Earnings Call: Q2 2020

Aug 6, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the NFI Group Inc. Second Quarter twenty twenty Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Also, 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. Thank you. Please go ahead. Thank you, Chris. Good morning, everyone, and welcome to our conference call. This is Stephen King, NFI's Group Director, Treasury, Corporate Development and Investor Relations speaking. Joining me today are Paul Subri, President and Chief Executive Officer and Pipasu Soni, Executive Vice President, Finance and Chief Financial Officer. For your information, this call is being recorded and a replay will be made available shortly. On this morning's call, we will be walking through a financial results presentation that can be found in the Investors section of our website under Events and Presentations. We will call out the slide number referred to as we walk through the presentation. Starting with Slide two, I will 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 more one or more of these uncertainties materialize or should the underlying assumptions prove incorrect, actual results may vary significantly from those expected. You're advised to review the risk factors found in NFI's press releases and other public filings on SEDAR for more details. During today's call, we will be discussing second quarter twenty twenty results with a specific focus on the COVID-nineteen pandemic's impact on operations and results. In addition to the results presentation, we encourage all participants to review the consolidated financial statements and the associated management discussion and analysis and press release that are all posted to our website and on SEDAR. 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 today's call, Paul will start with a recap of the quarter, Vipassio will take us through the financial results with a specific focus on the impact of COVID-nineteen and will then discuss our transformation initiative, the launch of NFI Forward. Finally, Paul will provide some market insights and discuss NFI's outlook. Following that, we'll open the call to analyst questions. I'll now pass it over to Paul. Thank you, Steven, and good morning, ladies and gentlemen. The 2020 is a period that none of us will likely ever forget. The COVID nineteen pandemic dramatically impacted everyone around the world, and this is especially true within the bus and motor coach industry. On Slide three of our deck, we recap the quarter. As you'll hear throughout today's call, our second quarter twenty twenty financial results saw a significant decline from 2019 as a direct result of COVID's impact on our customers and on our operations. This included a greater than 50% drop in revenue and a decrease in margins as we maintained our fixed cost base on a lower revenue base. We also incurred onetime COVID nineteen related costs of $12,100,000. We started the second quarter by executing on a plan to work cooperative with our suppliers and our team in response to the initial insights into the possible impacts of the pandemic. But as governments implemented more dramatic and definitive restrictions on travel, border closures, and self isolation mandates, our top priority focused on the health and safety of our people and of our customers and their customers. We began idling nearly all of our facilities in late March, and they remained idled until late May and June. We essentially lost two months of full production. We also implemented a company wide return to work protocol to be ready to educate and ensure the safety of our team when they did return. And we invested significantly in additional plants and office cleaning, sanitization and protection processes, and the implementation of a 100% mask or face covering policy across the company. Just to provide a little context, from April to now, we've engaged employees and leadership and our customers who have come on-site, of twelve thousand four hundred and forty four hours of specific, COVID nineteen education and training. With the facilities idled and the pandemic continuing to spread, we moved across quickly to address our costs and preserve cash flow where possible. While a significant portion of our costs are variable and linked to the production, we focused on reducing fixed overheads and admin costs where we could. We were able to remove approximately $10,000,000 in costs from personnel reductions at MCI, Carfare and NFI parts. We also moved quickly to strengthen our balance sheet by obtaining covenant relief on our senior credit facilities and entered a new sidecar or insurance credit facility to help ensure sufficient financial resources to weather the COVID nineteen pandemic. While we were able to remove certain costs immediately, the size and international scope of our business combined with multiple products and facilities, service centers, and aftermarket distribution centers required a thoughtful approach. We wanted to ensure short term decisions would not impact our longer term health, capacity, capability, or our delivery ability to deliver for customers and to be able to win new awards. The focus on removing the right costs, we're now accelerating NFI Forward, a company wide transformative initiative to make us a simpler, leaner business with fewer business units and a reduced footprint. NFI Forward was originally developed as part of our strategic plan presented to NFI Board in early March, which was pre COVID. Late in this call, Papasu later in this call, Papasu will discuss NFI Forward in more detail, including the projected financial savings, where they'll be recorded in our financial statements, and, the anticipated investment required to make this happen. As we've now restarted our facilities and being to and focused on managing recovery from COVID nineteen impact, we do so with the improved visibility on orders, deliveries, and sales for the remainder of 2020. We are reintroducing adjusted EBITDA guidance with an expectation that we will deliver between 145,000,000 and $155,000,000 EBITDA adjusted EBITDA for fiscal twenty twenty, which would represent $113,000,000 to $123,000,000 of adjusted EBITDA during the second half of this year, a strong improvement from the significant lows we experienced during the second quarter. Now turning to Slide four, I'll comment briefly on the impact COVID-nineteen has had on our end markets. I won't go through each slide in detail, but we will highlight a few key points. First, within the manufacturing segment of our business. North American Marks have received or have seen mixed results. In public transit, which includes public, buses and motor coaches, we've seen limited cancellations, but there have been deferrals of new vehicle builds and some delays in option conversions and new orders being awarded. Private operators, especially motor coach operators, who primarily serve tourism, travel, executive shuttle, and line haul operations, have been significantly impacted by the pandemic. And currently, over 90% of their fleets have been idled. We expect these markets to remain challenged for some time as the recovery restarts and recovers. The low floor cutaway and medium duty shuttle market has actually remained healthy. While production was disrupted for two months, we continue to see strong demand in that space with the interest in ARBOX low floor cutaway buses and medium duty Equus bus. The electrification of Equus, previously announced, with the support of the New Flyer product development team, is going very well and is ready for testing later this year. In The UK, where private operators provide public transit routes, the majority of our customers have delayed their planned 2020 buying activity as they've seen massive drop in farebox revenues. When 2020 started, The UK was expected to be a very busy market for ADL following several years of underinvestment. The need for vehicle replacement in The UK has not gone away, but COVID nineteen has definitely deferred orders. The speed of UK market recovery in new orders will likely be contingent on government support and ridership improvements, which has actually started to happen. Within our aftermarket segment, both NFI parts and ADL parts remained open through the quarter, and with a focus on servicing and supporting our customers that were operating. The same decline in activity that we've seen in private coach has also impacted the private aftermarket business. NFI quickly pivoted to launch a line of clean and protect products, including barriers, filters, UV lights, and other air sanitization treatment methods that has been very well received, focusing on the safety of both bus operators and their riders. Now later in this call in the outlook section, I'll walk you through the expectations of market recovery from COVID nineteen. Turning to Slide five, it shows our deliveries in the quarter and the backlog at quarter end. Deliveries in Q2 were down across all product lines, and the idling of production facilities and other associated impacts of COVID nineteen saw deliveries drop to 630 EUs, the largest decline being in the, motor coach private motor coach segments of MCI and ADL. NFI's backlog continues to be a positive strength and one that we are leveraging as we work through COVID nineteen. Backlog shows some decline, but that was expected as we recorded a fourth we had a record fourth quarter twenty nineteen deliveries, and there has been a delay in new orders in the 2020. Our backlog remains heavily weighted towards transit operators and public coach in North America, where government agencies largely have multiyear contracts. I'll now ask Papasu to walk you through the detailed financial results starting on Slide six. Thank you, Paul, and good morning, everyone. Turning to Slide six. As Paul mentioned, every one of our financial metrics were impacted by the pandemic. The year over year impacts in Q2 twenty twenty are a result of our focus on employee safety and remaining idle for two out of the three months of the quarter. This led to a decline in sales that resulted in a year over year drop in adjusted EBITDA from a positive $81,000,000 to a negative $24,000,000 This also dropped our free cash flow from positive $41,000,000 to negative 43,000,000 only one month of operations, we not only lost sales margin, but also had unfavorable fixed cost overhead absorption as we expensed overheads. As Paul mentioned, when the pandemic first started to impact markets, we focused on liquidity and balance sheet strength. Greatly improved both through a combination of cash management as well as increasing our access to credit facilities, ending the quarter with over $430,000,000 financial position plus anticipated future cash flow generation, we continue to believe that we can maintain our current dividend policy and do not expect to use the incremental sidecar credit facility. On Slide seven, we show that during the second quarter, we had a loss per share of $1.08 This loss came from the combination of lower volumes and lower margins, the net loss is 0.97 per share. Turning to Slide eight, I'd like to walk you through the NFI Forward initiative. This is an initiative that will transform NFI Group, one of the world's leading independent global bus manufacturers, into an integrated operating company. As you know, we've had a number of acquisitions that to date have largely run as independent businesses. All of these businesses have been one of the leading players in the markets they serve. During my first six months, I've come to realize that our market position is a result of heavy lifts by the leadership team to position NFI Group for the future. For example, we offer our customers the industry's widest choice in propulsion, zero emission battery or fuel cell electric, electric trolley, hybrid electric, natural gas, or clean diesel. We fully package and integrate batteries with an integrated battery management system, and we have optimized weight, vehicle performance, and range. We also feel that we are the best telematics systems with Connect three sixty that offers over the air software updates. We're the only OEM in North America who's truly going to put level four autonomous buses in service on a BRT route. We've already made the facility and personnel investments such that most of our legacy plants have the capability of building electric buses or fuel cells. The majority of our field technicians have now been trained on ZEB technology, so we have the largest North America mobile field service network. Most major cities where we sell our electric buses are on trial or in service. Our infrastructure solutions team has built credibility and business volume at a very fast rate. These are just some of the few advantages the NFI Group has today. As Paul and the leadership team and I think of the possibilities to enhance our competitiveness and increase shareholder return, we're focusing on areas that haven't been fully optimized. These focus around fully leveraging our scale, optimizing our cost and further cross sharing our technology and expertise. That's the power of the NFI Forward initiative. We have world class offerings. And with the efficiency gains possible for integrating the business, which would be an 8% to 10% reduction in overheads at SG and A, we could generate significant returns through volume leverage for our shareholders and get to a consistent double digit EBITDA margin. We originally raised this topic during our Q4 results call and at our Annual General Meeting as it was a critical piece of our pre COVID-nineteen strategic plan. We are now accelerating these initiatives to drive NFI Forward while navigating through the fallout of COVID-nineteen. NFI Forward will deliver a simpler organizational structure, which we outlined on Slide nine. We will continue to have two segments, manufacturing and aftermarket, with two business units below those segments, North America and international. We are excited to have Ian Smart, former President of MCI and previous EVP of NFI Parts, to lead our business transformation teams to design, implement and execute all NFI forward projects. Prior to joining NFI, he had managed the Standard Aero business transformation team as part of the significant and successful privatization of Kelly Air Force Base, a major U. S. Air logistics center located in San Antonio. To achieve these goals of NFI Forward, we have launched multiple sub projects that include a back office administrative function of HR, legal, finance, and accounting with a shared services model to efficiently support our business units, creating a combined MCI and New Flyer business unit focused on servicing public, bus, and coach customers and private coach operators. For three a, what North American aftermarket business that combines NFI parts, which services New Flyer, Navi, Orion, RBOC buses, and MCI Motor Coaches with ADL's part business. For three b, following the combination, we will rationalize the number of parts distribution centers to lower lease and overhead cost and capture freight savings. For four, we're creating a global integrated supply chain that further leverages our scale and buying power. And then number five, in The UK, we have accelerated, extended a program to review ADL's overhead and SG and A cost by evaluating, optimizing a decreasing facility footprint. And then number six, finally, NFI Forward will launch a dedicated team to assess our overall North American footprint to find opportunities to reduce both fabrication and production facilities. Turning to Slide 10. We outlined the financial impact of NFI Forward. The program is a combination of numerous initiatives that will drive $65,000,000 in annual EBITDA savings plus an additional $10,000,000 in annualized free cash flow savings. Over 2021 and 2022, we'll see the improvement start to take shape and achieve full year run rate in fiscal twenty twenty three. The savings will flow through the following categories on our income statement. 20,000,000 in adjusted EBITDA in business unit SG and A with savings driven by organizational changes and efficiencies at the business unit level. These primarily come from the combination of MCI and New Flyer and the creation of one consolidated North American aftermarket business, dollars 5,000,000 of adjusted EBITDA savings in centralized functional transformation activities included in SG and A. These include fully deploying our shared service model. Dollars 20,000,000 in adjusted EBITDA in manufacturing overhead reduction for facility and parts distribution center closures. This is a component of our cost of sales. And the $20,000,000 in adjusted EBITDA in production material cost savings as we integrate our strategic sourcing initiatives to leverage our global scale and size. In aggregate, NFI Forward is expected to deliver an 8% to 10% reduction to both manufacturing overhead and SG and A based on our 2019 run rates. The other $10,000,000 in cash flow savings is driven by a decrease in cash leases as we reduce our total facility footprint and the benefits of a central treasury team to lower interest and banking cost. In addition to these items, we continue to explore other cash generation options, including significant focus on working capital. We wanna increase working capital efficiency in turns, including improvements to our days payables outstanding and inventory turns. In order to generate the significant cost savings, we estimate that NFI will incur onetime restructuring and facility closing costs ranging from 15,000,000 to $20,000,000 during fiscal twenty twenty to fiscal twenty twenty two. The majority of these costs will be incurred in 2021. We will continue to provide regular updates on NFI Forward and its progress through our quarterly MD and A and other presentations. I'll now turn the call over to Paul to discuss our outlook. Thanks, Lipasu. Circling back to my earlier discussion on markets, as we talk through our outlook for 2020 and beyond, I think it's best to discuss some of the key market drivers. Turning now to Slide 11. Ridership has been a topic of significant focus over the past few months with numerous transit agencies and operators reporting significant declines. On slide 11, we show the impact of COVID nineteen has had on ridership in our markets and in some major US cities. Transit is an essential service and one that is utilized significantly by frontline responders, especially through the pandemic. As agencies continue to run buses, even though ridership has dropped by nearly 80%, it puts significant pressure on operating budgets. Recall with public transit agencies that operating budgets are separate from capital budgets and funded by state, local taxes, and farebox revenues. The good news is that as COVID nineteen restrictions are now being lifted, ridership is starting to show trending returns as you can see on the slide. While it's still at 50% of pre COVID levels, this improvement aligns with our belief that transit will recover and will be a critical driver for economic recovery over the long term. Transit is the most efficient and environmentally freight friendly way to move millions of people every day around the world. As businesses and offices and economies reopen, we expect riders will return, and it has started. An essential service government support is critical to public transit. On slide 12, we highlight this approach, and the support that we're experiencing. No matter what political affiliation, there's a desire to fund public transit in all of our major markets. The US government has been especially strong supporters of transit through the pandemic, providing over $40,000,000,000 in funds through the CARES and the HEROES Act to support agencies as they deal with the challenges of loader lower ridership. In a sign of longer term support, the potential successor to the current FAST Act, which was unveiled in June 2020 was unveiled in June 2020 through the investing in a new vision for the environment and service transportation in America, also known as the Invest in America Act. This new $494,000,000,000 act aims at providing significant funds for improvements to US infrastructure, including public transit. The act specifically focuses on reducing The US's carbon footprint and assisting with conversion to electrified or zero emission mass transit. This includes $1,700,000,000 in proposed funding for zero emission buses, which is a fivefold increase from the FAST Act. Invest in America Act is proposed as a five year act, which provides transit agencies with a longer term visibility to execute on their capital and fleet replacement plans. Now the act has not yet been approved, and we're hesitant to say that it will become law in 2020 with the pending election, but it is a significant step forward in the right direction. In Canada, the government recently launched the Safe Restart Agreement, which includes funding to transit agencies for 50 of the COVID related operating costs, up to total of $2,000,000,000. Prior to the pandemic, the government also announced a $28,700,000,000 platform in support for transit projects, and their election platform included the procurement of 5,000 electric transit vehicles and school buses, all positive. Before COVID nineteen, the UK government had announced a $5,100,000,000 £5,100,000,000 fund for the procurement of buses to revitalize The UK's bus fleet outside of London with a significant focus on zero emission buses. A release of these funds would have a significant impact and drive the recovery of The UK market. While all of these signs point to positive operating environment long term, the speed at which funds are released will dictate the recovery of capital purchases. Government funding is not a guarantee, but based on our experience following the financial crisis of two thousand and eight and 02/2009, stimulus funds can accelerate capital vehicle purchases very quickly that would benefit NFI as the market leader in every one of our businesses. Now turning to slide 13. We showcase that our North American public bid universe remains at record levels. The delay of orders or option conversion during the COVID nineteen pandemic has contributed to the public bid universe being at record levels. Active bids, where a new RFP has been released, plus RFPs that are already in the bid stage, are up 34% from the 2020, and they're up 77% from the same time last year. Another positive sign is that only a few public customer RFPs have been canceled to date even with the ongoing pandemic. Finally, another development is that orders that are happening have been smaller in total size and with fewer options. This is not a new trend, but something we've seen developing as agencies make the transition to zero emission buses, a topic we've discussed on previous calls. Orders continue to increase through the use of state schedules. It's something that we've talked about and focused on that allows our customers more flexibility and increased speed to purchase new buses. So the backlog chart is not the only way to buy buses. The movement to battery electric or fuel cell buses, or we refer to them as ZEB, zero emission buses, continues to be a key trend in the market, and there's potential that the recovery from COVID may accelerate this transition. Turning to Slide 14, we highlight that NFI is the leader in North America and The UK for zero emission buses and would benefit from an increased transition to ZEBs. Right now, ZEBs make up 9.7% of our backlog, up 4% the same time last year, and it makes up 26% of our total bid universe. New Flyer can manufacture ZEBs at all of our facilities. ADL has delivered the most ZEBs in The UK, and MCI is now selling its innovative battery electric coach, and the electric Equis is nearly ready for testing. Overall, the bid universe supports our view that demand for buses over the long term will remain strong. But as mentioned, the market recovery will depend on the speed of government support, COVID nineteen case rates, travel restrictions, and economic reopening. I maintain we're in a great position to cover other crisis in a very, very strong position. Now turning to slide 15, we show our historical deliveries at each of our major markets. The Canadian and US transit bus market, the Canadian and U. S. Motor coach market, and the combined U. K. Bus and coach market. In North America, coach deliveries were dramatically lower during the 2020. This was especially pronounced during the second quarter when the entire market only delivered 59 units compared to five zero units in 2019 in the same quarter. Private coach markets are expected to remain under pressure in 2020 and into 2021. And based on previous economic cycles, we expect that market will recover, but it may take a few years. To help offset these initiatives expected lower deliveries, we're advancing NFI forward initiative that Papasu discussed to reduce our cost base and improve our competitiveness. Combining MCI and New Flyer into one business will only enhance our business. In The UK, 2020 looked to be a period of increasing activities as operators executed on fleet renewal plans following several years of lower volumes. COVID nineteen disrupted those plans immediately, and many of our customers shifted orders originally planned for twenty to twenty twenty one. We're working closely with those customers to plan for 2020 and beyond as vehicles need replacement. The recovery in The UK market will take time, and as before, will depend on the speed at which government support is released. While not reported on this slide, Asia Pacific was our first market to recover from COVID nineteen and continues to be active with growth potential in New Zealand, Singapore, and Hong Kong. Hong Kong is currently in a a typically lower period following east increased activity in 2017 and 2018, but ADL remains the clear market leader in Hong Kong. Within the aftermarket segment, we continue to expect demand for heavy duty transit parts as operators in North America and international markets continue to recover their fleets and complete regular fleet maintenance and invest in additional products to clean and protect their vehicles. The large fleet of activist essential service transit vehicles provides us with visibility and generally recurring revenue streams. The private component of the aftermarket business, which is largely NCI and ADL coaches, will no question be negatively impacted by the operators who have idled their vehicles. The private component business of that parts represents about 30% of the segment's revenues. Expect those parts sales will recover over time as businesses reopen and leisure and business travel resumes. While COVID-nineteen impacted our results during the 2020, as we're now on the road to recovery, we do so with improved visibility. As I mentioned earlier on this call, we're reintroducing 2020 adjusted EBITDA guidance with the expectation that we can deliver between 145,000,000 and $155,000,000 of fiscal twenty twenty, which represents $113,000,000 to $123,000,000 of adjusted EBITDA during the second half of this year. This recovery in performance from Q2 is driven by our contractually obligated vehicle sales and expectations for private vehicle deliveries and aftermarket sales. COVID-nineteen will continue to impact our third and fourth quarter deliveries and results, and we expect both periods will be down when compared to the same periods in the prior year. But the impact will not be as nearly significant as the one we saw in the second quarter. The fourth quarter is historically our busiest period, driven by deliveries to private market customers at MCI and ADL. But based on our expectations for weaker activity in those markets, we anticipate that the fourth quarter will be slightly down from 2019 levels. Overall, while the third and fourth quarters will show improvement, we expect the larger recovery to start in 2021 and grow into 2022. In transit, the return to pre COVID production levels likely won't happen until later in 2020 as we manage orders, option conversion, and production scheduling. The speed of this recovery may accelerate, but we depend on the release of new orders, government funding, and how we quick how quickly the economic recovery with tourism, travel, and transportation takes place. Private market recovery in North America will directly relate to vaccines and treatment resulting in an increase in the general public's confidence in traveling and riding, on motor coaches. As I wrap up, I'll remind our listeners that NFI is the market leader in buses and coaches. Our customers around the world have relied on our vehicles for decades. We've supplied and supported an installed fleet of over a 105,000 vehicles, and we've been growing our presence in new markets. In 2020, we made significant entry into Ireland, and next year, we'll see our first major ADL deliveries of vehicles in Berlin. We are well positioned to benefit from fleet investment plans, the transition to zero emission buses, and aftermarket sales. And we will continue to invest in new products and technology to ensure we remain our leadership position, although we do expect lower CapEx of about 25,000,000 in 2020. Finally, I'm honored to recognize the nearly 9,000 NFI team members that have supported the company and our customers through this ugly pandemic and the most recent civil unrest activities. We continue to work hard and transparently on our diversity initiatives with great partners and active employee engagement. In fact, we just completed a company wide employee pulse check survey at the July with an amazing 50% of our team members, many still at home and many working remote, responding. The final question of the survey had an 88% response rate when asked, overall, I feel NFI is a great organization to work for. Now that's having confidence from your team. There's no doubt that COVID impacted our 2020 business and our first half results, but long term buses and coaches will recover, and we'll play a critical role as buses are the spinal cord of cities around the world. There will be bumps in the road as we recover to our normal run rates, but market recovery combined with structural changes made by NFI Ford will only make us more competitive and more cost efficient as the market leader. With that, I'll now turn it over to Steven to finish up our call. Thanks, Paul. I'll turn to Slide 16 to summarize today's call. We made the decision to idle our facilities to protect employees, customers and manage supply chains. It was the right thing to do and positioned us well for recovery even though it challenged Q2 results. The worst appears to be behind us. While COVID-nineteen's fallout continues to create some market uncertainty, we are focused not only on recovering production safely, but also optimizing our business and delivering shareholder returns. NFI Forward, process discussed has accelerated our plan to remove costs from the business and transition to a more efficient operating company. Q3 and Q4 will be recovery from Q2 twenty twenty, but expect they will both be down from the same periods in 2019. With the greater visibility, we've reintroduced fiscal twenty twenty adjusted EBITDA guidance with a range of $145,000,000 to $155,000,000 which would represent adjusted EBITDA of 113,000,000 to $123,000,000 for the 2020. Our total liquidity remains strong at more than $430,000,000 Based on our current financial position and anticipated cash flow generation, we expect to maintain our current dividend rate and do not expect the need to utilize the incremental sidecar credit facility. As Paul just said, NFI is the market leader for buses and coaches in all of our major markets, including Canada, The United States, The United Kingdom. Transit remains an essential service with strong government support, and private operators play a critical role in helping get tourism travel markets moving again. As orders and activity resume, customers who relied on us will return and NFI will be there to service them with competitive integrated. We'll now open the call for questions. Chris, please provide instructions to our callers. Thank you. Our first question is from Cameron Doerksen with National Bank. Your line is open. Thanks. Good morning. Hey, Cameron. Hey, Cameron. Just a question on, I guess, sort of related to your guidance, but I'm just wondering whether that kind of assumes at ADL because it seems to me that maybe some of the back half of the year deliveries at ADL may be dependent on some government stimulus. So maybe if you could just talk about what your expectations there at ADL and what does the guidance assume? Thanks, Kim. We look, we spend a lot of time thinking about how transmit, how to communicate to their analysts, our shareholders about the outlook for the back half of the year. As they're private operators, the reality of their capital allocations, the ridership, the farebox revenue that comes off them and so forth is obviously continue to be up in the air. We've been fairly conservative in our approach, of The UK at the back half of the year. Quite honestly, even if the government stepped up tomorrow with a big initiative, as you know, it doesn't turn the factories back on overnight at the previous levels because there's nonrecurring engineering efforts, there's supply efforts, there's production planning and so forth. So yes, there is some builds in the back half of the year for ADL, but not a significant amount. Okay. That's helpful. And second one for me, just any commentary around the actual bus deliveries over the next couple of quarters? What should we expect in Q3 and Q4 as sort of the production re ramps to a more normal rate by the end of the year? Yeah. So when you say bus cam, do you specifically mean, like, the New Flyer North American business? Or do you mean across the fleet? Across the fleet, I would say, know, heavy duty transit motor coach cutaway. What what are your expectations there for EUs? Yes. It's a good question. So clearly, the markets are disrupted as we've tried to articulate the facts and so forth. Just some color on each of the businesses. Chris' focus for the back half of the year was now rescheduling anything that was delayed, deferred, rescheduled, and so forth. So the vast majority of Chris' work is far more execution oriented than worrying about where the work's gonna come from. And and this most know, a good significant portion of that work is under contract. So it's a it's a it was a timing delay and now an execution story. Volumes will be down from previous year by, you know, somewhere in the neighborhood of, let's call it, 20% or 30%. The motor coach business, we've effectively eliminated very almost entirely the entire private motor coach expectation of buys in the back half of the year. As you know, about 40% of that business is is public transit operators, New Jersey or Houston or Connecticut, those kinds of people that use, motor coaches as public shuttle type vehicles into the cities. That business is largely contractual, but we've really, really downgraded, any expectations of private motor coach recovery in the back half of the year. In the RBAC world, we have, we're actually back up at pre COVID levels on our cutaway business, and we're slightly behind on the RBAC business, which probably acts a little bit more like a public transit type environment. Alexander Dennis, in North America is operating basically at the levels they were pre COVID in terms of the number of units coming out. In The UK, it's dramatically down. And in, Hong Kong, Singapore, New Zealand, where we're delivering, it's kind of back up to pre COVID levels. So in general, I'm gonna say roughly our production levels are, you know, in the 60% or 70% levels for the back half of the year across the overall fleet. Okay. And that's very helpful. Yep. Excellent. Thanks very much. Thanks, Ken. Our next question is from Chris Murray with ATB Capital Markets. Your line is open. Yes. Thanks, folks. Good morning. Maybe I don't know, Papaso, if you want to take this one. But I guess the one thing that we always worry about as we go through these transitions, I mean, we have some good ideas around what your CapEx expectations are and your debt expectations are, but really it's going be working capital. And so can you help us understand how working capital started to evolve through the quarter and your expectations as you start ramping on how you're going to have to lean on working capital and if you're seeing any issues around payment terms or anything like that and how your suppliers are responding to some of these challenges as well? Yes. Thanks, Chris. Good question. So at a very high level, what I would tell you is when we think about our business units and what I've seen so far, again, being fairly new in the businesses, we've got pockets of excellence in our businesses. So for example, when we think about our AR or AP and some of the work that New Flyer has done and we look at some of the cash generation we've got from that, it's been it's been really good. Now at the same time, one of the things that I'll kinda mention is what we're doing now is in what we've already done. In May, we went ahead and, integrated AP as a centralized function so we can start leveraging things. So what we're seeing out of that right now is what we're starting to see is there are some term differences. We're trying to get to a point where we get suppliers and understand what suppliers are shared across the business units, etcetera. So I think what we're doing right now is with that AP consolidation, we are gonna see some cash flow generation, and that'll be something that I'll talk a little bit more on the next call, especially and maybe our Investor Day, if we decide to do an Investor Day this year, where we talk about, you know, from a terms perspective, where we can get to. So we're we're starting to see some of that. From AR, we so so, typically, just so you know, we're trying to get to a point where we have typically 60 for an AP side, we're trying to get to a typical sixty day term play, me and David White, who is the EVP of our supply group. So we're working that. And then the other areas that we're starting to look at and me and Paul are starting to push at a little bit more is the inventory side, for example, with our parts business as well as our ADL. So some of that happens to be timing on our ADL and our MCI business. But, otherwise, we're good. So let Paul, anything else you want add? Just, Chris, you know, specifically, the the story went like this. As soon as COVID hit, we, you know, were focused on preserving working capital. And so we worked with our supplier community about delaying some payment terms and so on and so forth. As we had clarity moving through May and June that we were gonna start up our facilities, we got back current with all of those suppliers. They played ball with us. We played ball with them. And knock on wood, we've had no business disruption from any supplier, nonperformance, or bankruptcies. Now the world changes over time, but we've been really pleased with how David and the supply teams have managed those suppliers and transparently worked with them as we started back up. As you see in our written materials, we basically generated about a $100,000,000 of working capital with AR and a little bit creativity on on AP management. As we restarted the facility, we reinvested that $100,000,000 to get all of those suppliers current as well as to lay in the inventory to start production again at those levels. I think the biggest issue, as Papasu said now, is the centralization optimization of some of those processes, lot more focus across the business as well as a a way deeper review and look at the utilization and and inventories inside the businesses. Yeah. I think, just to add quickly, you know, historically, our business would run kind of 16% working capital as a percentage of last twelve months revenue. And, you know, through 1819, you know, some hiccups with KMG and then, you know, the addition of ADL and some accounting adjustments. And then now COVID nineteen, that number has grown, you know, to kinda sometimes in the low twenties. I think as Papasu mentioned and Paul mentioned, there's definitely the plan to get back to more of that kinda historic 16% run rate. And then I think as Papasu mentioned, you know, a lot more focus now with him on board on turns and how we manage that process with our working cap. Okay. So I I guess what I'm trying to think is as you restart the system through q three, q four, you would anticipate, even though you're gonna be at a lower level, maybe of of activity, you're is it fair to think that you should be working capital neutral for the rest of the year? Or or or with just the the offsets between, you know, what you've already done and some of the gains that you may get in other parts, like in in AP. Is that is that to think? I think, like, you know, based on what I'm seeing, we should see, you know, should be working capital positive, I think. Like, it should be a release because I think we'll get some of that inventory. Like, we've made a big investment now in inventory to restart the machines. At the end of quarter, you know, we made a $100,000,000 kind of investment in working cap to get us back up, start the facilities again. As Papasu mentioned, you know, now through the rest of the year, while volumes may be lower, we're gonna be releasing, you know, those things that we built up, releasing things that are in inventory, collecting on receivables. So I think, you know, as we go through q three and q four, we should have more of a release of working cap, and we have do with lot company. We we q four deliveries. Because we expect less, you know, lower volume in that segment of the business, we won't have that inventory buildup in the third quarter like we would have seen in some previous years. Yeah. And I think, you know, just to add to that, I think what we're seeing, Chris, is, you know, some of the ADL, for example, if we take ADL, for example, we are looking at, you know, deliveries and some of that inventory coming down as we get into q three, etcetera. So there's been some delays in terms of, you know, the orders, so we should be getting a a positive gain in working capital as we move forward. Okay. So fair to think that where you think earnings are heading on your EBITDA number, working capital being slightly positive, then that should also when we think about total leverage and I know you guys don't have a covenant until you have to hit Q4 reporting, but that's sort of the pass, if I will, on how you think that you're okay on covenant by the time you get to year end. Is that the right way to think about it? Absolutely. Absolutely. I'll add a little bit more detail on the CapEx spend, Chris. I'm I'm sorry. I didn't hear that. Just just say, absolutely, as you described it. But as you know and as we reported, we're gonna be a little more stingy in our CapEx than we have in previous levels, and we continue to expect to pay, continue our dividend policy and pay our dividend at current rates. And just to add, just on the leverage calc, just so it's clear, it's in our materials, but Q2 results are excluded from the calculation, and it's done on a prorated basis when it does resume for Q4. So Q2 is continuously excluded. So I think that definitely helps a lot because obviously Q2 was the worst period with the negative EBITDA. And then from there, so as we get through Q4 and then Q1, Q2 and Q3 next year, Q2 is consistently excluded from the calc. Yes. And Chris, and this is Papasu. And again, Steven leads our treasury function. But one of the things that I would add to that is we monitor cash flow on a weekly basis by the business units. We're looking at it on a daily basis basically. But at the end of the day, what we are seeing is we're seeing a couple of things that should kind of give us positive. Number one is we see us being within covenants all the way through this year. We don't see any kind of issues there at this stage. We are seeing some positives that will kind of help us throughout the year. There'll be some tax items that we'll probably look at that's going to also help us as well, some inventory reductions and some other things. So we feel pretty good about this year. No covenant issues that we see at this stage. Okay. That's fair. And then just maybe a quick question on the NFI Forward Plan and how you think that goes together. When you're talking about integrating, I guess, lack of a better term, the North American bus market integrating Transit and MCI, does that really envision building, common line product? Or will you still think you're going to need separate factories? I'm just trying to understand exactly what that means or if it's just leadership things, and you need different Good facilities and question, Chris. Job one is to integrate the businesses and optimize the overhead of the two businesses. I mean, 60% of MCI's work, which was private, is gone. And so we as you know, we cannot reasonably afford the infrastructure of the of the whole thing. And so the immediate decision that we made a couple weeks ago was to rationalize the exec teams. Now we're in the process of harmonizing the and looking at the org design. The the second project that and part of that is to harmonize and optimize the IT systems. As you know and as we've talked about, we've been working at putting Oracle and MCI. Now we will complete and finish that. And the final element is a North American plant review, you know, between New Flyer, MCI, ADL, RBAC, all of our Carfare and KMG facilities. We've got a quite a fast physical footprint, and so we will be looking at optimizing and reducing those facilities. Whether we actually see a transit bus on the same line as a motor coach, as the same line as in a double deck is yet to be determined. It's probably unlikely, but no question, there's a footprint opportunity and an overhead opportunity. Okay. And then I guess my last question, just, in terms of public, coach business, are there any larger bids that are out there or anything that you think that you might see that could offset some of the private market? Like, let's assume the private market essentially, to your point, is going be pretty challenged maybe for the next couple of years. Is there any thought around some stimulus? And one of the things that always happens when we get into these things, is there any worry about some of the other competitors in the market getting irrational? And are you seeing any anybody throwing around dumb numbers just to just to fill a factor? Yeah. So, you know, the MCI or the motor coach type operator in North America, they're, let's call it, seven or eight of the mill. The biggest one is Jersey or New York, as I mentioned before, Connecticut, Houston. There's others that use motor coaches. There is nothing, and there's no opportunity that we know that would replace our commercial business, which therein lies the opportunity to harmonize our entire machine around supporting public customers, whether it's a coach or a transit bus or a double deck and so forth. And and, of course, COVID changes everybody's plans at this point in time. There's no RFPs on the street or that we know of that would replace that that significant level of volume. So, you know, the the reality is optimize our machine, reduce our cost base, deliver to the contracts we have. As you know, just recently, we received year five of the New Jersey order, which had its annual order plus. And so that's a very strong recurrent revenue stream that runs all the way through '21 and into '22, and so we'll just keep working that one. As RFPs hit the street, we obviously will will compete. At this point in the motor coach space on public, we haven't seen, you know, crazy irrational. There really aren't any large RFPs on the street today. Okay. That's helpful. Thanks, folks. I'll turn it over to the call. Thanks, Chris. Thanks, Chris. Our next question is from Kevin Chiang with CIBC. Your line is open. Hi. Thanks for taking my question here. I'm just wondering, like, when when you talk to, the transit agencies, just just given the pressures they're seeing, do do you see any change in the buying habits in terms of the type of buses they want in their portfolio based on the ridership outlook and and eve even how they think about customization as as maybe a way to or reducing customization as a way to reduce the purchase price. Like, do do you see any of that changing, or or or do you think the way they bought buses a year ago, you know, that that just returns the way it was? I think it's probably too early, Kevin, to be able to honestly, provide any insights for that. You know, you and I were running a transit agency, we went from normal operations to, you know, serious issues in the very, very short term, reduced service, cleanliness issues, fogging and sanitized buses every single day, damn near every couple of hours, and so on and so forth. So as they kinda start to see recovery of ridership, in some cases, we're seeing more buses on the routes because they're having to socially distance the people on the buses. In other cases, we've seen reduced routes and so forth. We haven't yet seen any real change to fleet replacement plan strategies. And, of course, these guys live in a world which is multi, multiyear planning. And and because they're funding sources, some comes from local and a lot from the feds, they're trying to align all that stuff. I I can honestly say that the RFPs we've continued to see in the last three months haven't changed the spec of the vehicles, haven't changed the desire to consider more zero emission type vehicles. The great news is that we've already invested. We've done a really good job on the on the battery electric. The work that Chris and team have done on the fuel cell electric puts us in pole position. You know, we got a very significant fuel cell electric delivery scheduled the back half of this year moving into next year. And and the the customization of, you know, seating configuration and on that, we haven't seen that. Remember that a city is a very, let's call it, a political animal, and it has to manage its local communities and special interest groups' needs and so forth. That obviously will bump up against available funding as they try and replace their fleets. And we all remember that a 100% of the operating cost and maintenance costs are are are on a city. And so they are motivated to find a way to work, plan for, and budget for capital replacement. But I can't say, Kevin, that I've seen anything or that Chris' team has seen anything different in the short term. As you know also, we've worked at what we call reference buses on strategies that if customers do move to a more optimized bus and ask us for performance specs, not necessarily detailed design specs, that we can respond very quickly. We've already gone there of what we think would be the best price, value and performance on all of our platforms. So you ready for that if that happens. Mhmm. So that that that's helpful color. And I apologize if you went through some of these details. I did jump on the call late. In terms of your NFI forward, the the 65,000,000 of of, I guess, EBITDA savings and and the 10,000,000 additional cash savings on top of that. It looks like you'll get the full run rate in 2023, but how should I think of that progressing over the next few years here? Is it, you know, highly back end loaded, or do you kinda get a third, a third, a third until you get the full amount in 2023? Any color there would be would be helpful. I'd like to you know, so a a couple of things. So number one is we are developing some of those initiatives. So let me let me kinda give you what I what I know today as kind of Paul mentioned. So what so So what we've done today is for the organizational structure, especially for the combination of the two businesses with MCI and New Flyer, some of those costs have already been taken out. So when I think about the cost side of things, we have taken some of the costs. The the areas that are gonna be really the long pole in the tent is really gonna be the factory consolidation. So we've got two two portions of this, Kevin, just so you know. So number one is, you know, the new flyer and the MCI teams are starting to look at, you know, hey. What are we going to think about from their factories? And then number two is we've already kind of got a developed plan. I should say, we've got an initial plan, I should say, in terms of our distribution centers with our parts groups. So those are the things that are probably gonna to last till two thousand twenty three. But during the next earnings presentation, once we get these plans developed, let's try to give you more of a guidance, which kinda gives you more detail on what we would expect in 02/2020, '21, and '22 to kinda bake that out fully. Okay. That's that's helpful. And and and last one for me, and and and I and I know I kinda know what the answer is gonna be. But if I think of the 120,000,000 of EBITDA, you're you're kind of inferring for the back half of the year, and I annualize that, so you you kind of have a have a annual run rate of two forty. You know, what's missing in that if I think past 2020, like, I think into 2021? Sounds like, you know, you have some tailwinds from NFI forward. I guess the the ramp up of production will be a tailwind. You you have the New Jersey contract. You have the Berlin contract that I think kicks in next year. Like, how how should I think of the puts and takes of of 2021 in terms of things that might be additive or or or only be a negative to to that February number? Well, what we definitely won't have, you know, is a is a crazy adverse negative quarter like we had this year in the second quarter. And of course, the pace of recovery for us is going to depend on the available funding. We continue to look, monitor, be actively involved in government support type activities as we outlined in Canada, U. S. And UK. There's a certain level of our order book that is actually under contract. We haven't seen cancellations of government contracts. I think there's only one that we had that was, I think, a 15 unit option order that was canceled, but that's it from a public perspective. There is definitely movement in timing of builds and timing of deliveries and acceptance, and so that's what we're managing through. You know, the the other part of it, obviously, is is the biggest big swing thing or the two biggest swings will be the pace at which public sorry, private owner coach in North America recovers. Quite honestly, I don't see that of any significance in 2021. It's largely, we think, gonna move out to 2022. And, you know, stimulus is far more oriented, obviously, to government public transit agencies than it will be to any of the the commercial type operators. And then the other biggest change year over year is gonna be a pace at which The UK fleet starts to recover and buying starts to recover. But so a pure run rate is probably not a fair comparison. But at this point in time, it's a reasonable comparison given what we do know and what we don't know. Yes. And I think just to add to that, Paul, is, you know and, again, it's it's exactly what Paul said. But the February or the 01/20 kind of in that back half is still impacted by COVID, and we're just trying to figure out from a government standpoint when does that change. That that that's fair enough. Well, that's all my questions. Thank you very much, and best of luck in the back half of the year here. Thank you. Our next question is from Jonathan Lamers with BMO Capital Markets. Your line is open. Good morning. Hey. Morning. Good morning. Paul Paul, just to follow-up on your comment about that large fuel cell order. How many units was that for? Well, it's not at order, Jonathan. It's a number of operators. But we're we're seeing in the neighborhood, you know, right now of next year, something like 50 fuel cell buses, under contract for New Flyer, which is which is quite significant. You know, there there really isn't other any other mainstream player in North America in the ZEB transit bus space that has that capability. And as you know from walking through our facilities and conversations, the the strategy of an all electric bus that is either battery electric charged at depot or charged on route is we're starting to see more get interest in fuel cells that act as range extenders. And, you know, rough orders, context, rough context in terms of range, you know, a a rough 40 foot, battery electric bus with the appropriate amenities and whatever can get, you know, plus or minus 250 miles range, where we've seen that same bus with a fuel cell. Of course, the economics are different, but get up to 350, which then gets in the range of what a diesel bus operates. And as the environmental dynamic in The United States, as the strategy of of zero emission and fuel cell and so forth, it takes on Chris has done a fantastic job. I mean, we'll build probably, you know, 400 or so all electric vehicles next year, of which 50 will be those fuel cells. That's that's pretty significant from where we were a couple years ago. But it's not one operator, Jonathan. It's multiple. Okay. Thanks. Paul, I think you mentioned historically, like, New Flyer delivered something like 30 cell 30 fuel cell buses to date. Does that sound about right? Or would you like to get back to me on that? Yeah. It's probably a little bit more than that, but, we we can send you a note after. Remember, the original fuel cells, work was done in twenty two thousand eight and nine to get ready for the Vancouver or the BC Olympics. There was 20 vehicles in which the difference between then and now is those fuel cells were the actual propulsion engine of the of the the vehicle. And so cost, amount of fuel required, reliability, economics, maintenance, and so forth made them unpractical. So that's when Chris's team pivoted to to working far closer on battery buses that used fuel cells as range extenders, and it's gone very, very well. Historically, there's probably been about 47 total 45, 47 total fuel cells delivered by us today. Think a you know, what was a very telling stat, I think, in our materials is the improvement in the backlog for ZEBs. So, you know, not just fuel cell, but obviously, fuel cell part of that going from 4% to 9.7% is a pretty big jump. I mean, you know, so that transition to ZEBs is happening. And, you know, and it's great for us because we're the leaders in that market in North America and The UK. And and as we've mentioned on this call multiple times, battery electric or fuel cell, we can manufacture those in our facilities. So so it's definitely it's interesting to see that, you know, the forecast that people have been talking about on ZEVs are starting to come to fruition, with the actual, you know, orders and and vehicles hitting the road, in a fuel cell or battery electric propulsion. Absolutely. On the backlog, you know, I was encouraged to see the firm orders for q two were actually up year over year. Is it fair to say that firm orders are trending down over July and August given all the challenges the customers are facing? Yes. No question. Because quite honestly, Jonathan, there were very, very few awards in the quarter. Okay. Thanks. We're building out firm orders. We delivered a bunch of the vehicles that were in in our excess with, but there really weren't any any orders of any significance in the quarter awarded. Paul, the customers have requested additional emergency funding from the federal government. You know, how do you see this shaking out for the first half of twenty twenty one as it pertains to New Flyer? You know, could you could you break it into two scenarios, like one where the transit agencies do get the emergency funding and one where they don't get the emergency funding? And at what point would you start to get concerned about filling your assembly slots? I think that's a great question, and it's it's effectively the dilemma that we're dealing with every day. So, you know, if we sat at Chris' sales and ops meeting every Monday morning with his team and we went through what we have under contract, what options we expect to be delivered or to be converted, what new RFPs have hit the street or we expect to hit the street. The the first, let's call it the next kind of six or nine, twelve months, you know, a good portion of the early half of that is is effectively already under contract. But what we've done is effectively trying to manage the production rate so we don't go up in volume and then have a drop off, or we go too slow and have an inability to ramp that back up. And so it's a blessing and a curse. The complexity is we have three production systems, a split build between Winnipeg and Minnesota, a full build Minnesota, and a full build in Alabama. And so we're trying to manage, not having a full set of information today as we move through that. You know, if if the government does our current build production plan for next year doesn't, effectively currently contemplate any significant stimulus or any real stimulus. If that happens, you know, we've demonstrated in the past that we can, over a relatively short period of time, ramp up volume and production. The fact that that Chris has multiple production centers allows him to do that, but we're governing our our pace at right now with to handle that level of uncertainty. I'm in in, you know, the the understanding that Chris' team have of all competitions, all available or expected competitions. You know, we're very thoughtful and respectful of those transit agencies that are that are juggling day to day operations with the the the the long term reality is that they're gonna have to figure out how to continue to move people through cities. You know? And whether a vaccine is six months away or a year away, you know, to us, we see this as a transition window. The the new normal will still have a very significant portion of bus transportation in every major city around the world. And and I continue to point to, like, think about New York, it's 5,900 transit buses. Think about London, England. Those cities are unable to operate without transit buses being a core part of the movement of those cities. So it's a transition story, and we're going to be very cautious at the pace at which we manage short term so that we don't inhibit our ability to be successful in the long term. Okay. And you mentioned your tentative plan for the first half. Could you give us an update as to what line rates you expect over Q3, Q4 and the first half relative to pre COVID run rate? So we we obviously, you know, idled for for two months of the quarter. We started back up. I think the team did a fantastic job of, let's call it, phasing and staging. And by that, I mean, we didn't open up all our factories at one on one day so that we could allow our internal fabrication and our external suppliers to start back up at a at a at a jog rather than a run. And then what Chris did is he started those facilities at lower production rates just to make sure that, you know, people still worried about coming back to work or people that had childcare or or elderly people care issues or kids in schools and so forth. So we're now operating effectively at, let's call it, 90% of the rates or 85% of the rates that we were the run rates pre COVID. And we're gonna continue to kinda hover in that area and vary it over blocks of three or six months as we head into 2021. Obviously, we're talking every day about any customer that has pushed out a a production window of when they now want to receive those vehicles. Because it's one thing for us to build them, but they have to inspect them, then they have to accept them, then they have to put them in service. And so it's probably premature to give you any real forward guidance on on run rates heading into to 2021. But having said that, you know, a good portion of Chris' work, as we know, is multiyear contracts. And so it's all about option conversion, production rate management and winning our share or better of the RFPs that hit the street. Okay. And a quick one for Papasu. Does the H2 EBITDA guidance include expected receipt of any further wage subsidies? It does not. So if you do receive some, I guess, you would record those, but then break it out for us? Yes. So just, Jonathan, one of the things and again, I know we included some here, but if we kind of just step back for just a second, one of the reasons that we decided to use the government grants into our adjusted EBITDA, and we did talk to our auditors about this as well, we had a lot of internal discussions here. But one of the reasons is when we decided to take the grants, what we were doing is we incurred them because we basically didn't take those costs out. So we said, hey. You know what? We're gonna incur those costs so we can have our employees get, you know, get wages, and then we would offset that with the, obviously, the grants. Now if we think about kinda moving into into the second half of the year, if that does happen, right, then then if there was a one for one, the reason we did not furlough is because to to for the grants, then we would include them. But, you know, that's that's something of subject to, you know, depends on as we kinda get into that second half. But right now, we're we're not expecting to include those in in our in the numbers that we've provided. Okay. I believe in the notes to the financial statements, you kind of broke out the amount that's been recorded in receivables that you expect to collect as cash in the second half. Is that a good proxy to use? For the like it looks like a pretty small cash benefit you're expecting for Q3? Showing no further questions at this time. Okay. Well, thanks, Chris, and everyone for joining us this morning on the call. We'll wrap it up with that. If at any time you have any further questions, please reach out to me at any time. My contact information is all on our website. Thank you, and have a great day. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.