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 New Flyer Industries Inc.'s 2018 First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Paul Soubry, President and CEO, you may begin your conference.
Thank you, Lisa. Good morning, ladies and gentlemen. Welcome to the 2018 first quarter results conference call for New Flyer Industries. Joining me on the call today is our Chief Financial Officer, Glenn Asham. For your information, this call is being recorded, and a replay will be made available shortly after the call. As a reminder to all of our 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 with the security administrators for more details. I'll start off this morning with an overview of our quarter.
Glenn will speak to the financial results and some metrics. Then I'll finish up with some market insights and a little bit of our outlook. Following that, we'll open up the call to your questions. If our voices are a little raspy this morning, forgive us, we were up late watching the Winnipeg Jets win Game 7. With that, I'll hand it over to Glenn. Oh, sorry. Actually, I'll give you an update first. Yeah, apologize. All right. Overall, our markets remain healthy, and we continue to be confident in our market position, our strategy, and our business plan. We had another strong quarter of deliveries with 993 equivalent units of new buses, coaches, and cutaways in Q1 2018 compared to 892 equivalent units in the first quarter of last year. This is the first full quarter to include ARBOC Bus deliveries.
New awards received in the quarter totaled 736 equivalent units or 5,858 equivalent units for the last 12 months. At the end of the quarter, our total backlog was 11,548 units, of which 3,997 were firm and 7,971 are options. That equals CAD 5.75 billion of backlog or approximately 2.7 times our current annual production rate. A further 904 units were in award pending, where we've been notified by our customer that we're the successful bidder, but we have not yet received formal documentation, and therefore, we cannot yet add them to our backlog. We do so as soon as we receive those contract documents. Overall, our adjusted EBITDA in the quarter was up over last year's Q1. As Glenn will explain in a little more detail, we had a very strong manufacturing quarter and parts were down. Something that we're not overly concerned with.
We'll continue to remind investors that our business is lumpy and mix has significant impact on both our manufacturing and parts businesses. We continue to invest in areas of our company, including product development, facility upgrades, part fabrication capability, IT harmonization. For 2018, again, Glenn will give you some details, but we've increased our level of capital investment. We continue to focus on OpEx and synergy efforts in our recently acquired fiberglass businesses, our fiberglass-reinforced plastic or what we call FRP, in order to optimize that portion of our business. The combination of what was Frank Fair and Carfair and Sintex-Wausaukee Composites, now all branded as Carfair, will provide us with a much better control of our cost, time, and quality of virtually all of our FRP needs, which is a very delicate and yet critical portion of our material supply stream.
In addition, it also has helped us with our U.S. content requirements that are now part of the increased Buy America as a result of the 2015 FAST Act. As you may remember, those levels went from 60% to 65% at the end of 2017, and a further 5% is required by the end of Q4 2019. We also launched OpEx efforts with our recent acquisition of ARBOC, the low-floor cutaway bus manufacturer. The original efforts are focusing on plant layout and production flow. Our parts business leadership team continues to evolve its business to address the needs of its very diverse bus and coach customer base. This newly integrated organization is now branded as NFI Parts. It'll maintain its focus on supporting original equipment manufacturer business as well as targeting new opportunities.
Also in the quarter, on January 31st, we hosted an investor day at our Anniston, Alabama facility, and we showcased our production facility and our new Vehicle Innovation Center or VIC, which is a state-of-the-art lab with virtual learning spaces, driving simulators, and other interactive exhibits that will help us and the market evolve electric, autonomous, and telematic technologies for buses. In the quarter, we also came to an agreement, a milestone agreement, on a new collective bargaining agreement with our New Flyer transit bus manufacturing workforce at the Winnipeg plant. This contract is a 5-year deal, and that's the first time ever that we've been able to get an agreement for this site longer than 3 years. With that agreement, there was a retroactive adjustment to the pension plan, which resulted in a charge in this quarter's earnings related to past service costs, which Glenn will talk about.
We're actively working on two other CBAs that are currently in negotiation. Glenn will now take you through the highlights of our financial results for the first quarter of 2018. Following that, as I said before, we'll give you a bit of an outlook and then open the call to questions. I can hand it over to Glenn.
Thank you, Paul, and good morning, everyone.
I will be highlighting certain 2018 first quarter results and provide comparisons to the same period last year and focus my commentary on key financial insights. I would like to direct you to the company's full first quarter financial statements and management discussion and analysis of financial statements, which are available on SEDAR or the company's website. I do want to remind you that our interim unaudited financial statements are presented in US dollars, the company's functional currency, and all amounts are referred to in US dollars unless otherwise noted. Organizational changes to better align business functions with operating segments were made last year and implemented in two phases. In 2017, the over-the-counter part sales were moved from the coach operations to aftermarket operations.
In 2018, the service function comprised of technical service management and customer training, which was previously managed by the aftermarket operations of MCI only, was moved to the coach manufacturing operations. To improve comparability between periods, the related prior year segment information has been restated to reflect these changes. The company generated consolidated revenue of $578.7 million for the first quarter of 2018, an increase of 1.2% compared to $572.1 million during 2017 first quarter. Revenues from manufacturing operations increased by 0.6% for 2018 first quarter compared to the first quarter of 2017. The increase in first quarter 2018 revenue primarily resulted from 11.3% increase in new transit bus, coach and Federal-Aid deliveries compared to 2017 Q1 deliveries. As well as the inclusion of revenue to a third party for the fiberglass component operations.
Volume increased as a result of higher transit bus deliveries and the inclusion of ARBOC deliveries offset by a reduction in motor coach deliveries. Motor coach deliveries are seasonal and comparatively strong in the fourth quarter and softer in the first quarters. However, in the 2017 first quarter, deliveries were stronger as a result of recovering New Jersey Transit deliveries following a contract deferral in 2016. Additionally, management believes that tax changes in the U.S. related to accelerated depreciation resulted in seasonally stronger 2017 Q4 sales, followed by a weaker 2018 Q1. The decrease in average selling price for the quarter is the result of combining normal volatility in the transit bus and motor coach sales mix, and now the inclusion of ARBOC units, which have a substantially lower average selling price. Aftermarket revenue increased 4.1%, primarily a result of seasonality and sales mix.
Total adjusted EBITDA for the quarter totaled CAD 73.8 million, which represents an increase of 3.4% compared to CAD 71.4 million in the corresponding period in 2017. Manufacturing operations adjusted EBITDA increased to 11.1%, primarily as a result of increased deliveries, improved margin, and inclusion of ARBOC operations. Contributors to the increase in margin included a favorable sales mix and continued cost reductions through the company's OpEx initiatives. Aftermarket operations adjusted EBITDA decreased 13.1% due to sales mix and costs involved in consolidating New Flyer and MCI Bus business. Net earnings decreased by 24.7% and earnings per share decreased by CAD 0.13, primarily as a result of a CAD 3.9 million past service cost adjustment net of tax related to collective bargaining agreement, which commenced on April 1, 2018, and a CAD 2.8 million net of tax unrealized foreign exchange loss on non-current monetary items.
The impact of these two events to net earnings was CAD 0.11 per share. The liquidity position of CAD 204.1 million as at April 1, 2018, decreased as compared to liquidity of CAD 222.3 million at December 30, 2017. The decrease in liquidity relates to change in non-cash working capital. Changes in non-cash working capital are primarily a result of seasonality and are expected to be temporary in nature. The company generated free cash flow of CAD 52.4 million during the first quarter 2018, a decrease of 2.4% compared to CAD 53.7 million in the first quarter of 2017, primarily as a result of increased cash capital expenditures, offset by a decrease in current income tax expense. The company declared dividends of CAD 20.5 million in the first quarter of 2018, which increased compared to CAD 14.7 million in the first quarter of 2017.
Property, plant, and equipment cash expenditures in the first quarter of 2018 increased by 84.4% compared to 2017 Q1, primarily as a result of investments in facilities, increased part fabrication in the new Shepherdsville, Kentucky facility, and as a result of insourcing and continuous improvement programs. Management believes that ROIC is an important ratio and metric that can be used to assess investments against the related earnings and capital utilization. ROIC for the last 12 months ended April 1, 2018, was 15.4% compared to 14.6% during the last 12 months ended April 2, 2017. Improving primarily as a result of a decrease in effective tax rate under U.S. tax reform effective December 22, 2017, as well as the improved net operating results. I'll turn it back to Paul.
Thanks, Glenn. Yesterday in Toronto, we held our annual general meeting, pleased to report that we had our highest attendance ever at one of these meetings for us. At the meeting, our shareholders approved a name change of our publicly traded company from New Flyer Industries Inc. to NFI Group Inc. We asked to make this change to better reflect the multi-platform nature of our business that now includes transit buses built by New Flyer, motor coaches built by MCI, cutaway shuttles and medium-duty buses built by ARBOC, and aftermarket parts and component parts fabrication under the brand of NFI Parts. We'll now be working on launching an identity and a brand for NFI Group. Make no mistake, we want our focus to remain on our bus and parts brands directly with our customers.
At the AGM, I explained to our group how pleased we are with our strategy, our execution, and our business. We remain committed to maintaining and profitably growing our leading market positions in bus manufacturing and aftermarket parts through enhanced competitiveness with a laser focus on quality, customer satisfaction, and operational efficiency. Looking back almost 10 years ago, in 2009, we charted a course to optimize, defend, diversify, and grow our business. Optimize our facilities, processes, and products, defend our market-leading positions, diversify our business, and grow our revenue, our EBITDA, and our cash flow, all with a mission of delivering consistent and increasing total shareholder return. We're very proud of our last number of years' performance. We're also watching our business migrate from just being a bus builder to a solution provider.
The why of our business has evolved to providing solutions or leading solutions to move groups of people safely, efficiently, responsibly, and in style. In 2017, our market shares were as follows: New Flyer transit buses, 43%; MCI motor coaches, 43%, which is up from 37% at the acquisition in 2015, and approximately 64% of low-floor cutaway buses sold. Make no mistake, though, while we want to grow share, we're not interested in chasing volume for its own sake. Profitable return and customer satisfaction have guided us. We've lost some bids in the last 12 months where we felt pricing was unrealistic and not sustainable. New Flyer launched the charge version of our Xcelsior transit bus on a proven 35 and 40 foot and 65-foot platforms, and response has been fantastic.
E-bus orders, while increasing a little, continue to be proof of concept or trial programs for the most part. I'm really pleased with where we're at on our electrification and fuel cell agenda. Overall, our markets continue to be fairly robust and healthy. On March 23rd, 2018, the U.S. Congress passed the 28th fiscal year budget, which included appropriations for public transportation of CAD 13.5 billion. APTA, or the American Public Transportation Association, of which we're very involved with, has recently indicated that the federal budget is a big win for public transit. According to APTA, the total appropriations of CAD 13.5 billion is the largest amount appropriated for public transportation in an annual spending bill and the largest-ever one-year increase, with more than CAD 1 billion over last year. We think a sign of health supporting replacement of fleets and upgrades.
Based on an aging fleet, overall economic conditions expected, and customer fleet replacement plans and active anticipated procurements, we continue to believe and expect procurement activity through Canada and the U.S. will remain stable through 2018. On the MCI front, two days ago, we announced that New Jersey Transit had issued a purchase order for year three of its six-year contract to manufacture and deliver an additional 182 commuter coaches for an approximate value of nearly CAD 100 million. MCI expects to have completed all year two deliveries of that contract by the end of May and will begin production of the year three coaches starting in September of this year. In our private markets, the U.S. tax reform, as Glenn indicated, did have an an impact on our Q4 2017 orders, which then had a flow-through impact on Q1 2018.
Given MCI volumes are roughly or on average two-thirds private and one-third public, MCI continues to adjust the production line rates accordingly of the Model D and Model J buses. MCI also continues to develop the plan and expand its product portfolio. The new D45 CRT LE, or what we call the vestibule coach, which really is a game changer from a mobility perspective with revolutionary improvements of how to support people loading and unloading, has undergone its testing at the bus facility in Altoona, and is currently performing very well, therefore, once passed, will qualify as a vehicle eligible for purchase using FTA funding.
MCI is also in the process of detailed and heavy testing and certification of its 35-foot or J3500 MCI coach. MCI is also in the process of completing its first prototype of a J model electric coach, where the bus is actually in itself driving and starting its advanced testing phases. Production capability at MCI to support the new models of coaches continues and will be in place after the summer shutdown so that we can start production in the second half of 2018 with deliveries of some of those programs early in 2019. As population ages and ease of access and mobility becomes more of a focus, we also believe the demand for low-floor cutaway and medium-duty buses with greater accessibility will grow from its current level of only approximately 5% of the total cutaway market.
We're really pleased with the acquisition we completed last year of ARBOC, and we estimate that ARBOC delivered 64% of all low-floor cutaway buses in 2017. The other attraction we had to ARBOC was its new launch of a medium-duty bus that they title Spirit of Freedom. That bus is currently completing its testing at the FTA facility at Altoona. We're really, really pleased with customer response of the technical specs of the bus, but also the price point compared to other available medium-duty buses, some built domestically or one imported from China, and we anticipate deliveries to start in the second half of 2018. Our master production schedule, combined with our current backlog and orders anticipated to be awarded under new procurements, is expected us to maintain our guidance to deliver approximately 4,350 units during fiscal 2018.
Production rates always vary quarter to quarter due to production mix and timing. With our production schedule, our low leverage, solid liquidity, we continue to focus on PPE investment. As Glenn mentioned, we estimated it to be in the range of CAD 63 million-CAD 73 million. That's about CAD 8 million higher than we originally disclosed in our forecast, as the revised range now includes what was carried over from 2017 and not completed, but also money to be spent on PPE investments in our newly acquired composite business. Although our parts sales and margins remain difficult to forecast, we expect the parts market to be relatively stable in fiscal 2018. We're encouraged by the increase in gross parts already received in the quarter, reality is quarter-to-quarter volatility is normal and typical for this business segment.
Our parts teams launched a new website offering state-of-the-art online sales, primarily focused on private markets. It also has new distribution features, freight options, and so forth. While adjusted EBITDA for parts was low in the quarter, we're not worried about that segment of our business. We make a good return on parts sales, but customer satisfaction is key, especially during a phase of combining our businesses, so that when our customers go to buy another bus, we're first in line. We continue to be focused on an established customer base to provide best value and support. We also continue to investigate a number of incremental business programs in the parts world, specifically a number of vendor-managed inventory contracts that we expect to be in place later this year. We previously announced the closure of one of our redundant parts distribution centers that's located in Hebron, Kentucky.
We are doing that in July of 2018. We'll continue to assess further opportunities for cost reduction and consolidation once the New Flyer and MCI parts business are fully harmonized with a common IT system, which we expect to complete later this year. Actually, on Monday, I was in Kentucky. I visited the Louisville parts distribution center. Nearly 50% of the parts from Hebron are now successfully moved and stocked in Louisville. We're well on our way to making that July date. Finally, with our current overall NFI Group business performance, a healthy backlog, we continue to investigate M&A opportunities for additional long-term growth and diversification. We've actively evaluated both domestic and international opportunities within the definition of a bus business, as well as with our supply chain and our aftermarket. We've looked at targets. We continue to do so.
As I have in the past, any investments or acquisition we make will be strategic, prudent, measured, and appropriate. Finally, as was mentioned, NFI Group board approved yesterday an increase to our annual dividend to CAD 1.50 a share, which is up 15.4%. Reflects the confidence we have in this business. Ladies and gentlemen, thank you for listening today. We're proud of our history. We're excited about our future. We continue to be poised to be North America's leading provider of buses. With that, we'll invite your questions. I'll hand it over to Lisa, where you can please provide instructions to our callers.
Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile a Q&A roster. Our first question comes from the line of Mark Neville from Scotiabank. Your line is open.
Hey, good morning, guys.
Good morning.
Big win last night.
Yeah, we noticed.
Just on the EBITDA for EU on the bus side, if I'm backing out ARBOC, I'm getting about CAD 58 thousand, CAD 59 thousand per bus. It's a healthy number, but it looks like it took a little dip down from the last couple of quarters, and it feels like Q1's, for whatever reason, is typically the seasonally weakest. Is there a reason for that, or is there anything in the mix that you can speak to in the quarter?
Well, I'll let Paul jump in after I guess a couple of comments. For sure, it's always volatile quarter by quarter. The one impact, because we include all our SG&A for our corporate within the bus manufacturing operations, when you have a seasonally low period like we did this quarter, obviously, you have less expense leverage. That's part of it. We do have some volatility and variation in our mix, just quarter by quarter.
Okay.
There's nothing systemic in there, Mark, that would say there's movement or changes in mix that's not normal in the variation.
No, the SG&A explanation helps a bit. On that New Jersey contract you just mentioned, again, it sounds like the gap from June to September, did you also have that last year, just so we avoid maybe some dip in Q2? The New Jersey contract said, if you go back in 2016-
Yeah
ancient memory now, the contract was deferred. We had a whole number of We continued to build because we felt that this contract would ultimately get built. Eventually, New Jersey got their funding straightened out, the contract got put back into place, and we began to ship and trying to catch up all the backlog of buses we had built up. We did not catch up everything, and we had some buses that fell into Q1. Q1 2017 is when we finished the catch-up of the buses I had built up.
Going forward, though, Mark, your question about year-over-year
Yeah
MCI and New Flyer have different approaches to, let's call them summer shutdowns. New Flyer has a smaller kind of shutdown window, and MCI's always had a number of weeks in the summer. What we do is, in the public world, where you don't have model years, we basically will adjust to try and have a level flow. After the shutdown on the private side, we start to build model 2019 year coaches. Yes, that happens every year.
Okay. I guess my question, there's not going to be, again, a small dip in Q2 because of the New Jersey contract. You saw something similar last year, roughly.
No.
Right. Okay.
No different in terms of the quarter-over-quarter, I'd say.
Okay. On the aftermarket, it's been two or three quarters now, some good year-over-year momentum, but you're still calling or talking about a flat market. I'm just curious if it's maybe you're just being a bit conservative or you think you're gaining some market share or just it's just too difficult to call the market.
Well, it's really hard, and we've talked about this on other calls and in our Investor Days and so forth. The visibility of the total spend on parts is impossible to get our heads around because my silly example of a windshield wiper, you can buy it from me, you can buy it from my competitor, you could probably buy it from a broker, you could buy it on the internet. It's impossible to know. We do our best to try and go back into the transit agencies and look at their maintenance spends and their year-over-year budgets and so forth. So hard. We were trying to say in signal, we don't see any structural changes to the business in terms of the way people are buying parts. It is so volatile quarter-over-quarter.
If we're selling a bunch of stuff that is low dollar, that has no margin on the thing in a quarter, there's a batch buy and so forth, that can influence every single quarter differently. Again, we're trying to signal we don't see any changes in the market. We had a quarter where we had actual volume uplift, we had a high mix of low margin stuff, but it's not like it's fundamentally changing our business.
Okay. Maybe just on the closure of the Kentucky D.C., again, you've talked about that before, have you put an estimate on cost savings you might expect to see through the business from closing that?
Yeah. I guess just in terms of facility costs, that is probably in the neighborhood of CAD 1 million.
Okay.
The question becomes when we consolidate all the labor, is there some-
Yeah
supervisory that we have duplication. Don't really have a feel for that yet.
Okay.
We want to get the thing up and running, and then we'll assess. There's also some cost in there to shut it down, right?
Yeah.
We made a deal with a bunch of employees. We gave them several months notice. We put in some retainage packages to stick around and help us transition and so forth. Savings will be offset, at least in the quarter to some extent by costs going out to transition those people.
Yeah. Maybe just one last one then. I guess there was some industry press on the design of electric buses, the placement of batteries, what makes the most sense. I'm just curious to get maybe your thoughts or your opinion on it if you wish to share them.
It's a really good question, Mark. Our approach has been and continues to be, we've been building heavy duty transit buses for 80 years. We've chosen a structure, and when we introduced low-floor buses in North America in the early '90s, we've chosen a structure where traditionally you have an engine in the back, but you also have load on top of the buses, whether it be CNG tanks or fuel cell stuff or trolley stuff and so forth. We've tested the hell out of that bus. Our strategy when we first started electrification was to try and use exactly the same weight profile and distribution. We put, depending on the size and quantity of batteries, we put them in the engine compartment. In some cases, we've had them under the seats, in some cases on top of the roofs and so forth.
The center of gravity, if you will, and the weight distribution on the bus has been consistent across all of our models. We have competitors that have buses in the floor, much like a Tesla car does. Their strategy and approach is to build a composite structure and put them in the floor. When you had 150 kilowatts of battery, that was fine. Now that we're getting in the range of 400 to 500 kilowatts, you now have weight challenges on those buses in terms of total weight, but also axle and weight distribution. I will say, and our team will stand by, there's not one solution that is best. We're really feeling comfortable with our solution and what we've done. We had an incident with one bus where we had a driver that was recklessly driving the bus, and it flipped onto its side.
We looked at it, but that changed nothing to do with the safety, the design, the performance, the efficiency of our buses, and we're very confident with where we're at.
Okay. Thank you for that, and enjoy the rest of the playoffs.
Thanks, Mark.
Our next question comes from the line of Chris Murray from AltaCorp Capital. Your line is open.
Thanks, guys. Good morning.
Hey, Chris.
If we can go back to the Q1 manufacturing numbers, because I think there's a little bit of confusion we're trying to straighten out. I've got a lot of parts to this question, maybe we'll try to take them one at a time. First of all, can you tell us how many of the ARBOC buses were actually delivered in Q1 that made up part of this mix?
120 or something.
I thought it was around 130. It's not just in the MD&A, I'm just trying to find it. 135.
135. Okay, cool. All right. As we start walking through here, I guess part of trying to understand where the numbers are going to go, with ARBOC in there, you've got a lot of different mix items. I guess I just want to walk through the revenue pile a little bit. First of all, you've also now got the FRP program bringing in revenue. Still small at this point. I guess two questions on that. One, CAD 4 million a quarter, is that kind of the runway we should be thinking about? At what margin does that actually come in at?
Yeah. A couple of things. Number one, we bought this FRP business primarily for ourselves, and it did have some external customers. Our focus is not on trying to generate external revenue from this. We're out to support our products. In fact, in a portion of the business, in order to start dealing with some of our added volume requirements, we have had to turn some of that external revenue away. It's always going to be a small amount, in terms of revenue. I think it was CAD 3 million or something for the quarter. I wouldn't see it growing much from that. While there'll be some margin, now you got to remember, we bought this business, or the part of the business we bought, it was an asset sale distressed business. It was not making a whole lot of money on its external sales.
We're in the process of lowering the cost of that business, it will improve, but again, very low profitability.
Okay. Basically, think that used or pre-owned coach, kind of marginal or zero type of profitability at this point is the way to think about it?
Yeah. Absolutely, Chris.
Okay, great. All right. When we go back to look at the numbers, you said about 135 units. I know you talked about kind of 500 units for ARBOC this year. That is a bit of a step up from what you saw at Q4 or even the run rate through 2017. Should we assume that you're still aiming at that 500 number or should we be thinking of a slightly higher number at this point?
No, at this point, we haven't changed our full-year forecast, Chris. The number that we've got in the MD&A, of course, our quarterly releases and so forth still has us at that. If that changes, we'll just change that number quarter-over-quarter. It is not like New Flyer. It's probably more like MCI, where it's transactional in nature, not as much contractual in nature, and much, much shorter lead times. It's not like we're able to fill out a year of production slots.
Okay.
If that number changes going forward, we'll obviously change that guidance.
Okay. Is there any particular seasonality, like a shutdown or something like that we should be thinking about? You'll normalize to the 500 with a dropout of a couple of weeks in Q3. Is that the way to think about it?
Yeah.
Just looking at that. Then, just trying to go back, maybe even to Mark's earlier question. Trying to understand the core manufacturing margin. If I think about transit and the coach buses, the margin did look a little bit down. You're basically thinking that part of that is due to volume and mix in a weaker Q1. Is that the way to think about it?
Absolutely. Again, every quarter, however many orders we deliver in that quarter, 30 or 40 or 50, every one of them is going to have a very different volume and different margin associated with it. We've had lots of quarters where everybody's all excited about fantastic margins, and this one is not as great, but systemically, nothing is different.
Okay. All right. The other thing that has us a little concerned is your ROIC number. I know you talked about Q1 of last year, but I think the one that we're looking at is sort of the most recent print, which was 15.8, and now you're 15.4. Despite some of the noise in manufacturing, we're trying to understand why the ROIC is actually going backwards.
A couple of things there. Number one, we did have some heavy investment in working capital, then the invested capital is higher. We think that is related to seasonality and temporary and looking to reduce it. Secondly, obviously, we have CAD 100 million of capital related to ARBOC. We bought that business based on its growth potential. There, as a result, its return on invested capital is not at the same levels as the rest of the business today. However, we believe we're going to continue to grow that business and we'll get the return on invested capital heading back towards that same direction.
Okay. No, that's helpful. Thanks. Just a question about your outlook on the market. You used the term, you see orders this year being stable, which is a bit of a change from the previous terminology, and I don't want to read too much into it, of being robust. Is that a way that you guys are trying to give us an indication that you think this, call it supernormal book-to-bill rate that you've been enjoying is going to slow down and maybe normalize more around kind of replacement?
I wouldn't suggest we changed the words to signal anything different other than we're feeling Based on the funding environment, the orders we got, the competitions we're seeing, there's nothing changing in the space. If we had a tragedy like 9/11 that would fundamentally change a whole bunch of stuff, or if we had a real systemic shift on funding that changed, there's nothing different today in the health of our business of any materiality than we had last quarter or the quarter before. There's always things that change in terms of the tax issue change last year. Some of the commercial buyers of motor coaches pulled stuff into December to take advantage of the full-year tax, accelerated tax depreciation, which impacted maybe some of what we're hoping in the first quarter.
In the grand scheme of things, it's not material to the overall total business.
Okay. The last question, something that came up at the AGM yesterday was kind of interesting. There's some commentary that you had around maybe testing out some Marcopolo product for use in North America. Can you give us a bit more of an explanation about what you're actually doing there? Is this sort of a trial to see if you can do some development work through ARBOC?
Well, it's a really good question, Chris. Yes, we have a press release because at this point, we're evaluating. The story goes as follows. We got a Marcopolo made an investment in 2013 . It was a cash investment as well as some strategic MOU type stuff. Let's compare supply chains. Let's look at product portfolios. Remember, we had first right of refusal on their products and so forth. Because New Flyer and then MCI, we never had any experience with cutaway or body on chassis type buses, we really didn't have an opportunity to demo, to assess Marcopolo products in North America.
When the ARBOC opportunity came along, and now that we're learning a lot from Don Roberts and his team about how to build a cutaway, how to build a much lower cost medium duty bus, how a dealer network works in terms of selling and trade-ins and stocking and those things. We went back in partnership with our friends at Marcopolo and said, "What do you got in that class that we might want to consider?" We've brought two Marcopolo, let's call them kind of small to medium duty shuttle buses. One's a low floor, one's a high floor. We brought them to North America. We're marching people through the buses to say, what do you think of the styling? What do you think of the design? What do you think of the technical specs?
What do you think about if it's for a public world, you'd have to have Buy America compliance, if it's for a private world, you wouldn't. Price points and all those things. This is just part of our, as we've grown up from just a transit bus to multiple platforms, this is just good solid research to see if there's an opportunity based on some products that are already designed and crazy successful in Latin America.
Okay. Is this the kind of thing that, you alluded to public market versus private, is this the kind of thing where you basically take a distributor, right, and use the ARBOC network, or is it something that you actually start thinking about do you build yourself?
I guess, Chris, I don't have an answer for you yet, but you could think about the entire spectrum. In theory, we could import buses. The other end of the spectrum is we could license the designs and build them completely in the U.S. and anything in between. We're still first trying to determine whether the products, the two buses we've bought, they're very different. The two buses that we've brought to North America, for whether there's a there there, whether people, the market thinks that there's an opportunity to sell this product. Then there's the whole issue, like our wonderful learning experience with Alexander Dennis about Americanizing an international product is not trivial.
Yep. Okay, great. That's helpful, guys. Thank you.
Thanks, Chris.
Our next question comes from the line of Cameron Doerksen from National Bank Financial. Your line is open.
Thanks very much. Good morning.
Good morning, Cameron.
A question on the, I guess, the all electric motor coach. You put out a press release last night. It sounds like there's some good progress there. I'm just wondering if you can maybe describe, are you actually seeing, I guess, pull from customers for that type of product? Who are the potential customers of an all-electric coach? Is it more transit agencies or is it private operators?
That's a really good question, Cam. Of course, we have the benefit of the learning that we've had over the last, well, hell, since the '70s here at New Flyer, dealing with buses that have electric motors and batteries. In the last couple of years, pure battery electric, fuel cell electric and so forth. The pull comes from primarily from two places. One is public transit agencies that are following the same theme that you have in transit buses around emissions and clean and green and so on and so forth. There's absolutely some of the transit agencies that want this. Now, there's not a lot of transit agencies that operate coaches. Most of them are New York, New Jersey, and others where you're shuttling people into the cities.
In those scenarios, you got to really think about capacity and range, charging strategies and so forth. The primary draw and pull so far is coming from Silicon Valley. We talked, and we did it in our Investor Day a little bit, but in Silicon Valley, it's gone from kind of zero employee shuttles to something like 680 buses or motor coaches that are shuttling people to Apple and Facebook and Google and so forth all day long. These buses are operating for a couple of hours in the morning. They're operating for a couple of hours at night. The people that get on are professionals and only have a briefcase. They don't have luggage. The range is very well known. The capacity is known and so forth.
As we opened up a service center in the Bay Area, as we've been able to sell more diesel coaches, as we've looked at our product line up there, the ability to electrify a coach to be able to do that range in a green type approach really has a lot of those operators and those companies specifically very interested in it. This is not rocket science or inventing things from a New Flyer and MCI perspective. It's more of applied engineering based on learnings that we have. We're really excited. They like our bus, they like the design, they like the layout, they like the efficiency, and so forth. If we can add one more opportunity for propulsion choice, we're pretty pleased with it.
That's great. Just maybe to follow up, where are your competitors on an all-electric coach? Have you got a decent lead on them in developing something?
We have a Chinese competitor that has an electric coach, and they've been demoing it. We have another one that we're hearing planning to come to North America and start building here with an electric platform. If the transit world is in really early phases of the demoing, and trials, and charging strategies, and so forth, the motor coach world is behind it. It's really early stage evaluation.
Okay. Very good. Maybe just one final one from me, just on staying with the electric theme here. Maybe can you just update us on the progress of electrical infrastructure standardization? I know there's some trials going on right now. I know that's a big sort of sticking point for potential customers, is having some standardization across all-electric buses. Maybe you can just talk a bit about that.
Yeah. That's a really good point, too, Cam. We've been talking quite openly for the last, I'm going to say, year and a half or two years, trying to really get together FTA and the U.S. operators, and the competitors, and so forth, to be able to come to a standards definition. We think by the end of this year or even into 2019, that we'll have a consensus on what those standards are. Europe's ahead of us, where they already have agreed to certain standards, and what we're proposing and where we're at seem to be pretty close, if not identical, which would be fantastic. The other dynamic around adoption of electric buses, well, some people in our industry keep talking about, "Hey, they should be all tomorrow," and so forth.
Not only the price of the electric buses, and sure they've come down, but there is a premium to diesel or to natural gas. The bigger issue in our perspective around adoption has to do with infrastructure. I used an example at our AGM and in other meetings in the last couple of days. We put five buses into New York City on a trial basis, that go across Manhattan. These buses go, I can't remember the width of the island, but on average, they're 2.9 miles an hour, and they're loaded with people, and so forth. It took us nine months and 13 different civic agencies to sign off on our ability just to put two chargers in place.
Then you think about it on a bigger scale, the cost of the infrastructure and possible power stations and on and on, who's going to pay for that? That's one of the dynamics that is easy to talk about, just the bus makes sense, but it's the economics of the system and the funding that's going to really pace adoption. Hopefully, that color is helpful.
No, that's great. Appreciate it. Thanks very much.
Okay.
Our next question comes from the line of Kevin Chiang from CIBC. Your line is open.
Hey, good morning. Thanks for taking my question here. Maybe just on the EBITDA per unit, not to beat a dead horse, but in your disclosure, you noted, I guess from an apples-to-apples pro forma comparison, that your margins were up roughly CAD 2,500 year-over-year in the first quarter. I'm just wondering, is that the kind of lift we should expect through the year, even as we account for mix? Should that accelerate because you had a more challenging mix scenario in the first quarter of this year? Maybe you get accelerated cost savings as we get to the back half of the year. Just trying to level set the CAD 2,500 versus how we should think of the remainder of the year.
I think because we're talking about our things at the fringe, like for example, the SG&A, right?
We'll get better leverage out of those SG&A as we get into higher volume quarters. That'll provide for a little bit better. The mix is always questionable whether it's going up or down. We continue to focus on OpEx initiatives. Just going back to Chris Murray's question on ROIC, the other question that I might forgot to mention are capital expenditures that we've been booking over the last couple quarters. We anticipate to get earnings or margin enhancement out of that. That has deteriorated upfront, the ROIC, for example, but we would see that as now being a contributor to our overall margin enhancement strategy that we've been on for the last few years. I think what we could see is some marginal improvements as we continue to step forward, but nothing dramatic.
Okay.
Other than mix, right? The mix can be volatile.
Right. No, that's helpful. Then when I look at, I guess, over the past three years, you have seen a slippage in your market share within the heavy-duty transit market, but obviously, your deliveries are increasing here. I guess it seems like the individual that's taking share from both you and some of the other players is Nova. I'm just wondering, are you seeing them do anything differently from a competitive perspective? Or maybe just the overall competitive dynamics. Is there anything changing here given how healthy the market seems to be and given how the funding environment is shaping up here over the next couple of years?
Well, I think you nailed it, Chris. We have an increasing market, albeit not drastic, but the whole market's gone up. The competitive intensity has grown, and so where, for example, Nova Bus's increased their volume, Gillig's increased their volume, ElDorado's increased their volume, and we've tried to make conscious trade-offs about volume versus customer stats and profitability. I can point to three or four competitions in the last year where we've lost by CAD 75,000 to CAD 100,000 a bus by somebody bidding for that. I don't know how you make any money and how you sustain your business. If that's what it takes to maintain share, we'll pass on that, and we're going to focus on our core customers and our core performance and the profitability of our business.
How you bid CAD 75,000 to CAD 100,000 less than us is incredible, especially on volumes, in some cases, that are 300 or 400 bus orders. Now, whether that's a change in the industry, I'm not so sure. Some of our competitors have been doing that for years on certain orders, and I guess that's their prerogative. The competitive intensity, let's say, overall, is more intense today than it was three or four years ago when Nabi became part of us and when Orion Bus Industries went away. Of course, the next chapter in our lives with the electrification. We do have new competitors. Their ability to ramp up to volumes and so forth is something we haven't yet seen.
We'll watch it, but at the end of the day, I maintain we're about performance of the business, quality products, about profitability and returns so we can invest in new products, not about just chasing some of that crazy volume.
Are you finding that a lot of this increased pricing competition is happening It sounds like it's outside of your core customer base, suggesting that maybe your core customers' pricing is lower down on the list of things that decide whether they place an order with you or not. Is that a fair comment?
There are some of our core longstanding customers that just came back to us and said, "I have a price that's CAD 90,000 less than your bus. Sorry, guys, I can't justify that to my taxpayers," and I get it.
Some of these bids that we've lost are to some core customers. In contrast, though, we've won some customers that were competitors of other people, which is why we've been able to kind of hover on our market share but dramatically improve our profitability.
Okay, that's a fair point. Just last one from me. When I think of uses of excess capital, I think you've talked about M&A and the pipeline there and how you look at that. You raise your dividend, you're under-levered versus your target, and your willingness to go above the top end of that target on the right deal, you've made well known. If we think of 2019, CapEx rolls over, let's say M&A is still pretty quiet. How should I think of excess capital? Is it primarily through the dividend, and maybe accelerate that, or does the buyback become more relevant post this elevated CapEx spend if M&A doesn't show up in the next 12 to 18 months?
Well, you must have been sitting in our board meeting yesterday because that's exactly the conversation we have. First and foremost, we're going to continue to invest in our business, and we've demonstrated that. We've been very transparent about product enhancements or facility optimization or part fabrication, and that's why our CapEx is up. We're going to continue to try and live in that world of two to two and a half from a leverage perspective, but it's going to be volatile based on where we're at in the cycle. The M&A is absolutely on our radar, and we've been fairly transparent, but we're not going to just overpay for assets that we like. I go back to, it took us three years to buy NABI. It took us a year and a bit to get MCI. So we're going to take our time to do it right.
The dividend, we believe to be an important part of our strategy, which is why we increased it a little bit. The other dynamic is we continue to have deep conversations about the appropriateness of an NCIB with our board. I've told the shareholders for a couple of years, we didn't want to do that because we didn't think we were in a position relative to liquidity and the size of our business that made any sense. Now we're getting to the territory where the conversations around NCIB are very deep on the board agenda and trying to see whether that's prudent. Having said that, we want to continue to grow and diversify our business, we're spending time and effort on appropriate M&A for the future of our company.
That's all very clear. Thank you very much, guys.
Thanks, Kevin.
Thanks, Kevin.
Our next question comes from the line of Jonathan Lamers from BMO Capital Markets. Your line is open.
Good morning. With the significant changes to the MCI D model being made this year, will your D line be taking more downtime this summer than it did last year?
No, not more, Jonathan. The changes that we're making to the new D, it's hard to articulate without a kind of a flowchart of that thing, but think of it this way. The D and the J are two completely different lines. The new D is going to be built on the J line. The old D doesn't go away until we're finished building the current contracts. The one primarily that's in front of us is New Jersey, which worst case can go to 2022. We have been spending money at the shutdown at Christmas. We're spending more money at this summer shutdown to continue to put in common fixtures on the J line in Winnipeg to handle the new Ds. The shutdown won't be any different time duration, but that's where a lot of the CapEx of MCI is going.
Okay. Paul, you made some comments earlier about adjusting the production rates appropriately on the D and the J. Could you elaborate on that a little bit more? Are you seeing some softness in the private sector demand for the J? maybe-
Every single year, hell, every single quarter, we are tweaking the Model D and the Model J volumes and the production rates. Of course, it's easy to say, but very difficult to do because you have people moving across the plant that today work here and tomorrow works there, and then you have the bumping dynamics and so forth. We don't make those adjustments lightly. The dynamic of the, as Glenn and I both discussed earlier, of the U.S. tax reform that we felt had an impact on our fourth quarter deliveries that then had a rollover impact on the first quarter, have had us look at slowing the Model J down a little bit and increasing the Model D to handle the new, or the purchase order we just got for New Jersey.
The other dynamic that you have to keep in the back of your mind is that we build Model J models for a certain level for stock, and that stock can range from 20 or 30 buses in stock to 50, 60, 80, 90, depending on the timing and whatever, how many are on our shelf. Because of that first quarter dynamic, we're going to slow the Model J a little bit down and we're going to increase the Model D. Whether there's softness in commercial private orders that's systemic beyond the first quarter, fourth quarter impact, I'm not so sure we know yet.
Okay. It sounds like you have inventory to support wherever orders are in Q2, albeit you've taken down the Model J line rate a little bit.
Yes. Also keep in mind, Jonathan, I think, I can't remember if Mark asked this question earlier, but the other dynamic is the buses we build today are a Model '18 production year. The buses that we build after summer shutdown are Model '19s. You don't want to build too many '18 Models because some people might say, "Then I'll wait for a '19 Model." Which is, again, why we always adjust the Model D and the Model J lines to kind of synchronize with the short-term demand and the market conditions as opposed to a long-term production rate.
Okay, thanks. Glenn, would you have the contribution to EBITDA from ARBOC for Q1?
We haven't disclosed that, we don't intend to disclose that. We did provide last year, you could sort of set a benchmark, that number is not being disclosed.
Right. The deliveries were up 55% year-over-year.
Yeah, I think the way you can look at it is, I guess you can come up with an estimate of the EBITDA from 2017. That would be a proxy, I'll go forward.
Okay, no significant changes in ARBOC's earnings to flag?
No.
Okay.
There may be later on in the year as we start introducing and seeing some sales from the medium-duty coach. Right now, it's primarily Cutaway business, and therefore, last year's figure represented.
Right. Just to clarify, in the aftermarket segment, were the aftermarket SG&A margins up at all or were they maintained flat this quarter and we just saw the gross margin come down?
There was some in the SG&A, not a whole lot. It's primarily on the gross profit side.
Thank you. If I could just ask about this funding increase for public transit. Did you receive any indication as to how much of the increase is available for buses versus rail and other forms of transit?
I don't have that in front of me here. That's something maybe we can look at providing. Off the top of my head, I don't know the ratios and whatever. I guess the point we were trying to make is the strong support from the U.S. government continues, both in the FAST Act as well as the funding and appropriations bills. We can try and see if we can come up with that.
It sounded quite positive that the funding was up 8%. I was a little surprised that the market was kind of characterized as stable versus robust last quarter.
Yeah.
orders going forward.
Remember, too, Jonathan, that you get into a scenario that if the funding goes up today, it's not elastic. It takes transit agencies 12 months or nine months to put a competition together. So if you're working on a plan for your fleet to do X buses and Y upgrades and X mid-lives and so forth, and there's a little bit more funding coming in, it's not like it increases the volume tomorrow. Again, to Chris's point, and I guess lesson learned from my end, using the word stable versus robust and so forth, I guess we're going to have to be a little bit more careful about how people read into that stuff. I don't think you should read into that. We're comfortable with the funding. We're comfortable with the number of competitions.
I'll always, on the public side, point back to the bid universe, which is always very volatile, but we've got a really healthy number of competitions going on in active and in what people tell us they're going to buy over the next five years. With that kind of a funding and statement by the government, maybe we'll see people starting to say, "Hey, last time I talked to you, I think I'm going to buy 100 buses over the next five years. Now it's 120." That's where it'll first transpire is any uptake in the, what people tell us they think they're going to buy beyond their current budget window.
Thanks. One other question, if I can. On these capital projects that you're undertaking, the Alabama facility to be completed in January, the Kentucky parts fabrication facility, I think you said that'll be done by the end of 2019. Can you update us on whether those target dates are still accurate and perhaps the returns you expect from these projects, whether in terms of paybacks or IRRs relative to your other insourcing projects?
Projects are all on schedule. In fact, the first parts have started to come off from the Shepherdsville facility. Obviously, it'll ramp up throughout the year as we put more-
Into next year
Into next year. All on schedule there. The Alabama facility, all on schedule, looking forward to getting that in place. A lot of the equipment, and you saw it already in place from when we did our investor tour in January. You've already seen that. Moving along very well. Don't see any changes in our targets, as we sort of said. Both those projects are going to be contributors to our margins on a go-forward basis. We looked at these projects no different than we look at an M&A target and said it's got to be justified through return on investment and payback periods. I would say that the paybacks on these projects would be much in line with the other projects we've completed over the past three, four years.
The other dynamic, though, Jonathan, on that stuff is it's as much offense as defense from our perspective. In sourcing a part that we can make or a drawing that we can reduce the cost is fantastic, and we hope to get margin off it. The other dynamic, as we talked in the question earlier, is as competitive intensity ramps up, we got to keep going after our cost base to compete. If we've got to give some away on price in the short term and in the long term and so forth, having that ability to reduce our cost base is absolutely critical. We've based every single one of our business cases on current volume and current pricing of those individual subcomponents. You shouldn't expect massive increases in EBITDA. All it takes is a couple of competitions with tough pricing that allows us to compete.
We're really pleased with the performance, and as Glenn said, we're absolutely on schedule for all of the major projects that we've got going on.
Great. Okay, thanks for your comments.
Thanks, Jonathan.
Your next question comes from the line of Stephen Harris from GMP Securities. Your line is open.
Good morning, gentlemen.
Good morning.
Just had the one quick one and a follow-up on what Chris was talking about deliveries. When I look at your numbers, the CAD 4,350 guidance for the year, quite frankly, I struggle to get our number down to that level. I'm just wondering, is there anything we're missing? Is there any capacity issues or any constraints that you're aware of, or would you just characterize your guidance as being maybe on the conservative side?
I don't want to say it's too conservative. Obviously, we're trying to be prudent in the guidance we provide out there because we don't provide EBITDA guidance. We're trying to be prudent in how we approach that. The other dynamic, and I think, Steve, we saw this when we walked everybody through the Alabama facility, plant capacity is only part of the issue. Because specifically in the public world, every bus is different. Non-recurrent engineering that we do or with our suppliers is also a limiter, as well as the high variation of the supply chain. Ultimately, when we finish the bus or as we build the bus, the other limiter in capacity is inspectors. We've talked about over the years where we can build at a much faster rate, but the customer can't inspect nor accept and induct those buses at a certain rate.
We govern our output not only by our productive capacity, but all those other variations, whether it be, as I said, the non-recurrent engineering, the supply chain, or the customer. We've been pretty transparent. There's more capacity in our facilities, but we're hesitant to jack it up in any quick manner because it's got to be sustainable. That's why you see this build backlog at the same time as we're increasing production rates.
Okay. All right. When you think about these issues, are any of them sort of tangible and affecting your business right now? Or are they sort of concerns on the radar that you need to be worried about but aren't actually affecting your ability to operate today?
Well, I can't think off the top of my head of anything that is different than it's been last year or the year before. Glenn talked earlier about a bit of inflated working capital in the quarter. If you build X buses for a customer that can't take acceptance of them, you build up receivables. We're not worried about getting paid, it's just a matter of timing. You got other dynamics that have changed with certain customers in the U.S. where 10 years ago, they used to give us milestone payments, and they paid for the bus as we built it. Now, that has gone away with the exception of maybe one or two contracts, and we get a dynamic of what's called retainage, which certain customers actually are holding back tens of millions of CAD and drip-feeding it once all the buses are delivered.
I wouldn't say any of those are massively systemic issues, but it impacts every quarter. Because every customer is different, not only the spec, but how they pay, how they inspect, it's not like a normal tractor manufacturer where they punch off the line and they're very consistent. This is a building houses on an assembly line, highly variable. Everything about the technical, the inspection, the building, and so forth. To your point, I can't think of anything that's structurally different today other than maybe those payment term type things than there was a couple of years ago. This is also a dynamic that some of our competitors that are new to our industry are getting their heads around. We don't get to just decide what the bus looks like and build it.
We've got to integrate that unique spec and requirements into a very complex product, then you got to build it. Then you go through a very sophisticated and detailed inspection process, which every customer is different at.
Great. Thank you.
Thanks, Steve.
Your next question comes from the line of Daryl Young from TD Securities. Your line is open.
Morning, gentlemen.
Hey, Daryl.
First question relates to, with the rising environment and the increased deliveries across the industry, are you guys seeing any input cost inflation or anything that would impact potentially the margins that are actually in the backlog currently? Because I know in the past you've mentioned the margins in the backlog are kind of consistent with 2017 levels.
That's a great question. I don't think there's anything we can point to other than maybe steel pricing. I'll go back to, look, steel pricing is going up and we were in a period of five, six years or whatever, where it was crazy low, and then we have dealing with the dynamics of tariffs or possible tariffs and so forth. In the materiality perspective, the cost of raw steel that we buy that puts into a bus is how much, Glenn? 10 grand?
Yep. For a frame on a transit bus.
CAD 10,000, CAD 15,000. If it goes up 10% or 15% or 20%, yes, it has an impact on COGS, but it's not massively material. Because when we bid that bus, we went back to our supply chain and said, "Sell me an axle." In that axle, is that supplier's having to deal with the commodity prices. The next bus that we quote, they're going to give us a different price, which we're then going to build into our COGS, and then we're going to manage our margin on top of that. It's not as if I'm buying a whole bunch of commodities or raw materials that have a massive differential on my current backlog.
Okay, great. Fair to say that the margin profile this year would look similar to the last 12 months, which is kind of what you guys have been saying.
Yeah. The caveat of, look, everything's different. Every customer's different, and if it's a, I don't know, a trolley bus where two of us are bidding compared to a diesel bus where five of us are bidding, sure, you're going to have margin differentials. Nothing systemically inside that bucket or that mix.
Okay, perfect. The next question would be on aftermarket. Some of the new vendor-managed inventory programs you're talking about, as well as the recent MV Transportation contract, are those going to effectively stabilize the revenue profile, but at the cost of margins? What does that mean when you say lower margins? Is that sub 20%?
Well, that's absolutely a part of the dynamic that's already inside some of our results because we do have some vendor-managed inventory contracts. You absolutely trade off, let's call it, not surety, but confidence in volume for a differential margin. At the same time, there's a balance sheet impact because as we grow our VMI business, we're now into planning inventories for an appropriate customer and volume rather than guessing who needs what and then having a whole bunch of stuff on the shelf that may or may not turn. The deal with the one you just talked about, you've got a dynamic where we're only selling certain parts of them today. We've got a broader basket of parts, which hopefully can drive up more volume, yet there may be a margin trade-off.
That so far is a very small part of our business. It may grow.
Okay, perfect. In terms of the electric buses, plant capacity, obviously, we said is not an issue, but as the ramp-up of electrification happens, is there going to be additional CapEx that needs to go into your facilities to convert to a greater proportion of electric vehicles on the production lines?
We today, in two of our three systems, let's call it Winnipeg, Crookston, St. Cloud, and Anniston on the New Flyer side, two of the three are already capacitized to build an electric bus right beside a diesel bus or a natural gas bus. As part of our capital profile for this year and next, we will continue to make all those plants electric bus build or fuel cell bus build capable. Those are CAD 1 million here and CAD 1 million there. It's not like it's CAD 50 million or big dollars. MCI, exactly the same thing. It's all within our current CapEx that we've got planned.
Right. Okay. No real change to the sustaining CapEx profile.
No
going forward. Okay, perfect. Fair to say then that as the existing capital investments come through, the ROIC heading into 2019 directionally would trend back upwards.
Yeah.
Sure.
Correct. Obviously, the investment comes first and the benefits later on.
Okay, terrific. Thanks, guys.
Thank you.
We have no further questions in queue. I'll turn the call back to the presenters.
Great. Thank you, Lisa, much appreciated. Ladies and gentlemen, really appreciate you calling in and the very detailed questions today. Look forward to speaking with you at the next quarter in August. Have a great day. Go Jets.
This concludes today's conference call. You may now disconnect.