NFI Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 7 speakers on the call.

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to NFI Group First Quarter 20 24 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.

Operator

Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Stephen King, Vice President of Strategy and Investor Relations. Please go ahead.

Speaker 1

Thank you, Olivia. Good morning, everyone. This is Stephen King speaking. Joining me today are Paul Soubry, President and Chief Executive Officer and Brian Dusnip, our Executive Vice President, Finance and Chief Financial Officer. On today's call, Paul and Brian will provide an update on our financial results, the operating environment, market demand and our outlook.

Speaker 1

This call is being recorded and a replay will be made available shortly. We will be using a presentation that can be found in the Investors section of our website. While we will be moving the slides via the webcast link, we will also call out the slide number as we move through the presentation. Starting with slide 2, I would like to remind all participants and others that certain information provided on today's call may be forward looking and based on assumptions and anticipated results that are subject to uncertainties. Should any one or more of these uncertainties materialize or should the underlying assumptions prove incorrect, actual results may vary significantly from those expected.

Speaker 1

In addition, certain financial measures we reference today are not recognized earnings measures and do not have standardized meanings prescribed by International Financial Reporting Standards or IFRS. We advise listeners to review the risk factors, financial definitions and non IFRS measure statements found in our 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. S. Dollars, the company's reporting currency, and all amounts referred to are in U.

Speaker 1

S. Dollars unless otherwise noted. On Slide 3, we've 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 is a term we use for both production slots and delivery statistics.

Speaker 1

Slides 4, 5 and 6 provide a brief overview of our company For those interested in a more in-depth introduction to our business, including our mission, vision and ESG related materials, please visit the Investors section of our website. In short, NFI Group is a global independent bus and motor coach solution provider that is leading the evolution to 0 emission mobility. We are purpose driven and exist to build vehicles that move the world's most precious cargo. We move people. Slide 7 provides NFI's latest 0 emission statistics.

Speaker 1

Since 2015, NFI has delivered over 3,800 EUs of ZEVs that have completed over 180,000,000 electric service miles in more than 150 cities in 6 countries. Our infrastructure solutions team has also delivered over 4 75 chargers, totaling 75 megawatts of charging capacity since 2018. Demand for ZEVs continues to accelerate with a record 39% of our backlog being ZEVs and based on our analysis more than 50% of anticipated North American transit customer purchases over the next 5 years will be electric vehicles. We continue to project that at least 40% of our 2025 deliveries will be ZEVs. I'll now pass it over

Speaker 2

to Paul to walk us through an overview of results for 2024 Q1. Thanks, Stephen, and good morning, everyone. Thanks for joining us today, and I'm really pleased to report we're very happy with our Q1 performance and in fact exceeded our internal plan. On Slide 9, we provide a summary of our Q1 for 2024. Our financial results show continued positive improvement in our seasonally slowest quarter with double digit growth in vehicle deliveries and revenue, significant improvement in margin performance and a record total backlog with a value now at nearly 12 $1,000,000,000 Well as expected, certain legacy inflation impacted deliveries had a negative impact on our quarterly results.

Speaker 2

We knew this would happen. We have completed the majority of all those remaining contracts, which will help drive further margin improvement in growth as we move through the year of 2024 and into 2025. On the demand front, we saw record orders in the Q1 with 5,421 equivalent units added to our backlog. This resulted in a year over year increase of new orders of 189% and a trailing 12 month book to bill ratio of 117%. Our option backlog conversion rate also showed as expected recovery now reaching 49% for the Q1 of 2024.

Speaker 2

Year over year, bus and coach deliveries were up 42%. Quarterly revenue was up 38% and adjusted EBITDA was up 3 60%. Gross margins within the manufacturing segment were up 5 20 basis points, reflecting an improvement in vehicle manufacturing efficiency and line entry rates, while still being impacted what I described earlier as our legacy impacted contracts. Our aftermarket segment delivered yet another quarter of record performance with $160,000,000 in revenue, up 15% year over year and $38,000,000 of adjusted EBITDA, up 27% year over year. These results were primarily driven by increased volume in North America, by pricing improvements and by enhancing our product mix.

Speaker 2

As mentioned, NFI's backlog has now reached a record $11,700,000,000 consisting of over 14,750 equivalent units. The average selling price for our vehicles in the backlog also increased by 19% year over year, reflecting a higher portion of 0 emission vehicles and the pricing actions we've taken in contracts from mid-twenty 22 onwards to reflect the impacts of inflation and preferential product mix. We added several major orders during the quarter, including the largest combined order ever at our company, up 3,090 equivalent units or 2,090 buses through 2 contracts with the City of New York and the New York Transit Authority. Our focus on working capital management was another bright spot with improvements in working capital days both year over year and sequentially from the Q4 of 2023. This helped us maintain a strong quarter end liquidity position even as we increased inventory balances to improve production efficiencies and with increased production rates.

Speaker 2

On Slide 10, we show our quarterly inventory balances compared to the line entry rates. Line entry rates saw an increase of 19% from the Q4 of 2023, reflecting our ongoing production ramp up to meet our customer contracts. We project line entries will continue to show increases in 2024 as we ramp up to meet our production demand and improve production efficiencies. The ramp up will be phased approach, as we always said, matching consistent supplier performance with labor availability and our customers' ability to inspect and accept vehicles. We are being measured as we ramp up to ensure that we do not build up offline buses as they generate significant rectification interest costs and required significant investments in work in process inventory.

Speaker 2

Inventory balances were up $25,000,000 with work in process and finished goods increasing slightly, reflecting higher vehicle input costs. We also saw some customer acceptance delays impacting certain deliveries that were planned for the end of the quarter, pushing them into the Q2. That happens nearly every quarter. Our raw material inventory balances came down in the quarter, but remain elevated driven by higher input costs for electric vehicle components and from the carrying of safety stocks reflected in our supply chain performance and will continue to do so as it improves. As our supply chain health improves and we continue to reduce high risk suppliers, we anticipate we'll be able to lower safety stock levels back to pre COVID performance levels.

Speaker 2

We are very pleased with our performance across the business in the Q1 and we delivered to our targets, which sets up well for the rest of this year. I'll now ask Brian Dusim to walk us through the highlights of our Q1 results and provide some insights into our outlook.

Speaker 3

Thanks, Paul. Yes, I'm now 60 days into my new role as the CFO and I'm pleased to report it's been a great experience so far. We have great financial and accounting teams across the business and I'm excited at the outlook and the future of NFI. Also happy to report that we've completed our search for my replacement as a President of NFI Parts and ARBOC and I'm delighted to say that our target candidate who is an experienced business leader and currently a Chief Executive Officer has accepted our offer and we look forward to making a formal announcement in the near term. Picking up on Slide 11, our multi year backlog remains strong with a significant increase in option orders, which now extend all the way up to 2029.

Speaker 3

Year over year, we saw heavy duty transit bus deliveries up 67%, low floor cutaway and medium duty deliveries were up 6 percent year over year, primarily driven by cutaway volumes. Coach deliveries were down slightly, which is typical during this time of the year. Turning to Slide 12. Overall gross margin improved year over year to 9.5%, up from 6.9%. The aftermarket gross margin percentage was essentially flat year over year.

Speaker 3

Manufacturing gross margins improved year over year to 3.7% as compared to negative 1.5% in the Q1 of 2023. Margins are down sequentially reflecting a typical seasonality profile on a slower Q1 as well as delays in certain deliveries moving into the Q2 of 2024. We anticipate that manufacturing margins will see a significant improvement as we move through 2024 driven by improved production efficiencies, fewer legacy inflation impacted contracts and stronger pricing on contracts bid in 2023 2024. On Slide 13, we provided a chart showing segmented adjusted EBITDA dating back to 2020. The Manufacturing segment was down slightly on a sequential basis as compared to the Q4 of 2023, which reflects our typical Q1 low seasonality combined with the impacts of geographic and production mix.

Speaker 3

Certain deliveries moved in the Q2 of 2024 as well. Aftermarket segment delivered a record quarter at $38,000,000 On Slide 14, free cash flow saw a 26% improvement from the same period in 2023 to a negative $21,000,000 but was down from the Q4 of 2023. Free cash flow benefited from increased cash generated from operating activities offset by higher interest expense and cash capital expenditures. We saw positive cash generation from working capital of $9,600,000 given the increase in deferred revenue mentioned earlier. Our total liquidity ended at $166,000,000 down from $188,000,000 dollars as of the end of 2023 and up from $124,000,000 in the Q1 of 2023.

Speaker 3

Total liquidity was slightly impacted negatively by our volume ramp up, but positively impacted by the same items as free cash flow. The net results being draws on our North American and UK secured facilities. On Slide 15, our net quarterly loss of $9,000,000 decreased by 30 $7,000,000 with higher deliveries, revenue, adjusted EBITDA and unrealized gains offset by increases in interest and financing costs. We provide a reconciliation from net loss to adjusted net loss normalizing for unrealized gains on foreign exchange, gains on the cash conversion option on the convertible debentures, gains on our interest rate swap and other normalization adjustments, including non recurring restructuring and past service and pension costs. I'll now turn the call back

Speaker 2

to Paul. Thanks, Brian. It's now an opportunity to provide some insights into where our business is today and give you some context for our outlook. I'm now on Slide 17. Here we highlight our new order activity for the quarter.

Speaker 2

As I previously mentioned, we had our highest quarterly new orders in our history at 5,421 EUs, driving total orders LTM to 9,669 EUs. In addition, we also have 365 EUs in bid award pending that were at the end of the quarter. We expect that will convert to new awards in 2024. On Slide 18, we always provide an update of the what we call the bid universe, our key public demand metric for North America. Total active bids include 5,410 EUs, including 3,940 EUs where we have bids submitted and another 1470 EUs that we're working on proposals as we speak.

Speaker 2

Active bids declined in the quarter as we converted the large awards I referred to earlier with New York, but also awards of New Jersey and other prominent customers. Our 5 year customer bid forecast is now at 21,350 equivalent units and combined with the active bids I just talked about supports our view that bus and coach demand will continue to remain strong reflecting a solid funding environment. On Slide 20, I'm going to provide a bit of a summary of some key market updates. First, in the United States, the FDA announced funding for their 2024 low no, low or no emission grant program, which we refer to as the low no. This year, there are $1,100,000,000 in grants available for buses associated infrastructure.

Speaker 4

NFI had

Speaker 2

a record performance on last year's 2023 loan loan program being the named partner on over $200,000,000 of grants and we expect even stronger performance in 2024 given the recent changes to the competitive landscape and with one more participant leaving the U. S. Market and recently are in process of closing their business and one actively trying to recover from emerging from their Chapter 11 restructuring with a new owner. In the United Kingdom, the Zero Emission Bus Regional Areas or Zebra program continued to drive electric and fuel cell bus procurements. The latest round of funding supports the procurement of 955 Zero Emission Vehicles and we expect Alexander Dennis will benefit from this round of funding formerly called Zebra II as they have secured numerous contracts from the previous funding rounds.

Speaker 2

Finally, I want to comment on the continued efforts to strengthen the bus manufacturing industry in the United States. As we advised earlier on February 27 this year, I presented at the White House roundtable that we discussed key recommendations for immediate changes to the U. S. Bus contracts. This roundtable was followed by the immediate release from the FDA of what they call a Dear Colleague letter, which clarified that the U.

Speaker 2

S. Transit agencies can award contracts with progress payment structures, they can complete price adjustments on legacy firm contracts and they can include price indexing on new firm price contracts. It's also called for active efforts to try and reduce the amount of radical customization on new bus orders. We continue to advance our efforts on multiple fronts as outlined in the FDA guidance letter. We're actively discussing pricing adjustments with a number of customers, although the impact may not be as large as we have, we only have a few legacy inflation impacted contracts remaining in our current backlog.

Speaker 2

We also have actively progressing payment structures on both existing and embedding them in our newly bidded contracts. We're now embedding contract lodges for price indexing on new orders wherever possible. We project the FDA's guidance and the willingness of transit agencies combined with our aggressive actions should have a positive impact on our future financial performance in future periods, especially as it relates to working capital investments. Now turning to Slide 21. We are confident in reaffirming our 2024 financial guidance and our 2025 targets.

Speaker 2

For fiscal 2024, we provided we anticipate double digit revenue growth, triple digit adjusted EBITDA growth and improved free cash flow. We will see an increase in cash CapEx as we catch up on some of the deferred maintenance and invest in continued product development and growth projects. We anticipate 0 emission buses to be 30% to 35% of our total deliveries in 2024, growing to over 40% in 2025. We've also provided our 2025 targets, which include adjusted EBITDA greater than $350,000,000 and we expect to reach a $400,000,000 annualized adjusted run rate by the Q4 of 2025. The multiyear growth in our financial projections is driven by a combination of volume recovery, production efficiencies, improved product pricing and an increased number of higher margin 0 emission bus deliveries.

Speaker 2

We also expect to deliver the majority of legacy inflated legacy inflation impacted contracts in the first half of twenty twenty four and continued strong performance of our aftermarket. We have maintained our ROC target of greater than 12% for 2025 with the potential for outperformance on this metric as we lower debt balances and see improvements in working capital investments and customer milestone payment support. On Slide 22, we provide details on our total leverage covenant and debt maturity dates. The chart on the left provides our current total leverage of 7.8 times, which is expected to decrease rapidly in 2024 and throughout 2025. We provide our covenant requirements on the graph and we project to be below those covenant levels as we move through those periods.

Speaker 2

We provide this chart to provide directional expectations on how we think total leverage will significantly progress over the coming years. In 2024, the majority of this leverage reduction is driven by adjusted EBITDA growth, while in 2025, it is a combination of EBITDA growth and combined with strong free cash flow generation to support our active debt repayment plans. We could see even faster deleveraging based on progress made on bus manufacturing contract structures in the United States and our overall success in increasing customer deposits and milestone billings. We provide details on our debt maturities to provide insights into how we think about the balance sheet. The first major maturities are in April of 2026 when our senior secured North America and U.

Speaker 2

K. Facilities mature and our senior unsecured government loan facilities also mature at that time. In January of 2027, our 5 percent $250,000,000 convertible debentures mature and in August of 2028, our 14.5 percent second lien debt matures. We are actively focused on lowering our interest expense. And as we look at significant deleveraging in 2024 and 2025, we'll be looking to increase our financial flexibility in those periods by focusing implementing a lower cost debt structure in advance of our senior facilities maturing.

Speaker 2

We will provide additional details as we advance these efforts. Of note, in April 2024, NFI and the Manitoba Development Corporation, or MDC, entered into an amendment agreement on our existing unsecured facility with the province, reducing the fixed interest rate to 0% per annum, which was previously sulfur plus an applicable margin. Turning to Slide 23, we provide some directional commentary on our projected seasonality for 2024. The Q1 of 2024 was in line with our expectations for a sequential decrease in adjusted EBITDA. And as the Q1 is typically our slowest period in private markets and it was also impacted by legacy price contracts we were well aware of.

Speaker 2

Based on the Q1 and a view that we'll deliver approximately 35% of our annual adjusted EBITDA in the first half, this suggests a range of $156,000,000 to $182,000,000 of adjusted EBITDA in the second half. On this chart, we also highlight the directional growth in gross margins per EU, excluding depreciation and amortization in manufacturing. As you can see on the chart, in 2022 Q1, we had $4,630 of gross margin per EU. In 2023 Q1, this grew to $15,834 And now in Q1 of 2024, it was $34,566 As we move through 2024 and 2025, the directional growth is near doubling of this metric and derived largely from our known and contracted backlog, reflecting improved product mix, more volume, efficiency improvements and significantly better pricing. On Slide 24, we highlight the increasing average price of each unit in our total backlog.

Speaker 2

This amount has increased for both heavy duty transit buses in dark blue and motor coaches in light blue. Year over year, heavy duty buses were up 18%, while coaches were up 9%. These pricing changes were driven by a combination of higher zero emission orders, inflation adjusted pricing and improved margins in our new contracts. This improved pricing margin supports our guidance and our targets for 2025. So before we open up the call to Q and A, I just want to summarize where we're at.

Speaker 2

The Q1 was another major step in our recovery. We saw year over year growth in all major financial metrics and the aftermarket segment delivered another record quarter. Our backlog achieved another record at $11,700,000,000 driven by our highest quarterly new awards ever. The quarter did have some drag from legacy drag from legacy impacted contracts, which we expected, but we have delivered nearly all of those remaining contracts. The operating environment at our company continues to see some challenges on certain areas in supply and some labor availability, two areas that we are actively managing.

Speaker 2

While supplier performance has seen significant improvement, some high risk suppliers remain in plastics, seating and certain electrical components. Supplier challenges are primarily related to their labor efficiency, effectivity and availability as they recover their operations in parallel with us. On the labor front, we continue to secure the people we need. And in fact, we added 210 new team members during just the Q1 of this year alone and are actively managing for the requirements for the rest of the year. Subsequent to quarter end, we received that 2 year interest waiver on our CAD50 1,000,000 loan from the government of Manitoba.

Speaker 2

This waiver was a major milestone and provided by the government's efforts to support growing businesses in Manitoba within the green economy and allows us to continue to reinvest in our facilities, our products and our people. With 4 months of the year behind us, we are confident in our ability to execute to our plan and we again reaffirm our 2024 expectations for double digit growth in revenues, deliveries, tripled digit growth in adjusted EBITDA and positive free cash flow generation in the second half of the year. So thanks for joining. With that, we'll now open the line for analyst questions. Olivia, if you can please provide instructions to our callers.

Operator

First question coming from the line of Chris Merritt with ATB Capital Markets. Your line is open.

Speaker 4

Yes. Thanks guys. Good morning.

Speaker 2

Hi Chris.

Speaker 4

So I guess the first question is just going back to think about where we are with getting the legacy issues out of the way. So in the quarter or ending

Speaker 2

the quarter, at least you

Speaker 4

put in put in some of the commentary that you think that you're beyond most of the inflation impacted production. A couple of questions on this. I mean, of what's been what was done in Q1, how much of that was kind of naturally just delivered? But how much of that was also you did make mention of the fact that you received some pricing adjustments. So I guess, how much of this was also impacted by previous orders you thought you were going to have an issue with that maybe not as much of an impact as

Speaker 2

we go into Q2 and forward? Well, it's a good question, Chris, because it's kind of embedded. We've had improved results on new price contracts and we still have those legacies. The pricing recovery or adjustment agreements we're making with customers today had no impact on Q1 results. We'll start to see those through the rest of this year into next year.

Speaker 2

So if you look at the pure EBITDA and the ratios, if you will, of the Q1 compared to the Q4, we had a significant number of those low margin contracts go through the system. None of it is the benefit none of it got the benefit of any price adjustments. Price adjustments are still kind of few and far between at this point on legacy contracts. As I said, there's only a couple left that have any real impact. The biggest issue from that Dear Colleague letter is around milestone payments and that's part of the reason we were confident in our liquidity forecast because we have started to see some real significant response from customers on entertaining legacy payments or sorry, milestone payments on legacy contracts.

Speaker 4

Sorry, that would be so what you're talking about, like actually making retroactive payments for where you actually are in the production

Speaker 2

cycle? Effectively, yes, bringing payments forward, not retro, but bringing them forward from the historical dynamic where it was delivered, customer acceptance, invoice and then 30 or 45 to get paid. We are starting to see advanced payments through the build process today as opposed to only when we deliver the vehicles.

Speaker 4

Okay, that's great. And then maybe just thinking about the aftermarket, just to make sure we're not getting too ahead of ourselves here. I mean, very, very strong quarter, pretty solid margin. Is there something unique going on in the aftermarket right now? Is there a special program or something like that we maybe should be aware of?

Speaker 4

Just what we I think what we're always cautious of is that from time to time, you get too excited about these margins, you run the mid-20s margin and that's not sustainable longer term. So just any thoughts around the composition of what's driving that record performance would be great.

Speaker 2

Yes. And so it's a really insightful question because we worried at the end of the year of whether customers had kind of stockpiled their shelves, specifically public customers, because they didn't trust our suppliers' confidence in their supply chain. That doesn't have to seem to be the case. We had a solid Q4. We had a solid Q1.

Speaker 2

I think some of the stuff that we're doing is what's enhancing our performance as opposed to the industry issues. Yes, we always have campaigns or projects. We've got a big midlife project going on in Hong Kong that you're aware of that's down the tail end. We've got a midlife program going on in San Francisco. We've got one going on in Chicago.

Speaker 2

But those aren't disproportionately large or impacting our results. Most of it comes from really reaping the benefits of what Brian did historically of bringing all the parts businesses together and tightening up our cost base, reducing the number of stocking locations and improving the throughput. That's the first. The second issue is we continue to work on our basket of parts. And you know that we've added all those bus parts together, the Navis, the Orion, the New Flyers, the MCIs, Alexander Dennis and so forth.

Speaker 2

And Brian's team over the last couple of years tried to kind of respond to some of the customers' needs of different levels of parts, if you will. Good, better, best type mentalities around pick 1 windshield wipers or something where you have not multiple price points. The other thing that we've been really aggressive with, with some of our competitors struggling to exist, some of them pulling out of the U. S. Market, some of them completely going away.

Speaker 2

We've gone back and are working with our customers to aggressively try and support their ongoing parts needs. Some of them are common parts that we provide and so understanding the cross reference numbers and so forth, but some of it is us just really starting to lay in some material to help our customers through those periods of transition on other brands. And I think I wouldn't project the CAGR that we've seen over the last couple of years going forward in the parts business, but we've seen tremendous volume growth, good solid margin improvement and massive efficiencies of our own machine. And so look, parts performed a little bit better than we thought in the Q1, really pleased see that going on. The response from our customers to us stepping up has been very positive.

Speaker 2

So we continue to expect parts to be a very important solid contributor part of our business through 2024 and 2025. All right. I'll leave it there. Thanks, guys. Thanks, Chris.

Operator

Thank you. And our next question coming from the line of Jonathan Wasson with CIBC. Your line is open.

Speaker 5

Good morning. Thank you for taking my question. Can you provide us with an update on what you're seeing on competitors? I believe we have seen Solaris indicate that it is looking to enter the North American transit market?

Speaker 2

Sure. Let's look in the rearview mirror first to some extent. We saw Nova's announcement last year to leave the U. S. Space and focus on Canada.

Speaker 2

So that's actively happening. Late in the year, we saw Eldorado National owned by REV Group decide to literally just shut their business down. Their last inputs I think are happening this quarter with I think the last bus leaving their facility, let's call it in August or September. So they're completely removed from the market. Proterra went through the bankruptcy or Chapter 11 reorganization process came out owned now by Phoenix Motor Corp.

Speaker 2

Corporate are now planning to restart the production. It's a difficult dynamic for them. They've got a lot of unhappy customers, got a new owner that's going to have to mop up, if you will, or support the existing fleet, but also try and sell stuff going forward. On the new competitor front, we have seen a number of companies over the years talk about showing up. Van Hool had talked about standing up a facility in Tennessee that never happened.

Speaker 2

In fact, then, Houle themselves have just gone through a Chapter 11 reorganization process in I believe it's in Belgium and are in the process now of being taken over by another Belgium bus company called VDL. At this point in time, we have no indication that they're showing up in the U. S. We are aware that Solaris has made announcements of wanting to come to the United States. We know that New York City has given them an order for 5 firm and 85 auctions that are a test fleet paid for by local money, by state money.

Speaker 2

So it doesn't have a Buy America dynamic. When and if they show up in the North America is still unclear. And then the other company that's been talking aggressively about showing up is a company called Ebusco, which I believe is domiciled in France and today actually makes their products with a build partner in China. They too had had plans and announced this to show up in the U. S.

Speaker 2

And have shelved those plans and made announcement that they're not coming. So hopefully that gives you a bit of a color on the public transit space.

Speaker 5

I see. Thank you. And if I can just ask one more question. Do you have any concerns around shifts in demand in the event the administration in the U. S.

Speaker 5

Changes?

Speaker 2

Well, when we go back in time and look at funding from the FTA on public transit, it's kind of been bipartisan. The amount of dollars for rail, light rail buses has gotten stronger and stronger and stronger over the last 2 decades. And we're now at record levels. What the Biden Harris administration has done is added a lot more money associated with 0 emission vehicles, electric and hybrid, but also sorry, electric and hydrogen, but also charging infrastructure. The last time that Mr.

Speaker 2

Trump was in power, he honored the FAST Act that was in place at that point in time. The Republicans are very vocal about such as the ESG dynamic around emissions. Every city in the U. S. Is battling congestion.

Speaker 2

We're seeing more big cities around the world put in congestion tax in city centers. So our view is that we may see some noise around programs going forward or around the funding dynamics and so forth. There is tremendous, tremendous demand to rejuvenate fleets to deal with the environmental dynamic, but also that congestion dynamic. And so it could happen. At this point in time, our industry is monitoring it, talking about it, talking to both.

Speaker 2

We ourselves are running around Capitol Hill and talking to both parties at the Senate, at the House level. At this point in time, we have no indication that there's going to be any fundamental change at this point in time.

Speaker 5

Okay. Thank you. I'll jump back in the queue.

Speaker 2

Thank you.

Operator

Thank you. And our next question coming from the line of Daryl Young with Stifel. Your line is open.

Speaker 6

Hey, good morning guys. Hi Daryl. First question is just around the EV bus development. And I know you guys have a history of continuous improvement and constant innovation. So I'm just wondering if the EV models that you have today are pretty much set?

Speaker 6

Or are there new technologies, new configurations or components coming down the pipe that maybe change how your production goes? And I guess where I'm coming from is just are there risks related to things like the battery drain or whatnot that could come into view because of upgrades or new improvements to EV models? Or are we kind of at a standardized product now?

Speaker 2

It's a good question, Daryl, because all we got to do is pick up the paper and see changes in technologies and battery manufacturers and cell chip manufacturers and so forth. And of course, we're all watching the automotive world, blockbuster volume projections and then it's slowing down on a retail front. So we've got to kind of break it up into a couple of buckets. And again, as you know, I'm along with it, but just some color. Historically and before NFI acquired Alexander Dennis in the UK, Alexander Dennis had partnered with BYD and we were putting ADL bodies on BYD electric chassis that came out of the UK.

Speaker 2

And I'm going to estimate or guesstimate about 2,500 of those vehicles were absolutely first movers in the U. K. Our involvement was largely around complete building the bus, completing and delivering. In the last year and a half, we have converted almost all, we have one left of the platforms where we ourselves are the designer, the manufacturer, the source of the manufacturer and the integrator on the chassis. And we are not now delivering.

Speaker 2

We still have some in the bill schedule, but we're not bidding or proposing ADL bodies on BYD chassis. And so we have a whole suite of new products. The backlog and the order book on those new products in the UK with our own integral chassis has been really, really good. It's not like the technology is massively different, but things continue to progress. The amount of kilowatts per hour that go on the bus, the placement of the batteries, the packaging and so forth, it's something we are current and monitoring and advancing as we go forward.

Speaker 2

In North America, we have a couple of things that have happened. Originally, we saw diesel and natural gas and then we had a period of let's call it 8 or 10 years where we all were playing with different types of serial or parallel hybrids. Then we saw the introduction of in terms of legitimate production of battery electric vehicles. And at first we thought we'd have very little batteries, but you'd have on route charging throughout the cities. That's proven to be way more difficult to put the charging infrastructure in place than everybody ever imagined.

Speaker 2

And so what's happened over the last couple of years is that we now are relying less on route or on demand charging and way more on a bus that has enough battery spill to be charged and do its route for the day. So I think our largest battery packs in North America are transit buses are something like 6 50 kilowatts, which then input it has implications for the charging infrastructure and the depth of those things. But our strategy was to continue to evolve the size of the battery packs, but also to be actively involved in the installation, sourcing and deployment of the chargers. So we understand how that ecosystems work. At this point in time, it's not like there's new technology that's going to displace a battery electric bus.

Speaker 2

The batteries will get smaller and more efficient and cheaper and all this other stuff over time and we will continue to evolve. But the envelope of our bus was designed to be able to handle any of those different propulsion systems and has proven to be extremely robust in service. What has happened in the last couple of years that's kind of new is that we've seen more and more interest in hydrogen electric buses. And so think of it very simply that the bus is exactly the same as a battery electric bus, but in its case it has less batteries and the fuel cells job is to top up the batteries to make it a range extender. And where 10 years ago we thought hydrogen would be an alternative to battery, It's now a support or an ancillary support to the batteries.

Speaker 2

If you asked us today, we would say if the demand is 100% for 0 emission vehicles, we'd say in our forecast, 85% to 80% would be battery and 15% to 20% would be fuel cell. Fuel cell is not for everyone because you have to have fairly sophisticated and expensive fueling stations or hydrogen generation capacity or availability. So we're seeing some customers have a multi product strategy where they've got some battery electric, some fuel cell for some of those long routes that need additional range. So long answer, Daryl, but I think we're safe to say technology will continue to evolve. Battery and fuel cell will carry the day with advances in some of the technology on inverters and electric motors and so forth.

Speaker 2

We'll watch to see things like solid state batteries over the next decade of how that comes into play and so forth. At this point in time, us and our competitors are all kind of dealing with roughly the same technology. The trick really is around deployment and integration into our vehicles and ensuring that they're reliable.

Speaker 6

Got it. That's terrific color, Paul. And I guess just to ask maybe a slightly different way as well. As you ramp up over the next 12 months and what's in the backlog and coming down the pipe today, would those be pretty standard and proven designs on the EV side that are coming through the pipe? Or are there new model iterations that are layering into the production lines?

Speaker 2

Yes. Thanks for that question. And just to clarify what I was I think I was talking to Chris a minute ago. In the UK, we're effectively just completely rejuvenated the model lines with our own electric vehicle chassis. And at the same time taking the opportunity to do some styling and design upgrades on the vehicles.

Speaker 2

In the North America transit environment, what we're offering today, we'll have some tweaks and some evolution of minor style issues. But the foreseeable future, we're not talking about new products entering our portfolio. Other than some of the work that we're doing today on kind of some of the smaller or medium class vehicles and we're actually doing some really cool cooperation between RBAC, Alexander Dennis and New Flyer. What some of that smaller bus opportunity might look like and what the electrification of that fleet might be. But it's not new stuff.

Speaker 2

I will say that on the motor coach front, you may remember from your previous roles that we at the MCI front, we historically had 2 different platforms, a J platform and a D platform. And we took us about 5 years because of the order book. We're now completely out of the old D model. We're into a new D model, which is built on a common line as the J. So Winnipeg has been the beneficiary of some very significant improvement in design layout and flow of the business, but our efficiency associated with that common platform is really starting to kick in.

Speaker 2

0 emission adoption in motor coaches at this point is really around the motor coaches that operate inside cities and go home every night given the charging dynamics. And so some of the larger, let's call it, employee shuttle type dynamics, Facebook, Apple, Google, those kind of Genentech in the Bay Area are using electric motor coaches, but we're not yet seeing electric motor coaches going cross country.

Speaker 6

Got it. That's great color. Thanks, Paul. I'll jump back in the queue.

Speaker 1

Hey,

Speaker 6

man. Thanks, Daryl.

Operator

Thank you. And I'm showing no further questions at this time in the phone queue. I will now turn the call back over to Steven.

Speaker 1

Thanks, Olivia. I have one question from Cameron Doerksen that came into our webcast. Can you provide an update on what you were seeing for demand and the competitive environment in the U. K. Market?

Speaker 1

And second part of the question, are we seeing pricing improvements on new orders at OutDent or Dennis similar to what we're achieving in North America?

Speaker 2

So a good question, Cam. Let's separate the 2 then. Demand in the UK, if we go back in time, one of our investment thesis in Alexander Dennis was that the UK market had started to drop in kind of post Olympic timeframe. And we saw I think the trough of the market ultimately be 2023, but start to degrade in 2017, 2018, 2019 and so forth. And we started to see an aged fleet in the UK.

Speaker 2

As they recovered from COVID first and then global supply chain dynamics and economic realities, that market and demand of the overall fleet is now starting to recover to get closer back to what it was pre COVID. It's not there yet, but the overall demand for buses in the UK is on the recovery, very pleased. You've got an aged fleet that is costing these private operators that are making it difficult for them to be profitable. With respect to the pricing, the fact that we now are not putting or selling an Alexander Dennis body on a BYD chassis. The fact that we are now selling an integrated ADL design has enhanced our offering.

Speaker 2

Therefore demand is up and our pricing and margin is also better. There's a political dynamic in the UK that's different for example than in the United States. In the United States, the public or Canada, the public transit agencies that have various types of government funding, local funding, federal funding, you have special programs like the FDA loan notes. In the UK environment, these are private operators that bid on routes, Stagecoach or First for example, and then make money off the farebox and they have had a really dramatically difficult time over the last 4 or 5 years. What's happened to adopt 0 emission technology, you have that what I referred to in my notes today of the Zebra scheme and now the Zebra 2 scheme or the Scott Zed, the Scottish Zero Emission Bus scheme that have been helpful to actually generate private operator purchases of 0 emission vehicles, which has also helped given our product offering.

Speaker 2

The difference in the UK is you have kind of 2 major providers. You have us at a company called Right Bus, but you also have dynamic of competing as international operators and some Chinese guys. For example, Utah sells buses through an importer in the U. K. So it's a very different market.

Speaker 2

It's recovering, pricing is better. Zero emission adoption is faster than North America, but it also has an international competitive dynamic. So hopefully, Stephen, that gives Cam what he

Speaker 1

was looking for. Yes, I hope so. I think that was a good response. Okay. We're going to wrap it up there.

Speaker 1

No further questions here on the portal or on the phone line. Just a reminder for everyone, we have our AGM later this morning at 11 am Eastern. Information for joining that is on our website. And also our ESG report, our annual ESG report for 2023 will be released later in May. So you'll see an announcement for that soon in the near term and that as well will be available on our website.

Speaker 1

As always, if anybody has any questions, please reach out anytime. All of our contact information is on our website and on our press releases. Thanks and have a great day.

Operator

That does conclude our conference for today. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
NFI Group Q1 2024
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