Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the cannot find group Inc. third quarter results 2019 results conference call.
At this time all participants are in listen only mode. After the speakers presentation. There will be a question answer session.
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Please be advised today's conference is being recorded.
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It sounds like there's going to conference over to your speaker today Stephen Kim. Thank you. Please go ahead Sir.
Thank you Chris Good morning, everyone and welcome to NFV group's third quarter 2019 results Conference call. This is Stephen King Enterprise Group director of corporate development in Investor Relations speaking, joining me today or Paul Suber, <unk>, President and Chief Executive Officer, and Glenn Ashen, Executive Vice President and Chief Financial Officer.
For your information as Chris mentioned this call is being recorded and a replay will be made available shortly after the call details on the replay can be found on our website also I'll just remind everyone on the call that in and if I group is having in Investor day. This Friday at Evergreen brick works in Toronto, starting at 830 am I'll provide some additional detail.
On that at the end of this call.
As a reminder to all participants and others regarding this call certain information provided today, maybe forward looking them based on assumptions and anticipated results that are subject to uncertainties.
Sure at any one or more of these uncertainties materialize or should the underlying assumptions prove incorrect actual results may vary significantly from those expected your advice to review the risk factors down in the company's press releases and other public filings on SEDAR for more details. In addition, we encourage all participants to review the third quarter financial statements.
And the associated management discussion and analysis that are posted to our website and on SEDAR.
To start today's call I'll provide a few highlights of the quarter. Glenn will then speak to the financial results and Paul will provide market insights and enterprise outlook following that well open the call at the analyst questions.
The third quarter was a milestone period for Inphi as we delivered a record 1392 vehicles and our highest highest quarterly revenue. However, this was primarily by the quarter being the first full period, including Alexander Dennis Limited or 80 Els results in our numbers and if I group is now a leading independent globe.
The bus manufacturer with leadership positions in the U.S., Canada, United Kingdom, Hong Kong, New Zealand and vehicle, the operating in Singapore, and Mexico and parts of Europe .
The acquisition of video resulted in several significant accounting impacts, including numerous noncash charges related to purchase accounting Glenn will discuss these in detail in today's call as he walks through the third quarter financial results.
We also encourage listeners to review our Mdna, which includes a reconciliation of PD L. historic results for fiscal 2018 Q1 in Q2 2019, both pre and post acquisition plus pro forma fiscal 2018 in fiscal 2019 year to date reconciliations and analysis.
And if I was legacy business, which excludes HDL was focused on advancing its work in progress or with reduction strategy and stabilizing operations a KMG during the third quarter as we reported in the second quarter of 2019, which was built up during the first half of the year due to several factors, including the learning curve of launching new vehicles into production.
Both new Florida, <unk> supply chain challenges, both internally and from came to you started up and our block responding to chassis supply disruption.
We're pleased to report the came to has now stabilized and a delivering parse the all new flyer facilities, new flavors with production plan made solid progress in kitting and completing vehicles that have been building up and preparing them for customer delivery. The majority of these vehicles are expected to be delivered in the fourth quarter of 29 team as we indicated last quarter there is.
The high likelihood that some of these contractually obligated vehicle deliveries will slip into the first quarter of 2020.
Paul will discuss this as he walks through our outlook.
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In addition to those major items. We also continue to advance numerous strategic initiatives during the quarter and achieved other positive all of which will help and if I continue to maintain our market leadership positions and achieve our vision of enabling the future of mobility.
A few of these highlights I'd like to specifically brings your attention.
In the quarter and if I received 1335 use a new orders from several key customers and converted 220 ninee use from options deferred but the firm orders.
With the addition of video and if I was ending backlog in the third quarter was 11590 for use with a total value of 5.5 U.S. dollars. We delivered year on mission buses to major customers in London, Toronto, Los Angeles, Lavelle, San Diego and other regions in the UK, we've been very.
Pleased with the performance of our battery electric and hydrogen fuel cell electric buses, which sets and if I apart as the industry continues to transition to zero emission programs.
M.C. I continue to roll out new products, including regular production of its revolutionary de 45, CRT L.E. vehicle delivered numerous Jay 35, or its 35 foot motor coaches and also completed multiple demos if its battery electric motor coach in California.
HDL participated in bus world, the world's largest bus and coach trade show in Brussels, where it exhibited it Jim viral 500 class two configuration.
The exhibited vehicle and the acquisition by NFC by we're very well received by UK European and international customers at the show.
Glenn will now take you through the third quarter 2019 financial highlights and following that Paul will provide some outlook insights on our outlook.
Thank you Steven and good morning, everyone I'll be highlighting certain third quarter 2019 result, and provide comparisons to the same period in 2018 I.
I direct you to enterprise to Q3, 2019 passes payment and the Mdna if those financial statements.
Which are both available on SEDAR or enterprise website.
I also want to remind you that identifies unaudited consolidated financial statements are presented in us dollars the copies functional currency.
And all now to refer to our in us dollars unless otherwise noted.
As we previously announced effective December 31, 2018, and I adopted <unk> RF 16 for leases.
This news that it provides a single DC County model, requiring that's easy to recognize assets and liabilities for all major leases.
We have elected to utilize the modified retrospective approach and adopting status.
On a quarterly comparative information for 2018 has not been restated.
Accordingly, all Q3 2019 numbers reflect the adoption I FRS 16, well the comparative numbers have not been restated, making year over year comparisons difficult.
Our mdna clearly identifies the impact of the adoption of IRS 16 in our financial State result.
I recommend listeners review that information.
Yes financial results have been incorporated into enterprise operations from the acquisition date of May 22019 onward, with Q3 2019 being the first full quarter upbeat deals operation.
Included in Enterprise result.
The M.D.A. food historical financial information as well as a separate post acquisition acquisition HDR result.
With the addition of baby out we believe certain historic performance metrics, such as average selling price per you and adjusted EBITDA pretty you may look no longer be appropriate to measure the company's comparable performance due to the variations of product and geographic mix.
As a result, we revised our mdna in second quarter 2019, and added additional focus on gross margins earnings before interest income taxes and separate analogy caught core pedestrian aid from the existing manufacturing in aftermarket reporting segments.
We've also provided <unk> revenue segmentation by geographic region to now reflect international reach and a five.
No that vehicle revenue and gross margins can vary significantly by geographic region and by individual contract. This is especially to radio.
In reviewing our materials, you'll note that our pro forma basis revenue and adjusted EBITDA were both down year over year well. Some of this impact is due to fewer trended and low for a cutaway vehicles HDL also delivered fewer deliveries in the third quarter 2019 compared to third quarter 2018.
Due primarily to lower activity in the Asia Pacific market, primarily Hong Kong.
And timing of deliveries in North America, and the UK.
During the third quarter 2018, Hong Kong activity was particular elevated due the timing of deliveries to meet new emission regulations.
Compared to 2018 80, all expects to have significantly higher activity during the fourth quarter 2019 as it fulfills its current order book with the majority of deliveries in the UK and North America.
This is inline with our original expectations for the business.
As Steven mentioned, our third quarter financial results were impacted by several noncash accounting items. This included a 20.9 million dollar.
Unwind of fair value adjustments related to devaluation of PDL acquired assets.
Net after tax basis, this was 11.6 million.
There's also a 9.1 million tangible.
Amortization charge related to the acquisition of NGL tax effected three 6.3 million at 4.7 million Mark to market losses on interest rate swaps and foreign exchange contracts.
Hi, I will highlight specifically, where these items impacting results.
And if our generated revenue of $725 million in the third quarter 2019, an increase of 19.8% compared to the third quarter 2018.
Revenue from manufacturing operations increased by 20.3% primarily from the addition of video.
The increase was offset by lower volumes on our legacy heavy duty transit and look for cutaway business.
Revenue from aftermarket operations increased by 17.4%, primarily driven by the addition of videos parts business offset by lower sales volume within the enterprise parts business due to increased competitive pressure in the private motor code market as well as fewer mid life upgrades and fleet renewal programs.
Total gross margins decreased by 17.6% manufacturing gross margins decreased by 32.4%.
Primarily driven by the 20.2 million dollar unwinding of the fair value adjustments rate baby out and the 9.1 million intangible asset amortization expense.
You guys manufacturing gross margins would have it increased 4.8%.
Aftermarket gross margin increased by 27.6% primarily due to the addition of 80 out somewhat offset by lower margins in the legacy identify parts business.
Total adjusted EBITDA of 76.9 million for the quarter increased by nine a half percent with higher manufacturing adjusted EBITDA up from the addition of HDL offset by lower heavy duty transit and little for coverage deliveries plus higher costs associated with unofficially inefficiencies.
And vehicle remediation costs required to reduce excess working process.
Aftermarket adjusted EBITDA decreased to the impact of adding eight deals as DNA cost plus lower gross margins in the legacy and applied parts business.
A decrease in corporate costs also helped increase adjusted EBITDA due to lower incentive plan expense.
Net loss of $1 million or two cents per share compared to net earnings of 37 million in in Q3 2018.
In addition to the items that impacted gross margins net earnings were also impacted by $12 million increase in interest expense, including a 1.6 million dollar loss on interest rate derivatives and higher credit draws releases acquisition of HDL and higher working capital balances.
In addition, net earnings were also impacted by a 3.1 million dollar unrealized foreign exchange loss.
The interest rate derivative expense for generated by a fixed swap on enterprise interest rate, we pay on $600 million of long term debt at 2.27% plus an uptick <unk> credit margin.
Interest rate fluctuations will cause market mark to market gains and losses, but the fixed rate is in place until October 2023.
Adjusted net earnings of $50 million or 24 cents per share decreased by 15.6% compared to third quarter 2018.
This was driven by the same <unk> impact on net earnings, but adjusted to remove the non cash costs associated with the unwinding of is it fair value adjustments plus mark to market losses.
We now include the impact from Mark to market interest rate swaps in the adjusted net earnings, but we do not adjust where the impact of noncash intangible asset amortization from the acquisition of radio.
Which was significant during the quarter and will impact enterprise financial results going forward.
Our liquidity position of 86.6 million as at September 29, 2019 decreased from 202.2 million at the end of Q2 2019.
The decrease in liquidity, primarily related to capital returns to shareholders through dividends and changes in noncash working capital primarily as a result of increased weapon.
As we discussed the increase in west is expected to be temporary nature.
Our leverage and borrowers have increased were confident these funds together with share and debt issuance if necessary other borrowing capacity and the cash generated from our operating activities.
Well provide enterprise was sufficient liquidity and capital needed to meet current batch obligations as they come due and provide funds for future needs as they arise.
The company generated free cash flow of $37.6 billion, an increase of 30.6% compared to third quarter 2018.
The increase was primarily driven by higher just at the lower capital expenditures and lower income taxes offset by increased interest expense.
And if I declare dividends increase.
By 13% for the same period in 2018 and represents a payout ratio of 53.2% versus 62.9% from third quarter 2018.
Earlier this year end up by increase annual dividend rate by 13.3% from $1.50 per share Canadian to <unk> dollars 70 cents per share Canadian for dividends effect of after March 13 2019.
Property plant and expanded property plant and equipment expense cash expenditures decreased by 44.9% or 11.3 million compared to a third quarter 2018.
Planned capital expenditures for 2019 are expected to be lower than 2018 and 2017.
Spending expect would be no more than 45 million.
As major projects are nearing completion.
This is a decrease our previous guidance of 50 to 55 million pillars.
Return on invested capital our role for this period ended September 29.
<unk> was 10.2% compared to 14.8% for the same period in 2018.
The lower rock was primarily as result of significant investments made in KMG renovation and expansion new players Anderson facility.
And now as Alabama's sells a plus higher work in process and lower adjusted EBIT EBITDA.
We expect rule will improve as we execute on what production plans and realize the benefits of significance estimates made.
So now I'll turn it over to Paul will provide you with the market insights and our outlook.
Thanks, Glenn and good morning, ladies and gentlemen.
Heard both that Stephen and Glen talked this morning about the with recovery plan and the progress we've made to date.
Stabilizing candies part fabrication operations was a key goal of the quarter and we're pleased now that the camtek fabricated parts are recovered to on time delivery to the new flare production facilities.
KMG has a new plant manager and enhance management team in place we're underway to return to our original investment case, albeit approximately one year behind original schedule.
Excess whip remained a challenge during the third quarter, but our production plan is working we've made further progress in the fourth quarter to date and we expect the majority if in fact, the deliveries to made before the end of year as we noted before some of the excess vehicle deliveries will carry over to the first quarter of 2020, the vehicles impacted by the with production plan.
The contractually sole so their ultimate delivery is a matter of timing rather than market conditions.
Due to the due to this timing we've now lowered our 2019 delivery guidance by about 170 equivalent units with the majority of that reduction being new flare transit buses and our bock low for cutaway vehicles no changes have been made a deal 2019 delivery guidance.
This revised guidance suggests we deliver 2020 vehicles in Q4, 2019 or 36.8% of our total 2019 deliveries.
It's definitely a basically quarter and one that we should see strong revenue adjusted EBITDA performance.
And if I group team members around the world are busy finalizing vehicles and delivering to customers.
Which will continue right through to the year at given the significant volume of expected deliveries in the quarter. There's clearly some risks that somebody tells me not to get delivered until January due to weather customer acceptance inspection and supplier delays again that would primarily just be a timing issue that we're focused on delivering to our schedule, but won't jeopardize margin and customer.
License just to ship a vehicle by the end of year.
The temporary work in process build up also impacted our liquidity and our leverage which was 3.75 times at the end of the third quarter as Glenn mentioned, we don't expect any issues to our operations from the elevated debt balances and expect to lower total leverage and increased liquidity in the fourth quarter point 19, and again in the first quarter of 2020 as.
Vehicles are delivered and payments collected progress is already being made in the fourth quarter.
Overall, we are focused on de leveraging and believe that our financial results combined with the execution of the with production plan will enable us to return to our targeted leverage of two to two two to 2.5 times net debt to adjusted EBITDA within 18 to 24 months without impacting the company's dividend policy.
Cash generation will also be supported by lower Capex in 2019, and 2020 following periods of height investment in 2017 in 2018, we expect to realize the benefits of those capital that investments in 2020 and beyond.
Before I explore the overall outlook for individual markets I want to stress that while we dealt with numerous challenges in 2019. It was a very strong year for our company as we're now more diverse business than ever were armed with the material backlog, we've leading positions multiple markets and geographic jurisdictions solid free cash flow generation the highest.
The margin amongst our peers, a proven zero emission bus offering and a continued focus on returning capital to our shareholders.
Now looking at our end markets, let me start with Canada, and the U.S. public transit. The overall award activity in 2019 has been slower than expected, which we attributed primarily to the numerous transit agencies continue to evaluate their zero emission bus transition plans, but as expected our bid units has been growing with active bids up 18% from Q.
2019.
This increase supports our view that we will see increased award activity in the fourth quarter of 2019, and the first half of 2020.
While we expect award activity to increase in the near and medium term. We also expect the visual work to be smaller in from quantity.
Your options and shorter contract terms again, we believe this is primarily driven by transit agency assessing their fleet replacement plant and considering how when they will approach zero mission less programs.
As they do make the transition to zero zero emission buses overtime, we believe and a five will be a beneficiary of this change. This view supported by what we believed to be North America strongest zero emission bus platform with a variety of clean propulsion approaches, including battery and fuel cell electric in 35, and 40 foot single DECT configurations 60 foot.
Articulated and 45 foot double Decker Terence.
Witness a significant uptick in market demand for zero emission buses as they now make up nearly 20% of the active bids and almost 30% of our total bid universe.
Our infrastructure solutions business, which is aimed at assisting transit agencies in understanding the infrastructure requirements for zero emission buses and to source and project management station of associate charging infrastructure has been very successful to date and other differentiate four and five zero emission bus platform.
Within new flared stranded business, we do anticipate there would be some pressure on margins as the new contract volumes being awarded will likely be lower than those experienced you're in recent historic periods due to increased competition and the product mix.
The demand for low for cutaway. It medium duty bus continues to be encouraging we were especially pleased with the performance of the medium duty Atlas product, which has been relatively by the public and private customers and has helped drive our buck to record backlog in the third quarter.
Our box chassis supply disruption limited our ability to deliver low for kind of a vehicles in 2019 demand remains strong and we expect growth in that space in 2020, especially as we now have alternate chassis suppliers to mitigate future potential disruption.
On the zero emission front, our balk recently launched its excellent electrification program for the equity.
In motor coach, we expect the public market to remain stable, while private motor coach demand has declined in 2019 as it did in 2018.
As we've seen in prior years, the private motor coach business continues to be heavily weighted to the fourth quarter of every year and MCR is expected to be particularly business busy through the rest of November and through December of this year.
Looking forward, we expect there will be fewer opportunities in the private market, which will increase competitive factors and placed increased pressure on margins during 2020, and potentially 2021 I will however point Delta MCR is new models have been very well received we expect that they will maintain expand our leadership positions going for MCR is developing.
Testing of its electric motor coaches shows real promise and will help establish its position as the leader in motor coach zero emissions.
As for 80 Elds markets. The UK market is expected to be flat for the rest of this year with potential for growth in 20, and 21 as large commercial operators on smaller regional players increased orders after a number of several years of low activity.
Well as leading provider of zero emission buses in the UK and topped 100 vehicles sold during the third quarter of this year eight deals actively growing at zero emission position in New Zealand and now North America.
Asia Pacific markets continued to vary by jurisdiction.
Highly cyclical Hong Kong transit market is coming off its peak demand in 2017 in 2018, and moving to lower but more stable deliveries, which are expected to continue for a number of years.
I would like to specifically note that the highly publicized an ongoing protests and pump up have not impacted eight deals delivery activity in Hong Kong.
Helping to offset the lower demand in Hong Kong as a result of this cycle was a significant contract win in Singapore and further penetration by HDL in New Zealand.
In addition, the operational and financial challenges, resulting in one of 80 else primary UK competitors in filing for UK administration and subsequent subsequently being acquired by up to manufacture is expected to provide HDL with opportunities to grow its industry, leading share in both the UK in Hong Kong markets.
I'd else plaques and motor coach business, which build bodies predominantly on a formal chassis is primarily focused on the UK market and is expected to experience modest growth for the rest of 2019 and 2020.
Sales outside the UK have been relatively small historically, however plaque since continues to explore opportunities to grow deliveries.
From export markets.
As we've mentioned a few times on this call Hds unit revenue and gross margins very significantly by geographic region and by product type we recommend listeners to review the adjusted HDL historical fiscal 2018, and Q1 in Q2 financial information for 2019, plus the pro forma Q3 2019 in 2018 data.
Which we provided our mdna to get better and get a better understanding of adss potential impact on compliance and a five fiscal results.
And if I parts continued to be focused on numerous initiatives to counter competitive intensity and deliver profit growth.
These initiatives include absorbing in this past quarter, our box cutaway bus parts program, which we believe provided additional revenue synergy going forward.
And the five parts has also added additional focus on its vendor managed inventory programs are what we call via mine and enhanced product offering at various product price point and capitalizing on the previously mentioned implementation of the common it platform across the aftermarket business.
We continue to explore opportunities to combine LDL strength in engineering sales, new product development and third party manufacturing with enterprise operational excellence in sourcing strategy part fabrication systems management, which will strengthen our business and deliver long term financial results for our shareholders.
Our initial efforts are primarily aimed at the north American market. We're in a five seeks to optimize its product portfolio customer strategy and footprint.
In addition to these initiatives and if I is working closely with a deals leadership team to explore new market growth opportunities, while continuing to maintain or expand market share and existing jurisdictions.
2018 contract within Berlin is expected to provide meaningful financial benefits starting in 2021.
And it will be a platform for future European growth first pilots are being built in the UK as we speak.
I've been actively visiting with LDL customers around the world, probably north of about 75% of eight deals revenue. We're very pleased with the combination of identify any deal and we look forward to working what's in the future to meet their unique operational needs.
As Steven mentioned and Glenn indicated seasonality remains the reality of our business fabricating and delivering highly customized buses to customers around the world is a challenging business and the timing of finally final delivery of vehicles can move from period to period. We continue to stress. The NFL has a long term business and we think our shale versus probably focus on.
Full year or last 12 months results rather than a single quarter.
HDL being the market leader in the UK were carefully following potential impacts from the UK potential with withdrawal from the European Union, commonly referred as Brexit.
LDL differ significantly from many other UK manufacturers as it as few cross border sales with EU member States and has a significant local supply base.
Further and for the most part for UK customers buses are made in the UK buses for the Pac rim are made in the region and buses for North America are made in North America.
Well the outcome of Brexit remains unclear with numerous political sorry potential scenarios management's taking steps to mitigate potential risks, which include diversifying it supplier base leveraging global third party manufacturing partners identifying components that may be impacted by tariffs or maybe delayed entry into the UK and building up appropriate inventories as.
Required.
Ill also has an active current hedging strategy, which has used successfully since the original Brexit referendum in 2016 to manage currency risk exposure.
In closing, we're focused on achieving our delivery guidance and a strong fourth quarter 2019 to close out what's been an exciting but no question that challenging year.
As we look forward to 2020 and beyond we expect to see growth. Although we'll be some margin pressure that we will that will allow we believe will alleviate post 2020 as we realize upon investments we've made and lead the industry's transition to zero emission buses from demo a pilot projects to mainstream vehicle purchases more than effort we're proud.
Identifies path and excited about our future with that I'll turn it over to Chris who can please provide instructions to our color.
Thank you Sir.
At this time I would like to remind everyone in order to ask your question Press Star then the number one on your telephone keypad. Your first question comes from Chris Murray of Altacorp Capital. Your line is open.
Thanks, Good morning folks.
Okay, maybe we can talk a little bit about a plan for the with production couple of pieces and that's the first of all can we talk a little bit about.
Your expectations on margins in Q4, I. Appreciate you talked about coming into Q3 that you were going to have to maybe revert back to.
Leaning a little harder on the supplier base to catch up with stuff I'm trying to understand how thats happened the cost remediation.
And then the other piece in this last year you know what are you kind of Cai I think everybody by surprise in the coach market.
Typically there is some a lot of our high number of last minute orders if you will.
Last few weeks of December how should we be thinking about how that shapes out. This year is there anything unusual that you are seeing either in the U.S market or or any of the transitions.
We're just trying to kind of gauge the risk around being able to execute on this at this point.
Thanks, Chris It's a really good question on of course, given the aid the normal fourth quarter dynamic, especially of coach but also the realities of 2019 and catching up on on the the with the that we created so couple of questions in there in a few things.
First of all the primary driver of the transit.
Creation was kind of us doing it to ourselves, we launched KMG, but a year and a half a goal we slowly got it up and running we shut down basically third party supply of a number of components that we made for ourselves and then KMG did not deliver as we expected them. So as I said on previous calls Mea culpa.
That whole issue. So the first primary issue was turning back on third party suppliers to help us stabilized getting parts to the new car production lines that happened. The second issue then was us getting KMG under control. So we slowed down the input of parts that we started to make their we put a new leader.
Ship team in place we at its focus from other parts of the company and KMG now is delivering at something like 98 or 9% on time delivery to the to the new flyer production plants. So that has helped us.
Curb if you will the excess with growth that then turns to the reality of burning off excess wip and you've been to a number of our plants.
If it was always the same product that would be easy, but we have every different customer with different inspection criteria mandates and platforms as well as high degree of variation and so we didnt make as much progress as we had hoped in the third quarter, we expect to make really strong and have been making strong progress in the fourth quarter with burning down the.
Excess buttons.
Honestly as the weeks have gone by.
Crystal clear that we weren't going to get all of the whip out in the fourth quarter, which is why we largely adjusted our transit delivery guidance for the fourth quarter.
With respect to the motor coach market, it's always been highly.
Fourth quarter oriented and of course with a U.S. tax changes a couple of years ago, allowing our customers to take advantage of accelerated depreciation even got more amplified.
In sports business over a coach sells both to two contractual public customers and so those are building to a certain schedule, which has its own challenges just like transit the motor coach deliveries in the fourth quarter. The amount of units that we still actually have to sell on a retailer or transactional basis is relatively soon.
Paul it's really about delivering an execution to those customers in the fourth quarter, but I'm pretty confidence in the a in the guidance at any given us for the fourth quarter of being able to deliver motor coaches.
We used market.
I would say there is nothing really new to report in the U.S market as you know what's not a massive contributed to the business.
We sell in the neighborhood of 350 to 400 units a year there is a little bit of a fourth quarter dynamic again because of operator buying use coach can take advantage.
Advantage of those tax the dynamics.
But at this point, it's always been and continues to be kind of and basically a breakeven business that doesn't have a profit contribution to the business as we've noted over the last probably six or eight quarters.
The team at MCC I'd done has gotten very aggressive at the valuation of those coaches that are put on our balance sheet and sell the surprises of mark to market are materially less are different than we've seen in the past and but we're not really making money on the use coach business. So hope that answers. The three questions you have.
No no that's helpful. Glenn maybe you want to take US one just thinking about.
Call it normal leveraging and I know, there's a lot of moving parts in here, but.
I know you have your longer term goals.
Maybe a year router at more than that but thinking about.
As we get through this with bulge, which always seems to be one of these things. So when we get into call. It maybe Q4, maybe the into Q1, where do you think your normalized leverage is going to look like once you get back to.
I'm going to guess stable working capital requirements any thoughts around kind of what's the what's the true starting point once we're through this through this issue.
Sure. So I guess, a couple of things I mean, when we did looked at the acquisition pace we.
We believe that our pro forma.
Leverage would have been around three times after the acquisition.
Well, we did anticipate at that time was was the growth in who work in process. If you look at our financial statements, who first nine months. The year, we have invested an additional $176 million in our working capital. So thats obvious added direct impact on our leverage.
Substantially all of that we expect to reverse over time now does that happened in Q3, Q over Q1 and next year.
It will take some time to get through it but that'll have a significant reduction to our work our leverage ratios. So definitely the 375 that we are at the end of Q3, we see as being the top and we see it now coming down over the next few quarters.
It's purely from the the reduction in working capital and then tougher question is what's happening with earnings and as you know when we're not giving guidance on future earnings, but we believe that.
I will also make sure to reduced leverage.
Alright fair enough.
Then just maybe one more sort of technical question just on your EPS calculations. So if I understand correctly, you're going to begin to record intangible amortization for the HDL acquisition.
Should we be thinking that.
On a non taxable amount and then you have the mark to market on the interest.
The interest rate swap.
Anything else, we should be thinking about on a go forward basis, just trying to keep biotech just just TPS now this quarter was.
Pretty challenging to kind of get to clean number.
Well for sure the.
The greatest noise this quarter related to the HBIO acquisition and the unwinding of the fair value adjustments.
That unwind will be is substantially complete now there'll be a little bit lepton in Q4, and what and even though through our purchase of kind of we're providing deferred taxes. I mean were script I look at it for setting up those deferred taxes at the UK rate, which is somewhere around 17% for all in rate is 30% right. So.
That ends up.
Boosting the each car when you go through all the mathematics of that so that was a significant impact that go to some of our dog stock makes our expectations was once you remove all of that noise are higher normalize each our if you will would've been around that 31%.
So we expect to see in and at this point stay at that 31% on go forward basis, you will see obviously higher amortization charges and we'll have a bit of impact on our easier there because it once again those intangible assets for tax affected that the UK rate, which is 17% and our average earning our ABL.
Bridge rate across all business is 30% so the deduction, we're getting from or the recovery, we're getting from the deferred tax doesnt match, the nontaxable portion that.
We have it flow to earnings.
Mark to market obviously.
We've put in place our derivative to protect us on interest rate variation and I guess.
Our comfortable with the 2.27 rate that we achieved through that contract. Unfortunately, the impact of that is as markets go up and down even though realized in 2.2 0.7 present, we're going to see mark to market swings. So in times of dropping interest rates were going to see charges like we like we saw it in the last couple of quarters.
If interest rates start rising again, then obviously, we'll start see unwinding of that so.
And again, obviously that.
Paul impact the business as we go forward so I'm not sure if like as you all clarification, you want but overall I guess, we expect that.
Our normalized tax rate should remain around the 31% doing some more work on that but.
As is our expectation right now.
All right Thats helpful. I'll leave it there and I'm sure I was more questions when we get to the Investor day in a few days. Thanks.
Thanks, Chris.
Your next question comes from Kevin Chiang see RBC. Your line is open.
Thanks, Good morning, and thanks for taking my question here, maybe if I could look at your the outlook you provided for 420 20, and I appreciate you're not giving specific guidance.
The 29 team.
It looks like pro forma with a full year contribution of a deal your revenue somewhere.
3.3 billion your pro forma margins are just north of 10%.
So that gets you something like 235 million of EBITDA, maybe this year.
You got some kinji direct costs or come out I think you've called out to be 8 million so that.
That kind of get your run rate of just north of 340.
Is there any reason to think that does 340 is not a good starting point for 2020.
Then I appreciate you know you're seeing some end market weakness you rolled through some costs related to the with production and our box mix looks like a positive.
How you see some of those qualitative things you called out.
Positive net negative net neutral just trying to get a sense of how to level set 2020 year.
Well I think.
Yes, it's hard to argue with your math and your logic on that Chris reality of our 2020 guidance now that we we no longer are going to issue a unit.
Count if after every quarter.
Pulse 40 days later, what the Hell is I think what were are intending to do is is a finished the year burned down as much whip as we possibly can and then the first part of January provide a bit of an update.
To investors on what we expect what excess work, we're still build approach pull off.
Plus a kind of an updated full year 2020 delivery guidance, so thats kind of the way you're the timing in the methodology by which we're going to handle that.
The your Calcs getting so I think you said threeforty or whatever you know there's a lot of dynamics in that a good portion of some of our businesses like transit is contractual and we kind of know the margins are parts of it that we still have to win and deliver in that period, some of them or options that need to be converted.
When you move over to MCR in LDL and even to some extent orbach.
The have retail dynamics associated with the pricing at a time, a bid and still delivering in the same year.
So look we wanted to signal that there is price pressure in some of our marketplaces their softness in the motor coach, which we saw in the private market.
The same time offset by some strength and other parts of the world and the benefit now is having a portfolio as far as 2020, we clearly expect to be able to give you a bit above a better color and focus as we get into.
Into January of following a strong fourth quarter of delivers.
That's helpful and then.
Maybe just your Capex guidance down to 45 million. This year can you remind me how we should think about.
Maybe 2020 or or for the future years is $45 million a good level or does that continue to wind down here.
2020 and onwards.
Yes, so as I look at the 45 million I mean, our focus this year, although we did have a little bit of completion of major projects has been primarily on just maintaining our capital base and not a whole lot of new investment.
So that 45 million dollar number as probably pretty close to 100% maintenance and might be a couple of project. So maintenance Capex, maybe 40 million and then there's some other costs are up 5 million.
Although those other type of investments were constantly making so.
While we haven't finalized on our plans for next year at $45 million I don't think we're going to be able to get at much lower than that given the expanded sizes of overall business today.
Okay. That's helpful. Maybe just wouldn't want to think of lost last one from me here just one of the good ROI C.
Don It just over over over 10% versus I think something like 15%.
A couple of years ago.
We want to softer part of the bust cycle like how do you think of what I call, maybe a mid cycle ROI. So it's a business. You think you can run a 15% kind of through thick and thin or or 15 kind of the high point I mean, maybe 10 is a low points somebody do mid cycle. This is more of a low double digit oral once the business just how do you how do you see Orlando.
The cycle.
Yes, hi, good point, I mean, I wish our business was so predictable that we saw a nice flatlined, but life isn't like that.
So I would agree with your view that.
To.
10%, we've had some challenges in the current here. We also have a lot of big investments are made in 17 and 18 that we don't start realizing the benefit for going forward. So I would say, that's where that 10% to 15% ranges serve a good rates to think about.
Obviously is also further been impacted by 170 million dollar investment in working capital this year, which we hope to unwind withdrawal.
Give us some some lift in our ROI.
So Glenn I think it's fair to say that that 10 feels like the low end given the whip buildup.
Buildup and everything else.
That's it from me. Thank you for taking my questions.
Thanks, Chris.
Sure Okay.
Your next question comes from Mark novel of Scotiabank.
Your line is open.
Hi, good morning, guys.
Just one follow up on just sorry, just one follow up and some of the somebody earlier questions.
Just on the web reduction I guess, just want to make sure I'm understanding it but.
It's been pushed a little bit, but it feels like you've got your arms around it now so.
There was really <unk>, there was no real material negative development in the quarter that resulted not being pushed out.
No. It's just said we think what we've tried to do markets is explain.
Quite candidly in transparently why we got into the situation we were in.
And Oh, we explained that we kind of slowed down the transit inductions to be able to try and dedicate and support additional resources to burning off with but it's not a standard or normal product and we don't totally control how the inspection process works and the acceptance projects and by the way as different with every customer so.
Sure. We're disappointed we didnt get as more whip in Q3 and that we won't get more where production in Q4, but we were pretty comfortable with the formula methodology in the approach. We're taking we're using overtime, we're using weekends to try and burned down that weapons still keep our production rate.
In the range of what what what we had planned for that period.
Unfortunately, the reality is there's only so many days left and the way the year end dynamics work with Christmas and the shutdowns at the end of the year and so forth. The reality is now we got a better picture of how many will bleed over into 2020, and that's why we updated our guidance, but it's not a matter of not selling them. It's a matter of the timing of which we sell right.
Yes.
Sorry, just going to Mark and we're definitely staying close to customers through all this seasonal to explain the situation in the process and as as you know we build in quite a bit of buffer within the delivery schedule to make sure we meet customers' need.
So we've been in constant contact so like Paul said, it's just a timing issue rather than any kind of market condition or anything else. The vehicles are sold and they'll they'll get out either in the fourth quarter or the first quarter.
Yes.
So that's the that's helpful as sort of how understood. It I'm just curious the speed the issue right now is it more the bottleneck is a more customer inspection or is it again, just getting these finishing out the door.
Well, it's a combination I know mark you've been to our facilities, but you'll see that process. Every one is different and commissioning and I don't like for example, every electric bus has to go through something like 600 miles of testing before we can deliver to a customer and so we've got inspection online we've got our own inspection at the end of the line we have customers spec.
And that align we got to do a test for 600 miles then we got to get back through to get final test from search for we get shipped a darn thing and then we ship and we don't get Rev. Rec pellets assigned for on site and I'm not complaining I'm just saying the reality is it's not like we push print in the thing is delivered and we ship it overnight in the Fedex box all those complexities of how we.
Finish them.
A variation of the product and then physically getting it to the customer through their inspection thing just everyone is different so the predictability of it is a little bit harder than we would like it to be.
Okay. That's again, that's a that's good that's helpful. Maybe just on the balance sheet. If I can ask the question another way.
Chris asked it earlier.
And you've got your 3.75 now I think the target is to tune off within 18 to 24 months.
But.
Could you again with a sort of.
An exact time or number sort of a ballpark when do you think you'd be sort of back to low threes. It sort of feels like two three quarters, but just sort of curious to hear your thoughts.
I think your timing it is right I mean, I think we're going to see a.
A piece.
Improvement in Q4, now obviously, there's a bit but the cash cycle ray So us as the investment goes from inventory to receivables and ultimately coming out of cash so well see the what production in acute or some of that will be trapped in receivables come year end.
So we'll continue to see where production into Q1, plus then we'll start seeing the cash come through as those receivables are collected so coming down into the.
Mid threes I think it is achievable bye bye.
Bye.
Q1 of 2020 or first half.
Thats in that time right.
Okay.
Maybe just follow up on the guidance.
So Kevin sort of laid the math it pretty well.
So I'm just curious on the the the magnitude of the margin pressure seeing sort of within transit encourage that you spoke to.
Just to sort of again I don't know how material this is or how significant it is hard to sort of gauge.
And again, you're quoting or you're speaking to you know a much improved bid universe or.
Active bid or a universe.
So again, the the margin pressure in that sort of seems a little engine grew in but I guess, it's just a function of one of these orders get awarded.
Yeah, Yeah, you bring up a good point markets, it's hard to provide because there's no list price that were working against right. It highly customized products that we in our competitors are bidding on the number of units, where we used to see a twothree hundred order for a diesel or natural gas or whatever is now.
810, 12, 15, 20 electric buses and while the bid universe is up the number of awards.
Is still.
Kind of stuck in the system if you will.
Less than our competitors are trying to fill production slots and feel good about 2020, and so a bid for three 510 electric buses today or a smaller order of hybrids or something like that all we wanted to signal is not like it's a massive magnitude of price reduction, but there's definite competitive intensity.
In this period of transition from large orders with big auctions attached to that.
We were encouraged and excited to see the number of customers, telling us look when I get through my trials and my demos I'm going to be buying X Y or is that buses. The next five years. That's all very encouraging. The fact that active bids has gone up a little bit is really encouraging but I can tell you. We're also at the record number of level of bids on the goal and.
And that has huge implications for the way, we cost them and price them and bid them and try and win them and we've just seen of late some pretty aggressive pricing from our competitors I wouldn't say it's.
Ridiculous are stupid or major trends, but all of us we're trying to fill make sure that we filled our slots as best we can for 2020 and given the the orders are smaller in nature, that's caused us to to to acknowledge and want to call that out to you.
Okay. Thanks for color I appreciate it thanks.
Hi spark.
Your next question comes from Cameron directions of National Bank Financial your line is.
Thanks, Good morning, just a follow up on the that the margin question again, just looking at the aftermarket margin if look at the EBITDA margin in the quarter. It was you were lower than what you would typically generate I'm just wonder if there was anything unusual in the quarter in what what should we expect I guess for aftermarket EBITDA margins as it is it fair to say it should be kind.
I mean that high teens kind of range.
Yeah, I don't think you're out of the the ranges is reasonable and kind of the context of what you say that it's really interesting.
In our in our business a year ago, we we were seeing kind of softness in volume and in margins and you will in the public environment. This year what to Brian's team has seen actually is the inverse a little bit a recovery there in the via my programs have helped but we've seen softness in in volume and therefore pricing in may.
Arjun pressure in the private market.
But the blend continues to be relatively in the same range in consistent we're now trying to get our heads around what cooperatively and if I parts can do with the HDL parts team.
Whether it be sourcing whether it be overheads are systems and that kind of stuff to improve volumes, but also enhance our margins through through cost or better purchasing and sourcing going forward.
But you look every quarter every month every period seems to be deferred in that part submarket.
And Camden third quarter within the first quarter two within eight deals aftermarket business combined with the NFL parts business and that aftermarket segment. So you're seeing some of the impact there too obviously radios.
Overall business is lower margin business in our legacy business. So the combination of that as well as at some of the impact on EBITDA margin.
Okay, no that that explains it.
Just on the amortization of intangibles is what we saw in Q3, a good run rate going forward.
So we haven't completed all our purchase accounting analysis so.
Our purchase accounting is still open and still subject to further adjustments I'd say that.
We would think that we're going to remain fairly close to where we are so that was indicate that the amortization is it this quarter should be an indication.
Of the ongoing amortization, but still have to qualify it based on what we.
To come out as our final valuations on purchase accounting so became with a shift.
Away from the definite life assets to more in different then life you'd see a reduction in amortization.
Firstly, if it goes the other way you could see an increase but right now that's our best and I think Glenn and we'll continue to call that out in the quarterly results, even though it is part operations now just to highlight the fact of as a non cash impact intangible amortizations.
Right any thoughts about just excluding that from your adjusted EPS.
Some other companies do that.
And it's a tough on rigs you're living with it for 20 years.
Try to make make that calculation it makes it difficult.
We will definitely call it out as a.
One of the Ivan will pressure show up for the next four quarters as said, there's lower amortization the comparables.
We do exclude.
Intangible asset amortization from our role calculations less than one place we do make investment.
Okay, that's great thanks very much.
Your next question comes from Stephen Harris of JMP Securities. Your line is open.
Good morning, gentlemen, just wondering if we can delve a little more into this this pricing question.
It strikes me that it's got to be connected in some ways to the to the low pace of order awards and as you say a maybe some competitors trying to fill their books for and their their delivery slots for 2020, just wondering if you can give us a sense both on your your your own situation, where you procedure your competitors to.
In terms of how much of 2020 is actually sold at this stage and then just sort of follow on that if you're seeing pricing pressure now in contract discussions when do you think that actually flows into your margins is that mostly as the partly 2020 stories.
More of a 2021 story and finally or you know the core part of your story has been that and the transit side in particular that you've you've consolidated the transit business. It's it's down to fewer players and that created a a more positive pricing environment. How long do you think before you return to that.
The what we've seen basically since 2013 2014.
Well, yes, it's a long period, but no question, we saw and I wouldn't say massive price recovery I would say more price stability when naveed became part of our team in IRI and went away.
And there was really three major players in the marketplace.
16, 14, 15, 16 17, we didn't really have zero emission buses, we had a couple of nice contracts that we had one like 60 foot natural gas or trolleys that were beneficial.
To our average margin and so forth.
As we've now moved into this period of you know some entrance.
Once been around for 14 years one's been around for the last couple of years and just electric buses.
And the number of units that are actually being put up for bid and some of the special funding programs and so forth in the United States that have been very small most of those contracts, where we talk about pricing pressure today are really kind of end up 20 into 21, where we're seeing some of that as you know when we start the.
A year in something like just compare and contrast, when we start the year with.
The transit bus business, probably and I'm, just being generic here, but 60, plus or minus <unk> percent of that is actually sold slots.
2020, 530% of that is options that we expect from our backlog to be converted them. Then 10 15 whatever percent is we've got a win kinda now and build them at the end of.
The second half of next year, and so we got a pretty good picture on the transit space. Although no. We're bidding on electric bus contracts for 10 buses to build in the fourth quarter today, and we're seeing some price pressure.
In the motor coach World, It's it's probably about 50% of that business, maybe less that sort of about 40% 30% of that is contractual we know what we're going to build next year. The rest of it is transactional or retail where we're selling 123 buses at a time that market as you know we've called out a number of times over.
Last two years, where it's starting to slow down a little bit, albeit we've seen some growth in sub segments like employee shuttle and those kind of things, which have been relatively healthy all the quantities are not massive each time.
The our block business, we called out in you read in our notes. This time, we're actually at a record level since we've been involved with our backup backlog and it's a combination of cut of ways, but also the medium duty aquas type buses. So it starts the year in a much better position probably closer to the transit were 50, 60%.
That business, we have a contract for and it's an execution story as opposed to having to win and then having to deliver.
HDL is all over the map LDL has a combination of contractual work in North America. Some in the Pac rim. They have both are contractual work in the UK, but also annual by cycles in the UK that they're going through to win the filter slots and so they're kind of somewhere in between trends have been motor coach blended overall probably.
Probably 50% of our next year, maybe a little bit more is is the actual from sold we have a contract. We know we're going to build 40, plus or minus <unk> percent of the our next year is we're gonna have to win.
And deliver and some of that is actually option urgent and again I'm not trying to be difficult, but every market is very different.
I think like a Stephen if you look at our in their financials I mean, there as you know 4300 units in our backlog almost 2 billion in revenue and that is really mostly delivered in kind of the next 12 to 18 months that that for portion and then others I think 1500 options that expire next year, we expect a lot.
It was the convert in in 2020, so I think to Paul's point, you know the backlog is really a big strength of our business as we look forward and it's something I think a lot of our competitors would love to have the backlog, we haven't and we and we use that as a position of strength and I think in terms of the margin pressure I mean, hopefully it.
Will alleviate as these awards. This pent up demand is awards get awarded to could you know that gets out of active bids and these are fees get awarded to kind of through the ended 19 and first half of 2020.
Okay. Thank you that doesn't help slot just wanted to follow up one more also on the amortization of intangibles question. Glenn did I hear you right that you expect that number to last for for 20 years and will not be flattish number a trailing off it.
You guys look at the intangibles and you'll see it when we finalize right I mean theres some of the intangibles for example, the value assigned to the backlog amortize it very rapidly quality or.
Some of the intangibles as it relates to customer relationships will amortize out as long as 17 years. So it really comes down to the specific allegations each class.
But definitely over the next say you're you're so you guys see that number at the at the value that that we saw in this quarter.
Perfect. Thank you. Some that's returned after out burning at asked as Paul way, you'll start seeing reductions.
That's great Alright, well see we see you guys on Friday.
Thank you thanks, Steve.
Again, if you look to ask your question for a star than the number one on your telephone keypad. Your next question comes from Jonathan Winters of BMO capital markets. Your line is open.
Good morning.
Just one follow up on the.
Competitive pressures.
Are you able to tell yes.
Those have been in the tier one business or the tier two and tier three transit authorities.
Jonathan as Paul here I'm not sure I understand your question you mean, when you say tier you mean size of operator.
Are you seeing increased competition in the beds to large urban.
Transit authorities or to the smaller ones or is it just across everybody.
Well I would say specifically as it relates to did zero emission buses, we have seen some of the bigger guys. Ellie had had some big awards in the last little while.
You know we've seen Seattle, we've seen the Montreal dynamic there Toronto dynamic and so forth I would say that pressure and aggressiveness by all of us to try and when zero emission work then gain confidence from the operators that zero emissions are going to work, both operationally and economic.
He is universal whether you're a.
Grand Force, North Dakota, or whether you're.
Dallas, Texas, or a large operator like Los Angeles.
And because of the number of active.
Competitions in the sheer volume in there is relatively is starting to come back but is relatively small I wouldn't say, we seen any differentiation on the pricing approach.
As you referred to as tier one or tier two or three or where we would refer to as kind of smaller or larger operators.
Okay. Thanks, so as we consider that decline and the average selling price in the firm backlog this quarter.
Obviously, a lot of that would just be due to.
Bringing 80, LS backlog into the fold and.
It sounds like there has been price pressure in electric buses.
Uh huh.
I mean.
Surgeon profile on your conventional bus business.
Changed materially.
Well first of all.
As we've tried to call out in our DNA in the script, we had today.
Average selling price now with a diversified business is not really a strong measure we look at it our business for a couple of reasons the average selling price of a conventional diesel bias of versus an electric bus. That's got a high battery content is materially different and yet the margin dollars off of those units.
Can be very very close.
So we don't spend a lot of time looking at that the other dynamic is the average selling price of a bus for up let's call. It an unsophisticated operator that doesn't have counters or camera systems or voice reconciliation or Wi Fi is very different than the operator down the street that has all that stuff on there that can drive the price.
By 100 or $150000 just by their specification.
Then we have what you just described where HDL in some cases is selling of.
Doubled deck with all kinds of bells and whistles at the other end of the spectrum, maybe a small single deck.
With little of extra air conditioning, or extra cameras and electronics or in some cases radio sells the body based on somebody else's chassis and Thats why we kept saying to us average selling price whether it's in terms a period or in the total calculated backlog is is maybe not the most meaning.
Full measure for our business.
Okay. Thanks for your comments.
Thank you.
There are no further questions at this time I will now I'll return the call to our presenters.
Okay. Thank you, Chris and thanks, everyone for your questions just wanted to remind everyone that we are having on investor day.
This Friday November 15th starting at 830 am at Evergreen brick works in Toronto.
We're going to have presentations from various members of enterprise executive team discussion, our business and our outlook going a bit more you heard today a fleet of our vehicles will also be on display, including a DTC electric transit bus a super low HDL double deck and MCR motor coach in Ann Arbor cut away.
So we hope to see people there and the please check our website for further details on how to RSVP as space is limited.
You'll also find all of the materials that we talked about today press release financial statements Mdna and an updated investor presentation on our website.
Thank you and have a great day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
Yes.