Q3 2023 NFI Group Inc Earnings Call

Good day and thank you for standing by welcome to the F. 2023 Q3 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 the session you will need to press star one one on your telephone.

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I would now like to hand, the conference over to your first speaker today, Stephen King Vice President of strategy and Investor Relations. Please go ahead.

Thank you rose and good morning, everyone and welcome to <unk> group's third quarter 2023 results Conference call. This is Stephen King speaking and joining me today are <unk>, President and Chief Executive Officer, and capacity Soni Chief Financial Officer on today's call. We will provide an update on our third quarter 2023 results the bid and order environment.

And our outlook.

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, while we will be moving to slides via the webcast link will also call out the slide number as we go.

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 one or more of these uncertainties materialize or should the underlying assumptions prove incorrect actual results may vary significantly from those expressed.

<unk>.

In addition, certain financial measures. We reference today are not recognized earnings measures and do not have standardized meetings prescribed by international financial reporting standards or <unk>, we advise listeners to review the risk factors financial definitions and non <unk> measures statements found in our 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.

On slide four we've included some key terms and definitions referred to in this presentation of note zero emission buses or <unk> consists of battery electric hydrogen fuel cell electric control electric buses equivalent units or eus is a term we use for both production slots and delivery statistics.

Slides five six and seven provide a brief overview of NII and if I as the Canadian headquartered global independent bus and motor coach solutions provider that is leading the evolution to zero emission mobility for those interested in a more in-depth introduction to our business. Please visit our investor website.

Slide eight provides the latest statistics showcasing enterprise leadership in zero emission transportation, what we call. This evolution since 2015 <unk> delivered 3361 E use of <unk> that have completed over 140 million electric service models and more than 150 cities in six countries.

<unk> continues to accelerate based on our data, we see over 50% of anticipated customer purchases in the next five years been electric vehicles and 36% of our total backlog are now that.

We continue to anticipate that at least 40% of our 2025 production will be zero emission buses.

The backdrop of our products and solutions sustainability, and ESG or environmental social and governance is of critical importance to NFS sustainability is a key component of our strategy, our core value and influences how we make decisions.

'twenty three we established a sustainability council made up of company leaders with direct oversight from our board. We also built ESG related targets into our executive compensation program to find out more please visit the ESG section of our website, where you'll find five years of our ESG report and other related policies in charters.

I'll now pass it over to Paul on capacity to walk us through the financial results. Thanks, Steven and good morning, everyone. So we'll give you a bit of a highlight on the quarter capacity will give you the details.

So have you began on slide 10, with a summary demand remains very strong the north American total bubble public bid universe remains at a record high and NFS saw a 114% increase in total orders year over year funding for public transit is a major driver for this increase but private markets have also seen.

Creases with Mci orders up 47% year over year, Alexander Dennis orders up 136% and our bulk orders were also up 93%.

Third quarter consolidated results saw a 34% increase in new vehicle deliveries of 38% increase in overall revenue and 184% increase in adjusted EBITDA.

Our aftermarket segment continued to deliver another strong quarter of performance with revenue up 21% year over year and with record quarterly adjusted EBITDA.

Our results were primarily driven by increased sales in North America favorable favorable product mix and management of our freight cost and logistics NFS backlog remains strong at $6 $6 billion or nearly 10000 equivalent units with the average selling price for vehicles and our backlog increasing by over 20%.

<unk> year over year.

This reflects a higher proportion of zero emission vehicles and the pricing actions, we have taken to reflect the impacts of inflation.

We also ended the third quarter with over 1800 equivalent units in bid award pending which should position us very strong for another very strong quarter of backlog growth in the fourth quarter.

Quarter and net working capital remained elevated however at $462 million, primarily due to higher accounts receivable and inventory balances work in process inventory declined from the second quarter as we started completing.

Buses missing components and shipping those buses to customers' countering. This reduction we saw finished goods increase which is typical for our business as we head into our busy fourth quarter and we also had certain buses that were not completely ready for customer delivery.

<unk> materials also increased as production ramps up and we consciously chose to carry additional inventory to mitigate against potential parts shortfalls as the supply chain recovers as we move into 2024, we anticipate lower overall working capital balances and improved working capital days as we reduced work in process and work with their customer.

On final bus acceptance.

On slide 11 highlights our overall supplier performance supplier risk ratings continue to show improvement, although certain components remain challenged including items in this quarter like high voltage cables as many of our suppliers are also increasing production to meet higher demand, we're keeping them in a moderate risk rating to ensure that we work closely.

With them and monitor their performance as we wrap up our own production levels.

Slide 12 shows that we continue to increase new vehicle production rates with our third quarter line entry rates up 10% from the second quarter. This.

This increase came from the addition of over 240, new direct and indirect team members primarily in North America, We will continue to ramp up production throughout the rest of 2023 and into 2024 using a faced a phased approach Matt.

Matching consistent supply with labor availability production.

Production ramp ups take time in our business as we need to hire and train new team members. While also ensuring customers can handle delivery and inspection processes that are required to finalize performance on a contract.

Okay.

By 2025, we expect line entries feedback around the 500 units a quarter range approaching 2019 levels.

Driving deliveries of approximately 6000 equivalent units in 2025.

Capacity will now walk you through the highlights of the third quarter financial results and after that I'll provide you some insights into our outlook.

Thanks, Paul picking up on slide 13, our multiyear backlog remains strong at 9556 units split almost equally between firm and option orders. We have sold out all 2023 production slots and have sold a significantly higher percentage of 2024 slots than where we would typically be at this time of year.

Testament to market demand, our backlog competitive dynamics and the strength of our product offering.

Heavy duty transit bus deliveries were up by 34% year over year and coach deliveries were up 9%, notably low floor cutaway and medium duty deliveries were very strong up 129%.

Slide 14 shows gross margins by quarter from 2019 through the third quarter of 2023 manufacturing margins were relatively stable with the previous quarter and although still low are now positive. We anticipate the positive margin improvement trend will continue as we ramp up operations and move beyond.

Legacy inflation impacted contracts aftermarket continued to deliver very strong margin performance.

On slide 15, we provide additional key financial indicators.

Adjusted EBITDA met expectations at $11 2 million a significant increase from this time last year free cash flow, while still negative primarily due to higher interest expenses improved by 23% year over year.

Liquidity ended at $170 million up significantly from $82 million as of the end of the second quarter of 2023, but down from $471 million year over year. The changes primarily come from the completion of <unk> comprehensive refinancing plan in August 2023.

Through the plans equity and debt issuances, we generated $444 million of gross proceeds but available balances under our senior unsecured credit facilities were lowered by $275 million impacting total available capacity for the remainder of 2023 and enter fiscal 2024.

Expect a slightly longer cash collection cycle due to the significant increases in <unk>, and resulting time required for customers final inspection and acceptance what's on their properties on.

On slide 16, we outlined the impact to our net loss and adjusted net loss our net loss for the quarter was essentially flat with 2022 Q3, improving by 1% our improvements in vehicle deliveries our revenue and adjusted EBITDA were offset by higher interest and financing costs. In addition, we have fair market.

<unk> losses related to interest rate swaps and the cash conversion option of our convertible debentures, plus a gain from debt modification related to our refinancing Lansing plan I will now turn it the call back to Paul.

Thanks, Vanessa on Slide 18, we provide a summary of some of our key demand metrics as previously mentioned, our North American public bid universe is at record levels, which includes Rfps received bids that have been submitted to customers in response to the RFP and a five year outlook of demand based on customers' fleet replacement plans.

Total active bids of over 10300 equivalent units included 8770 units in <unk>.

<unk> submitted up 21% year over year and another 1591 equivalent units of bids in process. We anticipate these bids will lead to significant new awards and when combined with our five year customer outlook, we maintain our view that vehicle demand will continue to remain high going forward.

U S based public transit agencies also continue to use purchasing schedules that are an alternative to the traditional unique customer procurement process. This alternative method to acquire buses uses FET using federal funds and can help speed up the selection process and if <unk> has now been named at over 40 of these purchasing schedules generating awards of more.

1130 equivalent units since 2018.

On slide 19, we highlight third quarter order and delivery activity, we received new orders of 969 equivalent units in the third quarter, which is typically a slower period for us due to the timing of transit agencies approval processes. We also had another 1834 equivalent units in bids award pending where we have received notification.

The award from the customer, but formal procurement purchasing documentation has not yet been finalized.

This positions us.

For backlog growth in the fourth quarter of 2023.

New orders helped drive our book to Bill ratio above 100% for the third straight period.

And we show that on slide 20.

We expect this will continue in 2024, as we benefit from strong demand and healthy win rates.

Our option conversion rates on our LTM basis remained low but this is expected to be a temporary issue as we've seen numerous older internal combustion engine and legacy EV orders expire being replaced by new zero emission orders and use of state schedules. We anticipate conversion rates will start to show improvement in the last quarter of 2000.

And as we move into 2024.

On slide 21, we detailed some of the new developments in the North America over the past few months in October we announced a battery pack supply agreement with American battery solutions enhancing the resilience of our battery supply chain with the effective dual source battery strategy.

New Flyers redesigned 60 foot Excelsior charge and G. Now includes additional battery strength, increasing the range of the bus by about 30%.

And Alexander Dennis followed at its global strategy to partner with new contract manufacturers in expansion markets and appointed Nevada based big rig manufacturing as its north American build partner for the <unk> hundred to double deck bus production starts in the first half of 2024, and finally NFS U S subsidiaries are now qualified.

<unk> are now qualified manufacturer for the commercial clean vehicle credit program, which means customers can receive up to a 40000 U S dollar and tax credits per vehicle order.

Last week following years of design and development of testing Alexander Dennis launched its next generation battery electric buses for the UK and Ireland on Slide 22, we outline some of the details the new and viral 100, EV and viral 400, EV double deck had been fully redesigned in house in coordination with leading supply.

Partners I was that the U K for the launch event last week and I can see that the new <unk> EV mini bus is a game changer. It combines big bust <unk> and engineering with the capabilities required for shuttle in transit applications. This unique product that now has the potential for a global offering by NOI.

On slide 24, we provide a quick summary, as we always do have the record government funding for each of our major markets, which continues to help drive zero emission demand.

On slide 25, we outlined some of the recent funding news, we had our strongest ever showing for the FCA low no in buses low no buses and bus facility grants as a named partner on more than $200 million and specific customer grants.

Units identified for these grants do not immediately hit our backlog, but will lead to future orders in 2024 and beyond.

And Alexander Dennis recently hosted the U K government for the announcement of the new 129 million pound funding program called Zebra to that is expected to support procurements of zero emission buses through 2023 to 2025.

Turning to slide 26, we show our updated guidance for 'twenty three.

We reaffirmed our guidance for 'twenty, four and for our 'twenty five targets based on <unk> year to date performance and expected second half results. We've increased the lower end of our 2023 guidance ranges for revenue and we increased both the lower and higher end of our adjusted EBITDA guidance range again for 'twenty three.

We now anticipate full year 'twenty three adjusted EBITDA to be between 45 and $65 million followed by continued significant recovery to $250 million to $300 million in 2024, and a target approximately $400 million.

For 2025.

The multiyear growth and our financial projections is driven by a combination of volume recovery production efficiencies improved product pricing and an increased higher margin of zero emission buses. We also anticipate will move beyond legacy inflation impacted contracts with approximately 5% of our 2024 first half deliveries.

It's still being legacy contracts was challenged margins.

We have seen signs of commodities and material cost easing during the first three quarters of this year and anticipate newer contracts in our backlog now reflect appropriate inflation, adjusted costing and pricing and with updated and more effective terms and conditions for EFI.

Within the aftermarket we expect continued revenue growth and strong margin contribution through the fourth quarter and 23. However, adjusted EBITDA margin percentages may not continue at these elevated levels that we're experiencing today.

Based on our guidance and working capital expectations, we do not anticipate significant debt repayments in the fourth quarter of this year. We are continue to work on prepayment and deposit structures with our customers. While also advancing efforts to lower our work in process inventory balances and enhance vehicle acceptance timing based.

Based on delivery timing of cash flow conversion cycle. These efforts are not expected to have a material impact on cash flows until we move into the first half of 2024.

We have maintained our return on invested target for return on invested capital target of greater than 12% for 2025 with potential for outperformance on this metric as we delever our balance sheet and continue to improve our working capital investments. We continue to work on return on invested capital expectations to ensure they appropriately reflect the changes to our capital.

Structure following the completion of our successful refinancing plan earlier this year.

One of the underlying factors in our French expectations is the increase in zero emission bus sales mix on slide 27, we show that zero emission bus deliveries have increased rapidly going from 8% of our total volume in 2020% to 23% in the third quarter of this year. We expect further growth here in that zero emissions will be more than 40 person.

Net of our deliveries in 2025 and could be potentially up to 50% of our total deliveries.

Zero emission buses as a percentage of our backup has also been growing quickly doubling in size from 2021% to 2022 and related remaining stable at a record 36% in 2023.

Q2 <unk>.

Slide 28 shows the average price of each unit and our total backlog has dramatically increased both for heavy duty buses in the dark Blue line and motor coaches in the light Blue line since the start of the Covid pandemic in 2020, which reflects a combination of high higher zero emission bus orders inflation adjusted pricing and improve margin.

In our new contracts.

On slide 29, we summarize our investment thesis the actual results for the first three quarters of 'twenty three combined with our projections for the remainder of the year demonstrate recovery is now underway for us completion of the refinancing plan, which included both debt and equity was a major step for EFI and a strong denim demonstration of <unk>.

Since by existing and new investors, and our creditors and our business the recovery path and our future.

Our operations, while improving still are not back to pre pandemic performance levels of our efficiency levels and there is still work to be done to achieve.

Higher production and delivery performance, but we are on a path and have a detailed plan to achieve these targets across the entire business. We are laser focused on cash management and improving operational performance. We anticipate that we will be able to reduce overall working capital balances as we decrease work in process and move vehicles through to final accept.

But we continue to anticipate some investments in inventory and accounts receivable as we increase production rates and the quantity of zero emission buses that we built in 2024.

Our goal is to ensure working capital levels.

A more typical pre pandemic profile.

And we are confident about the path, we're on and the road.

And in front of us and as always we're proud of our history and excited about <unk> future as a market leader I do want to bring to your attention. The work that's being done in our industry the largest transit agency or transportation.

Agency is called after the American Public Transit Association, who recently launched task force to look at the health and performance of the United States and quite frankly, the North American.

OEM bus manufacturing.

The sector as well as the supply chain. This task force is co chaired by the CEO of Chicago Transit Authority, and the New York Transit Authority and.

And has the full support of the FTA funding champion behind public Transit. We're very encouraged that this task force will help our customers and our industry deal with everything from milestone payments and cash flow matching via investments in zero emission bus manufacturing, but also things like terms and conditions and standards.

<unk> going forward, we will continue to update you on the task force as its work evolves over the next corner.

We will now open the line for analyst questions Roseanne, Please provide instructions to our callers. Thank you.

Thank you, Brian we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.

Withdraw your question. Please press star one again.

Please stand by while we compile the Q&A roster.

Our first question comes from the line of Tami Chen of BMO capital markets. Your line is now open.

Good morning. Thanks for the question first I wanted to ask about the manufacturing segment. Your margin. It was flat quarter over quarter can you talk a bit about the moving pieces in there what's still.

Weighing on results because I believe as we have continued through this year the mix of those legacy.

<unk> inflation impacted contract should be representing a smaller and smaller portion of your mix. So what are the thought there'd been some sequential improvement in the margin, but we didn't see that yes. So can you just talk about the moving pieces in the quarter.

Well, thanks, Tammy Theres two issues there. The first is the vast majority of what we're building and delivering that still are what we call legacy <unk>.

Contracts, where pricing was dramatically impacted either by hyperinflation or by rapid changes to foreign exchange rates, a specific loan Canadian customer contracts. So that stuff is continuing to be prominent in our deliveries yields youll see it again to a certain extent in our 2024.

Our Q4 results.

The second issue is as we work buses through the system. So buses that are offline and finish them or buses that are in customer acceptance the labor.

<unk> finished those buses continues to be a very significant.

Inefficiency and so our labor efficiency in the production of our buses continues to be in the 60%, 70% range, where it should be in the high 80% range. So it will take time as we finish offline work and it didn't surprise us what that margin mix look like.

The other thing is youll see us in Q4 start to really move some of that excess work in process through the system and of course every quarter has different elements of stat holidays or plant shutdowns, and so forth, which impacts primarily in the third quarter of our company. So you won't see that change and really start to see of any material.

<unk> until the first quarter of next year.

Okay got it.

And on the supply chain.

So you went through that chart.

The number of outlets.

Come down in the quarter, which is encouraging but I noted in other parts of the press release as an example, there just seem to be some cautionary language on the cadence of.

Near term margin I think you also noted supplier performance has been impacted by the fact that you've been increasing your line entry. So could you just.

Bring it bring that altogether I, just felt a little bit conflicting like overall the supply chain situation would you state that it is improving or we're still kind of like one step forward then Phil one step back thanks.

Both etame, it's a great observation in terms of.

That slide 11 that shows that.

The number of suppliers that are really challenging our business, whether they are high risk or medium risk has dramatically come down we've done a number of things to try and mitigate so if you walked in our factory you'd see more days of inventory online to mitigate risk of supplier performance.

As you know, they're very complex vehicles, and so we continue to work with certain suppliers as they recover their business post.

Pandemic and supply chain Hell and in some of the cases, it's not that our suppliers don't have the parts to build the product in time, they too are struggling with the recovery of their business and the hiring and training of people in that so they're dramatically kind of regrouping their businesses.

We continue to see isolated issues for example in the quarter, we call out high voltage cables.

The dramatic increase in in North America of equipment that.

It requires high voltage cables, whether it be commercial product or military product continues to add certain pinch points in that supply chain and unless you have all the parts you still have labor inefficiencies and you still have higher work in process.

Look where we are.

Thrilled to see that chart dropdown to manageable levels, David Weightiness supply team here has people now that are out physically at our customers' locations. We've revamped our supplier development team and restarted a lot of that work to get those people healthy, but remember they are highly customized vehicles and by definition youre going to have.

Situations, where not all the parts are on there. So we're really feeling good about where we are but it's not a light switch it takes times and remember parts world. If we have an order when we have all don't have all the parts. We can still ship the vast majority of them in a bus world. If you don't have a high voltage cable or you don't have a window, where you don't have a seat.

Can't ship, the vehicle and Thats, just the ramping up of that supply chain and the improvement of our business is better and better and better and we expect to continue to see it being better in 2024.

We are raising our production rates to meet what is a tremendous backlog, but we're very careful not to raise it too fast either not to have enough trained and skilled people at our facility tour that our supplier community can't keep up the worst thing. We can do is create more offline work in process that we can't deliver to customers that sucks up working capital.

So youll continue to see us through the fourth quarter, just being cautious at the increased rate, but also laser focused on managing supply chain to get buses out of here to our customers and then accepted.

Thank you.

Thanks Tommy.

One moment for our next question.

Our next question comes from the line of Chris Murray of ATB capital market. Your line is now open.

Yes, thanks folks good morning.

Just maybe thinking a little bit longer term Paul.

As we go into 'twenty, one 'twenty five one of the questions that I get a lot is is.

Margins getting back to normal.

And theres been a bit of discussion around the average selling price being higher but I just wanted to get your opinion on transit and <unk>.

Do you think you can get back to.

Call it that high high single digit low teens margin profile and I don't know if you want to think about it in terms of EBITDA per unit or or a percentage margin because I know theres different ways.

Pricing flows into profitability, but just how do we think about where the where the target or the or the end ranges.

For the manufacturing business.

Well thanks, Chris It's a great question. If you take this as part of the reason that we gave kind of multi year guidance.

And of course with a more expensive zero emission vehicle.

And an improved EBITDA per unit you still have challenges with the percent margins, which is why I think we've talked many times, we don't get too fussed about the percent margin per units. We spent a lot of time focused on dollar per unit that gets through the facility. There is no question that average price has gone up for a couple of issues at <unk>.

Selling price one we have tried to embed all of the inflation impacted cost into the business to we've done our own little hedging or.

Protecting if you will of any uncertain price increases three we still have challenged.

<unk> and our business of getting worked through so that's going to help margins get better and better as we get up to into the Eighty's of labor efficiency and the last thing quite frankly is we have increased the margins on our on our product and this goes back to things like this task force to adapt to where what the industry wants is healthy suppliers, we went through a year with <unk>.

Pulling out of the U S on supplier in chapter 11, and so full health of our business doesn't happen overnight, we will happened deal happen to start to see that through 24 and <unk> 20.

26, we believe we'll get up to the high single digits in manufacturing, where we were before and a very strong margin percent performance in the aftermarket business.

Okay.

And then the other question I had for you and maybe this ties into some of the discussion that after having but.

Just wanted your thoughts around the coach business.

And how we should be thinking about kind of whats out there for orders in 'twenty four.

I know your bid pipeline focuses more on transit, but I'm just kind of curious about how coaches behaving.

Not only in the private market, but in the public market.

Because typically public markets, but I think about 20% of the marketplace, but it's been a little lumpy as well over the last few years. So just just thoughts on how we should be thinking about that over the next couple of years would be great.

That's a great question, Chris so.

Historically, when we were able to acquire Mci and I think it was 2015 and we always thought of Mci is roughly about 60% private business roughly 40% public and the mix changes every year based on purchasing cycles and so forth.

There are.

A lot of Rfps that are in the system today for New York, New Jersey, Houston, others that really are starting to re look at rejuvenating their motor coach fleets.

The private market is actually showing really really well recovery. It's in fact, it's better than I thought it would be at this point in the recovery cycle.

Pricing is relatively healthy or that market margins are good we're spending time effort and money at optimizing for example, the Winnipeg production facility that we're now on a full common line as opposed to two different production lines.

And so we're really pleased with the demand in the private market for motor coaches the recovery and we're pleased with the appropriate pricing in the marketplace. One of the things that plagued us in the past was the trade in market.

We as an industry kind of kid ourselves on what the ultimate profitability of that segment is because we can give them higher or lower trade in values.

But in fact used market has retained value in the new market is going on the other dynamic is healthy. It is has been and recovering is we're continuing to be very cautious and watching the market as interest rates go up watching with customers Dubai.

Fleet rejuvenation in the private market, we haven't seen a slowdown in demand since it's recovered, but there is a risk that that and so we're just managing the mci capacity. The performance of the business of Mci is better at this time than I thought it would be and there's even more to be had as we continue to optimize the production.

That comment line.

Okay. That's helpful. Thanks wholesale terminal thanks, Chris.

One moment for our next question.

Our next question comes from the line of Cameron Nordson net natural bank financial I'm, sorry of National Bank Financial Your line is now open.

Yes, thanks, good morning.

Again.

So.

Wanted to ask just about there that was working capital you provided some color there on the next few quarters I just wonder if you can you delve into that a little bit more.

If I read you correctly it sounds like we're still going to be some investment in working capital in Q4, and maybe that starts to unwind a little bit in the first half of <unk>.

2024, so maybe you can just sort of walk us through kind of the pace of what we're going to see as far as the working capital investment are unwinding in the next few quarters. So I'll start it off and then ask capacity to give a bit of color.

We still have bloated work in process in our facility as we talked earlier, but again, we get the parks for a bus that is built on offline theres still a lot of your Max gymnastics to get that bus built completed.

Tested and then through the customer inspection process and the fact that Theres more zero emissions means that we've got more dollars tied up in work in process. We also have a bunch of buses that were delivered to customers through the pandemic cycle that we call acceptance.

Once we delivered the bus the customer we've got revenue recognition, but we don't have acceptance from the customer, which then allows us to invoice and collect our receivables we've been the benefactor of certain customers proceeding or pushing earlier some of their payment cycles, but until we have the back to normal if you will and acceptance with we.

Still have excess dollars tied up in there the.

The other factor that is really starting to show itself as we do more zero emissions.

On average our customer contracts on acceptance takes something like 15% to 20 days for them to say, yes, I'll accept the bus and yet you can invoice me.

The zero emission buses are taking something like twice that number almost 40 days in some cases to get it.

Customer who is now new to the zero emission game to accept that but some of it is their knowledge or skills and ability. Some of it is their readiness on on testing the vehicle from a charging.

Infrastructure and so forth.

So we got a couple of things at play the burn down of excess work in process and the burn down of the.

Higher than normal.

Except in swim we also as we are increasing our business volumes. The units were putting through the factory are more expensive vehicles right now which goes back to this task force.

Government and App to trying to figure out how to introduce things like standardized milestone payments or some ability to actually fund the working capital through the build cycle.

So.

We're not yet it's not a light switch, which I said before we got to get that the buses offline finished to the customers and then we got to get through acceptance work in process. We don't see a lot of that unwind of cash will start to see some of it we did in the second third quarter, we will see more of it in the first quarter and then we'll see it in 2024, but we do expect.

The dollar per of working capital per dollar of sale to continue to be elevated as the mix changes. If we are successful through the app to task force with making milestone payments standardize that will fundamentally change the game in terms of our working capital profile password anything to add to that any context of the quantum's. So.

One Paul nail that Cam. So just a couple of quick things. Our viewpoint is just to summarize what policy brief unwind in Q1, we expect to have some more needs in Q2 because of the zeb ramp up as we're kind of talking about that and I think everything else Paul kind of covered because with the whip burned down we've got we're going to have more stuff into acceptance with which.

Obviously will take some time to go through because it's a lot of the <unk>. So I think you've got it.

I will now.

Okay.

Helpful and maybe second question just on.

The U S transit market, obviously, you've got kind of a government budget impasse there I'm wondering if there's any impact on that.

The Finalization of orders for your U S transit agencies as a result of any issues around the world.

The continuing resolutions and things with the U S budget.

Well the benefit of having pluses that are funded through the FTA is that money that has been set aside are appropriated for orders. We already have is locked in it's not like they need new money to pay for buses that are on their order. So if there is an impact that short or adds to a medium term.

Variability there could be an impact the good news is at least our public transit business in North America to make sure that the slots are almost effectively all sold out with pre appropriated money. So we don't anticipate.

Any impact on the demand that we have the contracts we have with the conversion of the options that we expect there could then be a slowdown in bids if theres a big loan government in past, we don't see it and customers are continue to be confident that the money is there for the work that the buses they are already effectively contracted for the parts.

<unk> is a different one parts businesses as you've as you may remember <unk> is 100% funded by local money not by federal money. So we don't see a slowdown if there was a government passed in any of our aftermarket businesses.

Okay. That's good to hear I'll leave it there thanks very much thank you Kevin.

As a reminder to ask a question will need to press star one on your telephone and wait for your name to be announced one moment. Our next question.

Our next question comes from the line of Christopher <unk> of CIBC. Your line is now open.

Alright, Thanks for taking my question I was wondering if I could just follow up on the supply chain question battalions asking earlier.

Have you seen kind of since since the end of the quarter any sort of impact from the UAW strike that impacted some of the smaller suppliers, who maybe had to lay off some workers. There I'm. Just wondering if you saw any issues from that.

Hey, Chris It's a good question, we've had a lot of people asking about that.

Supply chain for public transit is let's call it customized and michie have very different supply chain.

Then the mass automotive manufacturers. So we didn't see any impact of those strikes nor did we anticipate if they continued on forever.

For a longer period of time impacting our supply chain, we're still in recovery mode of that customized type supply chain again, largely driven by buy America, which is not the same dynamic you have in the automotive world, which is more of a global supply chain.

And the other dynamic where we could have been exposed that we haven't yet and don't anticipate is our bulk business builds cutaway buses on GM or Ford chassis, we have a very strong pool almost a year's worth of chassis on our launch are in.

In transit to US right now so yields.

Not have an issue we haven't seen an issue don't anticipate an issue associated with those UAW strike longer term, we may see scenarios, where some of those increase awards of our agreements and those cba's trickle into the broader U S manufacturing industry ours included which means potentially higher prices for things going forward, but at this.

In time, we haven't seen we don't expect and keep in mind that labor as a percentage of the manufacturing of our product is somewhere in the 10% to 15% range. So it will impact, but not have an impact to long term as labor rates go up.

Okay, perfect and just on the labor front.

<unk>. So it sounds like you made good progress hiring 240, new members how.

How many more people are you looking to hire and I guess, what's kind of the timeline youre targeting there to ramp up to full <unk>.

And again, so we're just at the.

Well into the process of building the detailed annual operating plan for our business for next year.

We have consciously hired more and continue to hire more people.

Expecting the ramp up remember that theyre not just <unk>.

Non skilled labor is the fact that we're doing way more zero emission buses.

Understanding and the skill set to be able to build that kind of a vehicle.

It's more than just a normal internal combustion engine.

So we've been successful at hiring there are still a few pockets in the United States, where it's very difficult to hire.

We're working with community colleges high schools traditional disadvantaged communities that we're trying to hire.

We've ramped up our resources and recruit recruiting we're bringing them in earlier to try and train them we probably.

Good I think in terms of the labor that we need to finish the buses for the rest of the year as we ramp up for next year Theres, probably three to 400 people that we need.

To add to our overall business mix to deal with the ramp ups. I also continue to caution people that were inefficient today as well.

Worked down offline whip, and therefore, as we get that offline.

Caused really by the pandemic supply chain dynamics backup we have effectively capacity in our business today that we're paying to do offline with that can help with first time build inside the business. So it's not massive we've got a global workforce of over 8000, now and we need to add maybe $3 to 400 next year to deal with our ramp ups.

Okay, perfect and just one last one from me.

Can you provide more details around the kind of in.

In light of your.

You are expecting from now through to 2025, when you kind of expect to reach them.

Pre pandemic levels.

So every one of our business units.

It's been increasing the line entry rates, we trough probably of rates I would say in the first or second quarter of this year, we probably had the worst supply chain.

Performance.

We are increasing those line rates somewhere in the neighborhood of single digits in terms of the percentages increase at this point in time as we've talked and tried to explain many times, it's not step change the ramp up is gradual so going from X units to X plus two to X plus three plus four over.

Weeks and months as our pace of ramp up.

We won't get to that 14, or 1500 units a quarter, which are which is our pre pandemic levels really to the end of 2000 and for quite frankly, as we start into 2025. So it's a gradual ramp up across the entire business through the rest of this year into 'twenty, four and Youll, probably see us hitting that.

Pre pandemic run rate levels in the first quarter or first half of 2025.

Perfect. Thanks, I'll jump back in the queue. Thanks, Christy I appreciate it.

Thank you I'm showing no further questions at this time I would now like to turn it back to Stephen King for closing remarks.

Alright, thanks, everyone for joining us this morning and for your questions as always if any investor or anyone has any follow up questions. Please feel free to reach out and contact our Investor Relations Department at any time all of our materials on our website and we encourage folks to read our financial materials, our disclosure materials on our website and on SEDAR.

Thanks, so much and have a great day.

Participating in today's conference. This does conclude the program you may now disconnect.

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