Q2 2020 NFI Group Inc Earnings Call
On the World and this is an especially true within the bus and motor coach industry.
On slide three of our deck, we recap the quarter.
As you'll hear throughout today's call our second quarter 2020 financial results saw a significant decline from 2019 as a direct result of Covance impact on our customers and are on our operations.
This included a greater than 50% drop in revenue and a decrease in margins as we maintained our fixed cost base on a lower revenue base. We also incurred onetime cobot 19 related costs of $12.1 million.
We started the second quarter by executing on a plan to work cooperated with our suppliers and our team in response to the initial insights into the possible impacts the pandemic.
But as governments implemented more dramatic and definitive restrictions on travel border closures and self isolation mandates our top priority focused on the health and safety of our people and of our customers and their customers.
We began idling nearly all of our facilities in late March and they remained idled until late May and June we essentially lost two months of full production.
We also implemented a company wide returned to work protocol to be ready to educate to be ready to educate and ensure the safety of our team when they did return and we invested significantly in additional plants in office cleaning sanitization of protection processes and the implementation of a 100% masker faced covering policy across the company just to provide a context.
Yes from April to now, we've engaged employees and leadership and our customers who have come on site.
12444 hours of specific cobot, 19 education and training.
With the facilities idled and the pandemic continuing to spread we moved across quickly to address our costs and preserve cash flow where possible. While a significant portion of our costs are variable and linked to the production, we focused on reducing fixed overheads and admin cost where we could.
We were able to remove approximately 10 million in costs from personal reductions at MCC car fair and NFI parts. We also moved quickly to strengthen our balance sheet by obtaining covenant relief on our senior credit facilities and entered a new sidecar or insurance credit facility to help ensure sufficient financial resources to weather the covert 19 pandemic.
While we were able to remove certain cost immediately the size and international scope of our business combined with multiple product products and facilities.
Service centers and aftermarket distribution centers required a thoughtful approach we wanted to ensure short term decisions would not impact our longer term health capacity capability or delivery ability to deliver for customers and to be able to win New awards.
The focus on removing the right costs were now accelerating NFI forward, a companywide transform reminisce shift to make us a simpler leaner business with fewer business units and a reduced footprint.
And if I forward was originally developed as part of our strategic plan presented to NFI Board in early March which was pre covance.
Late in this call capacity later in this call capacity will discuss NFI forward in more detail.
Including the projected financial savings, where they will be recorded in our financial statements and the anticipated investment required to make this happen.
As we've now restarted our facilities and being too and focused on managing recovery from Covance 19 impact we do so with the improved visibility on orders deliveries and sales for the remainder of 2020, we are reintroducing adjusted EBITDA guidance with the with an expectation that we will deliver between 145 and $155 million.
EBITDA adjusted EBITDA for fiscal 2020, which represent $113 million to $123 million adjusted EBITDA. During the second half of this year a strong improvement from the significant lows we experienced during the second quarter.
Now turning to slide four.
I'll comment briefly on the impact Cobot 19 has had on our end markets I won't go through each slide in detail, but we will highlight a few key points first within the manufacturing segment of our business North American marks have received there or have seen six mixed results in public transit, which includes public buses and motor coaches we see.
Limited cancellations, but there have been deferrals of new vehicle builds and some delays in auction conversions and new orders being awarded.
Private operators, especially motor coach operators, who primarily serve tourism traveled executive side shuttle and line haul operations have been significantly impact by the pandemic and currently over 90% of their fleets have been idled.
We expect these markets to remain challenged for some time as the recovery restarts and recovers.
The low floor cutaway and medium duty shuttle market has actually remained healthy well production was disrupted for two months, we continue to see strong demand in that space with the interest in our box low floor cutaway buses and medium duty Aquas plus.
The electrification of equity as previously announced.
With the support of the new Flyer product development team is going very well in is ready for testing later this year.
In the UK, where private operators provide public transit routes. The majority of our customers have delayed their plan 2020 buying activity as they've seen massive drop in Fairbanks revenues. When 2020 started the UK was expected to be a very busy market for HDL. Following several years of under investment the need for physical replace.
But in the UK has not gone away, but cobot 19 has definitely deferred orders the speed of UK market recovery in new orders will likely be contingent on government support and ridership improvements, which has actually started to happen.
Within our aftermarket segment, both NFI parts and HDL parts remained open through the quarter and with a focus on servicing and supporting our customers that were operating.
The same decline in activity that we've seen in private coach has also impacted the private aftermarket business.
And if I quickly pivoted to launch a line of clean and protect products, including barriers filters you V lights and other air Sanitization treatment methods that has been very well received focusing on the safety of both bus operators and their riders. The later in this call the outlook section I'll walk you through the expectations of market recovery from Cobot 19.
Turning to slide five it shows our deliveries in the quarter and the backlog at quarter end.
Deliveries in Q2 were down across all product lines and the idling of production facilities and other associated impacts of Cobot 19 saw deliveries dropped to 630 use the largest decline being in the motor coach private or court segments of MCR and adss.
Enterprise backlog continues to be a positive strength and one that we are leveraging as we work through cobot nights.
Backlog show some decline, but that was expected as we recorded a fourth we had a record fourth quarter 2019 deliveries and there has been a delay a new orders for the first half of 2020.
Our backlog remains heavily weighted towards transit operators and public coach in North America, where government agencies largely have multiyear contracts.
I'll now ask capacity to walk you through the detailed financial results starting on slide six.
Thank you Paul and good morning, everyone turning to slide six as Paul.
Every one of our financial metrics were impacted by the pandemic the year over year impacts in Q2 2020 are result of our focus on employee safety and remaining idle for two out of the three months of the quarter.
This led to a decline in sales that resulted in a year over year drop in adjusted EBITDA from positive 81 million to a negative $24 million. This also dropped our free cash flow from positive 41 million to negative 43 million with only one month of operations, we not only lost sales margin, but also had unfavorable fixed cost overhead.
No option as we Expensed overheads as Paul mentioned when dependent pandemic first started to impact markets, we focused on liquidity and balance sheet strength.
Greatly improved both through a combination of cash management as well as increasing our access to credit facilities ending the quarter with over 430 million in total liquidity based on our current financial position plus anticipated future cash flow generation. We continue to believe that we can maintain our current dividend policy and.
Do not expect to use the incremental sidecar credit facility.
On slide seven.
We show that during the second quarter, we had a loss per share of one dollar rate. This loss came from the combination of lower volumes and lower margins plus the impact of onetime covered 19 related costs, including a $10.4 million lower cost of market or net realizable value adjustments on pre owned coaches held within AMC.
And well.
After we adjust for these items plus restructuring cost as of smaller one time items, our adjusted EPS loss is 97 cents per share.
Turning to slide eight.
I'd like to walk you through the NFI forward initiative. This is an initiative that will transform NFI group one of the world's leading independent global bus manufacturers into an integrated operating company.
As you know we've had a number of acquisitions that to date have largely run as independent businesses. All of these businesses have been one of the leading players in the markets. They served during my first six months I've come to realize that our market position as a result of heavy lift by the leadership team to position NFI group for the future for example.
We offer our customers the in the Industrys widest choice and propulsion zero motion battery or fuel cell electric electric trolley hybrid electric natural gas or clean diesel we fully package integrate batteries with integrated battery management system, and we have optimized weight vehicle performance at range.
We also feel that we are the best telematics systems with connect 360 that offers over the air software updates were the only OEM, but north America, whose truly going to put level for autonomous buses that service ought to be RT route.
We've already made the facility at personnel investments such that most of our legacy plants have the capability of building electric buses or fuel cells.
The majority of our field technicians have now been trade on the technology. So we have the largest North America mobile field service network, most major cities, where we sell our electric buses are owed trial or its service our infrastructure solutions team has built credibility at business volume at a very fast rate.
These are just some of the few advantages the edify group has today as Paul at the leadership team at I think of the possibilities enhance our competitive competitiveness and increase shareholder return, we're focusing on areas that have at mid fully optimized these focus.
Around fully leveraging our scale optimizing our cost at further cost share guard technology at expertise that's the power of the Edify, Florida. This year, we have world class offerings and with the efficiency guedes possible integrating the business, which would be at eight to 10.
Preset reduction it overheads at ESG today, we could generate significant returns through volume leverage for our shareholders and get to a consistent double digit EBITDA margin.
We originally raise this topic during our Q4 results call at our annual General meeting as it was a critical piece of our pre cobot Ninetys strategic plan. We are now accelerate these initiatives to drive at five forward, while navigating through the fall out of covered it.
And if I forward will deliver a simpler organizational structure, which we outlined on slide nine.
We will continue to have two segments manufacturing at aftermarket with two business units below those segments North America at international.
We are excited to have you had smart former president of Sci at previous EVP of edify parts to lead our business transformation teams to design implement at execute all edify forward projects.
Prior to joining identify.
Manage the standard Arrow business transformation team as part of the significant at successful privatization of Kelly Air Force base, a major US Air Logistics Center located in San Antonio.
To achieve these goals of edify forward, we have launched multiple sub projects that include a back office administrative function of HR legal finance and accounting with a shared services model to efficiently support our business units, creating a combined Sci a new fire business unit focused owed servicing public boss.
And coach customers at private coach operators.
For three a what North America aftermarket business that combines edify parts, which services new Flyer Nabih Araya, our blockbusters NFC motor coaches with 80 else part business.
For three be following the combination we will rationalize the number of parts distribution centers to lower lease at overhead cost and capture freight savings.
For for we're creating a global integrated supply chain that further leverages our scale at buying power.
And that number five in the UK, we've accelerated extended a program to review 80 hours overhead at ESG at a cost by evaluating optimize it get decreasing facility footprint.
And that number six.
Finally, edify forward will launch a dedicated team to assess our overall North America footprint to fight opportunities to reduce both fabrication and production facilities.
Turning to slide Ted.
We outlined the financial impact of Edify forward.
The program is a combination of numerous initiatives that will drive 65 million to annual EBITDA savings plus an additional 10 million annualized free cash flow savings.
Over 2021 to 2022, we'll see they approve it start to take shape and achieve full year run rate in fiscal 2023.
The savings will flow through the followed categories our income statement.
20 million.
Adjusted EBITDA It business unit ESG today with savings driven by organizational changes at efficiencies at the business unit level.
These primarily come from the combination of MC I'd Flyer add the creation of what consolidated North America aftermarket business.
$5 million of adjusted EBITDA savings in centralized functional transformation activities included it SGT. These include fully deployed our shared service model.
20 million, an adjusted EBITDA in manufacturing overhead reduction for facility at parts distribution Center closures. This is a component of our cost of sales and the 20 billion.
Adjusted EBITDA in production material cost savings as we integrate our strategic sourcing initiatives to leverage our global scale and size.
In aggregate edify forward is expected to deliver at 8% to 10% reduction to both manufacturing overhead at ESG today based on our 2000 date he'd run rates.
The other 10 million and cash flow savings is driven by decreased cash leases as we reduce our total facility footprint at a benefits of a central treasury team to lower interest at Viking costs. In addition to these items, we continue to explore other cash generation options.
A significant focus on working capital.
We want to increase working capital efficiency uttered, including improvements to our days payables outstanding at inventory cards.
In order to generate the significant cost savings, we estimate that it and if I will occur what tie restructured facility closing costs ranging from 15 to 20 million during fiscal 2000 at 2020 to fiscal 2022. The majority of these costs will be incurred in 2021.
We will continue to promote provide regular updates on edify forward and its progress through our quarterly Mdna and other presentations I'll now turn the call over to fall to discuss our outlook.
Thanks for the past soon.
Circling back to my earlier discussion on markets as we talked through our outlook for 2020 and beyond I think it's best to discuss some of the key market drivers.
Turning now to slide 11.
Ridership has been a topic a significant focus over the past few months with numerous transit agencies in operation reporting significant declines.
On slide 11, we show the impact of cope with 19 has had on ridership in our markets and in some major use cities.
Transit is an essential service and one that is sick utilized significantly by frontline responders, especially through the pandemic.
As agencies continue to run buses, even the ridership is dropped by nearly 80% it put significant pressure on operating budgets recall with public transit agencies that operating budgets are separate from capital budgets and funded by state local taxes and Fairbanks revenues. The good news is that as cobot 19 restrictions are now being lifted ridership is.
Starting to show trending returns as you can see on the slide.
While it's still at 50% of free cobot levels. This improving aligns with our belief that transit will recover and will be a critical driver for economic recovery over the long term trend. It is the most efficient and environmentally freight friendly way to move millions of people every day around the world as businesses in offices and economies real.
Open we expect riders will return and it has started.
And essential service government support is critical to public.
Transit on Slide 12, we highlight this approach.
And the support that we're experiencing no matter what political affiliation Theres, a desire to fund public trends in all of our major markets.
The U.S. government has been exceptionally strong supporters of trends through the pin debit providing over $40 billion and funds through the carriers in the heros acts to support agencies as they deal with the challenges of loader lower ridership.
In a sign of longer term support the potential successor to the current fast Act, which was unveiled in June 2020 was unveiled in June 2020 through the investing in a new vision for the environment and surface Transportation in America also known as the invest in America Act. This new $494 billion Act aimed at providing.
Nipigon funds for improvements to us infrastructure, including public transit the X., specifically focuses on reducing the us as carbon footprint and assisting with conversion to electrified.
Zero emission mass transit.
This includes $1.7 billion and proposed funding for zero emission buses, which is a fivefold increase from the fast Act invest in America Act is proposed as a five year Act, which provides transit agencies with a longer term visibility to execute on their capital and fleet replacement plants.
Now the act has not yet been approved and we're hesitant to say that it will become law in 2020 with the pending election, but it is a significant step forward in the right direction.
In Canada. The government recently launched the safe restart agreement, which includes funding to transit agencies for 50% of the covered related operating costs up to total of $2 billion.
Prior to the pandemic that government also announced a $28.7 billion platform in support for transit projects and their election platform included the procurement of 5000 electric transit vehicles and school buses all positive.
Before cobot 19, UK government had announced a $5.1 billion 5.1 billion pound fund for the procurement of buses to revitalize the UK bus fleet outside of London with a significant focus on zero mission buses a release of these funds would have a significant impact and drive the recovery of the UK market.
Well all of these signs point to positive operating environment long term the speed at which funds are released will dictate the recovery of capital purchases government funding is not a guarantee that based on our experienced following the financial crisis of 2008 in 2009 stimulus funds can accelerate capital vehicle purchases very quickly that would benefit NFI.
As the market leader and every one of our businesses.
Turning to slide 13, we showcased at our North American public bid universe remains at record levels.
The delay of orders are option conversion during the cold with 19 pandemic has contributed to the public bid universe being at record levels.
Active bids where a new RFP has been released plus RFP that are already in the bid stage are up 34% from the first quarter of 2020, and they're up 77% from the same time last year. Another positive signs that only a few public customer RFP has been canceled to date, even with the ongoing pandemic.
Finally, and other development is that orders that are happening have been smaller in total size and with fewer options. This is not a new trend, but something we've seen developing as agencies make the transition to zero emission buses a topic we've discussed on previous calls.
Orders continue to increase through the use of state schedules is something that we've talked about and focused on that allows our customers more flexibility and increased feed to purchase new buses. So the backlog chart is not the only way to buy buses.
The movement to battery electric or fuel cell buses are we refer to them as the zero emission buses continues to be a key trend in the market and there's potential that the recovery for cold from Cobot may accelerate this transition.
Starting to turning to slide 14, we highlight that NFC is the leader in North America, and the UK for zero emission buses and would benefit from an increase transitions as the base right now the these make up 9.7% of our backlog up 4%. The same time last year and it makes up 26% of our total bid universe.
New player can manufacture zebra is that all of our facilities $80 deliver the most CBS in the UK and MCR is now selling its innovative battery electric coach and the electric equity is nearly ready for testing overall the bid universe supports our view that demand for buses over the long term will remain strong, but as mentioned the market recovery will depend on a speed.
Of government support Cobot, 19 case rates travel restrictions and economic reopening I'd maintain we're in a great position to come other crisis and very very strong position now turning to slide 15.
We show our historical delivers in each of our major markets that Canadian and US transit bus market that clean and use motor coach market and the combined UK bus and coach market in North America coach delivers were dramatically lower during the first half of 2020. This is especially pronounced during the second quarter with the entire market only delivered 59 units compared to.
502 units in 2019 in the same quarter.
Private coach markets are expected to remain under pressure in 2020 and into 2021 and based on previous economic cycles, we expect that market will recover but it may take a few years to help offset these initiatives expected lower deliveries were advancing and if I forward initiative, the past who discussed to reduce our cost base and improve our competitiveness.
Pining, MCR and new Flyer and to what business will only enhance our business.
In the UK 2020 look to be a period of increasing activities as operators executed on fleet renewal plans following several years of lower volumes.
Cobot 19 disrupted those plans immediately and many of our customers shifted or as originally planned for 20 to 2021.
We're working closely with those customers to plan for 2020 and beyond as vehicles need replacement that recovery in the UK market will take time and as before will depend on the speed of which government support is released.
While not report on the Slide Asia Pacific was our first market to recover from Covidien IP and continues be active with growth potential and New Zealand, Singapore and Hong Kong Hong Kong is currently in a typically lower period following east increased activity in 2017 in 2018, but HDL remains the clear market leader in Hong Kong.
Within the aftermarket segment, we continue to expect demand for heavy duty trans apart as operators in North America and international markets continue to recover their fleets and complete regular fleet maintenance and invest in additional products to clean and protect their vehicles. The large feet of activists essential service transit vehicles provides us with visibility and generally Rick.
Turning revenue streams, the private component of the aftermarket business, which is largely MCR in LDL coaches will no question be negatively impacted by the operators who have idled their vehicles.
The private component business, so that parts as it represents about 30% of the segment's revenues, we expect those parts sales recover over time as businesses reopened and leisure and business travel resumes.
While cobot 19 impacted our results during the first half of 2020 as we're now on the road to recovery, we do so with improved visibility as I mentioned earlier on this call where reintroducing 2020, adjusted EBITDA guidance with the expectation that we can deliver between 145 in 155 million of fiscal.
Fiscal 2020, which represents a $113 million to $123 million adjusted EBITDA during the second half of this year.
This recovery and performance from Q2 is driven by our contractually obligated vehicle sales and expectations expectations.
Private vehicle deliveries and aftermarket sales cobot 19 will continue to impact our third and fourth quarter deliveries in results and we expect both period will be down when compared to the same periods in the prior year, but to impact will not be as nearly significant as the one we saw in the second quarter. The fourth quarter is historically our busiest.
Period, driven by deliveries to private market customers at MCC and.
The based on expectations for weaker activity in those markets, we anticipate that the fourth quarter will be slightly down from 2019 levels.
Overall, while the third and fourth cores will show improvement we expect the larger recovery is start in 2021 and grow into 2022 in transit the returned to pre covert production levels likely won't happen until later in 2020, as we manage orders option conversion and production scheduling the speed at this cover recovery.
You may accelerate but we depend on the release of new orders government funding and how we cook how quickly the economic recovery with tourism travel and transportation takes place private market recovery in North America will directly related to vaccines and treatment, resulting in an increase in the general public confidence in traveling and writing.
On motor coaches.
As I wrap up I'll remind our listeners that NFI is the market leader in buses and.
Our customers around the world of relied on our vehicles for decades, we've supplied and supported an installed fleet of over 105000 vehicles and we've been growing our presence in new markets. In 2020, we made significant entry into Ireland and next year will see our first major a deal deliveries of vehicles in Berlin.
We are well positioned to benefit from fleet investment plans that transition to zero emission buses and aftermarket sales and we will continue invest in new products and technology to ensure we remain our leadership position, although we do expect lower capex of about 25 million in 2020.
Finally, I'm honored to recognize a nearly 9000 and a five team members that have supported the company in our customers through this ugly pandemic and the most recent civil unrest activities. We continue to work hard and transparently on our diversity initiatives with great partners and active employee engagement.
We just completed a companywide employee pulse check survey at the end of July with an amazing 50% of our team members many still at home and many working remote responding. The final question of the survey had an 88% response rate when asked overall I feel NFI as a great organization to work for now that's having confidence from year to.
I mean, theres no doubt that coded impacted our 2020 business and our first half results, but long term buses and coaches will recover and will play a critical role as buses are the spinal cord of cities around the world there will be bumps in the road as we recover to our normal run rates, but market recovery combined with structural changes made by NFV Ford will.
Only make us more competitive and more cost efficient as the market leader with that I'll now turn it over to ceded to fill finish up our call.
Thanks, Paul I'll turn to slide 16 to summarize today's call. We made the decision to idle auction facilities to protect employees customers and manage supply chains. It was the right thing to do and positions us well for recovery, even though a challenged Q2 results. The worst appears to be behind this workover 19 follow continues to create some market uncertainty we are focused.
Not only on recovering production safely also optimizing our business and delivering shareholder returns.
And if I look forward processed dust has accelerated our plan to remove costs from the business and transition to a more efficient operating company.
Q3 in Q4 will be recovery from Q2 2020, we expect they will both be down from the same period in 2019.
With the greater visibility, we reintroduced fiscal 2020, adjusted EBITDA guidance with the range of 145 million to $155 million, which would represent adjusted EBITDA of 113 to 123 million for the second half 2020, our total liquidity remained strong at more than $430 million based on our current financial position and anticipated cash flow Gen.
Ration, we expect to maintain our current dividend rate and do not expect the need to utilize the incremental sidecar credit facility as Paul just said and Inphi is the market leader for buses and coaches and all of our major markets, including Canada, The United States in the United Kingdom Transit remains an essential services with strong government support and private operators play a critical role and.
We get tourism travel market moving again as as orders and activity resume customers, who have relied on us will return and NFPA will be there to service them with additive integrated.
We'll now open the call for questions, Chris Please provide instructions to our callers.
Thank you.
As a reminder, if you'd like to ask your question. Please press Star then one on your telephone keypad.
Our first question is from Cameron Doerksen with National Bank. Your line is open.
Thanks, Good morning.
Hey, Kim Ann.
So just a question on.
Sort of related to your guidance, but I'm, just wondering where that kind of assumes at 80, Alex seems to be that maybe.
Some of the back half of your deliveries at 80 or may be dependent on some government stimulus. So maybe just talk about your what your expectations. There are radio and then what does the guidance assume.
Thanks, Ken.
Yes, we look we spent a lot of time thinking about how to how to transmit how to communicate to their analysts our shareholders about the outlook for the back half of the year at their private operators the reality of their capital allocations.
The ridership the fair box revenue that comes off them and so forth is obviously continue to be up in the year, we've been fairly conservative in our approach of the UK at the back half of the year.
Quite honestly, even if the government stepped up tomorrow with a big initiative as you know it it doesn't turn the factories back on overnight at the previous levels, because there's a nonrecurring engineering efforts. There is supply efforts is production planning and so forth. So.
Yes, there is some builds in the back half of the year for HDL, but not a significant amount.
Okay, that's helpful and and second one for me just any commentary around the actual bus deliveries over the next couple of quarters, what should we expect in Q3 and Q4 is sort of the production, we re ramps to a more normal rate.
Yes.
Yes, so when you say bus can do specifically mean like the new flared North American business or do you mean across the fleet across the fleet I would say.
Do you transit motor coach kind of way what are your expectations are for use.
Yes, it's a good question. So clearly the markets are disrupted as we've we've tried to articulate the facts and so forth just some color on each of the businesses.
Chris is focused for the back half of the year was now rescheduling anything that was delayed deferred rescheduled.
And so forth. So the vast majority of Chris is work is far more execution oriented than worrying about where the worst going to come from and this most a good significant portion of that work is under contract. So it's it was a timing delay and now and execution story volumes will be down from previous year by somewhere in the neighbor.
Ahead of let's call it 20 or 30%.
The motor coach business, we've effectively.
Eliminated very almost entirely the entire private motor coach expectation of buys in the back half of the year as you know about 40% of that business is public transit operators, New Jersey, or Houston, or Connecticut, those kinds of people that use.
Motor coaches as public at shuttle type vehicles into the cities that business is largely contractual but we've really really downgraded any expectations of private motor coach recovery in the back half of the year.
In the our block World, we have we're actually backup at pre cobot levels on our cutaway business and were slightly behind on the our block business, which probably acts a little bit more like a public transit type environment Alexander Dennis in North America is operating basically at the levels. They were pre cobot in terms of the number of units.
Coming out in the UK as dramatically down and in Hong Kong Singapore.
New Zealand, where we are delivering its kind of backup to pre cobot levels. So in general I'm going to say roughly our production levels are in the 60 or 70% levels for the back half of the year across the overall fleet.
Okay. That's very helpful. Yes, excellent okay. Thanks very much.
Thanks, Ken.
Our next question is from Chris Murray with VTB capital markets. Your line is open.
Yes. Thanks.
Good morning.
Maybe lateral cost if you want to take this one.
I guess, but one thing we always worry about.
As we go through these transitions I mean, we haven't some good ideas around what you what your capex expectations are and your expectations are.
Really can be working capital and so can you help us understand.
How working capital start to evolve through the quarter and your expectations as you start ramping on how you're going to happen lean on working capital and if you're seeing any issues around payment terms or anything like that.
And how your suppliers or are are responding to some of these challenges as well.
Yeah. Thanks, Chris Good question so.
At a very high level, what are what I would tell you as when we think about our business units and what I've seen so far again being fairly new in the businesses.
We've got we've got pockets of excellence in our businesses. So for example, when we think about our a our our ATP and some of the work that new Flyer has done and we look at some of the cash generation. We got from that it's been it's been really good now at the same time one of the things that I'll kind of mentioned as what we're doing now is in what we've already done in May we went ahead and ill.
Integrated HCP as a centralized function. So we can start leveraging thing so what we're seeing out of that right. Now is what we're starting to see as there are some term differences were trying to get to a point, where we get suppliers and understand what suppliers are shared across the business units et cetera. So I think what we're doing right now is with that IP consolidation.
We are going to see some cash flow generation and that'll be something that no all talk a little bit more on the call on the next call, especially and maybe our Investor day, if we decide to do at Investor Day, This year, where we talk about.
From a terms perspective, where we can get too. So we're starting to see some of that from a are.
So so typically just so you know we're trying to get to a point, where we have typically 60 for an IP side, we're trying to get to a typical 60 day.
Term play with me and David White, who is the VP of our supply chain of our supply group. So we're working that and then the other areas that we're starting to look at and me impaler starting to push at a little bit more as the inventory side for example, with our parts business as well as our HDL. So some of that happens to be timing on our ABL.
In our MCR business, but otherwise we're got so Paul anything else you had just Chris specifically the story when like this as soon as cobot hit.
We were focused on preserving working capital and so we work with our supplier community about delaying some payment terms and so on and so forth as we had clarity and moving through May and June that we're going to start up our facilities. We got back current with all of those suppliers. They play ball with US we play ball with them and knock on wood, we've had no business disrupt.
And from any supplier nonperformance or bankruptcies now the world changes over time, but we've been really pleased with how David in the supply teams of manage those suppliers and transparently work with them as we started backup as you've seen our written materials, we basically generated about $100 million of working capital of Aer and a little bit creativity on on.
Management as we restarted the facility, we reinvested that $100 million to get all of those suppliers current as well as to lay in the inventory to start production again at those levels I think the biggest issue as passive said now as a centralization optimization of some of those processes a lot more focus from across the business as well as a way deeper review.
And look at the utilization and inventories inside the businesses.
I think just add quickly historically, our business would run kind of 15, 16% working capital as a percentage of last 12 months revenue and needle through 18, 19, or some hiccups with KMG and then the addition of radio and some accounting adjustments and then now opened 19 that number is grown.
The kind of sometimes in the low twentys.
I think it provides you mentioned and Paul mentioned, there is definitely the plan to get back to more to that kind of historic 15, 16 and run rate and then I think as previously mentioned a lot of more focused now with him on board on that turns and how we manage that process with our working cap.
Okay. So I guess, what I'm trying to think is as you restart the system through Q3 Q4, you would anticipate.
Even though you're going to be at a lower level.
Maybe of activity.
Is it fair to think that you should be working capital neutral for the rest of the year or or which is the offsets between what you've already done and some of the gains you may get in other parts like in any piece is that fair to think.
I think like based on what I've seen we should see should be working capital positive I think like it should be released because I think we'll get some of that inventory like we've made a big investment now in inventory to restart the machines with the ended the quarter. We made 100 million dollar kind of investment in working cap.
To get us backup start to facilities again, as the POS who mentioned.
Now through the rest of the year, while volumes may be lower we're going to be releasing those things that we built up releasing things that are in inventory collecting on receivables. So I think as we go through Q3 in Q4.
We should have more of a release of working cap and we shouldn't have a manual in some of previous years. As you know we've been building up our commercial I guess, our private coaches throughout the year. So kind of in Q3, we tend to build more private coaches for Q4 deliveries.
Because we expect less lower volume in that segment of the business, we won't have that inventory buildup in the third quarter like we would have seen as in previous years.
Yes, and I think that are just to add to that I think what we're saying Chris as you know some of the ABL. For example, if we take HDL. For example, we are looking at you know deliveries and some of the inventory coming down as we get into Q3 et cetera. So theres been some delays in terms of the orders. So we should be getting a positive gain in working capital as we move forward.
Okay. So fair to think that where you think earnings are heading on your EBITDA number working capital being slightly positive. Then then that should also when you when we think about.
Total leverage and I know you guys don't have a covenant until you have to hit.
Q4, reporting, but but that's sort of.
The pass if I will on how you think that you're okay on covenant by the time you get to year end is that is at the right way to think about it.
Absolutely absolutely.
On the Capex spend Chris.
I'm sorry to hear that.
I was just absolutely as you described it but whereas you know as we reported were going to billet more stingy and our capex than we have in previous levels and we continue to expect to pay.
Continue our dividend policy and their dividend at current rates and just just to add just under leveraged couches to just so it's clear it's in our materials, but.
Q2 results are excluded from the calculation and it's done on a pro rated basis. When it does resume for Q4. So until Q2 is continuously excluded so I think that that definitely helps a lot. Because obviously Q2 was the worst period with the negative EBITDA and then that and from there. So as we get through Q4, and then Q.
[music] one to two in Q3 next year Q2 is consistently excluded from the cow.
And Chris This is positive and again you don't Stephen leaves, our treasury function, but one of the things that I would add to that is we monitor cash flow on a weekly basis by the business units. We're looking at it on a daily basis basically but at the end of the day, what we are seeing as we're seeing a couple of things that should kind of give us positive number one is we see us being with income.
Units all the way through this year, we don't see any kind of issues there.
This stage, we are seeing some positives that will kind of help us throughout the year there'll be some tax items that we'll probably look at that is going to also help us as well some inventory reductions and some other things. So we feel pretty good about this year no covenant issues that we see at this stage.
Okay, that's fair.
And then just maybe a quick question on the on the on the identify forward plan and how you think that goes together.
When you're talking about integrating I guess.
Locker, but it from the North American bus market integrating transit NMC.
Does that really envision building.
Common line product are you still think youre going to need separate factories I'm, just trying to understand exactly what that means or if it's just leadership type things.
Any different facilities in lines.
Good question, Chris job, one is to integrate the businesses and optimize the overhead at the two businesses I mean, 60% of NC highs work, which was private is gone and so we as you know we cannot.
Reasonably afford the infrastructure of the of the whole thing and so the immediate decision that we made a couple of weeks ago was to rationalize the exact teams now in the process of harmonizing the and looking at the order design.
The second project in part of that is harmonize and optimize the IP systems as you know and as we've talked about we've been working equity Oracle and MCR now, we will complete and finish that and the final element is a north American plant review.
Between new Flyer MCR by email our Bach all of our car fair and KMG facilities, we've got a quite a fast physical footprint and so we'll be looking at optimizing and reducing those facilities, whether we actually see transit box on the same line as a motor coach as the same line is double that.
Is yet to be determine its probably unlikely, but no question is a footprint opportunity and an overhead opportunity.
Okay, and then I guess my last question just in terms of public.
Business.
There are any larger bids that are out there or anything that you think that you might see.
The could offset some of the.
They could offset some of the private market.
Let's assume that private markets essentially that to your point is going to be pretty challenged maybe for the next couple of years.
Is there any thought around some stimulus and one of the things that always happens.
When we get into these things is there any any worry about some of the other competitors in the market getting irrational.
Are you seeing any anybody throwing around dumb numbers, just just to fill a factor.
Yes, so you'll be MCR is a motor coach type operator in North America there.
Call it seven or eight as our mill. The biggest one is jersey or New York as I mentioned before Connecticut, Houston, there's others that use quarter coaches. There is nothing in there is no opportunity that we know that would replace our commercial business, which therein lies the opportunity to harmonize our entire machine around supporting public customers whether its a.
Coach or transit bus or double deck and so forth.
And of course cobot changes everybody's plans at this point in time, there's no RFP is on the street or that we know that would replace that that's a good level of volume.
So the reality is optimize our machine reduce our cost base.
Delivered to the contracts we have as you know just recently we received the year five of the New Jersey order, which had its annual order plus and so thats a very strong recurrent revenue stream that runs all the way through 21 and into 22 and so we'll just keep working that has RFP hit the street, we obviously will compete.
At this point in the motor coach space on public we haven't seen create irrational there really aren't any large RFP is on the street today.
Okay helpful. Thanks, folks I'll turn over call.
Thanks, Chris Chris.
Our next question is from Kevin Chiang CNBC. Your line is open.
Hi.
Thanks for taking my question here.
I'm just wondering when you talk to the transit agencies, just given the pressures are seeing.
Just any change in the buying habits in terms of the type of buses they want in their portfolio.
Based on the ridership outlook and even how they think about customization as maybe a way to logistics optimization as a way to reduce the purchase price like do you see any of that changing or or or do you think the way they bought both as a year ago.
Returns a little was.
I think it's probably too early.
Kevin to be able to honestly provide any insights for that.
If you will never running a transit agency, we went from normal operations too serious issues in the very very short term reduced service cleanliness issues foggy and sanitized buses every single day damn there every couple of hours and so on and so forth. So as they kind of start to see recovery of.
Ridership in some cases, we're seeing more buses on the roots because they're having to socially distance the people on the buses in other cases, we've seen reduced roots and so forth.
We haven't yet seen any real change to fleet replacement plan strategies and of course. These guys live in a world, which is multi multi year planning and because of their funding sources. Some comes from local and a lot from the fed we're trying to align all that stuff I can honestly say that the RFP is we've continued to seen the last three months haven't changed the.
Spec of the vehicles haven't changed the desire to consider more zero emission type vehicles that great news is that we've already invested we've done a really good job on the on the battery electric the work that Chris and team have done on the fuel cell electric puts us in pole position, we've got a very significant fuel cell electric delivery scheduled the back half you this year moving.
Into next year.
And the customization us seating configuration on that we haven't seen that remember that a city is a very let's call. It a political animal than it has to manage its local communities and special interest groups needs and so forth that obviously will bump up against available funding as they try and replace their fleet and we all remember that.
100% of the operating costs and maintenance costs are on a city and so they are motivated to find a way to work plan for in budget per capital replacement I can't say, Kevin that I've seen anything there already Chris a team is seen anything different in the short term as you know also we've worked at what we call.
Reference buses on strategies that have customers do move to a more optimized.
That ask us for performance specs not necessarily detailed design stacks that that we can respond very quickly we've already gone there of what we think would be the best price value and performance on all of our platforms. So youre ready for that if that happens.
Thats helpful color.
I apologize if you went through some of the until that the jump on the call late in terms are under five for local 65 million or I guess, the but also the will depend on additional.
So on top of that it looks like we'll get the full run rate in 2023, but I'll give us enough progressing over the next few years here is that.
Highly backend loaded already accounted for the third until you get a full amount in 2023 any color there would be helpful.
I'd like to so a couple of things. So number one is we are developing some of those initiatives. So let me let me kind of give you what I would I know today as kind of Paul mentioned, Joe one it. So it was so what we've done today is for the organizational structure, especially for the combination of the two businesses with MCR and new Flyer. Some of those cost have already been taken out so when I think about the.
Cost side of things, we have taken some of the cost the areas that are going to be really the long pole in the tat is really going to be the factory consolidation. So we've got to offer two portions of this Kevin just so you know so number one is the new flyer and them Cie games are starting to look at you know what are we going to think about from their factories and then number two is we've already kind of.
I've got a developed to plan I should say, we've got an initial plan I should say in terms of our distribution centers with our parts groups. So those are the things that are probably going to to last fall 2023, but during the next earnings presentation. Once we get these plans developed let's try to give you more of a guidance, which kind of gives you more detail on what we would expect in 2000.
In 2000.
2021, and 22 to kind of baked that out fully.
Okay. That's helpful.
And last one from in.
No I don't know the answers will be but if I think of the 120 million of EBITDA, you're kind of them for the back half the your.
Annualized that incremental annual run rate of 240.
What the missile that over the past 2020 like looking into 2000 21000 lots until ones are going up on a forward I guess local ramp up production will be a tailwind of the new Jersey contract.
You have the Berlin contract I think kicks in next year.
Think of the puts and takes 2021 and total let the additive or or maybe a negative two to 240 number.
Well, what we definitely won't have.
You know is a is the.
Crazy adverse negative quarter like we had this year in the second quarter and of course, the pace of recovery for offices can depend on the available funding. We continue to look monitor be actively involved in government support type activities as we outlined in Canada us and UK.
There's a certain level of our order book that is actually under contract. We haven't seen cancellations of government contracts I think theres only one that we had that was I think a 50 unit option order that was cancelled but thats. It from a public perspective, there is definitely movement in timing of builds and timing of deliveries and except.
Since then so thats what were managing through.
You know the other part of it obviously is is the biggest big swing thing were the two biggest swings will be the pace at which public sorry, private owner coach in North America recovers quite honestly I don't see that of any significance in 2021, it's largely we think it a move out to 2022 and.
Stimulus as far more oriented obviously to government public transit agency than it will be to any of that the commercial type operators.
And then the other biggest.
Here is going to the pace at which.
The UK fleet starts to to recover and buying starts to recover.
But so.
Appear run rate, probably not a fair comparison.
But at this point in time, it's a reasonable comparison, given what we do don't don't know John I think just to add to that Paul as you know and again, it's exactly what Paul said, but the 240 or the 120 kind of in that back half is still impacted by Covance and we're just trying to figure out from a government standpoint, when does that change.
Let's turn off well that's all my questions. Thank you for lunch and vessel block on the back half the are here.
Thank you.
Okay.
Our next question is from Jonathan members with BMO capital markets. Your line is open.
Good morning.
Good morning, Good morning, Paul Paul just a follow up on your comment about that large fuel cell order, how many units was out for.
Well, it's not at border Jonathan It's a number of operators, but we're seeing in the neighborhood.
Right now as next year.
Something like 50 fuel cell buses under contract for new Flyer, which is which is quite significant.
There really isn't other any other mainstream player in North America in is the transit bus space that has that capability and as you know from walking through our facilities in conversations the.
The.
Strategy.
On all electric bus that is either.
Battery electric charge at Delaware charged on route is we're starting to see more get interest in fuel cells that act as range extenders and rough orders.
Contacts rough context of terms of range.
Rob 40 foot battery electric bus with the appropriate amenities and whatever can get plus or minus 250 miles range, where we've seen that same buses. The fuel cell course economics are desperate to get up to 350, which then gets in the region was either less operates and as the environmental dynamic in the United States as the history.
Atg of zero emission as fuel cell and so forth. It takes on state Chris has done a fantastic job I mean, we'll build probably.
400, or so all electric vehicles next year of which 50 will be those fuel cells thats pretty significant from where we were a couple of years ago.
But it's not one operator, Jonathan its multiple.
Okay. Thanks, Paul I think you mentioned historically.
Like you Flyer delivered something like 30 sell 30 fuel cell buses today, so it sounds about right or would you like to get back to them up.
Yes, it's probably little bit more than that but we.
We continue a note after remember the original fuel cells work was done in 22008 and nine to get ready for the Vancouver. The BC Olympics. There was 20 vehicles in which the difference between then and now as those fuel cells were the actual propulsion.
Engine of the of the vehicle and so costs, a math fuel required reliability economics maintenance and so forth made them on practical so thats when Chris is teen pivoted to to working far closer on battery buses that used fuel cells as range extenders, and it's been very very well historically, there's probably been above.
47, total 45, 47 total fuel cells delivered by us today.
I think.
What was it very telling stat I think in our materials is the improvement in the backlog for CBS.
Not just fuel cell, but obviously fuel cells part of that going from 4% to 9.7% is a pretty big jump. I mean, you also that transition to the visa is happening and you know and it's great for us because we're the leaders in that market in North America, and the UK and as we've mentioned on this call multiple times battery electric or fuels.
Well, we can manufacture those in our facilities. So so it's definitely it's interesting to see that the forecast that people have been talking about on the beads are starting to come to fruition.
With the actual orders and vehicles hitting the road in a fuel cell or battery electric propulsion.
Absolutely.
On the backlog.
I was encouraged to see the firm orders for Q2 were actually up year over year.
Is it fair to say that firm orders are trending down.
Over July and August given all the challenges the customers are facing.
Yes, no question because quite honestly, Jonathan there were very very few awards in the quarter.
Okay. So we're building out from orders, we delivered a bunch of the vehicles that were in our excess wet, but there really weren't any any orders of any significance in the quarter awarded.
So.
Yes, Paul the customers have.
Requested additional emergency funding from the federal government.
Yeah.
How do you see this shaking out for the first half of 2021 as it pertains to new Flyer.
Could you could you break it in two scenarios like one or the transit agencies do get the emergency funding in one where they don't get the emergency funding.
And at what point would you start to get concerned about filling or assembly slots.
I think that's a great question and it's effectively the dilemma that we're dealing with every day. So if we sat at Chris is sales and ops meeting every Monday morning, with his team and we went through what we have under contract.
Options, we expect to be delivered to be converted what new RFP have hit the street or we expect to hit the street.
The first still let's call the next kind of six or 912 months.
Good portion of the early half of that is effectively already under contract, but what we've done is effectively trying to manage the production rates. So we don't go up in volume and then have a drop off where we go to slow and have an inability to ramp that backup and so it's a blessing in occurs the complexity as we have three production systems a split.
So between one to peg in Minnesota, a full build Minnesota, Phil full full built in Alabama, and so we're trying to manage that not having a full set of information today as we move through that.
If if the government does our current build production plan for next year doesn't effectively currently contemplate any significant stimulus or any real stimulus if that happens we've demonstrated in the past that we can over a relatively short period of time wrap up volume and production.
The fact that has that Chris has multiple production centers allows them to do that.
But were governing our our pace at right now.
To handle that level of uncertainty I'm confident in the.
I understand it Chris a team have all competition all available or expected competitions, we're very thoughtful and respectful of those transit agencies that are that are juggling day to day operations with the long term reality is that they're going to have to figure out how to continue to move people through cities.
And whether a vaccine is six months away or a year away you have to us we see this as a transition window. The new normal we'll still have a very significant portion of bus transportation every major city around the world and I continue to point to think about New York 5900 Transit bus is think about London, England. Those cities are unable to.
It was out transit buses being a core part of the move into those cities. So it's a transition story and we're going to be very cautious at the pace at which we manage.
Short term so that we don't inhibit our ability to be successful the long term.
Okay. Thanks, and you mentioned your tentative plan for the first half.
Could you give us an update as to.
What line rates do you expect.
Over Q3 Q4, the first half relative to pre covered run rate.
So we obviously.
For two months of the quarter, we started back up I think the team did a fantastic job of let's call it phasing and staging and by that I mean, we didn't open up all our factories at one on one day, so that we could allow our internal fabrication, our external suppliers to start back up at a at a job rather than a run and then.
And with Chris did is started those facilities that lower production rates just to make sure that no people still worried about coming back to work or people that had child carrier or us elderly people care issues or kids in schools and so forth. So we're now operating effectively at let's call it 90% of.
The rates for 85% of the rates that we were the run rates pre coded and we're going to continue to have kind of hover in that area very it over blocks of three or six months as we head into 2021, obviously, we're talking everyday about any customer that has pushed out of a production window of when they now want to receive those vehicles because it is.
One thing for us to build them, but they have to inspect them than they have to accept them then have to put them in service and so it's probably premature to give you any real forward guidance on on run rates heading into 2021.
Having said that a good portion of Chris is work as we know is multi year contracts and so it's all about option conversion production rate management, and winning our share or better of of the RFP that hit the street.
Okay. Thanks, My quick one for Passu does the H. to EBITDA guidance include expected receipt of any further wage subsidies.
It does not.
So if you do receive some.
I guess you had a record those but then break it out for us.
Yes, so just Jonathan one other things and again I know we included some here but.
If we kind of just step back for just a second one of the reasons that we decided to use the government grants into our adjusted EBITDA and we did talk to our auditors about this as well.
And we had a lot of internal discussions here, but one of the reasons is when we decided to take the grants what we were doing as we incurred them because we basically didn't take those cost out. So we said hey, you know what we're going to uncover incur those costs. So we can have our employees get.
Get wages and then we would offset that with the the obviously the grants now if we think about kind of moving into into the second half of the year, if that does happen right than than if there was a one for one the reason we did not furlough is because to do for the grant than we would include on but.
That's that's something of subject.
Depends on as we kind of get into that second half, but right now we're not expecting to include those in.
In our in the numbers that we've provided.
Okay I believe in the notes to the financial statements you kind of broke out the amount that's been recorded on.
Receivables that you expect to.
Collectors cash on the second half is that a good proxy to use for the like it looks like a pretty small cash.
Thanks for Q3.
Yes.
Okay. Thanks for your comments.
Thanks, Sean.
Showing no further questions at this time.
Okay, well, thanks, Chris and everyone for joining us this morning on the call we'll wrap it up with that if at any time you have any further questions. Please reach out to me at any time my contact information is on our website. Thank you and have a great day.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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