Q3 2021 NFI Group Inc Earnings Call
Okay.
Good day, and thank you for standing by Watkins sales Beatify 2021 Q3 financial results 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 the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require assistance during the conference. Please press star see him out I would now like to hand, the conference over to your first speaker today, Mr. Stephen King <unk> Group Director corporate development and Investor Relations.
The floor is yours.
Thank you Hazel good morning, everyone and welcome to <unk> group's third quarter 2021 results Conference call. This is Stephen King speaking joining me today are Paul <unk>, President and Chief Executive Officer, <unk> Soni, Chief Financial Officer on.
On this mornings call, we will be walking through our results presentation that can be found in the investors section of our website, while we will be moving to slides via the webcast. We will also call out the slide numbers as we go through the deck for participants on the call.
Starting with slide two like to 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.
You are advised to review the risk factors found in enterprise press releases and other public filings on SEDAR for more details.
We also want to remind listeners that <unk> financial statements are presented in U S dollars, the company's functional currency and all amounts referred to are in U S dollars unless otherwise noted.
On slide three we've included some key terms and definitions referred to in this presentation.
Of note zero emission buses or Zed consist of battery electric hydrogen fuel cell electric and trolley electric buses.
Equivalent units or Eus is the term we use for production levels and delivery statistics. The majority of our vehicles represent one equivalent unit, while an articulated 60 foot transit. It takes two production slots and therefore is equal to two equivalent units.
On slide four for those of you new to the NFC story, we are a leading independent global provider of sustainable bus and motor coach solutions, we operate with our four pillar approach focused on vehicles infrastructure aftermarket support and workforce development.
Turning to slide five our purpose and mission is simple we exist to move people in other words, our products move precious cargo. We are focused on designing building and delivering exceptional turnkey mobility solutions on this slide. We've also included our stakeholder matrix that drives our strategic decisions and the core operating principles.
The governor behavior.
I'll now pass it over to Paul to recap the quarter.
Thanks, Steven and good morning, everyone I'll begin on slide number six titled Executive summary.
Similar to other global manufacturers <unk> third quarter results and operations were impacted by supply chain disruptions that caused a rapid deterioration in availability of critical parts components and chassis and negatively impacted our production. We responded quickly to these issues through the prudent albeit difficult decision.
To temporary reduce new vehicle input rates and by idling some of our facilities and by adjusting production levels and others. We.
We anticipate that these actions will assist us in controlling costs lowering our working capital investments and preserving cash until supply availability and the reliability of delivery improves.
Our customers have been very accommodating in working with us as we adjust production and delivery schedules in response to these near term disruptions.
In addition, our banking partners, our credit syndicate had been very supportive and assisting us in focusing on our long term business objectives, while managing near term challenges. We're currently ongoing discussions regarding additional financial and covenant flexibility for 2022 as we work through these most recent supply chain disruptions and the impacts of the other real.
Please of the COVID-19 pandemic there.
There were numerous positives in the quarter, while the with the antibody forward optimization efforts. Realizing several key milestones that are permanently reduced our fixed cost base.
With the expectations of a $67 million savings in 2023, and <unk> four and will drive margin improvement and increased returns on invested capital as our volumes recover.
Even in the face of the pandemic and the supply chain related challenges our aftermarket segment saw significant year over year growth with a record adjusted EBITDA for the second consecutive quarter.
There are a number of key forward looking metrics that we track that also increased in the quarter first our active bids are up 11% from the same time last year.
Right now it is the highest number of units that we've submitted for bid since 2017 quarter. Two at 6307 submitted equivalent units under bid at our five year total bid universe is up 7% with over 38% of that universe being zero emission buses.
We anticipate that the strong demand and growth in procurements will continue driven by robust levels of government support in all of our core markets. This bid activity is anticipated to generate revenue and backlog growth and we've also seen increases in public transit ridership data and a sooner than expected return in the private market for leisure.
<unk> <unk>.
<unk> is playing a leadership role in the evolution of zero emission transportation and we saw several major milestones this quarter.
Zero emission buses are now 21% of our total backlog up from 16% just last quarter.
Our battery and fuel cell electric vehicles have traveled now over 50 million electric zero emission miles.
We were also awarded some very large Zeb Awards in California, Virginia, New York, Nevada.
England, and Ireland, and we announced entry into the Australian market via strategic partnership with a local player.
<unk> zero emission buses are operating or on order in 15 of the top 25 transit agencies in North America and are used by 10 of the top 15 transit operators in the United Kingdom.
So far this year, we've completed zero emission charging infrastructure solutions projects in nine cities with projects in progress and a further 19 cities currently and we remain on track for approximately 20% of our annual deliveries this year to be from zero emission buses.
Very exciting for us this week as with Alexander Dennis double deck bucket buses in the U K 's best selling electric bus are on display at the United Nations 26 climate change conference of the parties or Cop 26 in Glasgow, Scotland. Our vehicles are also providing zero emission transportation to world leaders during this event.
And we're really proud to have worked with our customer partners. Both National Express Stagecoach at the event, highlighting our product and their commitment to a zero emission future next.
Next we will have 100% zero emission bus offering on display next week with all of our company showcasing their vehicles at the American Public Transit Association Expo or the industry Association called Pap tests, which is north America's largest public transit event.
More than 8000 in person attendees have signed up which is a massive amount given what we've gone through the last two years and all will be able to see our lineup of electric and fuel cell electric buses and coaches all equipped with NFS parts proactive air and service purification systems to continue to battle the Covid pandemic.
Recognizing the need to deal with global warming, which demand significant reduction of greenhouse gas emissions over the next decade countries around the world has made the landmark commitments to DHT reductions there has never been more urgency on the design and delivery of mobility solutions that are clean safe accessible efficient and most.
<unk> reliable this is <unk> core business and we look forward to assisting governance and our customers achieve their operating targets.
I'll now turn it over to our CFO for the past with Sony to review <unk> third quarter financial results and I'll be back shortly to give you an update on our outlook.
Alright, Thanks, Paul turning to slide seven we have our backlog of new vehicle deliveries throughout the year, we continue to be at or above our historical win rates and are seeing a significant pickup in bid activity and our biggest revenue business new flyer due to delays in New awards in both North America and UK Transit operations, you will see that our backlog was flat in the curve.
Current quarter during our Q4 2021 update we expect to provide an update on the results of the recent pick up in bid activity. Currently all signs point to positive momentum our backlog remains at a robust 8103 use with 21% being zeb.
As we flagged in our September 18th press release, the supply challenges that we have.
<unk> successfully maneuvering have finally caught up with US we are seeing even more of our suppliers delaying or reducing shipments of parts and components. This impacted our deliveries in the quarter as we consciously reduced production rates to minimize whip buildup and cash consumption.
Turning to slide eight as expected with the supply challenges our total revenue decreased by 26%.
We did have some bright spots in the quarter with a greater number of zeb deliveries and a greater number of higher priced motor coaches sold in the period. In addition, quarterly aftermarket revenue was up 21% year over year, despite being impacted by supply chain disruptions and the COVID-19 pandemic the improvement was.
Driven by increased volumes in all geographic regions.
Infrastructure solutions revenue also grew by 10% on a year over year basis.
For adjusted EBITDA with the lower production rates, resulting from the supply challenges, we had a year over year decline of 30 million also with constantly changing production schedules, resulting from navigating part shortages, we experienced variable production cost increases from labor to freight.
We also had less government support this quarter versus Q3 2020.
As mentioned earlier the bright spot this quarter was aftermarket business segment, where we had record EBITDA for the second consecutive quarter. In addition, we also saw increased sales from the company's infrastructure solutions Division at 60 billion savings generated by EFI forward going forward, we expect volume.
Margin improvement will replace the impact of wage subsidies received during 2020 at 2021 free.
Free cash flow in 2021, Q3 decreased by $13 9 million or 54% compared to 2020 Q3, mainly due to lower adjusted EBITDA in combination with higher lease obligation payments as the company made payments related to leases deferred by lessors at 2020 Q3.
The decline in free cash flow was partially offset by lower cash interest expenses lower income taxes paid at EFI forward savings.
Liquidity at the end of the quarter was $320 million a decrease of $69 million from the previous quarter. The decrease was due to higher period end inventory balances, resulting from supply chain challenges with.
Expectations for strong cash flow generated fourth quarter, we expect to add fiscal 2021 with more than $400 million liquidity.
Throughout 2021, our key priority across the company has been working capital management. The teams have done a phenomenal job navigating a very difficult environment, while focusing on the controllable levers of working capital as you may expect the escalation of the supply chain challenges had a material impact on working capital days increased to 68 days.
<unk> to 62 days at the end of 2021 Q2 at 60 during the same period last year.
Going forward, we anticipate continued improvements to working capital metrics, although supply chain challenges.
Mix it seasonality may cause quarterly variance.
Turning to slide nine our tax structure includes fixed and variable components based on profitability add impact of nonrecurring discrete items for which we normalize as you know we have a complex tax structure that we intend to unwind at some point in the future. This complex structure combined with current low.
Level of earnings before tax results. It challenges predicting tax rates, we do however, anticipate that our minimum fixed tax expense will be between $8 million to $14 million, while our variable of taxes will be based on a range of 21% to 23% of adjusted pre tax earnings for the year.
During the third quarter fixed taxes, combined with negative tax impacts from currency fluctuations to generate a total adjusted tax expense of $1 3 billion are at adjusted loss before taxes.
We may continue to see these impacts during the remainder of the year.
On slide 10, Youll note that our net loss for the quarter decreased compared to the same period of 2020, as we incurred lower restructuring a COVID-19 related cost adjusted net loss, which normalizes for Dod recurring one time items increased year over year, primarily driven by the same factors that impacted deliveries and revenue.
On slide 11, we are Rio Rio.
Reaffirming our adjusted 2020 guidance for revenue adjusted EBITDA and cash capital expenditures as updated in September 2021.
For the fourth quarter of 2020, what we expect lower adjusted EBITDA on a year over year basis.
Finally, a reminder, that for 2021 Efi's first second and third quarters were 13 week periods.
While the fourth quarter is a 14 week period, making the 53 week fiscal year I would like to now turn things back over to Paul to discuss our longer term outlook. Thank.
Thank you.
So I'm now on slide 12.
As I discussed earlier, we continue to see historic and transformational government support for zero emission public transit vehicles that have either been approved or proposed it all core markets. We also expect more government focus across the globe and financial commitment following the outcome of.
26 in Glasgow these.
These announcements are very encouraging but they are complex and in some cases, they are still going through the approvals and negotiations process as such we do not yet have all the details on when all proposals and funds will materialize into actual bus bus.
Generally in North America and take up.
Between 12 to 18 months from the time a bit is released before we actually see an impact on delivering buses and our financial results. We are very encouraged by the government support.
I'll now turn to slide 13, which is very telling for our business. It provides the latest update on what we call our North American public customer total bid universe, something new Florida created back in 2008.
And as I mentioned earlier active bids or where we have submit our where we have submitted or are in process of submitting a proposal, meaning they have the most significant near term near term impact on our business are at levels not seen since the second quarter of 2017.
We have over 6300 units in bids where we've already submitted a proposal and nearly 600 units where bids. We have just received in fact, just this population of customers for us or over 180 active competitions in product and process in the north North American public transit market alone.
<unk>.
The forecasted five year, North American industry procurement bid universe, which is developed through detailed discussions with individual transit agencies and from their published fleet replacement plans and indicator of forward demand has started to rebound and it was up almost 10% quarter over quarter.
The increase in long term forecast is primarily result of transit agencies recovery.
Their forecast and formalizing their short and long term procurement plans as they recover from the COVID-19 pandemic and as they learn more about the access to multibillion dollar funding programs that have announced or launched by the governments of Canada and the United States as of 2021 Q3 10200.
23 units or 38% of the total bid universe is zero emission buses highlighting the ongoing evolution.
Aero Mission transit as we've always said, it's not if it's a matter of when and clearly it is an evolution we.
We have also continued to see increased usage of purchasing schedules, which includes state and national contracts and cooperative purchasing agreement since 2018 <unk> received more than 600 individual vehicle awards from these schedules, which highlights their growing popularity within north American transit agencies, as a cost effective and efficient.
Bus procurement tool.
And our box through its dealer was recently named on one such large contract with the California Association of coordinated transportation or <unk>, which is one of the largest state transit associations in the United States.
A reminder, that these schedules are not recorded in <unk> backlog and as such they do not have defined quantities allocated to <unk> or any other OEM once a customer purchases a bus using one of these agreements the purchase orders recorded immediately as a firm order and we will press release it.
Turning to slide 14.
This shows <unk> targets through 2025, while there is no question in the near term challenges from the pandemic and the resulting stop supply chain and logistics issues, we remain well positioned for our previous announced long term targets with reasonable assumptions around market recovery to pre COVID-19 levels and increase in zero emission bus.
Sales and cost reduction through MSI forward, we maintain our expectations to grow revenues to $3 90 to $4 1 billion and adjusted EBITDA of $400 million to $450 million by 2025, nothing has changed in our longer term outlook. The path to recovery is slightly muted given today's realities.
At <unk>, we believe in delivery of long term sustainable transportation solutions and this drives our decisions and our operations. The current operating environment has been challenging to say the least but we've made tremendous slides and optimizing our footprint and adapting our structure.
Through a lower cost base and heavier focus on working capital management, we will drive significant improvements in our return on invested capital as we see our markets recover through 2025.
All of our key forward looking metrics suggest this recovery has started and will continue to gain steam, especially as we move into the second half of 2022.
I'd be remiss, if I didn't comment or shows tremendous support from our workforce our employees our team members from our customers and their patients from our board and from our credit partners and most importantly, our shareholders. In this case in all the support we've received and we're navigating through today's realities, but the long term.
<unk> continues to be very bright and exciting for our company.
Now I'll turn it back to Stephen to summarize today's discussion followed by opening the call for analyst questions over to you Steven Thanks, Paul turning now to slide 15 for a quick recap the NFIB forward initiatives continue to optimize our operations with adjusted EBITDA savings of $16 million in the quarter and $59 million since inception.
The quarter was impacted by global supply chain challenges and the ongoing COVID-19 pandemic.
Is disrupting production deliveries and customer order timing. These issues will continue to impact fourth quarter 'twenty, one and first half 2022 results with.
Bid activity and the overall bid universe increased and we achieved the highest level of submitted bids since the second quarter of 2017.
<unk> order activity combined with additional expected government support for trains. It supports our view that production volumes will start to return to more normal levels in the back half of 2022.
We reaffirm our full year 2021 guidance and can you continue to anticipate 20% of our 2021 deliveries will come from VEB.
We are focused on achieving our ESG goals through initiatives aimed at reducing our internal footprint, while creating equitable access to mobility and workforce development. We are leading this evolution to zero emission future with expectations for topline revenue growth and adjusted EBITDA performance in 2025.
Now open the line for analysts questions Hazel over to you.
Thank you.
To ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of no Man City from Laurentian Bank, Sir Your line is open.
Hi, good morning, everyone.
Right.
So my first question is like we're into.
A few weeks of fourth quarter, how has the supply chain issues sort of sequentially without has it improved or they continue to deteriorate and whats really the most challenging in terms of thoughts procurement is it just limited to chips are chassis or what's what's the most troubling part here.
Well, it's a really good question and of course every day in every product we have in every facility is slightly different.
The additional realities associated with the microchip problem and of course as you can imagine the number of parks.
On all of our different buses, we don't buy those micro chips or processors directly we get them from components that we buy from suppliers.
And so that has had the primary impact and continues to be one of the biggest issues associated with whether it's engine delivery or sub components on the bus or chassis.
Sure.
Our friends over at our Buck.
But we continue to manage we don't expect it to bounce back over 90, all we got to do is read the realities of our automotive friends and what Theyre doing to manage that so we've expected a bit of a muted recovery all the way through into 2022.
There's other parts that pop up every day. There is this huge issues associated with in some cases aluminum extrusion in some cases, it's plastics or.
In some cases it's.
Sub components like wiring harnesses, our electrical components that relying on individual pieces that ultimately come from China and other locations.
Has it gotten better in the first couple of weeks of fourth quarter look every day is different one day, we solve a problem on one part of it another part Pops up.
So it continues to be a day by day cut a dynamic we are making facility decisions on a week by week in terms of run rate in load for working very cooperatively with our team members and our Union partners to try and adjust to accommodate those kind of things and all that to say it is not really any better.
Our continuous slog at this point in time, and it's not an NFC issue every single one of our competitor with anybody in our space has exactly the same dynamics and issues.
And we don't really expect to see a material change to the stability of the overall supply chain until we get into 2022.
Okay. That's very helpful. Thank you for that and just when we think about the replacement cycle of some of these transit bus.
<unk>.
There is an element or historically.
We thought that the battery costs would come down and that would make them more attractive versus the traditional ice ones now that with these cost pressures.
Unlikely that we will see the same sort of battery cost reductions that we saw previously has that changed something on the client front are the conversations that you have with clients around that.
No I don't think so I mean intuitively if the market was elastic or responding that quickly you could see.
Nice changes in shorter Windows, we don't have a market like that our customers are working to five or in some cases 10 year fleet replacement plans. They are continuing to buy ice conventional or hybrid vehicles to manage their fleets over the next 10 12 15 years at the same time they continue to as we've talked about in our statistics.
<unk> increased the percentage of zero emissions the government support that.
We've seen and talked about it whether it's Canada U S U K.
It reflects both the increased cost of zero emission bus, but also the reality of needs for charging and electrical infrastructure.
So I don't think we've seen any change in anybody's strategy or plans associated with the ultimate evolution to zero emission. There is still a legacy business that is that very strong and continues to operate and <unk> seen a couple of announcements recently from us around some significant CMG or even hybrid type orders.
But the price elasticity around battery pricing is going to continue to come down over the next 1235 years seven years, whatever that period is I don't think thats influencing buying.
In the short term at all.
Okay. Thank you and just one last one from my end when I look at the bids in process for you for Q2 Q3. This theres a quite a bit of crops. So I'm just I just wanted to get a sense. The recent bids that you've had you've got the reserves for whats. The results like are you still maintaining the market share is there something changing.
There or its just how it historically it has been trending the same way.
Yes, no we put that chart on slide 13 to try and help people understand.
And in some cases it might be possible to misinterpret. The number of active bids has continued to go up you'll remember that we don't submit a bid in a customer decides on it. The next day. They go through their evaluation processes. In some cases, there is face to face meetings and negotiations in some cases there is a.
A rebid or best and final offer type process and so forth. So the up and downs of the new bids coming in it really isn't all that significant you really got to add both the bids we've received in the bids we've submitted that total active is the real metric you should keep your eye on and it's actually up literally 10% or 11 months.
11% year over year, we're really encouraged about that because it reflects the average transit agencies views around okay. We continue to manage our way through Covid.
We've actually seen some positive movement over the last.
Let's call it three months or so around the recovery of ridership in the impact will that have on our transit agencies planning their roots in their fleets.
So we're actually seeing that seeing that as very positive keep in mind. If you add those two numbers together the bids in process or the bid submitted it as high as we've seen in the last five years, it's very encouraging from where we sit.
And now this is <unk>, just maybe maybe just to add to that one of the things. We may want to add is obviously from from our win rate perspective, we are seeing slightly better than historical.
And particularly in the Zeb.
Arena at the moment, especially in the new Flyer business, but again from.
From our perspective, obviously, not losing any market share as we kind of what we've been seeing in the last the last several months.
Okay. Thank you for the color I'll get back into queue. Thank you.
Thank you.
Your next question is from the line of <unk> Yang from TD Securities. Sir Your line is open.
Good morning, guys.
Yes.
Just a quick one on on the infrastructure solutions group.
Just in your release, you mentioned that you've completed nine projects. So far and then you have an additional 19 projects in different cities.
It seems like a pretty quick ramp up and would that be a precursor to order flow obviously the backlog.
It's growing.
Surgeons have bid universe is growing but just just a little bit more color on sort of where those 19 cities are and what's happening there.
It's a really good question and as you know Daryl.
We'll take have good credit on strategy and have almost being forced into the frustration of trying to deliver zero emission buses and operators may be not being ready on on the electrical infrastructure of the charging infrastructure side. So we cobbled together a team and now we've expanded that team had added some really solid resources.
To work with our customers not every customer is going to want the bus provider involved in the infrastructure Big cities, Toronto, New York, even auto loss, others are handing some of that charging infrastructure facility infrastructure over to their major utility agencies inside the states of the provinces smaller to medium size.
Operators are no question wanting a bit of a bundled solution to ensure that the bus and the electricity and the charge of work as a solution we call it a bit of an ecosystem not just a vehicle.
Hi.
It's an area that we're studying deeply it's an area that we're deploying more resources on.
Rough order today for every time, we have 10 bids for zero emission in North America.
Five five or six times out of 10, we've got a charging infrastructure offering to go with it.
We're working with all kinds of different sizes of agencies everything from Antelope Valley, a customer in California that is buying.
Mci electric coaches office to smaller agencies like Culver city or Knoxville at La Metro we have a project with them on a specific charge of one of the locations worked with Minneapolis Metro Rochester, Minnesota, St. Louis So its quite varied.
Clearly, it's a reflection of our view that the future for our business is not just about the bus it's about the bus and how it works inside the ecosystem and we're going to continue to participate in that so we're really pleased with the progress and performance of that team.
And I think maybe just a little bit to add there.
Again, it is a leading indicator of our zeb sales right.
Would you kind of is from our perspective and it does it is a positive sign that our customers are starting to get ready.
For those bus sales, which is obviously something we want.
Got you Okay, Great and then when you look at I mean, you said youre holding market share.
Would you see any shifts or changes in who those customers are for the Zeb orders I guess, just any transitory shifts or is it mostly.
People that bought NFIB buses in the past our buying.
Electric buses now.
Well as you know we've talked in the past the selection criteria for every customer is different.
There are many of our current customers that have.
In their selection criteria past performance.
The requirement to submit case studies or reference customers.
The ability to demonstrate performance at all of those kind of things.
Sitting in a really good position that we have a very wide distributed fleet with customers that have our past and our history in the relationship and of course in electric buses is as much as we'd like to think it's plug and play there. It's a very complex vehicle and so the need to have.
A very significant field service team infrastructure as well as partnerships with all of the major component suppliers are charging suppliers charging equipment suppliers and so forth that has been really really critical I wouldn't suggest that we've seen new types of customers or we've lost customers as we transition it will be.
The continued evolution of our business case studies goal, an awful long way, we've seen some really important bids where we proposed and won based on our track record and our performance of delivering zero emission buses and supporting we've also seen some of our competitors have some real challenges, whether it's structural issues range perform.
<unk> issues, and so forth, which goes back to the electric propulsion is an important part of the bus, but the reliability and performance of this but that's got Alaska.
$150 18, 20 years has been critical in some of those selections where we've won yes.
And I think one other thing to add to that is some of our early adoption in zeb, it's enabled us to sell to some customers who werent typical new flyer customers. So I think that's one that obviously there is a fairly big positive for us and the only thing I'd add Darryl is.
Obviously, North America, Great success story with the edge, but it's also been really good in international markets, So Ireland and New Zealand to markets, we werent in before and we made a pretty big entry through zero emission buses battery electric buses with ADL.
Got it okay. Thanks, guys I'll get back in queue.
The next question is from Cameron <unk> from National Bank Financial Your line is open.
Yeah. Thanks, very much good morning, I, just want to come back to the supply chain question again I'm. Just wondering if you can comment on how <unk> doing relative to some of your competitors on supply chain issue I guess, what I'm trying to get at is whether there is.
Any impact on your ability to win contracts here relative to other competitors that are maybe in a better or worse supply chain situation.
Good question Cam.
Back to that it's not a short term by decision those customers take.
810, 12 months to make a decision on a vehicle we haven't had a contract that we bid in one and been canceled because we can't get a bus.
Any faster than our competitors. So it's not elastic like that in terms of our customer pivoting to say, hey, somebody else can get it to its faster.
Customers have been tremendously supportive working with us to adjust.
Pre production meetings online inspection of vehicles post build inspection as well as acceptance and delivery and so that's been really really good and support from our customers our competitors, while they will have different supply chain for some parts of the bus.
The same issues apply.
Resins plastics.
Extrusion.
All the issue associated with micro chips all of those things are the electrical connectors are universal.
Challenges in manufacturing, let alone transit bus manufacturing our motor coach manufacturing.
We haven't seen any competitor will be able to make any delivery promises any different that we've been able to make if anything just our sheer size. We believe where we're slightly ahead in the queue in terms of those customer supplying to us.
David White, and our team who heads up supply he and his team continue to not only go to our suppliers physically now, but also moving down to tier two and tier three to help our suppliers in some cases small U S businesses to help them navigate and negotiate the supply chain.
So there's been no change in business demand or change in selection associated with a short term supply challenges or logistics challenges, we're all facing.
Okay, that's good to hear.
Second question for me just on the motor coach market I Wonder if you could just talk a bit about the trends youre seeing there and maybe more specifically comment on I guess, the the change in ownership or Greyhound I know that they have not been a major buyer of motor coaches from you in recent years anyway, but.
The buyer of that business Flix bus I believe has been doing a trial with one of your Mci electric coaches. So I just wonder if you could talk specifically about the potential opportunity there for you.
Well, it's a really good question candidates as we see.
First American now, Canada move up and people moving again.
And I'll admit caught us a little bit earlier than we expected in terms of the recovery of some of the motor coach now they are still in a world of hurt let's be honest the private motor coach operator, they did receive money in the last call. It three or four months associated with the cares Act the United States, which was very helpful for the ongoing support of those businesses.
We are pleasantly surprised cris started and his team on the Mci had done a really good job of.
Working down the excess fin.
Finished goods inventory that we had built up at the start of Covid.
Chris has actively now working at restarting the private motor coach manufacturing line in the first quarter of next year, which is a reflection of our view of the market confidence.
We are really pleased with our decision.
Hindsight 2020, but to eliminate the significant pre owned motor coach pool that we had.
Pre COVID-19 that at the beginning of Covid. We ended up liquidating. It has allowed Chris and his team to be way more flexible working with customers around.
Appropriate trade ins and costing of those vehicles and the value that we put them on our balance sheet. So we're.
Bullish might be a little bit too aggressive a word we're really comfortable with the pace of recovery of our private motor coach.
The second issue then you asked about is the flex plus acquisition of Greyhound Greyhound historically going back 10 years 20 years was a largely a motor coach fleet and then over the last five years 17 years, we really havent sold them other than some spare parts, we haven't sold a new motor coaches.
The decision for Flex bus, whose business model is not to own the assets, but to use private operators to perform those routes.
It's interesting now to see them actually moving into acquiring an operator, whether that stays that way or they migrated more back to that using the private operators. We have a number of motor coach operators that are bought coaches from us that operate on behalf of flex bus.
I think it's a positive for the industry that somebody like that that has turned the industry on its head a little bit with how tickets are sold how seats are reserved at the root structure the pricing and so forth is a positive sentiment that in America people are wanting to move then you've got a premier player like flex bus wanting to get deeper into the space.
So while we don't sell buses directly to greyhound our flix plus today, we're quite encouraged the impact that could have on the motor coach operators in North America.
Okay. That's very helpful. Thanks very much.
Thanks, Ken.
Your next question is from the line of MS. Maggie Macdougall from Stifel. Ma'am Your line is open.
Good morning.
Okay.
So first off can you guys elaborate a bit on the strength in the aftermarket.
Vision during Q3.
I saw that there was some retrofit program for Asia, and I'm wondering how much of that.
Would be attributable to what we saw produced in the quarter, and then whether or not that program will be continuing into Q4.
So first of all we've had two quarters in a row of kind of record aftermarket numbers, which is really positive.
For our business I think it reflects a couple of things. The fact that we have scale and size as the supply chain is ground.
Ground down everybody's inventories, we are in kind of the.
An enviable position of having the most inventory the widest distribution network and we're becoming in some cases clearly the place to go from a delivery and a performance perspective, I think I heard the other day, there's something like 80 coach is down in North America, or 80 buses and coaches down where we don't have a are the customer can't get a part to get that bus back on the road. So there's a.
<unk> of the operators now being impacted not just on the Dolby of new vehicles, but on spare parts and but we're in a really good position to be able support that which I think enhances the growth we've seen in that business.
The other reality is as I mentioned before as public transit agencies.
<unk> worked their way back to normal operating.
<unk> route structures and deployments that will help that has helped and then the second issue is now this recovery of the private motor coach operator, both in the U K, but also in North America has provided some.
Some growth in demand in.
The Asia Pacific Retrofit is a very specific program for a customer in Hong Kong. It is been going on for probably the better part of three quarters of the year it will blend into.
The fourth quarter at the beginning of next year, having said that.
That program is discrete we also bid on all kinds of upgrades retrofits midlife programs than we are.
Cautiously optimistic we'll be able to continue the growth of our parts business into 2022 and beyond.
Okay great.
And then just in terms of the timing around when the Winnipeg Crookston facility idled the announcement with needs timber.
Our 18th I believe.
In any event mid September where those facilities idled in September or did that occur in Q4.
So.
It's a really good question and maybe reflects we've got to continue to tell that story clear.
As you know from seeing our facility Maggie in the past, it's it's not a normal production line that is building the same unit very highly customized vehicles with.
Different design propulsion systems parts that go on those vehicles.
Varying the rate from.
40, a week to 30, a week is a very difficult dynamic because you have.
Significant degree of nonrecurring engineering or upfront engineering, you've got a supply chain machine. Then you have the direct labor on the shop floor and all the support infrastructure rather than shutting the volumes from our reducing them from 30 or 40 to 30 or 20 or whatever the number is what we decided to do is to have windows of idling and still run the plants at exactly the same.
Right, but have less work weeks. So we have been what Chris has been doing both at the motor coach facilities.
And the transit facilities in North America is selectively working with his teams and with the workforce to adjust certain days off or weeks off to still keep the normal production rate operating at the same cadence, but less actual workdays. So all that to say that is that actually happening since she is probably march of this year.
Here and Chris continues to manage that and we will do so through the first of the fourth quarter of this year and maybe into the first quarter of next year, Yes, and I think one of the things we may want to add to that Paul you kind of mentioned this so obviously, we had a little bit of idling in September and an additional in Q4, but again. These are all very short term decisions based on the availability of parts.
And evaluated the move the lines right. So that was really the majority of those decision points there.
Think of it as.
Think of it as not a reduction of production right think of it as using the old line entry days or no line entry weeks to idle the facility to let the supply chain catch up.
Right that makes a lot of sense.
So if I'm trying to think about margin and production throughput as we go through Q4.
<unk> of next year.
Key industry box manufacturing operations compare in terms of working days or percentages of overall days working however, you want to frame it versus prior quarters in 2020 and sorry in 2021.
Good that's helpful.
Yes.
I'm struggling a little bit to be able to I don't have the production schedule in front of me in terms of the sheer number of production dates I do know that you can follow up later.
Okay, Yeah, just just.
In the fourth quarter for example of this year, we will have in the new Flyer factories, we will have basically two weeks of non line entry. So 10 lost production days, but how that compares to each individual quarter or period previously I'm, sorry, I don't have that detail off top of my head, it's roughly comparable but let us get you the detail and we'll come back to it.
Okay and then one final question for me I noticed in your MD&A, It's Scott.
Kicking covenant waivers from your lenders.
I'm wondering if you can give us a bit of an overview in terms of what your debt obligations are in the upcoming.
Year and.
How.
Current negotiation.
Is going versus past negotiations just given that there.
There is a bunch of moving parts here with supply chain, you've obviously got a good mid to long term demand picture, but.
Really you need parts to be able to satisfy that demand picture.
So some.
Color on upcoming obligations and then and then how how you expect that negotiation to play out.
Sure. It's a great question and it's a really important issue for us.
As you know context, we immediately when Covid happened last year March of last year, we adjusted worked with the syndicate and adjusted the covenants. We did the same in December of last year and again, none of us knew whether we'd have wave 234 whatever of Covid.
And none of us could have predicted the ultimate impact on supply chain, because ironically, we didn't really have supply chain problems in 2020 or even the first quarter of 2021 to the magnitude we have today.
So our issue is not liquidity and borrowing capacity our issue is covenant calculation and of course with a soft Q3 and four this year and.
Projected relatively soft Q1, and Q2 of next year, our LTM will likely put us upside on some of those covenant calculations.
Credit Syndicate in our case is 11.
11 11.
11 out of 11 banks in the North American Syndicate, and there's two in the in the U K credit facility that we have so there is a process. We're working the banks have been incredibly supportive clearly their view is they're taking a long term view not a short term view and we're very comfortable and confident that we'll get all that sorted out before the end of the year in terms of how those.
Covenants need to look for the first.
Half our second half of next year, but it's not a liquidity dynamic we expect to be north of $400 million.
Liquidity by the end of the year based on the current receivable profile and delivery schedule that we have without having to do any real.
In terms of managing payables or managing any of our other commitments.
Yes, Maggie just to add to that just real quick I mean, you know this but we have $1 3 billion in capacity you could do the math with a $400 million that Paul kind of mentioned in liquidity.
Our bank groups are very supportive.
And we are having some of those discussions so.
Really I'm not seeing any kind of issues with getting that covenant relief and for next year if needed.
Okay. Thanks, very much guys.
Thanks Meg.
Your next question is from Jonathan Lamers from BMO capital markets. Sir Your line is open.
Good morning.
Hi, Jonathan.
Hi on the continuing supply chain problems.
From that day to day.
Team has been able to solve challenges on some parts.
I'm curious is there anything youre procurement team can really do given the limited number of suppliers.
Allow you to stage biomedical compliant.
Well, yes.
That's the reality Jonathan It give you some examples when coming says we can't get in engine, because we can't get all the connectors and components and microprocessors Theres nothing we can do other than continue to work with them with adjusting our schedules and working with our customers.
The other end of the spectrum is a plastic tanks.
Tank Thats got some kind of a sensor on it.
Our team going out and working with that supplier figuring out how to maybe reverse or alternate engineer the part finding another supplier and within weeks, we solved that problem or within a month, we solve that problem.
The reality is we always have those issues and we were able to solve them with the appropriate lead time not to adjust historically adjust our production issues. The reality is the compounding issues today make that much harder.
So we solved the Def tank problem. Another one David's team is running around.
The vast majority of the connectors that are on electrical harnesses are coming from China and of course, a bunch of them are either on route or sitting in containers or somewhere in parts. So the ability to work with different kinds of suppliers, whether it be domestic or international to come up with alternate source to get them to our wiring harness suppliers to get there.
To get that wiring harness.
Just the the ugly reality of todays blocking and tackling we don't see those as long term systemic issues. It is a reality in the short term.
The other biggest issue is Christmas decision to govern the inputs because what we don't want is what we had in 2018 and 19, where we had supply from our own <unk> facility that created parking lot full of unfinished buses and which just sucks up working capital and then the other reality.
Every hour that we missed on installing a part of the production line. There is three or four hours of retrofit time in the parking lot or in the field and thats very expensive its very disruptive and has a direct correlation back on how we can efficiently run this stuff going through the product line.
So as tough as it was from our people and our productivity and a cost perspective, I think Chris made the right decision to govern the capacity in the short term while that supply chain goes and manages and works with individual suppliers I can't I can't stress how accommodating.
The customer base has been they get it they get the reality of what the pandemic has had on us and them, but also the supply chain and so we'll just continue to manage through that as I think you took.
From our numbers that are speaking notes this morning, Jonathan.
The number of Rfps the number of competition the quantity of units the support of the funding is really really encouraging.
The issue is we just got to continue to manage from here to there and we believe there is the second half of next year just in what we're seeing in terms of recent awards and Rfps on the Street.
Thanks.
And one follow up question.
Yes.
Relation on.
Basic components as unusually high over the coming quarters.
Well, new flyer be able to pass that on through the normal inflation adjustments built into the orders or will you need to reopen some previous contracts to protect your margins.
Well.
It's a really good question, but applies differently in every single case in.
New Flyers case, what we're building today was priced a year ago and what it has is half or 60% of that bus has a specific quote from a supplier of the engine cost is the transmission cost is the window cost is.
Theres no question been increase our freight surcharges or price escalation on certain commodities in the vehicle and so we continue to manage that on a day by day basis, but it hasnt has and doesn't have and that we don't expect it to have a material impact on our gross margin on future business. Obviously are we are.
<unk>.
Cost increases in when we're converting options, there's PPI indices and the vast majority of our contracts to allow us to cover any of those cost increases or where we're bidding for new work, we're reflecting the current cost of those materials.
So there is no question and impacting our business, we don't see it as a material impact in the short term and if anything our price will be reflected in the future based on the inflation of that cost and the purchase price indexes that we have the private markets are a little bit different in terms of what we do in Alexander Dennis or in the private motor coach.
Where we're negotiating a price but in those cases, the negotiations are far closer to the time at which we build the product as opposed to having a year long priced out there with a cost increase in the in the time it takes.
So an issue, but I don't see it as a major issue.
I think Jonathan you also on ORP. The PPI index is very high. So we are able to pass that on is our viewpoint.
Great.
Thanks for the comments.
As of the credit negotiations.
Could you update us on how the board is thinking about the dividend in the context of the.
Discussions with our lending syndicate.
Yes, it's a good question and the board continues to believe that the us.
As a management team that a dividend is an important historical part a and part of the core reason why people invest in our business, it's not the be all and all but it is an important part of our story.
We recently as you know.
<unk> that dividend.
The discussion with the board and the banks not with the Covenant discussions notwithstanding is that we continued the board is fully supportive continue to want to be a dividend paying business.
Okay. Thanks for your comments.
Thanks, John.
I am showing no further questions at this time I would now like to turn the conference back to Mr. Stephen King.
Okay. Thank you Haynesville, we only had one question I think on our webcast and I think from Carol than beverage guys. It was about the private coach market. I think you addressed that earlier. So I think we've answered that question in Haynesville I just wanted to make sure before we wrap up Chris Murray had.
You mentioned to me you might have a question, but if he's on the line then we will close out.
I am not showing him keyless I'll quick question on the line Sir.
Okay, Alright, well, we will end it there thanks to everyone for your questions and for joining us today on the webcast or via the call. All materials are on our website and we look forward to talking to you again soon thanks and have a great day.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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