in the route or school times. Parents receive their own private secure link which is setup to monitor only their child’s bus. We plan to offer this service in other communities we serve as the year progresses. I am very excited about the potential new revenue for this service in the coming years, we have a lot more work to do and we will be discussing this in more detail as we develop it further.

Our regional and local management teams continue to provide outstanding service to our customers and renewed many good long term contracts this year. While our 15-year contract renewal rate tops 95%, that’s 95% over a 15-year period, I am pleased to report that among the contracts up for renewal in 2012, 100% were resigned for another three to five year additional years.

A significant milestone for us fiscal 2012 was our dual listing on the NASDAQ global select market on September 6, 2011. We are now the only School Transportation Company to trade on a U.S. stock exchange. By year end our market Cap had risen to more than $515 million. Our U.S. shareholder base is on pace to actually double this year over last year as more U.S. shareholder learn and appreciate the simple business we operate with an attractive sustainable dividend. Our Canadian base of shareholders remains strong and we recently received the vote of confidence in a share purchase support from one of our largest institutional shareholders. We know this can be volatile times but we ask shareholders to read our publicly filed information, contact us directly or contact your broker for information on our company. There are unscrupulous people who purposely distort the facts through false and misleading statements solely for their own personal benefit and gain.

Now, I’d like to turn it over to Pat Walker, our CFO for a full review of our financial results and then I’ll be back to talk to you a little bit more about the coming year. Pat?

Pat Walker

Thank you, Denis. Good morning everyone and thank you for joining us today for our fiscal 2012 year-end conference call. We released the 2012 fiscal year end results, Tuesday afternoon after the close of business. We filed the fiscal 2012 financial statements and the associated MD&A on SEDAR yesterday which 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 EBITDA for the fourth quarter and full year of fiscal ’12. We use EBITDA internally as a useful measure for tracking performance. As you know, EBITDA is a non-GAAP measure. As a reconciliation of net income to EBITDA reflected in the press release shows our EBITDA is defined as Earnings Before Interest Taxes Depreciation, Depletion and Amortization expense, other income and expense, vehicle operating lease expense and non-cash items such as unrealized gains and losses on derivative contracts, bargain purchase gains, loss on extinguishment of debt, goodwill and non-cash stock based compensation.

The company’s 2012 fiscal year results reflect a continued growth of the company through the ABC growth strategy. The company closed seven acquisitions as Denis mentioned in fiscal ’12. Three occurred in the first quarter, which included Schumacher Bus Lines and S&K Transportation in Ontario, both of which were tokens to our existing Canadian operations, and  A and B Bus Company in California. Three were completed in second quarter, School Transportation Services in New Jersey, Dairyland in Wisconsin and Safe Start Transportation of New Jersey. And we closed the asset purchase from sale agreement for the assets and contracts in Texas and Washington at the very end of May. In addition, the company started operations on nine new bid contracts at the start of the 2012 fiscal year, six of those were tuck-ins to existing terminal operations.

And then in regards to the prior year acquisitions I would also note that we closed the acquisitions of Kevah Konner on December 31, 2011, the acquisition of Ridge Road on January 7, 2011 and the acquisition of Ocean State on February 16, 2011. As such the prior fiscal year does not include any operations for the fiscal ’12 acquisitions or the nine new bid wins secured for fiscal ’12, and with respect to the three prior year acquisitions that we completed mid-year, the prior fiscal year includes only a portion or a partial year of operations for those acquisitions.

During the fourth quarter, we recovered the majority of the $1.2 million revenue deferral that was present in March 31, 2012 that we noted on our Q3 call.

And looking at the results for fiscal ’12, revenue for fiscal ’12 totaled $369 million, an increase of $63.7 million or 20.9% over fiscal ’11. $50.4 million of the revenue increase for fiscal ’12 is attributable to the net new business noted with same terminal operations primarily making up the remaining $13.3 million in revenue increases in the current year. That primarily reflects our net increases and service requirements of existing contracts and contract rate increases.

EBITDA for the fiscal year of 2012 totaled $70.1 million, an increase of $11.2 million or 19% over the EBITDA for fiscal 2011. And again from where the results from the net new business identified. Same terminal operations reflected the EBITDA contribution associated with the same terminal revenue increases just noted and is offset by increases in wages, fuel costs, operating expenses, maintenance expense and administrative expenses, all of those which were partially offset by lower fringe benefits and insurance costs. Wage increase primarily reflected higher driver wages of $6.1 million while increases in operating expenses, maintenance expenses and administrative expenses reflected the additional year of operating leases, high parts expense and increase in administrative wages and professional fees respectively.

In terms of fuel, same terminal fuel expense for the School Bus Transportation segment increased in fiscal ’12 by $5.2 million compared to fiscal ’11. As a percentage of revenue, same terminal fuel was 9.2% of revenue for fiscal ’12 compared to 7.9% for fiscal ’11. And while 60% of our contracts have some form of fuel mitigation, we are still exposed to the impacts of higher fuel prices under some of these mitigation features. Further, while we also lack the additional 20% of fuel exposure with our fixed price contracts in fiscal ’12 similarly to the prior years, the pricing under those ends will lock in to increase approximately 30% year-over-year.

The decreases in fringe benefits which is primarily related to work risk compensation cost and insurance expense reflect hard dollar cost savings and fixed cost in premiums of insurance resulting from and combined with favorable claims experience.

In terms of net income, net income for fiscal ’12 was $2.2 million reflecting net income per share of $0.03 compared to net income of $1.5 million for fiscal ’11 which also reflected net income per share of $0.03. As we realized a $0.03 in net income per share, we are continually questioned on how we pay the annual CAD $0.56 dividend as Denis mentioned. Well, again net income and net income per share are not cash flow metrics. Our net income includes a number of non-cash items such as depreciation, depletion and the amortization expense, stock based compensation, unrealized gains and losses on our FX contracts, unrealized re-measurement gains and losses on the 6.25% convertible notes, the mark-to-market of the conversion feature of the 6.25% convertible notes and our tax provisional benefit.

Cash available for dividend payment basically reflects our EBITDA which excludes those non-cash items less operating lease expense payments, net cash taxes paid for the year, net replacement CapEx purchased and oil and gas investments. That was more than adequate in fiscal ’12 to cover cash dividends for the year which reflects the 79.9% pay-out ratio Denis mentioned earlier.

The $700,000 increase in net income for the current fiscal year is primarily attributable to accommodation of the $11.2 million increase in EBITDA combined with a $100,000 decrease in other expense which were partially offset by a $5.3 million increase in depreciation, depletion and amortization expense, a $1.1 million increase in non-cash stock based compensation, a $3.3 million increase in operating lease expense payments which reflects another year of operating leases and $0.9 million increase in interest expense.

The $6.9 million gain realized in the fourth quarter associated with the May close of the asset purchase and sale agreement basically offset the non-cash unrealized losses recorded for the year related to the 6.25% convertible notes which is the re-measurement of the convertible notes and the unrealized loss on the conversion feature of the convertible notes, even the unrealized losses on the FX contracts. And combined with the lower realized FX gains and the swing to a tax benefit in fiscal ’12, the year-over-year change in net income associated with those six items is literally zero. The unrealized re-measurement loss on the 6.25% convertible notes for fiscal ’12 is a non-cash adjustment resulting from the change in exchange rates during fiscal ’12.

As we had noted on the third quarter call, in prior interim calls STI issued $60 million in 6.25% convertible notes that are denominated in U.S. dollars in June 2011. STI’s functional currency is the Canadian dollar. As a functional currency of STI is the Canadian dollar unrealized gains or losses on the re-measurement of the 6.25% convertible notes, into Canadian dollar are considered transaction gains and losses and are included in the current period consolidated income statement pursuant to applicable accounting rules. The full year re-measurement loss of $3 million recognized in fiscal ’12 and any future re-measurement gains or losses will ultimately have no impact on the U.S. dollar principal balance of the 6.25% convertible notes at maturity.

The non-cash loss on the embedded conversion feature of the 6.25% convertible notes for fiscal ’12 results from the change in the fair value of the embedded conversion feature since the previous fiscal year. The conversion feature on these notes provides that the U.S. dollar denominated notes can be converted at a U.S. dollar denominated strike price in the common shares of STI, which I just mentioned has the functional currency of the Canadian dollar. Again, pursuant to the applicable accounting rules, the conversion feature therefore represents an embedded derivative that must be bifurcated and accounted for separately. The embedded conversion features recorded at fair value and other liabilities at each reporting period end with changes in the fair value included in the current period consolidated income statement.

Ultimately the $1 million non-cash loss recorded for fiscal ’12 will reverse itself to zero at maturity of the 6.25% convertible notes. The unrealized loss on foreign currency contracts for fiscal ’12 relates to the fair value adjustments of the foreign contracts entered into as an economic hedge of the U.S. and Canadian dollar exposure on our distributions.

And looking at cash flow statements I would note the following. As mentioned on previous calls due to the seasonality of business we look at cash flow on an annual basis. As reflected in investing activities, purchases of property and equipment totaled $48.6 million for fiscal year of 2012 while proceeds from equipment sales totaled $1 million. Of the $47.6 million which is a net number, net of the proceeds from the equipment sales in full year net capital expenditures for fiscal ’12, $39.3 million relate to the nine new bid contracts and additional route secured as part of the new business for fiscal ’12 that also includes new bids for fiscal 2013 that were funded in the fourth quarter. $7.1 million relates to replacement CapEx purchased and $1.2 million relates to oil and gas investments in existing wells.

In regards to fiscal ’12 growth and replacement CapEx in addition to the $39.3 million and the $7.1 million just noted in growth and replacement CapEx respectively. In July and August 2011 timeframe we also financed an additional $5.9 million in gross spend associated with the new bids for fiscal ’12 and deployed the equivalent of approximately $17 million in replacement fleet value under operating leases. The combined $22.9 million in operating leases have six year terms with effective rates as low as 2.8% with 5% of the upper end of the range, that’s combined. The purchase and leased replacement CapEx totals $24 million or approximately 6.5% of annual revenue for fiscal 2012 which is similar to the percentage replacement for the last few years.

As discussed on prior calls, the company finances the replacement fleet value through purchase of buses where we own the busses outright and through operating lease financing where less or own the busses. The busses purchases by the company are included as assets on the balance sheet and are included replacements CapEx spending. The busses leased are not included as assets as the lessor retains ownership of those busses. The operating lease payments are included in operating expenses on the income statement and thus are reflected as cash outflows on the cash flows provided by operating activities vying for the cash flow statement. The company’s utilized operating lease financing proportion of the replacement fleet to maintain availability under the credit agreement for growth. The company believes that the operating leases provide an attractive use of cash in relation to the company’s growth strategy. We’ll most likely purchase these vehicles at the end of their lease term to benefit from that second six years of asset life.

We continue to view leasing as a financing option available to us as we look to increase retained cash for growth. I will touch on the lease proposals that we secured in connection with the capital expenditure plan for fiscal ’13 in a few minutes.

In March 2012, as Denis had mentioned we completed an equity offering of 12.25 million common shares for net proceeds of approximately $79.6 million. We marketed the common shares in both the U.S. and Canada and the offering was well received in both markets. This was the first direct offering of common shares in the U.S. since the completion of the dual listing in September of 2011. The net proceeds of the equity offering were used to repay borrowings under the credit agreement and thus reload availability there under.

Also included in financing activities you will see total cash dividends associated with fiscal ’12 as $28.3 million. With respect to currency exposures and future proposed dividends going forward, we’ve hedged approximately 40% of such dividends for the next year and half on the current dividend rate in effect of the past year. Additionally, our Canadian dollar operating cash flow serve as a natural hedge against currency fluctuations.

And looking at the balance sheet at June 30, 2012 our outstanding debt balances totaled approximately $216 million. That included $130 million in convertible debentures, $35 million in senior secured notes, $15 million in credit agreement debt and about $100,000 in salary and other debt.

The company’s credit agreement provides for $140 million in initial commitments and also includes $100 million accordion feature for additional capacity when needed. The current credit agreement has a maturity date of February 4, 2016. The $35 million in senior secured notes has a fixed rate of 4.24% and that also has a maturity in 2016, on November 10, 2016. We issued the convertible debentures at the STI level, the last three times we went to market prior to the March 2012 equity offering based on the attractive rates of the convertible debentures. Those rates reflect at 7.5% for the first issuance in October 2009, 6.75% for the second issuance in June 2010, and 6.25% for the third issuance in June 2011. The first two issuances were in Canadian dollars and while the third was denominated in U.S. as previously discussed. Today, through the end of August, certain holders of the 7.5% convertible debentures exercised their conversion rights and they converted approximately CAD $30 million or roughly 60% of the 7.5% convertible debentures into the common shares. These convertible debentures are callable at the action of the company starting November 1. We will review the potential call of the remaining 7.5% convertible debentures as the first call date approaches.

During the first quarter as Denis had mentioned on September 6, our common shares commenced trading on NASDAQ under the ticker symbol STB, which is the same one that we used in Canada on the TSX. In connection with the dualistic of our stock we are now considered a foreign private issuer for Canadian Security Regulations. The Canadian Security Regulations allow the use of U.S. GAAP for continued disclosure and filing requirements in Canada. As such we adopt the U.S. GAAP for our continued reporter requirements going forward starting with the 2012 fiscal year.

In turning it back over to Denis, I conclude with a couple of following points. We entered fiscal ’12, the year we’ve just completed with an approximate 12% growth in year-over-year revenues as we reported during the first quarter of the fiscal year. In November we closed the acquisition of Dairyland as we mentioned. Dairyland, longstanding regional contractor in Wisconsin and added over 700 vehicles in five locations to our Midwest operations. In December, we purchased certain assets of contracts of Safe Start Transportation in New Jersey. With those two acquisitions our year-over-year revenue growth for fiscal ’12 came in at 20.9% slightly above the range of 19% to 20% noted on previous calls.

And follow up to the discussion of the operating lease proposals for lease financing in connection with our capital expenditure plan for 2013, as we discussed on the Q3 call, I am pleased to report that we accepted approximately $30 million in lease financing in connection with replacement CapEx for fiscal ’13 which covers a majority of such replacement CapEx. These leases also have future terms and they have a weighted average interest rate of approximately 3.5%. As in prior years we’ve utilized the lease financing to cover a majority of the replacement CapEx.

We currently have approximately $90 million of availability under the credit agreement commitments excluding the $100 million accordion feature. That also reflects having funded a majority of the growth spend required for the additional nine new bids that we’ve secured for fiscal ’13 as previously announced. Thus, we in an excellent position to continue to explore additional growth opportunity should they arise or to fund the redemption of the 7.5% convertible notes which would thereby lower interest expense.

With that, I will now turn it back over to Denis.

Denis Gallagher

Thanks, Pat. As you can see we are off to a great start as we said for the 2013 fiscal year. Thanks to the bid wins and acquisitions we completed in 2012 we have already locked in roughly 15% year-over-year revenue growth for fiscal 2013. Our focus in fiscal 2013 will be on the integration of our new operations which is underway and going well, reducing energy costs in our operations and lowering our pay-out ratio with a planned reduction in replacement capital spending due to many contract extensions that we receive this year. I am very pleased to report that we had a smooth and successful startup for our new school year in all of our locations and we are transporting almost 700,000 students every day to school this year. That is an awesome responsibility that we take ever so seriously.

Beginning this November we will have the right to redeem the remaining outstanding balance of our 7.5% convertible debentures issued back in 2009. Those note holders have done quite well. Our standing principal balance on those notes is approximately $20 million.

Under the terms of our agreement, we do get to call those at par once we give our 30 day notice. We will be reviewing that carefully in the next few weeks with rates today substantially lower than that. It may be beneficial for the company to call those notes.

Recently we received good news that we’re now listed on the S&P TSX SmallCap index by the Standard & Poor’s. inclusion in this index is a great accomplishment for us and a confirmation of our successful eager track record as a public company.

In closing, let me assure you that we will continue to take a disciplined approach to selecting the right opportunities for growth in the right areas and to offer creative solutions to school districts who are seeking solutions to capital shortages in their schools.

Now this concludes our remarks and we’ll now open it up Tyrone for some questions from our analysts if we can please.

Question-and-Answer Session

Operator

(Operator instructions). Our first question is from Greg Colman of National Bank. Your line is open.

Greg Colman - National Bank Financial

That’s reasonably close. It’s Greg from National here. Just a couple of quick questions. Good solid year. Taking a look at the growth coming out in 2013, fiscal 2013. We’ve already seen the announced acquisitions that you’re going to be bringing in there. Just wondering what the pipeline looks like. You opened the door a little bit to something happening in South Carolina, potentially a little bit further out. Just wondering how the near term pipeline looks for tacking on any additional fleets.

Denis Gallagher

Greg, I think with the 15% that we have built in year over year, we’re going to be a lot more selective about the deals that we looked at. We’ve actually decided to ramp down the purchase price multiples a little bit because we can. We don’t have to chase revenue. Revenue finds us. The opportunities are there. We do have a couple of small acquisitions that are old time guys that we’ve known, that I’ve known the grandfather and the father and now the sons. But that kind of thing, 30, 40 vehicles, small sized deals, maybe $4 million, $5 million. So we have a nice little pipeline of those. But we’re really in no hurry to do anything. I think the concentration as I said before is going to for – I think this year. But the fact that we’ve already got 15% year over year growth, we’re probably going to concentrate a lot more on reducing our own internal costs and in the integration of those operations. The deals will find us and the deals for 2014 will be zeroed in on the bidding season which will actually start pretty soon here.

So south Carolina may be for 2014. We’re certainly hoping that it will be. We’re encouraged by the speed that the South Carolina legislator has moved this. But there’s going to be – there’s an enormous bid and conversion pipeline for 2014. So with us being at 15% for 2013 maybe we’d end up in the 15% to 18% range if we closed a couple of small deals during the year.

Greg Colman - National Bank Financial

Okay. So just kind of rephrasing or reading in a little bit, a little bit more focused on operational execution, a little bit of margin expansion, cost reduction in this fiscal year versus just straight talking on more acquisitions.

Denis Gallagher

Correct.

Greg Colman - National Bank Financial

Okay. Now that’s good. Do you have – or maybe it’s a better question for Pat, do you have a good handle as to where that margin expansion is going to come from either a basis point or a percentage basis?

Pat Walker

On estimated savings?

Greg Colman - National Bank Financial

Yes.

Pat Walker

No. We haven’t necessarily formulated that. We’re going through plans now. We recently finished the budget cycles. We’re working with our operating guys in a number of areas trying to reduce expenses across the board.

Denis Gallagher

The budgets that we have Greg, are consistent with the margins that we’ve done historically. So the goal is to improve on those.

Greg Colman - National Bank Financial

Okay, great. And then just on the replacement vehicles, $30 million in lease financing I think I caught, 3.5% average if I was getting my notes correct there. Just wondering, how much did you have available to you? Was that $30 million of $30 million available or did you have a fairly – I’m trying to get a sense for the leasing market. Do you have a good optionality there unto who you could have gone to?

Pat Walker

No absolutely Greg. And I’m not sure if we had reported in our third quarter call. We may have, but we ended up with proposals in the 60 to 65 million hour range from eight different institutions. We used six. The last two they were just a bit late to the table because we’ve got to start the process and secure our slots with the manufacturers. But the rates from the last two were actually probably even a little better. But like I said unfortunately the timing was just a bit too late and they’re going to come back for next year. But yeah, we have ample supply, more than enough, almost twice as much as what we needed.

Greg Colman - National Bank Financial

Okay, great. And just one more question then I’ll turn it back to the rest of the lines. Just on that replacement vehicle side there. We are seeing municipalities that are potentially a little tight for capital that’s one of the pushes we’ve thought towards outsourcing school buses. Are we seeing a flexibility as to the lifespan that they’re allowing these fleets to stay on the streets as opposed to being really stringent into five, six, seven, eight years and stretching more into the low teens? Is that another way that guys are being a little bit more flexible on their budgets?

Denis Gallagher

Absolutely. I think what we saw was for example let’s talk about our own policy. Our own policy is our own policy. It’s an internal policy. There is only one state in the states which is New Jersey that actually has an age law and they actually extended it from 12 to 15, so that you could keep a conventional bus, 15 years now. So that’s a recent change that they’ve gone from 12 to 15. But what we’ve seen is that other school districts and certainly when like I’ve made a comment in my presentation today here that we’re going to be looking to take a real hard look at this and literally what we’ve been able to do is we’ve gotten some tremendous contract renewals and again we have – I think we have probably the highest renewal rate of anybody. But the 95% and we just verified that again the numbers throughout when we did our IAF which we’re filing. But 95% over 15 years. But our guys are in there and we’re in on contract renewals right now that literally don’t’ expire till 2014.

We’re actually getting those renewed now for another five years and what we’ve got is we’ve got a situation where school districts are saying to us, hey listen, I know we have a contractual amount to give you for say 2.5% increase. Can we give you 1.5% but extend the life of the vehicle on this contract so that you don’t have to go replace the vehicle at the end of maybe year eight or year 10, something like that. So if we can increase the life of the vehicles, that’s going to have, I wouldn’t say tremendous but it’s obviously going to have a nice reduction for us in our CapEx spend going forward on the replacement side. Now, we’ll actually keep up I think the total fleet age which we think is the youngest at 5.7 to 5.9 years because when we win new bids and we win new conversions, we put brand new vehicles in. so our concentration for 2014 fiscal year is literally on bid wins and conversions.

So we’re not probably going to be buying a lot of other acquisitions in the coming year because we’re going to concentrate on the new bids and the new conversions. That brings in the new fleets and then our guys have done this tremendous job of renewing our contract. So our weighted average remaining term of contract has now got out that much further and we’re getting extended life on those. So I think that’s a great trade off to get hey, we’ll give you a little bit off on quote the renewal price if you can give us a longer life on the asset. And by the way, the buses are being made today and lasting longer. So we’re getting rid of vehicles at 12, 13 years old that a lot of our competitors have an average age of 12. So I think for us to take the life up from 5.7 to 6.1 wouldn’t be a bad idea.

Greg Colman - National Bank Financial

Does that suggest what the buses staying on the roads for a little bit longer that the actual spread between what the income statement has a non-cash depreciation and what you actually need to spend is going to widen?

Pat Walker

Greg, that would require us to change the actual depreciable life and our depreciable life for big bus is 11 years and that’s the convention with the largest providers in the industry. Again that’s not useful life, it’s a depreciable life as an accounting term.

Greg Colman - National Bank Financial

Right. But your useful life is getting longer, that would be the suggestion?

Pat Walker

Yeah. We could change what we have to – that’s a big change in terms of our accounting and continued disclosure requirements.

Denis Gallagher

I’m not sure we would change the depreciable life. We would just extend the useful life.

Pat Walker

Yeah. Our useful life now we use our big buses 13 years or so.

Denis Gallagher

Yeah. If we got 14 years out of them it would be a great thing, or if we got 14 years out of 25% of them it would be a good thing.

Greg Colman - National Bank Financial

Right. Okay, that’s good color. Appreciate it. Again good looking quarter and thanks a lot guys.

Operator

Next question is from Tony Polak of Maxim Group. Your line is open.

Tony Polak – Maxim Group

Good morning. Could you give us an idea when you started to roll out or if you have this 499 a month for keeping track of the kids and how widespread if it is rolled out in your fleet it is?

Denis Gallagher

Yeah. Tony, it’s a pilot program that we have right now in Jacksonville. So we’ve got several hundred folks that are enrolled in this program now. It is something that is a technology driven base. We don’t own the technology. So the company that we’re working with has allowed us to I would call white label or rebrand it with ours. We are the only ones with it in the market. It’s going to be something that I think right now we’re trying to literally work out the backroom technology of it. But you can go, those parents in Florida right now can go online, sign up for it. So we want to make sure that we make it fail, make it work and fix it, break it, go through all the trial and errors. Parents have to sign up online. It’s very easy to do. It’s Visa, MasterCard, American Express. They get their text messages. It is working out. We do have to have it tied with a GPS system so we’ve got to go back in our fleet and our operations this year. We actually had a meeting yesterday identifying the operations of where we think this will roll out fast. We think it will roll out in places like Greenwich, Connecticut, Wilton, Connecticut, certain towns and communities in New Hampshire.

I would say that certain California locations, New Jersey clearly. So there’s a lot of places where that we have the existing technology where we can go turn this feature on. So we’re not – I’m very excited about it. We don’t have it built into our numbers. But we’ve got 700,000 kids this year that we’re transporting. My goal for us in the future is to have about 10% of our population actually initially signed up for this. The parents that have signed up for it actually love it and I do think that that’s part of our marketing and sales thing that we’ve got to build this whole marketing sales process out. But we are literally making that work. 700,000 kids, 70,000 parents had this product it would be an additional $3.5 million to our bottom line with literally no investment.

Tony Polak – Maxim Group

All right. How long has it been in Jacksonville and what kind of uptick have you gotten?

Denis Gallagher

We’ve only put it in this year so it’s only been in for a couple of weeks and as I said we’ve got 700,000 passengers and we’ve got 200 signed up so far just in three weeks with no ad – I mean we literally are working the kinks out.

Tony Polak – Maxim Group

That’s a pretty good percentage. Are there any other potential added revenues that you see in your fleet like this?

Denis Gallagher

There is another form of revenue that is out there that we’re working on hard which is – but it’s kind of an industry taboo but yet it’s legally allowed in certain states and that is advertising on buses. There’s both external advertising that is now allowed in about 14 states and there’s internal, inside advertising that is allowed. That’s very similar to advertising you’d see in a transit bus with kind of the ads along the top, above the windows let’s say. So it would look similar to that. The revenues on the interior are a little small, but they’re not – it’s about $150 a bus per month, if you can get those and on the exterior it’s running between $350 and $450 a month exterior. Now some of our – we just acquired a company in Texas that we talked about. Some of the school districts down there that own those buses but we operate them for them. The school district has the advertising on their and the school district gets the revenue. but the fact that Texas allows it is a real opportunity for us. Now, the yellow bus is an icon in communities and the yellow bus industry is not in favor of exterior advertising. So when you look at a yellow bus you would see the advertising behind the rear wheel to the back bumper on either side and then a portion of the back of the bus. That would be the only exterior advertising that’s allowed that’s out there right now approved. Now there was a bill today passed or moved actually got this morning.

There was a bill in New Jersey that’s actually moving that will allow school districts to advertise on the exterior. Not sure where that’s’ going. But we’re keeping very close on that. There’s one other third option on top of the advertising that we’re looking at and that’s what we call the edutainment business and this would literally be something that would be huge, but would be very difficult to get I think past a lot of school districts with parents and school boards and that would literally be almost like, this goes back to the days when Whittle Communications had what’s called Channel One and they had content provided to schools very similar to CNN airport maybe. You have CNN education and you would be able to provide that service through videos. Once you have the GPS on the bus you’d be able to provide the edutainment services inside the bus. So we’re out there kind of learning about this. We’re dealing with the vendors with this. The problem is going to be getting the content and the providers passed by school boards and state regulators and even people like motor vehicle who say well, where is the monitor going to be placed and is it going to hit somebody in the head. There is a lot of regulations before we can get to that side of the business.

Tony Polak – Maxim Group

Thank you. Appreciate it.

Operator

Thank you. Our next question is from David Tamberrino of Stifel Nicolaus. Your line is open.

David Tamberrino – Stifel Nicolaus & Company,Inc.

Hi guys. Thanks for taking my questions. First one I want to get across to you is taking a look at the CapEx spend in the end of the year. Looks like you did a lot for the growth going through 2013. I wanted to know and get your thoughts around where FY2013 CapEx is looking absent any further growth CapEx. Just kind of the remainder of your maintenance and general CapEx for the year.

Pat Walker

Yeah David we, in the fourth quarter we probably funded probably about $20 million, $25 million to bring some vehicles in early for the nine new – the additional nine new businesses that we’ve announced for fiscal ’13. In terms of our replacement, again a majority of that was funded through operating leases we purchased in July, August and here at the beginning of September. Probably purchased about $4 million to $5 million of replacement CapEx and then of the additional growth for next year probably another $5 million or so anticipated. That’s for the bids that’s secured to date.

David Tamberrino – Stifel Nicolaus & Company, Inc.

Okay. So is that – that’s full year talking maybe $5 million, $10 million – excuse me, $10 million?

Pat Walker

I’ll have probably another $2 million $to 2.5 million in non-vehicle CapEx which is standard. So that will get you up to about $12.5 million. Then the only other thing would be if school districts because while we’ve seen school districts cut back at time, a lot of times they turn right around when they realize that they can’t operate efficiently or effectively and start adding back routes. So we’ve had additional service requirements as you go through. But I wouldn’t expect them to be huge.

David Tamberrino – Stifel Nicolaus & Company, Inc.

Okay. And then just kind of a near term, I wanted to check in see how your summer charter business has trended.

Pat Walker

It’s been fairly consistent. I think last year as we were coming to fiscal ’12 we made it a point to focus on. I think we’re up about $1 million, I don’t know, about $300,000 in the summer of this year compared to last year. But even last year we had made it a focus to try and increase that in the summer months.

David Tamberrino – Stifel Nicolaus & Company, Inc.

Okay. And just because it’s on my mind from these last couple of weeks there was a recent teacher strike in Chicago. I know you probably weren’t servicing those, but in the event that there is a strike in a region that you serve, is there any guaranteed payment for you? Is that just lost revenue from not transporting the kids to school?

Denis Gallagher

Dave, our contracts are generally day specific. So there’s 180 day contract or so like that. So you will see in 99% of my experience they’ll make up those days. Now, in the teacher strike in Chicago, yes, we had no effect on that. We don’t work for Chicago public schools at all.

David Tamberrino – Stifel Nicolaus & Company, Inc.

Okay. I generally wanted to know.

Denis Gallagher

Yeah. No problem.

David Tamberrino – Stifel Nicolaus & Company, Inc.

Okay. Well, that’s all I had for your gentlemen today. Thank you.

Operator

(Operator instructions). We have a question from Theoni Pilarinos of Raymond James. Your line is open.

Theoni Pilarinos – Raymond James & Associates

Hi guys. I was just wondering if you kind of had a longer term that you’d be happy with in terms of your margins. You’re looking at certain areas. Is there – like are you looking at a 1% increase maybe over a couple of years or what’s kind of your – a long term goal you’d be happy with?

Denis Gallagher

Okay, good question. We’ve talked about this before. We’ve been in the margin range that we’re in and when you look at 2012 had filled in at last year’s rate we would be sitting here at 20.5% margin. But few was in that last year’s rate. So we did take the hit. But we’ve been pretty good at being able to lower our other costs. So our insurance costs have gone down because our action frequency rate has dropped considerably. The operations that we buy we’re able to go in and improve the purchasing side which lowers some of our maintenance costs and our purchasing costs. We lower our insurance costs through these acquisitions, those kinds of things. But we need to start really seriously working on the conversion of our fleet on the fuel side. And so there’s a couple of things that we can do. So we can kind of take fuel a little bit more out of the mix. I’ll give you an example. The four contracts that Pat mentioned or six contracts or seven contracts I guess, I’m sorry, that we won this past year, four of those had 100% customer paid fuel. So that’s the kind of things that will help improve our margin going forward because we’re not paying for any of the fuel. So we don’t have the volatility of the fuel. Nine years ago was 5% for us. Fuel is now 9% for us.

So we’ve taken a four point hit to our margin, yet our margins have stayed the same. So we’ve been growing, but we haven’t been able to add margin and primarily it’s literally on the fuel side. So what’s happened this past year? Well, we’ve been able to get our three main manufacturers which are IC Bus, Bluebird and Thomas Bus. Those three of our big bus manufacturers have all agreed to have what we call LPG or Liquid Petroleum Gas vehicles by 2014. Now we use some of those in California and some of those in Minnesota currently. We’ve got about 500 vehicles between compressed natural gas and LPG gas. We’ve been able to negotiate the capital cost down to a very reasonable price close to the cost of the diesel. Well, here’s the difference. The operating costs of running our LPG costs today is almost 50% of the fuel cost of a diesel engine. So that’s a tremendous difference in our energy costs as we start to convert to LPG and CNG. And the reason that we can do this is number one, the capital costs have come down for us and that’s significant. We have a partnership with companies like Clean Fuel Energy at Boone Pickens’s company which comes in and provides the infrastructure for us. So we don’t have to put the upfront capital to literally put the tanks in the system in. they do that for us and it’s almost like a royalty over five years.

They get a little bit in the price per unit or price per gallon equivalent that they would sell us this liquid propane at. So we already have this working in California and in Minnesota. We picked two different environments, one with extreme cold and one with heat and to make sure that it works in both kinds of environments and they’re both highly successful. Now the good news is the customer in Minnesota actually supplies the fuel. So the customer in Minnesota is the one reaping the benefit of the lower fuel cost. So again that will help us in our marketing. That will help us in our bidding prospects to go after new customers. States like Pennsylvania, states like Texas that have literally tons of gas and oil wells in their areas are encouraged by us going and converting to LPG. But I think the conversion to LPG, once we got the capital costs down, is going to really be an operating cost savings for us. If we can get back one to two points out of fuel, that’s going to be kind of the much range we’re going to be in. we’re going to probably be in the 20% to 21% range in the future if we can do that because we’ve been living through the last three years of zero increases in CPI with our contracts.

This is the first year we’ve actually gotten a CPI increase on our base contract. So we’re now back. We can – when we listen to people talk about inflation may come and things like that, inflation is actually not a bad thing for us because our contracts are primarily driven on CPI. When we get a 3% increase on our revenue contract it’s going to be holy cow, we haven’t seen those kind of increases in a long time. So we’ve been able to maintain the margins despite higher fuel costs and no increases and I think once we can get to a position where we can lower our fuel costs, that’s going to be an extra maybe two points for us easily and maybe get fuel down eventually back to the five point range. That’s a huge swing for us. Now the last point I’ll make on that is we’re very conscious in the marketplace of how we don’t price ourselves out of the business. We do have to be competitive. So we’re constantly looking at our internal costs. So when I talked about trying to reduce our energy cost, we’re doing things like contracting our gas and electric in our terminals now through some of the companies that are being sprouted up and they’re out there literally. They’re doing the hedging on that. So we’ve got certain states, Connecticut and New Jersey and a few others that allow the sale of gas and electric.

So we’re working with them and we’re going to see about a 10% reduction in those states where we have gas and electric bills just by purchasing better. So our own increased purchasing programs, our warranty programs have gotten better. Our parts purchasing programs have improved. We are literally working on all those other costs that we can. I will tell you the one cost we don’t ever keep on is our driver wages. We want to be in that category where we have the finest drivers in the business and we’ve been very good to make sure if all of us take zero increase year over year, our drivers get their increase and that’s very important to us. So we’ve got to do better. We’re doing good things with our insurance as I said. We’ve done some creative things with health insurance that we’re looking at. So there’s a lot of other ways that we can continue to take. Point one here and point two here and point three there. So we’re going to be driving that cost this year. So that’s what our focus is on is driving the cost down, working on the conversion of our fleet to an LPG fleet which is going to take time. But it’s also going to add to our margin I think because we’re going to have lower operating cost of fuel.

Theoni Pilarinos – Raymond James & Associates

That’s very helpful. Thank you.

Operator

Thank you. There are no further questions at this time. I’d like to turn the conference over to Mr. Denis Gallagher for any closing remarks.

Denis Gallagher

So really that concludes our remarks and we thank you all for joining us. We look forward to seeing you at our annual general meeting in Toronto which is coming up on November 8th for anybody that’s in town and would like to join us. And with that we would say thank you all for joining us and have a safe day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.

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