Blue Bird Corporation (BLBD) Q4 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Blue Bird Corporation Fiscal 2016 Fourth Quarter and Full Year Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Benfield, Director of Investor Relations. Please go ahead, sir.

Thank you, Kevin. Welcome to Blue Bird’s fiscal fourth quarter and full year 2016 earnings conference call. The audio for our call is webcast live on blue-bird.com under the Investor Relations tab. You can access the supporting slides on our website by clicking on the Presentations box on the Investor Relations landing page. Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings releases and filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This morning, you will hear from Blue Bird’s President and CEO, Phil Horlock; and CFO, Phil Tighe. Then, we will take some questions. So, let’s get started. Phil?

Well, thanks Mark. Well, good morning everybody and thank you all for joining us today for our fiscal fourth quarter and full year earnings call. We welcome this opportunity to share our latest quarter results with you. It’s been a very busy year for us and we’ve made significant progress in fiscal 2016. So, before we cover Blue Bird performance, let’s just turn to slide four and take a look at the overall size of the school bus industry and importantly its relevance in transportation. As a reminder, there are over half a million school buses on the road of the United States and Canada transporting 26 million children to and from school each day. It is the largest mass transit system in the U.S. and Canada at about 10 times a size of all other transit bus systems combined. There are three major manufacturers with each having between 30% to 35% market share. Approximately two-thirds of all school buses are purchased and operated directly by some 10,000 school districts with about 3,400 independent contractors purchasing and operating the remaining one-third of buses on the road today. Bottom line, it’s a robust and institutionalized transportation system and it’s a well-supported industry. So, let’s see how the new school bus industry fared in fiscal 2016. Let’s turn to slide five. At 32,700 buses, new vehicle registrations for full year fiscal 2016 were the highest since 2007. This was an increase of 9% over fiscal 2015. Clearly, this is a strong increase, but it should be noted that vehicle registrations can lag booked OEM sales to dealers and national fleets by several weeks or even months. We estimate that the fiscal 2016 industry, as measured by [indiscernible] registrations, benefited by between a 1,000 to 1,500 units from the surge deliveries for school start in the fourth quarter of fiscal 2015. In other words, the OEM sale was recognized in fiscal 2015, but the vehicle registration by the end customers recognized in fiscal 2016. So, the underlying real industry growth was probably between 5% to 6% in fiscal 2016. Nevertheless, the new bus industry exhibited another solid year of growth. In particular, vehicle registrations with the dealer network were very strong with 12% growth across the entire industry. Importantly, at Blue Bird, we saw 18% growth in registrations for sales through our dealer network. As you’ll see later, this translates into higher Blue Bird market share. Seasonality in our business remains similar to prior years with about two-thirds of all vehicle registrations occurring in the second half of the fiscal year. We saw industry growth in the registrations of alternative fuel powered school buses, up from 6% to 9% of industry, propelled substantially by the growth in propane bus registrations which were 77%. Incidentally, for Blue Bird our propane registrations represent 22% of our total sales. The need to replace older buses and increased funding from higher property taxes bodes well for continued industry growth next year. Let’s now turn to Blue Bird’s performance on slide six. Full year market share of 31% was up one point. Importantly, our market share from sales through the dealer network was 32%, up two points. This was buoyed by the 18% growth in vehicle registrations through the dealer channel that I mentioned on the previous slide. This is a great result by the Blue Bird dealer network. We sold just over 10,600 buses in fiscal 2016, and that’s a record for our Fort Valley, and made possible by the second shift we added in January. Now, while fourth quarter sales were down 160 buses from a year ago, both the fourth quarter and full year were impacted by the delay in emission certification and consequently shipments of our new gasoline engine. We estimate this resulted in up to 400 fewer gas-powered bus sales in fiscal 2016. Nevertheless, following that late certification, we were able to ship 406 gasoline engines in September that we previously built. We continue to lead in propane-powered bus sales, securing more than 75% share of total propane registrations in 2016. And importantly, at 2,340 propane bus sales, we saw a substantial 33% increase in our sales over fiscal 2015. That is a terrific result and represents our ninth year in the propane business. No one can match our experience in this sector. We delivered full year financial results in line with guidance on our key financial metrics, revenue; adjusted EBITDA; and adjusted free cash flow. While fourth quarter volume and financial results were down a little from last year, it is worth remembering that this was following an outstanding third quarter, when our unit sales were up 26% with corresponding growth in profitability. Bottom line, this was a strong year for Blue Bird. Let’s now turn to our operating achievements on slide seven. I covered many of the significant achievements during the third quarter earnings call, and each initiative will make us more competitive and supports our growth going forward. In particular, the launch of four new powertrains, gasoline, V8 diesel and Eaton Transmission in fiscal 2016 and all-new Type C CNG engine that was launched in the first quarter of fiscal 2017, provide us with the broadest array of engine choices in the industry, each one with the unique value proposition for the customer. Together with propane, our new gasoline and CNG engines provide three modern, powerful, and affordable alternatives to diesel, all using the same Ford and Roush CleanTech engine platform. That is product simplification that customers and technicians really appreciate. A brand new achievement is the refinancing of our term loan and revolver that we just completed. Phil Tighe will cover the details later, but at very competitive terms, we will reduce our interest rate by four points and will save about $4 million in cash interest expense in fiscal 2017. Last, I’d like to acknowledge the terrific performance by our Type A bus, Micro Bird. Our joint venture in Quebec sold a record number of buses in fiscal 2016, almost 3,000 and secured market share leadership in Type A school buses across North America. That’s a great achievement by the Micro Bird team. Let’s now turn to an area where Blue Bird strives to be the clear leader, alternative fuels, on slide eight. Blue Bird’s propane-powered Vision bus continues to be our number one product differentiator in the market with 10 times more propane buses registered on the road today than all of our competitors combined. Our propane Vision bus also has registered the highest owner loyalty in the industry. We sold 2,240 propane buses in fiscal 2016, up 33% from the prior year. We launched gasoline late in the year and sold and shipped 406 gasoline powered school buses, all in the month of September. We are really excited about the customer interest in this product and we’re the only OEM to offer a gasoline engine on a large school bus. Together with our latest Type C CNG offering, we have a compelling and broad range of engine choices, the widest in the industry. Altogether, our alternative fuel bus sales in fiscal 2016 totaled 2,752 units, representing 26% of our total sales. We are the clear leader in this space. As a reminder, our proven, modern and efficient propane engine is contractually exclusive to us, as our new gasoline and Type C CNG products, developed and supported by our partnership with Ford and Roush CleanTech. At Blue Bird, we believe in being first to market with differentiated products that customers want and value; and where we can, we strive for exclusivity as our alternative fuel results are a clear demonstration of this. Let me now turn it over to Phil Tighe, who will take you through the financials. And I’ll be back later to cover the fiscal 2017 outlook and guidance. Over to you, Phil.

Thank you, Phil, and good morning, everyone. It’s my pleasure to present you with the financial results for Blue Bird Corporation for fiscal year 2016 fourth quarter and full year. Just as a reminder, the fiscal year for Blue Bird is a 52, 53-week period. And the closing day for each quarter is the Saturday closest to the last calendar day of each quarter. So for the fourth quarter and full year material we are discussing today, it’s based on a close of October 1, 2016 for fiscal year 2016 and October 3, 2015 for fiscal year 2015. Mark mentioned that we use a number of non-GAAP measures in this presentation due to the fact that these are generally the metrics used by management in the business. We have included important pages that walk from the applicable GAAP to non-GAAP metrics and a discussion of the use of the non-GAAP measures and we would remind you to consider these as you read the results. Finally, we will be filing the 10-K this week. For any of you looking at it, it’s probably going to be filed tomorrow. Okay. If we can move to slide 10, which is a financial summary, this slide shows the results for 2016 for a number of metrics with comparison to 2015. We thought it was useful to present the slide in this fashion. We showed it I think in our last full year earnings call, and it shows also the impact of seasonality in our business. We keep talking about this, but I think it’s worthwhile when we see the full year to have a look at what the differences are between first half and full year. And if you look quickly at the chart, you can do the math later, but volume in the first half in fiscal year 2015 was 38% of the full year and fiscal year 2016 was 33% of the full year. Revenue followed pretty much the same pattern. Our profits are actually more pronounced seasonality with around a quarter of the profits in the first half and 75% in the second half. And that’s really driven by a rather stable fixed cost or operating expense view by quarter versus some pretty severe moves in volume. As Phil mentioned, Blue Bird sold 3,308 buses in the fourth quarter and generated $289.4 million of revenue. Volume was down about 4.6% in the fourth quarter, again this was due to the late release of the certification for gas buses. Revenue was down about 6.9%, again due to the volume of 160 units and also due to a lower per unit average selling price, which was a combination of 400 gasoline units. They have lower revenue than the diesel units, although they have a very strong margin, and the non-recurrence of a very high revenue CNG fleet that we did in fourth quarter of 2015. It’s worth pointing out also that fourth quarter in 2015 was actually the highest sales quarter whereas in 2016 the highest quarter was the third quarter. So, if you look at a half to half basis on the year, second half of fiscal year 2016 was 7,076 units or about 10% higher than the second half of fiscal year 2015, which we think was a great result. The full year sales were 10,616, they were 238 units higher than the prior year; revenue of $932 million was an improvement of around $13 million. The improvement in revenue is really due to volume offset by some adverse mix. Revenue, as Phil indicated was in line with the guidance. And sales included around 10,100 school buses and also included commercial buses exports and sales to the government. Just in commenting on mix, one of the things that impacted us in revenue was direct fleet and government sales were down versus the prior year. We’re on slide 10. These were areas where Blue Bird had expected to get more volume, but purchase requirements changed with the government and the fleet people. Adjusted EBITDA, on the lower right hand box -- lower left hand box, was $24.3 million for the fourth quarter, which was down about $4.7 million from the prior year. Again, this was due to lower volumes and an increase in operating expenses. Gross margin importantly for the fourth quarter was about equal to fiscal year 2015. The full year adjusted EBITDA of $72.2 million is slightly above guidance and $2.3 million better than fiscal year 2015 due to higher volumes and improved gross margins. This is somewhat offset by capacity across new product costs and personnel increases. Our full year margins of 7.7% on the bottom right box were slightly above fiscal year 2015. And you can see, we had very good margins in the third quarter and good margins in the fourth quarter. If we move to slide 11, this is a brief look at the move from the full year of fiscal year 2015 to full year of fiscal year 2016. So, the total move was $2.3 million. And you can see that bus gross profit was up about $8.9 million or almost 9% due to increased sales and improved gross margins. Gross margins for the full year were about 13.9% robust, which is up about 80 basis points. The margin improvement was to some degree also driven by lower material cost efficiencies, the resulting cost of goods sold reduction was about 1.5% due to material cost reductions and efficiencies and there was a partial offset in mix. Parts gross profits were largely the same year-over-year, and about one-tenth improvement despite some lower revenue due to some changes in distribution of cameras and one less week of selling in fiscal year 2016 versus fiscal year 2015. Operating and other expenses were up about $6.7 million. This was basically due to spending on new products, higher salary costs associated with supporting the second shift, salary economics and some increases in group insurance and pension expense that was I think driven by the I think change in the discount rate. Operating expenses on an adjusted basis were about 7.3% of revenue in fiscal year 2016, which is well below our long-term view of about 8% as an affordable cost. At the bottom of the slide, you can see adjusted income from continuing operations was pretty much flat at about $30 million with higher taxes offsetting lower interest cost and increased income from Micro Bird joint venture. Slide 12 takes a look at the fourth quarter, just briefly. You can see the fourth quarter is down. We had lower volume and some margin issues worth about $2 million. The real issue with the margins was the non-recurrence of CNG, very profitable CNG deal which occurred in 2015. Parts gross profit was down about $0.2 million, again due to lower sales. And operating expenses were up about $2 million due to the same issues that I discussed previously. Again, at the bottom of the slide, you can see the change in adjusted income from continuing operations that was down by about $3.9 million to $13.4 million. We move to slide 13, which is free cash flow. This slide shows the trend of free cash flow and adjusted free cash flow for 2015 and 2016. Free cash flow adjusted for business combination and special compensation payments was $44.6 million in 2015 and $33.3 million in 2016. The $33.3 million is in line with guidance. The reason for the higher number in 2015 was that we spent less CapEx in 2015 than we did in 2016. We took the opportunity in fiscal year 2016 to make a major restructuring of our IT, infrastructure with new data centers and all new servers. And this is very good for us from the point of view of reliability and security, all important things in the IT world. And I think that’s a positive thing that we’ve gone ahead and done that. Taxes in fiscal year 2015 were lower and also fiscal year 2015 had a onetime reduction in inventory that flows through but you only get them -- you get to record the good news one time unfortunately. So that’s really the difference between the two years. Again, the 33.3 was in line with guidance and our outlook will continue to be in the 30s for adjusted free cash flow. Slide 14, net debt, this is a very good story. Our net debt at the end of the fiscal year 2016 was just on a $100 million including $52 million of cash. The net leverage ratio, which is the important ratio with the then existing line was 1.7 versus a covenant of 4. So, as you can see, lots of cushion in there and liquidity stood at $107 million. Briefly, I’d like to talk to you about slide 15. There will be a filing with respect to this. Our prior credit agreement which was laid with SocGen was an initial term loan of $235 million with a revolver of $60 million. And you can see some of the key highlights of that term loan and revolver listed on this page. The interest LIBOR with a floor 1 and 5.5 points, 5% amortization and the revolver at $60 million. Yesterday, we actually closed on a new loan agreement to replace the SocGen agreement. The new agreement is laid by BMO with support from a number of other very solid banks. The new loan is for a $160 million for the term loan which replaces what was outstanding on the SocGen line. And the revolver increases from $60 million to $75 million. You can see the grid for the pricing. So, effectively, we’re going to be at around about 2.7 on interest rate versus the existing level of 6.5. Amortization for the next three years is still 5%, but that’s on $160 million versus the $235 million in the old loan. And the revolver size was increased by another $15 million to $75 million. All-in-all, this has been a great piece of work by a lot of people. We had a good relationship with the SocGen team, and we’re looking forward to the same type of relationship with BMO and the banks that are in the new syndicate. And if you look at the impact of it on our ongoing net income and cash flow, the full year interest saving will be in the range $4 million to $6 million, probably $4 million in fiscal year 2017 on a before tax basis because it’s a partial year. And we will have another $4 million saving in our amortization. So, both the good increase in bottom line profits and a substantial increase in cash flow. So, with that, thank you for your attention, and I’ll pass back to Phil Horlock, and he’ll talk about the outlook for 2017. Thank you.

Okay. Thanks, Phil. So, let’s now our shift our focus now to fiscal 2017 and turn to slide 17 please. As the headline says, we are forecasting continued growth in both industry and for Blue Bird. We are projecting new bus sales growing slightly from 32,700 buses in fiscal 2016 to 33,000 buses in 2017. This is for the industry. You’ll recall earlier that I mentioned how the life between bus sales and registrations appears to have boosted the industry registrations in fiscal 2016. Now, when we adjust for this, we see real underlying industry growth of about 4% to 5% in fiscal 2017. That’s a really nice stronger projection as we look forward and it shows the robustness I think of the school bus industry. We are forecasting Blue Bird unit sales growth of between 6% to 8% outpacing the industry growth and supported in part by the full year availability of all of our new engine choices. How are we doing today? Our order backlog and quote activity remain strong, up from last year. And with the C part of our business, we project growth in financial performance particularly in the second half of the year with highest sales in support of school starts. You’ve seen this before; it’s typical of our business, growth tends to happen in the second half of the year as schools gear up for their new busses in support of the new school year. That said, we are continuing to invest in the development of new and exciting products that will foster future growth and we are mindful of increasing commodity prices, particularly steel. So, let’s now turn to fiscal 2017 guidance on slide 18, which reflects these factors. Growth is projected in each of the three elements in which we provide guidance. We are projecting net sales between $980 million and $1,010 million, up $48 million to $78 million from fiscal 2016. Adjusted EBITDA, we are forecasting guidance at $72 million to $76 million, flat to an increase of $4 million. Adjusted free cash flow, as you know, continues to be a strong feature of our business model, representing over 50% of our adjusted EBITDA. And we are providing guidance of between $38 million to $42 million, an increase of $5 million to $9 million over fiscal 2016. So, in wrapping up, we had a strong fiscal 2016 performance, both operationally and financially and we met our guidance. We look to continued growth in fiscal 2017, and our guidance supports this. We’ll continue to update you on our progress each quarter. Well, that concludes our formal presentation. I’ll now pass it back to our moderator, Kevin, to begin the Q&A session. Over to you, Kevin.

Thank you, sir. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Eric Stine fiscal Craig-Hallum. Please proceed with your question.

Good morning, everyone. Maybe, -- you mentioned seasonality and that you expect this year’s first half to be flat versus last year’s. But just -- so, we’re thinking about the first quarter correctly. I mean, is this something where we should also expect a similar first quarter to last year’s or is it something where because of the gasoline bus and maybe some volumes that flowed into 2017 that it could be skewed a little bit?

Good morning, Eric. No, I think when we look at the first quarter, it is such a slow quarter. I mean, you’re talking October through December. We have Thanksgiving; we have Christmas vacation; we have shutdown period; it’s right after school start. It tends to be -- it is by far the slowest quarter. I think the first quarter is -- looking at last year, it’s going to be somewhat similar to last year’s performance. Surge is going to be later in the year as we always see.

Can you just remind me how you manage the second shift? Because clearly, you can handle significant volumes end of the year, just how you managed that in the first quarter and maybe how that plays into your strategy of getting into the commercial bus market and the international market?

Yes. Eric, this is Phil. We elected to maintain the second shift in the first quarter, albeit at lower line rates. So, when the second shift is fully operational in the second half of the year, it’s at 70 jobs a day. In the first quarter and second quarter, we are holding it in the 50s. This allows us to hold on to some people that we spend a lot of time investing in skills. We don’t want to lose those folks. So, there’s a bit of a cost penalty probably in holding that. But in the long run, I think we save in efficiencies and quality by hanging onto the skill set.

Got it. Thank you for that. Maybe, could you -- or I just want to turn to the overall market and also what you’re seeing, but I know 2016 was relatively quiet in terms of the large contractors and activity there. Any thoughts on what you may see in 2017 on that front?

Yes. The contractors we deal with, they’re still working on what their plans are for the year; typically that will pick up in the January, February timeframe. It’s early days yet for contractors. Obviously, we have a -- we typically sell a lot of buses and we have a great relationship with STI, as you know Student Transportation Incorporated and we’ll look to do business with them again this coming year. But I think it will be more -- you’ll start to see that coming in the second quarter, those orders appearing.

Okay. I will save that question for later then. But, maybe, I guess last one from me just more high level as well. But with what happened in Tennessee, what was it about a month ago, there has been talk of seat belt legislation. Curious is there a retrofit opportunity for you or is this something that -- I know there has been this backlog of buses that are well-beyond their useful life. Do you think that this is potentially something that maybe speeds that replacement cycle?

It’s possible. Here is the thing. We offer seatbelts, we offer lap belts, we offer three-point seatbelts in all our products. They are all engineered in. We offer them to school districts; it’s their choice whether they want to take them. We are able to have -- we offer convertible seats as well. So, in fact we offer seats that can be retrofitted later on with those three-point belts. It’s up to the customer to do that. We just want to give the customer all choices and flexibility. And we’ve been successful in doing that in the past and we look to continue to do that going forward.

Thank you. Our next question today is coming from Mike Baudendistel from Stifel. Please proceed with your question.

I just wanted to ask you on the 2017 guidance. It looks like the implied EBITDA margin is showing just a little bit of degradation, maybe 20 basis points or so. Can you just walk us through the change in EBITDA margin from 2016 to 2017, or if that maybe would have been up, with a little bit higher revenue?

Yes. Mike, this is Phil Tighe. We’ve been a little cautious. We’re seeing some upward ticks in some of the commodities, particularly steel where the second half of last year was pretty good for us on steel; we bought very well. We are not seeing that we can hold on to that position and we think the price levels are going to go up. So, we are expecting some -- we are expecting to pay more for steel ourselves and we are expecting to see some pressure coming from some of the suppliers who are heavy steel users. Steel is really the one that we are starting to focus in on but there are a number of commodities that appear to be ticking up during the year. As you know, in the school bus industry, you don’t necessarily get the flow through cost increases as they occur. So that’s really where we are seeing a bit margin degradation for those 2017 as opposed to 2016.

Yes, just one thing, Mike, I would say on this is that if you look at the range we gave on adjusted EBITDA guidance, I mean, we are cognizant of this. As Phil said, as we watch it, we’re mindful about it, we’ve been a little cautious I think as we put our plan together. And we listed the guidance out there. But we’ll continue to -- as I said before, we’ll continue to look at this each time we report on quarter results that was growing. We had a really good year last year in terms of material costs. I mean, our team worked extremely well with our supply base. We have still a lot of savings there. The question is whether you can hold on to that in fiscal 2017. So, we’re just -- I think we’re being prudent right now. I think it’s a way to do it. We’d like to come -- we’d like to be able to come each quarter and show you solid results, and we’ll just take it in quarter’s time is the way to look at this.

Thank you. That’s great detail. Also I wanted to ask about ASP. It looks like from the guidance, it’s implied that it’s maybe flattish in 2017 versus 2016. Maybe you can just walk us through how we should think about ASP, given that you’re selling more propane buses which are high ASP at the same time, more gasoline buses which are lower.

You sort of just about summarized it for us, Mike. Thank you. So, basically, we do expect to see propane continuing to grow in 2017. We expect to see gasoline probably grow quicker than propane because it’s still in that launch phase. We saw pretty high demand for it when we first announced it. That slipped off a bit when everybody realized that we weren’t going to be able to provide a lot of those to gasoline buses for the start of the new school year in the August, September period. We’re seeing a lot of activity around gas and expect quite a high mix of gas in fiscal year 2017. And as we said, the reason we’ve brought gas in to the school bus world is it offers school districts the absolute lowest acquisition price and a very competitive ongoing maintenance cost structure. So, the fact that it comes in at that lower price, and we’re expecting to see quite a spike of gasoline in 2017, it is going to sort of reduce the average selling price. So, you’ve got higher propane on one side boosting it up and gas engines on the other side dragging it down and we sort of ended up that where we started from.

And then, also just wanted to ask, in one of your recent presentations at a conference, you mentioned that you are in a process of upgrading -- some upgrading of your dealers as required. Can you just explain exactly what you are doing and sort of how far along you’re in that process?

Yes, there are few several things we’re doing there. I mean, we have around let’s say around 50 dealer principals, if you like, to operate in all the states and provinces across North America. And we’ve put in a very dedicated dealer development activity working under Mark Terry, our Chief Commercial Officer. And their role is to really work with each dealer to maximize their representation of their individual markets. And that’s really what we do. I mean it’s one thing -- this has been a product led recovery, a dealer led recovery, a quality improvement led recovery. I look at all these things we’ve done over the last several years. And now, it’s the dealer side, I think you can see this last year, I mean the fact that registrations in the dealer network was up 18%. We have a lot of dealers who are knocking the ball out of the park. Our very best dealers - very best dealer has 75% market share in the territory. At the other end of spectrum, we’re averaging 32% shares, we’ve got some other dealers below that level. So, what we’re going to do is work very proactively with many of our dealers to move them up that market share and to increase the penetration. I would also add that we’ve been proactive in bringing in new dealers to improve our situation. We just launched our new dealer in South Carolina, Blanchard, [ph] replacing Palmetto Bus Sales who have been the dealer there for long time. And we’re very excited, Blanchard is also the Caterpillar dealer in that state. So, it comes with tremendous service facilities, great brand name in the state of South Carolina and is really launched very, very effectively. So, if it’s going to be a combination, working without dealers, together with our dealers, improving their capabilities through everything from new bus sales, used bus sales, parts and service, I mean a representation across the state. And where we can and where we need to, we will look at alternative dealers where we -- if we see that we can’t make the progress we want to.

[Operator Instructions] Our next question today is coming Scott Blumenthal with Emerald Advisers. Please proceed with your question.

Phil, might you be able to give us any more information regarding your progress in the commercial market, maybe some metrics around orders or inquiries or anything like that?

It’s early days, I don’t think we’re ready yet to give you any declarative statement on where we are. I will tell you this, we’re very active on the road with our dealers. We have demo commercial buses on the road every day of the week visiting customers who are newer delight -- relatively new to the Blue Bird commercial bus brand. And we have been quoting a lot of business in the last two months. And these things take a little time to progress. I think this is a good one I think for maybe upcoming quarters, Scott. We can tell you the progress with this, very much work in progress right now. But I can tell you, lot of interest, lot of excitement about the product, customers love the price point that we have for 50-plus-passenger, very nicely appointed commercial bus. And of course we were at the BusCon show just about two to three months ago in Indianapolis where we received second place in bus of the show -- the first place is actually the new Micro Bird with the unique commercial product. So, we won the bus of show with that along with a mid entry door. And second place was to our rear engine diesel business, commercial bus. So, I guess what I’m telling is a long winded way here, lot of excite, lot of interest, early days yet but we’re certainly quoting business and that look to give you a good update as the year progresses on that one.

Okay. And then maybe something might you be able to tell us anything about the V8 diesel uptake at this point?

Yes. I mean, V8 diesel, again, we’re quoting that business. Obviously that business is -- when you think of the entry level product, it sort of competes with our other entry level product, the gasoline engine. But I’d say, both of them quoting a lot of business. Again, early days yet, here we are in December, I mean this is a small part of the season, so to speak. And I think that’s something we’ll see growing as more activity we get closer to school start, you’ll start to see those pick up and then volume picking up. But, right now it’s in the mix. Every single customer we talk to, we always quote, let’s give you the V8 diesel, let’s show you the price of the gasoline and lot of interest. But again, early days yet in our fiscal year.

Thank you. Our next question today is coming from Chris Moore from CJS. Please proceed with your question.

I know you don’t break out specifics on the gross margins, but kind of on a relative basis, I want to make sure that I am looking at it correctly. So, is it fair to say that the propane bus has the highest gross margin and then it would be CNG and then the gas, or can you just give me a little help in terms of how to look at that?

That’s about right, Chris. The propane is still the best overall gross margin vehicle. Even as the volume has grown, we’ve managed to maintain a reasonable premium for propane versus diesel, and I think that’s in recognition of the savings that come with propane over the life of the bus. So, that continues I think to be a great product for us and a very good investment for school districts. If you really compare gasoline to diesel, the thing there to think about is I think -- and again you’ve got to talk specific bids or -- but I think on an apples-to-apples comparison, gasoline, you sort of get a lower price but the same margin as the diesel at a higher price. So, that’s a way to think about it. CNG is so to spotty. There is not a lot of CNG buses sold. So, it’s a bit hard to really look at it. And CNG, the CNG sales depend heavily on subsidies that come from various grants. So, the CNG margins can look right, but there is not much volume to them.

Got you. Okay.

Chris, one thing I would mention just on it -- I can just give a little more color and flavor on this because I’m a huge believer in propane. I mean, I truly believe, we talk about the biggest differentiator, I believe it’s the industry’s biggest change in the last 20 years. There is a little premium for it when we price for it, but the benefits you get, the customer see it and they understand it. They’re going to say, even at today’s depressed prices for diesel, they’re going to save about $3,000 a year in fuel and maintenance savings. Aside from that, the quietness of the vehicle, the cold weather start capability, simplicity of the engine, the lack of expensive and then technically challenging emission hardware makes it a tremendous proposition. So, we do charge a premium for it. There is all the technology in that product. We also -- we train our customers -- we talk about training and education; this is why we can justify that price. When you look at it though, despite that premium price, our sales grew 33% last year, 33% in our ninth year of offering propane, we grew 33%. So, I think it shows you the traction this product has and the excitement about it. You can, when you get the right product, you can charge a premium because it’s right for the customer and they understand it, and they get the payback very quickly and they got the best technology and best solution on the road. So, in a nutshell, like I say, I think it’s a product we’re very -- continue to be very excited about. I think the growth we have in that business shows that the customer likes it too.

Last question again on seasonality, I know 2015 Q4 was the good quarter, 2016 Q3 and that was obviously impacted by the gas buses in Q4. But any reason to think moving forward that Q3 or Q4 is necessarily going to be the big quarter or could flip-flop on a year-by-year basis?

I think, Chris, the answer to the question is it will move around on a year-by-year basis. Quite frankly, personally, I tend to look at it at half-to-half rather than at quarter-to-quarter. Quarters can get really squirrelly based on the timing that orders come in and delivery dates. I think you sort of managed to even the pattern out a bit on a half-to-half basis. I understand that we have to report quarters, because that’s the way we report. But if I was -- and I tried to point it out on that long and horrible explanation I gave on one of the earlier slides, but if you look at that chart with the four quarters, I would tend to study those on a half-to-half basis if I was you.

Thank you. Our next question today is coming from Peter van Roden from Spitfire Capital. Please proceed with your question.

Just a quick -- couple quick questions for you. On the adjusted EBITDA guidance, does that include any allocation for stock-based comp this year?

No.

Okay, got it. And then, I’m a little bit -- I was a little bit curious because if I run the math on your prior credit agreement versus the new one, I get to a much higher cash savings than kind of a $4 million number. So, do you guys have to make a payment in the beginning of fiscal 2017 that is causing cash interest to be a little bit higher than the implied savings?

So, in fiscal year 2017, Peter, to start with, we’re really going to be dealing with less than a full year, which would reduce the savings maybe by a quarter. And there are some upfront fees associated with changing over. There’s always lots of lawyers to pay. So, I think maybe that’s way we could be -- so I think that’s way you could be seeing a sort of a shortfall to what you would expect.

And then, finally on the EBITDA margin guidance, it sounds like it is commodities that are kind of holding back margin growth relative to the sales growth that you guys are forecasting. In years when you’ve seen kind of commodity pressure, is it possible to try to improve pricing? Just walk us through the dynamics there.

We have seen pricing for commodities few years back, Peter. I think if commodities do start to spike, there is an opportunity. We have to be very careful, because again this is a bid based business. And if the competitors don’t follow, that’s a problem. But right now, we’re planning for commodity increases based on the projections of the firms out there that forecast commodities. And so, we’ve got the plan for the increase in -- prior to really getting any offset with revenue. If the increases do in fact occur in the way that the indices suggest they might, then I would suggest that probably in fiscal 2018, we’d be looking at revenue recovery.

Thank you. We have reached the end of our question-and-answer session. I’d like to turn the floor back over to Mr. Horlock for any further or closing comments.

Yes. Thanks, Kevin, and thanks to all of you for joining us on our call today. I have to say, I appreciate the questions, really good, and I appreciate your continued interest in Blue Bird. I can tell you we’re focused on profitable growth and we intend to deliver on our commitments. And we’re well-positioned today for growth not only in fiscal 2017, but into the future. Please don’t hesitate to contact our Head of Investor Relations, Mark Benfield, should you have any follow-up questions. We’ll be happy to assist in any way we can. Thanks again from all of us at Blue Bird and wish you a good day.

Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.