Q1 2023 NFI Group Inc. Earnings Call

Yeah.

Good day and thank you for standing by welcome to the NFA Group first quarter 2023 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need a press.

Star one one on your telephone you will.

And then here an automated message advising you that your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Stephen King Vice President of strategy and Investor Relations. Please go ahead.

Thank you Michele good morning, everyone and welcome to <unk> group's first quarter 2023 results. This is Stephen King speaking on slide two you will see that joining me today are Paul <unk>.

<unk>, Chief Executive Officer, <unk>, Soni, Chief Financial Officer.

On today's call, we will provide financial results for the first quarter provide information on the record date and order environment and update on supply chain and our capital allocation priorities will also cover our longer term outlook and anticipated financial recovery.

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 investors section of our website, what we will be moving to slides via the webcast link we will also call out the slide number as we go through the deck for participants on the call.

Starting with slide three 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 youre 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 enterprise financial statements are presented in U S dollars, the company's reporting currency and all amounts referred to are in U S dollars unless otherwise noted one other item to note <unk> is retrospective.

Affectively adapted <unk> 17 for insurance contracts on January <unk> 2023, please refer to our MD&A for details of the impact of this adoption.

On slide four we've included some key terms and definitions referred to in this presentation of note zero emission buses or Zev consists of battery electric hydrogen fuel cell electric and trolley electric buses equivalent units or use the term you'll hear throughout our presentation.

<unk> and they represent both production slots and delivery statistics most of our vehicles represent one equivalent unit one articulated 60 foot transit bus takes two production slots and is therefore equivalent to to use.

Slide five six and seven provide a brief overview of <unk> for those of you new to the story interested listeners are encouraged to visit our investor website and listen to our 2022 Q4 results call for a more in depth introduction to our overall business.

<unk> continues to lead this evolution to zero emission or what we continue to lead the evolution to zero emission or what we call. Those evolutions slide eight provides statistics on our capabilities and performance in depth. The 2891 electric vehicles. We've delivered since 2015 have completed over $115 million Electric service models.

130 cities across six countries.

<unk> for electric vehicles continues to accelerate quickly in our North American bid universe over 50% of anticipated customer purchases over the next five years are expected to be for electric vehicles.

Now pass it over to Paul for possible, who will recap the company's financial resort results for the first quarter.

Thank you Steven and good morning, everyone I'll begin on slide 10, with a summary of our first quarter 2023, we.

We continue to see record demand for our products and services paired with the continued supply chain disruption and associated production efficiencies, but.

But we have seen and are experiencing encouraging signs of improvement on both fronts in the quarter manufacturing segment of bus and coach deliveries was up 20% and revenue up 18% with adjusted EBITDA up 42% from 2022.

The significant improvement in adjusted EBITDA is driven by improved volumes and enhanced product mix. We also had fewer legacy inflation impacted contracts that were originally bid in 2020 and 2021 in the first quarter and so while there was an overall improvement the manufacturing segment continues to be impacted by certain supply disruption as well as lower.

Expected zeb deliveries and legacy inflation impacted contracts.

Our work in process increased in the quarter in part due to typical seasonality, but also as a result of delays related to the installation of new drilling technology within the energy export enclosure systems for certain new Flyer battery electric buses in North America.

Initial work on the drains commenced in the second quarter and we expect to start delivery that impacted those vehicles late in the second quarter and they will continue through the second half of 2023.

Aftermarket continues to provide strong contribution with increases in revenue gross margin and adjusted EBITDA and with return on sales now of 21% this exceeded our expectations and to us as a sign of the strength of our leading aftermarket parts business in both North America, and the UK and Asia Pac regions.

As Stephen just talked about CEB metrics, and so I'll skip over to our demand environment, which after setting numerous records in 2022 achieved even newer and higher heights in 2023.

Year over year, our North American public bid universe is up 18% new orders to <unk> are up 33%.

And our active bids are up 99%, reaching 11066 equivalent units the highest number.

Quarterly active bids we've ever had.

We ended the first quarter of 2023 with 2833 units bidding process and another 8233 equivalent units bid submitted which we expect to translate into steady orders throughout the rest of this year and growing our backlog going forward.

Our backlog has now reached a staggering $6 7 billion.

Up from $4 9 billion at this time last year. It is our highest dollar value ever and <unk> is a steady demand environment for today for our short term order book and for our future on the next two slides, we will provide graphs that provide an update on the supply disruption in some of our associated inefficiencies as a result first.

On slide 11, our supplier is our supplier risk ratings. This data is compiled from a detailed risk assessment process that we've been doing for many years that monitors and evaluates the risk and potential impact of supplier disruption of NFS cop 750 suppliers. After a incredibly challenging period from late 2021.

All of 2022, we have now started to seeing positive signals and signs of improvement.

There are challenges that continue to persist and our supply chains on a few.

Fronts are not completely healthy we continue to take actions to improve parts availability and are experiencing improvements in on time deliveries from our suppliers. This supports our outlook to start the gradual ramp up production in the second half of 2023 as we planned.

Now these disruptions inform the graph on slide 12.

These are our quarterly vehicle line entry rates or otherwise stated the number of new buses and coach bills that we started in our production facilities each week and our quarterly working process dollar investment line entries should be in the 500 units a quarter range similar to 2019. The result of the pandemic and supply disruption are evidenced this data shows that our facilities.

We are extremely inefficient and our teams were frustrated that could not complete.

Vehicles includes growing our work in process of buses and coaches that we are missing certain parts and components and had to be retrofitted offline.

<unk> improved in the first quarter of 2023 to the highest levels. We've seen since early 2021, we now expect production to continue to scale slowly as we ramp ramp up in tandem with our supply chain improvements.

Yep.

Excuse me.

Throughout the second half of this year.

As you can see on slide 13, we have continued to take actions to improve parts availability.

We have had a meaningful impact on our production and position us well for our expected increase in vehicle production in the back half of this year, an amazing effort by our sourcing supply engineering operations teams in cooperation with our suppliers I'll now ask capacity to walk you through details of our financial results and after that I'll come back and provide an update on our <unk>.

Over to you for passengers.

Thanks, Paul picking up on slide 14, we outlined the backlog growth Paul discussed with 4910 to use a firm orders. We are essentially sold out 2003 production slots, albeit.

Lower production levels with good visibility into 2024, we now have options out to 2028, providing significant visibility for future years.

<unk> deliveries were flat with a heavy duty transit in response to continued supply challenges both motor coach and cutaway sales were up year over year illustrating signs of recovery in these markets. We also saw higher average sales price across all segments, reflecting our ongoing efforts to adjust contracts for inflation as well as the transition to higher.

<unk> zero emission vehicles on.

On slide 15, we provide key financial indicators adjusted EBITDA exceeded expectations at $7 4 million and free cash flow, while negative increased by $11 5 million or 29% year over year liquidity ended at $124 1 million down $19 4 million.

From the end of 2020 Q4, primarily due to increased drawing from our credit facilities to support increased working capital primarily parts inventory and offline buses that Paul mentioned.

Slide 16 shows our gross margins by quarter from 2019 through the first quarter of 2023.

Aftermarket saw some pressure in 2022 due to inflation and freight impact the significant improvement in the first quarter from our efforts to mitigate price increases and lower freight costs combined with improved economic conditions manufacturing margins appear to hit bottom in the second quarter of 2022 with steady improvement since.

Even as we continue to manage through the impacts of rapid inflation from contracts one of the previous year supply disruption and significant production inefficiencies.

On slide 17, we outlined the impact to our net loss and adjusted net loss or net loss for the quarter increased by $18 million from 2020 to Q1, primarily due to increased interest in financing costs. Adjusted net loss decreased after factoring in normalization for a fair market value loss, our interest rate swaps.

And the lower gain the cash conversion option related to our convertible debt.

On slide 19, we summarize our capital allocation priorities.

We're working diligently with our banking partners to complete the amended agreement as planned by the end of 2020 through Q2 and remain focused on cash management liquidity and strengthening our balance sheet. The proceeds from the Manitoba facility and the EDC facility received in January 2023 supported liquidity in accounts payable during the quarter.

West levels remain elevated, but we expect a reduction to start late in the second quarter as buses and coaches missing component in Ceb's, requiring a new train technology are completed and delivered these deliveries will continue through 2023.

As we advanced credit Amendment, we are exploring other potential opportunities to generate cash flows, including customer prepayments and capital market activities.

Our shelf prospectus was put in place to provide us optionality related to these activities.

Turning to slide 20, we provide an update on the credit timeline <unk>.

<unk> is pursuing multi year agreements that provide capacity flexibility and covenants match to our anticipated financial performance and recovery. We continued productive discussions with our senior credit Syndicate to advanced Amendment and hoped it out details of these efforts in the near term I will now turn the call back to Paul to discuss our outlook and financial guidance. Thank you.

So I'm now on slide 22, and I'll move quickly through the next few slides to explain the drivers in our recovery.

And that support our longer term outlook.

On slide 22, we provide summary of some of our key demand metrics. The chart shows a five year outlook from our North American bid universe, along with known and active bids.

After bids of our over 11000 equivalent units combined with a five year customer projected outlook for procurements at another 20100 are you providing a record total bid universe now of over 31000.

Quibbling units, which supports our view that vehicle demand will continue to remain high going forward.

Our infrastructure solutions business also continues to deliver and since inception has been responsible for the installation of 356 plug in and 35% on route charging project for over 58 customers with projects now under contract with 10 additional customers for 2023 through 2025. This is an important part of our business.

As it creates a turnkey offering of infrastructure and vehicles that help customers on their electrification journey.

On slide 23, we highlight another impressive quarter of wins with 1873 equivalent units of new orders for a total of 6200 <unk>.

New awards during the LTM period.

We reported numerous multi year orders from major Canadian and U S customers and significant zero emission orders from customers in the United Kingdom and Hong Kong. During the period. We also continue to see customers use state and other procurement schedules to help speed up their vehicle orders specifically in the United States.

On Slide 24, we show that these orders continue to drive our order book and our book to Bill ratio, which remains well above 100%.

We now expect the book to Bill to remain above 100 throughout all of 2023.

While option conversion rates on an LTM basis, we're a low of 21%. This is expected to be a temporary issue as we've seen numerous older internal combustion engine and legacy EDI orders expire being replaced with newer zero emission bus and new technology buses.

We anticipate that the conversions rates will improve dramatically as we move through 2023 and into 2024.

On slide 25, we provide a quick summary of our record government funding in each of the major markets in which we participate which continues to drive the heightened bid environment for more detailed overview of the funding environment for each of those unique markets. Please refer to our 2022 fiscal year results call on our website.

Turning to slide 27, we again reaffirm our guidance for 2023 2024, and our targets for 2025 with positive improvements in supply chain performance. During the first quarter. We continue to view fiscal 'twenty three as a transition year and the beginning of our recovery there will be growth from.

<unk> 2022, but we will operate at production levels in the first half of this year.

We will offer at lower production levels in the first half of 2000 and prior to the ramp up beginning in the second half.

Exiting 2023 at higher production levels will set the stage for 2024, and our 2025 performance our experience shows that increased efficiency and volumes drive margin enhancement and this was apparent in the results of our 2015 through 2018 period.

Going forward, we anticipate the overwhelming majority of our contracts to be built in 2024, and 2025 to be now appropriately priced matching higher material input and wage costs to our contract pricing.

We also anticipate adjusted EBITDA of $30 million to $60 million in 2023 per the guidance that we provide previously followed by a significant increase to $250 million to $300 million of EBITDA in 2024, driven obviously by production increases volume recovery and cost management and a 2025 target of approximately 400 million.

Of adjusted EBITDA, we are very confident that we can achieve our target with the expectations that we will exceed $400 million of adjusted EBITDA as we get into 2026.

We've also maintained our ROIC target for greater than 12% for 2025 with the potential for significant outperformance on this metric as we delever, our balance sheet and see improvements in our working capital investments.

On slide 28, you can see that the zero emission buses as a percentage of our total deliveries have been increasing rapidly going from 8% in 2022, 23% last year in 2022 with the expectation expectations for additional growth in 2023 and beyond in the first quarter of this year, 21% of our deliveries were zero emission.

Although this was somewhat depressed due to delays related to the requirement for the new Dream technology, they've installed installed within the energy conclude your systems are sitting battery electric buses in North America that we will recover in the second half.

Zero emission buses as a percentage of our backlog have also been growing quickly doubling in size from 2021% to 2022, and reaching now a record of 36% in 2023 Q1.

Slide 29 highlights that our backlog pricing is also up significantly within both the heavy duty and motor coach segments. This reflects a combination of higher zero emission orders plus inflation adjusted pricing reflected in our new contracts and bids.

Finally, I'd like to.

Remind everybody and announced that our chair of our board the honorable Brian Tobin will be retiring today. After 18 years as our chair Brian stayed on for a couple of extra terms during the COVID-19 period and supply chain realities, and we are tremendously grateful for all that he has done for our business later today at our annual general meeting for reelection.

MS <unk> will take over as the new chair of MSI with that I'll turn it back over to Steven to summarize our investment thesis and then open the mic to questions. Thanks, Paul on Slide 30, we provide this short summary of our story and investment thesis, we are market leaders with unprecedented demand for our products and services, we are poised for recovery.

Plans to ramp up production slowly in tandem with sustained supply chain improvements, we're focused on completing our capital markets efforts to establish amended credit facilities. So we can place our complete focus on operations driving the business forward.

<unk> may seem aspirational compared to today's results, we have a history of outperformance and the road to $400 million of adjusted EBITDA is achievable effectively recovering slightly beyond our pre COVID-19 levels pro forma $333 million of adjusted EBITDA. This is especially true when.

When viewed within the context of the strength of our order book backlog and the ongoing demand for our vehicles and aftermarket parts. It has been a positive start to 2023, and we are confident that enterprise future as always we are proud of our history and excited about the future ahead of us as a market leader, we will now open the line to analyst questions. Michelle Please provide instructions.

To our callers.

As a reminder to ask a question at this time. Please press star one on your telephone and wait for your name to be announced.

Your question. Please press star one again, one moment, while we compile the Q&A roster.

Our first question comes from the line of Chris Murray with ATB capital markets. Your line is open. Please go ahead.

Thanks folks good morning.

Good morning, Chris.

No.

<unk>.

Turning to maybe to the discussion around the credit facility.

I'm wondering if you could give us some more color. Originally I think you had kind of indicated that you wanted to have this in place before you reported today.

I'm just wondering how this is going any progress, you're making and I guess the other piece of this.

The existing facility was due to mature early in 2024.

As part of this discussion about also perhaps extending this.

For a longer term at the same time, so I mean any color you can provide on the process would be helpful.

Thanks, Chris appreciate the question, it's Paul here.

So the extension we received the sixth amendment to our agreement that was done through the Covid and supply chain dynamic was completed as you know in December and it had an expiry date of the end of June so as.

As you know we issued a shelf prospectus in February to kind of introduce and provide us several options going forward.

The credit negotiation with the syndicate has gone very well we are on track and expect to have that completed by the end of June which is our target or which is the current term of that agreement.

The term of the agreement going forward and the work that we're doing with the syndicate and just a shout out to the syndicate. These teams 11 different banks have gone back to their credit committees several times on our behalf over the last couple of years. So we understand because they are drivers of risk mitigation.

And we have flexibility going forward.

Very pleased with where we're at with the syndicate.

And I expect that to be.

And there is no question that we are looking for.

Term that goes out two to three years to allow us runway as we manage through the recovery we talked about in today's call.

Okay. That's helpful.

You'd also mentioned previously that you thought you were able to do this without having to issue additional equity is this is that something that.

Do you think is maybe.

Maybe going to have to be more fluid in the future or is that something you don't think thats achievable.

Well, so clearly as we evolved our business over the last couple of years.

Never would have imagined the hit we took in 2022 the discussion with the banks is wide open on all different opportunities and part of the shelf was to open the breath of the the tools and the instruments that could be us. It all starts with our credit agreement and so any other things, we do whether it be looking internally our.

<unk> and our capability things like sale leaseback or things like customer advance payments and playing with them prepayments and so forth milestone payments from some of those customers. Obviously the whip production all plays into the conversation first step is to get the credit agreement done and to finalize that with respect to any of the other actions we will take them so stay tuned.

I expect as I said before the end of June to be able to give you some really solid colored inside of exactly what we're going to do.

Alright Thats helpful.

Just looking at the quarter's results aftermarket I think I've never seen a number quite like that in terms of margin performance.

Can you just maybe provide some additional color and is this is this is going to be like a one off number because this is approaching like a 30% margin number which again is usually your.

We're happy.

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