NFI Group Inc.

Good day, and thank you for standing by. Welcome to the NFI Group's third quarter 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. 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 of Strategy and Investor Relations. Please go ahead, sir.

Thank you, Norma. Good morning, everyone, and thanks for joining us. Joining me on today's call are Paul Subri, President and Chief Executive Officer at Papasu Sony Chief Financial Officer. Today, we will walk through our Q3 2022 quarterly results, provide an update on discussions with our banking syndicate and government partners with respect to liquidity and covenant relief, and then provide comments on the broader macro environment and our outlook. Following that, we will open the call for analyst questions. If you have not been able to access the dial-in option of this call, please post your question in the webcast chat, and we will read them aloud from there. 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 on the NFI Group website. We will be moving the slides via the webcast link as we present this morning. We will also call out the slide number as we go through the deck of participants on the phone and on the webcast. 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, keep 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. We were 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 reporting currency, and all amounts referred to are in U.S. dollars unless otherwise noted. On slide three, we've included key terms and definitions referred to in this presentation, but note zero emission buses, or ZED, It consists of battery electric, hydrogen fuel cell electric, and trolley electric buses and coaches. E-U is a term that 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 therefore equals 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 motor coach solutions. We are market leaders in our core markets, which include heavy-duty transit, motor coach, and aftermarket in North America, heavy-duty transit and aftermarket in the United Kingdom, and we are the world leader in double-deck transit buses. We operate under our sustainability pledge to deliver a better product, a better workplace, a better world. Further details on our environmental, social, and governance programs can be found on our website in our annual ESG website. Slide 5 shows the breadth of NFI solutions, which includes the vehicles themselves, charging infrastructure, telematics, aftermarket parts and service, training and workforce development, and finally financing solutions where required. We provide highly customized, engineered-to-order buses and a suite of bespoke mobility solutions to meet the needs of our customers. I'll now pass it over to Paul.

Thanks, Stephen, and good morning, everyone. If my voice sounds a little rough this morning, I apologize and we'll try to speak slowly and clearly. As if my luck couldn't get any worse, despite four vaccinations, I tested positive for COVID this past weekend for the second time, and so I've been working remote. I'm now on slide six, and we'll try to summarize the quarter. As we explained during our October 24th update, supply chain disruption and supplier underperformance has been a challenge for our business since mid-2021. But recent supplier delivery misses and decommitments on critical parts have compounded an already difficult situation. Let me be clear from the onset. Overall, NFI doesn't have a demand problem. We are short critical parts to efficiently build and deliver contracted bus, contracted buses. The supply disruption has led to lower than planned line entries, completions, and deliveries in the quarter, and forced us to change our plans once again of increasing production rates in the fourth quarter to fulfill contracted orders. It's also resulted in further growth of our offline work and process inventory, ending the third quarter with over 400 buses that have been built, but missing certain critical components. We're now focused on delivering as many of these offline vehicles as we can before the year end. The challenging macro supply environment is not unique to NFI, as primarily electrical subcomponents, which include microprocessors, electrical connectors, wiring harness, and other items, remain constrained globally, which impacts us and all vehicle manufacturers. We know for a fact that our peers in the bus manufacturing space are also facing these supply disruptions and also experiencing the buildup of an incomplete work process and have also had no line entry weeks. While we anticipate these challenges to continue in 2023, there are signs of improvement, which we'll discuss later on in this call. NFI continues to lead the evolution to zero-emission mobility in buses and coaches. In the third quarter of 2022, 13% of our overall deliveries were zero-emission buses, and they make up 21% of our backlog, and NFI electric buses and coaches have now completed over 85 million electric miles in service. In addition, our infrastructure solutions team has now installed over 330 EV chargers, a base of over 55 megawatts, and we expect to install at least 120 more chargers in 2023. In our aftermarket segment, revenue was flat year over year. However, adjusted EVLA was down slightly due to unplanned freight surcharges and some higher input parts costs. We were able to pass on the majority of these increased costs through our transactional pricing programs, we were not able to do so on certain fixed price contracts and programs. While 2022 has been challenging, our longer term outlook remains very strong, driven by significant increases in our demand metrics and our win rates. Our North American active public bid universe is up 14% year over year at 10,107 EUs. We submitted the highest number of bids on record during the third quarter of 2022 at more than 7,000 EUs in that quarter alone. Success on these bids will help us drive additional growth in our future backlog and our future contract wins that will extend over multiple years. Unprecedented government funding continues to drive this activity, and we expect that this elevated demand for our products will continue into 2023 and beyond. It's important to note that our ZEBs are a critical component of government funding programs as part of their net zero objectives and now represents 48% of our total public bid universe. NFI's total backlog was down slightly from Q2 2022, driven by the timing of new awards and higher option expiries, with a number of older diesel options expiring in the quarter as agencies ramped up their plans to acquire zero emissions. Reflecting the individual timing of each transit agency's unique approval processes and board meetings, we ended the third quarter with an additional 1,360 EUs of bid award pending, meaning that FIO has been selected as the preferred provider, but final contract documentation has not been finalized. Once the paperwork is received and the contract signs, these units will be recognized as awards and added to our pending backlog. Excuse me. We also continue to advance our NFI Forward and NFI Forward 2.0 initiatives, with a total of $18 million in combined adjusted EBITDA and free cash flow savings realized within the quarter. In 2022 Q3, we closed the legacy parts distribution facility in Delaware, Ohio, and integrated it into our existing NFI parts distribution footprint. We are also on track to close MCI's public mortgage completion facility in Pembina, North Dakota, that we announced earlier this year in the first half of 2023. As we noted in our update on October 24 and our third quarter results released last evening, based on our fourth quarter financial expectations, we anticipate we will not be able to comply with certain credit facility covenants that become applicable at the end of the fourth quarter. We, however, are in detailed discussions with our banking syndicate, with the Export Development Canada, or EDC, a member of our current syndicate, and the government of Manitoba to evaluate financing structures to obtain relief required as we launch into the next few years of recovery with increased contractual backlog and strong bidding activity. Based on the potential solutions being discussed with the government and banking partners, I anticipate NFI will be able to obtain the covenant relief required. On slide seven, we present our third quarter 2022 deliveries and our total backlog, which now has orders out to 2027. At the bottom of the slide, you can see that the quarter deliveries were slightly within We're up slightly within the heavy-duty transit space as the third quarter of 2021 was also under duress from supply chain disruption. All of our product lines and deliveries are down significantly on a year-to-date basis, reflecting the ongoing challenge supply environment. I want to stress that it's not all the parts we need, but certain critical electronic electric system parts related continue to be the most problematic. On slide 8, we've provided an update on two macro impacts to our business, inflation and foreign exchange, or FX. For inflation, we assess both firm and auction orders within our total backlog. 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 specific pricing for more than 50% of the vehicle's components from our suppliers, as they are often uniquely specified by the customer. For many other non-specified components, we use internal sources, including car fare for fiberglass fabrication or KMG for metal fabrication, electrical kit assembly, and plastic thermoforming. We incorporated an inflation adjustment into all of our contacts to reflect the time between award and manufacturing. As inflation escalated rapidly in 2022, we experienced a significant supplier surcharges, effectively pushing us to pay for it or don't get the parts. And actual cost exceeded estimates on certain firm contracts from suppliers, the majority of which were bid prior to 2022. The ability to resource or re-engineer other parts into the build is very limited. And for the impacted contracts, we launched a campaign with customers requesting price increases, surcharge recovery, and contract prepayments. We have seen success on these initiatives, with over $42 million in prepayments received as of October 2, 2022, and certain pricing adjustments have also been received by customers. We continue to advance discussions on similar programs and expect additional benefit in Q4 2022 and into 2023. But please keep in mind that each customer's funding mechanisms are different, as is the actual contract language. and their local and political and budget dynamics take considerable engagement for many customers and time to complete. Some customers have even responded with offering future bus volume and option convergence, but unfortunately, this does not help our 2022 results. In 2022, we updated our bidding and pricing strategies to reflect heightened input costs and higher inflation adjustments for both vehicle and aftermarket park contracts. And because of these actions, we anticipate the inflation will primarily impact 2022 margins, with some carryover into 2023. Inflation-related margin pressure is expected to erase in the second half of 2023, as the majority of our legacy contracts impacted by the onset of rapid and hyperinflation will have been completed. As a reminder, inflation on option orders is a different situation. For the majority of our option conversions, when a customer executes an option in the future, there is a repricing opportunity that factors in a producer price index or a government PPI clause, or in some cases, other type of inflation instrument. Contracts that have a PPI adjustment clause add a price increase at the time the option is actually executed, which protects margins from future inflationary pressures. NFI's total backlog is currently split about 49% firm orders and 51% options. The majority of today's firm contracts The majority of today's firm contracts reflect our updated inflation affected costing and therefore our pricing. With respect to currency movements, our foreign exchange or FX energy generally NFI prices contracts in local currencies. For example, in Canadian contracts are priced in Canadian dollars, UK contracts in pounds, sterling and so forth. While parts and components come from different jurisdictions with different currencies. We have a macro hedging strategy in place at NFI group level to address potential FX exposures. But given the rapid rise in the US dollar in 2022, we expect there to be some negative impact from FX on certain contracts bid last year or earlier this year that are built late in 2022 or in 2023. This is primarily a function of higher than normal portion of new flyer contracts being with Canadian customers planned for 2023. Offsetting this negative impact will be the benefits of lower wage costs for our Canadian-based employees and lower interest costs on our Canadian convertible ventures. Now turning to slide nine. In the second quarter of this year, we provided a summary of our workaround plan to address a specific microprocessor shortage impacting the supply of critical control modules to Newflower and MCI in 2022. This workaround program has been a success as we sourced microchips three levels down in our supply chain and completed buses on the production lines using flex units. We've now delivered nearly all of the effective buses that were missing this specific module, showing the success and creativity of our team. Unfortunately, we're experiencing similar issues with other critical parts such as wiring harnesses, electrical components, and destination signs today. As explained in October 24th press release and subsequent investor call, we launched another action plan this quarter to address key missing components, including the temporary halt of new line entries at all new flyer plants for a number of weeks to allow our suppliers additional time to deliver backward parts to our facilities. And like our module workaround plan that we announced earlier this year, NFI people are working diligently and creatively using a build and hold approach where required to accommodate missing parts. We have retro teams been created in every one of our plans to finish buses with missing parts as they arrive. Given the supply chain for certain critical parts is not yet reliable, we will continue to run operations at a lower new line entry rates to minimize the buildup of other station work and therefore excess offline inventory. A reminder, for every hour we miss installing parts on the production line in the planned work cell as the bus is being built, it requires three to five person hours to address offline and out-of-station work, which is both very costly and extremely disruptive to production. Slide 10 is an overall supply chain health chart. Despite the focused and tireless efforts of our supply team, the unplanned disruptions to our production lines of critical components have simply continued longer than we anticipated. Once again, we saw this destruction accelerate quickly early in the fourth quarter of 2022, with some suppliers providing less than a week's notice that they could no longer meet committed delivery schedules to our plant. The overall parts availability has been improving. If you walked into our plant, you'd see 98 or 99% of all necessary parts on hand and in station, but certain critical parts remain challenged. And it becomes even worse, especially when they have significant cascading impacts. For example, a wiring harness has massive cascading impacts downstream in production. We do expect these parts delays to continue into the first half of 23. And as a result, we've delayed once again the increase in production rates in 22 and now plan to begin increasing line rates in the first half of 2023. Given the wide variation in bus propulsion types and unique customer specs, this is not a simple process. And we are taking a measured approach to add capacity conservatively, allowing for proper training of skills and to ensure supply chain health. We are targeting your return to pre-pandemic run rates by late 23 and into early 24. I remind you again, this is not a demand issue. It's primarily a supply dynamic. I'll now turn the call back over to Papasu to summarize the financial results for the quarter.