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spk09: Good day and thank you for standing by. Welcome to the NFI 2024 Q2 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Stephen King, Vice President Strategy Investor Relations. Please go ahead.
spk10: Thank you, Sean. Good morning, everyone. Joining me today are Paul Subri, President and Chief Executive Officer, and Brian Dusnip, our Executive Vice President of Finance and Chief Financial Officer. On today's call, Paul and Brian will provide an update on our second quarter results, including significant -over-year improvement across our financial metrics, and provide an update on the operating environment, market demand, and our outlook. This call is being recorded, and a replay will be made available shortly. We'll be using a presentation that can be found in the Investor section of our website. While we'll be moving the slides via the webcast link, we will also call out the slide numbers as we go. 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 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. 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 CDAR for more details. A reminder that NFI statements are presented in US dollars, the company's reporting currency, and all amounts referred to are in US dollars, unless otherwise noted. On slide three, we have included some key terms and definitions referred to in this presentation. Of note, zero emission buses, or ZEM, refers to vehicles that do not have internal combustion engines, this includes 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. Slides four, five, and six provide a brief overview of our company. More detailed information is available on the NFI Group website. NFI Group is a global independent bus and motor coach solution provider that is leading the evolution to zero emission mobility. We are purpose driven and exist to build vehicles that move the world's most precious cargo. We exist to move people. We also play a critical role in the global journey to reduce emissions through every ZEB that we design, build, and put into service. Slide seven provides NFI's latest zero emission statistics. Since 2015, we've delivered over 4,000 EUs of ZEBs that have completed over 195 million electric service miles in more than 150 cities in six countries. Our infrastructure solutions team has also installed over 495 electric bus chargers totaling more than 80 megawatts of capacity since 2018. Demand for ZEBs continues to accelerate, with a record 41% of our current backlog being ZEBs, and based on our analysis, more than 50% have anticipated North American Transit customer purchases over the next five years will be electric buses. We continue to project that at least 40% of our 2025 deliveries will be ZEB. I will now pass it over to Paul to provide an overview of our results
spk08: for the second quarter.
spk06: Thank you,
spk08: Stephen. Good morning, everyone, and thank you for joining us today. I'm now on slide nine. This slide provides a summary of the second quarter of 2024 for NFI. Our financial results showed positive year improvement with double digit growth in vehicle deliveries and revenue, significant improvement in manufacturing margin performance, our first quarter of positive net earnings since 2021, and nearly 400% increase in adjusted EBITDA. Manufacturing margins saw significant improvement reflecting in the pricing and production rates. Margins were impacted by legacy inflation, margins were impacted by legacy inflation impacted deliveries, though we have now materially completed all of those remaining contracts, which will help drive further margin growth as we move through 2024. On the demand front, we had new orders of 1114 EUs in the first quarter, a 21% increase from the previous year. As expected, the new awards were down from the first quarter where we recorded our highest awards ever of 5,421 EUs. Our trailing 12 months book to bill ratio remained strong at 107%, even as we increased deliveries by 31% over that period. Our option backlog conversion rate also showed continued recovery, now reaching 52% for the second quarter of 2024. NFI's aftermarket segment delivered yet another quarter of record performance with 162 million in revenue and 35 million of adjusted EBITDA, both up 18% year over year. These results were primarily driven by increased volume in North America, pricing improvements and continued product mix development. Our quarter ending backlog saw a slight decrease in units, but an increase to 11.8 billion US dollars in total value, another record for NFI. The average selling price for vehicles in our backlog also continued to grow by 19% year over year, reflecting a higher portion of zero emission vehicles and the pricing actions we've taken in contracts from mid 2022 onwards. Our focus to manage working capital was another bright spot with improvements in working capital days, both year over year and sequentially. This combined with positive free cashflow generations helped us maintain a strong quarter ending liquidity position, even as we increased our production rates. On the supply front, we continue to work very closely with our suppliers to monitor performance with our dedicated supplier development program. While we've continued to see a reduction in the number of moderate and high risk suppliers, there have been delays for certain components, including seats and wiring harnesses for electric buses being the primary areas of focus. These are not global supply type challenges like we have with microprocessors, but rather isolated short-term delays we're actively managing with specific suppliers. We expect these types of delays will continue through 2024 as our suppliers ramp up their operations alongside our production increases and as we increase the percentage of zero emission production at NFI. Our strong backlog has helped us mitigate some of these risks by providing longer term visibility to our suppliers. In addition, we have continued to strengthen our ZEB supply base, bringing on additional suppliers from specific regions and partnering with larger, more established ZEB component suppliers, such as Accelera, BAE, Impact and Ballard. We achieved our hiring plan in the quarter, even with the continued tough labor market primarily still in the United States. We expect we'll continue to add new team members in 24 and 25, but at much lower rates than we did in 23 and the first half of this year, as we now focus on driving production rates higher through improved labor efficiency. The training demands to bring new people up to speed on our production lines with zero emission vehicles cannot be underestimated. Slide 10 shows a quarterly inventory balances compared to line entry rates. The line entry rates saw a 28% year over year increase and a 2% increase for the first quarter of 2024. This reflects our ongoing production ramp up. The increase was driven by healthy backlog, strong continued customer demand and improving production efficiencies. The ramp up is a phased approach, matching consistent supplier performance with trained labor availability and ensuring a trained workforce continues and our customers' abilities to inspect and accept this next generation of vehicle. We are being measured as we ramp up to ensure we do not build up excessive offline buses as they require a significant rectification and outside investments in work and process inventory and increasing interest expenses. Inventory balances were up 6% from the quarter with work and process and raw material balances increasing offset by lower finished goods. The increase in raw materials reflects the higher number of ZEBs planned for the second half of the year and we've continued to carry certain safety stock of parts reflecting very focused supply chain performance. As our supply chain health improves and as we continue to reduce high risk suppliers, we anticipate that we'll be able to lower these additional redundant safety stock levels over time. The second quarter was a positive step in our recovery and growth. Based on first half results, we are well positioned to deliver on our targets and I'll provide more detail after when I discuss our outlook a little later in the presentation, but for now, Brian will provide a deeper dive into our quarterly results. Over to you,
spk11: Brian.
spk08: Thanks Paul.
spk11: Picking up on slide 11, our multi-year backlog remains strong with another quarterly increase in option orders, which now extend all the way to 2029. Firm orders are down slightly reflecting higher deliveries in the quarter. Across all our product lines, we saw year over year growth in deliveries with low floor cutaway deliveries up by an impressive 73%. Turning to slide 12, overall gross margin improved year over year from .3% to 11.9%. We're especially pleased to see the progression in manufacturing, which achieved an 8% gross margin, the highest since the first quarter of 2021 and a significant jump from the .9% margin in the second quarter of last year. We project that manufacturing margins will see continued improvement as we move through 2024, driven by improved production efficiencies, stronger pricing and contracts that were bid in 2023, and the fact that we now have materially delivered all legacy inflation impacted contracts. Aftermarket gross margin percentage was up year over year to 28.5%, but down slightly sequentially. This decrease reflects higher public sector sales on large customer mid-life overall projects. On slide 13, we provide segmented adjusted EBITDA. The manufacturing segment was up 313% year over year and was nearly equal to the aftermarket segment. This growth was driven by higher deliveries and gross margin improvement. The aftermarket segment saw an .2% year over year improvement and had a very strong first half of 2024 outperforming expectations. Turning to slide 14, we reported our first quarter of positive net earnings since the second quarter of 2021 with net earnings of 2.5 million, a year over year increase of 105% or $50 million. Positive earnings in both manufacturing and aftermarket segments were offset by corporate expenses. Adjusted per share was a positive 2 cents and 3 cents on an adjusted basis. We also provided a chart on this page that reconciles net loss to adjusted net loss, including normalization items. I'd like to remind you that in our MB&A and press release, we've included reconciliations for all non IFRS measures. On slide 15, free cash flow was positive for the quarter and saw 104% improvement from the same period in 2023. Free cash flow was primarily driven by increased cash generated from operating activities and lower cash interest expense, linked to the timing of payments on our second lean to ventures. We did see a $22 million investment in working capital during the quarter, reflecting the investments in inventory balances that Paul discussed, offset by increases in deferred revenue. On slide 16, NFI's total liquidity was up 13 million from the first quarter, ending at 179 million, despite higher volumes. Total liquidity was positively impacted by the same items as free cash flow, offset somewhat by our investments in working capital. Overall cash generation allowed us to make a small repayment in our North American and UK secured facilities in the quarter. On this chart, we also outline NFI's debt maturities. While we're focused on deleveraging our balance sheet by increasing adjusted EBITDA and delivering free cash flow to support debt repayment, we've also begun investigating options to reposition certain debt balances to other debt instruments. This may provide an opportunity to lower our overall interest expense. This is an initiative that we will be actively pursuing during the remainder of 2024 and hope to provide additional information as we advance these efforts. Finally, subsequent to the quarter end, we amended our performance agreement with Export Development Canada, increasing capacity under our letter of credit support facility by 25 million, which is expected to support our liquidity and bonding going forward. This program includes a performance security guarantee of up to 90 million, which was previously up to 50 million. This is in place to cover standby letters of credit or letters of guarantees, required as part of collateral packages provided to support surety bonds, which are typically required by transit agencies in North America to support bus contracts. These collateral requirements have increased over the past couple of years, and we now have $94 million in outstanding letters of credit. I'll now turn the call back to Paul.
spk08: Thanks, Brian. On slide 18, we provide a summary of some of the key public demand metrics for North America. Total active bids of 6,792 EUs, including 3,153 EUs and bids already submitted, and another 3,609 of EUs that are bids are now in process is an increase from the first quarter of 2024. Year over year, we saw a slight decline in total active bids, driven primarily by the conversion of very large awards from New York and New Jersey, and from other customers to NFI that led to record orders for the first half of 2024. Our five-year expected public bid forecast is now 21,450 EUs, which is developed using customer fleet replacement plans and projections combined with active bids in process and supports our view that public bus and coach demand will continue to remain very strong, reflecting a strong funding environment. On slide 19, we provide a summary of key market updates. In the United States, the FDA announced funding for the 2024 low or no emission grants, commonly referred to as the no-low program. There were $1.1 billion in grants available for buses and associated infrastructure in 2024, and NFI expects to have another strong performance this year, surpassing our previous record in 2023, where we were named by a specific customer on over $200 million of grants. The announcements have been made by the FDA, and we're actively tabulating the results and plan to provide additional details to you in the short term. We've included a chart here from the American Public Transit Association that shows specific grant funding for bus and bus facilities and the low-node program. As you can see in the chart, there has been a dramatic increase in dedicated funding through the Infrastructure Investment and Jobs Act to support the continued rollout of low or no emission buses across the United States. In Canada, the government recently announced details on its 30 million Canadian, 30 billion, sorry, Canadian Public Transit Fund, the largest public transit investment in Canadian history. The fund, which includes dedicated funding for large public transit systems, will be distributed over 10 years, starting in 2026. This funding is in addition to the over Canadian $17 billion in federal funding to support Canadian agencies that is already in place until 2027. In response to the growing Canadian demand for NFI products, it is now actively, NFI is now actively working on enhancements to our heavy duty transit manufacturing footprint in Winnipeg. That would enable New Flyer to build complete transit buses for Canadian customers in Winnipeg starting in late 2025. In the United Kingdom, the Zero Emission Bus Regional Areas, or ZEBRA program, continue to drive electric and fuel cell bus procurements. Alexander Dennis has continued to secure new contracts with customers under the ZEBRA II program in England. Finally, I'll provide an update on our continued efforts to strengthen the bus manufacturing industry within the United States. As we've previously discussed, the FTA issued a Dear Colleague letter to transit agencies in February of this year that provided clarity on the ability to utilize progress payment structures within bus contracts, complete price adjustments on legacy firm contracts, and include price indexing on new firm contracts. It also called for active efforts to reduce customization on new bus orders. We've begun incorporating milestone payment or billing payment structures into new contracts wherever possible at standard terms. This would provide payments through the build period of a new vehicle, rather than current process of receiving 100% of the purchase price following delivery, customer acceptance, plus 30 or more days for final payment period. These structures have only started to be introduced into new bids and contracts following the FTA Dear Colleague letter. We've also actively pursued progress payments on structures on contracts already in place with reasonable success. It will take time for the impact of these new measures to fully reflect it in NFI's working capital balances, and we'll continue to provide insight as things advance. We anticipate that this will increase our deferred revenue balances as we move through 2024 and into 2025. Turning to slide 20, based on our first half performance, we are confident reaffirming our 2024 financial guidance and our 2025 targets. For fiscal 2024, we anticipate double digit revenue growth, triple digit adjusted EBITDA growth, and improved free cash flow. We anticipate zero mission buses to be 30 to 35% of our total deliveries in 2024, growing to over 40% in 2025. This does not imply that we will see a significant increase in ZEB deliveries during the third or fourth quarters of 2024, and this is in line with our firm, sorry, this does imply that we will see a significant increase in ZEBs during the third and fourth quarters of this year, and this is in line with our firm backlog and expected production schedule. We will see an increase in cash capex as we catch up on some of the deferred maintenance, and as we invest in our continued new product development and growth projects. For our 2025 targets, we expect to achieve an adjusted EBITDA greater than 350 million US dollars, and we expect to reach a $400 million annualized run rate by the fourth quarter of 2025. The multi-year growth in our financial productions is driven by a volume of accommodations, sorry, a volume recovery, production efficiencies, improved pricing, a shift away from legacy infacted contracts and an increased number of higher margin zero emission bus deliveries. We have maintained our return on the vested capital target of greater than 12% for 2025, with the potential for outperformance on this metric as we can see improvements in our working capital investments and achieve customer milestone payment support. On slide 21, with the first half of this year delivering 33 to 38% of our expected full year adjusted EBITDA, we continue to expect a strong third and fourth quarter, weighted heavier towards our typically busiest fourth quarter. We also show the continued projected improvement in gross margins as we move past those legacy inflected impacted contracts, increase volumes and deliver more zero emission buses. Turning to slide 2022, we highlight the increasing average sale price or ASP per equivalent unit in our total backlog, which helps support our ability to reaffirm our guidance. This amount has increased for both heavy duty transit buses, the dark blue line and motor coaches, the light blue line. Year over year, the average selling price for heavy duty buses in our backlog was up 17% and up 56% since 2021. ASP for coaches were up 11% or 19% over the same time periods. These average selling pricing increases were driven by a combination of higher ZB orders, inflation adjusted pricing and improved margins in our new contracts. Now on slide 2022, provide a few closing comments and then we'll open up our call to analyst Q&A. We were very pleased with our first half of 2024 performance and in line with our projections, especially the continued recovery of the manufacturing segment and the solid performance with our aftermarket. We saw year over year growth at all of our major financial metrics with positive net earnings and free cashflow while maintaining a healthy liquidity position. I'm grateful and proud of our team, now back to nearly 9,000 employees for remaining loyal to the company and working so incredibly hard to deliver these results. While our recovery is well underway, we do not underestimate the work head of us managing the risks with a challenging operating environment. We continue to work together to achieve our plans to deliver for our customers, whom have been incredibly patient and flexible to accommodate both NFI specific challenges and our overall industry dynamics. I look forward to continuing improved and positive progress in the second half of 2024 and we anticipate continued year rear recovery as we move in 2025. Sean, please open the line for analyst questions and provide instructions to our callers to ask questions.
spk09: Thank you. And at this time we will conduct the question and answer session. As a reminder to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster.
spk05: And our first question
spk09: comes from a line of Chris Murray with ATB Capital Markets. Your line is now open.
spk07: Yeah, thanks folks, good morning. Chris. I guess the first question, and maybe I know I asked this in the last quarter, but just looking at aftermarket, again, kind of a record performance, very, very strong, both top line and EBITDA margin. Again, just, can you talk a little bit about the sustainability of this going forward and should we kind of expect this is the kind of run rate performance we should expect through kind of the balance of 24 and into 25?
spk08: I think that's a fair assumption, Chris. As we moved through 23 and put our plans in place for 2024, we were trying to predict kind of the customer's reactions, both public and private to that period of time where we and then therefore couldn't supply parts directly to them given supply chain challenges. We thought or we projected that we may see a little bit of a flattening or slow down of that growth. That hasn't been the case. Our customers continue to work on ensuring their pullout and the performance of their vehicles and the readiness of those vehicles. We continue to work on adding products that make sense to our offering and moving that product through the same rationalized infrastructure that Brian and his team did for so many years. We have a couple of struggling competitors, some that have gone away. You know, one of our competitors has left the US market from new product, one of them effectively shut their business, so we now have some of those customers looking to us to try and fill a gap if we can provide parts for their vehicles. So we project that business to continue to be strong through 24 and 25. We'll continue to work on our cost base. The biggest area of opportunity is freight and we continue to try and manage that. But I think you're gonna continue to see a very strong top line and a reasonable margin throughout 24 and 25 in the aftermarket.
spk07: Okay, that's helpful. One of the other questions I get a lot is, thinking about as earnings are improving, is the capital structure for the company. I know in the release you talked about wanting to get back to a leverage ratio kind of normalized somewhere between two and two and a half times. Can you walk us through your thoughts around the, call it the unwind or the refinancing of the company? And while you're at it, I mean, one of the questions we also get a lot of the time is, is there any expectation you're gonna have to issue additional equity to kind of get you back down into that two to two and a half range?
spk11: Yeah, thanks Chris, I'll take that one. So, things in material changed in the last 12 months in terms of the turnaround of the company. And so we would expect that we'll have more options in the second half of the year and the first half of 2025 in terms of refinancing our balances. We think we'll be able to get a little bit lower rate. We do not expect to issue equity. We believe that we can fund all of our work in capital needs as well as our capital spending through cash flows that we generate. And I think we've, you know, you've seen the liquidity numbers for the second quarter. And so I think we're well on our way of being a little bit more working capital efficient along with benefiting from some of these milestone payments that we have alluded to in the FTA Dear Colleague letter. So just to be clear, we do not plan on issuing equity.
spk07: Okay, and then any plans on either being able to call or shift the senior secured or the second quarter? Can we?
spk11: We're taking a look at a whole bunch of options right now which are available to us now that we're doing a little bit better financially. So we'll continue to look at that and we'll give you updates you know, as the second half of the year progresses.
spk08: Chris, it's Paul, as you know, the senior secured doesn't come current nor do the government loans until the end of the first quarter of 2026. So, you know, the effort was to get, sorry, becomes due at the end of 2026 and therefore current the end of the first quarter of 2025. So we've got a little bit of runway. The markets are open, our business is doing better. Brian and his team are working pretty aggressively now to try and assess a variety of options of what we would do next relative to refi, but you know, there's nothing imminent you're gonna hear about in the next day or two. We're actively looking at that we're pleased that we'll be able to increase the volume through the business without sucking up working capital. And that has a lot to do with those milestone payments that Brian talked about. So, you know, we're actively looking at what to do and how to change potentially the shape of some of that debt.
spk07: Okay, that sounds great. And I guess my last comment or last question, I guess, is around production rates. And so I think in the release, you talked a little bit about maybe with the new Canadian program for federal spending that you're maybe reviewing, you know, maybe your capacity inside Canada. You know, there's also some other, I guess some other opportunities, especially with what you have to expect is higher market share. But I also know that you've always been conscious about not trying to outrun the industry that can be quite cyclical at times. So, you know, when we think about longer term, is there sort of a target kind of ideal of, you know, what the production level should be for the company, maybe even beyond 24 and 25. So maybe it's a little more theoretical, but just trying to get an idea of like where the terminal kind of production rate is optimized for you guys.
spk08: Well, you know, let me start a little bit at the demand thing. I think in our remarks and some of the graphs you saw, how healthy both the US federal funding, specifically the Lono program, but also in the Canadian environment now with this longer term, $30 billion, you know, very, very material focus on long term and reinvestment and enhancement of Canadian public transit systems. There's a dynamic as we continue to shift from ICE engines into zero emission. As you know, they're more complex. There's different types of zero emissions. There's different rage dynamics, fuel cells and all of those things. We still have a supply chain that has some challenges and we don't wanna run too fast. Having said that, we continue to increase the volume quarter over quarter that's going through our facilities. A Canadian program that would allow us to build Canadian zero emissions, you know, cradle to grave in Canada is something that we're now actively investigating and thinking through in our facilities. We've been talking to both the Manitoba government and the government of Canada about ways to try and bring some of that capacity back to Canada. It's probably 15 years, Chris, since we did an all Canadian build of a public transit bus in Canada. So I'm not sure we're in a position yet to kind of give you any numbers. You'll see it really translate through our forecast and our guidance going forward as we increase those production rates. We're pleased with the pace that we're running at. We're challenged by a couple of suppliers today. You know, there's still wiring harnesses continue to be a challenge. Even things that we would think wouldn't be a problem like seat supply, the repeatability of seats. Some of those things continue to govern the pace at which we're ramping up the business. It's not a demand issue. It's us trying to make sure that we're prudent about the rate at which we run it through and that we don't suck up working capital and use unnecessary liquidity by having stuff waiting for part supply. So we're pleased. Look, we're recovering very well. The rates at MCI, Alexander Dennis is running well. The Arbok business is actually ahead of its schedule in terms of planning its production rates and delivering them. And New Flyer is nicely coming along to wrap up those volumes. We're probably back, you know, production rates, you know, for 2025 of that kind of 1,500 to 1,600 total EU production rate per quarter, which is effectively where we were in 2019.
spk06: Okay, I'll leave it there. Thanks folks. Thanks, Chris.
spk09: Our next question comes from Cameron Dirksen with National Bank Financial.
spk03: Yeah, thanks. Good morning. Maybe just to kind of follow up on Chris's question just around production rates and just maybe taking the more short-term view, just wondering how you can sort of, you know, maybe give us a little more detail on, I guess, the next couple quarters, kind of how the split in kind of deliveries is gonna break out for the remainder of the year and also, you know, how should we think about the EBITDA generated by quarter, the next couple quarters?
spk08: So, you know, again, we gotta go business by business, which, you know, we won't do on this call, Cameron. It's a good question. You're gonna see it sequentially go up over Q3, over what it was at Q2. You're gonna see it in Q4, higher than Q3. Q4 also has that dynamic that has really an Alexander, Dennis, and MCI impact of deliveries go up even higher in the fourth quarter, just because of the way those things are paid for and tax depreciation strategies of our customers and so forth. But, you know, you're gonna see an improvement in Q3 and a more dramatic improvement in terms of volume and deliveries in Q4.
spk03: Okay, and I guess from a margin perspective, I mean, obviously there's mixed differences on the manufacturing side, but would you expect the kind of sequential improvement, obviously, in Q3, but then also a sequential improvement in the percentage margin in Q4?
spk08: Yeah, I think that's a fair assumption. You also remember that we, two issues at play. One is the negative drag that we had on low margin or legacy contracts is now effectively behind us. There's still a few, but it's not material as we move through Q3 and Q4. So you'll see better margins, and then Q4 will have an even higher percentage of zero emissions, which have a higher margin. So you'll see better volume and better margin in the fourth quarter as well.
spk03: Okay, that's helpful. Maybe just sort of my second question is just around the Alexander, Dennis business. You've introduced a new set of EV buses there. It seems like you're having some decent order success. Maybe you can just talk a little bit more about that market, so what you're seeing as far as the opportunities there, where the kind of production is with ADL, so any particular details you could provide would be great.
spk08: Good question, Ken. Just a little context for maybe some of the listeners that don't know the history, but when Alexander, Dennis first in 2016, 17 got into zero emission vehicles, they partnered with BYD, where BYD provided the entire battery electric chassis, and Alexander, Dennis put the body on it. As that progress, as that product kind of matured, and as the expectations of the operators in the UK for more range and better performance, we effectively made a decision not to go with BYD anymore, but to build our own chassis. So in the last two years, we have launched an E400, or Enviro 400 EV, which is a two-axle double deck, on our own electric chassis. We also still do them on our own diesel chassis, and some very small, but some on hybrids. The Enviro 500 is the three-axle double deck, which we are now delivering electric buses into the Asia-Pacific region, and that is going well. We have launched a new product called the Enviro 100 EV, which is a smaller vehicle. It's about a 28-foot vehicle, today sold almost exclusively in the United Kingdom, which has really hit the market with a lot of interest. We've got orders already, we've got deliveries already. It's kind of a market maker, because it's a smaller than a normal single-deck bus, and there's a lot of interest in the UK from it. So it'll start to see deliveries, well, it already has, but it'll see some in the third and the fourth quarter and ramp up next year. The last remaining product is their normal single-deck bus, which is called the Enviro 200. It has different widths and different lengths. The re-engineering of that chassis, it will be completed probably by the end of this year with deliveries starting in the second half of next year. So as that market continues to recover, we think we're very well positioned from a product standpoint. I will make a comment though, that while UK is higher than North America on the pace of adoption of zero emission, there is also some customers that have ramped up orders for diesel buses. So the death of the diesel is a little bit premature in some people's mind. What the opportunity for us is taking that technology and capability that we've developed in the UK and now leveraging in global markets. And that's really the next chapter for Alexander Dennis. The aftermarket over there has done well. The business is recovering well, both on volume and margin.
spk03: Okay, no, that's great detail. Appreciate the time, thanks.
spk09: Thanks, Cameron. Our next question comes from Tammy Chen with BMO Capital Markets.
spk01: Hi, good morning. Thanks for the question. Paul, a quick clarification here. I saw zero emission buses were a lower margin rate but higher EBITDA dollars per unit. Am I still understanding that right? Or zero emission buses are now also higher margin rates for you?
spk08: Zero emission buses have a higher EBITDA dollar per unit. But a lower margin percent.
spk06: If I confuse you, that's my issue.
spk01: Okay, got it. Yeah, thanks for clarifying. That was my original understanding. Okay, perfect. Then I wanted to revisit your comments about milestone payments. I think before, maybe it was last quarter, I got the impression that this part of the Dear Colleague letter may be the most challenging to implement both
spk00: of
spk01: existing programs with existing customers' work, but also in new contracts that you're bidding on now. It sounds like there's actually some good progress being made here. Could you just talk a little bit more about that? Are you seeing transit agencies now being more willing to incorporate this?
spk08: That's a really good question and thanks for the opportunity to clarify. So the original meeting was in January in the White House and then immediately there was the issue of the Dear Colleague letter. And all of the guidelines coming in that letter were the clarity around the contracts allow for milestone payments, the contracts allow for inflation readjustments and so on and so forth. And what we tried to explain to our investors is, going forward, we will now, in every bid that we can and every contract that we sign, and try and embed milestone payments. The reality is the stuff that we're bidding now, we don't build 12 to 18 months from now. So the impact is delayed. We also told our investors that what we were going to do is to go back to every customer that we had a contract in place, or that was coming up that we would start to build and try and negotiate milestone payments into it. Some customers have not wanted to do that, a number of customers have done that. And so we've been successful in North America, but I can also tell you in the UK, where government funding has helped them buy some vehicles that we've been successful at already achieving some of those milestone payments, which is part of the reason why you see volumes going up, and yet we're still being able to tread water on liquidity. Maybe Brian, you can give some color on the magnitude that we've seen so far.
spk11: Yeah, I think if you dig into the financials, you can see round figures since the beginning of the year, we've been able to increase milestone payment balances by about $45 million over the first half of the year. So, it has been helpful, it hasn't changed our working capital by hundreds of millions, but it has been helpful in 2024. And as we've indicated earlier, some of the contracts that we're negotiating and signing today will have a bigger milestone effect, if you will, in 2025, but we are still actively pursuing milestone payments in contract negotiations and the work that
spk06: we're doing in the second half of 2024.
spk01: I see, okay, thank you, and thanks for the magnitude there. And last question I had is on the zero emission buses. So, I remember a few quarters ago, you had to redesign the area that contained the battery for better drainage. I want an example of one of the things that you're learning as you go in this newer area. And both in the press release and in the commentary you had on the call, you called out the supply base is still missing in all of these factors. So, I just wanted to level setting, how should we and investors think about as you do ramp up more and more zero emission buses, it's still a new area. I think it's just a bit difficult to understand what are still some of the risk areas, what parts of the list you provided, where are you the most with respect to the execution, just because this is still a newer part, but it's gonna quickly become more and more meaningful for your deliveries. And maybe you could also update us on the cash cycle for zero emission buses, because I think I recall you said they're longer than the diesel buses, thank you.
spk08: So, the first question or the first topic you talked about was I think your words were a redesign of the battery container or whatever that put the cells in. A reminder of what happened there. We historically would buy modules that have been packaged, the cells have been packaged by a third party, and then we would embed them in some kind of a container. Internally, we call it a juice box. We make ours out of a fiberglass container. And inside that container are a series of battery modules that have also cooling going through there or heating, depending on the operating environment those batteries are working in. What we found out, not just us, but every one of our competitors in the vast majority of the industry, that there is a potential for the cooling system to have leaks inside those battery containers, or again, what we call a juice box. And if there was a leakage of coolant inside there, there is a possibility of a thermal event. So, what we decided to do was to embed some kind of a valve, if you will, that if there was a fluid inside the container, the valve would open up and it would eject the fluid from that thing and therefore minimize the potential of a thermal event. So, we did two things. We retrofitted the fleet that was in service, and then we made that as a standard part of our design of the vehicle. The other thing that we've been doing on batteries going forward is we've been trying to now, we're not trying, we are actively, and have, had multiple source of battery providers. For the first six or seven years of NuFlyer, maybe eight years of NuFlyer battery or fuel cell deliveries, we only had really one battery supplier. And we now have two active battery suppliers with two different types of batteries all inside a similar juice box container. So, we now have options, not only to have some price leverage, if you will, or competition among our suppliers, but also to build redundancy into our supply chain if there are any problems going forward. That's in the North American environment. In the UK environment, our Alexander Dennis designed and built chassis have batteries that are provided as full contained units from a third party that is based in Poland, and that company builds for a number of other manufacturers. We are actively and in process of setting an alternate supplier for the Alexander Dennis battery supply as well. So, as this thing evolves, the key most expensive component of any zero emission vehicle is the batteries or in the case of a fuel cell, a fuel cell device. And so, we're continuing to learn from product service. We're continuing to try to build redundancy into those things. So, that's what we're really working on. The other dynamic that is probably the most complex in a zero emission vehicle when you get past things like the batteries or fuel cells is the electrical architecture. The complexity of the wiring harnesses in the electrical system goes up exponentially compared to a diesel vehicle. And we are continuing to work with alternate supply and advanced design companies to continue to improve those things, just like any product would continue to improve over time. We're seeing improved reliability, we're seeing better costing, we're seeing competitive tension from suppliers. So, this is what we do all day long. So, we're quite pleased. It's not, those products are not without challenges and risks, but we're really starting to see both adoption rates go up and performance and readiness and reliability improved in the field.
spk01: And could you just talk about the cash cycle for the ZEBs?
spk08: Yep, so the second part of your question, the cash cycle. And so, Brian alluded to this and I commented a little bit. One of the dynamics when we first got into ZEBs, we had battery providers wanting us to pay them in advance of us building the vehicles to either secure the batteries up front or to buy the batteries or secure the faster or buy the batteries. We also saw customers taking longer to accept and inspect those vehicles. The discussion that we've had earlier about embedding milestone payments in contracts is mitigating some of that long cash cycle. We had hoped the industry would adopt a standard milestone payment schedule. That has not happened. Every customer has a different milestone payment schedule. We are getting more professional, more aggressive in our proposals of giving a fair price, giving a balanced product, an exceptional service and so forth, but also being aggressive at our asks for milestone payments. We are dealing with government purchasing agencies and so it's a negotiation, but we are pleased at the rate of acceptance, as I said, on the historical contracts we had. And we have been pretty aggressive on our asks and our proposals going forward to reduce that overall cash cycle. And that's why Brian was alluded to. We've got about a $40 million net benefit so far this year on milestone payments. And we will see that to increase over time as milestone payments become part of every contract, whether it's diesel or a ZEB
spk06: contract.
spk01: Great, thank you.
spk06: Thanks very much.
spk09: Our next question comes from Daryl Young with Stiefel.
spk02: Hey, good morning everyone and congrats on a good quarter. Thanks Daryl. Just wanted to touch on coach demand and at our buck demand, called out some pretty strong numbers. I think it's probably recovering faster than any of us would have expected at the depths of the pandemic. So can you maybe just give us a bit of color here on where the coach demand is coming from? Is it travel trends and tour operators or anything there? And then historically, I think coach has been the higher margin product of the two. Is that still the case with all the changes that have happened in the last couple of years?
spk08: It's a good question. And of course, it's not really well detailed in our analysis or MD&A. Just some context, Daryl, for a reminder, pre-COVID or when we first MCI become part of the family, we used to think about 60% of that business was private operators and 40% it was public operators. When COVID kicked in and all of these coaches were parked for a number of period, we didn't build a private motor coach for probably two and a half years. And then we started that line back up and it has recovered very well. There was rationalization in the private motor coach industry, there were some bankruptcies, there were some acquisitions by larger operators of other operators and so forth. When we go to the trade shows and go to see our customers, the rate that we're building MCI private coaches is now getting back up to in the neighborhood of 400 or so units a year. It's not really back up to maybe 600 or what it was at that time, but it has recovered probably faster than we thought. The government dynamic on motor coaches is very lumpy because it's a number of large agencies like New York, Dallas, Houston, New Jersey that buy in batches. And there's been a bit of a lull of the public motor coaches for a while, but there's some good contracts that we've either won or that are an active procurement right now. So we're quite pleased at the recovery of the MCI business overall. We've invested about $10 million in that facility over the last year in a complete overhaul of the building in Winnipeg that allows us to build motor coaches on a common line, which will give us some purchasing efficiency, some labor productivity and so forth. So that's motor coach. On the Arbac dynamic, it is historically a low floor cutaway business where we build a body and integrate it on top of a Ford or a GM chassis. That market has recovered very well. Today, there's only ICE engines and the demand of that market and the backlog of Arbac is well into, geez, almost the end of 25 or maybe 26 in terms of sold slots. It's really strong. And we have increased that business production rate sequentially every quarter for the last year or so. And we think there's more opportunity to do so. The other part of Arbac was the introduction of medium class vehicles, both ICE vehicles. We call the brand Equus or Zero Mission. The ICE, original design of the ICE had a little bit of challenge in the marketplace and demand slowed down, although we still think there's an opportunity for that business to grow. We offered a Zero Mission vehicle that has not really had that much take up, but we still believe that the cutaway market will support the Arbac business plan for years to come and that there is upside as we continue to investigate the medium class
spk06: vehicle specifically in Zero Mission. Okay, that is good color. That was it for me. So thanks very much,
spk05: guys. Thank you. Our next question. Do you want to go ahead for a question?
spk06: Our
spk09: next question comes from Christa Friesen with CIBC.
spk04: Hi, thanks for taking my question. I was just wondering on the ZEP deliveries this year, obviously it's a pretty significant ramp up that you're guiding to in the back half. Do you have any concerns around reaching that 30% target, just given the supply chain issues maybe you're seeing specifically related to ZEP?
spk08: Look, there's always risk on the supply chain. Quite frankly, if we didn't have any supply chain challenges, we could ramp up the ZEPs contractually dramatically faster. People skills, trained skills is obviously an issue, but the supply chain is the governing factor. So we've guided for the second half of the year to the rates that we've put out. Every one of those slots is sold. We know which customer we're selling and building for. Where we can, we've laid in advanced inventory or redundant inventories earlier than we've had in the past. It's a custom made product that has both technical complexity and then inspector or customer complexity and acceptance and dynamics. So there's always risks in that. We've given a full year range that we think has enough room to be able to handle both upside and downside risks. We're crazy deep in managing the supply chain with our vendor development team, whether it's an ICE bus or a zero mission vehicle. At this point in time, we're comfortable with the rate that we've put out there for Q3 and Q4.
spk04: Okay, great. And maybe just further on the supply chain. Is it that maybe you're just waiting an extra few days or a week for a part, or do you have some buses that are just sitting there and you don't know when that one part might show up?
spk08: So, this is an automotive, as you know, you've been and you've seen, we have a very sophisticated ERP system in the factory. We have customized bill of materials that have been signed off by the customer before we start the build. We have a very sophisticated vendor management system. We have some suppliers that have shorted us by supplying a part on a date that they had proposed to supply to us. And so, because we historically had just in time inventory or point of use inventory, when you don't have a widget to put on online, it has massive implications. We continue to adjust the production schedule as best we can, but it's not like we can just stop building order A and build order B, because all of the materials are bought for a specific customer. We're working incredibly hard to manage those customers. Two examples I gave you, one is our wiring harnesses, or I gave one of the guys earlier, wiring harnesses. We have kind of four major vendors. We've added another one, and quite frankly, we've insourced some of that to our own manufacturing capability to build redundancy in the wiring harness system. Now, in 22 and 23, we made the decision to line enter buses where we knew the wiring harness was not coming on time in the hopes that we could catch up. And the downside of what happened there is that we had way too many rectification hours, and we had too many dollars tied up in work and process. The decision we've made this year is if we know there's a part not coming that is that critical, like a wiring harness, we're not inducting the bus. So that's a big change in our operational strategy. So the supplier says he's supposed to have it on Monday, he now says Thursday, we're trying to manage our way through their performance to their promises. If it's a part like a seat, for example, that's our other major part right now, we have a US supplier that is really struggling to make the seats and deliver it on time. We'll still induct those buses, but we're installing those seats offline, and we're quite frankly charging back to the supplier the extra labor to do so, which we never did before in the past. It'd be really hard to be generic about, you know, is it a day or two days or a month for when we get those parts. We don't have buses lying around for long periods of time. So what we're trying to do now is mitigate or govern the line entry of vehicles rather than trying to deal with it offline downstream like we did in the past.
spk04: Okay, great, that makes a lot of sense. Thank you. And maybe on the ZEP backlog, I believe you said 41% of your backlog is now ZEP. Is that split similar if we were to just look at the firm orders or do you find the ZEP skew to options?
spk08: It's probably higher in the options. And of course, that's just the nature of the big orders that we've seen in the last little while. You know, the first year's firm and then the multi-years are options. I would suggest that as we get through 24, 25, 26, where we continue to see that percent ramp up, it's a prior, probably a higher percentage in the option pool than it is. I don't have the data right in front of me. Well, just a
spk10: reminder, Krista, that the ZEP is a very high percentage and everything that Paul mentioned around 2024, what's in our plan is in our backlog today. So those
spk06: ZEP orders would be in the firm backlog.
spk04: Okay, perfect. Thank you very much and congrats on the quarter. I'll jump back in the queue.
spk09: Thank you. This concludes the question and answer session. I would now like to turn it back to Stephen King for closing remarks.
spk10: Thanks, Sean. I did have one question through the web chat and this is one for Brian from Jim Barlow and you kind of answered it earlier, but I'll put it out here. How do you hope to reduce debt and increase funding to capital investments? Are you considering issuing debentures for private investors?
spk11: Okay, thanks. Great question. So as we mentioned earlier, we would expect to be able to fund and we project to be able to fund all of our capital spending and working capital increases for that matter through just normal company cash flows and normal activities. We do not expect to have to go out and raise increased debt balances or issue equity in order to fund those aspects of the company. So we feel comfortable as we projected out the back half of 24, 25 and 26 that we'll be able to fund all that with our cash flows.
spk10: Great, great. Thanks, Brian. That puts an end to our conference call. Thanks everyone for joining. As always, please reach out. If you have any follow-up questions, all of our contact information is on our website as well all of our financial information is there, our ESG information and our supplemental financial package which we hope helps people as they're doing analysis on the company. Thanks everyone and have a great day. Talk to you soon.
spk09: And this does conclude the program. You may now disconnect.
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