Student Transportation Inc (STB)

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Student Transportation (STB)

Q3 2013 Earnings Call

May 10, 2013 11:00 am ET


Keith P. Engelbert - Director of Investor Relations

Denis J. Gallagher - Chairman, Chief Executive Officer, Chairman of Student Transportation of America Holdings, Inc and Chief Executive Officer of Student Transportation of America Holdings, Inc

Patrick J. Walker - Chief Financial Officer and Executive Vice President


Mark Neville - Scotiabank Global Banking and Markets, Research Division

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Greg Colman - National Bank Financial, Inc., Research Division

Theoni Pilarinos - Raymond James Ltd., Research Division



Good day, ladies and gentlemen, and welcome to the Student Transportation, Inc. Fiscal 2013 Third Quarter Results Call. [Operator Instructions] I would now like to introduce your host for today's conference, Mr. Keith Engelbert, Director of Investor Relations. Please go ahead.

Keith P. Engelbert

Hi. Thank you, Kate. Good morning, everyone, and thank you for joining us to discuss the third quarter fiscal 2013 results, which ended March 31, 2013. Joining me today on the call are Denis Gallagher, Chief Executive Officer; and Pat Walker, Executive Vice President and Chief Financial Officer.

Yesterday, the earnings release, MD&A and financials were disseminated. The release, MD&A and financials are accessible on SEDAR, EDGAR and our website at This morning, we also released a message to shareholders from CEO, Denis Gallagher. Feel free to take a look at the letter when you get a chance.

In addition to our standard disclaimer about forward-looking statements, please also note that all figures are in U.S. dollars, unless otherwise specified. I will also remind you that this conference call is being webcast live.

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

Denis J. Gallagher

Thank you, Keith. Good morning, everyone, and thanks again for joining us. Obviously, I'm pleased to report that our operating results for the third quarter of the fiscal year improved over the same quarter last year. But more importantly, our year-end forecast, despite the weather deferrals and calendar shifts, are in line with our internal expectations as we fully expect to make up our deferred contract revenue days as we have done historically. In fact, we're already well into achieving that during April and now in May. I'll talk about the impact of the winter storms compounded by the earlier hurricane on our Northeastern and Midwest operations a little later. I'm also very pleased to note that next week, our company will pay its 100th consecutive monthly cash dividend since our IPO in December of 2004 and our first dividend payment to shareholders back on February 15, 2005. These dividend payments have been a hallmark of our successes, and reaching this milestone is a tribute to our Board of Directors, our shareholders, our dedicated management team and thousands of outstanding employees.

As I have stated in previous calls, we entered into the new fiscal year anticipating an approximately 15% increase in annualized revenues for fiscal '13 over fiscal '12. In fact, year-to-date, revenues are up -- up to March have increased by 13.5%, which puts us right on target with the anticipated 15% increase in annualized revenues we forecasted in the beginning of the year once we add back the recoverable days in the fourth quarter. Since we last spoke to you, we have broadened our company initiatives to reduce costs, secure several new contracts and, again, renewed over 95% of our existing contracts up for term this year. Our long-term contract visibility has never been greater. Some of the new contracts we have won will expand our use of environmentally friendly vehicles equipped with liquid propane auto gas fuel systems, or LPG, as we call it, for the start of the next school year.

Our growth efforts recently have been concentrated on bids, conversions and managed contracts. So looking to fiscal 2014 beginning this July, we are forecasting approximately 10% growth over fiscal 2013 with what we already have booked. There are potentially a few additional bids we are waiting on before the start of the school year, that we have not completed any acquisitions this fiscal year, we have not had any capital -- new capital raises in over a year, and we have no need, at this time, to go back to the capital markets for funding of our new or proposed growth for fiscal 2014 with the levels I just mentioned. We have made great progress in lowering future operating costs through a reduction of our long-term fuel costs and lowering our future payout ratio by securing more non-asset and asset-light businesses, as well as extending the life of our current revenue contracts with existing vehicles.

Pat Walker, our CFO, will review our complete financial results for this quarter of 2013 in detail in just a few minutes. Those deferred revenues from school closings this quarter were primarily due to to the seemingly endless winter storms that crippled much of the Northeast, the Midwest and even into Ontario. On top of that, we were still struggling to make up schooldays lost during the effect of Hurricane Sandy 3 months earlier. And of course, Easter was in March this year versus April last year.

However, and more importantly, the great thing about our contracted business is that we can predict pretty well the revenues we will receive during the fiscal year due to the revenue contracts we hold. Now this is not the first time we have had severe weather hit our operations, nor will it be the last. However, as in past years, we recoup those revenues deferred in the second and third quarters during the fourth quarters, as schools adjust their calendars to make up for the lost schooldays, giving us a strong finish to 2013 fiscal year. When this has happened in the past, I would hear from folks who would say, "Wow, you had a great fourth quarter." And I would say, "Yes, thank you. It's because we had a crummy weather in our second and third quarter." So it's just math. We have 180 schools -- 180 days of schools in almost all of our contracts. So while I can't predict the weather, I can forecast that the number of schooldays will generally remain constant. That is one of the main reasons our revenues are so predictable. If we close an acquisition during the school year, we can figure out how many days are left in a year, and that's the revenue we'll get from those. When we announce we win new bids, those start in the beginning of the school year and go 180 days. So while the revenue is predictable and our fixed costs are spread over the year, the variable in which schooldays fall and what determines which months and which quarters.

As we do know, fuel cost is a variable in our business. The steps we have been taking to tackle those costs are starting to show positive results and expected to continue as we move into 2014 and beyond. First, we have increased the number of contracts that include customer-paid fuel provisions or fuel mitigation clauses, and we're making consistent good progress in this area. Currently, over 60% of our contracts include some form of fuel protection, which is mitigated annually, and 28% is now 100% customer-paid. That's up from 10% customer-paid just a few years ago, plus we've been growing it at about 15% a year.

Now smart technology like GPS systems and fuel-idling monitors on our buses we've been using to reduce excess idling and lower our fuel costs have also begun to literally pay for themselves. Our operational teams are focused on this daily, and we're committed to continuing our progress to reduce fuel costs at the local level.

We've entered into new contracted arrangements with our major fuel suppliers, and we're anticipating to see a reduction in expense from improved procurement practices on that portion of the fuel which we purchase, some of that which, by the way, is in very rural communities.

The final fuel-related area which I -- which will see a significant impact on improving margins and lower operating costs involves alternative fuels. We have successfully operated with these fuels in 2 states, California and Minnesota, over the past 3 years and have significant orders for the coming year that will add 600 alternative fuel vehicles to our operations in Nebraska, Pennsylvania and Texas. By the start of the new year, we will operate over 1,000 alternative fuel vehicles, consisting of liquid petroleum gas, LPG; and CNG, compressed natural gas, in the U.S. And we continue to run the largest bio fleet in Canada, with over 1,600 vehicles. The benefits are really turning green, both environmentally and cash flow-wise. This is not a fad. The payback is real. Now, we have done a great job of negotiating reduced asset cost for these new engines, making them more affordable and significantly reducing the payback period.

A gallon equivalent of propane is currently about 50% less than the cost of a gallon of diesel, and it's domestically produced here in North America. Alternative fuel vehicles, such as LPG, produce 60% less carbon monoxide than gasoline engines, which parents, politicians, school boards and environmental groups strongly support. Our position to leverage LPG propane-powered buses was supercharged by our major contract win in Omaha, Nebraska, which we announced during our last earnings call. It's factored well into the decision by school boards, with new contract wins this quarter in Texas and with 2 school districts in Pennsylvania. Both of these states have large gas resources.

By the start of fiscal 2014, so far, our operations will have added approximately 800 vehicles. Of that, we will have deployed 600 new LPG vehicles, and we will be operating the largest propane school bus fleet in the United States. The Blue Bird Corporation is manufacturing these vehicles in Fort Valley, Georgia, for us, which are being equipped with ROUSH CleanTech liquid propane autogas fuel systems of Detroit, Michigan. The 125 of the 400-plus LPG vehicles for our Omaha contract have already been delivered and were most recently showcased in the Cinco de Mayo Parade this week in the city.

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