Greetings. Welcome to the Blue Bird Corporation Fiscal 2017 Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mark Benfield, Director of Investor Relations. Thank you. You may begin.
Thank you, Audrey. Welcome to Blue Bird's Fiscal First Quarter 2017 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 afternoon, 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?
Thanks, Mark. Good afternoon. Thank you all for joining us today for our fiscal 2017 first quarter earnings call. We welcome this opportunity to share with you our latest quarter results. Let's get started with an overview of our financial results on slide four of the presentation. As we've previously explained, the school bus industry is extremely seasonal, and we achieved solid results in the softest quarter of the year. The first quarter is the softest quarter as it covers the three months immediately following the start of the new school year, and consequently, is the slowest quarter for new school bus sales. We plan for this by taking our annual vacation shutdown for our employees in October, and of course, we have the holiday shutdown periods over Thanksgiving and the December holiday period.
This means that typically, first quarter unit sales represent no more than 15% of the full year volume, and this is also our expectation for fiscal 2017. We sold just under 1,500 buses in the first quarter, which is 6% higher than last year. At $137 million, net sales were 4% higher than last year's first quarter. The net sales revenue growth was a little lower than the unit sales growth, which we expected as we saw a number of specific customers shifting their new bus purchases from the first quarter to later in the year. Our alternative fuel-powered school bus sales mix was strong at 23%, although it was a little bit lower than last year's mix because of later order timing by specific customers that I just mentioned.
However, since the first quarter, we've experienced a surge in alternative fuel bus orders, such that as of close of business just two days ago, our year-to-date Blue Bird propane bus orders are 29% higher than the same time last year. We expect another great year for the industry's best-selling alternative fueled school bus. Our adjusted EBITDA of $2.6 million was down about $2.7 million from last year, but represents the fourth consecutive year in which we've achieved positive EBITDA in the lowest volume quarter of the year. The profit decline from last year reflects the change in customer mix and timing of engineering expenses. Purely a timing issue. This was a solid result and consistent with our full-year plan.
We ran production on two shifts through the first quarter, ramping up to 59 buses a day. We will continue to increase production until we hit 70 units a day in support of the peak season demand likely around May. This trough-to-peak increase in daily production rate of only 11 buses is manageable, resulting in less seasonal hires than in prior years. That's better for training, better for quality, and better for employee turnover. In fact, this contrasts with last year's first quarter when we ran one shift, peaking at only 46 buses a day. The climb to the summer peak of 70 units a day last year was more challenging. We refinanced our term loan and revolver as well at a much lower interest rate, providing about $5 million this full year in interest savings.
Finally, early industry data on registrations and actual orders received, together with higher quote activity that we are seeing, supports our position that the new school bus industry should grow by between 3%-4% this year and reach around 33,500-34,000 buses this year. All in all, a solid first quarter for Blue Bird and in line with our expectations. Let me now review our first quarter operating achievements on slide five. We recorded a number of significant achievements since the start of the fiscal year. Each one will make us more competitive and support our growth going forward. On the sales front, we won business with several new customers, including a school district in South Carolina, the Canadian Maritimes, Fulton County in our home state of Georgia, and Hawaii.
In total, these new customers have ordered around 500 buses this year, a combination of both diesel and propane powertrains. Are key to growing overall volume market share for Blue Bird. We recently welcomed a new dealer to our family, Blanchard Bus Centers of South Carolina. Blanchard is also the Caterpillar distributor in South Carolina and has an outstanding reputation for customer service. We'll be utilizing their many service centers across the state. Blanchard's appointment and their service footprint were instrumental in winning the new business in South Carolina that I just mentioned. We're delighted to have them on board as our newest Blue Bird dealer. As I mentioned in prior earnings calls, a cornerstone of our product strategy is to bring to market differentiated products and features that customers want and value.
Just two weeks ago, we released exciting news that we have been awarded a grant by the Department of Energy for $4.4 million to develop eight electric school buses for deployment in California with vehicle-to-grid capability. Working with our electric vehicle partner, TransPower, our goal is to develop a high-performance product with best-in-class range between charging at the most affordable price point. We are already clearly established as a leader in alternative fuel-powered school buses. This initiative will further strengthen that position. To showcase all of our products and features to our dealers and customers, we recently held three ride & drive events in Quebec, Georgia, and California. I can tell you, feedback from dealers and customers to these product immersion tours, or pit stops, as we call them, was outstanding. There's real excitement around all the new powertrains that we recently launched.
We have another four planned through the spring this year. This is a great initiative at building customer interest and excitement in our products. Through our dealer network, we've seen an increase in units quoted of about 6% over last year. This is a good indicator of the strength of the industry and, in particular, of customer interest in Blue Bird. We've seen that translate into orders, too, as through Wednesday of this week, our fiscal year volume of buses already sold and delivered, plus our backlog of firm orders that we have in hand, is up 22% from the same time last year. I can tell you now that our second quarter production slots are completely filled. We are well on our way to filling the third quarter slots with firm, non-cancellable orders.
Not surprisingly, we are seeing the biggest growth in orders in our alternative fuel-powered school bus sales. As a reminder, in the last year, we launched our latest generation propane-powered bus, we call it our Gen 4 model, an all-new and first-to-market gasoline-powered bus, and an all-new Type C bus powered by compressed natural gas. These three products, which, by the way, are all exclusive to us through our contractual partnership with Ford Motor Company and Roush CleanTech, together with our compressed natural gas Type D bus, powered by a Cummins Westport engine, represents a substantial 75% increase in orders compared with the same time last year. We are very excited with this customer response to our new engines. I will cover alternative fuels more in a couple of slides. Finally, we are reaffirming our full-year guidance for our key financial metrics.
A lot of good achievements, we believe, early in our fiscal 2017. Let's now take a closer look at our first quarter financial results on slide six. First quarter net sales of $136.7 million were $5.3 million, or 4%, higher than the same period last year. This result was in line with our expectations. While bus sales grew by 3.3% to $122.4 million, we saw a substantial growth in parts sales of nearly 11% to $14.4 million. This was a particularly strong performance by our parts and service team as they successfully launched several seasonal product programs to drive additional sales through the first quarter. At $2.6 million, adjusted EBITDA was down $2.7 million from a year ago, which is explained by retiming a specific customer order to later in the year and timing of engineering expenses.
As an example of the retiming of orders, last year, we had six specific propane school bus customers who purchased nearly 300 propane buses in the first quarter of fiscal 2016. One of these customers switched their entire 75-unit fleet to propane last year, so they won't be purchasing again in fiscal 2017. The six other customers have either submitted orders in the second quarter or plan to do so in the second half of the year. We deal with this quarterly lumpiness in orders throughout the year. It's a regular thing we experience at Blue Bird, but are well-positioned to meet our full-year objectives because throughout the full year, all these customers come back into the market to buy our buses. Turning now to slide seven, let's take a closer look at alternative fuel bus sales performance.
As of two days ago, we have 1,321 bookings and firm orders in hand for our combined propane, gasoline, and CNG-powered school buses. As I mentioned earlier, this represents a substantial 75% increase in orders compared with the same time last year. That is a very strong customer endorsement of our new alternative fuel-powered buses, and we're particularly pleased with the continued growth in propane and the acceptance of our new gasoline engine. We continue to be the undisputed leader in this growing school bus segment, with our market share running at over 80%. With still only 10% of school districts having purchased an alternative fuel-powered bus, we are well positioned for future growth.
Looking to the full year, based on orders in hand and our pipeline of potential orders yet to be placed, we project that our full-year sales of alternative fuel-powered buses will be over 3,000 units and could represent more than 30% mix of our total sales. That compares with a mix of just 17%, still a good number, but only two years ago. We're looking at growing from 17% mix of alternative fuel-powered buses to 30% in two years. That's exciting growth for Blue Bird. Let me now send it over to Phil Tighe, who will take you through the financials. I'll be back later to cover the fiscal 2017 outlook and our guidance. Over to you, Phil.
Good afternoon. Thanks, Phil. Good afternoon, everyone. It's my pleasure to present to you some further detail on the 2017 first quarter results for Blue Bird. On slide nine, you will see a summary of the results for the first quarter. I won't go through all the data on this page, but we'll call out a few areas of interest. Phil has already covered some discussion around the volumes. You can see we're up by about 6% in the first quarter. This achievement worked better than our internal plan, which is a good result for us. I would comment, too, that our dealers are doing extremely well in the first quarter, and dealers and sales to our export markets were up about 12%. Government and direct fleets were a bit slower than last year, but we expect that the government sales will start to increase as we move forward.
Net revenue, again, was $136.7 million, up about 4%, with both higher bus and parts sales. There obviously was a lower mix of propane, which drove the average revenue down. Also, we had an increased mix of the value price gasoline bus, which has an impact on our average revenue as well. Gross margin at 13.3%. This was down about a point versus last year. The decline was driven largely by propane. Propane mix was about 11% in the first quarter versus over 20% in the first quarter of last year, Phil's already talked you through some of that customer issues there. We also had some higher labor costs in the first quarter, this was basically due to carrying the second shift right through the first quarter. So we had some excess manning there.
I'll talk a little later about what we see the impact of that as being. On parts, we did improve the revenue on parts, that was due to growing our competitiveness as we target some areas where we're trying to grow volume in our parts business, which is a very positive thing for the future. I'll briefly mention net loss and diluted earnings per share. The net loss of $8.5 million and the diluted earnings per share of $0.42 in the first quarter of 2017. This result is largely influenced by the extinguishment of costs related to the prior loan. There's about $10.1 million of before-tax costs that had to be written off with the closure of the prior loan and the adoption of our new loan.
If you excluded these items, you would expect that our net loss and our earnings per share would have been just right around the levels that we achieved in the first quarter of fiscal year 2016. Lastly, on this page, I'll mention that the debt is now at $156.7 million. That's an improvement of $38 million versus the same time last year. That includes, we made a prepayment of $25 million, which I think we referenced in our year-end call, also the regular amortization of the debt. We're pleased that we're down around $156 million, we'll continue reducing our debt going forward. Slide 10 is the walk from fiscal year 2016 at $5.3 million to the profit of $2.6 million in fiscal year 2017.
Again, on the profit level for the first quarter of fiscal year 2017 at $2.6 million, this was also slightly ahead of our internal plan, we do not see any risk from that result with our full-year guidance. You can see on the bridge that bus gross profit was down about a half a million. Again, propane was a big factor in this with the lower mix. It was partially offset by increased sales of diesel and gas buses, as well as some favorable customer mix. As discussed previously, we also experienced some higher labor costs in the first quarter due to maintaining the second shift. Operating expenses were higher. Phil mentioned product development spend in the first quarter of 2017, I'll discuss that in a minute. Then we had some one-time expenses in sales in general.
We've taken a good look at what happened in the first quarter to convince ourselves that our guidance is still on track. I'll just take you through a few comments there. With respect to propane, I think we have a very positive outlook there. While the mix was down in the first quarter, as Phil Horlock commented, our backlog at the moment is up 29% versus the same period last year. We think we're on a very good track with propane, and we see ourselves at least achieving the expectations that we had when we set our guidance. With respect to labor, it did cost us some money to carry labor through the first quarter and keep the second shift going.
We felt that this was appropriate to get our people fully trained and to maintain the skilled people that we had hired last year and invested in. Our view is that when we hit the peak season and we have to hire less temporary workers and we have a stronger mix of skilled workers, we will see a payback in increased efficiencies in the plant, which will more than offset the cost of the first quarter. The product development costs that occurred in the first quarter had been included in our plan for later in the year. A change in the program timing requirements caused us to pull this work ahead, and so it will be offset as we go through the year. This was not incremental cost. It's just purely moving the timing of the spending.
Similarly, the SG&A costs had been included in the plan for later in the year, and we don't see a risk there. Moving to slide 11, free cash flow. This shows free cash flow and adjusted free cash flow for first quarter of 2016 and 2017. For 2017, you see the free cash flow was $35.1 million, $34.7 on an adjusted basis. It's about $8.5 million better than the previous year, which we felt was a good result. The key drivers for the change, obviously, interest was lower. We got some benefit from the new loan, although not the full benefit because the loan was only in for part of the quarter. We also saw a favorable trade working capital. It was down about $5.7 million versus the prior quarter.
Part of this was due to the fact that going into the first quarter, we had established an inventory task force. The team did a very good job in minimizing the traditional run-up we have in inventories in the first quarter. That was a good job by that team and gave us some positive news in trade working capital. Lower EBITDA, obviously, and higher CapEx were partial offsets. I will say, again, the CapEx was very much in line with our plan for the year. Finally, I'll take you to slide 12. This looks at our debt leverage and liquidity. Net debt stood at $143.7 million. That's $156.7 million of debt, net of $13 million of cash. This compares to about $178 million in the same period last year.
The net leverage ratio of 1.76 is substantially below the covenant of four, we feel in a very good position there. Liquidity of $82.7 million. There were no drawings on the revolver. I believe the liquidity in the same time last year was just over $61 million. Substantial improvement there. We also get the benefit of having an increased revolver with the new loan agreement. That helps us out. That's it from me. Thank you for your attention. I'll pass you back to Phil Horlock, and he'll talk about the wrap-up, things that are looking forward, and confirm our guidance for fiscal year 2017.
Thanks for that, Phil. Let's now focus on the outlook for the year and our full-year guidance. Please turn to slide 14. As the headline says, we are forecasting continued growth in both the industry and for Blue Bird. We're projecting new bus sales as measured by industry registrations compiled by R.L. Polk to grow between 3%-4%. We'll reach around 33,500 and 34,000 new buses this year. That's our expectation. We're forecasting Blue Bird unit sales growth of between 6%-8%, outpacing the industry and supported in part by the full year availability of our new engine choices that we introduced last year and, of course, our CNG that we introduced just late in the last fiscal quarter. Our substantial year-to-date growth of 75% in alternative fuel powered bus orders clearly supports this strategy. We believe it's working.
Our total bookings and order backlog are strong at 22% above the same time last year, and quote activity is higher, too. All bodes well for our volume growth plans for the year. With the seasonality of our business, we project growth in financial performance in the second half of the year as we will then see the peak demand come in in support of school start. I just want to stress that it'll be second half of the year where we think that we will see the growth in financial performance versus 2016. 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 potentially increasing commodity prices, particularly steel. Hence, that's reflected in our EBITDA forecast or guidance that we provide.
Let's now turn to fiscal 2017 guidance on slide 15, which reflects all of these factors. We are reaffirming the full year guidance we provided in our last earnings call with growth projected in each of the three metrics. Net sales between $980 million and $1.01 billion, up $48 million-$78 million from fiscal 2016. Adjusted EBITDA of between $72 million-$76 million. That's flat to an increase of $4 million over last year as we continue to invest in new products to drive future growth. Adjusted free cash flow continues to be a strong feature of our business model, representing over 50% of our adjusted EBITDA. We're providing guidance for adjusted free cash flow of between $38 million-$42 million, an increase of between $5 million-$9 million over fiscal 2016.
In wrapping up, we believe we had a solid first quarter performance in the softest and slowest quarter of the year. We look to continue growth in fiscal 2017, particularly the second half, as demand increases, our guidance supports this. We will continue to update you on our progress each quarter towards those guidance numbers. That concludes our formal presentation. I will now pass it back to our moderator, Audrey, to begin the Q&A session.
Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please. Our first question comes from the line of Matt Koranda with Roth Capital. Please proceed with your question.
Hey, good afternoon, guys. Thanks for taking the questions. I think you guys did a good job explaining some of the customer order timing in the prepared remarks, but I wondered if you could just get into a little bit more detail around the engineering expenses that happened in the quarter. Specifically, what those are for, then maybe just how you expect those to trend through the rest of fiscal 2017.
The engineering expense in the first quarter, Matt. This is Phil Tighe, Matt. Good to talk to you. The engineering expense was largely around testing and validation of some changes in regulations on the propane engines. There is a fair lead time getting all that through CARB and then the EPA. Some of you may recall that we had some timing challenges getting the gas engines done last year. We elected to go fairly conservative and pull ahead the testing so we could get our submissions in well ahead of time, make sure we did not miss any production on the propane as we enter into the peak season. As you can see from what we have told people about where the propane backlog stands, we really need to be able to push those buses out pretty quickly through the second half. That is the story, Matt.
It was basically protecting ourselves for the peak.
Got it. Those aren't really expected to be recurring throughout the year. It was a one-time thing in the quarter, then?
Yeah.
Yeah, it was about $1 million, Matt. It's Phil Horlock, in the quarter that we incurred. Like Phil said, we plan to spend that later in the year when put our plan together, which is purely timing. No repeat of that.
Got it. Okay. Helpful, guys. Thank you. When I look at the backlog of alternative fuel buses, obviously very impressive, up 75% year-over-year. Just wanted to see if you could speak to the relative strength between propane, CNG, gas. Our checks have indicated that there's definitely a lot of appetite for the gas engine, especially in certain regions. Wondered if you could maybe speak to the mix in there and the relative strength.
Yeah. Well, this is Phil Horlock again, Matt. Not surprisingly, propane is still the leader in the 1,300 or so units we talked about in our backlog there and the orders that Blue Bird's already made. The predominant product in there is still propane. It's around about just over 800 of those units are actually propane-powered school buses. Propane continues to be, I believe, and we firmly believe here, the flagship engine for the school bus industry. It's the best cost of ownership of any product in the marketplace. In addition to that, it's clean, it's green. You get all the benefits of cold weather start that diesel doesn't have. It's easy to maintain. It's very efficient. It's a very attractive product. Gasoline was also very good for us in the quarter.
Year to date, we have just over 400 of those engines right now, which is very good when you think about it. We only really launched that to our customers in September. This has been a really nice quarter for us in the slowest quarter of the year, and obviously a little bit further than that as we look into the orders that come in January and February. Gasoline, as Phil called it earlier, this is our value entry. The thing about a gasoline engine, it's simple. You don't have all the emissions hardware that a diesel engine has, and consequently, it's easy to maintain. Everyone's used to gasoline. Most people have gasoline vehicles. Technicians understand it. From a simplistic standpoint, it's easy to work on. And again, you get the benefits of great cold weather start.
It's, like I said, very understandable, easy to maintain, it's quiet, and it drives very well. I'll tell you, I think you've seen our annual report that we just issued last week. We had a first testimonial there from one of our first customers here in Georgia, Cobb County, and they were absolutely ecstatic about the product in terms of performance, its fuel economy, and the drivers love it. So we feel we're off to a great start with that. Now, compressed natural gas obviously is the smallest element of our alternative fuel products there, and that always comes down to fuel filling capability. It's expensive to install a compressed natural gas filling station. Now, typically, you will sell a compressed natural gas bus where the municipality has already installed a fueling facility. And they typically start at $1 million.
It goes high as $2 million or $3 million, depending on the size. You contrast that with gasoline and propane, it's a very simple installation. Above-ground tank, very easy. So we sell compressed natural gas typically where there's already fuel availability. It's a more expensive product
The fuel tanks have to handle incredible pressure of that fuel. They are Kevlar-coated tanks. They cost more money. While that has grown, it's up year-to-year, certainly our alternative fuel performance is dominated by propane and gasoline. We're just delighted to offer all three, and as you probably saw in our announcement, we just got a grant there for our electric bus, which we're looking to have that ready sometime early, we think, 2019. That'll give us a real nice rounding here on all the alternative fuel solutions that we can offer other than diesel.
Great. Very helpful, Phil. Maybe one more just on the alternative fuel front. Noticed that a supplier of your competitors that typically provides alternative fuel engines had been going through some issues, just wondering if any of that filtered through to end customers yet, are you guys in a position to capitalize on being able to fulfill immediate demand for certain school districts that are looking to get into propane or gas sooner than later?
I think the thing is, I don't accept it's up to me to comment on PSI, which obviously is who you're referring to there. I respect them, and they're trying to do a good job there, I'm not going to comment on that. I will just tell you this. We will build our 10,000th propane engine shortly. No one has the coverage we've got. We're in virtually every state of North America, or the U.S., I should say, and Canada, and provinces of Canada have received our buses at some point. We have probably, I think, six to seven times more alternative fuel-powered buses on the road than all of our competitors combined. The whole market understands our product, the Ford Roush product that we offer. We've had it on the market since 2012. It's exclusive to us. We know how to sell it.
We know how to maintain it. We know how to look after it. I just think it's a recognition when I talk about our propane being up some 29%, in the eighth year of us producing propane, we're just growing right now by 29%. That's pretty impressive. I think people just know and understand our product very well. We're much better known than anybody else in the marketplace, we play to those strengths.
Understandable. Thanks. I'll jump back in queue.
Yeah, Matt.
Thank you. Our next question comes from the line of Eric Stine with Craig-Hallum. Please proceed with your question.
Hi, everyone. Thanks for all the details there on alt fuels. I was wondering if we could just talk a little bit about the overall market. You gave your view of the current year, but when you think about the health of the market, maybe where we are in the cycle, I believe the last peak, it was 37,000 buses. Are there trends in your markets or in the industry that 37,000, that maybe that's a higher number, or how do you see that playing out? Where do you think we are in the cycle?
Well, I think we've still got some good runway, Eric. I really do because you're right. The last cycle, it was a nice peak that ended up, and last year we.
Just under 30.
just under 33,000, like 32,900. Probably came a little bit quicker than we thought, actually, to that level. I will tell you this, though. The correlation for our business, as we've looked at year after year, we correlate so closely to housing prices since property tax is the major funding mechanism. You still look at housing prices, they're still going up. I think I saw 5.5% growth in housing prices year-over-year in the month of December, I just recently saw. That bodes well for us. I think the new administration, I don't really see anything on the horizon that would threaten that. I can tell you, Talking to our dealers, we look at our dealers as they understand what's going on in their state. They understand the funding capabilities and availability and the planned budgets.
I would say it's a pretty good outlook right now that we have. I don't see any market particularly saying things are looking terrible versus a year ago. Basically, everything is at least as good as, if not better than a year ago. We just want to keep giving everybody great products so they choose us, and that's why we strive to have the broadest range in the market. I think we're at a good point in the cycle. Now, I will say that when the last recession hit, there was no question there was a weed out of sort of old buses out there. There were probably about 40,000, 50,000 buses were taken off the road. Now, when we look at those buses, most of those were what we call spares.
They weren't doing a whole lot of work anyway, but they were being registered and prepped for use. Those would've been weeded out, so there's a little less on the road. I can tell you, there are still over 130,000, 140,000, actually near 150,000, I'm being told, 150,000 school buses on the road today that are over 15 years of age. There's still a lot of demand and desire by districts to upgrade their fleet. The only thing that prevents more being sold is the funding availability. As I said, I think when you look at the housing price situation and what's going on in the housing market, we feel quite bullish still about it. I think that we've got a nice runway ahead.
Yep. Okay, thanks for that. I know, clearly expecting to gain share and a lot of that's alternative fuels regardless of what the market does. Maybe just talk about some of the growth initiatives. I believe last quarter, you were talking a little bit about commercial buses, transit buses, that you were starting to see pretty solid quote activity, testing activity, maybe characterize how that has progressed and do you see, or maybe when do you see, commercial and transit being a more meaningful contributor to results?
Okay. When I look at the commercial bus business, I think when I talked in the last quarter, we mentioned that we'd been to the BusCon show in Kansas City earlier in the year, and we presented our Blue Bird range of products and the Micro Bird range of products too, by the way. The smaller buses are very well received. We've been also on a road show around the country, visiting customers led by our dealer network on the products that we've developed. Where are we at the stage of that? I think we're looking at a few hundred units this year of commercial buses. It's probably more than a couple of hundred, less than 500 is the way I would look at it. It will be up from last year. We're still in the early stages here.
This is our first year of saying we want to be in the commercial bus space. We think we offer a very compelling, very attractive price point. Do we offer every bell and whistle of the other transit bus companies? The answer is no, we don't. We offer a very attractive price point product that's going to be lasting and durable. It's got all the testing requirements the commercial buses require. Altoona testing, Colorado Rack Test are two major things that transit buses have to have, and all of our buses meet those requirements. I think, again, I think we're on a nice runway. I can see us, but it's going to be a few hundred units, Eric, is the way I think of it. Year after year, growing a few hundred units more. Same with international.
Okay.
We've been successful internationally in Central America, particularly with Colombia in recent years, and we brought on a new dealer in El Salvador. We're looking at other markets right now, and we've been tendering for business there, and I think we'll have some success in that later in the fiscal year. I think all bodes well. Look, I want to be clear. The predominant business we have, we want to grow with is our North American school bus business. That's our priority.
Yep, understood. Maybe last one for me, just given the health of the balance sheet, your free cash flow expectations, just maybe thoughts on the capital allocation strategy. I would assume debt repayment is top of the list, but maybe just some of the other things under consideration.
Yeah, Eric, this is Phil Tighe. We continue to look at our debt. It's at $150 and change, and we will have the discussion with the board in a few months' time on whether we want to make another payment this year. We're also starting to think about whether we should perhaps provide for some of what we're seeing as our upside by adding a little bit more efficiency into the plant. That might take a little bit of cash. I wouldn't see it taking major chunks, but a little bit of cash. We could certainly use some more productivity aids in the plant, I think, at the present time because the volume's there. The plant's a fine old lady, but we could do with a bit of modernization, I suspect. Beyond that, we're approaching this discussion with the board about what we do.
It's a little bit early for us to say.
I think it's fair to say, just to second what Phil said, we have reviewed this with the board. We're talking about this with the board. We're talking about the use of the cash. The board's challenges, which is a great one to have, is: Is there something we should do regarding automation from upgrading our facilities? We launched a second shift only this last year, so we still got the same, if you like, facility support system here and footprint here that we had when we were doing one shift, and we've increased the volume dramatically. I think it's something we're definitely going to look at. One way to think about it is, obviously, we just talked about the fact that the new refinancing generated some interest payment savings of some $5 million this year. We haven't flowed that through yet.
We haven't shaved anything on our free cash flow, obviously, to reflect that in our guidance to you because we're looking at maybe got a good use of that. Maybe we could make some good use of that to help us in some automation or facility upgrades.
Okay, got it. Thanks for the color.
Thank you.
Thank you.
Question comes to the line of Chris Moore with CJS. Please proceed with your question.
All right. Hey, guys, thanks for taking the question. Yeah, most have been answered, but I wanted to talk a little bit more on the alternative fuels. Just in terms of the purchasing decision, is there any cannibalism between the propane and the gas? I know the gas is kind of an earlier, less expensive version, but do customers typically choose between the two, or is this just a diesel customer that's going to try something on the gas side, for example?
Hi, Chris. It's Phil here. Phil Horlock here. Yeah, good question. I think what we've seen so far, and again, it's early stages really for gas. We've only been in the market, just live, if you like, for about five or six months now. I'd say what we're seeing is we're seeing both those products still replacing diesel. When you look at this 500,000 or so school buses in the industry, 95% of those are diesel engines. What we're seeing is as folks come in and look at propane or look at gasoline, they're doing it for sort of different reasons. Propane, we talk about the total cost of ownership value. You do pay a little bit more for it, but you get a very quick payback because of the TCO value. Gasoline's all about that low price.
What we've seen so far is that they've really gone and been great products to replace diesel still. Diesel, they've had their issues. You still get the whole working on the engine, the complexity of it. It's a workhorse product. Look, I'm not knocking diesel because they're great products. I just think these other products right now, where we are today, offer alternatives that make it easy for the operators to work with. What we have seen, though, I'll say that because of the propane product and the diesel and our gasoline and our new CNG, have what we call the same architecture. It's the same Ford engine, it's the same Ford transmission. The system's developed by Roush CleanTech, that's the fuel delivery system. We're seeing that once you've sold a customer on propane, they really get gasoline very easily. They understand it.
Similarly, if you never sold propane to anybody, gosh, and you talk about gasoline, they get gasoline. It's a really easy sell. Really easy to understand. Again, I would say it's only been our experience so far, they've been replacing diesel with those products.
Can you just refresh me, the relative kind of gross margins between the propane and gasoline?
Yeah. Well, we don't declare that. I would just say that propane, there's a lot of new technology in that product. It's a higher priced product, has a higher margin for us, absolutely. The gasoline also is a good margin for us. We give a good value of both products to our customers. They understand the value proposition.
Got you. All right, guys, I appreciate it.
Okay, thanks, Eric. Thanks, Chris.
Thank you. Next question comes from Mike Shlisky with Seaport Global Securities. Please proceed with your question.
Thank you. Good afternoon. I just wanted to ask a question. I was looking through my notes on some of the other companies we cover, and a couple of days ago, Allison Transmission was talking about school bus production being down in 2017 and calling that out as a headwind, and I'm just trying to reconcile that with, I think you said school bus production up 3% or 4% a year. They may have just been talking about diesel only. Is that how you would interpret that? That diesel is going to be down in 2017, and it's sort of these alternative fuels that make it up 3% or 4%?
Hey, Mike, this is Phil Tighe. I don't know. I didn't see the Allison Transmission thing. I suspect they might have been talking about the diesel mix of it. The closest we come to seeing a view at the moment of production is through the material published by ACT Research. My understanding for the first quarter is they're showing the school bus production is up. Now, they don't obviously get into powertrain mixes or anything like that, but they're showing it as up. I think they also showed that there was pretty strong orders coming in in the last couple of months of the prior year as well.
The other thing, and I'm not sure, Mike, whether this has got any impact, but you do know that Eaton, who's Allison Transmission's competitor in the truck segments in the higher levels, did come in with that medium use transmission, and that could be influencing Allison Transmission as well. Again, not completely clear to me what their reference was. The only one I could suggest to you is ACT Research, that's showing the volumes as up.
Okay, got it. Then you mentioned in the press release that you won some first-time accounts during the quarter. Who were those? Were those school districts or contractors, and what enabled you to win that business?
Yeah, they were school districts. It's a combination, actually. They're all school districts. What enabled us to win it, I think, we went out and met with those guys, demo'd our buses. A good probably half of those customers, propane was their product of choice. We showed them our propane bus. They tried it out, they tested it, liked what they saw, and ordered that. We went out there, and we showed them what we could do, and in many cases, often they'll come to our plant here, meet us, walk the production line, and we worked hard to win that business. I'd say it was based on relationships with our dealers, technology we offer, and we offer a good value, too. Good value for the customer.
Like I said before, it's a combination of both the diesel engine and the propane product were the winners of those new customers for us.
Okay, good. Just wanted to ask you also about the parts revenue. That was up more on a % basis than the bus revenue. You talked about you had some initiatives in parts, and maybe you could just explain those a little bit more.
Yeah. We've been bringing on a lot of new, what we call SKUs, a lot of new parts in our parts bin. I think traditionally, Blue Bird is, if you go back, what we sell is what we put on a new bus. We've actually been expanding that because often when you get a 5, 6, 7-year-old bus, 10-year-old bus, the guys buying those parts might not necessarily want an original equipment part, might have more of a will-fit sort of part. We've been able to go out and really utilize the fact we have a lot of school buses out there. Blue Bird has many buses out there. We are the major provider of parts through our dealer channel that we have been able to expand our portfolio of parts that we've offered customers. We've also been carrying a lot for the season.
You get into the winter season, and you talk about cold climate, and you talk about stainless steel packages, things that really just help a customer in the winter conditions, anti-corrosion sort of products and features, we've sort of really gone out to market that and put some really nice packages together to be successful there. Really going out and challenging all of our dealers to really get out there and sell to customers. Don't wait for an order to come in. Get out there and visit school districts, sell to them, show what we've got, because we have a tremendous range of parts in the Blue Bird portfolio. I think it's been a combination of all those things, just being aggressive and going out and marketing ourselves with a broader range of products.
Got it. Thank you.
You bet, Mike. Thanks.
Ladies and gentlemen, we have reached the end of the question and answer session. At this time, I would like to turn the call back to Phil Horlock for closing remarks.
Yeah. Well, thank you, Audrey, and thanks to everyone for joining us on the call today. We do appreciate your continuing interest in Blue Bird. We have lots of exciting things going on. I think you can see that we are focused on profitable growth and intend to deliver on our commitments, and we believe we're well-positioned for growth both today and in the future. Please don't hesitate to contact the head of investor relations, Mark Benfield, should you have any follow-up questions. Again, thanks from all of us here at Blue Bird, and we wish you a good evening. Thanks very much.
This concludes today's conference. You may disconnect your lines at this time.