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spk02: Good day, and thank you for standing by. Welcome to the NFI Second Quarter 2022 Financial Results Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. participate simply press star 11 on your telephone please be advised that today's conference is being recorded i would now like to hand the conference over to your speaker today stephen king vice president strategy and investor relations the floor is yours thank you carmen good morning everyone and welcome to nfi nfi group's second quarter 2022 results conference call this is stephen king speaking
spk08: I'm pleased to have with me today our returning president and chief executive officer, Paul Subri, Brian Dusnip, president of NFI Parts, and our acting president and CEO during Paul's temporary leave, and Papas Usoni, chief financial officer. Today, we will walk through our quarterly results and provide our outlook for 2022 and beyond. 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 investor section of our website, and we will be moving the slides via the webcast link, and we will also call out the slide number as we go through the deck for participants on the phone. On this morning's call, Paul will give us a brief update on his return. Brian will walk us through milestones and major activities from the quarter, and then Papasa will discuss our financial results, and Paul will close it with our outlook. Starting with slide two, 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 uncertainty. Should any one or more of these uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary significantly from those expected. Please also note that certain financial measures used on today's call do not have standardized meanings prescribed by international financial reporting standards, and therefore may not be comparable to similar measures presented by other issuers. You are advised to review the risk factors found in NFI's press releases and other public filings on CDAR for more details. We also want to remind listeners that NFI's financial statements are presented in U.S. dollars, the company's functional currency, and all amounts referred to are in U.S. dollars unless otherwise noted. On slide three, we've included some key terms and definitions referred to in this presentation. Of note, zero-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. The majority of our vehicles represent one equivalent unit, while an articulated 60-foot transit bus takes two production slots and is therefore equal to two equivalent units. On slide four, for those of you new to the NFI story, we are a leading independent global provider of sustainable bus and coach solutions. We are leaders in our core markets, which includes heavy-duty transit, coach and aftermarket in North America, heavy-duty transit and aftermarket in the United Kingdom, and the world leader in double-deck transit buses. Turning to slide five, our purpose and mission is simple. We exist to move people. Very simply, our products transport precious cargo. We are focused on designing, building, and delivering exceptional, safe, and turnkey mobility solutions. We made our sustainability pledge in 2006, and it still holds today. A better product, a better workplace, and a better world. We have implemented numerous ESG advancements. Full details of our various ESG initiatives, including our diversity, equity, and inclusion survey, and our material mapping and exercise were outlined in our fourth annual ESG report, which was released in May 2022 and is available on our website. Slide 6 is critically important as it shows the breadth of our full offering. NFI solutions include vehicles, charging infrastructure, connected buses and coaches, telematics, aftermarket parts and service, and financing solutions. We are truly a partner of choice for bus and coach customers, offering comprehensive and customizable solutions. I'll now pass the call over to Paul.
spk07: Thanks, Stephen. Good morning, everyone. I'm on slide seven. It is great to be back after a brief medical leave. The ability to take time away from these past few months to focus on my health has been very important and I'm immensely grateful to Brian Tobin, the board of directors, to Brian Duzdip, my fellow executives, and the entire NFI team for their continued hard work and dedication during my absence. Pleased to report I'm down 21 pounds, not quite at my wife's target yet, but I'm on it, and I've been cleared by my health care team to return full-time with a plan in place to ensure my continued well-being going forward. So my deepest thanks to Brian Dusnip, president of our NFI parts business, for running his business and stepping in my shoes for leadership and guidance as acting president and CEO for my absence. NFI was in great hands with Brian and the rest of the exec team as they navigated through the temporary build-up of work and process inventory and were closing with Papu and others on his finance team and Stephen in completing amendments to our credit agreement. As I have just returned to work yesterday, it's probably more appropriate for Brian now to walk us through the highlights of the course. Over to you, Brian.
spk05: Thanks, Paul. We'll summarize the quarter. Q2 is similar to Q1 with continued impacts of global supply chain disruption and heightened inflation. While our results reflect these realities, they also highlight the strong demand for our market-leading products and services. In the quarter, we received new orders for 1,348 EUs, recorded a book-to-bill ratio of 158%, grew our backlog by 9%, up to 9,674 EUs, value of $5.5 billion. And we had another 1,098 EUs and bid award pending, which means we've been notified of an award by customers that await the formal contractual documents. Once they're received, they'll be recognized as awards in the third quarter. So we'll see another period of significant awards and new orders, which we expect to deliver more backlog growth. NFI has not only been successful in securing new orders, but we also witnessed our North American public bid environment continue to grow. At the end of the second quarter, there were 7,582 EUs in active bids out for procurement and 29,147 EUs in our total North American public bid universe, which measures active bids plus a five-year outlook for demand based on agency and operator's fleet replacement plans. On the zero-emission bus front, We received orders for another 325 EUs, representing 24% of new firm and option orders. Our total backlog is now made up of 1,900 EUs of zero emission buses, which equates to a record 20% of total backlog. 11% of our deliveries in the second quarter were zero emission buses, compared to 8% in the second quarter of 2021. And our total public bid universe is now 51% zero emission. All signs of the transition to zero emission buses is well underway and will continue to advance. Our aftermarket business saw revenue decline year over year, with the second quarter of 2021 being a difficult comparative as we delivered record revenue in that period with a major retrofit program in Asia Pacific, plus heightened sales in North America. We will see continued volumes from that retrofit program in 2022 that had a lower run rate than we had experienced in 2021. Second quarter saw some improvement in certain parts supply-related challenges, with the majority of disruption and missing components coming from electronics and microprocessor-related components. While there have been issues, our sourcing and supply team has been doing a masterful job navigating through these challenges and creatively mitigating issues as they arise. We will provide an update on our module shortage, WIP buildup, and delivery plan in a later slide. Turning to slide nine, We highlight some of the major wins that our teams have achieved in the quarter, including 733 EUs added as a backlog from the Toronto Transit Commission, or TTC, our first major win in that market in over a decade. In addition, we continued to secure numerous smaller EV awards, growing our battery and fuel cell electric footprint throughout North America and the UK. During the quarter, the TTC issued findings from their electric vehicle evaluation program that found NFI's battery electric buses delivered the highest performance when compared to two other vehicle manufacturers across a wide range of evaluation criteria. On slide 10, we show our backlog and second quarter 2022 deliveries. We saw another quarter of backlog growth with firm orders representing 45% of our backlog and option backlog extending to 2027 providing both near and long-term visibility. In total, our backlog grew by 9% from the first quarter of 2022 and 18% year over year. At the bottom of the slide, you can see that all our segments experienced year over year decline in deliveries. This reflects the supply chain challenges we saw in 2022 that we did not experience in 2021. We've added slide 11 to provide an update on the impact of inflation on our backlog. At the end of the second quarter in 2022, firm orders were 45% of our backlog, while option orders were 55%. Generally, our firm orders are manufactured and delivered within 12 to 18 months of an award being received. When we make our original bid, we will obtain pricing for approximately 50% of the vehicle's components from our suppliers, as they're often specified by the customer. For many other non-specified components, we'll use internal sources, including car fare for fiberglass, for things like metal fabrication, electrical kit assembly, and plastic thermoforming. We make estimates for inflation between the time of award and manufacturing in our contracts. Given the rapidly increasing levels of inflation and surcharges being passed on to ocean suppliers, actual costs have exceeded our estimates on some firm contracts did prior to 2022. For the contracts impacted by this, We've been discussing price adjustments with customers and are also negotiating relief with suppliers wherever possible. During the quarter, our new flyer business launched a detailed program with surcharge letters distributed to customers who have fixed contracts who do not have purchase price index or PPI clauses, reflecting the price increases we've seen from suppliers. We've seen success with these efforts and we expect they will help offset some of the margin pressure we're facing. Our financial guidance for 2022 reflects of inflation with improved margins anticipated in 2023. We've also been working closely with customers in various jurisdictions to discuss prepayments or deposits on vehicles that have and will help alleviate some of the working capital investments required by NFI. We've seen success on these initiatives, and some large deposits have already – large deposits already received in other customers investigating potential prepayments for vehicles. For vehicles and aftermarket parts contracts that are currently limited, We've increased the inflation adjustment in our contracts to reflect the macro environment and increase pricing and surcharges we're seeing from suppliers. Inflation on option orders is a different situation. For the majority of our option orders, when a customer executes on an option, there's a repricing that factors in producer price indices, PPIs for short. Contracts that have PPI adjustments will add a price increase when the option is awarded. which helps us include the impact of inflation into future contracts and protects our margins from downside inflationary pressures. On slide 12, we provided a summary of the workaround plan to address our microprocessor shortage, discussed in detail in last quarter's call. As per the plan, we're building and holding vehicles that are missing a specific control module as we await supply of microprocessors that will be installed into the module, at which point the buses can be completed and delivered. Turning to slide 13, this module workaround plan has been proceeding well to both our plan and schedule. We have produced approximately 117 buses, which are parked in secure locations and are complete, save for the addition of the required modules. These vehicles added $57 million to our total WIP at the end of the second quarter. During July, we continued to build up module-related WIPs as we await a large delivery of microprocessors in August. Our team has been meeting regularly with both the module supplier and the microprocessor supplier, and we've been assured that supply is on target over the next few weeks. Once the modules are received, installation of the new modules will take approximately four to five hours of service time per bus. These fully completed buses will be driven to customers where they will complete a final inspection and ultimately be recorded as read. We anticipate that the work and process buses will start to flow to customers later in August, with nearly all being delivered by year end. We may see some vehicles get delivered in early 2023 and anticipate significant cash conversion from these vehicles in Q1, 2023. In addition, the team has also been developing our next generation control module that will use a different, more readily available microprocessor. This new module is now in production and is being installed on some new vehicles. The new module provides additional supply redundancy and helps lower the risk of future disruption. As Tepapo will discuss shortly, Canapai has more than sufficient liquidity to support the temporary buildup of the work-in-process inventory as we execute on this plan. On slide 14, we provided an update to the supply chain challenges the company has been experiencing and mitigating. The quantity of high-risk, severe-impact suppliers is decreasing, while the number of high- and moderate-risk suppliers remains elevated. This analysis reflects a broader view that while overall supply chains are not seeing major improvements, it appears that we are through the worst of the disruption. We've also seen some initial signs that recessionary impacts in the broader economy may be helping to lower demand and inflation. Given the expectation that supply chains will see improvements during late 2022 and into the first half of 2023, we will soon begin the process of ramping up our weekly production run rates. This is not a simple process. And we're taking a measure whereby we add production of one to two additional vehicles a week with expectations that we'll be able to get back to pre-pandemic run rates by late 2023. I'll now turn the call over to Papasi to summarize the financial results. Thanks, Brian.
spk06: Turning to slide 15, we highlight some of our key metrics. As Brian mentioned, the quarter saw significant challenges from supply chain disruption and ongoing COVID-19 pandemic that led to heightened inflation, lower production, and reduced overhead cost absorption. In summary, sales were down 38% year over year. Adjusted EBITDA was negative 23.1 million with positive adjusted EBITDA in the aftermarket segment offset by negative adjusted EBITDA in the manufacturing segment. Negative EPS and adjusted EPS of 74 cents per share and 64 cents per share respectively. Our ending liquidity was strong at 628 million an improvement of over $200 million from the last quarter of 2021. Liquidity was down from the fourth quarter of 2021, representing typical seasonality and a slight increase in work and process inventory buildup stemming from supply challenges. It is important to note that at the end of the second quarter, our credit facilities required that we maintain a minimum liquidity of $300 million. Under the new amendments, this has declined to a minimum liquidity of $250 million. I'll note that our liquidity declined slightly in July with a closing position of approximately $540 million, reflecting further investment in work and process inventory made in July to address the module shortages that we expect to alleviate starting in late August. On slide 16, we reconcile net earnings to adjusted net earnings. In the quarter, net earnings were impacted by the same items that impacted adjusted EBITDA plus restructuring costs related to the ongoing closure of our Pemina MCI facility and settlement of a lawsuit. Offsetting some of these negatives were fair market value gain from our interest rate swaps. We currently have two swaps in place, one for $560 million at 2.27% and another for $200 million at 0.24%. With increases in base interest rates in Canada and the U.S., we had a gain for which we normalized. The chart on the bottom of the slide walks through the normalizations made year to date in 2022. Turning to slide 17, we are pleased to provide a summary of the amendments to our senior revolving credit facility, also known as a revolver, and our 50 million pound revolving UK credit facility announced on Friday last week. These amendments come after detailed discussions with all of our banking partners to provide a unanimous consent after reviewing our long-term financial projections and the benefits we expect to realize from demand growth and our cost reduction efforts. Thank you to our banking partners for their strong commitment to NFI. Under the terms of the amended facilities, the total leverage ratio, TLR, and interest coverage ratio, or ICR, has been relaxed for the remainder of 2022 and for fiscal 2023. NFI will have to meet three additional covenants. minimum cumulative adjusted EBITDA, minimum liquidity, and net debt to capitalization based upon different timeframes as outlined in the table. There may have been some confusion on the net debt to capitalization calculation, so just to clarify, this covenant does not include convertible debentures in the numerator, and the denominator includes borrowing on the credit facilities plus shareholders' equities. Details of the amendments to the credit facilities can be found in the press release dated July 29th, 2022. The updated documents will be posted on CDAR in the near term. These amendments provide covenant relief and additional flexibility and allow NFI to move forward in a stronger position as we ramp up production later this year and capitalize on our growing backlog and order book. On slide 18, we provide a brief update on NFI Forward. In the second quarter of 2022, NFI Forward realized adjusted EBITDA savings of $15 million and an additional $0.8 million in free cash flow savings. We are pleased to report that we now expect to achieve our NFI Forward target of adjusted EBITDA savings of $67 million from 2019 levels by the end of 2022, one year earlier than our original target of the end of 2023. With the majority of the original NFI Forward projects complete, we are now implementing a series of additional projects called NFI Forward 2.0. that is expected to generate additional annualized adjusted EBITDA savings in 2023 and beyond. NFI Forward 2.0 will be smaller in scale and financial impact when compared to the original NFI Forward initiatives, expected to generate somewhere in the range of $5 million to $8 million in annual savings from one-time capital investments of $8 million to $10 million. NFI Forward includes the integration of Delaware Parts Distribution Facility as Legacy Parts Warehouse of NABI that NFI acquired in 2013 into our existing NFI Parts footprint during the third quarter of 2022, and the closure of an MCI coach manufacturing facility in Pemina, North Dakota, by the end of 2022. Slide 19 outlines our guidance for 2022. We adjusted this guidance in April 2022 to reflect year-to-date results and the impact of the module shortages and the heightened inflation on our operations. As outlined on the slide, we reiterate our anticipated guidance of $2.3 billion to $2.6 billion in revenue, with 20% to 25% of manufacturing sales coming from ZEVs, adjusted EBITDA of $15 to $45 million. We have updated our guidance for cash capital expenditures for 2022 with an anticipated spend of $35 to $45 million in response to investments by the company in electric innovation projects, both battery and fuel cell electric, for our ADL business in international markets and other EV growth projects in our North American business. Turning to slide 20, we provide some details on revenue and adjusted EBITDA distribution from the first and second halves of the year. We expect that the third quarter, similar to the first and second, will see negative adjusted EBITDA as that period is impacted by supply chain disruptions and temporary buildup of WIPP inventory. The fourth quarter, however, is forecast to deliver positive adjusted EBITDA as we shift buses that were missing modules, benefit from improved battery supply, and see the typically strong seasonality of ADL and MCI from private customer sales. I'll now turn the call over to Paul to provide insights on our outlook.
spk07: Thank you, Brian and Papasu, for the update. I'm now on slide 21. As we've noted, our public bid universe continues to grow. We now have 4,477 equivalent units of bids in process and another 3,105 EUs of bids already submitted for a total of 7,582 active bids, which will drive new orders and awards in the coming months. Longer term, we see over 21,500 EUs of potential opportunities as identified by our customers from our five-year universe and in total our public bid universe now at new record levels of 29,147 EUs, with 51% of those being zero-emission buses. Recall that zero-emission buses have driven higher revenue per unit and better margins for NFI. We have seen some early stats as well on ridership really starting to recover, with APTA reporting an approximate increase of 60% in average weekly transit ridership in the United States for the first 26 weeks of 2021. weeks of 2021. We're pleased to see ridership increases as travel resumes, office reopen, and people start to move again. This will assist our customers' farebox revenues, lower congestion and emissions. And while ridership is very important, keep in mind the primary driver of public trans procurements in the United States and Canada is federal, state or provincial, and municipal funding, which is very strong. On slide 22, we've summarized the major investments we've made into public, or I'm sorry, being made into public transit by the government in all of our core markets. We've recapped these numbers before, so I won't go through in detail, but we will continue to see the flow of these funds translating into new and larger bids and orders that will drive future revenue growth. I'll highlight that the low or no emission grant programs, called low-no, in the United States aimed at driving zero-emission bus adoption We'll see grants of $1.2 billion in the U.S. in 2022, and these awards are expected to be released later in the third quarter. New Flyer was the leading partner on low-no grants with transit agencies last year in 2021 and very encouraged for 2022 awards. On slide 23, while our deliveries have been suppressed by supply chain disruptions greatly and well described by Brian earlier, Our book-to-bill has continued to grow with the second quarter of 2022 above 150%, positioning us well for the future. On slide 24, we recap our 2025 financial targets. Despite COVID and the related supply chain challenges, we remain committed to delivering on those targets. The achievement of these targets does not require fundamental changes to our business. As we already have the facilities, We have the products and are already investing in new product development, and we have the service and support infrastructure and part support business to achieve them. With improvements in supply chain, we see a clear path to $4 to $450 million of adjusted EBITDA still by 2025, coming from the growth of zero-emission bus sales, additional contributions from PARBOC and ADL, continued strong performance of our active market business, and the realization that Patasso described of our NFI forward savings. which you've already heard about and which is now close to our original $67 million target one year early. Finally, on slide 25, we recap the NFI investment thesis. While the past two years have been extremely challenging and require that we revise our guidance and recovery expectations, we remain focused on the long-term and delivery to all of our stakeholders. We just announced a very supportive credit facility coveted relief last week, And I want to add my thanks to all of the syndicate members, 11 banks, which at the end of the day provided unanimous support and the mass consent for this new agreement. And we look forward to finishing the second half of 22 stronger. 2023 looks to be a significant recovery year as we benefit from the record demand and backlog growth that has given us excellent visibility into our planned deliveries. In fact, in our public transit business, we are now recovering very close to our original time horizons for pre-production, very encouraging from a supply chain, an engineering, and an operational perspective. And while supply chain improvement remains a current headwind, and I'll comment and clarify, we have 98%, 97% of the parts. We still have anything with a microprocessor or an electrical component that's a problem. There have been some positive signs that the worst is now over. While there are near-term challenges, the tailwinds that support our success continue to increase in both intensity and quantity. New orders increasing bid activity, recovery of private travel, rising ridership rates, and lifting of various COVID-19 mandates, the rollout of government funding, and the continued advancement of our zero-emission leadership strategy will drive NFI's future. As we close, I just want to iterate my excitement about getting back in the chair and that I'm looking forward to helping our team complete the delivery of the buses impacted by the module. In hindsight, clearly the right strategy to build, hold, and then deliver buses to our customers and other supply shortages. Our customers, I'll be working with Chris and team on our customers on surcharges and delivery schedule adjustments, and we want to deliver on our strategic goal of continuing to lead the zero emission mobility of this evolution. COVID. and its resulting supply chain has impacted everything. And as I've always said to our team, we're excited about the path we're on and the future in front of us. We lead this industry and we will see strong recovery in 2023. And that will drive future growth as we get back on the path to our 2025 targets. We have a great group of people. We have solid leadership that has remained loyal and committed to NFI through are the toughest times in our history of our company. Our business leaders, Chris Stoddard, Paul Davies, Brian Dusnap, and our functional executives have all and continue to drive this recovery. I'd now like to turn the call back over to Stephen to provide directions for the Q&A portion of the call.
spk08: Over to you, Stephen. Thanks, Paul. I will now open the line for analyst questions. Attendees who are listening via the webcast link can type their questions to management, which we are able to review and read aloud. Carmen, I'll now ask you to open up the analyst questions and provide instructions to our callers.
spk02: Certainly. Thank you. And as a reminder, to ask questions via phone, simply press star 11 on your telephone. One moment while we compile the Q&A roster. We do have a question from Chris Murray with ATB Capital Markets. Please go ahead.
spk04: Yeah, thanks, folks. Good morning. Maybe turning back to slide 20 and just maybe looking at the near term and how to walk through this. I don't know if you want to take this one, but I guess what I'm trying to make sure we're understanding correctly is just the cadence as we go through Q3 and Q4. And I guess, you know, just your confidence in that supply chain and those module deliveries and anything else we should be maybe thinking about at this particular point. And I guess along those, you know, you did talk about some spill in the 23, so maybe if you can elaborate on that a little bit, that would be helpful.
spk06: So let me do this. Chris, maybe just jumping first to Brian, because I know he's a little bit closer to the module deliveries, would love to get his his input as well. So, let me turn it over to Brian first, and then I can jump in. Okay. Thanks, Papasu.
spk05: Yeah, as we said during the call, we are on plan from a delivery standpoint. The design of the new modules is coming along really well, and the supply, you know, we've been in constant communication, as you would imagine, with both the Tier 1 suppliers as well as the sub-suppliers on getting those modules in for the subcontractors. We see some opportunities as well, perhaps in the broker market to supplement that. So we feel like we've got kind of belt suspenders on that plan. And, you know, we work really well with our customers to make sure that the buses were accepted and parked. And so the only thing left on those really is the module installation. They'll be on the way to the customers. And then, of course, that'll follow like cash conversion a little bit later. And, you know, at this point, We don't know we're going to have 100% of those vehicles in 2022. As we indicated, we may have some spill into 2023, but the important milestone will be later this month as we begin to get the modules in and those buses start flowing to the customers.
spk06: Yeah, the only thing I would add there, Chris, just to echo Brian's point, but the one thing I would add is we are starting to see some NXP chips on the broker market to try to help us support our module plan, which we were not seeing as much in the past. So that should at least kind of help solidify that plan that we're looking for for this year. And I think, Chris, the only thing I'd add is the cadence, Q3, Q4.
spk08: I would say obviously Q4, heavy period, that's where we expect positive adjusted EBITDA. I think we do expect improvement in Q3 on the negative EBITDA side of things. But then Q4 would obviously be the heaviest period as you're looking at the second half of 2022.
spk04: Okay, that's helpful. And then just going back to comment about – thinking that you're going to be, have a, have a book to bill of above a hundred percent for the next little while, um, probably through, uh, through 22 and 23, I guess there's two pieces of this. One is the demand side, but one is also the production side. So just try to maybe frame this in a different way. Um, you know, how, I guess a couple of things, you know, what do you, what are you thinking? Um, you know, when you say that, you know, what, Is there a way to think about like what proportion of your full run rate are you thinking you're going to be able to achieve in 23 against that number? And certainly, you know, we can see the funding in transit and things like that. I appreciate that things like coach aren't necessarily in backlog, but it does go into the production rate. You know, how are you thinking about all the different facets of demand as you get into that book to bill ratio? and we think about the restart.
spk08: Yeah, so I think, Chris, I'll start and then I'll pass it over to Brian. I think the way I would think about 2023 and the book to bill, obviously, as we mentioned here, we're going to be ramping up production, but it's not a light switch. You can't just flick it on overnight. So it's going to take some time as we add kind of, you know, one or two units a week. We're going to start that in late 2022. So we'll be starting that ramp up of production and then that'll continue through 2023. And so I think what you will see is obviously deliveries will be increasing from where they are this year as we get into the 2023 in both transit business and the coach business with private market recovery, the ADL business with some UK recovery and then international markets. And then I think what you will also see, so obviously that will have an impact of deliveries are getting higher, but orders we expect to continue to be high because as we referenced here in right now, and government funding continues to flow. So what we've been seeing in 2022 is a lot of cases, even as those bids get turned into orders, they're getting replaced with new active bids. So we're continuing to see active bids, you know, RFPs hit the street, and I think our team is the busiest they've ever been in terms of the numbers of RFPs they're pursuing. So I think all that to say, you know, our expectation of having booked a bill above 100% as we get into 2023 is see strong order demand with probably deliveries a little bit lower than where they're going to get to. And then by the end of the year, we'll see that acceleration of deliveries as we get our production rates back up. And so, Brian, I don't know if anything else.
spk05: Yeah, I think it was a great summary, Steve. And I think the couple of things I'd like to add to that, you know, we talked in the call and we've talked a lot about the funding environment. And it's never been better in terms of the amount of funding that's out there. And then We mentioned within the call about this low-no award that will happen in – those will get released in August here, and we will see how we fare there, and we expect that that will add a fair amount to the order intake as well. And so when we look at that, the funding, we look at the low-no, we feel like the demand side is going to remain strong, and that's what gives us the thoughts and what you see in the presentation.
spk06: Hey, Chris, the only thing I would add to that is I think what, you know, exactly what Brian and Stephen said, but a couple of things, right? You know, we're looking at it again, assuming the supply chain holds, that in the second half of 2023, we would start getting back to kind of our full run rate is our thought process, right? And our order book today supports us being able to ramp up to that. So, you know, if that helps at all.
spk04: Okay. No, that's helpful. Thanks, Scott.
spk02: Thank you. One moment for our next question. We have a question from Cameron Dorkson with National Bank Financial. Please proceed.
spk09: Thanks very much. Good morning.
spk00: Good morning.
spk09: So I just want to ask a question about the, I guess, the inflation. I mean, you've given us some good color here at sort of the 45% of the backlog that's firm, that's you're more exposed to the inflation and you've had some success here, it sounds, with some repricing or surcharges. Is there any way you can maybe quantify what percentage of that firm order backlog would have, you know, some degree of, I guess, you'll call it relief from inflation? Just trying to get a sense of, you know, how we sort of expect the next few quarters to kind of look like as you deliver here. And this, the puts and takes on cost versus the offset on some of the repricing initiatives.
spk08: Yes, great question, Cameron. So, I mean, we don't give specific details, you know, exact disclosure amount, the amount of surcharge that we expect to get and what we're working on. But as we mentioned here, we are working with our customers on surcharge letters and working on, you know, payment plans, prepayments and deposits. So that's really trying to, you know, go through that 45% of our backlog where we have the inflation exposure. I would say the most of the things where we have that exposure wouldn't be that full 45% because as we outlined here on the call, There's things that we bid in 2020 and 21 that we're building in 2022. And those are probably the contracts where we have the most exposure and the ones where we're trying to work with the customers on surcharges. The stuff that we bid in 22 that we built in 23 and maybe some into 24 that's in the firm backlog, a lot of that now reflects kind of today's price and has the, you know, we built in either higher inflation or we built in, you know, the price that's appropriate for the customer. And you can see this somewhat in our, um, appendix here our slides on slide 27 you can see kind of that growing average price in the backlog as you can see you know i mean we're up to six hundred seven thousand on coaches and six hundred thousand on transit buses so you've seen that increase and that's to reflect the higher price um that we're seeing to reflect inflation impacts so can't give you the exact impact or sorry the exact percentage of that 45 but i would say that we're through probably the worst of it i would say on an inflation that's flowing through 22. So that's why we say we expect to see margin improvement in 23 because we are working with customers on some stuff to get surcharges for 22, but that's also going to impact 23 orders.
spk09: Okay, no, that's helpful. And just maybe secondly, I just want to maybe get a sense of what working capital is going to look like over the next couple of quarters. I mean, obviously you've built up some inventory here, but there's been some offsets on higher payables, lower accounts receivable. So maybe just talk about the trend you expect from a working capital investment perspective over the next couple of quarters.
spk08: So I'll start and then I'll pass it over to Brian. Working cap, I think you're right there, as you saw, obviously, with deliveries coming down. Accounts receivable, we were making collections, and then, you know, we expect that AR number to grow as we get deliveries kind of through Q3 and into Q4. Inventory, obviously, heightened investment right now, $770 million in our inventory, with a lot of that coming from that work-in-process inventory, so the things we talked about with the temporary buildup of the modules. We expect that to unwind, the majority of that to unwind by the end of the year. But as Brian mentioned on the call, we'll probably see cash conversion more in Q1 2023. So I think what you will see from us in working cap is a bit of, I would say, a working cap investment in the second half of 2022 and then a fairly large unwind, I would expect, in Q1 2023. So that's kind of the view I would take on. working cap is probably a bit of an investment in Q3, a bit of an investment in Q4, and then an unwind in Q1. I would agree with that.
spk09: Okay, that explains it. Thanks very much.
spk02: Thank you. One moment for our next question, please. Our next question comes from Kevin Xiang with CIBC. Please proceed.
spk03: uh thanks thanks for taking my question paul good to good to hear you on the call welcome back maybe just on the ar question from cam just i saw you sold 32 million of receivables in q2 just just wondering is that something you would look to to uh to lean on more as as you get to the back half here to manage working capital or as you make deliveries and you're dealing with you know basically triple a customers And so they're going to pay you. Do you just kind of live with the elevated working capital and just look forward to the cash conversion in Q1? Just trying to get a sense of maybe how you look at that program as you manage through your working cap.
spk06: Yeah, so this is Papasu. I'll maybe start on this. And I know Stephen and others may want to jump in. But, you know, at a very high level, we have engaged. One of our banks came to us when we did our last credit agreement about potentially doing this. And so, you know, from our perspective, you know, other banks are starting to come into play. So we will look to leverage that with at least two banks, hopefully in the near future.
spk03: Okay. So that could be an additional source of liquidity, at least on the working capital line versus maybe if I look at historical seasonality, I guess, or something like that. Okay. That's helpful. Maybe just on the supply chain challenges, a lot of great details here. When I look at slide 14, it's obviously positive that the high risk line is going down, but the moderate risk line is increasing. I guess, would you talk that up to a function of maybe management's attention on getting that high risk number down, so maybe a little bit of slippage in the rest of the supply base, and maybe are there concerns that these moderate risks become future high risks if they kind of stay at these levels? Just wondering how you think management's attention on getting that high risk number down, so maybe a little bit of slippage in the rest of the supply base, and maybe are there concerns that these moderate risks become future high risks if they kind of stay at these levels? Just wondering how you think about maybe both those lines converging on a downward slope.
spk07: I think if you looked... at our chart that we normally, so it's like a nine block matrix that shows high risk and high impact. Basically, the ones that got into the highest end of that, the top right of that chart, so highest risk, highest impact, some of them have gotten healthier and are moving down the chain from high risk to medium, and ultimately, hopefully, we'll get into low risk. There is still, as I mentioned in some of my comments, there is still tremendous uncertainty around Anything with a microprocessor and frustrations around confidence and supply of anything that has electrical components associated with it. A lot of the other parts that we were struggled with earlier this year and some maybe late last year have kind of worked their way out. One of the problems we have unique to our business because of the bespoke nature of our products We don't have a defined supply chain for every bus. There's a lot of unique customization or unique product or elements that are put on those buses. And so something that could be green today could be yellow tomorrow or red overnight. We've always had that problem. We've always had that challenge to work our way through. If David Weiner, EV supply, was in the room, he'd say, we're in a much better position today than we were three months or six months ago. We still have issues with certain parts. We are still working at two, three, maybe sometimes four levels down the supply chain compared to where we used to be working. We are now looking at different strategies for different parts. And so I'll be very simplistic, but rather than just six or seven days inventory across the board, maybe there's certain parts that we only need four days inventory and certain parts that will hold 15 or 20 days inventory. So all those things continue to be fluid, but the bespoke nature of our product will always have that level of complexity. You can read a million articles or talk to a lot of people about microprocessor supply. We've just seen the United States government make a very significant investment or plan to invest in domestic supply. But that whole world is not going to change overnight. We still have issues, and we'll continue to manage our way through it. I think what Chris and David have done with the whole issue with our VMM modules, the build and hold, the alternate or the next generation module development, is the kinds of things we're going to have to continue to do going forward to make sure that we have as much flexibility as possible. We've just gone through a deep review of all of our supply base and had, by an independent advisor, a really good review that says where we are able to dual source, we've done that effectively. Where we are bespoke nature or batch buy or unique buy, we are still going to be beholden to the health of the overall supply chain. So a lot of words there, but we're really confident, knock on wood, that we can execute through this year. And as you just talked to Papasu and Brian and Stephen about the ramp up going into next year, we're not 100% out of the woods, but we are much more comfortable with our ability to execute. The other issue with execution is people. The slowdown in some areas of the economy that made it difficult to hire people in certain places where we operate, is now helping us a little bit with retention or attraction of new people. And what we've done throughout the last year is adjusted many of our locations' pay levels, compensation levels, to make sure that we are market competitive and can attract those people. So our two biggest concerns were, do we have the parts and will we have the people for recovery? We've come a long, long way.
spk03: Well, that's great, Colin. Obviously, a lot of thought being put towards this issue. Maybe last one for me and maybe along the same lines around kind of how you look at your supply chain. We are seeing a lot more OEMs, I guess, as part of their broader EV strategy look to vertically integrate. And I think this week alone, we saw Nikola look to acquire Romeo. It's obviously something we hear from a lot of the passenger vehicles. Is that something you think you'll need to pursue eventually? Do you feel that or do you fear that you'll be competitively disadvantaged versus other OEMs if they're vertically integrated with their battery supply and you're not?
spk07: It's a really good question, and it's a heavy, heavy issue that gets reviewed on a regular basis in our businesses. just some context around the Nikola acquisition of Romeo. Romeo is a battery packager, right? The cells come from somewhere else, whether it's Samsung or LG Chem or whoever, and they package. And in some cases, the packager will make the battery management software. In some cases, it's a third party. In some cases, it's the OEM. As we've been saying probably for four or five years now, as we've got more and more zero emission buses in our business and battery, not only battery electric, but also fuel cell electric, We've chosen at this stage of our life cycle on those kind of components to be smart buyers, not to spend hundreds of millions of dollars to get into the packaging of battery cells into batteries. There may come a time where we want to move down that path. It's still very fluid. Supply chain of the cells continues to get healthier. We have, as you know well in the last year, dual source now, and we expect delivery of battery modules from a second source starting in the fourth quarter this year. At this stage of our lives, we think the best thing for us, given the bespoke nature of our business, continues to be smart buyers and the ability to adapt and move quickly without having to make $100 million investments. All that to say, could we move down that path in the future? Maybe. Today, we buy packaged cells or modules. and we contract the battery management software, you may see us move in that case in the future, or you may see us partner in a different way in the future. But dual sourcing and flexible buying today is the way we want to proceed with this.
spk03: That makes sense. Gentlemen, thank you for taking the time to answer my questions. Have a great rest of the week. Thank you. Thank you.
spk02: Thank you. One moment for our last question. We have a question from Maggie MacDougall with Stifel. Please go ahead.
spk01: Thank you. Good morning. Hi, Maggie. Hey. So my question this morning is around cost of goods sold, inflation or parts inflation versus pricing. What we've seen in a bunch of industries is that a lot of basic material cost inflation has sort of peaked in Q2. and is starting to roll over and companies implementing price increases you know following that trend may have some benefit however given you know parts supply shortages I think it might be a bit skewed for you in terms of the timeline so could you walk us through the proportion of your backlog that you're going to deliver into in the next call it three quarters that might be sort of playing a bit of catch-up on increased inflation in basic materials, and when you think that benefit of pricing increases that you've been able to accomplish starts to accrue through the revenue line.
spk05: Yeah, sure. As we mentioned during the call, we're in discussions right now with a number of our customers and the While we do look at the same charts and the same indices and we see some of the commodities starting to roll over and come down, we're not experiencing that in our cost base right now. And so our current situation is kind of ongoing discussions with a number of our customers about price adjustments as we see our costs at where they are, as we look forward to kind of 2023, I think Steven mentioned earlier, we mentioned earlier on the call that, you know, things that we did in 2022 included kind of the economics of 2022. And so we expect that, you know, our pricing and our costing, you know, will be where we would like it to be in 2023. And if we get any sort of reduction, you know, through kind of economics or these commodities are starting to go down, that'll just add to the margins in that timeframe. But we feel, you know, very good about the contracts that sit out in that timeframe and what we did in the last number of months with regards to the kind of economics and where we sit today.
spk07: Maggie, it's Paul. So just a little bit of color and we'll put an asterisk on my numbers and take them directional, not exact. When we head through the rest of this year, Almost everything that we're going to build and deliver by the end of this year, we know the price and we know the inflated cost that came through. And yes, we still get inflationary requests by our suppliers and so forth. But as Brian said, we are working with our customers to offset that stuff. As we head into 2023, approximately 20% to 30% of what we build will have been bid in a previous year, like previous to now, where we may have inflation that's not reflected in the price everything that we bid for the last three or four months and everything will bid throughout the rest of this year is now reflecting the current inflated cost base so if costs go down we have an opportunity for for some potential margin enhancements or mitigation any contract that that does have ppi indices so when we are in a multi-year contract as we move to 2023 we will apply the indices at that time, which are now also at inflated levels of 10, 12, 13% depending on the indices. So our forecast, which is today at early stages relative to 2023, will not have the same kind of bid previously hyperinflation on the cost and therefore exposure. I would, as I said before, maybe 20 or 30% of the stuff we're going to build next year has that kind of price at a certain level with an inflated cost base. The rest of it, we are very encouraged that the margins will recover to normal, if not slightly better levels going forward.
spk01: Okay. Thank you very much. One more question. You've had to flex your manufacturing sort of throughput up and down quite a bit since the beginning of 2020. With closures and, you know, idle facilities and all of that kind of stuff, and I imagine it's been difficult to manage from a workforce perspective, can you give us some insight into how you're dealing with, you know, your employees who I'm sure are highly valued and communicating with them around now ramping back up?
spk07: That's a great question. So yes, March 20th or whatever is 2020, we did the shutdown, we extended it, start, stop, slow, speed up, all that other stuff. We got to the end of 21 and then the supply chain really started to hurt us. We have done a couple of things. We have worked very progressively with our union partners where the facilities are unionized on schedules, in some cases moving from five-day workweeks to four-day workweeks. In some cases, obviously, laying people off, calling them back as we started to return to increased operating levels. Chris and Brian and Janice Harper, AVPHR, have gone through and done benchmarking of wage rates in every one of our locations. And so while we, like everybody else, had an element of the great resignation or an element of turnover where somebody in the last couple of years could get a job down the street hired, We now believe that we're at or better than market rate in terms of pay for all of our facilities, which has done a lot for retention and morale in the last little while. So our turnover rates are turning down and getting into a comfortable neighborhood. We will be adding more people to our facilities as we grow through the fourth quarter of this year. And as Stephen alluded to earlier, getting up to kind of the return to the new run rates in the first half of next year. And so by adjusting those wage rates, I think we're going to be in a good place of hiring people with a certain skill base that we want to come into our businesses. Knock on wood, we haven't had maybe the same that other businesses have had on some of the professional turnover. Yes, we've lost some engineers. Yes, we've lost some supply people and so forth. We really haven't lost any salespeople or very few of the service infrastructure, which is so critical to our customers. So, you know, COVID and its resulting issues like supply chain has been hell for our workforce. We're just starting another cycle of employee satisfaction surveys and so forth. At this point, nothing tells us that we're wildly out of sync with what we need to do to be successful going forward. And quite honestly, I'm tremendously grateful for the loyalty and commitment of our leadership team, which we've lost very few people to.
spk01: Okay, well, thanks very much, Paul. It's nice to hear your voice on the call. I'm glad to hear that you're feeling much better.
spk07: Thanks, Peg.
spk01: Take care.
spk02: Thank you. And that was our last queue. I will turn it back to Stephen King for any additional questions.
spk08: Yeah, so thanks, Carolyn. We had a couple of questions through the webcast. So our first one is from Mark Neville at Scotiabank, who I know was trying to join via the phone but had some technical difficulties. You previously said you expected to receive the required control modules in August. And now that August is here, what are you hearing from your supplier? Have you received any in advance? And can you also elaborate on the alternative module, the alternative chip? In the event there are further delays from the main supplier, could this alternative make up the gap?
spk05: Go ahead, Brian. Sure. Yeah, so as we talked a little bit earlier, our plan was always August. We're on that plan. Obviously, as we get closer to the plan, our confidence improves in that. Also mentioned that we've been active in the broker market to supplement that plan as well. So we're a couple of weeks away, and we feel very good about that and feel like we'll be able to begin working off the inventory and flush that backlog. With regards to the alternate module design, we commissioned our first bus with that design a couple of weeks ago, and it's still going through testing, but everything is positive there. So we will have a second source for that, and the componentry around that looks to be ample as well. And so we'll now have two versions of our modules that we're able to use and feel very good about that supply over the second half of the year and our ability to execute on the order book for the rest of 2022. Hey, Mark, it's Paul.
spk07: Just a little, you know, kind of color or comment on that too. One thing to get the modules, and as Brian, I think, alluded earlier, you know, four plus hours or so to put them in there, it's not like we could put a bus in a FedEx box and ship it overnight. So delivering 200 or 300 excess buses over a couple of months or whatever it works out to be is not trivial. And part of the reason – who alluded to delivery or rev rec in potentially bleeding over to 2023 isn't as much about putting the modules in, it's about getting them to our customers' locations, accepted, at least received at that customer relations so that we can take rev rec. And that's why we've been a little bit conservative. David's supply team has done an incredible job of working with the broker market. And the reason I say incredible and keep talking about it, we're dealing with suppliers of stuff that we've never dealt with before. So in a six-month period, building a relationship with the actual microprocessor suppliers, the distribution network of that, and then the brokers surrounding that has really been a yeoman's effort. So that extra supply that we have been able to secure, albeit at an inflated price, we're treating today as not additive to our business, but insurance to make sure we can deliver to the schedule that we've put forth to the banks and that we've negotiated with our customers. So as Brian said, we're on that plan that we highlighted in May, and we're on schedule, and we're committed to try and deliver exactly as we outlined at this point. As I say today, coming back, there is nothing that makes us feel that we can't deliver to that schedule.
spk08: And our final online question comes from Julia Simone Rutgers. I apologize if I mispronounced your name. So we mentioned that there's federal, state, municipal funding, or big drivers in North American transit demand, but noted that there were no grants received like SUEs or other wage subsidy programs in 2022. Is NFI expecting to receive any grants from either U.S. or Canada going forward? The second part of the question, you know, following the TTC commitments and the TTC report, how does NFI view the Canadian market going forward? And I know there's been some big announcements. Winnipeg, Brent, and other cities, so Paul.
spk07: Yeah. So the unique wage subsidy programs of, I think it's called the Furlough Scheme in the UK or the Canadian Emergency Wage Subsidy or the Canadian Emergency Rent Subsidy serves in Canada. We are no longer eligible for any of that. So we have nothing planned from a wage subsidy or grant or expected in 22 or 23 and beyond. So as far as we believe, that ship has sailed. As far as the Canadian market, You know, we actually started to see this probably in late 20 and early 21, where the federal government had done a couple things. They have put money to work through the Canadian Infrastructure Bank to help with kind of changing the game on infrastructure investment as well as a higher investment in zero-emission buses. And we've seen dedicated transit funding from the federal government. So the Canadian market actually has... quite, I think, an encouraging outlook over the next little while in terms of the fleet rejuvenation in Canada with a serious commitment by the federal government on helping the provinces and the cities make that happen. Almost, you know, without letting too many cats out of the bag, to the point where today where we build shells in Canada and complete them in the transit space in the United States, Chris's team is looking at scenarios of all Canadian builds going forward and those kinds of things to allow us to satisfy what we think to be a pretty encouraging Canadian market going forward. All right.
spk08: And that is it for all of our questions. Thanks, everyone, for joining today's call. I just will mention one thing, one new addition to our investor relations program. We now have a supplementary financial package, which is basically a large Excel file, which has all of our tables and all of our information from our MD&A and financial statements, which is also available modeling and analysis of our financial results. And with that, we'll end the call. Thanks, everybody. Have a great day.
spk02: Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating, and you may now disconnect.
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