New Flyer Industries, Inc. (OTC:NFYEF) Q1 2013 Earnings Call May 10, 2013 11:00 AM ET
Paul Soubry - President & CEO
Glenn Asham - CFO
Good morning everyone. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome you all to the New Flyer Industries, Inc., 2013 Q1 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. (Operator Instructions) Thank you.
I would now like to turn the call over to our host Mr. Paul Soubry, President and CEO. Sir you may begin your conference.
Thank you, Sarah and good morning ladies and gentlemen. Welcome to the 2013 first quarter results conference call for the New Flyer Industries. Joining me on the call today is Glenn Asham, our Chief Financial Officer and for your information this call is being recorded and a replay will be made available shortly after the call.
As a reminder to all participants and others regarding this call, certain information provided today maybe forward-looking and based on assumptions and anticipated results are subject to uncertainties. Should anyone 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 release and other public filings with the Securities Administrators for more details.
In a moment Glenn will begin our call by taking you through the highlights of our first quarter 2013 results. Following Glenn’s remarks, I will provide some commentary on our market, New Flyer order activity and backlog and progress on our strategic initiatives which include the acquisition of Orion Parts business from Daimler Bus North America and the beginning of our strategic relationship with the world’s second largest bus builder Marcopolo and following their investment in New Flyer earlier this year. After that we will open up the call to your questions and with that I will turn it over to Glenn. Over to you.
Thanks Paul and good morning everyone. I will be highlighting certain 2013 first quarter results and provide comparisons to the same period last year. Similar to last quarter, I will focus my commentary on this call to providing key financial insights that will allow for more time and attention on our market, business and strategic efforts.
I would like to direct you to the company's full 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 New Flyer’s financial statements are presented in US dollars, the company's official currency and all amounts are referred to in US dollars unless otherwise indicated.
Quarter-over-quarter New Flyer Bus Service increased 10.9% for the first quarter of 2013 compared to the first quarter of 2012. The increased deliveries were a result of the company being able to reduce the work in process levels by 22 equivalent units or by delivering buses that were temporary delayed at the end of the fourth quarter of 2012 due to a supplier issue. This resulted in WIP at the end of 2013 Q1 totaling 203 equivalent units.
New Flyer’s operating plan is for line entry rate and fiscal 2013 to average approximately 36 equivalent units per week. However, the actual production rate in any quarter will vary based on the order mix between 40 and 60 foot buses and the timing required to place orders into production. You will note that we had a higher production rate in the first quarter, 468 equivalent units line entered versus 428 equivalent units line entered in the first quarter of 2012 or an average rate of approximately 37 equivalent units per week.
For 2013 Q2 we expect the line entry rate of 36 EUs per week and then a significantly less than 36 EUs per production week in 2013 Q3 due to a company-wide planned vacation. Management estimates that the level of WIP at the end of at each of the fiscal 2013 reporting period will raise between approximately 200 to 230 equivalent units.
Average selling price per equivalent unit decreased 3.5%, which was primarily a result of sales mix and a high percentage of 60 foot articulated buses when comparing the two periods. We continue to remind investors that the customer choice propulsion systems are available options can dramatically impact the average selling price.
Aftermarket revenue increased 18.9% primarily as a result of increased volume including incremental revenue of $5 million from the Orion parts business subsequent to the March 1, 2013 acquisition date. Bus manufacturing operations adjusted EBITDA decreased 2.9% primarily due to a sales mix for this period that included buses with lower than average bus contract margins.
Aftermarket operations adjusted EBITDA decreased 4.7% primarily as a result of lower profit margin from continuing price pressures. The 2013 Q1 aftermarket operations adjusted EBITDA included $800,000 generated for the first 30 days of operating the Orion parts business after normalizing EBITDA for $0.2 million of non-recurring transition costs. Readers are cautioned that March results may not be representative of every month and therefore should not be linearly extrapolated to forecast the entire year.
Net earnings increased by $3.1 million. The company reported net earnings of $3.5 million in the first quarter of 2013, representing an improvement compared to net earnings of $0.4 million in the first quarter of 2012, primarily as a result of lower non-cash charges decreases in income taxes and a decrease in finance costs, which are offset somewhat by a slight decrease in earnings from operations.
The company generated free cash flow of C$7 million during the first quarter 2013, while declaring dividends are C$7 million as well. This compares positively to $8 million of free cash flow in the first quarter 2012 and declared dividend of $9.5 million in that same quarter. Management continues that expect to the company’s free cash flow should be sufficient to maintain the current annual dividend rate of $0.585 per share per annum and dividends are paid on monthly basis.
During 2013 Q1, cash decreased by $4.6 million primarily due to increased investment in non-cash working capital items, such as increased accounts receivable and income taxes recoverable, which offset the net cash retained after investing in Orion’s parts business with a portion of the cash received from Marcopolo’s investment in New Flyer.
With that I will turn it back to Paul.
Thanks Glenn. I would like to take a few minutes to talk about our first quarter our backlog and our pipeline and also before I do that, though we just mentioned, we had a good turnover at our Annual General Meeting yesterday in Toronto and at that meeting I presented an updated investor slide pack, which will be available today on the New Flyer website.
So a little bit about what's going on in the business. Management believes that our market continues to show really positive signs of recovery. A number of larges bids were awarded in the first quarter of 2013 as New Flyer was awarded new orders of approximately 2,000 equivalent units. As well, the total number of request for proposals received an in process of review New Flyer and bids of proposals submitted by New Flyer in a waiting customer action at the end of the quarter remained high at over 7,300 units compared to 5,400 units at April 2012 and just 4,000 units in January 2012, so you see that we are very busy in reviewing, responding and preparing proposals.
Now our new size book-to-bill ratio which we define as the new order intake both firm and options had divided by the deliveries in the quarter for the last 12 months ending March 31, 2013 was 211% as compared to the book-to-bill ratio of just 31% for the last 12 months ended April 2012. A dramatic increase in the [order] activity. This is the first time since the third quarters of 2009 where our New Flyer’s book-to-bill ratio was greater than a 100%. The total backlog at the end of the first quarter was 7527 units, an increase of 19% from the backlog at the end of 2012. The firm portion of the total backlog at the end of first quarter 2013 is made up of 1899 units which is an increase of 14% over the end of 2012 of Q4.
The total value of our order backlog at the end of the first quarter was $3.3 billion compared to just $2.7 billion at the end of quarter four 2012. This increase in total backlog was not unexpected now inconsistent with the market conditions or management expectations. We clearly have seen the market turn positive. As Glenn mentioned earlier the New Flyer backlog combined with our recent order activity intake is expected to allow the company to average a line entry rate of approximately 36 units a week or per production week. However, as always we caution that this average rate and the margin in every quarter are variable due to the constantly changing mix of 40 to 60 foot buses. And while order activity has increased and our backlog is improved, we do not yet feel sufficiently stable in our orders to increase the production line entry rate. We are taking a very prudent approach to managing our capacity and our build rate to ensure that we can execute for our customers and we can have stability for our business going forward.
Now let me provide you with an update on some of our strategic efforts, and you have seen us actually start to rollout in the past year. First the joint venture that we established last year with the UK’s largest bus builder, Alexander Dennis Limited to introduce a medium duty or what we call a MiDi in North America is proceeding on schedule and on target. ADL is a world class company and we are really enjoying working them, they are building the first eight test and demo busses that are in various stages of completion and in fact the very first MiDi was on the ground in United States this past week. We launched the MiDi at a press conference with tremendous customer interest on Monday of this week at the APTA or the American Public Transit Association Annual Trade Show in Indianapolis. Now we've already begun readying our St. Cloud, Minnesota facility to manufacture the MiDi and they will be built in both 30 and 35 foot configurations and we continue to plan our line entries to commence in December of this year. We do not yet have a specific firm order for MiDi, but I can report very active interest and remain excited, encouraged that this bus will meet the customer requirement and deliver to our business plan. The launch this week was a major milestone for New Flyer and our partner Alexander Dennis.
Our second major strategic initiative relates to the investment in New Flyer by Marcopolo. As I mentioned, Marcopolo is the world’s second largest bus builder and we are very excited to have such a prominent and successful strategic investor now involved in our business that can really help New Flyer execute on that broader business plan. Our working relationship has already been established and we began to explore activities that will hopefully expand our strength through sourcing and cost reduction opportunities, the review of new products potentially for the North American market, plus it allows us to explore further business acquisitions and opportunities aimed at achieving new products goal of long term diversification and growth. We have had a number of visits here in Winnipeg from Marcopolo personnel and we have a first team heading down there in the first week in June from New Flyer.
Finally a short update on the integration of Orion, the aftermarket parts business we acquired in March 2013 from Daimler Bus North America. We are well into our 100-day integration plan and are working diligently on the sales, information technology, material and warehouse integration activities. Sales and margins as Glenn reported in the first month following our decision are in line with our expectations and the market reaction from the Orion bus operators and you will remember we reported there are 10,000 Orion buses on the road has been overwhelmingly positive now knowing that New Flyer the largest player in the bus parts market Canada and United States will steward the Orion parts market and support going forward. So in summary, this business should be looked at a longer term basis, not just a quarter-by-quarter view. We continue to advice about volatility and mix and margin and the types of customers we work on. Our adjusted EBITDA results in the first quarter of 2013 improved from the last quarter and was in line with our expectations for the quarter, knowing the mix of the customers and the production schedule we had.
As Glenn outlined, we were pleased to see the efforts of our operations team to bring New Flyer Bus with the quarter end back down in line with our operating plan. We continue to be confident in maintaining our dividend, and as one of our analysts continues to provide insight for our investors to get paid while we wait, a strategy really where we are comfortable to maintain our dividend rate and now moving on a strategic focus to return to growth. We remain focused on operational excellence initiatives and encouraged by the improved market opportunities. And the start of our backlog recovery and our improved book-to-bill performance is very encouraging, all of which we see as positive indicators. Yes we have continued to see pressure on our parts business, but we are starting to see that market subside in terms of pressure and we have put actions in place with additional resource changes in some of the leadership team and systems and tools to respond to that pressure. New Flyer is committed and poised to continue as the leading provider of heavy duty transit buses, leading provider of after market parts and soon the leading provider of medium duty busses in North America. Thanks for listening today. With that, I will invite your questions and Sarah, if you can please provide instructions to our callers.
(Operator Instructions) Your first question comes from Chris (inaudible) of Canaccord Genuity. Your line is now open.
Just on what you’ve got coming out in the next quarter, is it fair to assume that because you pushed so many 60 footers through this quarter that that mix might be better next quarter or what should we be thinking in terms of mix for the rest of the year?
Our production schedule is subject to some movement. We do expect near the end of the year at this point that we’d have a lower mix of 60 footers; but again given what the order activity is currently, a lot of that would be dependent specifically at the back end of the year, would be dependent on some of the orders that we went at. But it is safe to say that we do believe that going forward, we will have a less concentration at least in 2013 of articulated buses.
So I guess what I am hearing is that the high line rate in Q2 means probably more the lower man hour buses? Is that accurate?
Yeah, I think that’s the fairway to look at it. I mean with the first half of the year, a higher concept, as a higher proportion of 60 foot buses. So there is labor efficiency challenges and so forth when you have a higher concentration of 60s and then the back half of the year where we expect more 40 footers, we will see a slightly different mix of (inaudible) utilization and those kinds of things.
And just in terms of the overall order flow raising, most demands are going out in terms of new mix?
It's really hard to say Chris; I mean it's literally changes. The rest of this year where we do have open slots, it's not like it's business that we have to go out and win those are options, and we haven’t placed or signed to certain customers that we go to close and covert on. So we’ve got a reasonable good feel of what our build mix looks like for the rest of this year, but there is uncertainty in volatility of when they actually want those buses and which quarter will build demand and which ones will push forward or pull back and so forth to fill any of the open production slot that we do have. It's a little bit delicate at this point to try to give you any kind of certainty around what that mix might look like.
Right I am just trying to get a sense of what you guys are bidding on what's sort of bus you are bidding on right now?
I mean it's hard to generalize, there is a lot of demand as you see from our bid universe and sheer number of bids and proposals that we’ve responded to or working on. I wouldn’t suggest that the 60-foot content is any bigger or lower as a percentage of the total, than it has been in the past, 64 articulated budget is not for every customer, depending on the size of their garages, their fleet profile, their root structures and so forth. But I wouldn’t say it’s inconsistent, but there are quarters where we have much higher 60-foot content and there are quarters where we have buses with much higher or lower margin.
And just the last quick one for me, as this company-wide vacation in Q3, will it have a material impact on after market?
No, it won’t. In fact it's just a little bit insight or commentary on that. One of the challenge we have at New Flyer is we don't have a summer shutdown. Many production and manufacturing facility have a dedicated shutdown, and part of our issue as our workforce has continued to change and grow over the last couple of years is the newer employees never seem to get summer vacations because those of more seniority have, first dips on the summer vacation slot. So in working very cooperatively with our partners in Canada, the CAW and our partners in US at the CWA, the union organizations, we thought what we will do is try a company wide vacation affectively for a week tapped onto the week where there is a couple of long weekends in there between Canada and US to allows those people who haven’t been successful at bidding for summer vacation to do so. Having said that we call it a company wide kind of a summer vacation that does not mean we will shut down certain parts of our business, we will still sell parts and operate our parts business. We are affectively stopping the line entry of the unionized facilities for that individual week. So long answer but I think it was important to give you the context, it is not meant that we are not [giving] the right product support, warranty support, sales parts support in those company, it’s really around the production side of the business.
(Operator Instructions) your next question comes from (inaudible) your line is now open.
Just going back to the Paul just one clarification; I know when you guys do the sort of the Christmas shut down though, are you guys going to continue to actually certify and deliver buses or is that also going to shut down with the line entry?
Yes, you are right Chris and you were careful not to, the shut down is kind of a delicate word. It really meant that we are going to handle the summer just away we handle that time between Christmas and New Year. Now it won’t impact our average production rate for the year of 36 units per week line entry. So as you saw we had more line entries in the first quarter that will slow that down slightly in the second. We will level around the third and build it back up in the fourth to average at 36, but we will still be delivering buses during that week.
So we should also probably see the EU kind of drop out, but probably normalize by the end of the quarter is the expectation.
Yeah, but remember when we talk about EU, when I talk about 36 that's the input, the fluctuations and whip and deliveries is really the output. So I don't think in that quarter you should see dramatic change in the output coming out of our business.
Just kind of looking forward can you give us an idea how the factories are looking loaded right now, just you have taken some pretty sizeable orders and I was wondering how they are going to sort of flow into the next say year to 18 months of production.
Yeah, really the question of you've been here Chris and a number of our investors or analysts who have been here we've worked really hard at streamlining kind of that lean implementation of the facilities. We are running at a cadence where most of our facilities are on a day shift with some spotty areas where there's kind of an evening shift or in our machine shop for example where we’ve got a couple of cells that basically go as the three shift type pattern. The orders that we've been winning and we've been talking about for quite some time and so forth, part of the strategy is working with our customers, not to have all those orders built in too much of a concentrated period where we have a bulge in our production and then a value at different time. So that's the little bit why I keep saying I don’t plan at this point to increase our production rate, we are effectively really trying to sell out that consistent flow at 36 a week. So you shouldn't see we don't expect to see knocking unless we win some stuff that we really didn't plan on any real impact on our production rate coming through the facilities.
So, I mean just to put a number on it though, like if you think about 36 EU or (inaudible) base line what's your slot loading right now through the next year.
We could continue to look at 36. We are continuing to manage our factory to bid and we vary whether we are aggressive or less aggressive based on trying to ensure that we have that level loaded and its not just a New Flyer issue, we have such a developed supplier base and you almost have to look at it for every one job in our factory of assembling the bus there's four to five jobs in the supply chain that are feeding us. So we are trying for ourselves selfishly level a little bit in terms of the assembling a bus but we are trying to help our suppliers level those so that they can feed our facilities. And as you know we've eliminated central warehouses and all the extra cost of working capital to have those guys feed our lines at point of use. So it’s incumbent on us to try and have as much lead time as that flat 36 a week as we can. And as I said many times if in fact we are successful at some of the big orders and maybe some of the ones that we had really planned on that's the time when in the future we think we can be able to increase the run rate up beyond that point. What we don't want to do is go to 40 and then drop down to 30 and up back to 38 and back to 32 which is just hell from an operations standpoint.
Yeah, fair enough. Just one of the things I really wondered you didn't really talked about it yet but I know you talked about a little bit at the AGM but I guess a couple of questions on the development of the electric bus if you can give us an update on where that is as well one of the things I'm also wondering about it have you guys looked at any sort of entry into some of the adjacent markets into the infrastructure markets around the support that those things are going to need, be it you know either induction systems or (inaudible) or anything like that.
Really good question Chris, then so we did talk a little bit about at the AGM from a strategy perspective we have been very transparent that our strategy has been to have that excels your bus platform to be propulsion agnostic and so if a customer wants clean diesel or a hybrid or a CNG or a trolley or whatever we can provide that based on the core platform. As I think we've been very candid in our expectations. We think 8-10 years from now, a good portion of what we've built will be all electric type buses. So we have a prototype operating here in Winnipeg that we've been going through a variety of testing. It is in Xcelsior platform. We have two buses going in Chicago later this year that are based on again Xcelsior with a much larger battery content and no on-route charging type strategy. So very much of a run your routes during the day, charge at night, off-peak grid hours, lower cost, more efficient and so forth.
So that strategy Chicago is trying at this point. We have four more buses coming in partnership with SETC here in Canada as well as the Winnipeg Transit that are going to run Winnipeg transit service starting later this year where we actually got a [cantinary] charging system or on-route charging type strategy. So because that’s where we're at, we're actively bidding on a few other lets call them pilot type or demo programs with customers of that nature and again we really want to build based on that Xcelsior platform rather than have a separate business which adds cost and maintenance support and so forth.
As far as the ancillary stuff around charging, we have been pretty aggressive working and looking with different partners at working on, battery and the integration strategy. We have, in fact the Winnipeg buses and are currently building a [catenary] charging system. We've been looking at induction charging that you see in rail environment and so forth. So we don’t believe that we can just sell a bus that we're going to have be integrated in all of those different type of ways that you charge or replenish the batteries, and this business model that may change in the future where we sell a bus but also maybe a battery replenished in a tight strategy in partnership with a battery provider and so forth. But the market is really starting to look at it and I feel very comfortable the way we are proceeding there cautiously prudently from an investment standpoint and it’s something that clearly can't do ourselves a good [deal] for partnerships.
There are no further questions queuing at this time. We turn the floor back over to the presenters.
Thank you, Sarah. Much appreciate everybody joining us today and we look forward to talking to you next quarter.
This concludes today’s conference call. You may now disconnect.
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