Student Transportation's (STB) CEO Denis Gallagher on F3Q 2014 Results - Earnings Call Transcript

May 12, 2014 7:59 PM ETStudent Transportation Inc (STB)
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Student Transportation Inc. (NASDAQ:STB) F3Q 2014 Earnings Conference Call May 8, 2014 11:00 AM ET


Patrick Gallagher - Marketing & Communications Manager

Denis Gallagher - CEO

Pat Walker - EVP and CFO


Theoni Pilarinos - Raymond James

Brady Cox - Stifel


Good day, ladies and gentlemen, and welcome to the Student Transportation Fiscal 2014 Third Quarter Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to Patrick Gallagher, Marketing & Communications Manager. Sir you may begin.

Patrick Gallagher

Good morning, everyone, and thank you for joining us to discuss the third quarter’s fiscal 2014 results which ended March 31, 2014. Joining me today on the call are Denis Gallagher, Chief Executive Officer and Pat Walker, Executive Vice President and Chief Financial Officer.

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

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

Denis Gallagher

Thank you, Patrick. Good morning, everyone, and thanks again for joining us. As you can imagine, similar to a lot of transportation companies are operating results for the third quarter of 2014 were impacted by the extreme weather conditions of this past winter.

The polar vortex that left a big portion of students in North America in the deep freeze during November and December worsened January and February and continued into the first part of March causing school cancellations and delayed starts across many of our operating areas.

As a result our deferred revenue totaled $17.2 million at the end of the third quarter. As I said in prior years we can predict how many days we will operate based on our school contracts but we can’t predict in which months those days will fall.

What it different than most others and good news for us is as we have seen historically, we will recover nearly all of those contracted days and generally about half of that revenue falls through our adjusted EBITDA line.

We’re also working very hard to reduce other costs and increase new revenues to make up for the higher than normal labor, fuel and maintenance cost caused by this record breaking winner. March did however prove to a bright spot in than otherwise chilly quarter.

Despite some of the lingering school closings in the first part of the month, operating results for March met our internal expectations and significantly outpaced the revenue and adjusted EBITDA percentage increases achieved for the third quarter and for the first nine months of fiscal 2014.

Pat Walker, our CFO will review our completed financial results for the third quarter and year-to-date positions for 2014 in details in a few minutes but first let me just give you a brief overview. Revenue for our third quarter increased to $138 million from $120 million in the third quarter of fiscal 2013. Adjusted EBITDA for the quarter was $26.7 million compared to $25.9 million recorded for the same period last year and includes about $3.5 million of additional associated costs for the severe winter.

I must say though, that while we did not choose to incur the weather related cost, we did so to ensure the continued safe operation of our fleets for our school listed customers, our students and our parents. Our company as you know has built a reputation on safety and reliability and that’s what our customers count on.

So while we have incurred winter storms, hurricanes, floods and fire storms in the past, this year was doozy. However, it’s our job to -- despite these hard conditions to make sure our busses start in subzero temperatures, our drivers are ready to go if needed and our terminals are operational regardless of the weather. We don’t get back the extra cost associated with the increased fuel cost, snow removal, driver mechanic overtime, but we have been working hard to reduce other expenses to minimize those hits and we’re doing a good job of that.

Net income for the third quarter was $2.6 million compared to $1.8 recorded last year due to the reporting of a bargain [ph] gain on the purchase of certain assets. While we look at the first nine months of fiscal 2014 and add the number of snow and cold weather days that we made back up, the numbers are tracking well with our internal expectations.

So revenue for the first nine months, not inclusive of the deferred days of fiscal 2014 increased to $346.9 million from $301.4 million and adjusted EBITDA was $56.2 million from credits of $50.8 million for the first nine months of the prior fiscal year.

On a very positive note, we were able to close the acquisition of certain assets from Atlantic Express California operations on February 10, 2014. As previously reported Atlantic Express’ parent company filed for bankruptcy protection and we were able to acquire their California school bus assets under an agreement that was approved by the bankruptcy court.

It did include 425 vehicles and several school contracts which were included as part of the same deal at very favorable rates. The acquisition resulted in a non-cash bargain gain during the quarter as the price paid was lower than the fair market value of the assets we purchased.

More importantly we demonstrated to the customers our high service level and commitment to the people who joined us and we have renewed those contracts for extended periods of five years or more with increases.

We also won some additional new contracts for the coming school year, which we have already in house. They include trade school transportation contracts in upstate New York that we won in February. Together those contracts add about 150 vehicles and $7 million in new annualized revenues beginning in the new fiscal year.

In April, we announced two more contracts in Pennsylvania, adding another 10 million in annualized revenues and 200 cleaner burning propane autogas vehicles for our alternative fuel fleet. Now, we do anticipate additional contracts of work shortly and we will be announcing them as soon as they are awarded in the next couple of weeks.

I will talk more about alternative fuels and what the new contracts mean for our future in my closing remarks but now I will turn it over to Pat Walker for a full review of our third quarter results. Pat?

Pat Walker

Thank you, Denis. Good morning everyone and thank you for attending our Q3 conference call for fiscal 2014. We released our Q3 results yesterday. We also filed the quarter financial statements and the associated management discussion and analysis MD&A for the third quarter ended March 31, 2014 on SEDAR and EDGAR yesterday. That will include more detailed information.

Unless otherwise noted, all financial information discussed is in U.S. dollars. The operating results summarized in the press release include revenue and adjusted EBITDA for the third quarter and first nine months of fiscal 2014. We use adjusted EBITDA internally as a useful measure for tracking performance. As noted previously adjusted EBITDA is a non- GAAP measure.

On all of our quarterly calls, I note the seasonality of the school bus transportation industry and thus the Company’s operations based on that seasonality. Thus the financial results for the Company for any one quarter are not necessarily indicative of the financial results for full fiscal year. And then following up on what Denis have mentioned previously, today I also have to note the severe winter weather conditions that we experienced throughout North America in the January to March period.

Our third quarter results for fiscal 2014 were adversely affected by the severe winter weather experienced in January and February, which continued into the early part of March. We touched on this during our Q2 call. Revenue deferrals as Denis mentioned, at the end of March 31, 2014 amounted to $7.2 million, due to weather related school closings during the period compared to anticipated school dates for the period.

In regards of these revenue deferrals, we expect to recover substantially all of the deferrals during the fourth quarter, similar to past years’ experience. Apart from those revenue deferrals, this year we also experienced additional weather related expenses due to the widespread snow storms and record low temperatures during the period, primarily in the areas of driver wages, fuel expense, maintenance cost and wages and facility expenses.

Combined, we estimate the increased expenses associated with severe winter weather to be in the $3.5 million range. The Company’s Q3 and nine month results of fiscal 2014 reflect the continued growth of the Company through the execution of our growth strategy. The Company started operations on nine new big contracts in July for the 2014 fiscal year, three of which we’re talking.

We also closed two acquisitions during first quarter of fiscal ‘14 and the Atlantic Express asset acquisition during the third quarter of 2014. We do not have any acquisitions during fiscal 2013. As such, the third quarter and first nine months of the prior fiscal year do not include any of the operations for the new big wins that we secured for fiscal ‘14 and the three fiscal 2014 acquisitions.

We had also touched on the Atlantic Express asset deal on our Q2 quarterly call. On February 10, 2014, the Company closed the acquisition of certain assets and school contracts in Southern California from Atlantic Express for approximately $17.2 million. Our subsidiary School Wheels Direct, managed the California operations of AEV from January 10th to February 9. Atlantic Express has filed for bankruptcy protection on November 4, 2013. The School Wheels Direct management services contract and the purchase agreement to acquire the California assets of ANE which included 425 vehicles and several school contracts were both approved by the bankruptcy court.

The purchase price as Denis has noted was lower than the fair market value of the assets acquired. Therefore we recognized a gain of 2.8 million which was net of tax and it’s reflected in our P&L. And looking at the results for the third quarter and first nine months of fiscal 2014, revenue for the third quarter of fiscal 2014 totaled $138.3 million, an increase of $17.8 million or 14.8% over the third quarter of fiscal ‘13. The change in exchange rates between the Canadian dollar and U.S. dollar from the third quarter of last year to the third quarter of this year, in connection with the translation of our Canadian operations into U.S. dollars, our reporting currency, have a 1.9 million negative impact on the period-over-period change in revenue.

$16.3 million of the revenue increase for the third quarter of fiscal ‘14 results from the net new business noted earlier. $6.3 million in revenue related deferrals out of that total of $7.2 million at March 31st happened during the quarter. Revenue for the first nine months of fiscal ’14 totaled $346.9 million, an increase of $45.5 million or 15.1% over the first nine months of last year.

The change in exchange rates had an impact of, had a negative impact of $3.6 million in the period-over-period change in revenue for the nine months. $34.5 million of the revenue increase for the first nine months of fiscal ‘14 is attributable to the net new business noted earlier and as just discussed, our total revenue related deferrals at March 31st totaled $7.2 million. We expect to recover substantially all that revenue in the fourth quarter and as Denis has mentioned we expect about half of that to fall through the adjusted EBITDA line.

Adjusted EBITDA for the third quarter of fiscal 2014 totaled $26.7 million, an increase of $0.8 million or 3.1% over adjusted EBIT for the third quarter of fiscal 2013. The impact of exchange rate changes here had an adverse impact of $0.4 million in the period-over-period change for the quarter. $3.9 million of the net increase in adjusted EBITDA for the third quarter of fiscal ‘14 is attributable to the net new business noted earlier.

The adjusted EBITDA contribution associated with the same terminal revenue increases were offset by increases in salaries and wages, maintenance cost, fuel cost, insurance and fringe benefit cost and facility cost. As mentioned, the increases in salaries and wages, maintenance, fuel and facilities primarily reflect the initial expenses incurred in the quarter due to the severe winter weather conditions experienced in the period.

Same terminal operations wage increase was primarily reflected higher driver wages and maintenance wages of 1.3 million. Maintenance cost increased to $0.9 million while fuel and facility expenses increased $0.4 million and $0.6 million respectively. Further, our new growth locations also experienced similar expenses associated with the severe winter weather conditions.

Insurance expense increased for the third quarter of fiscal ‘14 by $0.4 million compared to the third quarter of fiscal ‘13 due to some unfavorable claims development in the current year. And taking a look at fuel expense for the third quarter, while the growth secured in fiscal ‘14, we have maintained our fuel mitigation in our contracts in the 60% range and roughly half of that mitigation in the form of customer paid fuel.

Having said that, I will continue to note that we are still exposed to some impacts of higher fuel prices and the mitigation features. In addition, we had also locked-in an initial 23% of our fuel exposure with fixed price contracts during fiscal ‘14 which continues through the end of the current fiscal year. The pricing under these lock-ins for the first nine months of ‘14 increased slightly from the prior year by about 1.5%.

We will continue to review additional fixed price contracts for approximately 20% to 25% of our fuel exposure for the 2015 fiscal year as well as for a portion of the 2016 fiscal year. Although fuel mitigation, combined with some fuel saving strategies in the first half of fiscal ‘14, associated with reduced idling and the deployment of alternative fuel vehicles helped us lower fuel expense in the second quarter of fiscal ‘14 compared to the second year of fiscal ‘13.

As we reported on our Q2 call, we saw a same terminal fuel expense for school bus transportation decrease for the second quarter by $0.4 million, compared to the second quarter of fiscal ‘13 with fuel representing 8% of revenues in the second quarter of fiscal ’14, compared to 8.6% of revenue in the second quarter of fiscal 2013.

That favorable trend reversed some in Q3. As a percentage of revenue, same terminal fuel was 9.1% of revenue for the third quarter of fiscal ‘14 and roughly $0.4 million higher compared to the fuel for the third quarter of fiscal ‘13 which was 8.9% of revenue. The fuel levels for the third quarter of fiscal ‘14 were impacted by the severe winter weather during the period as we have been discussing.

Adjusted EBITDA for the first nine months of fiscal ‘14 totaled $56.2 million, an increase of $5.4 million or 10.5% over adjusted EBIT for the first nine months of fiscal ‘13. The increase for the first nine months of ‘14 primarily result from the net new business identified. The adjusted EBITDA associated with the same terminal revenue increases were offset by increases in salaries and wages, maintenance cost, insurance cost and fringe benefits cost, all to the [ph] third quarter increases just discussed. Net income for the third quarter of fiscal ’14 was $2.6 million, which reflects net income per share of $0.03, compared to net income of $1.8 million which reflected a net income per share of $0.02 for the third quarter of fiscal ‘13.

The $0.8 million increase in net income for the current fiscal year third quarter compared to the prior year third quarter basically reflects $0.8 million increase in adjusted EBITDA with a $2.8 million bargain gain on the purchase of the AEV assets combined with a $1.3 million reduction in unrealized re-measurement loss and $0.3 million increase in unrealized gain on the conversion feature and lastly the $300,000 decrease in unrealized loss on FX contracts, were all offset by a $1.4 million increase in operating lease expense, and $1.1 million increase in depreciation, depletion and amortization expense, a $0.7 million increase in interest expense, a $0.5 million increase in non-cash stock based comp and then lastly 0.1 or the 1.0 million reduction in other income.

Net loss for the first nine months of fiscal ‘14 totaled $3.3 million, compared to a net loss $2.9 million for the first nine months of fiscal ’13. The $0.4 million increase in net loss for the nine months of fiscal ‘14 results primarily from the $5.4 million increase in adjusted EBITDA, combined with a $2.8 million margin gain and a $1.0 million increase in tax benefit, partially offset by a $3.4 million increase in operating lease expense, $2 million increase in depreciation, depletion and amortization expense and $1 million in interest expense and $1 million in non-cash stock based compensation and the $2.1 million reductions in other expense.

And turning to the cash flow, as you will see reflected in investing activities, purchases of property equipment totaled $2.1 million and $35.8 million for the third quarter and first nine months of fiscal ‘14 respectably, while proceeds from equipment sales totaled $0.4 million and $1 million respectively. Of the $34.8 million in year-to-date net capital expenditures from fiscal ’14, so net of those proceeds, $30.5 million related to the 19 big time attraction [ph] vehicles associated with additional rides that were secured for fiscal ’14, $2.9 million relates to net replacement capital spending and $1.4 million relates to oil and gas investments.

In regards to fiscal ‘14 growth and replacement CapEx, in addition to the $30.5 million and $2.9 million in growth and net replacement CapEx that I just mentioned that’s reflected in the Q3 cash flow statement, in fiscal ‘14 we also financed approximately $20.4 million in growth CapEx and $24 million in replacement CapEx under operating leases. These operating leases have nine year terms with effective rates in the 2.3% to 4.5% range. That’s combined the purchase and leased growth and replacement CapEx deployed totaled approximately $50.9 million and $26.7 million respectively.

In regards to the total deployed replacement CapEx, the combined amount purchase and leased represents about 6% of revenue for the full 2014 fiscal year. As discussed on prior calls the Company financed into replacement fleet value to purchase of busses where we own the busses outright and also through operating refinancing, where the lessor own the busses.

Included in financing activities, you will see cash dividends associated with the third quarter and nine month period ended March 31 2014 were $8.5 million and $25.9 million respectively. With respect to the currency exposure on any future proposed dividends going forward, we have hedged approximately 33% of the dividends for the next 14 months. Additionally our Canadian dollar operating cash flows serve as a natural hedge against currency fluctuations.

And looking at the balance sheet, at March 31, 2014 our outstanding debt balances totaled approximately $285.7 million, which included $172 million in convertible debentures, $35 million in senior secured notes, $78 million in credit agreement debt and $0.2 million in seller and other debt.

We are pleased to welcome a new member to Bank Group (indiscernible) joined the bank group in February 2014. The Company’s credit agreement currently provides for a $165 million in commitments and includes a $90 million accordion feature for additional capacity when needed. The current credit agreement has a maturity date of February 27, 2018. The $35 million in senior secured notes has a fixed rate of 4.24% and a maturity date of November 10, 2016.

On November 12, 2013, which was during our second quarter, the Company closed an offering of Canadian dollar denominated 6.25% convertible subordinated unsecured debentures, which are due in June 2019. Net proceeds from the issuance of the Canadian dollar denominated 6.25% convertible notes, amounted to $68 million. Those net proceeds were used to repay borrowings under the Company's credit agreement.

We currently have two other convertible debt issuances outstanding. One is a Canadian dollar denominated 6.75% convertible debenture issuance and the second is the U.S. dollar denominated 6.25% convertible to debt issuance. The Canadian 6.75% convertible debentures mature in June 2015. Under the indenture governing these debentures, company as the option to break the debentures into common shares at maturity. We will monitor the financial markets as we maturity taking regards to the potential refinancing and/or conversion of these debentures at maturity.

Before I turn it back over to Denis, I’ll include a few remarks. We entered fiscal 2014 with an estimated 11% growth in year-over-year revenues that we noted as we came into the year. That was associated with a nine new bids for fiscal 14 and one of the acquisitions that we completed in the fiscal first quarter.

To that we have now added that second acquisition in the first quarter and the midyear acquisition in California. With the acquisition of the ANE assets and customer contracts in February 10, we anticipate partial year revenue from ANE operations for the period, that period being just shy of five months for fiscal ‘14 to approximately $12 million. So the partial year gain in revenues, our anticipated revenue growth before team [ph] now increases from the original 11% range up to 14% to 15% for fiscal ‘14. We have been and continue to review additional bid opportunities for fiscal ‘15 as well.

We continue to explore ways to improve and expand our debt financing availability. We continue to review and monitor the senior debt agreements as well as exploring new leasing opportunities. Currently we have approximately $80 million to $85 million of availability under the credit agreement commitments, subsequent to the AME asset deal. And we just noted, we expanded the bank group and now we have six member banks in that group.

In addition, we are in the annual review process in regards to operating lease financing. We currently have an additional $85 million in lease proposals, similar to the level of proposals we have last year. We are currently viewing these lease proposals in connection with our capital requirements for fiscal ‘15. We currently anticipate approximately $35 million of replacement CapEx, deployment for fiscal ‘15, a portion of which we will finance with operating leases, consistent with prior year.

Growth CapEx will be dependent on the final outcome of the current bid season which is winding down quickly. With the financing availability under the credit agreement and the lease financing proposals, we cover the purchase of the AME California assets and are looking forward to fiscal ’15. We think we are in good shape to cover the initial range of replacement CapEx for ‘15 and the off season funding requirements for fiscal ‘15.

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

Denis Gallagher

Thanks, Pat. Now as the winter is behind us and we have proven before due to the contracted nature of our business that we will make up the days we lost during the quarter and recover a majority of the deferred revenue. The improved results that we experienced in the month of March are very encouraging and we are well positioned to the end the fiscal year on a strong note. We’ve already secured over 10% annual growth in revenues for fiscal 2015, which starts this coming July. These are all very nice long-term agreements that many of them include elements that make us successful. Our new contracts include options for renewals for additional years, the majority call for customer paid fuel, which will further reduce our exposure to fluctuating fuel prices, they add to our regional density in our regional operations thus leveraging our overhead and our experience in those areas and they represent the importance of being known as the top service provider in creating long-term value for our shareholders.

That last point is particularly important. In many cases our existing customers came out and again supported our efforts and while we were not the low cost bidder in most of these proposals, we demonstrated in the RFP and selection process that over the term of the contracts, we provide a significantly better alternative value. We are expecting our alternative fuel fleet to grow to almost 2,000 vehicles next year, further enhancing our environmental stewardship and cost savings on fuel.

School districts and parents also appreciate the state-of-the-art technology features that increase the safety and communication between Company, the schools and our parents. Finally, there is that intangible frankly priceless element of our service that continues to be our secret sauce and that’s our people. In April, I am pleased to say that we celebrated our third annual employee appreciation week during which we give employees the chance to express their appreciation for their colleagues. Our drivers, mechanics, monitors, dispatchers and staff are very passionate about what they do.

They leave the Company every day in their community and they help spread our Company’s vision. I really invite you to watch our employees made video on our website which is very cool. We were especially proud of Ricardo Ramos, one of our drivers from Riverside California operation. Last summer when the powerful thunderstorm caused the flash flood, Ricardo jumped off his bus and pulled two young children from rushing waters that threatened to claim their lives. Ricardo’s quick action and bravery are a great testament to all STI employees and a great source of the Company pride. His caring and selflessness helped him earn a special recognition, School Bus Driver Of The Year by the California Highway Control. Ricardo and his actions are indicative of the overall 11,000 colleagues across the United States and Canada, who deliver over 1 million children to and from school safely everyday. They are the reason that we continue to have an industry leading contract renewal rate.

To-date, we have renewed 98% of our existing contracts this coming year and redeployed the assets of one small contract that we lost actually at higher margins. Among the largest contracts renewed during the year, some are very significant, with long-term renewals of contracts in Riverside, Long Beach in Los Angeles unified school districts in California, Duval County schools in Jacksonville, Florida and the Milwaukee public schools in Wisconsin, just to name a few. All of these very large contracts were renewed with new additional routes added, a nice increase to the base business.

We continue to design and develop our new non-asset revenue businesses with our new opportunities with SafeStop, our SafeStop app, our parent paid back-office product, which is a hot item right now and some new announcements coming shortly on our expanding management services team which by the way did a tremendous job in California with the Atlantic Express contract where we were offered the opportunity to provide management services for the court there until an agreement with our operation side could be worked out. Many of the 10,000 school districts that choose to continue to own and operate their own fleets are in need of expertise in many of the areas we provide, in what would be a normal contract service.

Simply Google, Hillsborough County Florida school bus and See What I Mean is one example. Educating them on how these unbundled services can apply to them and the value that we could bring in management, routing efficiency and equipment purchasing is creating quite a buzz as we begin to launch this new division. As school district owned fleets get older, we have creative and innovative solutions to take advantage of the lowest rates in years and a government that is allowing and encouraging banks to lend to them tax free. We can arrange the services.

School Wheels and its new products and services remain a key element in our overall vision as we grow our logistics and management services business. It does take some time to make sure it’s done right, but we are building an exciting new vision for this group. We have been out demonstrating to customers some new ideas in routing efficiencies and in other ways to lower cost and leveraging the low financing rates and lower alternative fuel costs that exist today.

We have announced plans to introduce our School Wheels direct service in the Charleston South Carolina area, or first move into the South Carolina, where the state legislature there continues to grapple with the issues which caused and equated an inefficient school transportation system. Just Google News for Charleston County School bus. We’re also working with many private and chartered schools to explore expanding our School Wheels parent-pay program in providing our backroom and technology service for transportation departments even in other public schools.

At the recent board meeting this week, the Board took several actions, but two very notable ones, which I’d like to bring your attention. One was the approval of the dividend for the next quarter which is -- I believe now takes us through to September of 2014. As you know, the Board approves the dividends on a quarterly basis. And in a new move the Board agreed to take my recommendation and form a new committee at the Board level called the Technology and Innovation Committee.

Wendi Sturgis is our newest board member and has agreed to service the chair of this new exciting committee to review and work with the management on various innovations in our businesses and in our operations and how we can increase technology to improve processes, lower cost and design new products for increased efficiencies and new revenues. That’s what I’m really excited about. We have many new ways to improve on what we do and to find new revenue streams in a non-asset environment. We need to make sure we have the proper team and investments to make this happen.

Lastly, I want to make a point in general. It’s been eight years since we went public on the TSX. Our shareholders have continued to enjoy in our growth and in our consistent dividends that we provide and will continue to provide. In 2004 at the IPO, we had a 10% yield. We also had about 3000 vehicles with an average age of just under six years and senior internal debt levels of approximately just under two time senior and about four times total. Now we have strict covenants in place that we must adhere to in the bank agreements and we have done that.

Today, we will have grown to just under 12,000 vehicles for the coming year. We have an average age of just under six years as we did back in ‘04, and we also have consistent debt level ratios as we have been, and our yield is now around 8%. So we’re working hard to improve our results for the screeners as I call them, who only see what they see and do not understand the strong, consistent and long-term cash flows and financing alternatives that we have available to us.

I believe with some of the things we are doing to reduce cost and improve efficiencies and with the non-asset revenues we will be delivering in the coming year, we’ll be able to possibly even please the screeners.

This is a stable business and the top management team in the industry. We didn’t bailout on our investors back at the Halloween Massacre or even the market crash a few years ago. We have strong loyal employee and customer base. 97% of our contracts have been renewed for over an 18 year period, which is absolutely amazing. 99% of our shareholders hold our shares and appreciate the income to them in dividends they receive each month. They are the people that we serve in the public trust we take ever so seriously. Others will come around and realize what all of us know, simple and consistency is a good thing.

I look forward to making additional announcements pretty soon about some of those new exciting areas that we’re working on. And with that this concludes our remarks. Destiny [ph], we’ll take a few questions from our analysts and if you could open up the lines. Thank you.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Theoni Pilarinos of Raymond James. Your line is open.

Theoni Pilarinos - Raymond James

Just have a couple of questions for you in terms of the lost revenues. Is there a -- we should expect all of that to be recovered in the next quarter then?

Denis Gallagher


Theoni Pilarinos - Raymond James

Okay. And they also mention of a couple of contracts that weren’t renewed, not typical for you guys. Just wondering what happened there?

Denis Gallagher

Yes. Two very small contracts. I mean literally 30 bus -- 230 bus size. One literally the customer wanted us to roll back the prices and we just couldn’t do that. So we’ve decided to give that up. We had an opportunity to redeploy those 30 vehicles to actually a higher margin business and we choose to do that. So that was 30 out of our 11,000 buses. And the other was actually a 35 bus, that we would call -- what we call a managed contract where we did not own the vehicles. And so we basically drive about a 10% or 12% EBIT on that and we had a local transit agency come in and bid that at about 4% or 5% EBIT. So we thought at that rate they could take it.

Theoni Pilarinos - Raymond James

And just on, touching on your asset like business, could you talk a little bit about growth? And how do you expect that or when you expect that to kind of start showing results?

Denis Gallagher

Yes. I think in 2015, we’re kind of hoping that we’ve got a lot of the kinks worked out on SafeStop which is very good. I talked a little bit about in my session there about the backroom services. We’ve got some folks out that literally want to -- because we had started our School Wheels direct program and we have a very innovative system online, where parents can choose their routes and pay when we go -- once we go into a different area.

But what we found out was there’s a lot of other schools and charter schools and private schools and even public schools both in the U.S. and in Canada that are already doing a lot of parent pay, but it’s a problem for them in the backroom. So they’re coming to us and ask us literally to hang on to our backroom services. We’re not really positive and I say this with as much respect that I can get that that we’re not really positive how to price that kind of thing, but it’s more of a transaction kind of deal leveraging what we’ve already invested in. So we’re going to be looking to do more of that.

The management services team, I am going to be kind of coming out with an announcement on that. We’re going to expand that quite a bit, but we’ve got a lot of activity going on that side. So while we don’t have projections yet for 2015, we are heading into our budgets season now. And we’ll be providing our budgets -- our internal budgets kind of over the next month or so, right. We had it pretty much. And we’ll get those done and we will be able, I think by -- when we do our year end call give you some nice projections on where we will be for this new business.

Theoni Pilarinos - Raymond James

Okay. Great. And a little bit on the fuel price increase, that impacted your fuel expense. I know weather was part of it, but there was reference you had in fuel price increases. And so far you’ve been pretty focused on adding litigation cost in a customer paid contact. So as well as the price, do you see that increase as a result of market price increases? And can you comment to that amount?

Denis Gallagher

I think the only - the one thing we said was when we did our lock in this year for that 23% which is over and above the 60% in the mitigation, that lock in price compared to the lock in we did last year was about 1.5% higher. And then our other general price increase.

Pat Walker

We had some of that price increase margin.

Denis Gallagher

Right. Roughly?

Pat Walker

$0.30 a gallon basically but a lot of that is protected by our fuel mitigation.

Denis Gallagher

Yes. That’s what I also think that and obviously as we’re seeing, our volume in fuel that got used actually went up during those extreme winter months, because of idling the vehicles a lot longer. In certain markets like was Wisconsin and Minnesota, Buffalo et cetera. We had literally -- in Fahrenheit we had 20, 25 degree sub-zero temperatures. So we -- in a lot of our diesel operations, we had to run those through.

Similar, even though the propane start, in order to keep them -- the busses warm, we get them started. So this is what we were trying to say. It’s probably an anomaly that has happened this year because of the extreme cold. We generally would not run buses this long. So it’s -- a lot of it was just burning some additional fuel by having the buses, having to get started at 4:00 and 5:00 in the morning to be able to go out and be ready by 6 o’clock or 7 o’clock in the morning when they hit the road. So our volume actually went up.

Now we got caught in the Midwest a little bit with -- even with Omaha where we have -- we locked in about 50% of our propane use there for three years but the other portion, actually the price went up dramatically from the $60 that we were paying upwards as high as $3.50 to $4 a gallon equivalent for those two or three months, while distributors in that area try to figure out how to move propane around from themselves really.

So I think part of our issue was literally just a very harsh winter. It made us increase that volume of fuel that we had to burn. We got caught was a little bit of price increase in a couple of markets. On a positive side we’ve already seen propane back down now, which is actually at or what we -- it’s below the $1.60 actually today a gallon equivalent. So we’re getting ready to kind of lock in again for some additional use.

We are seeing diesel as of this morning about $0.04 off of where we were last year. So we got a chance to lock back in at last year meeting with the 2014 rate. So we can kind of lock in 2015 very near where our 2014 rates will be, if we want. So those are some things that happen but I really think you’re going to see the fuel obviously level off in the fourth quarter. Part of the fuel distortion is because the revenue is low, we missed a lot of the days and then the fuel use was higher because on the days we had to run, we had to run the buses longer.

Theoni Pilarinos - Raymond James

And just remind me what the spud [ph] is between diesel and propane in your fleet?

Denis Gallagher

Yes, it’s right now probably -- about 15% of our fleet is what we would call alternate.

Theoni Pilarinos - Raymond James

Okay. And then just one final question in terms of your payout ratio. You are always looking to drive that down by bringing EBITDA up. You’ve obviously had weather work against you here but do you feel like they’re heading in the right direction and where do you see that?

Denis Gallagher

If wishes were horses, beggars would ride but if we didn’t have that severe weather, we were on plan to have a six handle in front of our payout ratio, which I was very excited about. I think we ended last year I think in the 78, 79, 79 range, 78 range. I think we’re right now - if everything kind of comes through to where we think and I’m not forecasting for you here but my good guess would be that we could be in the low 70s, low to mid-70s.


Thank you. Your next question comes from Brady Cox of Stifel. Your line is open.

Brady Cox - Stifel

I just had sort of a quick follow-up. I know it’s come up a few times, but I’m just trying to get a little bit clarity on how your contracts work for the delayed and canceled base? I know I guess in the school district where I grew up, if we miss seven days in the winter, we may have only had to make up two once we got over that like five day hurdle rate. How does that work in your contract for the amount of days that actually get made up in June for whatever was canceled throughout the winter?

Denis Gallagher

Yes, so the contracts that we have -- that we budget internally. So for example most of them on average, and I say most of them, meaning 90% plus of them are 180 school day contracts. They budget, the schools will budget on average of 185 days in their calendar. So they will build-in five, let’s call five snow days or five weather related days. They -- in this case, they used those five days and some of them used more. They are literally -- have been making them up any day that they can between April, a shortened version of Easter, the spring breaks have been cut back. So they have between now and June 30. We are only hearing possibly one school district out of 227 that we have, possibly one in Minnesota where they are saying they may end up going 178 or something like that. So, we are not hearing anybody not agreeing to make it up. We’ve actually even heard horror stories of people saying well, we are going to have an e-day where we are going to have the kids take their laptops home in case, those and we are going to petition the state governors to be able to approve that those happen. Those governors, thank goodness for us have not agreed to have those days. Haven’t let that happen.

So, we are going to make-up the days. We bank on it and we literally just have a monthly -- not monthly I am sorry -- we have a weekly call with our operations folks on literally the days that are getting made up and in March we still had six or nine inches of snow in certain parts of Illinois and Minnesota but the rest of the areas were kind of cleaning up and making up some days. In April, we made up quite a few days. I am anticipating, we got schools going literally right through to June 27, 28.

Brady Cox - Stifel

Great. And then when you were discussing that in the prepared remarks, did you say -- I think you said 50% of that will fall to EBITDA.

Denis Gallagher

Yes, because pretty much all of the fixed cost are done. So it’s literally driver wages and fuel that we kind of expense when we are run back those extra days.

Brady Cox - Stifel

So, in a normal scenario where you have a lot of delay days in the second and third fiscal quarter, is it safe to assume that, absent any other externalities that the fiscal fourth quarter should be considerably higher from a margin perspective?

Denis Gallagher

Exactly and if you go back to last year to 2013 and you listen to last year’s fourth quarter call that we had, we’ll have folks calling in and saying, why you guys had a great fourth quarter and we say no we had a crappy third quarter and the fourth quarter was really good. So, if you look, all we got to do is take last year and kind of see where we are. The problem is the severity this year was bigger.

Brady Cox - Stifel

Right, to an even worse winter, yes.

Denis Gallagher

And it was an even worse winter but also our volume is 15% bigger, right. We are bigger in size.

Brady Cox - Stifel

And then just one question that sort of piqued my interest there. At 15% of your fleet on propane now, do you have a long-term target on sort of how much of your fleet you think could or should move towards propane?

Denis Gallagher

We are tracking a couple of things and what really impacts the decision is the price of fuel and the miles per gallon. And we have been pretty clear that the miles per gallon, in other words, the operating efficiency on propane is about 20% less than diesel. The cost however is 50% less than diesel. So if we can work with our own drivers to improve the miles per gallon at half a mile per gallon, even as little as that, it’s a huge savings for us. If we -- the new contracts that we’ve added and the majority of contracts quite frankly where we have propane are customer paid fuel. So in that particular case, the customers are getting the savings.

But as we continue to look at this, we are seeing that right now, like I said, when we look at the price of propane, it’s actually less than what we paid last year, if we were to lock-in today. Propane is a totally different industry than, I hate to say, than the petroleum industry because the fuel oil and petroleum industry have a tremendous network of dealerships and regional players as well as the major players, whereas in the propane industry there’s only two national players and there are several regional players, and there is a ton of guys who sell barbeque grills.

While the barbecue grills are not the guys that we’re fueling from. We are fuelling from the majors and also from the national or the regional suppliers. So I have guys calling me all the time and saying, I just know that my barbeque grill at $3.65 a gallon, how do you get it for $1.60? Well, we buy a lot of gallons. And it’s just a different kind of a purchasing process. So I would see us continue to review how the operating efficiency goes. I will tell you from an operations point of view, the places where we had propane, which was Omaha Nebraska, we had higher fuel costs because we had to run them and we got caught with fuel in that Midwest kind of going up and spiking, I would say unusually, but I think long term we’re probably looking to continue to have nice mixed fleet.

We do use for types of fuels. We use diesel, we use gasoline, we use CNG, and we use propane. So we are four different fuel types of vehicles. We are only using CNG on a limited number of vehicles in a highly sensitive area in California where the government requires you to use alternative fuels. Our LPG, our liquid propane is now used in six states and we’re probably going to be expanding that to our seventh and eighth new States coming this year. And then our main stay is obviously diesel, and then we have a contingent of small vans, that we run -- school vans and a lot of those run on gasoline actually.

Brady Cox - Stifel

Okay and then maybe just my last question, a follow-up on that. I guess when you’re talking to school districts and municipalities about the option for the propane fleet, do you get any sort of pushback or hesitance to move in that direction, people that maybe are just sort of stuck with the idea of a diesel bus or is it sort of a more open conversation when that option comes up?

Denis Gallagher

That’s a great question, and one I love to answer because it’s literally not funny, but it’s funny to go out and meet with these superintendents. I met with one the other day in a new state, in Ohio, where we’re not. And he was like, well I ran propane in 1990 and we didn’t like it. And I said do you realize that was 24 years ago. The technology has changed tremendously.

The technology in the propane engines that we use today is literally, it’s a Ford engine, it’s a gasoline Ford engine and it literally has a propane fuel injection system in it. So if you know anything about engines, and on top of it, take off the gasoline fuel injectors and you can put on this propane fuel injectors. It’s a very simple conversion for the manufacturer to do. And we use ROUSH Technologies, which Jack Roush is the NASCAR kind of expert and he knows fuel technologies, and that’s part of the Blue Bird product. We do have an enormous amount of people who just like diesel and they’re convinced that, geez I get longer distance with the vehicle and I want to do that.

But the other part that is changing fast, and that’s the millennial moms that are coming on board. And when the millennial moms are starting to see 60% less carbon monoxide in and around our schools, there is a lot of interest in bringing technology and if school districts can have that where it doesn’t cost them any more and/or has the opportunity to save them money, then they certainly are the ones that are pushing it. By the way, our drivers that are used to driving diesel and now drive the propane vehicles absolutely love it because the vehicles are so much quieter and then there is also no black smoke that comes out of the back end. Mechanics like it because as I said it’s basically a gasoline engine to work on.

Brady Cox - Stifel

You made one comment there on it not costing the district more and actually saving on money. Is it not more expensive upfront for them to purchase those vehicles? Is it about the same price or is it more expensive?

Denis Gallagher

Well, you’re talking about the school district purchasing vehicles, where in our case we purchase the vehicle.

Brady Cox - Stifel


Denis Gallagher

So where we purchase the vehicles, we have been able to have a very good propriety contract with our manufacturers that keeps the cost of the propane and the diesel pretty consistent.


Thank you. And there are no more questions at this time. Thank you all for joining us.

Denis Gallagher

Thank you very much. I appreciate everybody on the call and if you get a chance to visit our website at and you can get some new updates from us. And look forward to some releases we’re going to have some out about some new work. Thank you all for joining us. Have a safe day.


Ladies and gentlemen this does conclude the program. You may all disconnect. Everyone have a great day.

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