NFI Group Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 5 speakers on the call.

Operator

Day and thank you for standing by. Welcome to the NSI Group First Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

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

Speaker 1

Thank you, Michelle. Good morning, everyone, and welcome to NFI Group's 1st Quarter 2023 Results. This is Stephen King speaking. On Slide 2, you will see that joining me today are Paul Subry, President and Chief Executive Officer and Pappas Sousoni, Chief Financial Officer. On today's call, we will provide financial results for the Q1, This call is being recorded and a replay will be made available shortly.

Speaker 1

We will be using a presentation that can be found in the Investors section of our website. While we will be moving the slides via the webcast link, we will also call out the slide number as we go through the deck Starting with Slide 3, I would like to remind all participants and others that certain information provided on today's call may be forward looking based on assumptions and anticipated results that are subject to uncertainties. Should any one or more of these uncertainties materialize or should the underlying assumptions prove incorrect, Actual results may vary significantly from those expected. You are advised to review the risk factors found in NFI's press releases and other public filings on SEDAR for more details. We also want to remind listeners that NFI's financial statements are presented in U.

Speaker 1

S. Dollars, the company's reporting currency, and all amounts referred to are in U. S. Dollars, unless otherwise noted. One other item to note, NFI has retrospectively adopted IFRS 17 for insurance contracts on January 2, 2023.

Speaker 1

Please refer to our MD and A for details of the impact of this adoption. On Slide 4, we have included some key terms and definitions referred to in this presentation. Of note, 0 emission buses or ZEBs consist of battery electric, hydrogen fuel cell electric and trolley electric buses. Equivalent units or EUs It's a term you'll hear throughout our presentation and they represent both production slots and delivery statistics. Most of our vehicles represent 1 equivalent unit, 60 foot transit bus takes 2 production slots and is therefore equivalent to 2 EUs.

Speaker 1

Slides 5, 6 Kevin, provide a brief overview of NFI. For those of you new to the story, interested listeners are encouraged to visit our investor website and listen to our 2022 Q4 results call for a more in-depth introduction to our overall business. NFI continues to lead the Zevolution to 0 emission or what we Yes. Continues to lead the evolution to 0 emission or what we call the zevolution. Slide 8 provides statistics on our capabilities and performance in ZEVs.

Speaker 1

The 2,891 electric vehicles we've delivered since 2015 have completed over 115,000,000 electric service miles in 130 cities across 6 countries. Demand for electric vehicles continues to accelerate quickly. In our North American bid universe, over 50% of anticipated customer purchases Over the next 5 years are expected to be for electric vehicles. I'll now pass it over to Paul Mpipas, who will recap the company's financial results for the Q1.

Speaker 2

Thank you, Stephen, and good morning, everyone. I'll begin on Slide 10 with a summary of our Q1 2023. We continue to see record demand for our products and services, paired with the continued supply chain disruption and associated production efficiencies. But we have seen and are experiencing encouraging signs of improvement on both fronts. In the quarter, Manufacturing segment of bus and coach deliveries was up 20% and revenue up 18% with adjusted EBITDA up 42% from 2022.

Speaker 2

This significant improvement in adjusted EBITDA is driven by It improved volumes and enhanced product mix. We also had fewer legacy inflation impacted contracts that were originally bid in 2020 and 2021 in the Q1. And so while there was an overall improvement, the Manufacturing segment continues to be impacted by certain supply disruption as well as lower than expected ZEB deliveries and legacy inflation impacted contracts. Our work in process increased in the quarter in part due to typical seasonality, but also as a result of delays related to the installation of new drain technology within the energy enclosure systems for certain New Flyer battery electric buses in North America. Initial work on the drains commenced in the 2nd quarter and we expect Aftermarket continues to provide strong contribution with increases in revenue, gross margin and adjusted EBITDA and with return on sales now of 21%.

Speaker 2

This exceeded our expectations and to us is a sign of the strength of our leading aftermarket parts business in both North America and the UK and Asia Pac regions. Now Stephen just talked about ZEB metrics and so I'll skip over to our demand environment, which after setting numerous records in 2022 achieved even newer and higher heights in 2023. Year over year, our North American public bid universe is up 18%. New orders to NFI are up 33% And our active bids are up 99%, reaching 11,066 equivalent units, the highest number of quarterly active bids we've ever had. We entered the Q1 of 2023 with 2,000 833 equivalent units bid in process and another 8,233 equivalent units bid submitted, which we expect to translate into steady orders throughout the rest of this year and growing our backlog going forward.

Speaker 2

Our backlog has now reached a Staggering $6,700,000,000 up from $4,900,000,000 at this time last year. It is our highest dollar value ever And NFI has a steady demand environment for today, for our short term order book and for our future. On the next two slides, we'll provide graphs that provide an update on the supply disruption and some of our associated inefficiencies as a result. First on Slide 11, Our supplier is our supplier risk ratings. This data is compiled from a detailed risk assessment process that we've been doing for many years that monitors and evaluates The risk and potential impact of supplier disruption of NFI's top 750 suppliers.

Speaker 2

After an Incredibly challenging period from late 2021 throughout all of 2022, we have now started to seeing positive and significant size of improvement. While there are challenges that continue to persist and our supply chains on a few fronts are not completely healthy, We continue to take actions to improve parts availability and are experiencing improvements in on time deliveries from our suppliers. This supports our outlook Start the gradual ramp up production in the second half of twenty twenty three as we planned. Now these instructions inform the graph on Slide 12. These are our quarterly vehicle line entry rates or otherwise stays the number of new buses and coach builds that we started in our production facility each week and our quarterly work in process dollar investment.

Speaker 2

Line entries should be in the 1500 units a quarter range similar to 2019. The results of the pandemic and supply disruption are evident. This data shows that our facilities were extremely inefficient And our teams were frustrated as they could not complete vehicles, growing our work in process of buses and coaches that were missing certain parts and components and had to be rectified offline. Line entries improved in the Q1 of 2023 to the highest levels we've seen since early 2021. We now expect production to continue to scale slowly as we ramp up in tandem with our supply chain improvements throughout the second half of this year.

Speaker 2

As you can see on Slide 13, we have continued to take actions to improve parts availability that have had a meaningful impact on our production and position us well for our expected increase in vehicle production in the back half of this year, An amazing effort by our sourcing, supply, engineering and operations teams in cooperation with our suppliers. I'll now ask Kapaso to walk you through details of our financial results and after that I'll come back and provide an update on our outlook. Over to you, Kapaso. Thanks, Paul. Picking up on Slide 14, we outlined the backlog growth Paul discussed.

Speaker 2

With 4,910 EUs of firm orders, We have essentially sold out 20 23 production slots, albeit lower production levels with good visibility into 2024. We now have options out to 2028 providing significant visibility for future years. Quarterly deliveries were flat within heavy duty transit in response to continued supply challenges. Both motor coach and cutaway sales were up year over year illustrating signs of recovery in these markets. We also saw higher average sales price across all segments, reflecting our ongoing efforts to adjust contracts for inflation as well as the transition to higher priced 0 emission vehicles.

Speaker 2

On Slide 15, we provide key financial indicators. Adjusted EBITDA exceeded expectations at $7,400,000 and free cash flow while negative increased by $11,500,000 or 29% year over year. Liquidity ended at $124,100,000 down $19,400,000 from the end of 20 22 Q4 primarily due to increased drawings from our credit facilities to support increased working capital, primarily parts inventory and offline buses that Paul mentioned. Slide 16 shows our gross margins by quarter from 2019 through the Q1 of 2023. Aftermarket saw some pressure in 2022 due to inflation and freight impacts, the significant improvements in the Q1 from our efforts to mitigate price increases and lower freight costs combined with improved economic conditions.

Speaker 2

Manufacturing margins appear to have hit Bottom in the Q2 of 2022, with steady improvement since even as we continue to manage through the impact of rapid inflation from contracts won in the previous year, supply disruption and significant production inefficiency. On Slide 17, We outlined the impact to our net loss and adjusted net loss. Our net loss for the quarter increased by $18,000,000 from 2022 Q1, Primarily due to increased interest and financing costs, adjusted net loss decreased after factoring in normalizations for a fair market value loss, Our interest rate swaps and the lower gain, the cash conversion option related to our convertible debt. On Slide 19, We summarize our capital allocation priorities. We're working diligently with our banking partners to complete amended agreement as planned by the end of 2023 Q2 and remain focused on cash management, liquidity and strengthening our balance sheet.

Speaker 2

The proceeds from the Manitoba And the EDC facility received in January 2023 supported liquidity and accounts payable during the quarter. WEP levels remain elevated, but we expect a reduction to start late in the second quarter as buses and coaches missing components And ZEBs requiring a new train technology are completed and delivered. These deliveries will continue through 2023. As we advance credit amendments, we are exploring other potential opportunities to generate cash flows, including customer prepayments and capital market activities, A shelf prospectus was put in place to provide us the optionality related to these activities. Turning to Slide 20, We provide an update on the credit timeline.

Speaker 2

NFI is pursuing multi year agreements that provide capacity, flexibility and covenants matched to our anticipated financial performance and recovery. We continue productive discussions with our senior credit syndicate to advance the amendment and hope to announce details of these efforts in the near term. I'll now turn the call back to Paul to discuss our outlook and financial guidance. Thank you, Pefaso. I'm now on Slide 22.

Speaker 2

And I'll move quickly through the next few slides to explain the drivers in our recovery and that support our longer term outlook. On Slide 22, we provide summary of some of our demand metrics. The chart shows a 5 year outlook from our North American bid universe along with known and active bids. The active bids of our over 11,000 equivalent units combined with a 5 year customer projected outlook for procurements at another 20,100 EU, providing a record total bid Universe Now of over 31,000 equivalent units, which supports our view that vehicle demand will continue to remain high going forward. Our Infrastructure Solutions business also continues to deliver and since inception has been responsible for the installation of 23 through 2025.

Speaker 2

This is an important part of our business as it creates a turnkey offering of infrastructure and vehicles that help customers on their electrification journey. On Slide 23, we highlight another impressive quarter of wins with 1873 equivalent units of new orders for a total of 6,200 EUs of new awards during the LTM period. We reported numerous multi year orders from major Canadian U. S. Customers and significant zero emission orders from customers in the United Kingdom and Hong Kong during the period.

Speaker 2

We also continue to see customers use state and other procurement schedules to help speed up their vehicle orders specifically in the United States. On Slide 24, we show that these orders continue to drive our Order book and our book to bill ratio, which remains well above 100%. We now expect the book to bill to remain above 100 throughout all of 2023. While option conversion rates on an LTM basis were a low of 21%, this is expected to be a temporary issue As we've seen numerous older internal combustion industry and legacy EV orders expire being replaced with newer zero emission bus and new technology buses, We anticipate that conversions rates will improve dramatically as we move through 2023 and into 2024. On Slide 25, we provide a quick summary of the record government funding in each of the major markets in which we participate, which continues to drive the heightened bid environment.

Speaker 2

For a more detailed overview of the funding environment for each of those unique markets, please refer to our 2022 fiscal year results call on our website. Turning to Slide 27. We again reaffirm our guidance for 2023, 2024 and our targets for 2025. With positive improvements in supply chain performance during the Q1, we continue to view fiscal 2023 as a transitionary year and the beginning of our recovery. There will be growth from 2022, but we will operate at production levels in the first half of this year we will operate at lower production levels In the first half of twenty twenty three, prior to the ramp up beginning in the second half, exiting 2023 at higher production levels We'll set the stage for our 2024 and our 2025 performance.

Speaker 2

Our experience shows that increased efficiency and volumes drive margin enhancement And this was apparent in the results through our 2015 through 2018 period. Going forward, we anticipate the overwhelming majority of our contracts to be built in 2024 and 2025 to be now appropriately priced, matching higher material input and wage costs to our contract pricing. We also anticipate adjusted EBITDA of $30,000,000 to $60,000,000 in 2023 per the guidance that we provided previously, followed by a significant increase to $250,000,000 to $300,000,000 of EBITDA in 2024, driven obviously by production increases, volume recovery and cost management and a 2025 target of approximately $400,000,000 of adjusted EBITDA. We are very confident that we can achieve our target with the expectations that will exceed $400,000,000 of EBITDA as we get into 2026. We've also maintained our ROIC target for greater than 12% for 2025, with the potential for significant outperformance on this metric as we delever our balance sheet and see improvements in our working capital investments.

Speaker 2

On Slide 28, you can see that the 0 emission buses as a percentage of our total deliveries have been increasing rapidly, going from 8% in 2020 to 23% last year in 2022 with the expectations for additional growth in 2023 and beyond. In the Q1 of this year, 21% of our deliveries were 0 emission. Although this was somewhat depressed due to delays related to the requirement for the new drain technology We've installed within the energy enclosure systems for certain battery electric buses in North America that we will recover in the second half. Zero emission buses as a percentage of our backlog have also been growing quickly, doubling in size from 2021 to 2022 and reaching now a record of 36% in 2023 Q1. Slide 29 highlights that our backlog pricing is also up significantly within both the Heavy Duty and Motor Coach segments.

Speaker 2

This reflects a combination of higher 0 emission orders plus inflation adjusted pricing to be reflected in our new contracts and bids. Finally, I'd like to remind everybody and announce that our Chair of our Board, the Honorable Brian Tobin We'll be retiring today after 18 years as our Chair. Brian stayed on for a couple of extra terms during the COVID period and supply chain realities, We are tremendously grateful for all that he has done for our business. Later today at our Annual General Meeting following the election, Ms. Wendy Key will take over as the new Chair of NFI.

Speaker 2

With that, I'll turn it back over to Steven to summarize our investment thesis and then open the mic to questions.

Speaker 1

Thanks, Paul. On Slide 30, we provide this short summary of our story and investment thesis. We are market leaders with unprecedented demand for our products and services. We are poised for recovery with plans to ramp up production slowly in tandem with sustained supply chain improvements. We are focused on completing our capital markets efforts to establish amended credit facilities, so we can place our complete focus on operations and driving the business forward.

Speaker 1

While our targets may seem aspirational compared to today's results, We have a history of outperformance and the road to $400,000,000 of adjusted EBITDA is achievable, effectively recovering slightly beyond our pre COVID levels or pro form a $333,000,000 of adjusted EBITDA. This is especially true when viewed within the context of the strength of our order book, backlog and the ongoing demand for our vehicles and aftermarket parts. It has been a positive start to 2023 and we are confident in Innofy's future. As always, we are proud of our history and excited about the future ahead of us as a market leader. We'll now open the line to analyst questions.

Speaker 1

Michelle, please provide instructions to our callers.

Operator

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

Speaker 3

Thanks folks. Good morning. Good morning, Greg. So just Turning maybe to the discussion around the credit facility. Wondering if you could give us some more color.

Speaker 3

Originally, I think you had Kind of indicated that you wanted to have this in place before you reported today. Just wondering how this is going, any progress you're making? And I guess the other piece The existing facility was due to mature early in 2024. As part of this discussion about also perhaps Extending this for a longer term at the same time. So any color you can provide on the process would be helpful.

Speaker 2

Thanks, Chris. Appreciate the question. It's Paul here. So the extension we received, the 6th amendment to our agreement that was done through the COVID and Supply Chain Dynamic was completed, as you know, in December and it had an expiry date of the end of June. So As you know, we issued a shelf prospectus in February to kind of introduce and provide us several options going forward.

Speaker 2

The credit negotiation with the syndicate has gone very well. We are on track and expect to have that completed by the end of June, which is our target, which is the current term of that agreement. The term of the agreement going forward and the work that we're doing with the syndicate and just A shout out to the syndicate. Look, these teams, 11 different banks have gone back to their credit committees several times on our behalf over the last couple of years. So we understand They're drivers of risk mitigation and ensuring we have flexibility going forward.

Speaker 2

Very pleased with where we're at with the syndicate And I expect that to be announced. And there is no question that we are looking for a term that goes out 2 to 3 years to allow us runway as we manage through the recovery we talked about in today's call.

Speaker 3

Okay. That's helpful. You'd also mentioned previously that you thought you were able to do this without having though to Issued additional equity, is this is that something that you think is maybe going to have to be more fluid in the future or is that something you still think that's

Speaker 2

Well, so clearly as we evolved our business over the last couple of years and never would have imagined the hit we took in 2022, The discussion with the banks is wide open on all different opportunities and part of the shelf was to open the breadth of The tools and the instruments that could be used, it all starts with a credit agreement. And so any other things we do, whether it's been looking internally at our Facilities and our capability at things like sale leaseback or things like customer advanced payments and playing with them prepayments and so forth, Milestone payments from some of those customers, obviously, the WIP reduction all plays into the conversation. First step is to get the credit agreement done And to finalize that with respect to any of the other actions we'll take. And so stay tuned. I expect, as I said before the end of June, to be able to give you Some really solid color and insight on exactly what we're going to do.

Speaker 3

All right. That's helpful. Just looking at the quarter's results, Aftermarket, I think I've never seen a number quite like that in terms of margin performance. Can you just maybe provide some additional Caller and is this going to be like a one off number because this is approaching like a 30% margin number, which again, usually You're happy in the high teens. So if you could just give us some color on maybe what happened there, if there's anything unusual or one time in that?

Speaker 3

And how does that play into the rest of the year, please?

Speaker 2

Well, super question, Chris, and I appreciate you highlighting that. Our teams have done a really good job of responding. Both, as I said in my comments, both the North American business and the International Parts business were ahead of our plan. So from a revenue perspective, strong. And the split between private customers and public customers both showed improvements, which to us reflects the recovery.

Speaker 2

Many people look at our business and look at ridership as the barometer of the health of our customers. And while ridership is critical, the whole reality around getting buses Back in service, customers optimizing their route structures and all those things to keep those buses moving has helped. We did feel and thought through COVID, we had a number of situations where customers were far more focused on execution and their own survival than they were on planning inventories. So that's the first issue. The second issue is that we've really worked hard over the last 2 years on dynamic pricing.

Speaker 2

And by that I mean roughly 60% of our business is day to day or quote by quote as opposed to 40% of our parts business is contractual or multiyear Contracts. So as we've seen price increases over last year, whether it's from our suppliers or from the freight and surcharges and those kind of things, Our teams have worked really hard to ensure that we are adapting our prices to our customers as we see any changes in cost base. So we're not Swallowing margin hits like we saw in the past. You've also got positive environment right now where The inflation has started to slow down and clearly will be input cost of parts is better. Freight costs have come down, surcharges for the most part have slowed down.

Speaker 2

And so the other part of this is we are working crazy hard on the management of our freight. Just context and you may see this in the financial statements, but rough order of magnitude, our North American parts business cost about $35,000,000 of Overhead and SG and A to run the business for the year, we spend about $33,000,000 to $35,000,000 of freight, bringing it in and then shipping into our customers. So we are working really hard at optimizing freight and delivery to our customers, which has had a positive impact on the business. All those things have been really positive. I'm not so sure that is sustainable at the same level to the second part of your question going forward.

Speaker 2

But I think we've proven that we've mitigated what happened to us in kind of 2021 2022 and we're now in a much better position. The other reality, quite frankly, as we are the largest player both in North America domestically for our products and some of the others is that we have had availability of material better than some of our competitors and our ability to satisfy our customers' need is based on our size. All those things have conspired to really help us show a solid quarter. And quite frankly, we're projecting a solid year in our aftermarket parts business.

Speaker 3

Right. That's helpful. Thanks very much, guys.

Speaker 2

Thanks, Chris.

Operator

Thank you. And one moment for our next question. And our next question is going to come from the line of Daryl Young with TD. Your line is open. Please go ahead.

Speaker 3

Hey, good morning, everyone.

Speaker 2

Good morning, Darryl. Hey, Darryl.

Speaker 3

Just one quick one for me. With respect to The longer term 2024 and 2025 guidance and I guess the battery drain issues that you described for The ZEB Buses. Just wondering how you're thinking about some of those inefficiencies as we go through this evolution to the battery electric buses. And I mean, it's an enormous transition for the industry and it will likely be some technology teething pains as we go through that. So What kind of buffers are you building into that guidance to maybe reflect some of those unexpected technology inefficiencies in the future?

Speaker 2

Yes, that's a super question. First of all, the forecast that we've used for 2024 and 2025 on volume, Total volume still are not the levels that we expected or that we had, sorry, pre COVID. So we clearly expect market recovery, Total number of deliveries as an industry and us to recover, but the line isn't as steep as some may think on the surface and primarily because The selling price for 0 emissions is higher and the margin is higher, so we don't have to sell as many units. The second issue is we've tried to go after through our NFI Forward and NFI Forward 2.0 initiatives to adjust our cost base and we've talked a little about that kind of over the years. We've got the added performance, Strong performance and forecast associated with our parts business as well as our infrastructure solutions business.

Speaker 2

So all those things kind of Lead up to a 0 based budgeting, if you will, of units, dollars, margins, mix to get to those 24, 25 target levels. There is no question that the percentage of orders that we're getting right now associated with Zero Mission has gone up. And we took the conscious decision a couple of years ago not to build 0 emission buses on different production lines. By definition, that is built in some efficiency of building a 0 emission bus or an internal combustion bus or a natural gas bus and so forth on the same production line. We have tried to design those lines to be as flexible as possible.

Speaker 2

And quite frankly, the more 0 emission we get on the lines, The more efficiency we'll also get. We're also in the process as you know of shifting some of the supply chain because The suppliers of batteries, harnesses, inverters, all the electronic components are migrating more to that 0 So we're cautiously trying to manage the mix over that period of time. The last thing is you're absolutely right. There is no question that there are Teething pains, learning pains associated with 0 emission vehicles. This whole drain dynamic is a result of An unintended consequence that by the way has not just affected NFI, we've seen almost all of our competitors have some kind of a recall associated with the battery in The reality is that there is both high voltage cables connecting the batteries inside of these battery systems as well as there is cooling systems.

Speaker 2

And we've all learned very quickly about that the potential for leaks. Now originally, the battery enclosures were designed to be Completely self contained and not be able to deal with leaks. So the addition of drains is a safety measure to ensure that if there is a leak inside a battery enclosure that leaks out, so that doesn't create a potential for a fault or therefore a thermal event. So we've learned a ton about sourcing, a ton about the deployment, about the design of all these kinds of things. We continue to do that.

Speaker 2

The other part of it is that as we've had more and more of a solid order book over the last year and leading into 2024 2025, We have a lot more visibility on our expected margin based on our current costing approach that we're able to Our pricing going forward and our win rates have been very, very strong. So all those things have really helped us feel comfortable with the numbers that we've put out And we continue to learn as the fleet adopts 0 emission vehicles, whether it be battery or hydrogen fuel cell related.

Speaker 3

Got it. Okay. That's great color. Thank you. And then just one more.

Speaker 3

I mean pricing you've made huge headway on The average price in the backlog, how much more you need to put through and or are we getting close to Having recouped kind of 100% of the cost at this point of the inflation cost on the price?

Speaker 2

Well, that's a great question. And of course, as We've guided and been clear in 2023, a good portion of what we're building is still stuff that was bid in 2021 or 2022 Free the massive inflation that we saw primarily last year. What would the teams have been pricing since the first Really the Q4 and the Q1 of this year includes all of the inflation that we experienced and we've done a lot more work to validate the pricing from And the contractual relationships we have to ensure that we can manage the going forward and deliver with the margins we expect. And we have gotten more aggressive and more defensive or conservative, if you will, on the expected margin, Given that the risk profile that we saw historically. So we're feeling really good.

Speaker 2

And of course, as you know, every time we bid, we're not bidding based on a standard cost. 60% to 70% of those costs were actually getting quoted from suppliers. And so all of our pricing now reflects that higher inflation base. Yes, that's all. I'll get back in

Speaker 3

the queue. Thanks very much guys.

Speaker 2

Thank you, Joe.

Speaker 3

Thank you, Joe.

Operator

Thank you. Our next question comes from the line of Cameron Doerksen with National Bank. Your line is open. Please go ahead.

Speaker 4

Thanks. Good morning.

Speaker 2

Hi, Cameron. So I just want to

Speaker 4

ask a little bit about the supply chain. I mean, I look at the line rate Entries in Q1, it is the highest we've seen for quite a number of quarters. Obviously, good progress. But I guess what should we read into that number? Is that a reflection of you're seeing the ability to start to ramp production?

Speaker 4

Or was there Something unusual happened in Q1. I'm just wondering if you can maybe talk through how you're seeing the supply chain and your ability to ramp up deliveries?

Speaker 2

Well, on one of the slides today, we showed you the number of our suppliers that were medium risk, but high severity and or high risk and high Very impact on the business. And it has dramatically come down. We peaked this time last year at 50 suppliers that could essentially shut our lines down. And so I would think more of last year has massively stunted line entry rates, trying to manage through what we knew we're going to be putting buses online where we didn't have all the parts. The Q1 of this year reflects a much, much better confidence we have that the parts are available.

Speaker 2

It also reflects that the fact that we probably have 2.5 times as much inventory, spare parts inventory inside the business to buffer as best we can, where we know we have some Supply challenges, of course, you can't do that because of some of the customized nature of the customer spec buses. So the plan was to slowly start to gradually Increase the line entry rates across the business as we've gained more and more confidence. There's no question we still have labor inefficiencies. We still have expedited cost to bring parts in. There are no question there are certain commodities that we still have problems with such as Wiring harness is probably the one that we're still managing through that's the most visible.

Speaker 2

There are certain components that are one offs like seats or windows that we have problems with certain suppliers that are ramping up their business and are not yet a stable production. So last year was massive, right? The whole kicked off by chip shortages and then all the electrical components and so forth. We had numerous weeks last year, we either shut down or stopped line entries just so that we didn't over our burden our facility and create more than we did offline with. This year, our scheduled attainment last year was probably 60%.

Speaker 2

This year, it's north of 90% or 95%. So what you're going to see is that number continue to look solid through the Q2 and we continue to ramp it up in the 3rd Q4 of this year, so that we're ready for A much solid recovery as we forecasted for 2024.

Speaker 4

Okay. That's very helpful. And Maybe sort of an associated question is, as it gets around the cash and specifically the working capital investment. Obviously, you have the width has gone up and you invest So, moving capital in Q1, what should we think about for Q2 for working capital? And then as you do ramp production in the back half of the year, like what is the working capital investment needed for that.

Speaker 2

Okay. So if I kind of think this is Bahasa, just to kind of walk through it a little bit, you really think about our North America bus and coach business, one of the things is today we're probably somewhere around 2 50 The excess working capital, we've talked a little bit about that or Paul kind of mentioned it. We do expect that to decrease by somewhere in the 50 to 80 units in Q2 Is what we're forecasting today and then really kind of seeing that unwind in Q3 and by the time we get to Q4, we would be back to some normal working capital levels. And the other issue, Cameron, is as we start to deploy this drainage technology to 0 emission buses, we deliver them, They kind of get accepted, then we invoice them, we got to get paid. So the working capital doesn't reverse as quickly as we'd all like, which is why we forecasted the Kinsey to have high levels of both WIP and working capital in the second quarter and it starts to unwind in the third and more significantly run lines in the Q4.

Speaker 2

Our target and our plan as we head to the Q1 of 2024 is to have somewhere as capacity in the neighborhood of 250 or so buses that are currently in excess to our targeted WIP eliminated from our working capital profile by the end of the year.

Speaker 4

Okay. That's very helpful. Thanks very much.

Speaker 1

Thanks, Cameron.

Operator

Thank you. And I'm showing no further questions at this time. And I would like to hand the conference back to Stephen King for any further remarks.

Speaker 2

Before Steve wraps it up, it's Paul Suler again. I just wanted to summarize. We are really excited about our business In the recovery mode, the things we talked about both in our prepared remarks, but also the Q and A around Customer confidence in our business around the pricing and the backlog that we've been able to secure. And now we're starting to see really significant improvements in supply chain performance. But I just want to be clear, It's not a light switch and we still have issues that are causing inefficiencies in our business and we still have to actually execute on wood production, delivery, or invoice and receivables.

Speaker 2

So we think the path we've got set up now for now to the end of the year, all the elements are in place. We'll continue to see more supply chain improvement and We are excited about 2024 and 2025 as we head into those periods. Stephen, maybe over to you to wrap it up.

Speaker 1

Yes. Thanks, Paul. So thanks everybody for joining the call. Just Reminder that our AGM is this morning at 11 am Eastern. We're at First Canadian Place, 100 King Street West on the 24th floor, And we'll also be webcasting that AGM details of which can be found on our website, along with all of our investor materials and a replay of this call and the transcript

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Earnings Conference Call
NFI Group Q1 2023
00:00 / 00:00
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