Ladies and gentlemen, thank you for standing by, and welcome to the NFI Group Inc. Third Quarter 2019 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Stephen King. Thank you. Please go ahead, sir.
Thank you, Chris. Good morning, everyone, and welcome to NFI Group's Third Quarter 2019 Results Conference Call. This is Stephen King, NFI's Group Director, Corporate Development and Investor Relations speaking. Joining me today are Paul Soubry, President and Chief Executive Officer, and Glenn Asham, Executive Vice President and Chief Financial Officer. For your information, as Chris mentioned, this call is being recorded and a replay will be made available shortly after the call. Details on the replay can be found on our website. I'll just remind everyone on the call that NFI Group is having an Investor Day this Friday at Evergreen Brick Works in Toronto starting at 8:30 A.M. I'll provide some additional detail on that at the end of this call.
As a reminder to all participants and others regarding this call, certain information provided today 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. You're advised to review the risk factors found in the company's press releases and other public filings on SEDAR for more details. In addition, we encourage all participants to review the third quarter financial statements and the associated management discussion and analysis that are posted to our website and on SEDAR. To start today's call, I'll provide a few highlights of the quarter, Glenn will then speak to the financial results, and Paul will provide market insights and NFI's outlook. Following that, we'll open the call to analyst questions.
The third quarter was a milestone period for NFI as we delivered a record 1,392 vehicles and our highest quarterly revenue ever. This was primarily driven by the quarter being the first full period, including Alexander Dennis Limited, or ADL's, results in our numbers. NFI Group is now a leading independent global bus manufacturer with leadership positions in the U.S., Canada, United Kingdom, Hong Kong, New Zealand, and vehicles operating in Singapore, Mexico, and parts of Europe. The acquisition of ADL resulted in several significant accounting impacts, including numerous non-cash charges related to purchase accounting. Glenn will discuss these in detail on today's call as he walks through the third quarter financial results.
We also encourage listeners to review our MD&A, which includes a reconciliation of ADL's historic results for fiscal 2018 Q1 and Q2 2019, both pre and post-acquisition, plus pro forma fiscal 2018 and fiscal 2019 year-to-date reconciliations and analysis. NFI's legacy business, which excludes ADL, was focused on advancing its work in progress, or WIP reduction strategy and stabilizing operations at KMG during the third quarter. As we reported in the second quarter of 2019, WIP was built up during the first half of the year due to several factors, including the learning curve of launching new vehicles into production at both New Flyer and MCI, supply chain challenges, both internally and from KMG startup, and ARBOC responding to chassis supply disruption. We are pleased to report that KMG is now stabilized and is delivering parts to all New Flyer facilities.
New Flyer's WIP reduction plan made solid progress in kitting and completing vehicles that have been building up and preparing them for customer delivery. The majority of these vehicles are expected to be delivered in the fourth quarter of 2019. As we indicated last quarter, there's a high likelihood that some of these contractually obligated vehicle deliveries will slip into the first quarter of 2020. Paul will discuss this as he walks through our outlook. Oh. Sorry, Chris, we're getting some music on the line. Okay, seems to be gone. In addition to those major items, we also continue to advance numerous strategic initiatives during the quarter and achieved other positives, all of which will help NFI continue to maintain our market leadership positions and achieve our vision of enabling the future of mobility. A few of these highlights I'd like to specifically bring to your attention.
In the quarter, NFI received 1,335 EUs in new orders from several key customers and converted 229 EUs from options to firm orders. With the addition of ADL, NFI's ending backlog in the third quarter was 11,594 EUs with a total value of $5.5. We delivered zero-emission buses to major customers in London, Toronto, Los Angeles, Laval, San Diego, and other regions in the U.K. We've been very pleased with the performance of our battery electric and hydrogen fuel cell electric buses, which sets NFI apart as the industry continues to transition to zero-emission programs. MCI continued to roll out its new products, including regular production of its revolutionary D45 CRT LE vehicle, delivered numerous J35 or its 35-foot motor coaches, and also completed multiple demos of its battery electric motor coach in California.
ADL participated in Busworld, the world's largest bus and coach trade show in Brussels, where it exhibited its Enviro500 Class 2 configuration. The exhibited vehicle and the acquisition by NFI were very well received by U.K., European, and international customers at this show. Glenn will now take you through the third quarter 2019 financial highlights, and following that, Paul will provide some insights on our outlook.
Thank you, Stephen, and good morning, everyone. I'll be highlighting certain third quarter 2019 results and provide comparisons to the same period in 2018. I direct you to NFI's Q3 2019 financial statements and the MD&A of those financial statements, which are both available on SEDAR or NFI's website. I also want to remind you that NFI's unaudited consolidated financial statements are presented in US dollars, the company's functional currency, and all amounts referred to are in US dollars unless otherwise noted. As we previously announced, effective December 31, 2018, NFI adopted IFRS 16 for leases. This new standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all major leases. We have elected to utilize the modified retrospective approach in adopting the standard, accordingly, comparative information for 2018 has not been restated.
Accordingly, all Q3 2019 numbers reflect the adoption of IFRS 16, while the comparative numbers have not been restated, making year-over-year comparisons difficult. Our MD&A clearly identifies the impact of the adoption of IFRS 16 in our financial results, and I recommend listeners review that information. ADL's financial results have been incorporated into NFI's operations from the acquisition date of May 28th, 2019 onwards, with Q3 2019 being the first full quarter of ADL's operations included in NFI's results. The MD&A includes historical financial information, as well as the separate post-acquisition ADL results. With the addition of ADL, we believe certain historic performance metrics, such as average selling price per IU and adjusted EBITDA per IU, may no longer be appropriate to measure the company's comparable performance due to the variations of product and geographic mix.
As a result, we revised our MD&A in the second quarter of 2019 and added additional focus on gross margins, earnings before interest and income taxes, and separate unallocated costs at corporate SG&A from the existing manufacturing and aftermarket reporting segments. We've also provided revenue segmentation by geographic region to now reflect the international reach of NFI. Note that vehicle revenue and gross margins can vary significantly by geographic region and by individual contract. This is especially true for ADL. In reviewing our materials, you'll note that on a pro forma basis, revenue and adjusted EBITDA were both down year-over-year.
While some of this impact is due to pure transit and low-floor cutaway vehicles, ADL also delivered fewer deliveries in the third quarter of 2019 compared to the third quarter of 2018, due primarily to lower activity in the Asia-Pacific market, primarily Hong Kong, and timing of deliveries in North America and the U.K. During the third quarter of 2018, Hong Kong activity was particularly elevated due to the timing of deliveries to meet new emission regulations. Compared to 2018, ADL expects to have significantly higher activity during the fourth quarter of 2019 as it fulfills its current order book, with the majority of deliveries in the U.K. and North America. This is in line with our original expectations for the business. As Stephen mentioned, our third quarter financial results were impacted by several non-cash accounting items.
This included a $20.9 million unwind of fair value adjustments related to the valuation of ADL-acquired assets. On an after-tax basis, this was $11.6 million. There's also a $9.1 million intangible amortization charge related to the acquisition of ADL, tax effect of $36.3 million and $4.7 million mark-to-market losses on interest rate swaps and foreign exchange contracts. I will highlight specifically where these items impact results. NFI generated revenue of $725 million in the third quarter of 2019, an increase of 19.8% compared to the third quarter of 2018. Revenue from manufacturing operations increased by 20.3%, primarily from the addition of ADL. The increase was offset by lower volumes on our legacy heavy-duty transit and low-floor cutaway business.
Revenue from aftermarket operations increased by 17.4%, primarily driven by the addition of ADL's parts business, offset by lower sales volume within the NFI Parts business due to increased competitive pressure in the private motor coach market, as well as fewer midlife upgrades and fleet renewal programs. Total gross margins decreased by 17.6%. Manufacturing gross margins decreased by 32.4%, primarily driven by the $20.2 million unwinding of the fair value adjustments related to ADL and the $9.1 million intangible asset amortization expense. Without these items, manufacturing gross margins would have increased by 4.8%. After-market gross margin increased by 27.6%, primarily due to the addition of ADL, somewhat offset by lower margins in the legacy NFI Parts business.
Total adjusted EBITDA of $76.9 million for the quarter increased by 9.5%, with higher manufacturing adjusted EBITDA from the addition of ADL offset by lower heavy-duty transit and low-floor cutaway deliveries, plus higher costs associated with production inefficiencies and vehicle remediation costs required to reduce excess Work In Process. Aftermarket adjusted EBITDA decreased due to the impact of adding ADL's SG&A costs, plus lower gross margins in the legacy NFI Parts business. A decrease in corporate costs also helped increase adjusted EBITDA due to lower incentive plan expenses. A net loss of $1 million, or $0.02 per share, compared to net earnings of $37 million in Q3 2018.
In addition to the items that impacted gross margins, net earnings were also impacted by a $12 million increase in interest expense, including a $1.6 million loss on interest rate derivatives and higher credit draws related to the acquisition of ADL and higher working capital balances. In addition, net earnings were also impacted by a $3.1 million unrealized foreign exchange loss. The interest rate derivative expense was generated by a fixed swap on NFI's interest rate that we pay on $600 million of long-term debt at 2.27%, plus an applicable credit margin. Interest rate fluctuation will cause market-to-market gains and losses, but the fixed rate is in place until October 2023. Adjusted net earnings of $15 million, or $0.24 per share, decreased by 58.6% compared to the third quarter 2018.
This was driven by the same impacts on net earnings, but adjusted to remove the non-cash costs associated with the unwinding of the fair value adjustments plus mark-to-market losses. We now include the impact of mark-to-market interest rate swaps in the adjusted net earnings, but we do not adjust for the impact of non-cash intangible asset amortization from the acquisition of ADL, which was significant during the quarter and will impact NFI's financial results going forward. Our liquidity position of $86.6 million as at September 29, 2019, decreased from $202.2 million at the end of Q2 2019. The decrease in liquidity primarily relates to capital return to shareholders through dividends and changes in non-cash working capital, primarily as a result of increased WIP. As we discussed, the increase in WIP is expected to be temporary in nature.
While our leverage and borrowings have increased, we are confident that these funds, together with share and debt issuance, if necessary, other borrowing capacity, and the cash generated from our operating activities, will provide NFI with sufficient liquidity and capital needed to meet current financial obligations as they come due and provide funds for future needs as they arise. The company generated free cash flow of $37.6 million, an increase of 30.6% compared to the third quarter 2018. The increase was primarily driven by higher adjusted EBITDA, lower capital expenditures, and lower income taxes, offset by increased interest expense. NFI declared dividends increased by 13% for the same period in 2018, and represents a payout ratio of 53.2% versus 62.9% from the third quarter of 2018.
Earlier this year, NFI increased its annual dividend rate by 13.3%, from CAD 1.50 per share Canadian to CAD 1.70 per share Canadian for dividends effective after March 13th, 2019. Property, plant, and equipment cash expenditures decreased by 44.9%, or CAD 11.3 million compared to the third quarter 2018. Planned capital expenditures for 2019 are expected to be lower than 2018 and 2017, with spending expected to be no more than CAD 45 million as major projects are nearing completion. This is a decrease from our previous guidance of CAD 50 million-CAD 55 million. Return on invested capital or ROIC for the period ended September 29th was 10.2% compared to 14.8% for the same period in 2018. The lower ROIC was primarily as a result of significant investments made in KMG, renovation and expansion of New Flyer's Anniston, Alabama facility, plus higher work in process and lower adjusted EBITDA.
We expect ROIC will improve as we execute on WIP reduction plans and realize the benefits of the significant investments made. Now I'll turn it over to Paul to provide you with market insights and our outlook.
Thanks, Glenn, good morning, ladies and gentlemen. You've heard both Stephen and Glenn talk this morning about the WIP recovery plan and the progress we've made to date. Stabilizing KMG's part fabrication operations was a key goal of the quarter, and we're pleased now that the KMG fabricated parts are recovered to on-time delivery to the New Flyer production facilities. KMG has a new plant manager and enhanced management team in place. We are on our way to return to our original investment case, albeit approximately one year behind original schedule. Excess WIP remained a challenge during the third quarter, but our reduction plan is working. We've made further progress in the fourth quarter to date, and we expect the majority of impacted deliveries to be made before the end of the year.
As we noted before, some of the excess vehicle deliveries will carry over to the first quarter of 2020. The vehicles impacted by the WIP reduction plan have been contractually sold, so their ultimate delivery is a matter of timing rather than market conditions. Due to this timing, we've now lowered our 2019 delivery guidance by about 170 equivalent units, with the majority of that reduction being New Flyer transit buses and ARBOC low-floor cutaway vehicles. No changes have been made to ADL's 2019 delivery guidance. This revised guidance suggests we deliver 2,020 vehicles in Q4 2019 or 36.8% of our total 2019 deliveries. It's definitely a busy quarter and one that we should see strong revenue and adjusted EBITDA performance. NFI Group team members around the world are busy finalizing vehicles and delivering to customers, which will continue right through to the year-end.
Given the significant volume of expected deliveries in the quarter, there is clearly some risk that some vehicles may not get delivered until January due to weather, customer acceptance, inspection, and supplier delays. That would primarily just be a timing issue that we're focused on delivering to our schedule, but won't jeopardize margin and customer relations just to ship a vehicle by the end of the year. The temporary work in process buildup also impacted our liquidity and our leverage, which was 3.75 times at the end of the third quarter. As Glenn mentioned, we don't expect any issues to our operations from the elevated debt balances and expect to lower total leverage and increase liquidity in the fourth quarter of 2019 and again in the first quarter of 2020, as vehicles are delivered and payments collected. Progress is already being made in the fourth quarter.
Overall, we are focused on de-leveraging and believe that our financial results, combined with the execution of the WIP reduction plan, will enable us to return to our targeted leverage of 2 times-2.5 times net debt to adjusted EBITDA within 18-24 months without impacting the company's dividend policy. Cash generation will also be supported by lower CapEx in 2019 and 2020, following periods of high investment in 2017 and 2018. We expect to realize on the benefits of those capital investments in 2020 and beyond. Before I explore the overall outlook for our individual markets, I want to stress that while we dealt with numerous challenges in 2019, it was a very strong year for our company, as we're now a more diverse business than ever. We're armed with a material backlog.
We have leading positions, multiple markets and geographic jurisdictions, solid free cash flow generation, the highest EBITDA margin amongst our peers, a proven zero-emission bus offering, and a continued focus on returning capital to our shareholders. Looking at our end markets, let me start with Canada and the U.S. public transit. The overall award activity in 2019 has been slower than expected, which we attribute primarily to the numerous transit agencies continuing to evaluate their zero-emission bus transition plans. As expected, our bid universe has been growing with active bids up 18% from Q2 2019. This increase supports our view that we will see increased award activity in the fourth quarter of 2019 and the first half of 2020.
While we expect award activity to increase in the near and medium term, we also expect the individual awards to be smaller in firm quantity with fewer options and shorter contract terms. Again, we believe this is primarily driven by transit agency assessing their fleet replacement plans and considering how and when they will approach zero-emission bus programs. As they do make the transition to zero-emission buses over time, we believe NFI will be a beneficiary of this change. This view is supported by what we believe to be North America's strongest zero-emission bus platform with a variety of clean propulsion approaches, including battery and fuel cell electric in 35 and 40-foot single-deck configurations, 60-foot articulated, and 45-foot double-deck variants. We've witnessed a significant uptick in market demand for zero-emission buses as they now make up nearly 20% of the active bids and almost 30% of our total bid universe.
Our infrastructure solutions business, which is aimed at assisting transit agencies in understanding the infrastructure requirements for zero-emission buses and to source and project manage the installation of associated charging infrastructure, has been very successful to date and another differentiator for NFI Group's zero-emission bus platform. Within New Flyer transit business, we do anticipate there will be some pressure on margins as the new contract volumes being awarded will likely be lower than those experienced during recent historic periods due to increased competition and the product mix. The demand for low-floor cutaway and medium-duty bus continues to be encouraging. We were especially pleased with the performance of the medium-duty Equess product, which has been well received by the public and private customers and has helped drive ARBOC to record backlog in the third quarter.
While ARBOC's chassis supply disruption limited our ability to deliver low-floor cutaway vehicles in 2019, demand remains strong, and we expect growth in that space in 2020, especially as we now have alternate chassis suppliers to mitigate future potential disruption. On the zero-emission front, ARBOC recently launched its electrification program for the Equess. In motor coach, we expect the public market to remain stable, while private motor coach demand has declined in 2019 as it did in 2018. As we've seen in prior years, the private motor coach business continues to be heavily weighted to the fourth quarter of every year, and MCI is expecting to be particularly busy through the rest of November and through December of this year. Looking forward, we expect there will be fewer opportunities in the private market, which will increase competitive factors and place increased pressure on margins during 2020 and potentially 2021.
I will, however, point out that MCI's new models have been very well-received. We expect that they will maintain and expand our leadership positions going forward. MCI's development and testing of its electric motor coaches shows real promise and will help establish its position as the leader in motor coach zero emissions. As for ADL's markets, the U.K. market is expected to be flat for the rest of this year, with potential for growth in 2020 and 2021 as large commercial operators and smaller regional players increase orders after a number of several years of low activity. ADL is leading provider of zero-emission buses in the U.K. and topped 100 vehicles sold during the third quarter of this year. ADL is actively growing its zero-emission position in New Zealand and now North America. Asia Pacific markets continue to vary by jurisdiction.
The highly cyclical Hong Kong transit market is coming off its peak demand in 2017 and 2018 and moving to lower but more stable deliveries, which are expected to continue for a number of years. I would like to specifically note that the highly publicized and ongoing protests in Hong Kong have not impacted ADL's delivery activity in Hong Kong. Helping to offset the lower demand in Hong Kong as a result of this cycle was a significant contract win in Singapore and further penetration by ADL in New Zealand. The operational and financial challenges resulting in one of ADL's primary U.K. competitors in filing for U.K. administration and subsequently being acquired by a manufacturer, is expected to provide ADL with opportunities to grow its industry-leading share in both the U.K. and Hong Kong markets.
ADL's Plaxton motor coach business, which builds bodies predominantly on a Volvo chassis, is primarily focused on the U.K. market and is expected to experience modest growth for the rest of 2019 and 2020. Sales outside the U.K. have been relatively small historically. Plaxton continues to explore opportunities to grow deliveries from export markets. As we've mentioned a few times on this call, ADL's unit revenue and gross margins vary significantly by geographic region and by product type. We recommend listeners review the adjusted ADL historical fiscal 2018 and Q1 and Q2 financial information for 2019, plus the pro forma Q3 2019 and 2018 data, which we provided in our MD&A to get a better understanding of ADL's potential impact on combined NFI fiscal results. NFI Parts continued to be focused on numerous initiatives to counter competitive intensity and deliver profit growth.
These initiatives include absorbing, in this past quarter, ARBOC Cutaway bus parts program, which we believe will provide an additional revenue synergy going forward. NFI Parts has also added additional focus on its vendor-managed inventory programs or what we call VMI, an enhanced product offering at various price points and capitalizing on the previously mentioned implementation of the common IT platform across the aftermarket business. We continue to explore opportunities to combine ADL's strength in engineering, sales, new product development, and third-party manufacturing with NFI's operational excellence in sourcing strategy, part fabrication, systems management, which will strengthen our business and deliver long-term financial results for our shareholders. Our initial efforts are primarily aimed at the North American market, where NFI seeks to optimize its product portfolio, customer strategy, and footprint.
In addition to these initiatives, NFI is working closely with ADL's leadership team to explore new market growth opportunities while continuing to maintain or expand market share in existing jurisdictions. ADL's 2018 contract within Berlin is expected to provide meaningful financial benefits starting in 2021, and it will be a platform for future European growth. The first pilots are being built in the U.K. as we speak. I've been actively visiting with ADL customers around the world, probably north of about 75% of ADL's revenue, who are very pleased with the combination of NFI and ADL and who look forward to working with us in the future to meet their unique operational needs. As Stephen mentioned and Glenn indicated, seasonality remains a reality of our business.
Fabricating and delivering highly customized buses to customers around the world is a challenging business, and the timing of final delivery of vehicles can move from period to period. We continue to stress that NFI is a long-term business, and we think our shareholders should probably focus on full year or last 12 months results rather than a single quarter. With ADL being the market leader in the U.K., we're carefully following potential impacts from the U.K.'s potential withdrawal from the European Union, commonly referred to as Brexit. ADL differs significantly from many other U.K. manufacturers as it has few cross-border sales with EU member states and has a significant local supply base. Further, and for the most part, for U.K. customers, buses are made in the U.K., buses for the Pac Rim are made in the region, and buses for North America are made in North America.
While the outcome of Brexit remains unclear with numerous potential scenarios, management is taking steps to mitigate potential risks, which include diversifying its supplier base, leveraging global third-party manufacturing partners, identifying components that may be impacted by tariffs or may be delayed entry into the UK, and building up appropriate inventories as required. ADL also has an active current hedging strategy which it has used successfully since the original Brexit referendum in 2016 to manage currency risk exposure. In closing, we're focused on achieving our delivery guidance and a strong fourth quarter of 2019 to close out what's been an exciting but no question a challenging year. As we look forward to 2020 and beyond, we expect to see growth.
Although there will be some margin pressure that we believe will alleviate post-2020 as we realize upon investments we've made and lead the industry's transition to zero-emission buses from demo or pilot projects to mainstream vehicle purchases. More than ever, we're proud of NFI's past and excited about our future. With that, I'll turn it over to Chris, who can please provide instructions to our callers.
Thank you, sir. At this time, I would like to remind everyone in order to ask a question, press star then the number 1 on your telephone keypad. Your first question comes from Chris Murray of AltaCorp Capital. Your line is open.
Thanks. Good morning, folks. Paul, maybe we can talk a little bit about the plan for the WIP reduction. A couple of pieces of this. First of all, can we talk a little bit about your expectations on margins in Q4? I appreciate you talked about coming out of Q3 that you were going to have to maybe revert back to leaning a little harder on the supplier base to catch up with stuff. I'm trying to understand how that's happened, the cost of remediation. Then the other piece of this, last year, it kind of caught, I think everybody by surprise in the coach market. Typically there's a lot of or a high number of last-minute orders, if you will, in the last few weeks of December.
How should we be thinking about how that shapes out this year? Is there anything unusual that you are seeing, either in the used market or any of the transitions? We're just trying to gauge the risk around being able to execute on this at this point.
Thanks, Chris. It is a really good question, of course, given the, A, the normal fourth quarter dynamic, especially of Coach, but also the realities of 2019 and catching up on the WIP that we created. A couple of questions in there and a few things. First of all, the primary driver of the transit WIP creation was us doing it to ourselves. We launched KMG about a year and a half ago. We slowly got it up and running. We shut down basically third-party supply of a number of components that we made for ourselves, KMG did not deliver as we expected. As I said on previous calls, mea culpa on that whole issue. The first primary issue was turning back on third-party suppliers to help us stabilize getting parts to the New Flyer production lines. That happened.
The second issue then was us getting KMG under control. We slowed down the input of parts that we started to make there. We put a new leadership team in place. We added some focus from other parts of the company, and KMG now is delivering at something like 98% or 99% on-time delivery to the New Flyer production plant. That has helped us curb, if you will, the excess WIP growth. That then turns to the reality of burning off excess WIP, and I know you've been to a number of our plants. If it was always the same product, that would be easy, but we have every different customer with different inspection criteria and mandates and platforms, as well as a high degree of variation. We didn't make as much progress as we had hoped in the third quarter.
We expect to make really strong and have been making strong progress in the fourth quarter with burning down the excess WIP. Quite honestly, as the weeks have gone by, it was crystal clear that we weren't going to get all of the WIP out in the fourth quarter, which is why we largely adjusted our transit delivery guidance for the fourth quarter. With respect to the motor coach market, it's always been highly fourth quarter oriented, and of course, with the U.S. tax changes a couple of years ago, allowing our customers to take advantage of accelerated depreciation, it even got more amplified. Ian Smart's business over at Coach sells both to contractual public customers, those are building to a certain schedule, which has its own challenges, just like transit.
The motor coach deliveries in the fourth quarter, the amount of units that we still actually have to sell on a retail or a transactional basis is relatively small. It's really about delivering and execution to those customers in the fourth quarter. I'm pretty confident in the guidance that Ian's given us for the fourth quarter of being able to deliver motor coaches. The used market, I would say there's nothing really new to report in the used market. As you know, it's not a massive contributor to the business. We sell in the neighborhood of 350-400 units a year. There is a little bit of a fourth quarter dynamic, again, because an operator buying a used coach can take advantage of those tax dynamics.
At this point, it's always been and continues to be basically a break-even business that doesn't have a profit contribution to the business. As we've noted over the last probably six or eight quarters, what the team at MCI done has gotten very aggressive at the valuation of those coaches that are put on our balance sheet, the surprises of mark-to-market are materially less or different than we've seen in the past. We're not really making money on the used coach business. Hopefully that answers the three questions you had.
Yeah. No, that's helpful. Glenn, maybe you want to take this one. Just thinking about, call it normal leverage. I know there's a lot of moving parts in here. I know you have your longer-term goals maybe at a year out or a bit more than that. Thinking about as we get through this WIP bulge, which always seems to be one of these things. When we get into, call it maybe Q4, maybe the end of Q1, where do you think your normalized leverage is going to look like once you get back to, I'm going to guess, stable working capital requirements? Any thoughts around what's the true starting point once we're through this issue?
Sure. I guess a couple of things. When we did look at the ADL acquisition case, we believed that our pro forma leverage would have been around three times after the ADL acquisition. What we didn't anticipate at that time was the growth in the work in process. If you look at our financial statements through the first nine months of the year, we have invested an additional CAD 176 million in our working capital. That's obviously had a direct impact on our leverage. Substantially all of that we expect to reverse over time. Now, it doesn't happen in Q3 or Q1 of next year. It'll take some time to get through it, but that will have a significant reduction to our leverage ratios.
Definitely the CAD 375 that we are at the end of Q3, we see as being the top, and we see it now coming down over the next few quarters. It's purely from the reduction in working capital. Then the tougher question is what's happening with earnings, and as you know, we're not giving guidance on future earnings, but we believe that as we go forward, that'll also be a contributor to reduced leverage.
All right. Fair enough. Just maybe one more sort of technical question, just on your EPS calculations. If I understand correctly, you're going to begin to record intangible amortization for the ADL acquisition. Should we be thinking that as a non-taxable amount and then you'll have the mark-to-market in the interest rate swap? Anything else we should be thinking about on a go-forward basis just to keep an eye out of, just EPS this quarter was pretty challenging to get to a clean number?
For sure, the greatest noise this quarter related to the ADL acquisition and the unwinding of the fair value adjustments. That unwind is substantially complete now, there'll be a little bit left in Q4, and even though through our purchase account, we're providing deferred taxes, I mean, we've got to look at it. We're setting up those deferred taxes at the U.K. rate, which is somewhere around 17%, but our all-in rate is 30%. That ends up boosting the ETR when you go through all the mathematics of that. That was a significant impact, and if you go through some of our documents, our expectations was once you remove all that noise, our normalized ETR, if you will, would have been around that 31%. We expect to see, and at this point, stay at that 31% on a go-forward basis.
You will see, obviously, higher amortization charges, and we'll have a bit of an impact on our ETR there because, once again, those intangible assets for tax affected at the U.K. rate, which is 17%, and our average rate across the whole business is 30%. The deduction we're getting from or the recovery we're getting from the deferred tax doesn't match the non-taxable portion that we have it flowing through earnings. Mark-to-market, obviously, we've put in place our derivative to protect us on interest rate variation, and I guess are comfortable with the 2.27 rate that we achieved through that contract. Unfortunately, the impact of that is as markets go up and down, even though we're realizing 2.7%, we're going to see mark-to-market swings. In times of dropping interest rates, we're going to see charges like we saw in the last couple of quarters.
If interest rates start rising again, then obviously we'll start seeing unwinding of that. Again, obviously that will impact the business as we go forward. I'm not sure if that gives you all the clarification you want, but overall, I guess we expect that our normalized tax rate should remain around the 31%. We're doing some more work on that, but that is our expectation right now.
All right. That's helpful. I'll leave it there, and I'm sure we'll have some more questions when we get to the investor day in a few days. Thanks.
Thanks, Chris.
Your next question comes from Kevin Chiang of CIBC. Your line is open.
Thanks, and good morning, and thanks for taking my question here. Maybe if I could look at the outlook you provided for 2020. I appreciate you are not giving specific guidance. If I look at 2019, it looks like pro forma with the full year contribution of ADL, your revenue somewhere like $3.3 billion. Your pro forma margins are just north of 10%. That gets you something like $335 million of EBITDA maybe this year. You got some KMG direct costs that come out that I think you've called out to be $8 million. That kind of gets you a run rate of just say north of $340. Is there any reason to think that that $340 is not a good starting point for 2020?
I appreciate you're seeing some end market weakness, but you rolled through some costs related to the WIP reduction and ARBOC's mix looks like a positive. Just how you see some of those qualitative things you've called out, is that net positive, net negative, net neutral, just trying to get a sense of how to level set 2020 here?
I think it's hard to argue with your math and your logic on that, Chris. The reality of our 2020 guidance, now that we no longer are going to issue a unit count that gets issued after every quarter and then the results 40 days later, whatever the hell it is. I think what we're intending to do is finish the year, burn down as much WIP as we possibly can, and then the first part of January provide a bit of an update to investors on what we expect, what excess WIP we'll still be able to pull off, plus a kind of an updated full year 2020 delivery guidance. That's kind of the way or the timing and the methodology by which we're going to handle that. Your calcs getting to, I think you said $340 or whatever, there's a lot of dynamics in that.
A good portion of some of our businesses like transit is contractual, and we kind of know the margins. There's parts of it that we still have to win and deliver in that period. Some of them are options that need to be converted. When you move over to MCI and ADL and even to some extent ARBOC, that have retail dynamics associated with the pricing at time of bid and still delivering in the same year. Look, we wanted to signal that there is price pressure in some of our marketplaces. There's softness in the motor coach, which we saw in the private market. At the same time, offset by some strength in other parts of the world and the benefit now of having a portfolio.
As far as 2020, we clearly expect to be able to give you a bit of a better color and focus as we get into January of following a strong fourth quarter of deliveries.
That's helpful. Then maybe just on your CapEx guidance down to CAD 45 million this year, can you remind me how we should think about, I guess maybe 2020 or the future years? Is CAD 45 million a good level or does that continue to wind down here in 2020 and onwards?
Yeah, as I look at the CAD 45 million, I mean, our focus this year, although we did have a little bit of completion of major projects, has been primarily on just maintaining our capital base and not a whole lot of new investment.
That $45 million number is probably pretty close to 100% maintenance and might be a couple of projects. Maintenance CapEx may be $40 million, and then there's some other costs around $5 million. Those other type of investments we're constantly making, so while we haven't finalized on our plans for next year, that $45 million, I don't think we're going to be able to get it much lower than that given the expanded size of the overall business today.
Okay. That's helpful. Maybe just when I think of last one for me here, just want to think of your ROIC, down to just over 10% versus I think something like 15% a couple of years ago. We are on a softer part of the bus cycle. How do you think of your, what I call maybe a mid-cycle ROIC? Is this a business you think you can run at 15% kind of through thick and thin, or is 15% kind of the high point and maybe 10% is a low point, so maybe mid-cycle, this is more of a low double-digit ROIC business? Just how do you see ROIC through the cycle?
Good point. I wish our business was so predictable that we saw a nice flat line, life isn't like that. I would agree with your view that obviously, that 10%, we've had some challenges in the current year. We also have a lot of big investments that were made in 2017 and 2018 that we don't start realizing the benefit for going forward. I would say that sort of that 10%-15% range is sort of a good range to think about. Obviously, it's also further been impacted by CAD 170 million investment in working capital this year, which we hope to unwind, which will give us some lift in our ROIC.
Glenn, I think it's fair to say that that 10 feels like the low end given the WIP buildup and everything else.
Yeah. That's it for me. Thank you for taking my questions.
Thanks, Chris. sorry.
Kevin, yeah.
Yep.
Your next question comes from Mark Neville of Scotiabank. Your line is open.
Hey, good morning, guys. I just want to follow up on some of your other questions. Just on the WIP reduction. I guess I just want to make sure I'm understanding it, but it's been pushed out a little bit, but it feels like you've got your arms around it now. There was no real material negative development in the quarter that resulted in that being pushed out.
No, it's just that I think what we tried to do, Mark, is explain quite candidly and transparently why we got into the situation we were in. We explained that we kind of slowed down the transit inductions to be able to try and dedicate and support additional resources to burning off WIP. It's not a standard or a normal product, and we don't totally control how the inspection process works and the acceptance process, and by the way, it's different with every customer. Sure, we're disappointed we didn't add more WIP in Q3, and that we won't get more WIP reduction in Q4, but we're pretty comfortable with the formula, the methodology, and the approach we're taking.
We're using overtime, we're using weekends to try and burn down that WIP and still keep our production rate in the range of what we had planned for that period. Unfortunately, the reality is there's only so many days left, and the way the year-end dynamics work with Christmas and the shutdowns at the end of the year and so forth, the reality is now we've got a better picture of how many will bleed over into 2020, and that's why we updated our guidance. It's not a matter of not selling them, it's a matter of the timing of which we sell them.
Right. Yeah, no, like-
Definitely, sorry, I was just going to say, Mark, we're definitely staying close with customers through all this to explain the situation and the process. As you know, we build in quite a bit of buffer within the delivery schedule to make sure we meet the customer's need. We've been in constant contact. Like Paul said, it's just a timing issue rather than any kind of market condition or anything else. The vehicles are sold, and they'll get out either in the fourth quarter or the first quarter.
Yeah, that's helpful. That's sort of how I understood it. I'm just curious, the issue right now, the bottleneck, is it more customer inspection or is it, again, just getting these finished and out the door?
Well, it's a combination. I know, Mark, you've been to our facilities. You see that process. Every one is different in commissioning and Like for example, every electric bus has to go through something like 600 miles of testing before we can deliver to a customer. We've got inspection online, we've got our own inspection at the end of the line, we have customer inspection at the end of the line. We got to do a test for 600 miles. We got to get back through to get final customer search before we can ship the darn thing, and then we ship it, and we don't get rev rec till it's signed for on site. I'm not complaining, I'm just saying the reality is, it's not like we push print and the thing is delivered and we ship it overnight in a FedEx box.
All those complexities of how we finish them, the variation of the product, and then physically getting it to the customer through their inspection thing, just every one is different. The predictability of it is a little bit harder than we would like it to be.
Okay. Again, that's good. That's helpful. Maybe just on the balance sheet, if I can ask the question another way, I think Chris asked it earlier. Again, you've got your 3.75 now. I think the target is two, 2.5 within 18 to 24 months. Could you, again, without sort of an exact time or number, sort of a ballpark when you think you'd be sort of back to the low threes? It sort of feels like two, three quarters, but just sort of curious to hear your thoughts.
I think your timing is right. I think we're going to see a improvement in Q4. Now, obviously, there's a bit of the cash cycle, right? As the investment goes from inventory to receivables and then ultimately coming out of cash. While we'll see the WIP reduction in Q4, some of that will be trapped in receivables that come year-end.
We'll continue to see WIP production into Q1, plus then we'll start seeing the cash come through as those receivables are collected. Coming down into the mid-threes, I think is something that is achievable by the Q1 of 2020 or first half of 2020, in that time range.
Okay. Again, maybe just follow up on the guidance. Kevin sort of laid the math out pretty well. I guess I'm just curious in the magnitude of the margin pressure you're seeing sort of within transit and coach that you spoke to, just to sort of, again, I don't know how material this is or how significant it is. It's just hard to sort of gauge. Again, you're quoting or you're speaking to a much improved bid universe or active bid universe. Again, the margin pressure on that sort of seems a little incongruent, but I guess it's just a function of when these orders get awarded.
You bring up a good point, Mark. It's hard to provide because there's no list price that we're working against, right? Highly customized products that we and our competitors are bidding on. The number of units where we used to see a 200, 300 order for a diesel or a natural gas or whatever is now eight, 10, 12, 15, 20 electric buses. While the bid universe is up, the number of awards is still kind of stuck in the system, if you will. Us and our competitors are trying to fill production slots and feel good about 2020.
A bid for three, five, 10 electric buses today or a smaller order of hybrids or something like that, all we wanted to signal is not like it's a massive magnitude of price reduction, but there is definite competitive intensity, in this period of transition from large orders with big options attached to it. We're encouraged and excited to see the number of customers telling us, "Look, when I get through my trials and my demos, I'm going to be buying X, Y, or Z buses in the next five years." That's all very encouraging. The fact that active bids has gone up a little bit is really encouraging.
I can tell you, we're also at the record number of level of bids on the go, and that has huge implications for the way we cost them and price them and bid them and try and win them. We've just seen of late some pretty aggressive pricing from our competitors. I wouldn't say it's ridiculous or stupid or major trends, but all of us are trying to make sure that we filled our slots as best we can for 2020. Given the orders are smaller in nature, that's caused us to acknowledge and want to call that out to you.
Okay. Thanks for the color. Appreciate it. Thanks.
Thanks, Mark.
Thanks, Mark.
Your next question comes from Cameron Doerksen of National Bank Financial. Your line is open.
Thanks. Good morning. Just to follow up on the margin question again, just looking at the aftermarket margin, if you look at the EBITDA margin in the quarter, it was lower than what you would typically generate. I'm just wondering if there was anything unusual in the quarter and what should we expect, I guess, for aftermarket EBITDA margins? Is it fair to say it should be kind of in that high teens kind of range?
Yeah, I don't think you're. The range is reasonable and kind of the context of which you say that. It's really interesting, in our business. A year ago, we were seeing kind of softness in volume and in margins, and we were in the public environment. This year, what Brian's team has seen actually is the inverse, a little bit of recovery there and the VMI programs have helped. We've seen softness in volume and therefore pricing and margin pressure in the private market. The blend continues to be relatively in the same range and consistent.
We're now trying to get our heads around what cooperatively NFI Parts can do with the ADL Parts team, whether it be sourcing, whether it be overheads or systems and that kind of stuff to, A, improve volumes, but also enhance our margins through cost or better purchasing and sourcing going forward. Look, every quarter, every month, every period seems to be different in that parts market.
Cam, the third quarter would've been the first quarter, too, with ADL's aftermarket business combined with the NFI Parts business in that aftermarket segment. You're seeing some of the impact there, too. Obviously, ADL's overall business is a lower margin business than our legacy business. The combination of that as well has had some of the impact on the EBITDA margin.
Okay. No, that explains it. Just on the amortization of intangibles, is what we saw in Q3 a good run rate going forward?
We haven't completed all our purchase accounting analysis. Our purchase accounting is still open and still subject to further adjustments. I would say that we would think that we're going to remain fairly close to where we are, so that would indicate that the amortization you see this quarter should be an indication of the ongoing amortization, but still have to qualify it based on what we make to come out as our final evaluations on purchase accounting. If we came with a shift away from the definite life assets to more indefinite life, you'd see a reduction in amortization. Conversely, if it goes the other way, you could see an increase. Right now, that's our best estimate.
I think, Glenn, we'll continue to call that out in the quarterly results, even though it is part of operations now, just to highlight the fact that it's a non-cash effect, the intangible amortization.
Right. Any thoughts about just excluding that from your adjusted EPS? Some other companies do that.
It's a tough one, right? Because you're living with it for 20 years. To try to make that calculation makes it difficult.
One of the items that will for sure show up for the next four quarters, as there's lower amortization in the comparables. We do exclude intangible asset amortization from our roll-up calculations. That's the one place we do make adjustments.
Okay. No, that's great. Thanks very much.
Your next question comes from Stephen Harris of GMP Securities. Your line is open.
Good morning, gentlemen. Just wondering if we can delve a little more into this pricing question. It strikes me that it has got to be connected in some ways to the low pace of order awards and as you say, maybe some competitors trying to fill their books and their delivery slots for 2020. Just wondering if you can give us a sense, both on your own situation and where you perceive your competitors to be in terms of how much of 2020 is actually sold at this stage. To sort of follow on that, if you are seeing pricing pressure now in contract discussions, when do you think that actually flows into your margins? Is that partly a 2020 story? Is it more of a 2021 story? Finally, the core part of your story has been, and the transit side in particular, is you have consolidated the transit business.
It sits down to fewer players, and that created a more positive pricing environment. How long do you think before you return to what we've seen basically since 2013, 2014?
Well, it's a long period, but no question we saw, and I wouldn't say massive price recovery, I would say more price stability when NABI became part of our team and Orion went away, and there was really three major players in the marketplace. 2014, 2015, 2016, 2017, we didn't really have zero-emission buses. We had a couple of nice contracts that we had won, like 60-foot natural gas or trolleys that were beneficial to our average margin and so forth. As we've now moved into this period of some entrants, one's been around for 14 years, one's been around for the last couple of years in just electric buses. The number of units that are actually being put up for bid and some of the special funding programs and so forth in the U.S. that have been very small.
Most of those contracts where we talk about pricing pressure today are really kind of end of 2020 into 2021, where we're seeing some of that. As you know, when we start the year in something like just compare and contrast, when we start the year with the transit bus business, probably, and I'm being generic here, but 60, plus or minus % of that is actually sold slots. 20%, 25%, 30% of that is options that we expect from our backlog to be converted, then 10%, 15%, whatever % is we've got to win kind of now and build them at the end of the second half of next year. We got a pretty good picture on the transit space, although we're bidding on electric bus contracts for 10 buses to build in the fourth quarter today, and we're seeing some price pressure.
In the motor coach world, it's probably about 50% of that business, maybe less than that, sorry, about 40%, 30% of that is contractual. We know what we're going to build next year. The rest of it is transactional or retail, where we're selling one, two, three buses at a time. That market, as you know, we've called out a number of times over the last two years where it's starting to slow down a little bit, albeit we've seen some growth in subsegments like employee shuttle and those kind of things which have been relatively healthy, although the quantities are not massive each time. The ARBOC business we called out, and you read in our notes this time, we're actually at a record level since we've been involved with ARBOC of backlog, and it's a combination of cutaways, but also the medium-duty Equess type buses.
It starts the year in a much better position, probably closer to transit, where 50%-60% of that business we have a contract for, and it's an execution story as opposed to having to win and then having to deliver. ADL is all over the map. ADL has a combination of contractual work in North America, some in the Pac Rim. They have both contractual work in the U.K., also annual buy cycles in the U.K. that they're going through to win to fill their slots. They're kind of somewhere in between transit and motor coach. Blended overall, probably 50% of our next year, maybe a little bit more is actual firm sold. We have a contract. We know what we're going to build.
40 ±% of our next year is we're going to have to win and deliver. Some of that is actually option conversion. Again, I'm not trying to be difficult, but every market is very different.
I think like, Steven, if you look in the financials, there's 4,300 units in our backlog, almost $2 billion in revenue, that is really mostly delivered in kind of the next 12 to 18 months, that front-end portion. Then there's I think 1,500 options that expire next year, and we expect a lot of those to convert in 2020. I think to Paul's point, the backlog is really a big strength of our business as we look forward, and it's something I think a lot of our competitors would love to have the backlog we have, and we use that as a position of strength.
I think in terms of the margin pressure, hopefully it will alleviate as these awards, this pent-up demand as awards get awarded to, gets out of active bids and these RFPs get awarded kind of through the end of 2019 and first half of 2020.
Okay, thank you. That helps a lot. Just wanted to follow up one more also on the amortization of the intangibles question. Glenn, did I hear you right? That you expect that number to last for 20 years? Will that be a flattish number or trailing off?
Well, you got to look at the intangibles, and you'll see it when we finalize, right? There's some of the intangibles, for example, the value assigned to the backlog amortizes very rapidly, right? Call it one year. Some of the intangibles as it relates to customer relationships will amortize out as long as 17 years. It really comes down to the specific allocation to each class. Definitely over the next year or so, you're going to see that number at the value that we saw in this quarter.
Perfect. Thank you.
As some faster turns, faster burning assets fall away, you'll start seeing reductions.
That's great. All right. We'll see you guys on Friday.
Thank you.
Thanks, Steve.
Again, if you would like to ask a question, press star then the number one on your telephone keypad. Your next question comes from Jonathan Lamers of BMO Capital Markets. Your line is open.
Good morning. Just one follow-up on the competitive pressures. Are you able to tell if those have been in the Tier 1 business or the Tier 2 and Tier 3 transit authorities?
Jonathan, it's Paul here. I'm not sure I understand your question. You mean, when you say tier, you mean size of operator?
Are you seeing increased competition in the bids to the large urban transit authorities or to the smaller ones, or is it just across everybody?
Well, I would say, specifically as it relates to zero-emission buses, we have seen some of the bigger guys. L.A. had some big awards in the last little while. We've seen Seattle, we've seen the Montreal dynamic, their Toronto dynamic, and so forth. I would say that pressure and aggressiveness by all of us to try and win zero-emission work and gain confidence from the operators that zero emissions are going to work both operationally and economically is universal, whether you're at Grand Forks, North Dakota, or whether you're Dallas, Texas, or a large operator like Los Angeles.
Because of the number of active competitions and the sheer volume in there is starting to come back, but is relatively small, I wouldn't say we've seen any differentiation on the pricing approach, as you refer to as Tier 1 or Tier 2 or Tier 3, or where we would refer to as kind of smaller or larger operators.
Okay, thanks. As we consider the decline in the average selling price in the firm backlog this quarter, obviously a lot of that would just be due to bringing ADL's backlog into the fold. It sounds like there's been price pressure in electric buses. Has the margin profile on your conventional bus business changed materially?
Well, first of all, as we've tried to call out in our MD&A and the script we had today, average selling price now with a diversified business is not really a strong measure we look at at our business for a couple of reasons. The average selling price of a conventional diesel bus versus an electric bus that's got a high battery content is materially different, and yet the margin dollars off of those units can be very close. We don't spend a lot of time looking at that.
The other dynamic is the average selling price of a bus for a, let's call it an unsophisticated operator that doesn't have counters or camera systems or voice pronunciation or Wi-Fi, is very different than the operator down the street that has all that stuff on there that can drive the price up by $100,000 or $150,000 just by their specification. We have what you just described, where ADL in some cases is selling a full-fledged double-deck with all kinds of bells and whistles. At the other end of the spectrum, maybe a small single-deck with little of extra air conditioning or extra cameras and electronics, or in some cases where ADL sells a body based on somebody else's chassis.
That's why we kept saying to us, average selling price, whether it's in terms a period or in the total calculated backlog, is maybe not the most meaningful measure for our business.
Okay, thanks for your comments.
Thank you.
There are no further questions at this time. I will now return the call to our presenters.
Okay. Thank you, Chris, and thanks everyone for your questions. Just wanted to remind everyone that we are having our investor day this Friday, November 15th, starting at 8:30 A.M. at Evergreen Brick Works in Toronto. We're going to have presentations from various members of NFI Group's executive team discussing our business and our outlook in a bit more than what you heard today. A fleet of our vehicles will also be on display, including a TTC electric transit bus, a Super-Lo ADL double deck, an MCI motor coach, and an ARBOC cutaway. We hope to see people there, and please check our website for further details on how to RSVP as space is limited. You'll also find all of the materials that we talked about today, press release, financial statements, MD&A, and an updated investor presentation on our website. Thank you and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.