NFI Group Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 8 speakers on the call.

Operator

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the NFI 2024 Q3 Financial Results Call. All lines are placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn the call over to Stephen King. Thank you, and please go ahead.

Speaker 1

Thank you, Kate. Good morning, everyone, and welcome to NFI Group's Q3 2024 results conference call. Joining me today are Paul Subry, President and Chief Executive Officer and Brian Dusnip, Executive Vice President and Chief Financial Officer. On today's call, we will give an update on our quarterly results, highlighting year over year improvement across numerous financial metrics, the strong demand environment for our products and our record backlog. We'll also provide an update on the operating environment and our near and long term outlook.

Speaker 1

This call is being recorded and a replay will be made available shortly. We will be referring to a presentation that can be found in the Investors section of our website. We will be moving the slides via the webcast link and we'll also call out the slide number as we go for participants on the phone. Starting with slide 2, we provide our cautionary or forward looking statements. We note that certain financial measures referenced today are not recognized earnings measures and do not have standardized meanings prescribed by International Financial Reporting Standards or IFRS.

Speaker 1

We advise listeners to our press releases and other public filings on SEDAR for more details. A reminder that NFI statements are presented in U. S. Dollars, the company's reporting currency, and all amounts referred to are in U. S.

Speaker 1

Dollars unless otherwise noted. On Slide 3, we have included some key terms and definitions referred to in this presentation. Of note, 0 emission buses or ZEBs refers to vehicles that do not have internal combustion engines. Equivalent units or EUs is a term we use for both production slots and delivery statistics. Slides 45 provide a brief overview of our company.

Speaker 1

More detailed information is available on our website. In summary, NFI Group is a global independent bus and motor coach solution provider that is leading the evolution to 0 emission mobility. We are a purpose driven organization and exist to build vehicles that move the world's most precious cargo. We move people. We play a critical role in global transportation and every bus we put into service supports the journey to reduce global emissions.

Speaker 1

I'm now on slide 6, which provides NFI's latest 0 emission statistics. Since 2015, NFI has delivered over 4,300 EUs of ZEBs that have completed over 220,000,000 electric service miles across 150 cities. Our infrastructure solutions team has installed over 540 electric bus chargers totaling more than 87 megawatts of capacity since 2018. I'll now pass it over to Paul to provide an overview of NFI's results for the Q3.

Speaker 2

Thanks, Stephen, and good morning, everyone. Thanks for joining us today. I'm now on slide 8, where we provide a summary of the Q3. Financial results reflected our continued recovery in growth with significant year over year improvement. We had a 3 75% increase in quarterly adjusted EBITDA helping contribute to $161,000,000 improvement on an LTM basis.

Speaker 2

Gross margin improved to 12.2%, representing the highest gross margin we've had since the Q1 of 2021. On the demand front, we had new orders of 1050 equivalent units in the quarter, up 8.2% from the previous year. With 7,585 equivalent units of new awards so far this year, 2024 is shaping up to be another record year for new orders for NFI. As we expect additional large multiyear orders in the Q4, we anticipate our US12 $1,000,000,000 backlog will continue to grow. This is primarily driven by the North American public transit and coach operations with a number of active bids bidders on many new RFPs has reduced substantially and in a number of recent cases NFI was the sole bidder.

Speaker 2

Our trailing 12 month book to bill ratio remained really strong at 115%, primarily driven by our increased order intake. And our option backlog conversion rate also showed continued recovery now reaching 70% on an LTM basis. NFI's aftermarket segment delivered yet another exceptional quarter with $153,000,000 in revenue $34,000,000 of adjusted EBITDA up 7% and 8% year over year respectively. Now as a result of the U. S.

Speaker 2

Task force from APTA supported by the FDA and the White House on healthy contracting, we continue to have success securing prepayments and embedding milestone payments and proper contracting terms in our bus contracts with customers. This is having a positive impact on our liquidity and cash flows. However, working capital remains elevated due to an increase in 0 emission bus production reflecting higher input costs and the adverse impact disruption of a significant North American seat supplier that has non performed to our schedule, which we'll discuss in a little bit detail more detail later in this call. Slide 9 walks you through our Q3 deliveries. We had our highest quarter ever of low floor cutaway bus deliveries in Q3.

Speaker 2

Coach deliveries were also up and transit deliveries reflect the impact of the seat supply disruption and operational efficiencies as we ramp up production and the impact of higher ZOB production. In total, the seat supply disruption led to a loss of approximately 79 EUs of planned 3rd quarter deliveries. We also had lower production rates as we managed offline buses trying to bus finishing and the working capital. We are focused on improving 4th quarter resolved transit deliveries as we complete and ship contractually sold buses that were missing seats from inventory. Offsetting the decline in deliveries was 11% increase in the average selling price of the heavy duty transit bus along with improved manufacturing gross margins.

Speaker 2

Now on slide 10, I'll walk you through the impacts of the seat supply disruption. I'll start with the overall supply chain health. The chart of the screen goes back to 2020 and reflects the deterioration of NFI's supplier delivery performance starting in the Q2 of 2021. Through the remainder of 2021 and 2022, numerous high and medium risk suppliers had a dramatic impact on NFI's performance. In 2023 2024, we made tremendous progress as we expanded our active supplier development and monitoring program.

Speaker 2

We only have 2 suppliers currently rated as high risk, high impact, one in the United States one is the United States based seat supplier, who is now not meeting their delivery time lines, which has impacted NFI and our competitors and some of the broader rail and transit industries. This has caused disruption to our master production schedule and obviously impacted our planned deliveries. On slide 11, I'll provide a quick overview of the steps involved in North American public transit procurements and the manufacturing process to give you some context on the impact of this issue. On a typical procurement, the customer issues a request for proposal with unique customized specification. We then work with the specific suppliers

Speaker 3

and others to

Speaker 2

develop costing and pricing and estimated delivery timelines. After bidding and securing a contract, we determine where it fits into our master production schedule. We then complete final engineering designed typically 26 weeks prior to the bus for an order being started at our facility. Seat engineering is completed at this stage and based on the shop floor plan of the bus sorry the planned layout of the bus. We also finalized the seat structural attachment points in the wall and floors that are specific to those seats and unique to every bus built.

Speaker 2

Suppliers are given a lead time of up to 15 weeks prior to commencement of the 1st bus build to prepare for their delivery. We begin the manufacturing process with the steel frame, then the exterior fiberglass, the roof followed by interior installations. This is where the seats are installed, glass, the roof followed by interior installations. This is where the seats are installed based on the pre engineered design. It is nearly impossible to switch an alternative supplier at this stage in the process given the engineering design and limited alternatives, plus the fact that there are very few Buy America compliant seat providers.

Speaker 2

Buses are inspected at our factory before they're shipped to customers where they go through another final inspection and then get put into service. So moving to slide 12, we highlight our strong response to the seed issue and its current impact. We and our direct competitors have sent dedicated oversight and production resources to the supplier to support their people and their build process. We were active in an intervention with the supplier where we pushed them to hire external operations consultant and to develop and execute on a recovery plan. They have also hired third party labor to increase their manufacturing output.

Speaker 2

I will note that we are receiving some seating kits and shipping some affected buses, but we did not see an increase in the number of missing seats in October. It is difficult to predict the duration of this transformation and impact, although we expect it to continue for at least the remainder of 2024 and there is risk that it may move into 2025. During this time, we are actively working with our customers to expedite advanced payments for these essentially complete buses, which will support our liquidity as we carry higher working balances in the short term. We have also actively engaged a successful European seat supplier who currently builds for NCI and Alexander Dennis to set up a Buy America compliant seating production in the first half of twenty twenty five. We expect this will take some of the pressure off this challenged supplier and the overall supply of seats that are Buy America compliant.

Speaker 2

I'll now turn it over to Brian Dusnip to discuss the results in more detail and back to

Speaker 4

give you an outlook shortly. Thanks, Paul. Picking up on Slide 13, manufacturing gross margins for 2024 Q3 improved slightly over last year even with the lower deliveries we experienced. This is primarily driven by the fact that we completed our legacy inflation impacted contracts earlier this year. We continue to expect manufacturing margins will improve with significantly better pricing in our backlog, the increased contributions from ZEVs and as we execute on production efficiencies.

Speaker 4

The aftermarket gross margin percentage was up quarter over quarter to 29.6 percent, but down slightly year over year reflecting unique sales mix in the quarter. Slide 14 walks through year over year changes in adjusted EBITDA within our reporting segments. Manufacturing EBITDA was up by $31,000,000 even with the lower deliveries reflecting the significant improvement in gross margins. Our aftermarket segment continues to deliver healthy EBITDA growth driven by sales volume and improved gross margins. Corporate adjusted EBITDA improved due to the positive impacts of FX, contributions from our captive insurance business and lower incentive compensation accruals.

Speaker 4

Turning to Slide 15, you can see the LTM adjusted EBITDA for manufacturing and aftermarket from 2020 to 2024. Both segments have seen strong improvements even with the impacts of seat supply disruption. Aftermarket adjusted EBITDA achieved a record $136,000,000 on an LTM basis and manufacturing has seen strong recovery from the lows of 2022 and $180,000,000 year over year improvement with further growth projected in 2025. On Slide 16, the company experienced a net loss for the period of $15,000,000 which was still a 62% improvement year over year. On an LTM basis, we saw an improvement of 91%.

Speaker 4

We've also provided a chart on this page that reconciles net loss to adjusted net loss, including normalization items that are detailed in our MD and A and press release. On Slide 17, free cash flow positive for the quarter versus a negative $43,000,000 in the Q3 of 2023. We did have another quarter of working capital investment reflecting the impacts of inventory growth. This was somewhat offset by increases in deferred revenues of $47,000,000 showing continued progress on our new customer payment structures. Slide 18 is inventory and production rates.

Speaker 4

In the quarter, seat disruption was the primary driver of inventory growth and lower line entries. We experienced a number of weeks of lower production as we managed working capital and focused on completing buses missing seats. In addition, we also had some production inefficiencies as we increased production of more complex ZEVs. On Slide 19, we recap our total leverage ratio and covenants which resume in the Q3. You can see the significant decline in our leverage ratio on the chart from over 14.1 times in 2023 to 5.19 times in 2024.

Speaker 4

And we expect to get back to our targeted target leverage ratio range of 2 to 2.5 times by the end of 2025, well within our bank covenants which are shown on the chart. During the quarter, we also advanced discussions with our banking partners in evaluating options for shifting debt balances into different instruments that may provide opportunities to both lower our total interest cost and increase overall liquidity. We will provide a further update on that front with our 4th quarter results. Liquidity and cash management remain a key focus as we navigate through the seeding headwinds and continue our production ramp up. As Paul mentioned, we're actively securing additional customer prepayments and deposits.

Speaker 4

We've also secured improved payment terms from certain suppliers. Finally, in October, we obtained a proactive temporary waiver of our from our banking partners that allows us to access the additional $50,000,000 under our secured facilities should we need it. We did this out of an abundance of caution as we do expect that our current liquidity combined with the additional customer payments will be sufficient to fund operations. I'll now turn the call back to Paul.

Speaker 2

Thanks, Brian. At NFI, we're absolutely frustrated with the seat situation, but extremely proud of the year over year improvement growth and performance of our business. We are poised for a strong continued recovery and growth in revenue, adjusted EBITDA, free cash flow and net earnings. Over the next few slides, I'll walk through a couple of key factors underpinning these observations and I'll walk through a couple of key factors underpinning these observations and growth. On slide 22, we provide a summary of some of the key public demand metrics for North America.

Speaker 2

We ended the quarter with total active bids for public customers at 8,759 equivalent units including 3,226 in bids that we've already submitted and another 5,500 of EUs that are bids that are actually in process, which has increased from the Q2 of 2024. The black line on the chart overlays our awards versus the active bids. You can see the correlation between the bids in the light blue and the contract awards. We anticipate current bidding activity will help further grow our already record backlog. Our 5 year expected public bid forecast, which is compiled from published customers' fleet replacement plans, is up now to 20,690 EUs.

Speaker 2

This highlights a longer term outlook driven by robust funding that we recap on slide 22. Multi $1,000,000,000 investments have been made in the U. S, Canada and the U. K. To support transition to low and 0 emission fleets and to address congestion in urban centers.

Speaker 2

The U. S. Is working through the Transformational Infrastructure Investment and Jobs Act or IIJA that is in place until 2026 with spending that will go beyond 2026 as vehicles are manufactured and delivered. In Canada, we've expanded their federal funding through a new $30,000,000,000 Canada public transit fund. Canadian federal level funding has been a significant driver of increased Canadian demand.

Speaker 2

The combination of existing Canadian backlog alongside active bids and positive outlook from our customers has helped us now launch our all Canadian transit bus build project. This will increase our Canadian productive capacity and competitive starting late in 2025 before reaching full run rates at the end of 2026. By adding capacity in Canada for Canadian customers, it also frees up capacity for more U. S. Customers that require Buy American production.

Speaker 2

The recently elected labor government in the U. K. Is continuing to fund existing programs that support 0 emission bus purchases, which also focusing on placing more investment into the hands of regional decision makers across the U. K. With the desire to ensure funding dollars provide broader benefits for U.

Speaker 2

K. Industry and the U. K. Economy. Turning to slide 23.

Speaker 2

Based on our year to date performance, the impacts from the seat supplier disruption and our anticipated Q4, we have had to slightly adjust our 2024 financial guidance. We now expect to generate adjusted EBITDA between $210,000,000 to $240,000,000 from the revenues of $3,100,000,000 to $3,300,000,000 with 20% to 25% of those deliveries continuing to be 0 emissions. While this is a decrease from our earlier guidance, it does represent $141,000,000 to $171,000,000 year over year improvement in adjusted EBITDA. For our 2025 targets, we are actively completing our annual business plan for next year based on our typical process, but continue to see a strong path to deliver on our targeted adjusted EBITDA of greater than $350,000,000 for the year. The improvement in 2025 will be driven by significant increase in deliveries with 0 emissions representing approximately 40% of our volumes, improved gross margins, strong aftermarket continued aftermarket performance and improved overhead absorption.

Speaker 2

We are assessing the impacts of seat disruption and the improved competitive environment in North American transit and other factors as we finalize this plan. And as Brian mentioned, we hope to provide or we will provide a detailed update after we close out 2024. We have maintained our ROIC target for greater than 12% for 2025 with potential for outperformance of this metric as we see improvements in working capital invested, continued progress on customer milestone payments and advanced changes to advance in the changes we want to make to our debt structure. On slide 2024, we show our current expectations for strong Q4, which is typically the busiest period due to the seasonality of our business. The range for Q4 impact reflects the impact of seat supply disruption, our planned shipping recovery of buses from inventory as seats are delivered, plus the potential timing of 0 emission deliveries in both North America and the U.

Speaker 2

K. Our margin profile continues to improve with the graph on the right hand side showing our gross margin profit per equivalent unit, which includes cutaway, medium duty, coach and heavy duty for both North America and international. We had a strong positive trend here, which we will continue to see improving in 2025. Turning to slide 25, we highlight the increasing average sale price or ASP per EU in our total backlog, which helps support our ability to reaffirm this guidance. This amount has increased for both heavy duty buses in dark blue and motor coaches in light blue.

Speaker 2

Year over year, the average selling price of heavy duty buses in our backlog was up by 17% and up by 62% since 2021. The average selling price for coaches was up 14% 27% over the same time periods. The average selling price increases were driven by a combination of higher percentage of 0 emission orders, inflation adjusted pricing, significantly improved margins in our new contracts reflecting the competitive environment we now see ourselves in today. There are a few additional slides in our appendix that provide additional detail and metrics that further support our 2025 targets and our positive long term outlook. I'm now on slide 26 and we'll provide a few closing comments and then open the call up to Q and A.

Speaker 2

Our financial recovery continues to advance and we are capitalizing on record demand and a dramatically improved pricing environment for our products and services. We see significant growth in our financial metrics as we have the largest backlog in company history at US12 $1,000,000,000 This equates to almost 3 years of production. We have already nearly sold all of our North American public transit slots for next year and are now selling well into 2026. Our competitive positioning has improved in North America and we're working on several major bids that we will further add confidence to our longer term outlook with limited bidders competing. We're also actioning strategic initiatives to further strengthen our North America team to ensure that they capitalize on our market leading position and ensure supplier performance.

Speaker 2

Aftermarket is another continued bright spot for us providing steady recurring revenue streams and a solid foundation for cash flow generation. In the U. K, competitive dynamics have increased, especially from foreign competitors and we are actioning initiatives to continue to lower our cost base and response. We've launched a new line of 0 emission chassis in late 2023 and have received a very positive response from customers on both the styling and performance of these vehicles. We remain the market leader in the U.

Speaker 2

K. And feel we can continue to grow, but need to see the improved winning performance of these new zero emission platforms. While we tackle the headwinds on seat supply and production efficiency, we are confident we'll get through them and deliver on our backlog to provide strong future growth. I'm grateful and very proud of our team. We're now back to over 9,000 strong who are working incredibly hard and remain committed to our customers and our shareholders.

Speaker 2

While our recovery is well underway, we do not under speed the work ahead of us managing this risk in the challenging operating environment. I look forward to continuing improved and positive progress in the last quarter of this year where we anticipate continued year over year growth as we move into 2025. With that, please open the line to our analyst questions and provide instructions to our callers.

Operator

Your first question comes from the line of Chris Murray with ATV Capital Markets. Please go ahead.

Speaker 3

Yes, thanks guys. Good morning. I guess thinking about the seat problem and your revised guidance, if you look at what

Speaker 5

that implies for Q4, it's

Speaker 3

a pretty wide range, even if you think about where your number is going to be. So can you just maybe walk us through some of the puts and takes of kind of what gets you to the bottom end of the range, what gets you to the top end of the range?

Speaker 2

Sure. It's a good question, Chris. It's one of these unique dynamics where the supplier is specked by the customer. We don't really have leverage on the supplier. We do supplier monitoring.

Speaker 2

We do vendor development. We audit the supplier. Performance was deteriorated in the 1st part of this year. We were there. We were involved.

Speaker 2

We saw recovery. And of course, as of the and mid as we work through the end of Q3, their performance massively deteriorated. This is a company that was moving from an old tired facility into a new one. They moved the assembly operations and they got into real troubles when they started to move the fabrication capability. Then they lost control of their MRP system.

Speaker 2

So the number of units that were affected as I think I said in my notes that affected the Q3 delivery specifically was about 79 buses. At the same time, we had to continue to adjust our production rate because the last thing you want to do is line enter more vehicles where you know you're not going to have the seats and therefore the inventory for the rest of the buses on the way in. So as I said at the end of the quarter we had 79 that we'd expect to deliver. We also had a few of the units the seats that were supposed to be delivered to Alexander Dennis' U. S.

Speaker 2

Double deck production that didn't weren't delivered. In addition to the 79 delay that we thought that we experienced and therefore we could ship a bus, we also had another or sorry, as of today, we're at about 113 offline. So not only did you get out of control, it got very deteriorated very, very quickly. So we forced ourselves into the business. We forced an intervention to get them a full time transformation consultant and we also are supported by a number of other key customers.

Speaker 2

Some of them are direct competitors of ours who have actually put people on-site to help manage and get control of their production and fabrication operations. It's way more intrusive than we've ever had to be involved with a supplier. So the problem we now have, Chris, in terms of handicapping Q4 is how many of the seats do we think they're going to be able to deliver. The build cadence now is any bus that's sitting against the fence that's completed and waiting the seats or a full set of seats or parts is the number one delivery. So we rescheduled basically all of our demand from that supplier.

Speaker 2

What we don't know is how fast that business will get into control and therefore do we need to continue to slow the line rate down, expand the line rate or increase the line rate and how many of those offline buses will get fixed. So the downside is that we put a wide range in the Q4 because as of today, we don't actually know the pace at which they're going to recover. I believe they'll recover. I'm very confident in our team that's working inside that. We've got the guy that runs our entire fabrication business, which is like a $400,000,000 business inside there helping them to chart their course.

Speaker 2

And the wide range reflects uncertainty of that pace of recovery, not whether they will or not recover.

Speaker 3

Okay. And then maybe just another piece of the question to this is and I appreciate it's seating. It's not like something that you have to take the bus apart or put it back together again. If the seats for whatever reason show up, what's the what does it look like to actually get them into the bus and get the buses finished, approved? Is this something short?

Speaker 3

Are you going to run into constraints with inspection? I'm just trying to figure out like how fast you can rectify.

Speaker 2

Well, that's all part of our wide range, Chris, and you've been to our facilities many times. If a bus is fully built, but waiting all the seats, the seats show up, it's not that it doesn't look like they come in a FedEx box and we put it on and deliver it, right? There's X number of installation hours. And then in some cases, customers have signed off on the bus quality subject to the seat installation and then they'll inspect it on-site. In some cases, the customer said, no, I want to come see the buses inside your facility before you can ship them.

Speaker 2

So we've got various buses at different stages of that. There is no question customer inspection and approval by the customer is also one of the pacing factors. It's not like a taillight, we put it on the bus and ship it. There is going to be variation in the pace. That's again part of the dynamic of the wide range of the Q4 guidance.

Speaker 1

But Paul, I

Speaker 3

think it's

Speaker 1

fair to say the complexity of seats relative to some of the stuff we had. Yes.

Speaker 2

It was a wiring harness, yes.

Speaker 1

Much better.

Speaker 2

No question.

Speaker 3

Okay. And then maybe just looking back at your I would just like to ask this question. Looking back at the challenge suppliers, I know we've talked about wiring harnesses and seats, I think, for a good chunk of the year. You did mention that of the 2 kind of majorly impacted suppliers, the seat suppliers 1. Can you just give us a little color on who the other one is?

Speaker 3

And is there anything there that could create an issue of this magnitude?

Speaker 2

I don't believe so. As you may remember Chris and some of the people, the investors have been through our facility, we have different types of inventory labeled as different things. And so we have discrete part number, bus number parts that are dedicated to that vehicle. We have common parts that are New Flyer or MCI part numbers that can be potentially universal. And then we have Kanban or assembly type parts, nuts, bolts, washers and those kind of things.

Speaker 2

We were in the middle of a transfer from a supplier A to a supplier B to take track of all the Kanban systems. And that did not go quite as planned. Some of it are doing, some of it the translation and the implementation by our supplier. That's pretty well solved and will be solved over the next couple of weeks. It has some impact on a few line entries that we had to delay or change, but it is nowhere near the ramification of building a bus with having no seats or having no wiring harness.

Speaker 2

The irony of the whole thing is that we're way better in terms of point at use of inventory as a percentage, right? It's up to 96% or 97% or whatever it is percent of parts and station. The downside is something like seats, whether it's a partial seat, a part off of a seat or a full ship set, you cannot ship the bus to the customer and therein lies the long pole in the tent. We're beefing up our supplier vendor and vendor development team yet again. We added a bunch of people.

Speaker 2

We're adding more to it to make sure we don't get cut off guard. In this situation, we were there, we saw it, we had people on ground and only after a while we had felt because it wasn't getting any better, we felt we had to force ourselves and have some kind of a consultant and personal intervention into that business. We cannot afford them to get that much behind schedule again.

Speaker 3

Okay. My other question is just thinking about like the 2025 and longer term guidance. I mean irrespective of the seats and it kind of feels like we're call it 6 to 8 weeks away from a solution. But when you think about the 2025 guide, I think you made the comment that even when you set the guide, the world was a bit of a different place than it is today. In a lot of ways, a lot of things have gone maybe more in your favor than not.

Speaker 3

Can you talk about how you're thinking about the 2025 guide? Maybe what's a little bit better than you would have originally thought when you set that first guide? What's changed? And what kind of thoughts are you having about production rates and maybe talk about some investment in the business to give you more capacity in Canada. Was there anything else like that that would let you maybe grow beyond what you would consider the normal historical rate?

Speaker 2

Sure. I'll start it off just by context and then Brian can give you a little bit more color on the individual elements. The conversion to 0 emission vehicles, while we all get intuitively what that means, is an order of magnitude more complex on the production lines or hell, every way through the design, the sourcing, the production, the commissioning of electric bus, even the acceptance at the customer location. So in addition to the line rates that are critical for that, the mix of 0 emission versus ICE buses is another issue. The third issue that is going to play into us next year and we haven't finalized our schedule is the mix between a 40 foot bus and an articulated bus that has 2 halves.

Speaker 2

So one that has a propulsion system in it and the other which has basically the driver's compartment. And so all of those things add to the complexity of the schedule and the mix dynamics. So Brian, maybe some color on Chris' question.

Speaker 4

Yes. Thanks, Chris. Just when you talk about positive and negatives, I would say where we are now, the backlog and the order book has been a very, very nice surprise, not necessarily surprise, but situation in North America, the competitive environment and the margins in North America, we've seen improvement aftermarket business and the strength there is something that we really like and is a positive. We do have more ZEV experience now. We've got significant volumes that we've put through.

Speaker 4

We've got more experience in the field. We've got, I'll call it smarter customers who have them and know how to service them a little bit better now. We have the Alexander Dennis vehicle launches, EV vehicle launches largely behind us now for a couple of platforms. So we've got those vehicles beginning to enter service and then the increased capacity in Canada as well. Like all of those are positives and point to a pretty good future.

Speaker 4

A couple of lingering concerns, 1, the U. K. Bid environment, it's a pretty competitive environment and we see that continuing maybe a little bit more competitive than we would have thought. And then of course the supply environment where 5 years on from COVID, we would have expected that suppliers that have been with us for 20 plus years where we never had a problem. We see a problem, particularly with seats today.

Speaker 4

And so that environment maybe is exactly where we want it to be. So that's kind of the balance between the positives and negatives that we see. And as Paul mentioned, we're working through what's a prudent line rate and what are the resultant kind of financials around that line rate.

Speaker 3

Okay. I'll leave it there. Thanks, folks.

Speaker 2

Thank you, Chris.

Operator

Your next question comes from the line of Christa Friesen with CIBC. Please go ahead.

Speaker 6

Hi, thanks for taking my question. Maybe if we can just speak on the liquidity and you proactively seeking that waiver. What's the scenario analysis that you ran where you need that waiver on the $50,000,000 Is that if this leading supplier essentially declares bankruptcy or how bad would it have to get for you to need to use that waiver?

Speaker 4

Yes. I think early on as we went into assess the seating supplier, the more we got in there, the more kind of concern and downside concern that we had. Now where we are today, we're smarter. We have actually our people embedded and so we have more confidence in the recovery than we might have had. But when we felt the need to go secure the waiver, we didn't have as much information and just prudent to plan for not necessarily the worst case scenario, but as we looked at some of the downside, we wanted to be a good partner with our lenders.

Speaker 4

And as we have the discussions with them about some disruption, we just kind of collectively thought it was prudent so that we could go out and have access to that in the case that we didn't we weren't able to secure milestone payments from customers and some of the other things that we've been working on. So our expectation is that we won't need to use it. But in an abundance of caution, we went out and made sure we communicated with our lending partners so that they were aware and they've been extremely supportive and cooperative. And you've seen a couple of things that we've talked about that they where they've been supportive and they continue to believe in the business and the bright future we have ahead.

Speaker 2

Chris, I'll add another comment that it maybe isn't as intuitive to a normal manufacturing business. Because we're highly customized, we've got a certain production schedule. We know the parts that we're behind from the seat supplier. If that seat supplier starts to deteriorate, obviously, we don't want to build more and more product that sits against the fence. So we adjust the production schedule.

Speaker 2

The downside is if we're within about a 6 to 9 week window, most of the parts are coming to us anyway for the rest of the bus. So inevitably, any changes to working to the line entry rate has not only cost with non productive labor, but has effectively parts coming in that we're not going to use for a longer window. And so to Brian's point, having the liquidity or the interest covered flexibility should we need it, just gives us that more security. And quite frankly, given some of the challenges over the past couple of years, we'd much rather have that positive mature advanced conversation with the lenders than under duress saying, holy smokes, I need a waiver tomorrow, should I need it? And that was really the intent.

Speaker 2

I think the lesson learned from last time, really try and get out in front of these things.

Speaker 6

That makes sense. And maybe just if I can ask, I know you've been asked this question on previous conference calls, but given the verbiage around the liquidity where you mentioned you have access to capital markets. Is there an intention to issue equity or are you pretty firm in your belief that you're not going to go that direction?

Speaker 2

So we are we have no intention unequivocally today to want to do that. We believe that we'll solve this seed issue. It may take shorter or longer than we thought. We believe that we'll be able to relieve the inventory, some of which we've got some advanced payments for, some of which we've asked customers now not to have terms so that once we deliver they pay us real time, some have agreed to that and some will go to normal terms. We also believe that we have planned for a much more stable schedule as we move into 2025.

Speaker 2

We have no intention of issuing equity. We believe that we can manage our way through that with the existing profile. The change earlier this year that I just can't stress enough, when we got support from APTA, our trade association, but also the FTA in the White House around what they call better contracting terms that allowed for clarity on milestone payments has been an absolute game changer for our business. Now most of those advanced milestone payments unfortunately have helped us finance this crazy situation with seats, But that is a net positive to our business going forward where the vast majority of contracts we're bidding on right now have milestone payments embedded in them. And as I said before in my statement, where we find ourselves in a probability of 1 or maybe only 2 bidders, we're all asking for milestone payments and therefore they're becoming far more commonplace than they were than we even had before.

Speaker 2

And that has fundamentally changed the current, but also the future working capital profile of our business. The non unearned revenue that we have today and what we expect in the future is a material number.

Speaker 4

And I'll just add to that that as we continue to see the leverage ratios come down, we're no longer talking about being 5 leverage ratio 5 in a couple of quarters. We're there right now. We continue to project that to come down. So as that continues to come down to where we would expect it to be, we'll have access to other kind of debt instruments and things like that. So we're definitely moving into a zone where even if we were to need some additional liquidity, in much better shape with the actuals and we're not talking about, hey, in 6 months or so, we're talking about the here and now with some of the leverage ratio improvement.

Speaker 6

Okay. That's really helpful. And then maybe just on the so the milestone payments, sounds like a lot of progress is being made there. I think I read a few weeks ago that LA Metro is adopting some of these recommendations for less customization on the buses as well. Are you seeing that from other municipalities?

Speaker 2

So it's a really good question. So back to the task force mission. A, number job 1 was to deal with milestone payments. Job 2 was to deal with some clarification and standardization of clauses that were far more balanced like price determination, redetermination mechanisms and periods of hyperinflation and so forth. The 3rd leg redetermination mechanisms and periods of hyperinflation and so forth.

Speaker 2

The 3rd leg on that whole priority was this customization. And so the first thing that happened is the FDA grants for 2024 for 0 emission or for infrastructure, charging infrastructure, part of their scoring criteria was based on minimized customization. So we've now starting to see a lot more customers think that way when they're issuing their RFPs. We'll start to see more customers like LA that are being vocal about trying to get regional operators to have much more common fleets. Now that is not a light switch.

Speaker 2

Remember, we got a backlog that is based on a number of years of bidding that had customization. So it's not like it's going to impact 24 or 25 that much, but it is no question going to change the game. We think 26, 27 where we'll never get to pure standardization, but we might get closer to configuration than pure unadulterated customization. It's all net positive for the health of our business and our industry, but it's not a light switch.

Speaker 3

Okay, that's great. Thank you.

Speaker 2

I'll jump back in queue. Thank you, Christa.

Operator

Your next question comes from the line of Daryl Young with Stifel. Please go ahead.

Speaker 5

Hi, everyone. Just with respect to the 2025 outlook, just trying to get a sense of some of the potential upside, like what's the magnitude of the pricing in those orders that's coming through that you're rejigged versus what you would have originally expected? Because it does sound like there's some positive upside there.

Speaker 2

So as we built the 2025, we're in the process of building it and you can see in our deck there, I think, Stephen, we've got it on Slide 25. There's a dramatic uplift in the average price of what we're bidding on right now. And of course, the increase in price is a reflection of a couple of things. A, the 0 emission dynamic makes for more expensive components, battery packs of $200 versus a $30 engine, those kind of things. The second issue is you have hyperinflation that has continued in some places and in some cases cost of components coming down.

Speaker 2

So there's movement on the, let's call it, input cost across there. There's labor increases, we've seen some areas across the whole world has seen some jumps over the last little while. And then the 4th element is that we are because of the competitive environment in most of our markets, we are have increased our margin. So you can just see on that one slide again 25, you can see 3 years ago, the average transit bus in our backlog was 5.16. It's now 8.60.

Speaker 2

And that number is only going to go north as 0 emission goes up and as we continue to bid strategically where we think there's the best opportunity for return on the capacity that we sell to them. So we've tried to think about that. As Brian outlined, the challenges with next year is we don't want to try and ramp up the volume too fast as we get a higher percentage of 0 emissions because that in itself adds an element of risk. And like we got just snooker here right now with the seed supplier, we're going to spend way more time and more focus and more and more making sure that the vendors are capable of ramping up not only the volume as we increase, but change the mix alongside us. So look, we're going to finalize our 2025 plan before the end of the year.

Speaker 2

We pitched our first pass of it this morning to the Board, great conversation and dialogue and we'll see what that looks like.

Speaker 4

And then just to sorry, just to add a little bit to that as well. I think the average backlog is largely just the dynamics of the market is North America phenomena and most of our order book in the transit business is full for 2025 at this point. So a lot of the margin improvement and things may be reflected in 2026 more so than 2025 just to keep that in mind.

Speaker 5

Got it. And then with respect to this year and obviously the seating is the big issue, but you did mention the complexity of the ZEBs. What's coming through in the next quarter here and into 2025? Like are you realizing the same margin that you would have expected on those buses? Or is that complexity really bringing down the profitability of those buses compared to

Speaker 7

what you thought? And how much

Speaker 5

of that might be impacted in that guidance reduction? Like is it

Speaker 2

85 percent of seats? No, I don't yes, it's the vast majority is supply disruption as opposed to the time or complexity of us building a 0 emission. And we've built a bunch of them now, right? So we're well up the learning curve. We don't have really anything wildly new, for example, on the MCI or the New Flyer side.

Speaker 2

We have more zero emission next year. We have more hydrogen fuel cells. On the Alexander Dennis side, we still have some learning curve as we've now transitioned basically 2 of the platforms. The third one is coming online and then the 4th as they go to the zero emission platforms. But I would say that the disruption in the guidance adjustment is a direct correlation of the seat dynamic, specifically as it relates to what happened to us in Q3 with a little bit of stunted deliveries and as we now introduced a wider range for the Q4.

Speaker 5

Got it. And then just one last one on the balance sheet. The last couple of quarters, you talked about the potential to maybe term out some of your higher cost debt that's effectively off the table given or I guess off the table until you kind of get through these seeding issues? Or is there still an option to continue advancing that restructuring in some of the notes?

Speaker 4

We continue to have some really good discussions with the banking syndicate and other lending partners. Right now, we're really evaluating our current year financials as I think it was pointed out earlier, we have a fairly wide range in Q4. And so as we look to narrow that range and get closer to the end of the quarter, it's really more about timing and when is the optimal timing to go to market so that we can realize the material savings and interest and whether that's Q1 or Q2 of next year, unsure at this point. And I think we committed to give you an update with Q4 earnings release in a few months.

Speaker 3

Okay, great. Thanks, Herb. Thanks,

Operator

Your next question comes from the line of Cameron Doerksen with National Bank Financial. Please go ahead.

Speaker 7

Yes, thanks. Good morning. I wanted to, I guess, ask you about your thoughts on the new U. S. Incoming administration.

Speaker 7

I mean, obviously, it's going to be hard to maybe predict what they're going to do. But I guess maybe I want to understand better, I think, a downside scenario here on public funding transit in the U. S. So maybe if you can just provide a little bit of your thoughts on where your confidence, I guess, that the current funding bill is going to continue as planned and how supportive the next administration is going to be for public funding transit public transit funding?

Speaker 2

It's a great question, Cameron. And I wish I had a crystal ball, but let's look a little bit of history and let's also kind of get a status quo. So first of all, transit funding for the last 20, 25 years has for the most part been a bipartisan issue because it's not just green transit that's big right now. Trying to get congestion, trying to get pollution out of the cities, trying to get more people out of their cars and therefore efficiency through cities and so forth has been supported by both republics and democrats. Number 2, the previous Trump administration took over and supported Obama's administration's FAST Act that went through, I think it was 2016 to 2020 and then in fact Trump extended it into 2021.

Speaker 2

Number 3, the Infrastructure Investment and Jobs Act is currently in place until 2026 and funding from that act is currently and will be continued to use to purchase the 27 and 28 builds. It's hard to stay at this stage what the new administration's post IIJA funding might look like. Although our industry generally believes there's an expectation there will be continued bipartisan support for transit. Now as we are in a situation of very strong funding, we've seen a lot of agencies pushing to get their RFPs out on the street and get contracts in place prior to 2026. And so I think we rattled off in here the number of active bids we have, the number of bids already submitted and the number of units in our bid universe, which again reflects fleet replacement plans are reflective of what they're currently thinking.

Speaker 2

I talked a little bit I think in Chris's question about the healthy contracting rules which have made a better if Mr. Trump is pro business, it provide a better environment for our industry in terms of pricing, pricing mechanism and then adjustments and appropriate things. The other thing that I'll comment is, if somebody hypothesis that Mr. Trump will not be as green in his outlook, that may be the case. But that's part of the reason we chose to be propulsion agnostic.

Speaker 2

We've seen a number of competitors recently go out of business or change dramatically where they only have a 0 emission offering. We've chosen to be agnostic and continued ICE, electric sorry, diesel, clean diesel, natural gas. We've seen an uptake in the last little while of hybrids, people getting closer to 0 emission. And then of course, we're seeing strong 0 emission and fuel cells. So our ability to kind of continue to provide whatever they need depending on their funding or their political environment, we think helps safeguards a little bit as opposed to people that are only 0 emission.

Speaker 2

But who knows what Mr. Trump administration might do. Right now, there's a lot of funding in place that will help only build our order book for the next couple of years.

Speaker 7

Okay. No, that's good color. And just on the mechanics, I guess, of how the bus orders are funded, Is everything that in your backlog both firm and options, is that already appropriated money I. E. It could not be clawed back in the scenario because it's already been appropriated by Congress?

Speaker 2

That is my understanding, Cameron. Again, with our new administration, I guess, the uncertainty is never we really don't know what he could or might want to do. But our understanding is to put an RFP, that customer has to have secured appropriate funding. And so therefore, they're not just fishing for pricing when we see it, that they're actually planning to buy those buses and have the ability through those contractual mechanisms to exercise the options.

Speaker 7

Okay. That's good. And just maybe final one on, I guess, this issue just around, I guess, potential tariffs that might come up. How would that potentially affect your business?

Speaker 2

So we've been doing a little bit of work on trying to understand the impacts of tariffs. Today, most of our stuff is built physically in the United States for the United States market. We don't export a lot out of the U. S. Other than in some cases, we'll build some parts that send to Canada.

Speaker 2

The other end where we build something in Canada, a shell, most of it is used with U. S. Steel or U. S. Components and so forth.

Speaker 2

We also live in the environment of the USMCA where some things may have a tariff on it, but the tariff gets waived out because of the basically the old NAFTA tariff codes don't apply to some of those components. So we're basically concerned obviously, but not disastrous disasterly worried that there's going to be a massive impact. It may change some of the things we do say in Canada. We may want to push more to the U. S.

Speaker 2

Going forward and those kind things. We have plants on both sides of the border. So we'll continue to try and adjust if and when this kind of stuff comes through. We also have this element as you may remember in most all of our contracts have what's called a regulatory clause. And so if the government changes the emission standards or changes the government puts in a tariff, we have the ability to go back and negotiate with the customer on those anything that's driven from a government change.

Speaker 2

So again, until we see exactly what things happen, we feel comfortable to be able to manage our way through it.

Speaker 7

Okay. That's great to hear. I'll leave it there. Thanks very much.

Operator

I will now turn the call back over to Stephen King for closing remarks.

Speaker 1

Thanks everyone. Thanks for your questions and thanks for those listening in on the webcast. As always, you can find all of our materials on our website and please don't hesitate to reach us online. We have our email contact information or you can get me at stephen.kingnfigroup.com and we look forward to speaking with you again early in the New Year. Thanks.

Speaker 1

Have a great day.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Key Takeaways

  • In Q3 2024, NFI achieved a 375% increase in adjusted EBITDA year-over-year, a 12.2% gross margin (its highest since Q1 2021), and recorded new orders of 1,050 equivalent units, helping drive a record $12 billion backlog.
  • A major North American seat supplier’s delivery failures disrupted Q3 production by about 79 buses (with 113 units still offline), prompting NFI to deploy on-site support, pursue an alternative European supplier, and expect impacts into late 2024.
  • Free cash flow turned positive in Q3 (versus –$43 million a year ago) thanks to advanced customer milestone payments, though working capital remains high; NFI secured a $50 million waiver under its credit facilities to bolster liquidity if needed.
  • Demand remains robust, with year-to-date awards of 7,585 equivalent units, active public transit bids totaling 8,759 units, and a five-year forecast of 20,690 units, underpinned by U.S. IIJA funding, Canada’s $30 billion transit fund, and U.K. zero-emission investments.
  • For 2024 NFI now guides to $210–240 million in adjusted EBITDA on revenues of $3.1–3.3 billion (20–25% zero-emission deliveries) and reaffirms a target of over $350 million EBITDA and >12% ROIC for 2025, driven by higher ZEB mix and improved contract pricing.
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Earnings Conference Call
NFI Group Q3 2024
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