Q2 2022 NFI Group Inc Earnings Call
Good day and thank you for standing by. Welcome to the NFI second quarter 2022 financial results call. At this time, all participants are in a listen only mode. After this speaker's presentation, there will be a question and answer session to participate, simply press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Thank you for your time.
only chief financial officer.
Today we will walk through our quarterly results and provide our outlook for 2022 and beyond. This call is being recorded and a replay will be made available shortly. We will be using a presentation that can be found in the investor section of our website, and we will be moving the slides via the webcast link.
And we will also call out this slide number as we go to the deck for participants on the phone.
On this morning's call, Paul will give us a brief update on his return. Brian will walk us through milestones and major activities from the quarter, and then for PAPASA we'll discuss our financial results. Paul will close it with our outlook.
Starting with slide two, I would 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 from those expected? Please also note that certain financial measures used on today's call do not have standardized meanings prescribed by international financial reporting standards.
and therefore may not be comparable to similar measures presented by other practitioners.
You are advised to review the risk factors found in NFI's press releases and other public filings on CDAR for more details.
We also want to remind listeners that NFI's financial statements are presented in US dollars to complete functional currency. All the amounts referred to are US dollars unless other Web notes.
On slide 3, we've included some key terms and definitions referred to in this presentation. Of note, zero-emission buses, or ZEVs, consist of battery electric, hydrogen fuel cell electric, and trolley electric buses.
Equivalent units or EUs is a term we used for both production slots and delivery statistics. The majority of our vehicles represent one equivalent unit.
while an articulated 60-foot transit bus takes two production slots and is therefore equal to two equivalent units.
Slide 4. For those of you who are new to the Annabelle Story, we are a leading independent global provider of sustainable bus and coach solutions. We are leaders in our core markets, which includes heavy duty transit, coach and aftermarket in North America, heavy duty transit and aftermarket in the United Kingdom and the world leader in double deck transit bus. Slide 4. For those of you who are new to the Annabelle Story, we are a leading independent global provider of sustainable bus and coach and aftermarket in the United Kingdom and the world leader.
Turning to slide five, our purpose and mission is simple. We exist to move people. Very simply, our products transport precious cargo. We are focused on designing, building, and delivering exceptional, safe, and turnkey mobility solutions.
We made our sustainability pledge in 2006 and it still holds today. A better product, a better workplace, a better world.
We have implemented numerous ESG events, full details of our full various ESG initiatives, including our Diversity, Equity and Inclusion Survey and our Material Map and In Exercise. We're outlining our fourth annual ESG report. We're outlining our fourth annual ESG report.
which was released in May 2022 and is available on our website.
Slide 6 is critically important to the shows the breadth of our full offering. Anify solutions include vehicles, charging infrastructure, connected buses and coaches, telematics, after-market parts and service, and financing.
We are truly a partner of choice for Bunk & Coach customers, offering comprehensive and customizable solutions.
I'll now pass the call over to Paul.
Thanks, Stephen. Morning everyone. I'm on slide 7. It is great to be back after a brief medical leave.
the ability to take time away from these past few months to focus on my health has been very important.
you
I'm actually grateful.
to Brian Tobin, the Board of Directors, to Brian Duszup, my fellow executives, and the entire NFI team for their continued hard work and dedication during my absence.
Please report I'm down 21 pounds not quite at my wife's target yet, but I'm on it and I've been cleared by my health care team to return full time
with a plan in place to ensure my continued well-being going forward.
So my deepest thanks, Brian . A dusent president of our NFI parts business for running his business and stepping in my shoes for leadership and guidance, acting in president and CEO for my absence. I'm not acting in president and CEO for my absence.
NFI was in great hands with Brian and the rest of the exec team and they navigated through the temporary build-up of working process inventory and we're closing with the passos and others on his finance team and Steven.
in completing amendments to our credit agreement.
As I have just returned to work yesterday, it's probably more appropriate for Brian now to walk us through the highlights of the course.
Thanks for all. Turn this to slide eight, and we'll summarize the quarter.
Q2 is similar to Q1 with continued impacts of global supply chain disruption and heightened inflation. While our results reflect these realities, they also highlight the strong demand for market leading products and services.
In the quarter, we received new orders for 1,348 EUs recorded a book to Bill Ray's show of 158 percent. record a book to Bill Ray's show of 158 percent.
through our backlog by 9%, up to 9,674 e-uses.
a 5.5 billion. And we had another 1098 use and bid award pending, which means we've been notified of an award by customers to wait for formal contractual documents.
Once they're received, they'll be recognized as awards in the third quarter. So we'll see another period of significant awards and new orders, which we expect to deliver more backlog growth.
And if I had not only been successful in securing new orders, but we also witnessed our North American public bid environment continue to grow. At the end of the second quarter, there were 7582 EU's in active bid. On the 1st quarter, there were 7582 EU's in active bid.
out for procurement and 29,147 to use in our total North American public did universe.
which measures active bids plus a five-year outlook for demand based on agency and operator's fleet replacement plans.
On the zero emission bus front, we received orders from another 325 EUs representing 24% of new firm and option orders.
Our total backlog is now made up of 1,900 EUs of zero-emission buses, which equates to a record 20% of total backlog.
11% of our deliveries in the second quarter were zero-emission buses.
compared to 8% in the second quarter of 2021. And our total public bid universe is now 51% zero-emission. All signs of the transition to zero-emission buses is well underway and will continue to advance.
Our aftermarket business saw revenue decline year over year, with the second quarter of 2021 being a difficult comparative as we delivered record revenue in that period with a major retrofit program in Asia Pacific, plus heightened sales in North America.
We will see continued volumes from that RETRARFFER program in 2022 that at a lower run rate than we had experienced in 2021. RETRARFFER program in 2021.
Second, order-sauce improvement in certain parts of supply-related challenges with the majority of disruption in missing components coming from electronics and micro-professor-related components.
While there have been issues, our sourcing and supply team has been doing a masterful job navigating through these challenges and creatively mitigating issues as they arise.
We'll provide an update on our module shortage, we'll build up a delivery plan in a later slide. We'll build up a delivery plan in a later slide.
Turning to slide 9, we highlight some of the major wins that our teams have achieved in the quarter, including 733 EUs added to backlog from the Toronto Transit Commissioner TTC. Our first major win.
in that market in over a decade. In addition, you can hear numerous smaller EV awards growing our battery, you can feel so electric footprint throughout North America and the UK. It's throughout North America and the UK.
During the quarter, the TTC issued findings from their electric vehicle evaluation program that found NFIs battery electric buses delivered the highest performance when compared to two other vehicle manufacturers across a wide range of evaluation criteria.
On slide 10, we saw a backlog in second quarter 2022 deliveries. We saw another quarter of backlog growth with firm orders representing 45% of our backlog and option backlog extending to 2027, providing both near and long-term visibility. In total, our backlog grew by 9% from the first quarter of 2022 and 18% year-to-year.
At the bottom of the slide, you can see that all our segments experienced year-over-year decline in deliveries. This reflects the supply chain challenges we saw in 2022 that we did not experience in 2021.
We've added slide 11 to provide an update on the impact of inflation on our backlog. At the end of the second quarter in 2022, firm orders were 45% of our backlog while option orders were 55%.
Generally, our firm orders are manufactured and delivered within 12 to 18 months of an award being received.
Make our original bid we will attain pricing for approximately 50% of the vehicles components from our flyers.
that they're often specified by the cost of.
For many other non-specified components, we'll use internal sources including carfair for fiberglass.
we use internal sources including carfare for fiberglass and KMG for things.
but overradiation by the
of education, electrical kit assembly and plastic were
We make estimates for inflation between the time of award and manufacturing in our contracts.
Given the rapidly increasing levels of inflation and surge charges being passed on to ocean suppliers.
Actual costs have exceeded our estimates on some current contracts that have been prior to 2022. Actual costs have exceeded our estimates on some current contracts on some current contracts. Actual costs have exceeded our estimates on some current contracts. Actual costs have exceeded our estimates on some current contracts. Actual costs have exceeded our estimates on some current contracts. you.
for the contracts impacted by this.
We've been discussing price adjustments with customers and are often negotiating relief with suppliers wherever possible.
During the quarter, our new flyer business will launch a detailed program with surcharge letters distributed to customers who have fixed contracts who do not have purchase price index or PPI clauses.
reflecting the price increases we've seen from suppliers.
We have seen success with these efforts and we expect they will help offset some of the margin pressure we're facing.
Our financial guidance for 2020 reflects the adverse impacts of inflation with improved March and anticipated in 2023.
We've also been working closely with customers in various jurisdictions to discuss prepayments or deposit on vehicles that have and will help alleviate some of the working capital investments that are required by NFI. We've also been working closely with customers in various jurisdictions to discuss prepayments We've also been working closely with customers
We've seen success on these initiatives and some large deposits already received and other customers investigating potential prepaints.
for vehicle.
For vehicles and aftermarket parts contracts that are currently included, we've increased the inflation adjustment in our contracts to reflect the macro environment and increase pricing and searchers we're seeing from suppliers.
Inflation on option orders is a different situation. For the majority of our option orders, when a customer executes on an option, there's a repricing that factors in producer price indices, TBI is for short. Inflation on option orders is a different situation.
Contracts that have DPI adjustments.
will add a price increase when the option is awarded, which helps us include the impact of inflation into future contracts and protects our margins from downside inflationary pressures.
On slide 12, we provided a summary of the workaround plan to address our microprocessor shortage. Disgust in detail in last quarter's call. As per the plan, we're building and holding vehicles that are missing a specific control module as we wait to apply of microprocessors that will be installed into the module. At which point, the buses can be completed and delivered.
Turning to slide 13.
This module workaround plan has been proceeding well to both our plan and schedule. We have produced approximately 117 buses, which are park and secure locations and are complete saved for the addition of the required modules. The required modules. The required modules. The required modules. The required modules.
These vehicles added $57 million to our total WIP at the end of the second quarter.
During July , we continue to build up module-related wish as we await a large delivery of microprocessors in August .
Our team has been meeting regularly with both the module supplier and the microprocessor supplier, and we've been assured that supply is on target over the next few weeks.
Once the modules are received, installation of the new modules will take approximately fort five hours of service time per bus. Once the modules are installed, the module will be installed. Once the modules are installed, Once the modules are installed, the module will be installed. Once the modules are installed, Once the modules are installed, Once you have installed the module will be installed. Once the modules are installed, you
These fully completed buses will be driven to customers when they will complete a final inspection and ultimately be recorded as red. The buses will be driven to customers when they will complete a final inspection and ultimately be recorded as red.
We anticipate that the work in process buses will start to flow to customers later in August with nearly all being delivered by year end.
We may see some vehicles get delivered in early 2023 and anticipate significant cash conversion from these vehicles in Q1 2023.
In addition, the team has also been developing our next generation control module that will use the different, more readily available micro-processing.
This new module is now in production and it's being installed on some new vehicle film. And it's being installed on some new vehicle film.
The new module provides additional supply redundancy.
lower the risk of future disruption.
That's the possible success shortly.
NFI has more than sufficient liquidity to support the temporary bill.
work across this inventory as we execute on this plan.
On slide 14.
We've provided an update to the supply chain challenge which the company has been experiencing in mid-economy. The company has been experiencing in mid-economy.
The quantity of high-risk severe impact suppliers is decreasing, while the number of high and moderate-risk suppliers remains elevated.
This analysis reflects the broader view that while overall supply chains are not seeing major improvements, it appears that we are through the worst of the disruption.
We've also seen some initial signs that recessionary impacts in the broader economy may be helping the lower demand and inflation. We've seen some initial signs that recessionary impacts in the broader economy
Given the expectations and supply chains will see improvements during late 2022 and into the first half of 2023, we will soon begin the process of ramping up our weekly production run rates.
This is not a simple process and we're taking a mini-grid whereby we add production of 1 to 2 additional vehicles a week with expectations that we'll be able to get back to pre-pandemic run rates by late 2023.
I'll now turn the call over to positive summarize the financial results.
Thanks, Brian . Turning to slide 15, we highlight some of our key metrics. As Brian mentioned, the quarter-saw significant challenges from supply chain disruption and ongoing COVID-19 pandemic that led to heightened inflation, lower production, and reduced overhead cost absorption.
In summary, sales were down 38% year over year.
adjusted EBITDA was negative 23.1 million with positive adjusted EBITDA in the aftermarket segment offset by negative adjusted EBITDA in the manufacturing segment.
Negative EPS and adjusted EPS of 74 per sense per share respectively.
Our ending liquidity was strong at $628 million, an improvement of over $200 million from the last quarter of 2021.
liquidity was down from the fourth quarter of 2021, representing typical seasonality and the slight increase in work and process inventory buildup stemming from supply challenges. California
It is important to note that at the end of the second quarter, our credit facilities require that we maintain a minimum liquidity of 300 million. Under the new amendments, this is declined to a minimum liquidity of 250 million.
I'll note that our liquidity declined slightly in July , with a closing position of approximately $540 million, reflecting further investment in work and process inventory made in July to address the module shortages that we expect to alleviate starting in late August .
on slide 16.
reconcil net earnings.
to adjusted net earnings.
In the quarter, net earnings were impacted by the same items that impacted the Justice EBITDA, plus restructuring costs relating to the ongoing closure of our PEMINA MCI facility.
and settlement of a lawsuit.
Offsetting some of these negatives where fair market value gain from our interest rate swaps we currently have two swaps in place, one for 560 million at 2.27% and another for 200 million at 0.24%. With increases in base interest rates in Canada and the US we had a gain for which we normalize. The chart on the bottom of this slide walks through the normalizations made year to date in 2022.
Turning to slide 17, we are pleased to provide a summary of the amendments to our senior revolving credit facility, also known as a revolver and our 50 million pound revolving UK credit facility announced on Friday last week.
These amendments come after detailed discussions with all of our banking partners who provided unanimous consent after reviewing our long-term financial projections and the benefits we expect to realize from demand growth and our cost reduction efforts. Thank you to our banking partners for their strong commitment to NFI.
Under the terms of the men and facilities, the total leverage ratio, TLR, and interest coverage ratio, or ICER, has been relaxed for the remainder of 2022 and for fiscal 2023. And if I will have to meet three additional covenants, minimum cumulative adjustity of a dot, minimum liquidity, and net debt decapitalization, based upon different time frames without wind and the take.
There may have been some confusion on the net debt to capitalization calculations, so just to clarify, this covenant does not include convertible adventures in the numerator. And the denominator includes borrowing on the credit facilities plus shareholder's equity.
Details of the amendments to the credit facilities can be found in the press release dated July 29, 2022. The updated documents will be posted on CDAR in the near term.
These amendments provide covenant relief and additional flexibility and allow NFI to move forward in a stronger position as we ramp up production later this year and capitalize on our growing backlog in order.
On slide 18, we provide a brief update on NFI Forward.
in the second quarter of 2022.
NFI Forward relies on the Justice EBITDA savings of 15 million and an additional 0.8 million in free cashable savings. We are pleased to report that we now expect to achieve our NFI Forward target of the Justice EBITDA savings of 67 million from 2019 levels by the end of 2022, one year earlier than our original target of the end of 2023. With the majority of the original NFI Forward projects complete, we are now implementing a series of additional projects called NFI Forward 2.0.
that is expected to generate additional annualized adjusted even our savings in 2023 and beyond. On
NFI Forward 2.0 will be smaller in scale and financial impact when compared to the original NFI Forward initiatives.
Expecter to generate somewhere in the range of 5 million to 8 million in annual saving.
from one time capital investment of 8 million to 10 million.
NFI Forward includes the integration of Delaware Parts Distribution Facility and the Legacy Parts Warehouse of NABI that NFI acquired in 2013 into our existing NFI Parts footprint during the third quarter of 2022.
and the closure of an MCI Coast Manufacturing Facility and Pemana, North Dakota by the end of 2022. Thank you.
Slide 19 outlines our guidance for 2022.
We adjusted this guidance in April 2022 to reflect year-to-date results and the impact of the module shortages and the heightened inflation on our operations.
As outlined on the slide, we reiterate our anticipated guidance of $2.3 billion to $2.6 billion in revenue.
with 20 to 25% of manufacturing sales coming from ZEBs.
by Justin Ybidah of 15 to 45 million. We have updated our guidance for cash capital expenditures for 2020 with an anticipated spend of 35 to 45 million in response to investments by the company Electric Innovation Projects, both battery and fuel cell electric for our ADL business and international markets and other EV growth projects in our North American business. We are now in our North American business.
Turning to slide 20, we provide some details on revenue and adjust the EBITDA distribution from the first and second halves of the year. Turning to slide 20, we provide some details on revenue and adjust the EBITDA distribution from the first and second halves of the year. Turning to slide 20, we provide some details on revenue and adjust the EBITDA distribution from the first and second halves of the year. Turning to slide 20, we provide some details on revenue and adjust the EBITDA distribution
We expect that the third quarter, similar to the first and second, will see negative adjusted EBITDA as that period is impacted by supply chain disruptions and temporary buildup of WIP inventory.
The fourth quarter, however, is forecast to deliver positive adjusted EBITDA as we ship buses that were missing modules, benefit from improved battery supply, and see the typically strong seasonality of ADL and MCI from private customer sales. I'll now turn the call over to Paul to provide insights on our outlook.
Thank you Brian and Papsu for the updates.
I'm now on slide 21.
As we've noted, our public bid universe continues to grow and we now have 4,477 equivalent units of bids in process and another 3,105 EUs of bids already submitted for a total of 7,582 active bids which will drive new orders and awards in the coming months.
Longer term, we seek over 21,500 EU's potential opportunities as identified by our customers from our five-year universe. And in total, our public bid universe, now at new record levels of 29,147 EU's, with 51% of those being zero emission buses. And in total, we seek over 21,500 EU's, with 51% of those being zero emission buses. And in total, we seek over 21,500 EU's, with 51% of those being zero emission buses. And in total, we seek over 21,500 EU's, with 51% of those being zero emission buses.
Recall that zero mission buses have driven higher revenue pre-unit and better margins for NFI.
We have seen some early steps as well on ridership really starting to recover, with APTEM reporting an approximate increase of 60% in average weekly trans ridership in the United States for the first 26 weeks of 2022, as compared to the first 26 weeks of 2021. We're pleased to see ridership increases as travel resumes, office reopen and people start to move again.
This will assist our customers fair box revenues, lower congestion and emissions. And while ridership is very important, keep in mind the primary driver of public transportation in the United States and Canada is federal, state or provincial and municipal funding, which is very strong.
On slide 22, we summarize the major investments we've made in public and the public transit by the governments in all of our core markets.
We've recapped these numbers before, so I won't go through in detail.
but we will continue to see the flow of these funds translating into new and larger bids and orders that will drive future revenue growth. I'll highlight that the low or no emission grant programs called low no in the United States aimed at driving zero mission bus adoption will see grants of 1.2 billion in the US in 2022 and these wars are expected to be released later in the third quarter. and these wars are expected to be released later in the third quarter.
New Flyer was the leading partner on Loneal Grants with Transit Agency last year at 2021 and very encouraged for 2022 awards. 2020 Tun? Award
On slide 23, while our deliveries have been suppressed by supply chain disruptions, greatly you've been well described by Brian earlier, our book to build has continued to grow with a second quarter of 2022 above 150%, positioning us well for the future. In the last 24 days, with wait I hope the data is ???????? Ladme, Thank you.
On slide 24, we recap our 2025 financial targets.
Despite COVID and the latest bi-chain challenges, we remain committed to delivering on those targets.
The achievement of these targets does not require fundamental changes to our business, as we already have the facilities, we have the products and are already investing in new product development, and we have the service and support infrastructure and part support business to achieve them. With improvements in supply chain, we see a clear path to the $4 to $450 million of adjusted EBITDA still by 2025, coming from the growth of zero emission bus sales, additional contributions from Parbok and ADL, continued strong performance of our active market business.
and the realization that the pastor described of our NFI forward savings, which you've already heard about and which is now close to our original 67 million target one year early.
Finally, on slide 25, we recap the NFI Investment Thesis.
While the past two years have been extremely challenged and require that we revise our guidance and recovery expectations.
We remain focused on the long term and delivery to all of our stakeholders.
We just announced the very support of credit facility Co bunun relief last week.
And I want to add my thanks to all of the Syndicate members, 11 banks, which at the end of the day, provided unanimous support and the mass consent for this new agreement. And we look forward to finishing the second half of 22 stronger. 2023 looks to be a significant recovery year. As we benefit from the record demand and backlog growth, that has given us excellent visibility into our planned delivery.
In fact, in our public transit business, we are now recovering to very close to our original time horizons for pre-production.
very encouraging from a supply chain, an engineering, and an operational perspective. And while supply chain improvement remains a current headwind,
I'll comment and clarify, we have 98-97% of the parts, we still have anything with a microprocessor or electrical components as the problem. There have been some positive signs that the worst is now over.
While there are near-term challenges, the tailwinds that support our success continue to increase in both intensity and quantity.
New orders increasing bid activity, recovery of private travel, rising ridership rates, and lifting of various COVID-19 mandates, the role of government funding and the continued advance of our zero-mission leadership strategy will drive an advice future.
As we close, I just want to iterate my excitement about getting back in the chair, and that I'm looking forward to helping our team complete the delivery of the buses impacted by the module. In hindsight, clearly the right strategy to build, hold, and then deliver buses to our customers and other supply shortages. Our customers, I'll be working with Chris and team on our customers on surcharges and delivery schedule adjustments, and we want to deliver on our strategic goal of continuing to lead our allowed traffic coverage to business Nit night when pickup? is just FREE!pm
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COVID and its resulting supply chain has impacted everything.
And as I've always said to our team, we're excited about the path we're on in the future in front of us.
We lead this industry and we will see strong recovery in 2023.
and that will drive future growth as we get back on the path to our 2025 targets.
We have a great group of people. We have solid leadership.
that has brewed oil and committed to NFI through.
the toughest times in our history of our company.
Our business leaders, Chris Stoddart, Paul Davies, Brian Dusenup, and our functional executives have all and continues to drive this recovery. I'd now like to turn the call back over to Stephen to provide directions for the Q&A portion of the call. Over to you, Stephen.
Thanks Paul. I will now open the line for analyst questions. Attendees who are listening via the webcast link can type their questions to management, which we are able to review and read aloud. Carmen, I will now ask you to open up the analyst questions and provide instructions to our callers.
Certainly, thank you. And as a reminder to ask the questions via phone, simply press star 11 on your telephone.
one moment while we compile the Q&A roster.
We do have a question from Chris Moray with ATB Capital Markets. Please go ahead.
Yeah, thanks folks. Good morning. Maybe turning back to slide 20 and just maybe...
looking at the near term and how to walk through this. I don't know if you want to take this one, but I guess what I'm trying to make sure we're understanding correctly is just the cadence as we go through Q3 and Q4. And I guess, you know, just your confidence in that supply chain and those module deliveries and anything else we should be maybe thinking about at this particular point. And I guess along those, you know, you did talk about can spill into 23. So maybe you can elaborate on that a little bit. That would be.
both the tier one supplier as well as the sub-suppliers on getting those modules in for the second half in August . And so that all is going well. We see some opportunities as well, perhaps in the broker market to supplement that. So we feel like we've got kind of belt suspenders on that plan. And we work really well with our customers to make sure that the buses were accepted in part. So the only thing left on. So the only thing left on.
on those really is the module installation. They'll be on the way to the customers. And then of course, that'll follow like cash conversion a little bit later. And you know, at this point, you know, we don't know we're gonna have 100% of those vehicles in 2022 as we indicated. We may have some spill in the 2023, but you know, the important milestone will be later this month as we begin to get the modules in and those buses start flowing to the customers. The
Yeah, the only thing I would add there, Chris, just to echo Brian's point, but the one thing I would add is we are starting to see some NXP chips on the broker market to try to help us support our module plan, which we were not seeing as much in the past. So that should at least kind of help solidify that plan that we're looking for for this year.
And I think, Chris, the one thing I'd add is the cadence Q3, Q4. I would say obviously Q4, heavy period, that's when we expect positive adjusted E, but I think we do expect.
Improvement in Q3 on the negative EBITDA style of things, but then Q4 obviously with the heaviest period as you look at it in the second half of 2022.
Okay, that's helpful. And then just going back to comment about thinking that you're gonna have a book to bill of above 100% for the next little while, probably through 22 and 23. I guess there's two pieces of this. One is the man side, but one is also the production side. So just trying to maybe frame this in a different way. I guess a couple of things. What are you thinking?
You know, when you say that, you know, is there a way to think about like what proportion of your full run rate are you thinking you're going to be able to achieve in 23 against that number? And certainly, you know, we can see the funding in transit and things like that. I appreciate that things like coach aren't necessarily in backlog, but it does go into the production rate. You know, how are you thinking about all the different facets of demand and ensure you have an important volume of authorized capital to support transit? And, you know, I think, you know, the the
as you get into that book to bill ratio and we think about the restart.
Yeah, so I think Chris, I'll start and then I'll pass it over to Brian . I think the way I would think about 2023 at the Book to Bill, obviously, as I mentioned here, we're gonna be ramping up production, but it's not a light switch. You can't just look it on overnight, so it's gonna take some time as we add kind of, you know, one or two units a week. We're gonna start that in late 2022, so we'll be starting that ramp up of production. And then that'll continue through 2023. And so I think what you will see is obviously deliveries will be increasing from where they are this year, as we get into the 2023.
in both transit business and the coach business with private market recovery, the ATL business with some UK recovery and then international markets. And then I think what you will also see, so obviously that'll have an impact of orders, or sorry, deliveries are getting higher, but orders we expect to continue to be high because as we referenced here in the presentation we get 7,500 units of active bids.
which are on the street right now, and government funding continues to flow. So what we've been seeing in 2022, there's a lot of cases, even if those bids get turned into orders, they're getting replaced with new active bids. So we're continuing to see active bids, and RFPs hit the streets, and I think our team is the busiest they've ever been in terms of the numbers of RFPs they're pursuing. So I think all that to say, our expectation of having booked a bill 100% is we get into 2023. So we're going to have to do all 100% to get into 2023.
I think the first half of the year is driven by, you know, continuing to see strong order demand with probably deliveries a little bit lower than where they're going to get to. And then by the end of the year, we'll see that acceleration of deliveries as we get our production rates back up.
And so Brian , I don't know if anything else.
Yeah, I think it was a great summary, Steve. And I think the couple of things I'd like to add to that, we talked in the call and we've talked a lot about the funding environment and bits. Yeah, the case is the animals are of some kind of really fresh Quebec and coast attacked them by crowd of environment and that's...
never been better in terms of the amount of funding that's out there and then we mentioned within the call about this low-no awards that will happen in those that will get released in August here and we will see.
you know how we fare there and we expect that that'll add you know a fair amount to the order intake as well and so when we look at that you know the funding we look at the low no we feel like the demand side is going to remain strong and that's what gives us you know the thoughts and which see the presentation. Hey Chris I pray saw the only thing I would add to that is I think what you know exactly what Brian and Steven said but a couple things right. You know we're looking at it again assuming the supply chain holds.
that in the second half of 2023, we would start getting back to kind of our full run rate in our thought process. Right? And our order book today supports us being able to ramp up to that. So, you know, if that helps at all.
Okay, no, that's helpful. Thanks, Kof.
Thank you. One moment for our next question.
We have a question from Cameron Dorgeson with National Bank Financial. Please proceed.
Thanks very much. Good morning.
So I just want to ask a question about the, I guess the inflation. I mean, if you've given us some good color here, it's sort of the 45% of the backlog that's firm that's more exposed to the inflation and we've had some success here. It sounds with some repricing or surchargers. Is there any way you can maybe quantify what percentage of that firm order backlog would have some degree of, I guess, call it relief from inflation?
Just trying to get a sense of how we sort of expect the next few quarters to kind of look like as you deliver here and this is the puts and takes on cost versus the offset on some of the re-pricing initiatives.
Yes, great question, Cameron. So, I mean, we don't give specific details, you know, exact disclosure amount, the amount of surcharge that we expect to get and what we're working on. But as we mentioned here, we are working with our customers on surcharge letters and working on, you know, payment payments, pre-payments and deposits. So that's really trying to, you know, go through that 45% of our backlog where we have the inflation exposure. I would say the most of the things where we have that exposure wouldn't be that full 45% because as we outlined here on the call...
There's things that we bid in 2020, 21 that we're building in 2022. And those are probably the contracts where we have the most exposure and the ones where we're trying to work with the customers on surcharges. The stuff that we bid in 22, that'll be built in 23 and maybe some of the 24 that's in the firm backlog, a lot of that now reflects kind of today's price and has the, have, you know, we built in either higher inflation or we built in, you know, the price that's appropriate for the customer. And you can see this somewhat in our appendix here.
Our slides on slide 27. You can see kind of that growing average price in the backlog. And as you can see, we're up to 600,000, and on coaches and 600,000 on transit bus. So you've seen that increase, and that's to reflect the higher price that we're seeing to reflect inflation impacts. So can give you the exact impact, that are sorry, the exact percentage of that 45, but I would say that, or through probably the worst of it, I would say that on inflation perspective, because this stuff that we bit in 2020-21,
that's fallen through 22. So that's why we say we expect to see Mars' improvement in 23, because we are working with customers on some stuff to get search charges for 22, but that's also going to impact 23 or 3. But that's also going to impact 23 or 3. But that's also going to impact 23 or 3.
Okay, no that's helpful. I just maybe secondly, I just wanna maybe get a sense of what working capital is gonna look like over the next couple of quarters. I mean, obviously built up some inventory here, but there's been some lots that's on higher payables, lower accounts receivable. So maybe just talk about the trend you expect from a working capital investment perspective over the next couple of quarters.
So I'll start and then I'll pass it over to Brian . So working cap, I think you're right there, as you saw obviously with deliveries coming down. Accounts receivable, we were making collections, and then expect the AR number. And then expect the AR number.
and grow as we get deliveries kind of through Q3 and into Q4. Inventory, obviously height and investment right now, 770 million. Inventory with a lot of that coming from that work and process inventory so the things we talked about with the temporary buildup of the modules.
We expect that to unwind, the majority of that to unwind by the end of the year, but as Brian mentioned on the call, it will probably see cash conversion more in Q1 2023. So I think what you will see from us in working cap, if you know a bit of, I would say a working cap investment in second half of 2022, and then a fairly large unwind, I would expect in Q1 2023.
So that's kind of the view I would take on working capital. Probably a bit of an investment in Q3, bit of an investment in Q4, and then an unwired and cute one. And then an unwired and cute one. And then an unwired and cute one.
I would agree with that.
Okay, no that explains it. Thanks very much.
Thank you. One moment for our next question, please.
Our next question comes from Kevin Chang with CIBC, please proceed.
Thanks for taking my question, Paul. Good to hear you on the call. Welcome back.
Thank you.
Maybe just on the AR question from Cam, I saw you sold 32 million of receivables in Q2. Just wondering, is that something you would look to lean on more as you get to the back half here to manage working capital or as you make deliveries and you're dealing with basically AAA customers and so they're going to pay you? Do you just kind of...
Live with the elevated working capital and just look forward to the cash conversion in Q1. Just try to get a sense of maybe how you look at that program as you manage through your working capital. You can get a sense of maybe how you manage through your working capital.
Yeah, so this is Papasu. I'll maybe start on this and I know Stephen and others may want to jump in, but at a very high level we have engaged, one of our banks came to us when we did our last credit agreement about potentially doing this. And so from our perspective, other banks are starting to come into play, so we will look to leverage that.
with at least two banks, hopefully in the near future. Okay, so that could be an additional source of liquidity, at least on a working cap line person, maybe, maybe if I look at historical seasonality, I'll show you something more.
That's helpful. Maybe just on the supply chain challenges, a lot of great details here. When I look at slide 14, it's obviously positive, but the high risk.
That's helpful. Maybe just on the supply chain challenges, a lot of great details here. When I look at slide 14, it's obviously positive that the high risk line is going down, but.
The moderate risk line is increasing. I guess, would you talk that up to a function of maybe management's attention on, on getting that high risk number down so maybe a little bit of sloppy agent?
And the rest of the supply base and maybe are there concerns that these moderate risks become each or high risks if they kind of stay at these levels? Just wonder how you think about maybe those both lives converging on a downward slope. And both lives converging on a downward slope.
I think if you looked up...
at our chart that we use internally. So it's like a nine block matrix that shows. So it's like a nine block matrix that shows.
You know high risk and high impact
basically the ones that got into the highest end of that, the top right of that chart, so highest risk, highest impact.
Some of them have gotten healthier and are moving down the chain from high risk to medium and ultimately hopefully we'll get into low risk.
There is still, as I mentioned in some of my comments, there is still tremendous uncertainty around anything with a microprocessor and frustrations around confidence and supply of anything that has electrical components associated with it.
A lot of the other parts that we were struggled with earlier this year and some maybe late last year have kind of worked their way out.
One of the problems we have unique to our business because of the bespoke nature of our products.
We don't have a defined supply chain for every bus. There's a lot of unique customization or unique product or elements that are put on those buses. So something that could be green today could be yellow, tomorrow, or red overnight.
We've always had that problem. We've always had that challenge to work our way with.
If David Winnery V. Supply was in the room, he'd say, we're in a much better position today than we were three months or six months ago. And we were three months or six months ago.
We still have issues with certain parts. We are still working at two, three, maybe sometimes four levels down the supply chain compared to where we used to be working. We are still working at two, three, maybe four levels down the supply chain We are still working at two, three,
We are now looking at different strategies for different parts. And so I'll be very simplistic, but rather than just six or seven days inventory across the board, maybe there's certain parts that we only need four days inventory and certain parts that will hold 15 or 20 days inventory.
So all those things continue to be fluid, but the bespoke nature of our product will always have that level of complexity. This is how that level of complexity is. This is how that level of complexity is.
You know, you can read a million articles or talk to a lot of people about microprocessor supply. We've just seen the United States government make a very significant investment or plan to invest in domestic supply, but that whole world is not going to change overnight. We still have issues and we'll continue to imagine where through it. I think what Chris and David have done with the whole issue with our VMM modules.
The build and hold the alternate or the next generation module development is the kind of things we're going to have to continue going forward to make sure that we have as much flexibility as possible.
We've just gone through a deeper review of all of our supply base and had a brewed it by an independent advisor, a really good review that says where we are able to do all source.
We've done that effectively.
where we are a spoke nature or batch buy or unique buy, we are still gonna be beholden to the health of the older off supply chain. the older off supply chain.
So, you know, a lot of words there, but.
We are really confident that we can execute through this this year.
Steven about the ramp up going into next year. We're not 100% of the words but we are much more comfortable with our ability to execute. The other issue of execution is people. The other issue of execution is people.
The slowdown in some areas of the economy that made it difficult to hire people in certain places where we operate is now helping us a little bit with retention or attraction of new people.
And what we've done throughout the last year is adjusted many of our locations' pay levels, compensation levels, to make sure that we are market competitive and can attract those people.
So our two biggest concerns were do we have the parts and will we have the people of recovery? We've come a long long way.
That's great, Colin. Obviously, a lot of thought being put towards this issue. Maybe last one for me and maybe along the same lines around kind of how you look at your supply chain. We are seeing a lot more OEMs, I guess, as part of their broader EV strategy, look to vertically integrate. And I think this week alone, we saw Nikola look to acquire Romeo is obviously something we hear from a lot of the passenger vehicle.
OEMs, is that something you think you'll need to pursue eventually? Do you feel that or do you feel that you'll be competitively disadvantaged versus other OEMs? If they're vertically integrated with their supply, the battery supply and you're not?
It's a really good question and it's a heavy, heavy issue that gets review on a regular basis in our business.
just some context around the Nikola acquisition of Romeo. Romeo is a battery packager, right? The cells come from somewhere else, whether it's Samsung or LG Chem or whoever, and they package. And in some cases, the packager will make the battery management software. In some cases, it's a third party. In some cases, it's the OEM.
As we've been saying probably for four or five years now, as we've got more and more zero-emission buses in our business.
and battery, not only battery electric, but also fuel cell electric.
We've chosen at this stage of our life cycle on those kind of components to be smart buyers, not to spend hundreds of millions of dollars to get into the packaging of batteries.
of battery cells in the batteries. There may come a time where we want to move down that path. It's still very fluid. Supply chain of the cells continues to get healthier. As you know, well, in the last year, dual source now, when we expect delivery of battery modules from a second source starting in the fourth quarter this year. At this stage of our lives, we think the best thing for us, given the visible nature of our business, continues to be smart buyers. And the ability to adapt and move.
quickly without having to make $100 million investments. All that to say, could we move down that path in the future? Maybe today we buy cell, we buy packaged cells or modules and we contract the battery management software. And we contract the battery management software.
you may see us move in that case in the future or you may see us partner a different way in the future. But dual sourcing and flexible buying today is the way we want to proceed with this.
That makes sense. Gentlemen, thank you for taking the time to answer my questions. Have a great rest of the week. Thank you. Thank you.
Thank you. One moment for our last question.
We have a question from Maggie MacTogel with Stifel, please go ahead.
Thank you.
Thank you. Good morning.
Hi, Meg. Hey, so my question this morning is around cost of goods sold inflation or parts inflation versus pricing.
What we've seen in a bunch of industries is that a lot of basic material cost inflation has sort of peaked in Q2 and is starting to roll over and companies implementing price increases, you know, following that trend may have some benefit. However, given, you know, parts supply shortages, I think it might be a bit skewed for you in terms of the timeline. So could you walk us through the proportion of your backlog?
that you're going to deliver into in the next, call it three quarters, that might be sort of playing a bit of catch up on increased inflation and basic materials. And when you think that benefit of pricing increases that you've been able to accomplish starts to accrue through the revenue line.
Yeah, sure. As we mentioned during the, this is Brian , as we mentioned during the call, we're in discussions right now with the number of our customers and what we do look... and what we do look...
you know, at the same charts and the same indices and we see some of the commodities starting to roll over and come down. We're not experiencing that in our cost base right now. And so our current situation is kind of ongoing discussions with a number of our customers about price adjustments as we see, you know, our costs at where they are as we look forward to kind of 2023. I think Stephen mentioned earlier, we mentioned earlier on the call that
you know, things that we did in 2022 included kind of the economics of 2022. And so we expect that, you know, our pricing and our costing will be where we would like it to be in 2023. And if we get any sort of reduction, you know, through kind of economics or these commodities is starting to go down, that'll just add to the margins in that timeframe. But we feel very good about the contracts that sit out in that timeframe and what we did in the last
number of months with regards to the kind of economics and where we sit today. Maggie is tall so just a little bit of color and we'll put our asterisk on my numbers and take them directional not exact. When we head through the rest of this year.
Almost everything that we're going to build and deliver by the end of the year, we know the price and we know the inflated cost that came through and Yes, we still get inflationary requests by our suppliers and so forth But as Brian said we are working with our customers into a lump set that stuff
As we head into 2023, approximately 20 to 30% of what we build will have been bid in a previous year, like previous to now, where we may have inflation that's not reflected in the price. Everything that we bid for the last three or four months and everything will bid throughout the rest of this year is now reflecting the current inflated cost base. It is now reflecting the current inflated cost base.
So if costs go down, we have an opportunity for some potential margin, enhancements or mitigation. Any contract that does have PPI indices, so when we are in a multi-year contract as we move to 2023, we will apply the indices at that time, which are now also at inflated levels of 10, 12, 30 percent that depend on the industry.
So our forecast, which is today at early stages relative to 2023, will not have the same kind of bid previously, hyperinflation on the cost and therefore exposure. I would, as I said before, maybe 20 or 30% of the stuff we're going to build next year has that kind of...
price at a certain level with an inflated cost base. The rest of it, we are very encouraged that the margins will recover to normal, if not slightly better levels going forward.
Okay, thank you very much. One more question. You've had to flex your manufacturing sort of throughput up and down quite a bit since the beginning of 2020. With closures and idle facilities and all of that kind of stuff, and I imagine it's been difficult to manage from a workforce perspective. Can you give us some insight into how you're dealing with your employees who I'm sure are highly valued?
progressively with our union partners where the facilities are unionized on schedules in some cases moving from five day work weeks to four day work weeks in some cases obviously you know laying people off, clung them back as we started to return to increase operating levels.
Chris and Brian and Janice Harper, ABPHR, have gone through and done benchmarking of wage rates in every one of our locations.
And so while we, like everybody else, had an element of the great resignation or an element of turnover where somebody in the last couple of years could get a job down the street higher, we now believe that we're at or better than market rate in terms of pay for all of our facilities, which has done a lot for retention and morale in the last little while. So our turnover rates are turning down and getting into a comfortable neighborhood.
We will be adding more people to our facilities as we grow through the fourth quarter of this year. And as Stephen alluded to earlier, getting up to kind of the return to the new run rates in the first half of next year. And so by adjusting those wage rates, I think we're going to be in a good place of hiring people with a certain skill base that we want to come into our businesses.
knock on wood, we haven't had maybe the same that other businesses have had on some of the professional turnover. Yes, we've lost some engineers. Yes, we've lost some supply people and so forth. We really haven't lost any.
Sales people are very few of the service infrastructure, which is so critical to our customers.
So, you know, COVID and its resulting issues like supply chain has been held for our workforce. We're just starting another cycle of employee satisfaction, you know, surveys and so forth. At this point, nothing tells us that we're, you know, wildly out of sync with what we need to do to be successful going forward. And quite honestly, I'm tremendously grateful for the loyalty and commitment of our leadership team, which we've lost very few people to. I'm very grateful for the opportunity to be a part of this. I'm very grateful for the opportunity to be able to help you. Thank you.
Okay, well thanks very much Paul. It's nice to hear your voice on the call. I'm glad to hear that you're feeling much better.
Thanks, Meg. Take care. Thank you.
Thank you. And that was our last queue. I will turn it back to Stephen King for any additional questions.
Yeah, so thanks, Calvin. We had a couple of questions for the webcast.
but it's from rock, never, let's go, should bank, why not? We're trying to join by the phone, we're trying to get a technical difficulty. We're trying to get a technical difficulty. We're trying to get a technical difficulty.
You previously said you expected to receive the required control modules in August , and now that August is here, what are you hearing from your supplier? Have you received any in advance? And can you also elaborate on the alternative module, the alternative chip, in the event there are further delays from the main supplier, could this alternative make up the gap?
Go ahead, Brian . Sure. Yeah, so as we talked a little bit earlier, our plan was always August . We're on that plan. Obviously, as we get closer to the plan, our confidence improves in that. Also mentioned that we've been active in the broker market to supplement that plan as well. So.
You know, we're a couple of weeks away and we feel very good about that and feel like we'll be able to begin working off the inventory and flesh that backlog. With regards to the alternate module design, we commissioned our first bus with that design a couple of weeks ago and, you know, it's still going through testing that everything is positive there. So we will have a second source for that and the component to be around that looks to be, you know, ample as well. So we'll now have two versions of our modules that we're able to use.
and feel very good about that supply over the second half of the year and our ability to execute on the the order book for the rest of 2022. A market just a little color or comment on that too.
One thing to get the modules, and as Brian had I think alluded earlier, four plus hours or so to put them in there, it's not like we could put a bus in a FedEx box and ship it overnight. So delivering two or 300 excess buses over a couple of months or whatever it works out to be, is not trivial. And part of the reason I was so alluded to delivering a rev rack in potentially bleeding over to 2023 isn't as much about putting the modules in, about getting them to our customer's locations.
network of that and then the brokers surrounding that has really been a yeoman's effort.
So that extra supply that we have been able to cure, I'll be at an inflated price.
We're treating today as not additive to our business, but insurance to make sure we can deliver to the schedule that we've put forth to the banks and that we've negotiated with our customers.
So as Brian said, we're on that plan that we highlighted in May.
And we're on schedule and we're committed to trying to deliver exactly as we don't line up at this point. As I say today, coming back, there is nothing that makes us feel that we can't deliver to that schedule. Okay. And our final online question comes from Julia Simone Rutgers. I apologize if I mispronounced her name. So we mentioned that there's federal state municipal funding or big drivers in North American transit to man, but noted that there were no grants received like zoos or other wage subsidy programs.
in 2022. Is NFI expecting to receive any grants from either US or Canada going forward? The second part of the question, following the TTC commitment and the TTC report, how does NFI view the Canadian market going forward? And I know there's been some big announcements, Winnipeg, Brent and other cities.
So the unique wage subsidy programs of, I think that's called the furlough scheme in the UK or the Canadian Emergency Wage subsidy or the Canadian Emergency Rent Subsidy Serves in Canada, we are no longer eligible for any of that. So we have nothing planned from a wage subsidy or grant or expected in 22 or 23 and beyond. So as far as we believe that ship has sailed. So as far as we believe that ship has sailed.
As far as the Canadian market, we actually started to see this probably in late 2020 and early 2021 where the federal government had done a couple of things. They have put money to work through the Canadian Infrastructure Bank to help with kind of changing the game on infrastructure investment as well as a higher investment in zero emission buses. And we've seen dedicated transit funding from the federal government. So the Canadian market actually has...
Quite an encouraging outlook over the next little while in terms of the fleet rejuvenation in Canada, with a serious commitment by the federal government on helping the provinces and the cities make that happen.
Almost without letting too many cats out of the bag to the point where today where we buy build shells in Canada and complete them in the transit space in the United States, Chris and his team is looking at scenarios of all Canadian builds going forward and those kinds of things to allow us to satisfy what we think to be a pretty encouraging Canadian market going forward.
All right, and that is it for all of our questions. Thanks everyone for joining today's call. I just will mention one thing. One new addition to our Investor Relations program. We now have a supplementary financial package, which is basically a large Excel file, which has all of our tables and all of our information from our MDNA financial statement.
which is also available on our website. Should anyone need that for modeling and analysis for our financial results? We have our financial results. We have our financial results. We have our financial results. We have our financial results.
And with that, we'll end the call. Thanks, everybody. Have a great day. Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating, and you may now disconnect.
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