Earnings Call: Q2 2019

Aug 14, 2019

Good morning. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the NFI Group Inc. Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Stephen King, you may begin your conference. Thank you, Lisa. Good morning, everyone, and welcome to NFI Group's second quarter twenty nineteen results conference call. This is Stephen King, NFI's Group Director, Corporate Development and Investor Relations speaking. Joining me today are Paul Subri, President and Chief Executive Officer and Glenn Asham, Executive Vice President and Chief Financial Officer. For your information, 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. As a reminder to all participants and others regarding this call, certain information provided today is 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 are 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 Q2 twenty nineteen financial statements and the associated management discussion and analysis, MD and A, that are posted to our website and on SEDAR. To start today's call, I'll provide a few highlights of the quarter, Glen 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 second quarter was a milestone for NFI as we successfully completed the acquisition of Alexander Dennis Limited or ADL, transforming NFI from a purely North American business to a leading independent global bus manufacturer. With the addition of ADL, NFI now has over 9,000 employees with an installed fleet of over 100,000 vehicles operating in 11 countries. ADL solidifies NFI as the market leader in North America, plus brings market leadership in The UK and Hong Kong and provides a platform for future international growth. Since closing the acquisition, our accounting and finance teams have been busy converting ADL's results from a private company following UK GAAP to a public company following IFRS. A recognition of ADL's historic results sorry, a reconciliation of ADL's historic results for fiscal twenty eighteen, Q1 twenty nineteen and Q2 twenty nineteen pre and post acquisition are provided in the MD and A. Glenn will discuss the impact of ADL on NFI's overall financial results this morning. To provide a more comprehensive disclosure of financial performance, we've decided we will no longer issue a separate quarterly deliveries orders and backlog press release and will now consolidate the deliveries orders and backlog information directly into our normal quarterly reporting within our MD and A. As we have grown and diversified NFI, we found it limiting to only talk about part of our company's performance in our quarterly deliveries, orders and backlog release, yet not provide the complete financial results. As such, we feel this change will benefit readers of our MD and A and financial statements to have the full picture at one time. This new reporting change will take effect starting with NFI's twenty nineteen Q3 results. As for our legacy business, we continue to work our way through the learning curve of launching new vehicles in production at both New Flyer and MCI's facilities, supply chain challenges, the delayed startup of our new parts fabrication facility, KMG and RBAC responding from the chassis supply disruption we experienced early in 2019. All of these factors have led to an increase in work in progress or WIP inventories, resulting in lower than planned deliveries so far in 2019. We know the issues and are diligently working to recover. Paul will discuss this plan and other items when he comments on our outlook. While there were challenges, there were also numerous positives in the quarter, all of which will help NFI continue to defend our market leadership position and achieve our vision of enabling the future of mobility. A few highlights I'd like to specifically bring to your attention. In May, we announced that Kathy Winter, the Vice President and General Manager, Automated Driving Solutions Division of Intel Corporation was elected as a Director of NFI, bringing expertise and insights that can help us as we explore the world of autonomous vehicles. NFI launched an autonomous bus program for advanced driver assistance systems and automated vehicles in partnership with Robotic Research, a U. S.-based innovative engineering and technology company that has provided autonomous solutions to commercial and government customers, including the U. S. Department of Defense. In addition, ADL already has an ADAS project underway in The UK. New Flyer's Infrastructure Solutions team completed the installation of New York's first interoperable en route charging solution. And as well, the Excelsior Charge H2 fuel cell vehicle delivered three fifty miles of zero emission range in a California road test. MCI continued to deliver its new J35 coaches with very strong market response. Subsequent to quarter end, MCI received approval from New Jersey Transit for an additional 183 commuter coaches on its existing six year contract. ADL's new ultra low emission Enviro 400 city double deck vehicles were put into service by First Glasgow as part of its premium Glasgow Airport Express service and ADL also secured a 50 vehicle order from Singapore's Land Transportation Authority for double deck buses featuring a new three door, two staircase layout. With that, Glenn will now take you through the second quarter twenty nineteen 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 second quarter twenty nineteen results and provide comparisons to the same period in 2018. I direct you to NFI's second quarter twenty nineteen financial statements and the MD and A of those financial statements, which are both available on SEDAR or NFI's website. I also want to remind you that our unaudited consolidated 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. As we previously announced, effective December 3138, NFI adopted IFRS 16 for leases. This new standard provides a single leasing accounting model requiring leases to recognize assets and liabilities for all major leases. We have elected to utilize the modified retrospective approach in adopting standard and accordingly comparative information for 2018 has not been restated. Accordingly, all Q2 twenty nineteen numbers reflect the adoption of IFRS 16, while the comparative numbers have not been restated. Our MD and A clearly identifies the impact of the adoption of IFRS 16 on our financial results and I recommend listeners review that information. We incorporated ADL's financial results into NFI from the acquisition date of May 2839, essentially one month in Q2 twenty nineteen. The MD and A includes historic financial information as well as a separate post acquisition ADL results. With the addition of ADL, NFI now delivers an even broader range of vehicles, including single deck, double deck and articulated transit buses, motor coaches and motor coach bodies, low floor cutaways and medium duty shuttle buses across various geographic jurisdictions. With this broad portfolio, we believe that certain historic performance metrics such as average selling price per EU and adjusted EBITDA per EU may no longer be appropriate to measure the company's comparable performance. As a result, we have revised the MD and A and added additional focus on gross margins, earnings before interest and income taxes and separated unallocated costs and corporate SG and A from the existing manufacturing and aftermarket reporting segments. We have 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 from geographic region and by individual contract. This is especially true for ADL. In reviewing our materials, you'll note that ADL did not positively contribute to NFI's second quarter twenty nineteen results, but results were within management's expectations, reflecting adjustments required from the conversion to IFRS that impacted the revenue recognition. ADL's first half twenty nineteen results were similar to the 2018 with the first and second quarter results vary due to the timing and location of specific vehicle deliveries. In addition, some ADL deliveries that would have been recognized in the second quarter under U. K. GAAP will now be recognized in the third quarter under IFRS as a result of change in revenue recognition policy. For NFI's consolidated second quarter twenty nineteen results, NFI generated revenue of six eighty three million dollars an increase of 1% compared to the 2018. Revenue from manufacturing operations increased by 1.5%, primarily from the addition of ADL. The increase was offset by lower volumes in our legacy manufacturing businesses driven by the production and delivery challenges Stephen discussed at the beginning of this call. Revenue from aftermarket operations decreased by 1.9% primarily driven by the $8,800,000 addition of ADL's parts business offset by a $2,000,000 impact from Daimler's termination of MCIS distribution rights agreement for Centra motor coach and parts sales in The U. S. And Canada and fewer fleet renewal programs. Total gross margins decreased 21%. Manufacturing gross margins decreased 27.7% driven by the same production inefficiencies that impacted revenue, including the learning curve from new products and the startup of KMG. ADL experienced a $9,700,000 loss to gross margin, primarily driven by the unwind of the fair market value adjustments related to the valuation of acquired assets. Aftermarket gross margins increased by 5.8%, primarily due to favorable sales mix and the addition of ADL. Total adjusted EBITDA of $81,100,000 for the quarter decreased by 11%, again due to previously mentioned production issues. Net earnings decreased by $41,200,000 and earnings per share was down by $0.67 per share. In addition to the items that impacted gross margins, net earnings were impacted by $13,300,000 of one time transaction costs related to the acquisition of ADL. Interest expense was also higher, primarily driven by $12,600,000 non cash mark to market loss on the interest rate swap and higher credit draws related to the acquisition of ADL. The interest rate swap fixed NFI's interest rate that we pay on $600,000,000 of long term debt at 2.27% plus an applicable margin. Interest rate fluctuations will cause market mark to market gains and losses, but the rate the fixed rate is in place until October 2023. Adjusted net earnings of $25,800,000 or $0.42 per share decreased by 50% compared to Q2 twenty eighteen. This was driven by the same impacts on net earnings, but adjusted to remove the one time costs associated with the acquisition of ADL. The mark to market impact of interest rate swap has not been adjusted as adjustments are expected on a quarterly basis and the amount of the adjustment is dependent on movement in market interest rates relative to the contracted rate of 2.27%. Our liquidity position of $202,200,000 as of June 3039 decreased from $301,500,000 in March 3139. The decrease in liquidity primarily risked the acquisition of ADL, the amount of capital returned to shareholders through increased dividends as well as changes in non cash working capital, which are expected to be recovered as work in process is reduced to normal levels. The company generated free cash flow of $41,400,000 during the 2019, a decrease of 13% compared to Q2 twenty eighteen. The decrease was primarily driven by lower earnings from operations, partially offset by lower capital expenditures. The company declared dividends increased by 12.3 from the same period in 2018 and represents a payout ratio of 49% versus 38% from Q2 twenty eighteen. In March, NFI increased its annual dividend rate by 13.3% from CAD1.50 to CAD1.70 per share, that's Canadian for dividends effective March 1339. Property, plant and equipment cash expenditures decreased by 45.2% or $8,500,000 compared to the 2018. Planned capital expenditures for 2019 are expected to be lower than 2018 as major projects are nearing completion. Return on invested capital or ROIC for the period ended June 3039 was 11.2% as compared to 15.5% for the same period in 2018. Our lower growth was primarily as a result of material investments made in KMG, which is not expected to generate benefits late until late twenty nineteen, plus higher inventory and lower adjusted EBITDA. So now I'll turn it over to Paul to provide you with market insights and our outlook. Thanks, Glenn, and good morning, ladies and gentlemen. You've heard from Stephen and from Glenn talk this morning about the production challenges we've experienced in the 2019 that resulted in us having reduced deliveries in the first half. We make no excuses. We accept responsibility. We know the root cause. We know the path forward, and we're well into our recovery effort, which is focused on lowering our WIP and delivering the vehicles to our customers. The result is expected to have a pronounced impact on the fourth quarter of this year as we get caught up. Now we've been asked a number of times if our due diligence and our acquisition effort of ADL in the first half of the year took our focus away from the core business. This is categorically not the case. The good news is we're now a more diverse business more than ever with a material backlog, leading positions in 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 focus on returning capital to our shareholders. Now looking at our markets, let me start with North American public transit. As we expected, our bid universe has been growing with the active bids up 22% from the first quarter of this year. This increase supports our view that the 2019 will see increased award activity. And we've already experienced this with nearly 200 EUs awarded to NFI and announced just this past week. We expect an increase in the number of vehicle awards in the second half, but also expect that individual awards may be smaller in firm quantities with fewer options or shorter contract terms. As we've discussed before, this is primarily driven by transit agencies continuing to reassess and redevelop their five year fleet replacement plans and to consider how and when they will approach the zero emission bus or ZEB programs. As they do make that transition to ZEBs, we believe NFI will be beneficiary of this change. Now in North America, NFI offers what we believe to be the market's strongest ZEB platform with a variety of clean propulsion approaches including battery electric thirty five and forty foot single deck, 60 foot articulated and now with ADL double deck variance. As anticipated, we've already seen an increase in number of ZE bids in our universe and now makes up a total of 20% of that total bid universe. To complement our ZEB, we also introduced and launched earlier this year our infrastructure solutions service to assist transit agencies in understanding the infrastructure requirements for zero emission buses and to help project manage the installation of the associated charging infrastructure. This has gone extremely well. The demand for low floor cutaway and low floor medium duty buses also continues to be encouraging. And while AARBOC's chassis supply disruption for our low floor cutaways impacted our ability to deliver those vehicles in the first half, the demand remains strong, especially for our medium duty product where we build our own chassis that generates a higher margins. And in addition to just the general diesel bus, Arboc recently launched its electrification program for the Equus model. In the motor coach segment, we expected the public market to remain expect the public market to remain stable. And while private motor coach demand has declined, as we've seen in previous years, the private motor coach business continues to be heavily weighted to the fourth quarter. MCI is also deep and continues its development testing of its electric motor coach. As for ADL's markets, The UK market is expected to be flat for the rest of 2019 before growing in 2020 as the large commercial operators and smaller regional players increase orders after a number of years of low activity. We expect ADL will be the beneficiary of this increased demand. ADL has the leading market share in single and double deck battery electric buses in The UK and is now selling their zero emission buses in New Zealand. ADL also expects to maintain its leader position in the cyclical Hong Kong market, while it is coming off peak demand of 2017 and 2018. It is moving to lower but more stable deliveries and helping to offset that lower demand in Hong Kong is the important contract win that Stephen talked about in Singapore and further penetration by ADL in New Zealand. Now ADL's Plaquestone motor coach business, which in this case builds bodies predominantly on Volvo chassis, is primarily focused on The U. K. Market, which is expected to experience modest growth in 2019 and again in 2020. Sales outside The U. K. Have been relatively small for Plaxon. However, they continue to explore opportunities to grow deliveries from new export markets. As you know, last month we revised our 2019 total delivery guidance down by 3.4% to reflect: a, the impact of the low floor cutaway sales, the lower sales and B, to reflect a slowing demand in private motor coach sales in the 2019. So with the addition of ADL to NFI, we've now added 1,400 EUs to NFI's total annual delivery guidance for 2019, which includes which now increases the total to 5,660 EUs. In the case of ADL, we will count both the single and double deck models as one EU, given they only consume one production slot as opposed to New Flyer's 60 foot articulated buses that consume two production slots. And note that the ADL delivery guidance we just gave you covers only the period from May 2839, the acquisition date to December 2939. Now as mentioned a few times in this call, ADL's unit revenue gross margins vary significantly by geographic region and by product type. We again recommend that listeners review the adjusted ADL historical fiscal twenty eighteen and Q1 and Q2 financial information provided within the MD and A to get a better understanding of ADL's potential impact on NFI's 2019 results. With respect to NFI parts, they continue to be focused on numerous initiatives to counter competitive intensity and deliver profitable growth. These initiatives include added focus on these vendor managed inventory programs that we have won and enhanced product offering and capitalize on the previously implemented common IT platform across our aftermarket business. In addition, NFI Parts is now exploring the absorption of the management and distribution of ARBOC and Cutaway Parts which is expected to provide an additional revenue stream going forward to NFI Parts. ADL's parts business continues to focus on enhancing its own online parts and service platform, which they branded AD24, which provides industry leading aftermarket support today to UK customers. ADL Parts business is expected to grow as its fleet expands internationally. Now our business has changed over time with the acquisitions of MCI, ARBOC and now ADL. And with these changes, our revenue diversity has added seasonality to our results. We now expect the second half of each year to be busier periods than the previous comparable periods, especially in the fourth quarter. In addition to the seasonality impacts, we also expect to have in the second half of this year to be busy as we recover from our challenges at New Flyer and MCI in a reduction of our WIP. Our WIP production effort is as I said already underway and expected to have a pronounced impact on the fourth quarter of this year. With ADL being the market leader in The UK, we're carefully following potential impacts from The UK's potential withdrawal from the European Union or commonly referred to as Brexit. ADL in our mind differs significantly from many other UK manufacturers as it has fewer cross border sales with EU member states and has significant local UK supply base. Further and for the most part, UK customer buses are made in The UK, buses for the pack room customers are made in region and buses for North America are made in North America. So while the outcome of Brexit remains unclear with numerous potential scenarios, management at ADL is taking steps to mitigate potential risks. A few things they're working on is diversifying their supplier base further, leveraging global third party manufacturing partners, identifying components that may be impacted by tariffs or delays of entry into The UK and building appropriate inventories as required. ADL has an active currency hedging strategy in place to attempt to manage currency risk exposure. ADL also has numerous exciting opportunities in Europe, Latin America and Asia Pacific region that will help drive top line growth in the future. We're extremely well positioned to capitalize on the ZEB evolution and we're gaining share in the employee shuttle coach space and medium duty shuttle spaces. NFI is a long term business, and we think shareholders should take a long term view, not as focused on any specific quarter. Throughout our history, we've made accretive acquisitions and we've used our balance sheet wisely to diversify and grow. The ADL transaction is no different. And as we now focus on deleveraging over the next eighteen to twenty four months, we're also maintaining our leadership positions and realizing the benefit of the significant investments we've made in our operations and to provide steady dividends. Obviously, the impact we had in the first half of this year has caused some turbulence, but we will get through that. With the half year complete, we're executing on our plan to lower CapEx expenditures. We're now expecting to be in the range of about 45,000,000 to $50,000,000 for the legacy NFI business. And with the addition of ADL, CapEx now total will be approximately 50,000,000 to $55,000,000 for 2019. Ladies and gentlemen, at NFI, we're proud of our history and now with ADL, we're even more excited about our future. With that, I'll turn it over to Lisa to answer any of your questions. Thank you. And our first question comes from the line of Chris Murray from AltaCorp Capital. Your line is open. Thanks, folks. Good morning. Just maybe going back to the delivery guidance and thinking about some of the cadence here. I guess the concern that a number of us have is just how do you deal with the inventory glut? I mean, you're looking to be pushing out a fair number of pieces of equipment in the back half of the year. Can you just talk about some of the risks around that? And I think the thing that maybe is more concerning is thoughts around being able to hit the coach number because that seems to be kind of more subject to market conditions as opposed to being contracted backlog at this point? Yes, it's really good question. Thanks, Chris. So let's go through each of them. Start with ARBOC. We've reduced the guidance as you know primarily because in our production environment without the chassis, we lost the production slots. And so we reduced that. Very comfortable with the Equus, the medium duties that we talked about. And so there, we revised down, we're comfortable. On the New Flyer front, we built up our WIP unfortunately, primarily as a result of the delayed implementation of KMG and the parts that it was building to go to the production lines as well as some supply challenges we had with a few suppliers and then ultimately ramping up volume at the same time as we implement electric buses inside the factories. So the New Flyer story for the back half of the year is really about two things: a) the buses that we line enter getting them through and b) catching up on the excess WIP that we've created. The MCI story, we've adjusted the private market down a little bit in our forecast for the full year. MCI too had some excess WIP that it needs to burn down, but you're absolutely right, a good portion of the MCI's work is contractual is not contractual, it's transactional. And as we look back for the last ten, fifteen, twenty years, the third and mostly the fourth quarter has significant deliveries, some of which are sold and we're building custom coach for an operator and some of which we sell from a buildup of inventory, what we call fast track, so selling a coach if you will off the shelf. We maintain different than in the public world, we maintain our own kind of little bid universe, if you will. So we have a database, if you will, of every single operator we've talked to, what their forecast is currently, what they've bought in the past, what their fleet looks like, what we expect them to come out for, bid their quote in the next couple of months and our ability to deliver those buses. Now some of those buses, as I said, are buses we still need to build. Some of them are buses or coaches that we actually have in inventory. So we've effectively handicapped our historical batting average of selling rate. It's not like we're just using an average or a number, we're using individual customer by customers based on our selling forecast. Is the risk always there's risk of us not being able to sell or a, sell and b, deliver on time for the year in rev rec. Both the numbers we've given you are based on the latest scrubbed forecast from Ian Smart and his team over at MCI about what we think we can deliver. And Klaus, you got to remember that it's not Altus private markets in the excess inventory. There's a good portion of it. That's also public market sales related to the new product launch. So the issues there, and I'm sure Paul will get into them next, the issues on that is no different than what we deal with in the new flyer business. Right. The final business is ADL, so we just added the total number of units. We've had some calls from some of the analysts and investors saying, Hey, we read your materials. How can ADL lose money in the first month that you own it? The reality is the conversion of the business from U. K. GAAP to IFRS fundamentally changes the revenue recognition. And so the number of units that were actually built and shipped but not yet accepted or received by the customer causes that revenue to move over into July. And so that didn't concern us. That was the way we had expected that work to go. The number of units that Colin Robertson and his team have forecasted for the rest of the year are again largely sold or defined slots with some like the Motor Coach World where we actually ask to secure a customer, sell a bus and then build it and deliver it by the end of the year. But the numbers we've given to the market are based on our absolutely best scrub and our best estimate of a ramp up delivery primarily in the fourth quarter. Okay. So if I was to think about and this is where we're trying to maybe even sequence because there's a lot of moving parts on this one. So if I think about deliveries Q3 versus Q4, I mean, you've taken shutdowns in Q3 and even small shutdowns in Q4 in some of your operations. So what you're telling me though is you're comfortable with the level of inspection, the level of quality control that you've got that you should be able to move these buses out the door by year end, although I'm going to guess there's got to be some period to period variation? There always is that, Chris. And that's the challenge. And again, because every bus is different or largely different, the degree of variation and customization and as you said, the inspection dynamic causes always some scenarios where we can deliver right on time and somewhere we have a little bit of a delay. Keep in mind that as we said, even with the shutdowns you described, in the motor coach world, we're selling buses that are some are already made as opposed to having to make them and getting through the production process. So the shutdown doesn't have the same impact on MCI as it does on, for example, New Flyer. Okay. Fair enough. Just going back, when you did the order and deliveries update, you mentioned that your WIP had built and I mean it looks from looking at it, you've got 700 at the time, at least you said like ex ADL, had close to 800 units in inventory. We saw the impact on working capital. So I guess, first question on this one, ADL, what does that do to your inventory number? And then maybe a better way to think about it is, what's the normalized number once we get past this kind of thing? And then Glenn, if you want to just chime in, what do you expect for working capital for the remainder of the year? And where do you think that that should take you in terms of overall leverage as you sort of flush a lot of this stuff? Sure. So we'll look more at dollars than sort of the actual units. Mean, if you look at it, the cash that has been consumed in working capital since the beginning of year is over $100,000,000 right? And that's ex the add of ADL. So we think for sure getting our work process back to down normal levels, substantially all of that should get recovered. ADL obviously adds inventory and I guess the best place and I don't have the time here, but the best place to look at would be to look at the opening balance sheet that we have currently presented for ADL in the MD and A. And what I would do there is I would take out the fair market value bump out of that inventory because that's going to flush through the system and not get replaced. So really if you look at the opening balance sheet pre fair value adjustments, that's sort of the level of inventory we would be expecting from ADL. Okay. And so I mean to your point, I mean so fair to think that you'll flush the 100,000,000 through the back half of the year. Is that the right way to think about it? Yes. And I guess looking at it, as we said, primarily in the second quarter. So when you look at fourth quarter, because when you look at what we actually do to achieve it, I mean step number one is to get the production line healthy again, so that buses coming off the line are shipped. That obviously doesn't deal with the offline inventory. So that offline inventory then get once we can stabilize the production lines, gets focused on, which is the reason most of the recovery happens in the fourth quarter. Okay. Just my last question, just turning to the aftermarket business for a couple of seconds. Percentage margins on an EBITDA basis were actually pretty positive, a little higher than they've been in a little while. I know there over the last year or so, there's been a lot of discussion around IT harmonization, some facility reorganization. This like an odd number for the quarter? Or is this just kind of structurally some of the changes that we've been seeing over the last few years coming to fruition? I think this is structurally some of the changes. We have definitely seen a reduction in the amount of operating costs for that operation as we put together the IT systems and harmonize the management groups into one group. So from the cost basis, I would say that is reflective of the new business post combination. The other thing, Chris, that's not a P and L issue for the balance sheet issue is we're now in a position with the harmonized IT systems and the one rationalized facility where there's an ability to reduce some of the working capital or the spare parts inventory on the shelf that's part of the back half of this year's plan. So that's the added back of just that much better planning systems. Okay. Thanks guys. That's my questions for now. Thank you, Chris. Your next question comes from the line of Cameron Doerksen from National Bank. Your line is open. Good morning. Thanks very much. Maybe just a couple of follow-up questions on the ADL disclosure. I'm just wondering if you're able to give us how many actual buses were delivered by ADL in Q2. I know it was only one month, but I'm just trying to, I guess, figure out what's remaining to be delivered at ADL based on your delivery guidance for them for the next two quarters? Well, you take that what number do we have? 1,500 or whatever and just subtract the deliveries? 1,500, yes. So what is the deliveries in I think it was around 500 in Q2. But you got the Yes. One I that you thought it was around 150 ish? Yes. Sorry. That would be great. Okay. So about 150 deliveries in Q2 for the month that you owned it? Yes. Okay. Okay. Perfect. And can you maybe just talk a little bit more about the seasonality here? I mean, I'm just sort of looking back at the sort of pro form a numbers you provided. And Q2 last year for ADL was big, maybe not as much this year. So I'm just if you could just sort of describe what the typical seasonality is for ADL? Or is there a typical seasonality? I know it's more back end, back half loaded, but just sort of by quarter. Yes. Really have to look at it almost market by market. For sure, The UK market is much like what we would see in MCI, so very Q3, Q4. Similarly, the Hong Kong market would also be back end loaded and I guess one of the issues there that you see from seasonality, the Hong Kong business has been falling off since the 2019, so some of that seasonality will be reducing. Not falling off, but the natural And cyclicality of the then obviously, there's the North American business, which is going to behave most of their business is the public market. So there should be less seasonality there, such as much like what we see in the Transit business. Okay. And just on maybe the final one for me, just on ADL. I just wondered if you can talk about your confidence here in The U. K. Market rebounding in 2020. You've kind of mentioned 2019 maybe flattish, but you're expecting a rebound in 2020. What gives you that confidence? So as we as you and I've talked actually in the past about the market in The U. K, if you look on the Internet and look for macro bus deliveries in The U. K, it looks like it's been dropping fairly materially. And we argue and look at specifically that was largely related to kind of smaller micro or mini type buses, which ADL doesn't participate in. ADL's U. K. Business is dominated by, I'm going to say, 10 operators. I may have that number a little bit wrong, but 10 major operators and then a number of regional operators. And just like New Flyer, where we're not selling one bus at a time, they're contractually type businesses. We're customer by customer, year by year, month by month, quarter by quarter, analyzing, working when our RFPs hit the street, working on our win rates historically, looking at our competitors' viability and competitiveness and building up our forecast associated with that. So the rest is largely sold out for ADL and it's an execution play. 2020 is a win build and deliver play. Now the difference between ADL and New Flyer is when you start the year, a smaller portion of ADL will be actually sold by the time you start the year. It's far closer to an MCI type dynamic. So our confidence is due diligence we did as part of the acquisition and then the subsequent review and assessment and work with Colin Robertson and his team to come up with that forecast for 2020. But it's not a market size type conversation, it's a customer to customer buildup. Okay. No, that's great. That's all for me. Thanks very much. Thank you, Cameron. Our next question comes from the line of Kevin Chiang from CIBC. Your line is open. Hey, thanks for taking my questions here. Maybe just going back to some of the comments you made, Paul, around the steps you're taking to kind of deal with some of the execution issues you faced over the past year or so. Wondering, one, with the plan in place, are you starting to see some improvements already? Or is that something that likely won't start materializing in the third quarter here when you look at kind of all the various initiatives you're pursuing? And then secondly, when you start integrating ADL here as you integrate ADL here, just maybe lessons learned in terms of what you've experienced over the past year? And would you approach the integration of ADL maybe differently than you might have otherwise, let's say twelve to eighteen months ago? Okay. Great question. The primary dynamic in New Flyer is we stood up a KMG, so a part fabrication business to do two things. One was to enhance our Buy America capability so that we would get credit for now the increased U. S. Content rule. The second issue was a profitability opportunity because as we resource stuff from Canada or internationally to The United States, we made a decision that we thought most of what could be built through KMG we could do ourselves and that there was a profit opportunity. The reality is we underestimated and did a poor job of implementing or launching KMG. And the reason why that's so important is that as we slowed down the sourcing of material from other places and began relying on KMG, which didn't deliver, so GILTI is charged, we now ended up with buses on production lines that didn't have the parts. Because as you know, in our New Flyer environment we don't carry buffer inventories. It's a just in time point of use strategy of building parts. So largely did it to ourselves. No excuse other than we got to fix that going forward and we're comfortable with that. The second issue is while that was going on, we were adjusting volumes across our facilities and introducing electric buses into every one of our production lines. And so we added a whole bunch of complexity to that average person on the line building the buses. And we thought we did a good job of planning, executing, prioritizing, training all those things. But the combination of parts shortages and a model mix caused us to basically in part of my expression, but get constipated with our ability to deliver the buses. So their recovery plan is a, fix KMG so that the parts get to the main production line and the ones that we're building right now get out on time. And then b, because the buses have gone through the production line and they now need parts that weren't there, you've got all kinds rectification work for that excess inventory that Glenn talked about. So the fix is get that healthy. And there will be a little bit of an impact in Q3, but the most part of the excess WIP gets out in Q4. So from lessons learned, I don't see we're not going to take ADL parts into KMG and start building parts for them to try and grab a little profit until we're very comfortable now that KMG can actually stabilize and take on more work. So we're going to be very careful about that dynamic. The other thing is that so far ADL strategy on electric buses is different than New In New Flyer, we basically take the same chassis frame and shell and we basically implement the electric system on the buses, the battery system, the motors and so forth. In ADL's case, their strategy in The UK is to team with somebody provides the chassis. And so it has not had the same impact on ADL as they've moved and implemented the manufacture and delivery of electric buses. There's lots of lessons learned that we can get from NFI parts, from Motor Coach and NFI that we're going to use and work with Colin Robertson and his team as ADL comes on board. The biggest integration opportunity for New Flyer and ADL is in North America, which is about 25% or 30% of their business or whatever the percentage is. And that's where we can start to think about common supply chain, insourcing versus outsourcing, facility optimization over time, overhead optimization or rationalization and so forth. But that's not as we said, we didn't base our business case on ADL based on synergies. We based it based on being able to coordinate and grow the business. And if we grab some synergies, that's a bonus or a benefit to profit. That's super helpful. And when you think of the timeline to all the stuff you just mentioned, especially on the KMG front, is the expectation still to be basically at some sort of normalized run rate in 2020? Or will those is there still a bit of a ramp up as we kind of look in the 2020 to get profitability or the costs the extra costs associated with the ramp up fully out of the system? The question we had earlier from Cameron and Chris on volumes and so forth, we have currently forecasted, planned and are executing to get the vast majority of the excess WIP we've created out in the first quarter. Because it's variable based on supply chain and customer inspection and acceptance Could some of that bleed into 2020? Absolutely, it could. But the vast majority we expect to get out in the fourth quarter. That's helpful. And then just last one for me. If you were to look at maybe the cost, I don't even know this is the right way to think about it, the cost or the margin impact from these issues and to the extent it when you look on to 2020, a lot of this reverses. Is there a dollar figure you would put on this? Like this would have been $10,000,000 of EBITDA hit in 2019 when it's all said and done? Is it tough to kind of quantify because there's a bunch of moving pieces here? It's fairly tough to quantify. You guys look at a lot of the rectification costs, it's just going be labor costs which when you look at the total cost of the bus it's relatively small, seven to 8% of sales. So could that go up 10%, 15% on those offline buses for sure. But again, you talked about relatively low cost piece of the over cost of the bus. No significant change in obviously the material cost. So there could be a small impact on margins as we go through the Q4 reduction in work process, but we wouldn't think it is significant. For sure there's far more variation quarter to quarter just by mix of contracts than you see from any impact on the cleanup of the work process. The biggest benefit Kevin is going to be the burn down of the excess WIP which generates the cash that is kind of ballooning our balance sheet right now. Okay. And maybe sorry, just maybe just a clarification question. Apologize if you mentioned this. It looks like you're based on your guidance, you're going to deliver roughly 3,400 buses through the back half of the year here, give or take. Did you mention what percentage of that would have been, say, contractual versus what percentage of that is transactional? So what is it that you know for certain you can deliver based on a customer order and what percentage you kind of have to you have to find the buyer when you look at that 3,400? Yes. We haven't provided specific percentages, but let's just talk about them again. So our box dynamic and again relatively small in the grand scheme of things, but the a high percentage of that greater than 50% or 70% of where I was off the top of my head roughly is we've already have a contract, we've got to build and deliver. New Flyer, essentially all of the slots, we know whose bus it is, it's a contractual dynamic. So there's the build and deliver the new stuff and the catch up and execute of the excess WIP. MCIs, as we talked earlier, has a reasonable portion of contractual, most of its government, our public type customers. The private operators, there's a percentage of them where we actually know we were going to sell 10 or two buses to these guys, but there's a lot of it that is still got to win the deal, got to deliver the bus, which is why we have that combination of, again, fast tracks or pre built buses and some of it is we still got build a bus for a unique customer. And then ADL is a lot closer to New Flyer where the vast majority of twenty nineteen is not about finding a customer, it's about building deliver a bus. I think a good thing to look at there, Kevin, is the firm orders and backlog that we gave in July and the orders release, obviously excluding ADL, but for the New Flyer MCI and the Aarbock business. That's it for me. Thank you very much. Thank you, Kevin. Our next question comes from the line of Mark Neville from Scotiabank. Your line is open. Hey, good morning, guys. Maybe just a couple of questions on ADL. When you bought the business, think you said a 7.3x multiple, I think it would suggest about $55,000,000 of EBITDA. But I'm looking through the MD and A, again LTM and sort of last year, it looks closer to sort of $35 $36,000,000 of EBITDA. So I'm just really not sure sort of what the difference is or how to bridge that gap or maybe my numbers are bit off. Yes. If you go back to our original quote our original press release, that multiple was really based off The UK GAAP numbers, that's all we had at the time. So when you look at what has changed between UK GAAP and IFRS, the biggest single change would have been the revenue recognition and the other significant change would be the treatment of the new product development cost. So I would say probably three quarters of this difference is revenue recognition and obviously that's just a timing issue from our standpoint as the cash flow doesn't change, so we are very clear on what the cash flow was for this business and while the revenue gets recognized at different points, the cash still comes in as planned. And the other part which we knew about during our diligence, but couldn't fully quantify because some because they capitalized all their new product development, some of that would be true tangible assets, some of that would be soft engineering costs, which obviously in our world we expect. So we knew the adjustments were coming, we just couldn't quantify them until we could get inside the business and start peeling back and looking at the numbers. But I guess again, right from our standpoint, we value the business, look at it in a number of different ways, probably most significant of which was based on the cash flow generation of the business. And obviously, that has not changed as a result of changes in accounting policies. Okay. Maybe I'm just not fully getting it, but just on the revenue recognition, I'm just curious why or how that would cause so much significant Yes, impact you got to look at it got to look at it and and there's two major adjustments. So you got to look at really their UK business and then their export business. The UK business, they were basically recognizing revenue at the time of the bus being ready to ship from the factory. Under our policies, we recognize revenue once they are arrive at the customer and the customer takes control of the product. So maybe that's just revenue one to two weeks. Right? Not not a significant risk. The other piece was on their international work. And there, they were recording revenue on a long term contract basis. And they so they basically were recording revenue at specific milestones, those milestones being when they completed the chassis, when they finished building the bus body and when they delivered the bus to the customer or had buses ready to ship. So for sure, I mean obviously now we're recording as the bus arrives at the customer, so there's a significant gap. I mean it can be up to six weeks from the time they start a bus to the time they finish a bus. Say the chassis is done sort of halfway through that process, or so say there's four to up to four or five weeks of difference on some of the components of revenue recognition. Hey Mark, just some color and it's not material information, but just context. When they closed off June under now our ownership, historically they would have had rev rec for about 60 units. So there was, for example, seven in The UK that were on their way to a customer. There was 41 that were in shipment to the Asia Pacific. There was 12 that were being delivered in Europe that didn't again, historically they would have had rev rec and there was four in North America that were on a truck on the way to the customer. Those 60 units, they would have historically recognized in June, now go into July. So over time, all that will sort itself out, but it just so happens that from the date of purchase to the end of the quarter, we found them in that the situation where it's a bunch of units that never actually got scored for or got credit for. Okay. And you did touch on this, but I'm just again, just sort of curious, again, the volatility in Q1, Q2 this year versus last year, again, it sort of all ties in, I guess, into the revenue recognition. But I mean, is it typical or going forward? Are we going is it going to look like this in the first half or potentially where there's lot of volatility from one quarter to the next? On ADL specifically, Mark? Yes, exactly. Yes, sorry. Well, Yes, I think so. And it's kind of as I said before, it's halfway between Flyer and MCI. It's close to Flyer where they're mostly multiunit contracts, but it's like MCI where it's not in the bag as the year starts. And so there's going to be variability in ADL quarter to quarter. And now even more based on this rev rec dynamic or at least for a while you'll see it amplified to what we would have seen ADL in the past. If you look at their revenue split, approximately half is The UK. As we said earlier, that revenue is much like MCI where it's strong in Q3, Q4. That's just the nature of that market. Right. Okay, guys. Thanks. I'll get back in queue. Thank you, Mark. Our next question comes from the line of Stephen Harris from GMP Securities. Your line is open. Good morning gentlemen. I'm just if we can dig in a little more into KMG which seems to be at the root of a lot of these production issues and inventory issues. And if you can maybe let us know on your assessment right now, sort of more qualitatively than quantitatively, what exactly went wrong, where you are in fixing it, and maybe what what you would do differently if you had to do it over again. Sure. So it's a multi cell production facility. And our experience historically is adding part fabrication to our existing manufacturing plants. So cut and weld and paint a bracket and put it on the bus beside it. Our desire and our wisdom was the two things I said before. One is grab some U. S. Content, the second was grab some profitability based on repatriating ourselves. And the most part, the capability or the technology at KMG is building stuff that we've done in our other plants. So we took a facility, we set up these nine cells, we put a leadership team in place, we put an IT system in place, we train these people. And most of the people in that area come from a warehousing type environment. And so we're training people to get from somebody that stocks the shelves to somebody that's now assembling a part or building a wiring harness and so forth. And we got some support assistance from state of Kentucky and the local area and so forth. So at the same time, we started to slow down the sourcing of material as we insourced it. So we shut off Vendor A and we started building it inside KMG and there was a ramp up period. In the first couple of months of ramp up were fine, but they were very small volumes. As that volume started to ramp up, it became crystal clear that the leadership team wasn't probably the right ones. We made those changes. The second issue is the training and deployment and execution of the IT systems, the planning systems and so forth should have been done better. And then the third is the underestimation of the volatility of the workforce and where people in most of our plants once they come, they stay. And in this case, you have people leaving for $2 an hour or $0.10 an hour going down the street and so forth. So all those things conspired to have us now a product line in New Flyer sitting there waiting for a part from KMG that didn't come. And then of course the turbulence associated with that. If I could do it over again, I thought we had a good project plan in place, it turns out we didn't. We thought we had the right leader in place, it turns out we didn't. So what we've decided to do is slow it back down to the core level of components. We've re outsourced the key components that we've been holding up the product lines. We've changed the executive oversight inside New Flyer to be able to handle and manage this thing. We've redeployed numerous people to the site to basically go right back to ground zero in training of systems, using of equipment and so forth. The team in place now has stabilized KMG. And so the parts past due or the hours overdue has gone from it's down by a factor of 90% than what it was two months ago. So we're pretty comfortable that the parts coming out and the parts we're buying elsewhere are going to allow the product lines now to the build lines to build their buses. And we will now slowly ramp KMG back up to get back onto the business case plan that we set up one years point ago. But we're not going to jerk it up too fast given the lessons learned from the last time nor are we going to start to put MCI or ADL parts in there until we feel that it's healthy, which is probably a year from now. The focus is primarily now on New Flyer parts and RBAC parts. So again as I said in my remarks, Mia Culpa in terms of project management, we've been pretty successful at the vast majority of our project management over the last ten years in the implementations. This one got away from us. We're on it. We're going to fix it. Perfect. Okay. Rest of my questions are asked and answered. Thank you. Thanks, Stephen. Our next question comes from the line of Jonathan Lamers from BMO Capital Markets. Your line is open. Good morning. Do you have the number of units that ADL delivered over the first five months of the year up to the acquisition date? So we haven't disclosed it, Jonathan. All we've because we just did from the acquisition period onwards. And then we've provided, I guess, the quarterly revenue and adjusted EBITDA in the MD and A. We did provide in the acquisition announcement the annual deliveries for ADL. Now that was on a UK GAAP basis, so there is a little bit of difference between the 2,533 units on a UK GAAP basis versus the IFRS number. But hopefully, if you look at the seasonality and the annual deliveries, it can give you an idea of what 2018 looked like and then therefore what 2019 looked like. But we haven't disclosed the deliveries for the previous period. Okay. I'm just trying to gauge by how much ADL unit volumes are expected to be down for 2019 versus 2020 sorry, '19 versus 2018. Yes. So I think if you look at overall unit volumes, so we've given our guidance of 1,400. The challenge with ADL, I think the biggest issue is the mix. It has such a pronounced impact and the geographic region to where the vehicles are delivered. So if they have vehicles in APAC versus UK versus North America, the revenue and margin per vehicle is quite different. So realize that's a challenge, I know, for you as you're doing your modeling. So maybe we can take it offline, we can go through it. But I think the I think looking at the 2018 data that we provided, tries to give the seasonality mix and the average kind of revenue per unit. But again, I think if you look at the 1,400 and then what we've talked about here, you look at how the first half of this year played versus the first half of last year, I'd use that as the starting point. And then I guess year in the quarter and the month that we did own ADL, they delivered 129 transit buses and 17 motor coaches. Thanks. Paul, on the motor coach business, can you remind us when the new models were introduced? Well, we do a new model year of the traditional J and D models in the fall of each year. The new model, the additional models of the J3500, We, I think, delivered our first j 3,500 in the first quarter. So that started to ramp up kind of January, February. And it is being built on the same line as the j 4,500. So while they're similar buses and look the same, they are different to one axle versus two axle and tooling and a whole bunch of other issues. The other new bus model that we introduced was what we call the d c D45 CRT LE, which is the vestibule coach, and it started heading the production line in late first quarter and into the second quarter, and it is built on the J line as well. And of all the extra production costs that you've incurred over the first half, are the costs for running two lines now significant? Or is the larger bucket going to roll off as you work through all of these inefficiencies during the initial ramp? Well, they're both the answer to both is yes. Remember that the d line is a completely separate line, and we will continue to run with duplicate overheads on the legacy d lines until it is a 100% gone. So you have different sourcing effort, you have different engineering efforts, you got different manufacturing engineers on the shop floor, different leadership, and so forth. So we won't be till twenty, I think, '21 or 2022 before you have completely harmonized lines. So we will, until then, always have a higher overhead rate per, you know, per average unit coming out of the facility. The challenges associated with just like a New Flyer, the same technicians, the same leaders, the same supply people handing a new product on a common line or a common J line we'll burn those excess costs and those things will largely be behind us at the 2019. Okay. And for the transit business, can you Paul, you mentioned that you continue to expect order sizes and attached options to be smaller than previous years. Can you tell if those are improving a bit in the second half? And can you update us on sort of what you're hearing from the customers? Are they still continuing to focus on electrification? Well, it's a good question. It's obviously very topical. It's not a one quarter or a half a year or a one year issue. And I think last quarter and even in some of the individual conversations, give an example of the average transit agency that's got 200 or 300 buses that had diesels or natural gas. They've now been directed to find a way to plan for electric. The politicians in that area have said by 2020, 2030 sorry, 02/1930, 2040 whatever will be all electric. And so those transit agencies continue to be in kind of a mad scramble to do two things. A, try the and select somebody to have a couple of pilot buses, figure out the impact on their maintenance garages and technicians and all drivers and so forth. And then b, come up with a multiyear replacement plan without real clarity of where the incremental funding for more expensive buses, a, and b, charging infrastructure is going to come from. So when we started the year, I thought we were hopefully clear to our investors that you're going to start to see a slowdown in the total bid universe. In fact, not the total, but the active bid universe, the total of what people say they think they're going to buy in the next five years continues to be very healthy and kind of near record levels. But their inability to put out big competitions and have smaller orders of electric to try. So for example, I can't remember the transit agency, but about a week ago there was an RFP on the street for 100 diesel buses. We had worked on a proposal as our competitors. I think we actually even submitted the proposal. The transit agency with their local municipality decided, You know what, we're not going to proceed with that. We're going to reissue an RFP and we're going to try five electric buses. And so that's the dynamic that's happening in many, many cases across The United States. Are they talking about electric? I don't think there's a transit agency that we've talked to in the last year that is not talking about electric and trying to figure that out. So what we did also expect is as people started to get their head around when and how electric might fit for them, we've seen it over the last quarter. And again, we saw it here the data we just released, a number of in the active bid universe is starting to creep back up, which is a very positive sign. And in our remarks, we just wanted to make sure people realize this isn't elastic. It's not going to go from 5,000 or 6,000 active down to 2,000 and then back to 5,000 or 6,000 overnight. It's going to creep its way back. But we're quite encouraged with the number of RFPs that have come out. We're encouraged with what people tell us they're going to put in for RFPs. We've started to see some of the bigger electric RFPs of thirty, forty, 50 as opposed to two, three and four. And all those things we think bode well. The unfortunate part of it is that a lot of that big backlog that we have is going to burn down, which is a good news. We have orders that we can actually work through that are conventional diesel or natural gas or hybrid. Some operators are nervous and skittish about going to full all electric. And we ultimately think hybrids will go away because an all electric makes much more sense. But in the interim, we're seeing a bit of resurgence on hybrids so that certain transit agencies that today have no electric experience can get their feet wet, can get their technicians up to speed and their drivers and so forth. So I apologize for the long answer, Jonathan, but hopefully that gives you some color of what we're hearing. The other good side of that is that our buses and service and notwithstanding some initial teething pains and deliveries and charging dynamics, our buses and service have performed to or better than our expectations. And not to add too much, Paul mentioned it, I wouldn't take fewer options on an order as a sign of decreasing demand. It's just transit agencies wanting to maintain that flexibility as they look at the ZEP transition and battery electric. So while there's more firm and maybe fewer options, it's not a change in demand. It's just transit agencies wanting to have that option going forward if they decide to procure more ZEVs in the near term. The other thing you don't see and quite honestly, we don't see until it happens, Jonathan, is we have state contracts. And you know historically it was a customer by customer and then there was some agencies working together to kind of put a collaborative bid out. What's happened again in the last couple of years and we tried to point to in our MDA is this concept of state contracts where there's a schedule that the state has put out that anybody in the state and some other named parties could actually buy off that schedule. The problem is there's no defined quantities in our backlog for those state schedules. The minute we get an opportunity, we'll bid on it. We again still don't put it in backlog because we whether it's funded or whether it's going to proceed. But the minute we get awarded, it goes immediately to firm. And you're going to see and have see, I'm sure, over the last little while announcements of 20 buses here, five fifty buses there, are off of a state schedule. And so we've been very successful in California and in Washington and in Florida getting on those state schedules, which is now kind of a new or a different way to buy transit buses. Okay. Thanks. That's a good answer. Maybe just one follow on on that. Are there any levers that you can pull to manage through this situation, whether on pricing? And can you just talk about how you would manage through a scenario where the orders kind of remain at a similar level to where they were at the first half? Well, so all the components, when we wake up on July 1 and we make our plan for the rest of the year, we know which ones are under contract. And so we know under the contract which ones are firm and we know which customers we think they're going to exercise their option so that we can build slots. We know other people that have said they're going to put out a fast track RFP that we think in the next number of months they're going to put it out and we think we can build in this year. The pricing is a slippery slope because as we move to electric buses, the last thing we want to do is drop price, set new market rates for something that's maybe not sustainable for the long term. And as I've said, I think a number of times, so far, knock on wood, we or any of our competitors have not been irresponsible, irrational on electric bus pricing. And part of that is there's not enough history to know what go forward pricing and margin and cost will look like. And so we sure don't want to be price leaders just to try and grab a short term volume. The good news is we have backlog and we have state schedules that allow us to kind of manage that. And as I think as whoever's questioned before, maybe it was Chris's or somebody's, but in the New Flyer case, for the rest of this year, it's not like we got to fill slots. It's an execution story. And we're now filling slots in Q1 and Q2 of next year either from backlog, new bids or from state schedules. Okay. Thanks for your comments. Thank you. Our next question comes from the line of Daryl Young from TD Securities. Your line is open. Good morning, guys. Hey, Dale. Just a couple of questions from me. In terms of leverage, the expectations to delever down to two to 2.5 times, looks like it's been pushed out just slightly to eighteen to twenty four months. Is that a reflection of the inventory ramp up or lower cash flow expectations? I'm sorry? Say that again, please, Daryl, just to be clear. The decision to term out the deleveraging to eighteen to twenty four months post acquisition versus within eighteen months previously, is that a reflection of the inventory ramp up? Or is there a lower expectation for margins going forward? No, I would say a lot of it is around the inventory wrap up and obviously, hopefully we're going to get that back this quarter, but a little bit of hedging there. I guess the other piece is revenue recognition, but again that does not going to impact the cash flow over them. So it's really we don't really think we haven't really changed the business plan. So it's just related to the work in process. I think really, Daryl, it's just a way of being clear that we've got some turbulence right now. It's not changing our vision and desire to delever back down and just giving a little bit more comfort or clarity or headroom, if you will, on our ability to get there. We sure didn't want to set unrealistic expectations given kind of the roadblocks we've seen recently. I'm not so sure I can say or I definitely got say that it's our expectation of lower margins. Yes, exactly. I think it was primarily the reflection of the WIP production 2019 would be the main change for that, the few extra months added. Okay, great. And then in terms of ADL, the CapEx expectations are very low for 2019. Do you guys foresee a ramp up in CapEx come 2020 as you prepare for the new Berlin order? First of all, it's a very different operating model than we have in New Flyer, right? So for sure in the Asia Pacific region, they're utilizing third party contractors to do their build, very CapEx light for that part of the business. The Berlin contract timing, we there's some work to be done there to see how we end up building that. I mean, it could be built in the Scotland operations or we could look at other outsourced providers. The Berlin contract has kind of three stages to it. The first is the pilots and proof of concept in service. The second is the first initial order, which is like 60 or 70 units. And then there's options that go out a couple of years up to 400 something units. So the first pilots are being built in The U. K. Facilities. In fact, I think it's a Scottish Scotland facility. As we think about the first tranche, the ADL has been very smart about keeping their options open. One is a scenario of building them in The U. K, one is a scenario of building them with a partner in Europe or Eastern Europe and a third might be a Chinese build and then importing them back into Germany. And so the gang has not been definitive on the way they want to approach that. That's one of the things that really attracted us to ADL is this variable strategy depending on the dynamics of the time. The other issue associated with that is Brexit and making sure that we don't commit to something that has an impact on our business. We have time though before those initial deliveries beyond the pilots. It's probably a year and a bit away before they start to happen. So we've already had a lot of preliminary conversations with Colin and his team about how they might address it and they do have various scenarios they're working on. And I think, Daryl, just to add, if you look at their historic financial statements under U. K. GAAP, where they used to capitalize new product development, CapEx will probably look higher on a U. K. GAAP basis versus IFRS. That's primarily all expense. And then the other thing in our guidance, I guess, for 2019, just to note that the kind of $5,000,000 guidance range that we provided, that's just for the seven months kind of from the acquisition date onwards. So in 2020, obviously, we have a full year of ADL. Okay, great. That's all the questions for me. Thanks guys. Thank you. Our next question comes from the line of Stephen Harris from GMP Securities. Your line is open. Yes, just one follow-up from me. One of the things you were encouraging us in your commentary was to change the way we look at the company and to move away from a sort of an EBITDA per EU model and focus on other metrics like gross margin and like. Is this really a function of the increased complexity of the business or the greater variability between contracts? Or is there something else you're seeing that leads you to think we should be focusing looking at the government? It's a really good question, Stephen. And we really worked hard on trying to explain what we were doing. So pardon a little bit of a rambling here, but context. When it was just New Flyer, it was easy because it was a kind of a per unit slot. It was North America. The pricing and margins between Canada and United States was kind of comparable and so forth. We added NABI and again, it was easy. It was a simple discussion. When then we got Motor Coach added to the thing, margin profiles have been changing and moving between Coach and Transit, but the blend worked out okay. The minute ARBOC came in, the average EBITDA per unit for a cutaway where we don't include the chassis or a medium duty, which the quantum is half or two thirds of the price of heavy duty, started to screw up the averages. And so we spent a disproportionate amount of time trying to explain to people it's not a drop in margins, it's a mix dynamic and so forth. And then overlaid with that you still always had this per EU dynamic associated with two production slots in an Arctic. The minute we bring ADL into the story, you've got such a wide mix. You've got double decks that are either conventional natural gas or diesel or a hybrid. You got double decks where you have a chassis provided from somebody else on electric. So now the average selling price and the average margin is very different. You have single decks in different regions that have very different pricing and margin profiles. And when we started to calculate EBITDA per EU number, it was like, oh my God, this thing is so different and there's 10 different components that an average is now meaningless. And then we tried to figure out, can we provide the same fidelity of data that we do in the North American environment based in the global markets? And it's very difficult. So we were crystal clear trying not to tell anybody there's no hiding or no other driving factor other than the story to tell is very much different today than it was before those things. So we went back and researched a whole bunch of other reporters to try and figure out what do they do with those blended margins and mixes. We looked at the global guys like Volvo or Daimler. We looked at some of the different heavy equipment manufacturers and just really felt the most natural thing now with both product but also geographic diversification is a margin perspective and an EBIT perspective to be able to help the investor have a good handle on the trajectory of our business over time. And so the most natural time to do that was post the ADL investment. In addition, I mean, we've also provided some additional information that we haven't done in the past. We've done more to break down our cost of sales between what is the truly direct cost related to those sales versus the overhead. So you get a bit of a feel to what variable is versus fixed cost in the cost of sales number which is something that previously was not provided. Great. Thank you. Appreciate that. Thanks for bringing that up, Stephen, because it's been an issue we wanted to make people understand. It's not to hide, it's to amplify and provide a full story. The other thing that you didn't ask about, but just a comment providing a release fifteen days after the quarter on units disconnected from the financial realities causes the investor, the analyst and us for that matter to spend a disproportionate time telling part of the story and part of the time. And so we just felt the best way to do that is to tell the whole story as a comprehensive package, which you'll now see starting next quarter. Great. Thank you. Thank you, Stephen. And we have no further questions in queue. I'll turn back to the presenters for closing remarks. Okay. Thanks, everyone, for joining us and for your questions. If you have any follow ups, please feel free to reach out anytime. My contact information is on the website and in the press releases and we look forward to speaking with you all again soon. Have a great day. This concludes today's conference call. You may now disconnect.