Good day, ladies and gentlemen. Welcome to the Blue Bird Corporation Fiscal 2018 first quarter earnings conference call and webcast. Today's presentation is being recorded. At this time, I'd like to turn the conference over to Mr. Mark Benfield, Director of Investor Relations. Please go ahead, sir.
Thank you, Catherine. Welcome to Blue Bird's Fiscal First Quarter 2018 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 release 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. We will take some questions. Let's get started. Phil?
Well, thanks, Mark. Well, good morning, everybody, and thank you for joining us today for our first quarter earnings call for fiscal 2018. We welcome this opportunity to share our latest quarter results with you. Let's get started with an overview of our performance on slide four. As we have previously explained, the school bus industry is extremely seasonal, and the first quarter is always the softest quarter of the year, with unit sales typically representing no more than 15% of the full year volume. This is also our expectation for fiscal 2018, I am pleased to report that our sales and financial results were strong, coming in well above last year's levels. We sold just over 1,700 buses, which is 14% higher than a year ago.
Net sales of $162.5 million showed even stronger growth at 19% above last year, buoyed by significantly higher volume of our All American rear engine bus, which is our highest priced body style. We recorded our highest ever first quarter sales mix of alternative fuel powered school bus sales at a healthy 31% of our total bus sales. That compares with a 23% mix last year. In fact, our volume of alternative fuel buses were a substantial 49% higher than the first quarter last year. That's leadership and momentum in the fastest-growing segment of the business. As a reminder, in alternative fuels, we do count all of our propane, compressed natural gas, and gasoline-powered buses as all of these are alternatives to diesel, which has been the staple fuel for years. For the last several years, we've been achieving significant growth in alternative fuel bus sales.
As I just mentioned, we have not slowed down this year. We'll cover alternative fuel performance in more detail a little later. At $5.3 million, first quarter adjusted EBITDA was about double last year's level and is the fifth consecutive year which we've achieved positive EBITDA in the lowest volume quarter. Net income was a loss of $7.8 million, which was about $700,000 better than a year ago. The net loss does include certain non-recurring expenses in support of delivering our transformational initiatives that are discussed later. Both our cash and debt positions improved from last year, with net debt $17.5 million lower than a year ago. Looking at the overall industry, although still early in the fiscal year, order intake and quote activity support our position that the industry should again exceed 35,000 units and will likely be the highest industry since 1985.
That's a strong market that we're playing in. As I mentioned in our prior earnings call, we are embarking on a number of transformational initiatives to accelerate our profitable growth, these all kicked off in the first quarter. First, we have a cross-functional project well underway to drive down the direct cost of our buses with significant savings projected in the second half of this year as production is impacted. We have contracted with automotive process experts to assist us in this regard and importantly, to ensure the learnings become the norm within Blue Bird. Second, we'll be significantly upgrading our Fort Valley assembly plant to drive improvements in efficiency, quality, and capacity. As a reminder, prior to 2010, we had never produced more than 5,000 buses in Fort Valley.
Following the closure of our second assembly plant in North Georgia in 2010, each year, we have significantly increased Fort Valley's production and its capacity. In fact, it's grown to over 11,000 buses last year with minimal capital investment. With the increasing demand we are seeing for our products and our desire to continuously build a better bus, supported by a strong balance sheet and liquidity, we will be significantly upgrading our plant facilities and production processes, including the construction of an all-new paint shop in Fort Valley. We have already moved almost 200 salaried personnel from Fort Valley to a new corporate office in Macon, just 30 miles away, to make room for the new paint shop. We are planning on minimal disruption in production as the paint shop will be an addition to the existing building located at the exterior.
Other upgrades will be handled during production hours or in typical scheduled downtime during the year. Completion of this big program of ours is scheduled for early 2019. Third, we are developing a major product program with significant upgrades to bring to the market in the coming years. The outcome of these actions are in part reflected in our fiscal 2018 guidance, which I'll cover later, and are key to future profit growth. All in all, these are exciting times at Blue Bird. Let me now review our year-to-date key operating achievements on slide five. We recorded a number of significant achievements, each one will make us more competitive and support our growth going forward. I just covered the Fort Valley transformational initiatives we kicked off in the first quarter to drive improvements in quality, efficiency, and capacity, including the construction of a new paint shop.
These actions are key to improving EBITDA margin toward our goal of 10%-12%. Beginning this year, where we project a one-point improvement in adjusted EBITDA margin, going from 7% to 8% in fiscal 2018. While we achieved 14% growth in the first quarter, importantly, 21% of our customers were new to the Blue Bird brand of buses, and that's a positive endorsement of our products and our dealers. In fact, through our dealer network, we've seen an increase in units quoted to date of about 5% over last year. That's a good indicator of the strength of the industry and of customer interest in Blue Bird. As of Monday this week, our fiscal year volume of buses delivered, plus our backlog of firm orders, is up about 3% from last year, and our production slots are now full through the second quarter.
With our seasonality, the major ordering period is still ahead of us, and we are seeing a recent increase in daily quote activity as we expected. Not surprisingly, we're again seeing the biggest growth in orders in our alternative fuel-powered school buses, with a 13% increase in fiscal year orders through Monday this week compared with the same time last year. We continue to lead the market in this key segment, and I will cover alternative fuel performance and full-year outlook in more detail in just a couple of slides. In 2017, we unveiled a new range of electric-powered school buses, which are another Blue Bird product exclusive, and that we are bringing them to the market in 2018.
In the first quarter, our Type D electric bus qualified for CARB's HVIP voucher program in both California and New York, and we expect our Type C electric bus to be qualified shortly. This provides customers with grants of $220,000 per electric bus, representing a significant contribution to the acquisition price. Our dealers have been actively quoting electric buses with school districts in recent weeks following several successful ride and drive events that we held. We anticipate receiving significant orders in the coming weeks and months, which I'll report on. Finally, based on our first quarter performance and outlook for the balance of the year, I am pleased to announce that we are increasing guidance for all the metrics on which we report. I will cover this in more detail toward the end of the call.
It's fair to say that we continue to advance the business on multiple fronts, and we are focused on profitable growth. Let's now take a closer look at our second quarter financial results on slide six. I touched on many of these financial results earlier, and Phil Tighe will run through the details later. Just to summarize the first quarter, we exceeded our fiscal 2017 results in every category. Total net sales, bus sales, parts sales, and adjusted EBITDA were all higher. Total net sales for the first quarter were up a strong 19%, and adjusted EBITDA was about double last year's result. Turning now to slide seven, let's take a closer look at our alternative fuel bus sales performance. With almost 1,500 units booked or in the order backlog as of Monday this week, we are running at about 13% above last year's volume.
As I mentioned earlier, in the first quarter, we saw growth of 49%, with alternative fueled buses being a strong 31% mix of total sales, a new record for the first quarter. We continue to be the undisputed leader in the fastest-growing school bus segment, with our market share running at over 85% last year, particularly buoyed by propane when we sold our 10,000th propane bus in 2017. No one else comes close to that number. With less than 15% of school districts having purchased an alternative fuel-powered bus, we are well positioned for future growth. As a reminder, we offer the widest range of alternative fuel-powered buses and the most modern and proven engine in the industry. With our exclusive partnership with Ford and ROUSH CleanTech across all alternative fuel engines, it makes it easy for Blue Bird's customers to grow their alternative fuel fleet.
With the same engine architecture, the same transmission, and the same service requirements across all three products, it's an easy move for a school district or fleet operator to select a Blue Bird bus. Propane is widely recognized as having the lowest total cost of ownership in the market and is a true green engine. In fact, the Blue Bird level of NOx emissions of 0.05 grams per brake horsepower per hour is one quarter of other manufacturers' buses. That's another great reason for choosing Blue Bird propane. Our new gasoline engine is readily understood by technicians and mechanics, who really appreciate the emissions simplicity and cold weather start capability it shares with propane. It also has a lower price point than diesel, so really works for those customers where acquisition prices are concerned, and sales are off to a great start this year.
With the first quarter behind us and a strong backlog of orders ahead of us, we are on track once again to deliver a record number of alternative fuel-powered buses this year at more than 4,000 units. Let me now turn it over to Phil Tighe, who will take you through the financials. I'll be back later to cover the fiscal 2018 outlook and guidance. Phil, over to you.
Thank you, Phil. Good morning, everyone. The next few slides are a summary of our financial performance for the first quarter of fiscal year 2018. Additional information in the appendix will deal with reconciliations between GAAP and non-GAAP measures mentioned in the review. Detailed material will be available today. We will file our 10-Q today. The material we are discussing today is based on a close of December 30, 2017, for the fiscal year 2018, and December 31 of 2016 for fiscal year 2017. We have no new accounting pronouncements that impacted Blue Bird's financial results in this report. Risk factors are basically unchanged from the previously filed 10-K. Please note there are some important disclaimers at the end of this deck. If we want to go to slide eight, which is a summary. Slide nine, I should say, a summary of the first quarter results.
Obviously, as you can see from this slide, this lines up a number of key statistics for fiscal year 2018 first quarter versus 2017. It was a fairly strong quarter for us. Volume, as Phil Horlock has already expressed, was an improvement of 14% versus prior year. It was our best first quarter since 2015, and that's encouraging in that we're starting to get some momentum back into the first quarter. Phil's already talked about propane being up. It was 31% of our sales, up about 12 points versus the prior year. Also in the first quarter, importantly, and you'll hear a bit more about this later, we saw a 10-point mix improvement in our larger All American buses at a 30% total mix versus 20%. Net revenue was up by $26 million or about 21%. The majority of this growth was due to volume.
Per unit revenue on buses, however, was up by about 6%, and this was due primarily to product mix. As I've mentioned, the higher revenue All American bus. The All American bus is the flat front bus that comes in a front engine and a rear engine version, and it has additional passenger capacity. So we sold a lot more of those through both our dealers and also non-dealer sales, which was principally to the government. Our gross margin. Gross margin was down about six tenths of a point at 12.7%. Bus margin declined by about four tenths of a point, and the balance of the decline was actually due to a lower mix of parts sales. Parts sales revenue was about flat versus the prior year, but as you saw, bus revenue went up significantly. So parts went down and parts had a higher margin.
That managed to deteriorate the margin by a couple of tenths of a point. With respect to the bus, the average cost of goods sold on the bus did increase, and that was basically due to a combination of the specification levels that were required by some of our more competitively priced school districts. There seemed to be a higher level of expensive equipment like lift buses, which added cost to both our diesel and our gasoline buses sold to the schools. Revenue did not go in hand with the cost on some of those. And also there was a higher mix of the government units, as I mentioned. These are expensive buses and the margins are a bit thinner than the revenue perhaps should indicate they would be. Also included in the margin change, we did see higher freight costs in the first quarter.
There were two issues around freight. One was there were actually a lack of available trucks due to a change in the ELD system, I believe it's called, which kept some trucks off the road. And secondly, fuel costs were up about 16% versus last year. I think last year first quarter might have been about a low point on diesel, and fuel costs have been up substantially. In addition to that, we continued to have some higher production overhead costs. We did get hit with some higher healthcare costs in the first quarter of our year, which is the last quarter of a plan year for our participants. And we had a couple of very high claims, which we should see some of that money come back through insurance through the balance of the year. The net loss and earnings per share, let me turn to that.
You can see that we did lose $7.8 million, as Phil previously mentioned. That's about $700,000 better than last year. The adjusted diluted earnings per share was a loss of $0.10 versus a loss of $0.13 last year. Our net loss position, the positive impacts on it were higher gross profit, obviously, lower interest expense, as well as non-recurrence of the extinguishment of the debt charge that we had at the same time last year. The negative impacts were higher operating expenses. We did incur costs up front for the operational transformation initiatives that we're undertaking, and we did have higher taxes. Let me pause for one minute on the higher taxes because that might confuse everybody.
The taxes were a $3.7 million benefit in the first quarter of fiscal year 2017 and a $1.4 million expense for the first quarter of fiscal year 2018, a change of $4.1 million on a year-over-year basis. The majority of the change and the reason for the negative rate is the result of a new tax legislation, which causes us to remeasure our deferred accounts and other balance sheet tax items. In effect, we were required to revalue our net deferred tax asset position at the lower tax rate, and we reflected that change in the first quarter provision. That drove us into a much higher tax position than we otherwise would have had for the first quarter. Adjusted EBITDA, we'll take you briefly through a bridge on the next page.
It is worth pointing out the margin of 3.3% was up by about 140 basis points or 1.4 points versus the prior year. Debt and cash. Cash is $10 million higher than last year. I would point out to you that we have continued to progress our share buyback program, and to date, we have spent $38 million on that program. That has used up some cash, but it's a very successful program, and we think we will continue to buy back to the authorized level. We're continuing to spend cash on that. Debt was reduced by $7.3 million, which is consistent with the amortization schedule. The next slide is the bridge. You'll see there that the whole discussion really is around the fact that bus gross profit grew based on an additional 212 units.
That was the large part of the walk from prior year. You can see parts gross profit was up a touch at $200,000. The parts margin was 36.5% versus 35% last year. Operating expenses and other were about $200,000 better than the prior year, which was a good result for us. The result, at $5.3 million, as Phil mentioned, was about two times better than the prior year and was ahead of our internal plan with volume as the principal driver. I'll turn now to slide number 11, which is the discussion of free cash flow. This slide shows free cash flow and adjusted free cash flow for both fiscal year 2018 and fiscal year 2017 first quarters. The first quarter for fiscal year 2018 of $31.8 million is about $3 million better than the prior year. This page does highlight the seasonality of our business.
As volume drops, we see a significant working capital drain in the first quarter. Although, we did do, I think, a very good job in the first quarter of 2018, and you see that there was an improvement in trade working capital year-over-year. The key absolute drivers for fiscal year 2018 were obviously higher adjusted EBITDA of $2.7 million. Interest costs were down by seven tenths, and of course, trade working capital requirements reduced by about $6.9 million. The offset was in the euphemistically called other, which basically is changes to accruals and prepayments. Much of that will be a timing issue, which will smooth out over the year. We have shown on the page the walk to free cash flow from adjusted cash flow.
On a free cash flow basis, our result was $37.3 million, which was $1.2 million unfavorable, this is more than explained by the cash paid for the operational transformation initiatives. As we speak about those initiatives, there is a very large activity going on in the company, and you will really see some of the benefits of that coming to the bottom line as we get into the second half of the fiscal year. Moving ahead to my final slide, we'll talk about net debt liquidity and leverage. You can see here that net debt at the end of first quarter 2018 stood at $126 million, including $23 million of cash. This is an improvement of $17.5 million, as previously mentioned, versus the end of fiscal year 2017. The high year-end cash and lower debt accounted for the improvement.
As I mentioned earlier, this is net of about $38 million in stock buyback payments. The net leverage ratio of 1.5 is substantially below the requirement of 3.75, we continue to maintain a very good cushion there. Liquidity stood at about $90 million. There were no drawings on the revolver. Liquidity at the same time last year, by the way, was about $83 million, we're marginally ahead there. I thank you for your attention, and now I'll hand you back to Phil Horlock, who'll talk about the outlook for 2018. Thank you, Phil.
Okay. Thanks, Phil. Let's now focus on the outlook for the year and our full-year guidance. Let's turn to slide 14. As the headline says, we're targeting margin growth in fiscal 2018. With the industry at a 30-year high last year, we do anticipate another record year in fiscal 2018. At the last earnings call, I indicated a flat to slightly higher industry. Based on the market activity we are seeing, we do foresee a potential for about a 2%-3% growth in the industry, even at this early stage in the year. Importantly, at Blue Bird, we are well positioned to capitalize on these opportunities. We now anticipate Blue Bird sales growth in the 3%-4% range, slightly higher than projected in the last earnings call.
Our focus on fiscal 2018 is on transforming our business structure as we seek to drive EBITDA margin improvement in the coming years toward our desired range of 10%-12%, up from 7% last year. As I explained earlier, we're excited about our plans underway on several fronts to drive efficiencies, higher quality, and provide additional capacity. This work will progressively be implemented through fiscal 2018, and as Phil and I both mentioned, we expect to see results particularly in the second half of fiscal 2018 and into the following year. Additionally, we're continuing to work on our passion to provide best-in-class and differentiated products that customers want and value. That's how you win in the market. Let's now turn to fiscal 2018 guidance on slide 15, which reflects these initiatives.
Based on first quarter results, the outlook for the remainder of the year, and the favorable impact of the new tax regulations, we are raising our guidance on all three reported metrics. Net sales guidance is now between $1.01 billion-$1.04 billion, up $10 million from the prior range. Adjusted EBITDA guidance is now between $80 million-$85 million, about a $3 million increase over prior guidance at the midpoint of the range, and a significant $11 million-$16 million increase over fiscal 2017 as we focus on driving down costs and improving EBITDA margin. Our outlook for the full year adjusted EBITDA margin is about 8%, a full point higher than last year.
Adjusted free cash flow is now between $40 million-$45 million, up about $4 million to $5 million from prior guidance, reflecting the new combined federal and state tax rate of 28%-29%, compared with the prior assumption of 36%. For fiscal 2019 and beyond, the tax rate should normalize at around 25%. That's really going to help our adjusted free cash flow, obviously, and our overall cash position. Adjusted free cash flow continues to be a strong feature of our business model and now represents at least 50% of adjusted EBITDA in fiscal 2018, despite the planned facility upgrade investments we have planned and in place. In wrapping up, we had a strong fiscal 2018 first quarter performance, both operationally and financially, and we are increasing our full year guidance. We look to profit and margin growth in fiscal 2018, and our plans and guidance support this.
We'll continue to update you on our progress each quarter. That concludes our formal presentation, and I'll now pass it back to our moderator, Catherine, to begin the Q&A session. Over to you, Catherine.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press *1 on your telephone keypad. If you're on a speakerphone, please pick up your handset and make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's *1 for questions, and we'll hear first from Matt Koranda with ROTH Capital Partners.
Hey, guys. Good morning. Thanks for taking the questions.
Well, good morning, Matt.
Morning, Matt.
Just wanted to start off with the revenue guide and the raise there. I wanted to clarify, are you raising revenue because you saw strength in your fiscal Q1 deliveries, or it's essentially more of an outlook for industry strength ahead?
I'd say it's a combination of both. Obviously, we've seen a slightly stronger industry. We're also seeing a nice first quarter for us. Obviously, as we look at the business we're quoting on, the backlog we have today, and what we call, which we don't talk about on the call today, but we call our pipeline of activity that we're working on, we feel good about it. I think it's a combination of both, I would say, Matt.
Okay. The 1-2 points of share gain that you guys had provided before, and it looks like that's sort of implied in the guidance here, but do you still view 1-2 points of share take as feasible? I was curious, in one of the slides you highlight 21% of customers or new customers were conquest accounts. It seems like a large portion of customers are conquest accounts. Why wouldn't we expect or why shouldn't we expect more share take, just given those dynamics and the favorable alternative fuel mix that you've got?
Well, a couple things really, Matt. A great question, but a couple things I would say is, first of all, the first quarter is relatively low volume, 50% typically of our full year. It's obviously fairly small in the full scheme of the full year. What tends to happen when you conquest an account often is they try you out. They test you. They come and advise. They don't bet everything that year on you. They might just try it. We'll take a few of your buses, see what we think of them. We like to grow into that the years ahead. I don't think you can take it that when I say 21% of customers, doesn't necessarily mean 21% of our volume. That's the important distinction there. It bodes well, and I think we do look to grow our market share.
When you talked about one or two points, that's probably a good ballpark to be in at this early stage of the year for our growth plans.
Got it. Turning to gross margins for a moment, just with the mix of alternative fuel, also you guys called out sort of a mix of favorable Type D buses. Was there any element in gross margins or in your cost of goods in terms of overtime? What were the inefficiencies that held it back? I guess Phil Tighe mentioned there was some element of sort of unfavorable mix, just given some of the custom work you did. Is that everything that drove the margins, or was there overtime that you didn't call out in the prepared remarks?
Yeah, this is Phil, Matt. We had a quite high mix of the government buses, which are the rear-engine All American buses in the first quarter. Those things require a lot of preparation and quite a lot of work to get them ready for inspection. There was some overtime in there that I didn't specifically call out. The government is a demanding customer, and we love having them, but there's a lot of work done to get the buses ready. Given the lower volumes in the first quarter, they represented quite a high mix and substantially higher than the first quarter of last year. That contributed to it. I think some of the other things were more driven around some of the specific markets that bought buses in the first quarter.
We had quite a few of the alternative fuel buses going up to Canada, that also complicates some of the costs. Yeah, there are a few things going on. We see the margins being increasingly better than last year as we move through the year.
Got it. In terms of freight costs, I think you had called that out as well, Phil, in your prepared remarks. Is there a way to quantify that in terms of the drag that presented this quarter, and do you expect that to continue? If so, how do you offset it?
Well, it was a little hard to estimate the pieces of it. We think that the cause for some of the trucks being off the road has been resolved over the last couple of months, and the drivers are back on the road. The fuel cost one will continue to be up, I think. Diesel fuel seems to be holding up at its cost level. As part of our transformational initiative, we are working hard with some logistics providers, and we're actually looking at alternative routes and more full-load trucking to spread some of the increase in fuel costs. We don't expect to see the level of impact as we go through the rest of the year.
Okay. Maybe one more from me. Just when I look at the incremental margins on your revised guidance, it looks like essentially the implied drop through on incremental dollar of revenue is about 25% incremental EBITDA. Am I getting that right? I guess, does that hold true if the industry growth drives your revenue higher than expected for the rest of the year?
Maybe not go as high as 25%. I'd have to think about that one, Matt.
All right. We'll take the rest of them offline. Thanks, guys.
Yeah. Thanks.
Thanks, Matt.
Our next question comes from Eric Stine with Craig-Hallum.
Good morning, everyone.
Good morning.
Just wondering, you mentioned some major product upgrades, it seems like that is different than just typical coming out with your next generation of your current products. Maybe just some details on what that's referring to or as much detail as you can share on that going forward.
Yeah. Eric, it's Phil. Hold on. Firstly, I can't share that. That's competitive information. I just want you to know we have a considerable amount of resources that our engineering team we're expending on that. You look at what we talk about as a major product upgrade. You look at our bus fleet, where we are. We know these are just things we want to do. Other than that, I really don't want to get into it. We're excited.
Okay
about it. As we're ready through the course of year, next year, we'll tell you more when we feel it's the right time.
Yep, understood. Okay. Maybe just turning to alternative fuels, and I guess trying to get at maybe thoughts about ASP or average ASP going forward. I know last year, gasoline and propane volumes were pretty equal, but I also know that gasoline, you had some pent-up demand. How do you think about that mix going forward, mix between gasoline and propane?
Yeah. It's a great question. Both are doing very well. Again, I'm always reluctant this early in the year to tell you what to significantly declare. Obviously, overall, a great performance. They're both doing what we expected. Propane has been what I call our lead alternative fuels vehicle. Continues to be so for us. Continues to be what I still believe is the best total cost of ownership product in the marketplace. Obviously, gasoline, it's the really easy, soft position for a lot of customers. They understand the technology. Refueling is really straightforward. Is propane, by the way, but everyone possesses gasoline even easier. It works really well. They're both off to a great start, but I still look at it as our lead is propane, but gasoline is doing extremely well for us.
Okay. Maybe last one for me, this is more big picture, but I know as you look out a few years, 2021, you've got the Phase 2 Greenhouse Gas Standards coming and I know that's going to have an impact to diesel, the cost of diesel. Just thoughts on potentially what you think that does for your business, and do you think that the market fully appreciates the impact that that is going to have?
Okay, let me take the last part of the question first. I don't think necessarily that the market has really focused on that. Certainly when you look at the truck industry, you look at what other OEMs, big automotive OEMs are talking about, they do talk about the cost of transporting vehicles that are powered by diesel is getting more and more costly and more and more difficult for customers to afford. I just look at the fact that we're in a great position. It's not often you're in a business that's been around such a long time, and you see things like 13% growth or 49% growth in a quarter for a particular segment. What we're seeing, I think, is we're seeing customers now really saying, "Hey, I see it. This is no longer a fashionable boutique, small part.
This is mainstream. Propane, now with gasoline being added for us, too, but particularly on the alternative fuels, the traditional ones with propane. I do think it puts us in a great position. By the way, we're not stopping there. You're going to see more coming from us, I can tell you that. That's one product little tip I'll give you. You're going to see more coming from us in the propane front to further our advantage in the coming months. We're excited about that. I think we're in an active position. Of course, now, last piece, now we've got the zero-emission solution. We're going to be in both Type C, Type D, and I didn't mention today, but we'll have Micro Bird Type A electric later this year.
For those folks who have got grants, California, New York, these are markets where we hear a lot about interest in zero emissions. They've set up to deploy with grants. We've been very well positioned for those businesses, those customers.
Got it. Okay. Thanks a lot.
We'll now hear from Chris Moore with CJS Securities.
Hey, good morning. Thanks. Maybe just start kind of bigger picture, too. From a kind of overall dynamics of the big three players from a pricing standpoint. What are you seeing for 2018? Is pricing pretty much flat? Do you anticipate a little bit more aggressive stance going after market share from the other two, or how are you looking at that?
Well, first of all, I don't really want to talk about the other two. I'll talk about what we're seeing. I'd say it's fairly flat right now. I'd say it's a good market. It's similar to last year. It's looking a little bit up, as we said, in the industry outlook. A lot of interest in our products, and certainly it's flat, too, and if we can get more pricing where we can, we're going to take it. I wouldn't say there's been any real change, dynamic change or anything out there in the marketplace from what we can see. Certainly from our customer base.
Got you. Okay.
They'll have to move our position. Yeah.
Maybe just switch to the alternative fuel for a second. Just in terms of the average expected life of the alternative fuel buses, and maybe we need to break it down between the three, but is it similar to diesel, or how do you look at that?
Absolutely. The life of a school bus, typically, the average life of a school bus, most districts are between 12 and 15 years. That's a guideline. Some states will run their buses for 20 years or more. Absolutely our alternative fuel buses, the propane, the gas and the CNG, can handle that completely. There's no issue there. I think it's pretty proven. I talk about this a lot, but that Ford engine out there is powering a whole bunch of F-Series trucks. There's about 1.5 million of them on the road. Believe me, that's a tough, durable engine that's proven. Many hundreds of millions of miles of experience from that product and putting it through its paces. No, we are very confident. By the way, we do back that up, because we have the best warranty in the business.
We offer a five years unlimited mileage warranty on that product across the full range of those. We don't see any issue at all on longevity of that product versus diesel.
Got it. The point being, you talked last quarter in terms of potentially bigger opportunity on the parts and service side from the alternative fuel because of the relationship with Ford and ROUSH. If I'm looking at the potential for parts and service revenue over the lifetime of an alternative fuel bus, what's a reasonable estimate for revenue as a percentage of the upfront cost of the bus? Is it 10%, 20%, 30%? I'm just trying to get a feel from a modeling standpoint, what's possible moving forward given that upside on the parts and service.
Are you specifically talking about the Ford ROUSH parts and service opportunity?
Right. I'm trying to understand, while there's more opportunity in parts and service on the Ford and ROUSH, I don't have a good sense. Let's just assume it's on the propane bus. What percentage of that, whatever that might be, $85,000 or $90,000, could you generate in parts and service over the lifetime of that bus?
Yeah. Obviously, when you look at parts and service, the parts and service opportunity varies according to the age of the bus. With the older bus, more service it needs, more work it needs, the more things change. You have to change things out. That's part of the life. I don't really want to get into sort of dropping a number on the table and what that really means, because here's why. We're now in our sixth year of selling the Ford ROUSH product. First five years were all covered by warranty. There's been minor service work, routine service. Now we'll see the benefits going forward. Relatively speaking, it's still a fairly small part, isn't it? We have 150,000 school buses on the road that are Blue Bird branded, running across North America right now. Of which we said before we sold our 10,000th propane last year.
It's 10,000 of a whole 150,000 network. It is fairly small in the scheme of things, but obviously it will grow going forward. Bit of a long-winded answer. I guess to try and think of what I could tell you is, when you look at oil filters and routine maintenance, and occasionally, as a bus ages, year eight, nine, 10, there may be some bigger service item. Probably two, $300 a unit, something like that in the parts opportunity. Something like that, I would say, going forward, that we don't have today, that we can capture.
Got it. Yeah, that's what I was after. My assumption was the back half of the life of these buses is when that part of the revenue probably would kick in. All right. I appreciate it, guys.
You bet. Thank you.
Again, that's all for questions. We'll go to Mike Baudendistel with Stifel.
Thank you. Just wanted to ask you, I guess, in your Adjusted EBITDA guidance, how much is included for transformational costs and product redesign costs?
Sorry. In Adjusted EBITDA guidance, there is nothing included because we've adjusted it out. Let's make sure we got this right. There's a unique cost we're paying today. We mentioned that we brought some expert partners we're working with, non-recurring. Once we're done with this, they'll be gone. We get the benefits of the savings. In the Adjusted EBITDA margin, there is nothing in for that. In fact, there's a reconciliation page towards the back of the material, and you'll see what we spell out there in the first quarter that we've specifically excluded from Adjusted EBITDA, but obviously it's in the net income number.
Okay. Yeah, I was just asking more for how much you're planning to adjust out. I got that it was adjusted out, or even if you think that's a relevant number.
Yeah.
Well, Mike, you can see the number on slide 18. It was about $7 million.
Okay. Maybe just another question on that topic of adjustments. Can you just explain why you feel that stock-based compensation and product redesign costs should be adjusted out from adjusted EBITDA? Both of those things, at least to me, seem like they should be just costs that are from the regular course of doing business.
Well, the product redesign, there is some history to this. We did it previously. These school buses don't get redesigned terribly often. The average life of these buses is like 15-20 years before you do anything major to them. It's a little hard to call it normal operations. If you look at the automotive industry, where they're doing a minor or a moderate or a major change on a 2-year cycle with vehicles, two for minor and four for moderate, and eight for major. The school bus industry is nowhere near that. We're talking 15-20 years between any sort of model change.
We concluded that it was appropriate to deal with it this way because we will spend the money over the next 12-18 months, and you probably will not see that sort of money spent again on the bus for 10 years or more. You don't really want to skew your ongoing profitability with that sort of large cycle spend. Stock-based compensation, this is really, I think, a pretty common practice that we've seen, that stock-based compensation would come out on an adjusted EBITDA basis. It's a reflection of valuation of the stock. Be more than happy to talk to you about that offline if you want.
Yeah. I think the other thing on stock-based compensation, it's a non-cash item. Therefore, that's one of the factors out. It's a non-cash item and therefore is appropriate to pull it out. That's the rationale that most companies use.
Got it. Understood. I guess the other question, just from covering some other manufacturing companies, some of those other companies are having difficulty with input costs. I know you talked about transportation costs, but I think some of these others were having difficulty with rising commodity prices and then difficulty with labor, and I guess it's a different labor pool. It's local to that Georgia area. You talked about running some overtime hours, but are you having difficulty finding and retaining employees with the stronger industrial economy?
Yeah. Let me take that. I'd say, we do an extremely good job here. Where we are here in what we call Middle Georgia, we're the largest public company out here, largest manufacturer, and we do a great job. In fact, we ran a job fair about a year ago, and we had literally thousands of folks show up interested in a job with Blue Bird. I think we do a very good job of retaining our employees. We've always had this seasonal employee base, too, that typically we're able to access. Just the nature of the farming work around here, and it just works well with us. It's a good counterbalance for us. We've been able to bring some of those folks in full time too, as we've grown the business and been successful. I think that works really well for us.
I'm sorry, what was your second question? You had a second point to that. What was the second point?
Yeah. Anything on commodity price increases that you're seeing that could impact margins?
Let me take that. Our biggest commodity, by far, is steel purchase. A lot of steel goes into a school bus. Our guys have done a lot of work with the mills. Actually, as part of our transformational initiative, we've done a serious amount of work with the mills that supply us and the other people we work with on steel. We do see steel going up. We've seen it. We think we're in a position where the steel pricing is something that we can contain within our margin projection for this year. We buy selectively in advance to take advantage of spot rates. We do buy, we believe, at a pretty good rate from the folks that we do business with. We're conscious of the commodity change. We're conscious of the fact that steel has risen quite a bit.
We have provided for it as we planned our margins going forward.
Got it. Thank you.
Thank you.
Our next question comes from Scott Blumenthal with Emerald Advisers.
Good morning, gentlemen.
Morning, Scott.
Morning.
I'm going to follow up on one of Mike's questions here. I don't know, maybe if I asked it a different way, and I guess this is a question for Phil Tighe. The product redesign costs that were adjusted as part of the adjusted EBITDA, do we expect that same type of run rate per quarter, and for how long should we expect that? It looked like it was about $750,000.
Yeah. It'll move around a little bit by quarter. I would expect that you will see it for about 12 months. You go through cycles with these development projects. We'll see some of it for about 12 months as we go through the complete engineering and testing cycles.
We notice that most school buses, regardless of brand, look very similar. Are these redesign changes mandated by new regulations, or is this something that Blue Bird is undertaking themselves to maybe make the bus more easily producible, more efficient, or for some other reason?
Well, I think if I could just mention this, I think it's what Phil touched on earlier. We talked about the fact that, you're right, the buses, they look somewhat the same in all regards, right? They've been around, they have a 15- to 20-year life. After 15 to 20 years, you need to do something to them. This is our initiative we're embarking on, to do something that will obviously extend the life. We'll bring it to the market, that it will be exciting. Customers are going to love it. Bring new features that'll help us run this bus out into the future. That's the best I can give you. It'll meet all the regulatory requirements, as Blue Bird tries to do, exceed them in many cases, also provide the customers with incredible value.
Okay, great. Now, Phil, you said that you expect, or that the production slots are full through Q2, you are still running two shifts currently, correct?
Yes, we are.
Certainly plan to do that through Q2?
Yep. Through the rest of this fiscal year, we'll run two shifts. Yep.
Okay. Thank you for that. Also, you mentioned that alternative fuel buses were 31% of sales. Is that dollars or units?
Units.
Okay. I guess my last one to clean things up, I guess this would be for Phil Tighe. Phil, could you give us a number of shares or average price per share in the share repurchase number? I think you mentioned $38 million to date.
Yes. It is $38 million to date. I don't have the number of shares on me. We can certainly get it to you, but-
Phil, I'll try to-
Is there someone in the room that can do it?
Yeah. It'll be in the 10-Q filing later today in the item.
Okay. Super. Thank you.
Thank you.
Thank you. We'll hear now from Prasad Phatak with Tappan Street Partners.
Hi, guys. How are you?
Hi, Prasad. Good, thanks. How are you doing?
Good, Prasad.
Good. Just a quick question for you. It looks like the next nine months, the free cash flow generation could be, just doing the math on the adjusted free cash flow, could be as high as $70 million. Which kind of puts you in a net debt position at year-end that is sub one times levered. Just kind of curious, with your cash flow, hopefully, even growing into next year with tax reform and then hopefully some margin improvement, is there any plan for some kind of regular dividend or maybe even a floating dividend at year-end where you pay some percentage of yearly cash flow, something like that? Because, at this point, we obviously don't want you to pay off debt, and at some point, your cash balance is just growing so much.
Well, look, I think you've raised some good questions. All I can tell you at this point is these are things we discuss with the board, and we always talk about what we're going to use our cash for, what's the best use of it. Obviously, we elected to do a share buyback program at the end of last year. I think it's gone very well for so far. We're excited about that. We just had a board meeting just last week, and what did we do? We talked about cash and how we're going to use it. We'll just let you know as we go forward here. You raised some great points there. Great questions. We just want to make sure we do the best things to drive shareholder value.
Okay. Thank you.
We'll let you know some of you tell. Thanks.
Thank you. No additional questions in the queue. I'll turn the floor back over to our speakers.
Okay. Well, thank you, Catherine, and thanks to all of you for joining us on the call today. We do appreciate your continued interest in Blue Bird. I really love the questions you asked. I think you get a sense, I hope, that we are focused on profitable growth, and we intend to deliver on our commitments. I think we are really well positioned for growth today and well into the future. Please don't hesitate to call our Head of Investor Relations, Mark Benfield, should you have any follow-up questions. Once again, thanks again from all of us at Blue Bird. Have a great day.
Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.