Student Transportation, Inc. (NASDAQ:STB)
Annual Shareholder Meeting Call
November 8, 2012 2:00 PM ET
Irving Gerstein – Lead Independent Director
Mark Spiro – Corporate Secretary
Christopher Harwood – President, Student Transportation of Canada
Denis Gallagher – Founder, Chairman and CEO
Pat Walker – EVP and CFO
Pat Vaughan – COO
Good afternoon, ladies and gentlemen, and welcome to the Annual Shareholder’s Meeting of Student Transportation Inc. My name is Irving Gerstein, I’m Lead Director of the Board and will act as Chairman for today’s meeting. With your permission, I would like to begin with the formal part of the meeting, following which I will ask Denis Gallagher, the Chairman and Chief Executive Officer and his team to discuss the Company’s performance and then Denis will answer any questions. That’s any questions you may have.
Before we begin, I would like to introduce the senior executives here with us today. To my left are Denis Gallagher, CEO; Pat Walker, Chief Financial Officer; we have Pat Vaughan, Chief Operating Officer; and Bob Burney, Secretary of the meeting and Corporate Secretary.
In addition to Denis and myself, I would like to introduce the other members of the Board in the audience, who I would ask to stand when I announce their names – Ken Needler; Grace Palombo; George Rossi; David Scopelliti; and Victor Wells. There are additional members of our management staff who are here with us today. I ask them to stand and they will be available to you; just so that you can see who they are, a few more, but will be here with you and be able to discuss matters with you after the meeting.
With the permission of the meeting, I appoint Robert Burney to act as secretary of the meeting. The meeting will now come to order. With the consent of the meeting, I ask Graham Shured [ph] and Matthew Gemeld [ph] of Computershare Investor Services Inc. to act as scrutineers.
A notice calling the meeting was mailed to shareholders on October 10, 2012 and we have received an affidavit of mailing from Computershare Investor Services Inc., the Company’s transfer agent confirming mailing of the notice. I ask the secretary to table the notice. The scrutineers’ preliminary report on attendance has been received. We confirm that a quorum is present, a copy of their report is available for inspection. At the best of my knowledge, if a ballot were conducted on any matter to be considered at this meeting, the total number of votes attached to shares represented by proxy which are required to be voted against such matters is less than 5% of the votes eligible [ph] to be cast; accordingly, voting will be conducted by a show of hands on all matters.
I now declare the meeting to be properly constituted for the transaction of business. On behalf of the Board, I thank those shareholders who have chosen to attend the meeting today. I also thank those who submitted their proxies in advance. To make the best use of our time, certain shareholders or proxy holders have been asked to move and second the proposals which are called for in the notice of meeting. Those persons are Mark Spiro and Christopher Harwood.
The first item of business is the presentation of the consolidated financial statements of the Company for the year-ended June 30, 2012, and the auditor’s report thereon. A copy of the financial statements was included in the annual report previously mailed to shareholders.
We will now proceed with the election of directors. Seven directors are to be elected today. Mark Spiro who has been asked to place before the meeting the names of those persons proposed to be nominated for election as directors.
I nominate Denis Gallagher, Irving Gerstein, Ken Needler, Grace Palombo, George Rossi, David Scopelliti, and Victor Wells.
I second the nominees.
Are there any other nominations? In 2009, the Board of Directors adopted what is commonly referred to as a majority voting policy. Under that policy, a director is required to tender his or her resignation if he or she receives more withhold votes than votes cast for his or her election. Based on the proxies received for the election of directors, if elected, none of the nominees would have to tender their resignation under Student Transportation Inc.’s majority voting policy. I declare the nominations closed. With that, Mark Spiro to move, and Chris Harwood to second, a resolution for the election of seven person nominated as directors and directing me as Chairman to cast the single ballot for their election.
I move the resolution be followed. These results [inaudible] seven persons nominated are hereby elected as directors of the Company to hold office until the next annual meeting of shareholders or until their successors are elected or appointed, and the Chairman is hereby authorized to cast a single ballot for the election of the seven persons as directors of the company.
I second the resolution.
Thank you. All those in favor of the resolution, please so signify? Contrary if any? I declare the resolution carried. I declare that Denis Gallagher, Irving Gerstein, Ken Needler, Grace Palombo, George Rossi, David Scopelliti, and Victor Wells have been duly elected as directors of the company to hold office until the next annual meeting of shareholders or until their successors are duly elected or appointed.
We will now proceed with the appointment of auditors and authorization of the directors to fix their remuneration. Mr. Spiro, may I have a motion to appoint auditors please.
I move a resolution [inaudible] Ernst & Young LLP are hereby appointed as auditors of the company to hold office until the next annual meeting of shareholders. The directors are hereby authorized [inaudible] their information and the Chairman is hereby authorized to cast a single ballot in favor this designation [ph].
I second the motion.
Thank you. You have heard the motion. Are there any questions? All in favor? Contrary if any? I declare that Ernst & Young LLP has been reappointed as the auditors of the company.
The next item of business is the approval of the increase to the shares issuable under Student Transportation of America Holdings Inc.’s equity incentive plan. Full particulars of which are set out in the management information circular for this meeting. The form of resolution is set out in Schedule A to the circular and requires the approval of a majority of the votes cast by shareholders present in person or represented by proxy at the meeting. Will someone move and someone second a resolution approving the amendments to the equity incentive plan?
Mr. Chairman, I move to follow the resolution [inaudible] resolution set out in Schedule A of the Company’s management information scheduled [ph] for this meeting, received [ph] and hereby approved, and the Chairman is hereby authorized to cast a single ballot in favor of this resolution.
Mr. Chairman, I second the motion.
Thank you. Are there any questions? Since there are no comments or questions, it is now an order to vote on the motion. All those in favor, please so signify. Contrary if any? I declare the resolution carried. We now have completed the formal part of our meeting. If there is no further business, I will ask Mark Spiro for a motion to terminate the meeting.
I move that the meeting be terminated.
I second the motion.
Thank you. All those in favor? Contrary? Carried. I declare the meeting terminated.
I would like to express the gratitude of management and the Board to all of you who attended today. There will now be a short video presentation, followed by a recap of the fiscal year as well as an update on the Company by our CEO, Denis Gallagher; our CFO, Pat Walker; and our COO, Pat Vaughan. Lastly, Mr. Gallagher will entertain questions from the meeting with respect to the corporation, its annual report and operations during the year.
Thank you Mr. Gerstein, thank you everyone, and welcome for joining us today at our annual general meeting for our shareholders. Kind of corny video, I guess, the guy in the beginning there but it’s a true story of actually how I started in the business. I always look forward to the annual general gathering because it gives me an opportunity to thank everyone here and obviously on our webcast today for the trust and the confidence that you have placed in us year after year. It’s a trust and it’s a commitment that we take extremely seriously.
Before we get started, please be aware that in addition to the standard disclaimer about forward-looking statements, which you see here, please note that all figures will be in U.S. dollars unless otherwise noted. I will also mention that the meeting as I said is being webcast live and will be archived on our website at www.ridestbus.com.
Fiscal ’12 was an important year for us in many ways. We dual-listed our common stock in the U.S. on the NASDAQ Global Select Market a little over a year ago. We completed a number of strategic acquisitions and capitalized on moves made by a competitor for an acquisition that we wanted to complete for over 10 years. Both of these expanded our North American footprint to include three new states and really, really great new operational teams.
We picked up significant new business through competitive bids such as our – due to our reputation for service, safety, and savings, which combined to spread [ph]. We continued to try to educate our school boards to the advantages of converting their public school bus fleets to our high-quality, efficient, and cost-effective privatization model. Now, it has been slower than we thought but we’re still convinced that the trend is moving in this direction. There’s a $24-billion industry school transportation and $18 billion is in the hands of the public-run government operations. We just believe that they can’t continue to provide that kind of a service in that service level. The pressure on cost; the pressure on public pensions; and the lack of capital and access to new equipment without substantially raising taxes is going to be significant.
For the 8th year in a row or our 93rd consecutive month, we paid shareholders an annual dividend of $0.56 per share. That’s a 93-month track record of diligence, transparency and solid performance. Please note today that the Board also approved the dividend for the following quarter through until March, which they do on a consistent basis. In short, it was another great year of consistent predictable and profitable returns.
Our year-over-year numbers speak for themselves. Revenue was up 20%. Adjusted EBITDA increased by 19%. And margins top 19% again despite continued tough economic conditions, uncertainty in the capital and the debt markets, rising oil prices and shrinking state and provincial municipal budgets. Our success is largely due to the strength of our business model and the strength of the management team, many of which you’re going to meet here today.
Our CFO, Pat Walker, will be up in a few minutes to review the full fiscal 2012 financial results and he’ll also touch on the first quarter. Then he’ll introduce our Chief Operating Officer, Patrick Vaughan, who will share some thoughts on the operational highlights responsible for our strong financial results for fiscal ’12 and outline some of the exciting opportunities before us in 2013. He’ll also mention a few things in relationship to the terrible storm that hit the North East most recently and its effect on our operations.
I’ll return after their remarks for some final thoughts and we’ll wrap up with a question-and-answer period for those that are here today. I will also mention that – and I did mention that the meeting is being webcast live. Before I turn it over to Pat Walker – well, we have two Pats, Pat Walker and Pat Vaughan – however, I’d like to call your attention to the photographs that you see here and were on the video today. They’re not only here to introduce you to some of the faces of our 9,500 employees and the 700,000 plus kids that we take to school each and every school day. They’re here to remind each and every one of us that these folks are the people that make this happen. These are the point-of-service, and they create the guiding principles that make our company, our culture, and our people really unique. They are the secret sauce that differentiates us from our competitors.
I’d like to take just a minute to share a few of these guiding principles with you. We understand our public trust to transport student to and from safely and on-time to school. We treat our employees with respect and we operate like a family business, knowing and caring about our employees. We listen to our customers. We address issues immediately and we allow them to concentrate on education, which is what they do best.
We invest in our schools and we take seriously our responsibility to make sure we use smart tactics and smart use of taxpayer dollars. We invest in our communities with our employees giving countless hours of caring community service with environmentally friendly vehicles and operations. And finally, and important to all of you here today, we serve our shareholders by carefully managing our business to deliver consistent and attractive returns on your investments.
These are the words we live by. If we can take care of the little things, the big ones tend to fall in line. And I’m so proud of our drivers, our dispatchers, our mechanics, and the managers who put these principles into practice every day. We are a company to invest in the long haul. We are a company built to last. We will take our dedication to the streets of North America each and every school day. I would ask those to judge us on how well we perform and see the respect that we have earned over the past 16 years and eight years as a public company – respect from our employees, our customers, our communities and the financial community. If you do that, I’m sure that we will earn your respect as well. If you’re looking to invest in a well-managed company, we’re one to be considered for the long haul.
Now I’d like to turn it over to Pat Walker, our CFO, for a full review of our fiscal ’12, and also a few words about our first quarter of 2013, which we released this morning as well. Pat?
Thank you, Denis. Good afternoon and thank you all for being here. I apologize in advance if my voice cracks a bit. I just came down with a cold over the last week. I’m going to touch on some financial highlights and summarize the results for the fiscal year-end, June 30, 2012 and for the first quarter of fiscal 2013, which ended September 30, 2012.
On September 6, part of the first quarter of fiscal ’12, our common shares commenced trading on NASDAQ under the ticker symbol STB. In connection with the dual listing of our common stock, we are considered a foreign private issuer under Canadian Securities Regulations. And under those regulations, we are allowed to use U.S. GAAP for continued disclosure and filing requirements in Canada. As such, we adopted [ph] U.S. GAAP for continued reporting requirements going forward, starting with fiscal 2012. Each of the quarterly interim financial statements for fiscal 2012 and our year-end audited financial statements for fiscal 2012 were prepared in accordance with U.S. GAAP.
The 2012 fiscal year results reflected continued success of our A-B-C growth strategy. We completed seven acquisitions in the year; three in the first quarter; three in the second quarter; and lastly, we closed an asset and purchase and sale agreement for assets and contracts in Texas and Washington, which basically closed at the end of the fiscal year.
We also started operations on nine new big contracts for the year, six of which were tuck-ins to existing operations. Revenues for fiscal 2012, totaled $369 million, an increase of $64 million or 20.9% over fiscal 2011. The increase in revenue demonstrates STI’s continued achievement of consistent, reliable growth year over year.
Now let’s turn to EBITDA. EBITDA is a non-GAAP financial measure but we believe it’s useful in measuring FTA’s [ph] performance. Our calculation of EBITDA is defined in our quarterly and year-end press releases. The line items included in the reconciliation of net income to EBITDA are clearly non-cash and non-operational items. The EBITDA reconciliation, with the exception of the operating lease expense which is a financing expenditure in summary [ph] to that use in our debt agreements in relation to our leverage coverage ratios under those agreements.
In the future, we will use the term adjusted EBITDA to further improve transparency and we will continue to provide the reconciliation in the quarterly and annual press releases. Adjusted EBITDA for 2012 totaled $70.1 million, an increase of $11.2 million or 19% over adjusted EBITDA for 2011. As with the revenue increase, the increase in adjusted EBITDA primarily is due to the net new business secured in the year and similar to the continued revenue trends, shows the steady, predictable and consistent growth here as well.
Net income for fiscal ’12 was $2.2 million compared to net income $1.5 million recorded for the 2011 fiscal year. Net income per share for fiscal 2012 was $0.03, consistent with the same net income per share of $0.03 for the 2011 fiscal year. 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 amortization expense; stock-based compensation; unrealized gains and losses on our foreign currency contracts; unrealized re-measurement gains and losses on our 6.25% convertible debentures; the mark-to-market of the conversion feature of those convertible debentures; our tax provision and benefit, and for fiscal ’12, the bargain gain recognized in connection with the May close of the asset purchase and sale agreement.
Now let’s turn to some cash flow and debt items for fiscal 2012. Purchases of property and equipment totaled $48.6 million for fiscal ’12 while proceeds from equipment sales totaled $1 million, which resulted in net capital expenditures of $47.6 million. Of that amount, $39.3 million relates to new bid contracts and route secured as part of the net new business for fiscal ’12 along with some growth spend pre-spending [ph] in the fourth quarter for new bid secured for fiscal 2013. I will touch on those in a minute. $7.1 million relates to net replacement capital expenditures which we purchased and $1.2 million relates to other capital investments.
In regards to our fiscal 2012 replacement CapEx, the Company deployed approximately $24 million in fleet value for fiscal ’12 or approximately 6.5% of revenues for the full fiscal year; similar to the percentage of replacement for fiscal ’11 and prior years. Of the total replacement CapEx deployed for fiscal ’12, I just mentioned that we purchased $7.1 million; we also funded $17 million via low-cost operating lease financing. The operating lease is associated with fiscal ’12 replacement CapEx all at six-year terms with implicit interest rates in the range of 2.8% to 5% and residual value of 30%.
The Company has utilized operating lease financing for a portion of the replacement value of the fleet putting the service based on the competitive financing rates and to maintain availability under the credit agreement. Total cash dividends for fiscal ’12 were $28.3 million. At year-end, we hedged approximately 40% of such dividends to the next year and a half based on the current dividend rate in effect for the year. Additionally, as our Canadian dollar cash flows increase, they serve as a natural hedge against currency fluctuations.
As of June 30, 2012, the year-end, our outstanding debt balance has totaled approximately $215 million and included a $35 million of senior secured notes, approximately $50 million in borrowings on the credit agreement; $130 million in convertible debentures; and $0.1 million in seller and other debt.
In March 2012, we completed an equity offering of 12.25 million common shares for net proceeds of approximately $80 million. We marketed the common shares in both the U.S. and Canada. And the offering was very well received in both markets. This was the first direct offering of common shares in the U.S. market since the completion of our dual listing in September 2011 that I mentioned earlier. The net proceeds were used to repay borrowing on the credit borrowings on the credit agreement.
We also extended the maturity date of the senior secured notes during the year earlier in fiscal ’12. In November, we rolled over the $35 million in senior notes with existing senior note holders lowering the fixed rate and extending their maturity date another five years to November 2016. This came as a follow on to the refinancing of the credit agreement we did with the bank group that closed in the second half of fiscal 2011. With the credit agreement refinancing, we extended that maturity date another five years to February 2016; secured $140 million in initial commitment and an additional $100 million in accordion feature for additional capacity when needed.
Since we also released our first quarter results today as well, I will conclude with a brief review of the financial results for the first quarter of fiscal 2013, as we have done in prior years. The fiscal 2012 momentum should continue as we look forward to fiscal ’13. We have secured contract revenue increases of approximately 15% in school transportation revenues for the 2013 fiscal year at historical margins. As we turn to the first quarter results, let me remind you that the first quarter results always reflect the seasonality of the school bus business, with cash flows typically lower during the first quarter because schools are not in session during the summer months and due to the incurrence of incremental off-season expenses associated with newly acquired secured business for the new fiscal year.
Revenue for the first quarter of fiscal 2013 was $61.6 million, an increase of $10.5 million compared to the $51.1 million for the first quarter of fiscal ’12. Adjusted EBITDA for the first quarter of fiscal 2013 was a negative $3.5 million, compared to a negative $2.4 million in the prior year first quarter. The larger adjusted EBITDA loss is primarily due to the off-season expenses associated with the growth secured for fiscal 2013.
Net loss for the quarter – for the first quarter of fiscal 2013 was $7.6 million while the prior year first quarter net loss was $11.3 million. The improvement in that loss is primarily attributable to the currency re-measurement gain on the U.S. dollar denominated 6.25% convertible debentures issued by STI, combined with unrealized gains on currency contracts included in the first quarter of fiscal ’13, partially offset by the higher off-season expenses and higher non-cash and non-operational expenses compared to the prior year first quarter.
Over the past two fiscal years and through November 1st of the current fiscal year, certain holders of our 7.5% convertible debentures exercised their conversion rights to convert their debentures into common shares. On October 3rd, the Company announced its right to redeem the 7.5% convertible debentures effective November 2, 2012. The Company have now completed that redemption.
So while we maintain availability under the current credit agreement, as Pat Vaughan will explain further in a few minutes, we plan to focus our efforts this year on the integration of the fiscal 2012 acquisitions we did and the new bids for the current fiscal year while reviewing cost-savings initiatives and also new asset-like business opportunities as we continue through fiscal 2013. Thank you.
And now, I would like to introduce Pat Vaughan, our Chief Operating Officer who will discuss the Company’s successful start-ups and touch on hurricane Sandy. Thank you.
Thank you, Pat. Good afternoon, everyone. It’s a pleasure to be here with you all just to discuss our North American school bus operations, our employees, and our very important customers that have helped make fiscal 2012 such a successful year.
I’d like to gear today’s discussion around three key areas. Number one, our achievements of this past year; number two, our new product offerings; and number three, fiscal year 2013 objectives.
But before we get in to the highlights of this past year, let me bring you up to date on our Company’s response to super storm Sandy, that hit the North East Coast of the United States this past week. First, our hearts go out to the families of those who lost their loved ones and to the residents of communities up and down the coastline who have suffered immeasurable loss. Thanks to some extremely good planning amongst our regions and proactive measures taken on the emergency preparation side, our management teams have been successful in establishing and keeping our assets safe. Our people are safe and our assets are safe.
We had service disruptions in New Jersey, Connecticut, New York, Rhode Island, and in New Hampshire. In the worst area of New Jersey and Connecticut, several of our locations experienced a minor flooding but the damage was minimal and the clean-up has begun. We sustained no damage to any of our vehicles which were repositioned well prior to the storm hitting. Our local teams and staff have been out in their communities offering assistance wherever possible. In hard-hit New Jersey, we have fueled fire trucks, transported the elderly, and provided shuttle service for those in need of local shelters. Our IT system was up and running the entire time. And the help and assistance from the employees at our locations in the 12 other states plus here in Ontario is a testament to the family culture that has been built here at STI.
We did lose about a week of school in New Jersey and in parts of Connecticut. As in the past however, with our 180-day year school revenue contracts, lost days are historically made up throughout the balance of the year. And we fully expect that pattern to continue. In fact, Governor Chris Christie from New Jersey has already issued a directive to the schools in New Jersey that they’re to make up the days, and we’re receiving similar information from Connecticut. So there’s no doubt that we will recover those lost days.
As of today, we’re getting power back on and schools are anxious to reopen. Our vehicles are fueled up and our local teams are ready to go. Believe me, we’re not just partners with our communities, we are part of those communities.
Now, let me review some of the highlights of what has been a very busy fiscal 2012. We successfully completed seven key acquisitions. We were awarded nine new bid contracts. We added 25 new operating locations. We increased our fleet size by 23%. We expanded our footprint to include three new growth states – Texas, Wisconsin, and Washington. Most importantly, we improved our safety performance by reducing accidents 15%. And we secured 100% of the contracts up for renewal for additional attractive multi-year terms. Let me just say that again. We secured 100% of contracts up for renewal. This is a true hallmark of customer satisfaction.
Our success is driven by outstanding effort of our team from our regional area and location leaders to everyone who works behind the wheel and under the hood. Our employees strive to deliver the safest and highest quality of service in the most cost-effective manner. I say proudly and without hesitation, we have the most experienced management team in the industry and continue to be recognized as the industry leader because of our stellar reputation.
We are also a family business. We’re a family of people and a family of companies. We take care of each other and take enormous pride in taking care of our employees and customers. We see the results of that culture at work every day in our lower than average employee turnover and higher than average customer contract retention. And when called upon to assist in the largest integration of new work in this company’s history, the team responded with seamless transition points, from contracts to customers, to back-office functions; a true success story in and of itself.
Complementing the integration process was the addition of highly qualified and experienced business leaders in markets such as Wisconsin, Texas, and Washington. We have known these top-quality people for many years and we jumped at the chance to have them join our team.
The second area that I’d like to touch upon involves some new product and service offerings intended to increase revenues. Providing creative solutions to the everyday challenges faced by parents and school districts is what we do best. Our Direct-To-Parent business is a good example of just one of the ways we can prepare for changes in the market place.
Last year, we piloted a new service and branded it, SchoolWheels Direct. It provides an additional revenue stream in new markets and a way to redeploy any excess equipment into existing markets. As some school districts operating their own fleets reduce transportation due to a higher cost self-operating model, more and more parents will be looking for safe, reliable, and affordable ways to get their kids to school. And we plan to be prepared to meet those needs.
Earlier this year, we enhanced our SchoolWheels Direct pilot programs in Florida and in California, with a rollout of state-of-the-art security service called SafeStop. Initially, SafeStop is being offered at $4.99 per month. This subscription service allows parents in our pilot areas to monitor their child’s bus every school day via their computer or to receive text messages 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 the unexpected changes in the route or school times. Parents receive their own secure link which is set up to monitor only their child’s bus.
We have found that parents are busy and their time is very important, so is the knowledge of the well-being of their child. Knowing when the bus will arrive and the time it will return gives parents piece of mind. We plan to offer this service in additional communities we serve throughout the coming year. We’re very excited about the potential new revenue for this and other edutainment type subscription services in the coming years. In this fast-paced technology age, there are many possibilities for creating new revenues on board as we move forward. Right now, these are small beta sites where we’re working with all kinds of details and backroom technology that will allow us to learn what works well and how best to expand this direct side of the business, which will also include easy online booking of school events and school trips, as well as local charters, weddings, and other special events.
We’re looking at our 9,000 vehicles as mobile devices, not your typical smart phones but with similar intelligence-gathering capabilities, the likes of which we have only begun to explore.
The last area that I’d like to discuss relates to our objectives for fiscal 2013. I would be remiss if I failed to mention the tremendous start up to the 2012 and 2013 school year. It was without a doubt our best start up ever. By every measure and every metric our customers are thrilled with our performance. This accomplishment is even more significant when you consider the fact that we started this school year with 20% more locations than last. We now transport more than 700,000 children to and from school safely each day.
On the growth side, we remain diligent and disciplined in our approach through our acquisition, bid in, conversion, and now direct to customer growth model which will continue to leverage our assets, recognize synergies, and expand our footprint. We are not chasing revenue. We have tremendous opportunities for growth.
We continue to work with our manufacturers to target cleaner, less expensive energy alternatives such as compressed natural gas, CNG; and liquid propane gas, LPG. At the close of fiscal 2012 almost 80% of our fuel cost was protected by some form of mitigation and we were operating more than 500 CNG and LPG vehicles on the road yet we need a better solution on the fuel cost side. We have to push our manufacturers to deliver new alternative fuel vehicles at better prices. We need access to lower cost alternative fuels available to use right here in North America.
Our recent expansion into Texas is serving as a catalyst for future growth. Our team is on the ground working with school districts across the state looking for creative ways to cut non-instructional costs. We have a big [inaudible] solution for these districts; that is access to a lower cost of capital than governments, we have to raise taxes and lower operating costs due to regionalization of our business. That regionalization gives us the greater purchasing power and creates operational efficiencies and synergies not available to local school districts.
There are approximately 1,600 school districts in the State of Texas and yet only 60 outsource school bus transportation. We also continue to make progress in North Carolina and South Carolina, Georgia and Florida where opportunities for conversion of public to private operations is very promising. In South Carolina, the state owns and operates all public school buses. The state legislation recently moved legislation and has formed a study commission to consider the implementation of that legislation and to create alternatives for transporting that state’s students. That commission is expected to present their recommendation in support of bidding local contracts for the 2014 school season. This has never been done before in the state of South Carolina and is viewed as a huge opportunity for us.
Here in Canada, our successful start ups and new contracts in Niagara, Orillia, and Midland have paved the way for continued growth and we’re actively seeking new opportunities in three new provinces.
I’m pleased to report that in the majority of this past year’s bids, across North America, we were not the lowest bidder, and yet we were awarded those contracts representing a fresh change in service, relationship, and culture to the awarding district. With start up in the rearview mirror, this year, our operational focus is not on further growth but instead our focus is on using our increased regional density and scale to drive operational efficiencies and improve margins. We’ll do this by using all the tools and technology we have available to carefully manage our costs, to optimize vehicle utilization by creating route efficiencies and to better manage our fuel consumption through GPS idling systems and driver education and awareness programs. Lastly, we will work on ways to increase our vehicle asset life and reduce our replacements CapEx.
Now I’d like to turn the floor back over to our Chief Executive Officer, Denis Gallagher.
Thank you, Pat. Before I open up the floor to any questions that you have, I did want to comment on Pat Walker. He lost his voice because he – obviously, our office is in New Jersey, he’s been without power in his home for the last 10 days. So, we finally got him up here to take a shower and get some hot water and tea, but he’s – our office had been closed down there with no power. Our employees came in. Our IT guys had run some generators in and we had absolutely no loss in service from our – as we said before our other 12 states plus here in Ontario. New Jersey represents about 10% of our business but it is where our executive office is. So we had tremendous help and cooperation from everybody within our company and it was just an outstanding show of the kind of culture that we have here and the company that we’ve built.
So, with that, I would like to open it up for any questions we have. This is a great opportunity to be able to fire off some questions, and I see one coming right over here. So let me see what we can do.
Mr. Walker, my name is Paul Gernnon [ph]. Looking at the balance sheet on page 57, really, there is $215 million of long-term debt, and the debt-to-equity ratio is really very high, it’s more than 100%. And you took – you’re paying out in dividends $28 million and you’ve watered the float, you’ve – the earnings per share is flat because you’ve watered the float, you’re paying out even more in dividends. Some of this debt is at fairly high rates, don’t you think the dividend payout is a little bit out of line considering everything?
Pat, do you want to answer it?
Sure, Denis. During fiscal ’12 – sorry – can you hear me? During fiscal ’12, our payout ratio was approximately 80%, our cash flow payout ratio. So our EBITDA less replacement CapEx that we purchased, our cash interest expense, we had targeted 85, we came in in the low 80% range. And so we’re comfortable with our payout ratio.
Yeah, well, that’s still – still high. But relative to –
Well, I think, wait a minute, on the –
Some of that debt is fairly high rate, isn’t it?
Well, no, the highest debt rate we have right now is at 6.5%.
That’s the highest rate that we have, and those are convertible bonds. And so they will eventually at the end, we just literally converted the last one which was at 7.5%. We were hoping that nobody would convert and we could pay them out with our 3% debt that we can do. But we’ve grown –
– the company by using debt and we’ve used debt, quite frankly, we’ve used our debt pretty effectively to be able to get some growth out of that.
You’re looking at what is essentially a great chance now to grow and you’ll ride along with the higher debt, and as time goes by maybe there won’t be opportunities for acquisitions, is that what you’re thinking?
Well, for the current year, as Pat Vaughan said, the concentration this year is, number one, we have 15% year-over-year growth already booked before we even start the fiscal year.
We have decided that this year, with adding over 20% plus growth this year, it’s a good time for us to work on the integration. We’ve gotten some large operations that we acquired, as we said 25 new locations. So we’re concentrating this year, not on growth, on the integration, on cost reduction, on increasing the utilization of those assets. Our guys have – Pat talked about the 100% renewal rate. This is not something that we take obviously very lightly. That renewal rate comes from, number one, customers get to vote with their feet [ph]. So if service levels aren’t good, you’re not safe, you’re not cost competitive, customers will tender your contracts. We’ve been able to retain our business. That’s very important from a visibility of revenue point of view. Our contracts are out five to seven years. We can sit down today without any growth and we can tell you what our revenue is going to be for the next five to seven years going out. A lot of companies don’t have that. And it’s contracted revenue.
We talked about the storms that we had today, we lost five, six days of school. We have 180-day contracts, they’re going to make those up. They’re making, in fact, two of those days up this week which were normally teacher conventions. So the visibility of the contracts, I think, from a shareholder perspective, certainly, from a bank perspective is very good. And when it comes to leverage, and you talked about total debt and things like that, we’ve got almost 300 and some million dollars [ph] of rolling assets, okay. So we’ve – remember, we’re a capital-intensive business. Without real-estate alone, just in the buses alone, we’ve got over $300 million of rolling assets. So we have used debt effectively.
We also have very good relationships with our credit market and with the banks. We have a senior debt – at June 30, we had senior debt to total debt ratio of about 1.9 times.
The senior was 1.9.
Just under two times, okay. We have covenants that allow us to go to three times on senior debt and total debt on five times. So we always stay within the covenants. That’s the goal post that we get to play in, and I think when we look at debt, we’re not debt as compared to maybe some other companies where you’re looking that they don’t know where their revenue streams are coming from. We know what our cash flows are; we know what our – we know how to use that debt effectively I guess is really what I’m saying.
Now, we will continue, very important, we’re going to continue to try to lower that debt down and use our internal cash to be able to grow and to be able to use our internal cash effectively to lower our debt. By the way, this past week, we just lowered our total debt by $20 million as those $20 million – that $20 million that was left in a convertible bond literally decided that they would convert the shares. So from a cash-to-cash basis, we’re going to be about pretty much neutral, maybe a little bit more cash out the door paying the dividend versus paying the interest expense. From a net income point of view, okay, we’re not going to pay 7.5% on $20 million, we’re going to save $1.5 million in interest expense. So, cash wise, kind of neutral; accounting wise, net income wise, yes, very important for us, we’re going to save $1.5 million.
Lastly, on the other point. The $100 million, I would say, Pat, is the converts that are left?
Roughly, is roughly a $100 million of convertible debt. I think the second one is almost in the money or so. So, again, the convertible market – the convertible debt market is a very attractive way for us to be able to get access to money. If we went back to the equity market today, say, we would need to pay 8% dividends for that. We’re maybe getting quoted 5.5% to 6% debt which is very cheap. Our credit facility debt is almost 2.5% to 3% debt. So we tend to use our credit facility debt whenever possible. So, on a total basis, if you’ve got 6% debt and 3% debt, we’re in the 4.5%, 5% kind of blended rate which isn’t bad today for us.
Thank you. Good discussion. Anybody else? We’d like to really talk to you about whatever you’d like to know. We get some comments during the year and we hear from a lot of folks every day. Yes, ma'am, coming up. We love to see everybody out here today too.
Thank you. [Inaudible] United States. Have you – won’t [ph] you need adjustments to your coverage? Your litigation payout is much higher especially for [inaudible] litigations in Canada.
Well, I would – I’d say from insurance – you mean from an insurance point of view?
Yes, insurance, yes.
Yeah, from an insurance point of view, insurance is very important to us. Obviously, safety is the most important thing that we think of each and every day, correct?
Our – from a loss point of view, Pat said – Pat Vaughan, because we have two Pats – reiterated again that we were 15% again this year reduction in our loss ratio. So we continue to drive down less incidents, less accidents, the same driver on the same route with the same kids everyday makes a much safer day. So, we talked about lower turnover, all of those things go to preventing accidents. So while we also are very astute that we have insurance to cover those losses, okay, the insurance industry as it relates to the school transportation is something that we can monitor very well. We know what losses are. We know how to handle those losses. But the key is, number one, don’t have the losses. So, we do look at our coverage here in Canada, okay, and it is a little bit different than our coverage in the United States. Glenn [ph], would you just help her out there one second. We look at our coverage in the U.S. a little bit differently. We actually carry more liability in the U.S.
You would have to.
Yes, ma'am, we do; we actually do. But he cost for our insurance has been pretty – on a percentage to revenue is pretty consistent for our 16 years as a company. It’s been about, I would say in the 3.5% kind of range. So it’s pretty consistent.
But you’ve just gone in to the United States quite recently.
No, ma'am, we started in the United States. We came to Canada in 2006.
There’s I think a confusion between operations and listing. There’s a confusing in operations and –
I’m sorry, maybe I’m missing [ph].
No, we’ve been operating in the United States since inception of the company. And we just, in September, went down and dual listed on NASDAQ.
But we’ve always operated in the United States.
We’ve been operating in the United States since 1997.
I see [ph]. Thank you.
No, thank you. Thank you. We got one more coming? Just trying to get an early run? Anybody else?
Thank you all so much for coming. This is – as we said before, this is a business that we take very, very seriously. We are extremely different from maybe a lot of other investments that you’re in. If you have a question ever, feel free to call me. You can call me directly. You can get our email addresses. We’re very accessible. I answer everybody’s email within three to five minutes, 24 hours a day, 365 all the time. And I do get calls and informations and letters. And, by the way, when we have good years, I get cookies as well too. So I’m open to all kinds of things and directions. But you’ll always read different things about us. If you really want to know questions and answers, ask us directly; contact myself; contact Mr. Walker; contact Keith Engelbert, our Investor Relations Director. We’ll be happy and more than glad to answer any questions and set the record really straight.
Again, thank you for your votes. Thank you for your confidence and thank you for your support, and continue to have for us. Please, ask, that we have a safe day because that’s what’s most important in what we do every day. Thank you, all, for coming.
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