Q1 2020 Earnings Call
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Dead dead. Thank you for standing by and welcome to the NFI group's first quarter 2020 Financial results conference call at this time. All participants are in a listen-only mode after the speaker's presentation. There will be a question-and-answer session to ask a question during that session. You will need to press star one on your telephone. If you require any further assistance, please press * 0. I would now like to hand the conference over to Stephen King, please go ahead sir.
Thank you, Cheryl. Good morning, everyone and welcome to the group's first quarter 2020 results conference call. This is Stephen King and his group director of corporate development and investor relations speaking. Do you mean today or Paul Subaru president and chief executive officer and papazzio Sony Executive Vice President finance and Chief Financial officers for your information. This call is being recorded and a replay will be available shortly on this morning's call who will be walking through a financial results presentation that can be found in the investor section of our website. We will call out the slide number referred to as we walk through life and
Starting with slide to I will remind all participants and others that certain information provided on today's call may be forward-looking and based on assumptions and anticipated results that are subject to uncertainties should any one or more of these uncertainties materialize or should the underlying assumptions prove incorrect actual results, May Vary significantly from those expected you're advised to review the risk factors found in a press releases and other public filings on Cedar more details during today's call will be highlighting certain first quarter 2020 results and provide comparisons to the same periods in 2019. In addition to the results presentation. We encourage all participants to review the Consolidated financial statements the associated management, discussion and Analysis or mdna and press release that are all posted to our website and I'm Sita.
We also want to remind listeners.
Financial statements are presented in US Dollars. The company's functional currency and all amounts referred to are in US Dollars unless otherwise noted on today's call Paul will start with quarterly highlights long. It will take us through the financial results in the impact of covid-19. And finally Paul will provide some Market insights and discuss nfi's Outlook following that will open the call to analysts questions. I'll now pass it over to AJ called to provide highlights for the first quarter. Thanks Steven and good morning. Ladies and gentlemen, I'm turning to now slide three of our results presentation. The first quarter of the year is our seasonally slowest day. And this was our expectation as we started twenty twenty. We did see significant growth and deliveries during q1 when compared to 2019 primarily driven by the addition of Alexander Dennis plus higher. He's at our book who did not experience any chassis disruption this year as they did last year.
Q 12020 adjusted ebit was generally in line with our expectations. However, we did start to experience the first impact of covid-19 towards the end of the quarter with a few cancellations and deferrals nearly all of which were in the private segment of our business has various governments implemented shelter-in-place and lockdown regulations. We responded by idling nearly all of our facilities to ensure the safety of our team. We also work with suppliers who who have been impacted by the same government measures to coordinate timing and adjust incoming inventory shipments and avoid supply chain disruptions with the facilities idle in April and into may we decrease the majority of our cast expenses which are variable and tied to production and we implemented numerous measures to lower our fixed costs which include freezes on hiring and salary increases temporary decreases to leadership compensation ranging from twenty to fifty percent a delay in payment of 2019 earned and sent home.
It's a reduction in the amount and delay of of the board fees and a permanent reduction in force of over three hundred people.
While new vehicle production was idled. We were able to complete late-stage work-in-process vehicles and deliver them to customers these measures along with the increased focus on working capital have proven to be very effective as we generated over ninety million in cash from the end of the quarter to now in addition to cash generation. We greatly improved our total liquidity by securing to new credit facilities in club first a new $250 unsecured facility or sidecar for General Corporate purposes and second a strategic fifty million dollar facility to support Alexander Dennis International operations are banking Partners. Also provided Covenant relief to help us navigate through covid-19 the combination of the new facilities and the credit Covenant relief shows are banking life Partners have had strong support for our management team our business and our strategic plan to pass. It will discuss additional treasury matters later in this call. We continue to believe that the credit app
passing our existing revolving credit
Will be sufficient to fund our business including dividends, but the addition of these new facilities makes us extremely well positioned to work through the impacts of covid-19 as we now have over $550 US dollars in total or sorry. Yeah US dollars in total liquidity while there is no doubt that covid-19 pandemic creates near-term challenges. We continue to be optimistic about our end markets. This view is driven primarily by record levels of North American bid Universe with active bids up 16% from the end of 2019 and 61% from the fourth quarter of 2019 in April and May even as a pandemic caused major destruction. We've been pleased to see procurements and vehicle Awards continue a recent example was not significant New Flyer win in Miami-Dade 444 Miami-Dade County, Florida for a hundred forty units on slide for we outline the delivery performance by quarter by product type month.
All of which increase with the majority of increased coming from the addition of ADL in both heavy duty Transit and motor coach product lines to take us through the financial details of the Court.
Thank you Paul and good morning, everyone turning to slide five in the first quarter of 2020. And if I reported an increase in revenue of 25% to 710 off the increase was driven by the addition of ADL higher Arbok delivery and increase aftermarket part sales to public transit customers adjusted ebitda was $56 off a decline of 7% from 2019 at a margin of 7.9% The decline in adjusted ebitda margin is mostly due to the addition of lower-margin international business plus sales make and margin pressure in the new flyer Transit and MCI private motor coach businesses offsetting these items we're lower incentive payment accruals the money factoring and after market segment, saw both significant Revenue increases and while the manufacturing segments adjusted ebitda was down primarily for the reasons. I previously mentioned aftermarket adjusted ebitda in
Increased by 17% from the addition of ADL and positive sales mix from public market sales on slide 6. We Show net earnings and adjusted net. Okay. The first quarter, we had a loss per share of a dollar eight primarily as a result of a non-cash 50.8 million Goodwill impairment for MCI.
The impairment reflects the dramatic impact covid-19 has already had and is expected to continue to have on the private coach Market in 2020. There was also an increase in the cost of equity Capital utilized due to Market volatility caused by covid-19 in the calculation to determine the recoverable amount of the MCI cash generating unit net earnings were also contacted by higher depreciation and amortization from the addition of ADL the higher interest expense including a twenty two point five million mark-to-market loss on the interest rate swaps.
adjustments to net earnings
For these non-cash items created it and adjusted net loss per share of one set both met our earnings and adjusted net earnings include 4.3 million in a tangible amortization related to the acquired assets of ADL. There would not have been a similar expense in q1 2019 a Reconciliation of net earnings to adjust a net earnings money is provided with additional details in the appendix of the presentation.
Turning to slide seven first-quarter free cash flow is challenged by higher interest and current income tax expenses return on invested Capital which is calculated on a trailing 12-month basis was also down as improvements the LCM adjusted ebitda from higher deliveries after market growth and lower corporate expenses were offset by impact felt during 2019, including life new models and the start-up of k m g how you're invested capital from the from the acquisition of ADL and whip plus the financial impacts of non-cash accounting adjustment from the ADL transaction.
Slide 8 provides a detailed look at the impact impact are dedicated Focus. So cash flow Management in the face of covid-19 has had on liquidity as you can see we've been offered a position by $445 million since the end of February through a combination of inventory reduction strong accounts receivable performance tables management expensive and deferrals plus increased access to credit facilities.
Turning to slide 9 subsequent to the end of the quarter. We entered into two new credit facility and also saw our banking Partners ways covenants for the second and third quarters of 2028 on both our existing and new facilities.
Now I'll provide some insight into the impacts covid-19 has had on NFI on slide ten. We outlined the high-level areas where the pandemic has created challenges and is Palmer we Idol the majority of our facilities in late March the ensure the health and safety of our team members we've experienced a timing disruption in North American Transit deliveries with some units originally planned for delivery and the second quarter being shifted into other periods of 2020 which creates a ripple effect causing some deliveries to move from 2029 to 2021 again with the impact of this Market is primarily seen as the timing issue rather than market for customer concern today new fires experience negligible cancellations while our box also Idol this operation Monday to have not had material cancellations our bar continues with a strong low-floor cutaway order book for the remainder of 2020 are and are in discussions with dealers about Equus dead.
All right in the UK.
Private operators operates Transit routes and all have experienced a significant drop in Fair box revenues, which has put pressure on timing of orders and deliveries. Again, we have not seen order cancellations of anything but we continue discussions on deferrals into 2021. The hardest-hit segment is private motor coach both within MCI in North America and Flaxton in the UK nearly ninety percent of private coach coaches currently said Idol and this slowdown was led to both cancellations and deferrals voters. I would aftermarket part sales is also been impacted our business was able to continue operations throughout the pandemic I'll bet with much with a much stronger focus on Innovation and physical distance in between staff after market has been supporting cut off with vehicles in service in April. We launched additional clean and protect products to assist operators with safety and cleanliness on buses and coaches to help Transit agencies and private operators for Thursday.
Employees and passengers while there have been challenges program covid-19. And if I has taken a very measured and proactive response to lower-cost protect cash flow and ensure stability for our customers on slide 11:00. We outline the the measures in detail by focusing on three major areas. We've been able to generate positive cash flow over the past month even while facility from a working capital perspective. We've accelerated receivable and have worked with suppliers on extended terms. We've eliminated discretionary spending and lower Capital spending too critical maintenance projects only across the business. Our team have made numerous concessions including salary decreases for all management employees hiring and wage freezes and deferred board fee payments would have been lowered by 35%
Finally, we made the difficult decision to lower dividend in response to the uncertain economic conditions caused by covid-19 while these measures were difficult and impact all of our stakeholders thought we were appropriate given the unrest the nature of covid-19 and the economic uncertainty that's created. I'll now turn the call over to Paul.
Thanks for that soup. So I'm now on slide twelve of Our Deck our total backlog position ended the quarter at 10579 equivalent units off the total value of 5.1 billion. And as you see from the graph has held Splat since Q4 2018 and continues to provide us with visibility and confidence. Not only as we navigate through covid-19 and 2020, but as we look to Future periods turning to slide thirteen, there's no doubt that 2020 will be a challenging. For our operations and our financial results, but we are well-positioned to execute on our restart plan with our production facilities, reopening already and continue on through early June on a very calculated phased and not approach our internal supply businesses started operations. This past week has both car fare and KMD resume operations to support our business start-up. It was important that these dead
to reopen as a supply to
varying degrees of vehicle production lines at New Flyer MCI Arbok ADL North America as well as our nuclear Parts business
next week will begin a process of resuming operations with the expectation that all facilities in both North America and UK will resume normal operations by early June. There is a risk to this operational plan due to the unknown certain surrounding covid-19, but we are taking every precaution to ensure a clean and safe working environment for our people last week. We launched a very detailed return to work protocol for all employees which includes extensive social and physical physical distancing policies continuous cleaning and sanitization measures additional personal protective equipment requirements and significant other guidance to govern how we will work while we're at work. This program will be supported through training and orientation for all team leads and every team member to ensure understanding and compliance.
As we resume operations, we continue to utilize or investigate government programs, which may assist us with reimbursement for costs incurred. We're currently availing of these programs in the UK and exploring opportunities in Canada. And with the US government also, which will also play critical role for many of our customers who's lost billions of Revenue in an incurred significant change in cost during this pandemic. So given the ongoing uncertain nature of covid-19. It is important to provide Financial guidance for 20. It is is imprudent. Sorry to provide Financial guidance for 2020 at this time, but we can offer some insights to our investors about potential scenarios first. Our financial results will be negatively impacted by covid-19 note question in the second quarter. We expect a significant decrease in revenue and adjusted ebitda net earnings and free cash flow from the same period in 2019 all driven by the disruption of this pain dead.
We expect a third and the fourth quarter will be impacted by the pandemic but not to the same degree as the second quarter. Our Capital expenditures will be significantly lower than 20/20 than we've found in our original guidance of range and 45 to 50 million will be down to arrange around 30 to 40 million dividends continue to be important part of the NFI story and we'll we believe that our thoughts flow generation efforts combined with our existing liquidity provides us with the funds required to finance our operations through the pandemic and continue to return shareholder Capital to shareholders.
Obviously as this proceeds will provide further updates on our 2020 guidance when the situation stabilizes now shifting to our long-term Outlook as we move through covid-19. We do so from a position of strength we have now strong liquidity a business that is primarily driven by variable cost linked to production and a solid aftermarket business provides a base of recurring Revenue. We focused on lowering our fixed costs base and have a track right over moving costs through operational instructional initiatives. We see numerous opportunities to drive margin enhancements now and in the future long as we transition anafi from a holding company type structure to more of an operating model the majority of our Global end markets remain positive and advise vehicles are large dogs used for public transit which Remains the spinal cord of cities around the world and the primary daily method for transportation of millions of users.
Covered for covid-19 pandemic and execute on strategies to improve accessibility renew fleets and migrated to more zero-emission buses. We expect to be a beneficiary name is supported by continued strong growth in our North American bit Universe with which remains at record levels plus announcements from governments in Canada, the US and UK regarding dedicated multi-year funding programs to support Transit operations and vehicle procurements while the outlook for overall end market demand is positive. We do expect that the private motor coach business which represents approximately 8% of our Consolidated revenue and even lower percentage of our net earnings will continue to be negatively impacted by the covid-19 pandemic in the near-term.
This near-term impact is reflected the impairment we reported in q1 2020 longer-term. We do see motor coach returning to previous cash flow performance. And this view is supported by preme economic Cycles, but given current market conditions we've taken measures to remove costs from the segment of our business. We made the difficult decision to complete permanent layoffs and wage increase production Levels by 62% which are expected to save MCI in excess of ten million per annum to date. We have continued to explore options with the coach business and the team other NFI businesses to adjust our overhead and will act accordingly before turning the call back to Stephen and opening the call for analysts questions. I really want to take this opportunity to thank our team members took an extremely supportive and committed both those who have been idled and disrupted and those who work in essential or core Services through this covid-19 pentamic and implemented a variety of proteges.
as numerous jurisdictions were
For us to get back to work everyone across our business units has played a role in developing and executing our safety programs. I also want to thank the dedicated Frontline members of our Transit agencies public and private operators who continue to work every day putting their health and safety at risk to ensure essential workers are able to get to work and communities and families can stay connected. We will do everything we can to support Transit agencies and operators to make buses safer for drivers and Riders during this pandemic and following on with that. I'll hand it back to Stephen. Thanks boss. I'll now turn to slide 13 to summarize today's call. The first quarter was in line with our seasonally slower expectations, although covid-19 did begin to impact operations and customer orders late in the quarter cup. Korben 19 is a new reality and is greeted a new normal for not only NFI, but our customers and suppliers Around the World Cup.
We have responded appropriately and are continuing to focus on ways to remove cost from our business while also offering additional products focused on health and safety. Our operations are resuming and will continue to do so in June June. We were much stronger position than we were just over a month ago now on with improved liquidity and increased flexibility and financial capacity from the generation of ninety million of cash and over three hundred million additional credit capacity as Paul mentioned 20/20 will be challenged and results will reflect the impact of covid-19. But we remain very well positioned to be a beneficiary as demand for Transit Vehicles remains Thursday. We have a strong backlog and a solid aftermarket revenue-based. Well now open the line for questions Cheryl. Can you please provide instructions to our callers?
Thank you at this time.
If you would like to ask a question, please press star one on your telephone handset. Our first question comes from Kevin Jiang from CIBC, please go ahead your line is off and thanks for taking my question here and hope everyone safe safe out there. Maybe maybe I'll start with Monday. I appreciate the the the the the color you have given in terms of the near-term adjustments. You've made I think you said production you've reduced at 62% and it's about ten million of like a scam cost savings, but to the extent of leisure travel takes multiple years to get back the long term, but how do you how do you reposition this business for the longer-term if if let's say that two-thirds of its typical demand, you know takes a much longer time to recover.
Is that Kim for your question? And it's a good one? Let's just dissect m c i a little bit and and I mean, you know the business well, roughly fifty to sixty percent is primed operators 40 to 50 depending on the year is our public operators. The public is contractual. You know, there's no change at this point in time. At least for twenty twenty years that we've seen in any way shape or form that reduces the public demand the private demand, as you know has sub-segments. And so no question the the tourism type operator is Idle this point in time you still have demand from employees shuttles you have to demand that we think will recover to some extent in the limousine or private Charter type environment thought City type Charter. Um, we think that over time throughout this year as people get back and comfortable of you know, getting on an airplane or whatever that you're still going to see people moving and coming back home.
Albeit, maybe less people on board more social distancing with all these protect and Care type products that we're putting in place UV lights in the air conditioning systems suck penis sanitizing products barriers in between driver's and passenger's barriers between passengers at the end of the day, once the world starts to move again. You're still going to have to move those people some efficient way. And so we know when we you know, we go back to you know, having forbid nine-eleven you go back to the financial crisis and you look twenty thirty years back when there have been economic shocks and then I'll be at this one is different. It's not just economics to help Dynamic. But when we look at MCI, and we did the, you know a forecast we've taken a pretty aggressive look at the downside on the private Market or at least the same thing that we think will be, you know impacted in the short-term and you know at the end of the day fast forward months or is a month so I should say quarters or years, you know dead.
Smarter safer more cognizant social distancing communities and so forth. We're still going to see people moving and and you cannot
Find any community in North America that doesn't have a big Reliance on on coaches as part of their their transit or as part of their moving of people. So, you know, it's dying in the short-term. No question Indians team has done a fantastic job to dial the tap back on production for the private motor coaches, but we still have that public business. MCI is still you know violence, but it's going to be impacted to some extent and that's why when you do the math when you run the forecast, there's obviously a Goodwill impairment in the short-term. That's great color and maybe just a second and last one from me. I'd be interested in know in your conversation with the transit agency's. Do you think they'll be a change in how how they look at their Fleet composition? I mean, I think we've all read headlines around ridership be down and I think there's various forecasts around what that would cover looks like. So do you think maybe absolute Transit demand is lower, but but but maybe
Who wants smaller buses cuz it may end up identifying the bus. Um does the electrification is is that still an important goal for a lot of Transit Agency today? I'd be interested in money and markets are saying in terms of how they think a fleet composition post covid-19. Well, you know the not all the transit agencies have people all back to work in a full complement and say oh and we saw, you know ranging from let's call it fifty to eighty percent drop in ridership. Universally across North America and even to the UK and Hong Kong and so forth. The Hong Kong market is back up and running quite efficiently. And so we're seeing demand over there stabilize and actually be fairly healthy. The UK is unlocked down and continues to be unlocked down. Here's what we're hearing from customers. They they haven't changed their Fleet replacement plans. We know that there was a a slow down as we saw in eighteen and nineteen around trying to figure out how electric vehicles are fuel cells or dead.
Might make it into their fleets. The fleet replacement plans are critical to their ability to access Federal funding and to have a real strategy about, you know, replacement of 12-year buses in the US and five hundred thousand miles and all those kinds of Dynamics what we're hearing from though is that you look at it as a movement of people across any City that gets to some level of normality. There are not enough cars there is not off of and lifts out there to be able to move all these people and quite frankly the cost of those things are prohibitive for the average person that uses public transit to get to work or to to move to go visit people to go shopping. So forth what we have heard in some cities anecdotally and I can't translate it into demand is we may see more buses on the road because they don't want to fill them to the same level that they had before and as you know, the the bus has, you know, fifty or sixty seats of depending on the configuration another forty or so people Thirty or forty that can be in standing capacity. We actually met see coming out of covid-19.
As well as we're strategizing around more capacity to be able to move people and still allow some level of social distancing. We haven't seen a change.