New Flyer CEO Discusses Q2 2013 Results - Earnings Call Transcript

 |  About: New Flyer Industries, Inc. (NFYEF)
by: SA Transcripts

New Flyer Industries, Inc. (OTC:NFYEF) Q2 2013 Earnings Conference Call August 7, 2013 1:00 PM ET


Good afternoon ladies and gentlemen and welcome to New Flyer Industries Inc., Second Quarter Results Conference Call.

At this time all lines are in listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time to queue up for a question. (Operator Instructions). I would like to remind everyone that this call is being recorded on August 7, 2013.

I would like to turn the conference over to Mr. Paul Soubry. Please go ahead.

Paul Soubry

Thanks Saloni and good afternoon, ladies and gentlemen. Welcome to the second quarter 2013 results conference call for New Flyer Industries. Joining me on the call today is Glenn Asham, our Chief Financial Officer. For information this call is being recorded and a replay will made available shortly after the call.

As a reminder to all participants and others regarding this conference call, certain information provided today maybe forward-looking and based on assumptions and anticipated results that 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 releases 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 second quarter 2013 results and following Glenn’s remarks, I will provide some commentary on our market, the New Flyer order activity and backlog, our integration progress on the Orion Parts business and the acquisition of NABI on June 21, 2013. After that we’ll be glad to open up the call to your questions.

And with that I will turn things over to Glenn to give you the financial overview.

Glenn Asham

Thank you, Paul and good afternoon everyone. I will be highlighting certain 2013 second quarter results and provide comparisons to the same period last year. Similar to the last quarter I will focus my commentary on this call to providing key financial insights that will then 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 that are available on SEDAR or the company's website. I do want to remind you that New Flyer’s financial statements are presented in the U.S. dollars, the company's functional currency and all amounts are referred to in U.S. dollars unless otherwise noted.

Revenues from bus operations increased 10.1% for this quarter compared to 2012 second quarter. The increase in 2013 Q2 bus revenue primarily resulted from a 10.9% increase in total bus deliveries. The increased deliveries were a result of the company’s intent to reduce the work and process levels during the second quarter 2013. The delivery increase was also impacted by a higher production rate in the New Flyer manufacturing facilities where 475 equivalent units were line entered in the second quarter 2013 compared to 453 equivalent units line entered in the second quarter 2012.

2013 Q2 operating results include just over one week of NABI line entries of 18 equivalent units and deliveries of 15 equivalent units during the period from June 21, 2013 to quarter-end which was on June 30, 2013.

Aftermarket revenue increased 72.4% over the second quarter of 2012. The increase in revenue in aftermarket operations is primarily a result of increased volumes at New Flyer and includes incremental revenue from the Orion parts business during the second quarter of 2013. Bus manufacturing operation's adjusted EBITDA decreased 6.5% primarily as a result of less favorable settlements on foreign exchange contracts, which resulted in a $1.6 million decrease in realized foreign exchange gains in 2013 second quarter compared to the same quarter in 2012.

Aftermarket operation's adjusted EBITDA increased by 48% primarily due to $2.2 million of additional adjusted EBITDA generated from Orion parts business after normalizing the EBITDA for $0.6 million of non-recurring transitional cost. Readers are cautioned that the second quarter 2013 Orion results may not be representative of every quarter and therefore should not be linearly extrapolated to forecast the entire year. Management believes 2013 Q2 Orion results were positively impacted by pre-ordering by a number of customers in an effort to avoid any possible disruption caused by the planned transition of Orion inventory to New Flyer.

During July and August the Orion inventory at the Canton, Ohio warehouse was physically moved and integrated to the New Flyer network of parts distribution centers, including our recently expanded Midwest Distribution Center in Kentucky. The majority of the non-recurring transitional costs relating to relocating the Orion inventory and integrating the people and processes will incur in the second half of 2013.

Net earnings decrease by $1.7 million. The company reported net earnings of $1.7 million in the second quarter 2013 as compared to net earnings of $3.4 million in the second quarter of 2012, primarily as a result of the $3.3 million increase in costs associated with acquisition of NABI and $0.6 million of non-recurring expenses related to the Orion parts business transition. This is offset somewhat by the favorable impact caused by foreign currency translation resulting from the weakening Canadian dollar.

The company generated free cash flow of C$9.2 million during the second quarter of 2013, while declaring dividends of C$7.5 million. This compares positively to the C$5.6 million of free cash flow and dividends declared of C$9.5 million in the second quarter of 2012. Management continues to expect that company’s free cash flow should be sufficient to maintain the current annual dividend rate of $58.5 per share per annum and our dividends are paid on a monthly basis.

During 2013 second quarter the company increased its cash by $9.8 million, primarily due to decreased investments in inventories and accounts receivables after factoring out the acquired assets from NABI and the free cash flow generated from operations.

With that I will turn it back to Paul.

Paul Soubry

Thanks, Glenn. I’d first like to take few minutes to talk about our second quarter order activity, the backlog situation and our bid universe or pipeline. Management believes the transit industry, the transit market continues to show positive signs of recovery.

The total number of equivalent units in the bid universe at the end of the quarter was just over 18,000 compared to 15,184 at the same time last year. The active equivalent units, which includes the request proposals received and in process or review at New Flyer and the business proposals where we submitted a proposal to a customer and are awaiting customer reaction at the end of 2013, Q2 remains very high at 8,489 EUs, which compares to just 6,730 EUs as of July 1st last year.

So very pleased to see the continued level of bid activity and customer awards happening. A large number of bids were awarded in Q2, 2013 and New Flyer received new orders of 513 equivalent units compared to 498 in Q2, 2012. New Flyer’s book-to-bill ratio, which we’ve defined as the new order intake both firm and options divided by our deliveries for the last 12 months or the LTM ending June 30, 2013 was 230% as compared to only 13% for the LTM ended July 1, 2012. A ratio above 100% implies that more orders were received than were filled, indicating that strong demand that I was talking about.

The total backlog for New Flyer at the end of Q2, 2013 was 8,536 EUs which is an increase of 13.4% from the backlog at the same period last year. The firm portion of that total backlog at the end of this last quarter is made up of 2,252 EUs, which is an increase of 18.6% compared with 1,899 at the end of the first quarter of this year. The total value of that order backlog at the end of 2013 Q2 was $3.7 billion compared with $3.3 billion at the end of the first quarter of this year.

In addition to New Flyer’s quarter activity in the second quarter 2013, our total backlog was increased due to addition of 1,159 equivalent units or $491.8 million relating to the NABI acquired backlog which is now being reviewed and validated by New Flyer and included in our total backlog numbers and will be going forward.

While order activity has increased and our backlog has improved the company does not yet feel sufficient stability in order to increase the production or line entry rate. We will continue to be prudent with the management of our capacity across all our facilities and to ensure the build rate has stability for the long term.

Management currently expects the line entry during the third quarter of 2013 be on average less than the 48 EUs per production week and the 48 is made up of 36 EUs per week at New Flyer and 12 EUs per week at NABI, due to a companywide planned vacation that occurred in the first week of the second half of 2013. This short fall in the third quarter is expected to be offset by higher production rates in the fourth quarter of 2013 and is consistent with our operating plan.

Let me talk a little bit about the acquisition of NABI which we press released on June 21, 2013. The company acquired NABI from an affiliate of Cerberus Capital Management LP for cash consideration of approximately $80 million virtually all was for the satisfaction of affiliate debt. The purchase price was funded by the proceeds C$64.7 million equity investment by Marcopolo S.A. and an additional 20 million that was drawn from the company’s amended and extended senior credit facility.

The company issued 6,162,304 shares to Marcopolo for proceeds of 64.7 million. The shares were issued as part of the second and final tranche of Marcopolo's strategic equity investment in New Flyer that originally closed on January 23rd of this year. Under this agreement Marcopolo agreed to make a strategic investment totaling a C$116.4 million to acquire 19.99% stake in New Flyer or in total 11,087,834 new shares. Each of those shares in both tranches was issued at a price of C$10.50 per share.

Concurrent with the acquisition of NABI, the company completed a fourth amended and restated credit agreement or what we call our credit facility, which extended its senior secured credit facility to April 24, 2017 while increasing the total amount of the credit facility to $257 million which is an increase of $45 million. The borrowing limit of the revolving facility has been increased to $115 million from $90 million to support any working capital fluctuation across both NABI and New Flyer that may occur. The borrowing limit of the term facility has been increased to $142 million from the previous $122 million.

In addition, certain financial covenants and definitions have been adjusted to reflect the acquisition of NABI and the credit agreement also maintains an accordion feature of $75 million for future investment or acquisition opportunities for New Flyer. Let me now provide you with an update on some of the other strategic efforts and projects we’ve been working on.

First of all the joint venture we establish last year with UK’s largest bus builder, Alexander Dennis Limited to introduce a medium duty or Midi in North America is proceeding approximately and effectively on schedule. We have nearly completed the expansion of our facility here in St. Cloud, Minnesota to manufacture the Midi and will be issuing that or delivering that in both 30 and 35 plus configurations and we continue to plan line entries to commence in the fourth quarter of this year.

Our testing program continues and we are effectively on our final stage of securing our first order from a Canadian customer for five Midis. U.S. customers are highly able to place orders until all of our testing and FTA certifications are complete which remain on schedule for the rest of 2013.

Our second major strategic activity related to the investment in New Flyer by Marcopolo which as we reported is the world’s second largest bus builder. As a result of the strategic investment and the relationship we established with Marco an MOU to explore a number of projects that may include the introduction of other products of theirs in the North American bus base, sourcing and cost reduction opportunities and possible future business acquisitions aimed at achieving New Flyer school of long term stability through diversification and growth. Numerous trips have happened both to Brazil and up to Canada and United States facilities of New Flyer to start the process of investigating these opportunities.

Finally a short update on the integration of the Orion Parts, the aftermarket parts business that New Flyer acquired in March 2013 from Daimler Buses, North America. We’ve completed the physical move from the former Canton, Ohio warehouse which was a freightliner warehouse to a new and extended Kentucky Parts Distribution Centre of New Flyer and we continue to complete our remaining integration activities. I’m pleased to report that we have no material disruption from customers and vendors in transferring or signing contracts, moving inventory or buying material.

One of the most significant efforts has just been completed this past week which including merging and synchronization of the parts cross reference databases between both New Flyer and Orion, which will enhance our sourcing efforts and improve our bidding competitiveness in the future.

So in summary our adjusted EBITDA results in the second quarter of 2013 improved from last quarter. It was in line with our company management plan and expectations. We knew the mix of buses and customers had Q2 an aggressive schedule and feel confident in that.

As Glenn outlined we’re pleased to see the efforts of our operations team to be to reduce our bus working process at quarter end in line with our annual operating plan. We’re encouraged by the improved market opportunities, the start of our backlog recovery the improve book-to-bill performance as shown by our recent wins all of which are seen by management as positive indicators of the market and encouraging in terms of New Flyer’s performance.

We continue to execute on our strategic plan and are very encouraging and excited about the Marcopolo supports and relationship. We are excited about the acquisition of NABI and previously Orion Parts business as it allows for complementary products enhance customer support and some synergies.

The alignment of our bus and parts teams is on-going. We are now six weeks into the acquisition of the company in a number of best practices and workshops have taken place to allow us the bench mark and each other. We’re also pleased to see the return and response from our shareholders and our convertible debenture holders who have shown confidence to our share price increase.

New Flyer’s committed employees to continue as the leading provider of heavy duty transit buses and the leading provider of aftermarket parts in support in Canada and the United States and are excited about our future.

Thanks for listening today and with that Leon I’ll send it back to you to provide instructions to our callers for today’s questions.

Question-and-Answer Session


Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from Chris Murray from PI Financial. Please go ahead.

Chris Murray - PI Financial Corporation

Thank you. Good afternoon guys.

Paul Soubry

Hi, Chris.

Chris Murray - PI Financial Corporation

I just, as you thought about six weeks now as you’re saying with NABI, one of the questions I think we’ve asked a couple of times now is do you have any idea about any sort of synergies that you may be able to generate. I was wondering if you had a either a number or sort of some of the impact you can maybe give us some more detail on.

Paul Soubry

Good question Chris. The first order of business was to diagnose the order book and backlog and so we now had a chance to go through and review all of the contracts, scrub the way they defined firm orders and options to make sure is consistent with New Flyer and that now fits inside our total backlog figures and so we’re very comfortable with that.

Second order of business was obviously customer communication and alignment of any customer concerns whether it would be bids in process, bid that have been previously submitted and so forth. And so either by phone or in person we’ve have gone out and met with all of the customers that were either under contract or in proposal stage with NABI to ensure that there was no issues.

Next we have now had an engineering trip down there, we have had a supply team trip down there, a number of HR teams and accounting teams going down there and we’re just really early in the stage of the identification of opportunities around synergies. I think as we mentioned when we put the proposal together A, to our board and B, ultimately told the investors about it, this was not a scenario where we planned a significant amount of synergies around people and so forth.

We fundamentally believe that there is lots of competitive opportunities in the market place that offer the NABI and the New Flyer products. And so the synergies that we have booked at this point seem to be some of the obvious ones around some administration costs and those kinds of issues.

We have had a couple of people move on for example. We have made one change in the combined sales team. The ex-CEO of NABI, a great leader Jim Marcotuli was part of the planned process of moving on till those have all been executed on. And so we really haven’t nailed down the exact synergy dollars. There has been some need opportunities on the supply side, both in the parts and the bus businesses where we’re able to kind of align our contracts, align the way we buy and see if there is some opportunities. And so that kind of stuff is literally happening as we speak.

But in terms of giving you a range of dollars or percentage and so forth we’re not there yet.

Chris Murray - PI Financial Corporation

Okay. Do you have any sort of idea of how long this process might take before you’re able to lock that out a little bit?

Paul Soubry

Sure, we have 90 day integration plans and then we’re going to effectively start up in September here to build our 2014 business plans, and our annual operating plans and strategy plans and so we’ll start to see that stuff.

Honestly, Chris I’m not sure we’re going to be advertising very specific synergy numbers. We’re going to provide, continue to provide the investors and the analysts with some run rate understanding and some backlog totals and order book, that kind of stuff, but candidly from an external perspective we’re going to be reporting a bus segment and a part segment.

Chris Murray - PI Financial Corporation

Okay. Moving on just thinking for the update on the Midi bus I just want to talk a little about that market. There seems to be some movement with a number of the market players, Alloy Specialty Vehicles' buy Thor's operation, for the smaller buses we’ve seen Design Liner sort of take a pause. I’m just wondering there seems to be similar to how the transit market was behaving, some weakness in the market a little bit. I was just wondering if you guys have any thoughts around that space as you basically are going to enter it.

Paul Soubry

So really good question. First of all Design Liner I must admit I’m not up to speed as exactly where they play in this product mix but our understanding is the vast majority of what they have on the go today is coach type business or commuter coach businesses and that most of their contracts I believe are with New Jersey and Denver are the ones under play. There is some smallest stuff where they are I think selling some electrical buses, half of dozen or so into Quebec.

So we don’t see Design Liner having any impact on the core market that we’re going to after. Now Midi was designed to be able to sell to smaller transit, the shuttle operators to airports and the private operators. And so your commentary about ASV buying, Allied Specialty Vehicles buying Thor's business is interesting and in fact our research on the cutaway business and that includes what Thor owns and now ASV, what the Berkshire Hathaway investment in Forest River and a number of other cutaways, is that market is actually very, very strong just like there's been a recovery in the RV market there is a very strong recovery in that cutaway space.

And you remember that we try to position our Midi product to be at the high end of that segment and the low end of the heavy duty transit space where we believe transit operators did need a heavy duty 40 foot bus.

So we have been actively now since our May launch if you will our unveiling of the bus in North America. We’ve been actively talking to a number of customers. As I said we're effectively right at the altar here now with securing our first order and are in pre-production type activities just waiting for a purchase order for five buses, a Canadian operator. We’re unable yet to get orders from U.S. customers until we provide all the testing and the FTA certification, which is on schedule for the remainder of Q3 and Q4 into this year.

So I’m still very bullish on the niche that we’re going after with the Midi, the customer response on drivability, accessibility, noise, the price points we’re talking about, the life cycle costs, all seem to fit very well. And as we reported in the past we’re not planning to come out of the chute by selling thousands of these buses in the first couple of years, our first year we plan it 120 type buses to be in our schedule two to three week max and so we still feel pretty good about that.

Chris Murray - PI Financial Corporation

Okay. Good, that’s a great answer, thank you. Just one more housekeeping question if you can. Can you give us an indication, based on your current rate what your forward slot bookings are looking like?

Paul Soubry

Yeah, as you know Chris coming to our facilities and seeing kind of the way we manage this stuff in detail, we basically maintained a continuous slot profile for basically about year and a half to two years out. It turns out NABI does exactly the same thing. The NABI facilities are effectively sold out for the next year or so in terms of the current contracts they have, the current slots that they’re filled.

NABI was very positive and proactive in securing the WMATA contract for the next five years and so that will be largely the build profile for them as they move into 2014.

So NABI has no unsold slots in calendar 2013. New Flyer has about 50 unsold slots where we have a number of high probable opportunities and options that we’ll try and convert for the fourth quarter of this year.

Chris Murray - PI Financial Corporation

Okay. And in to ‘14?

Paul Soubry

In the ’14 again we’re trying to stay away from giving you too much guidance on that. I would suggest that the data we presented to our Board this morning was the number of open slots that we have next year. Based on our current operating plan is effectively at this time the same as what we had last year. So relatively high degree of confidence but as you know and as mentioned many time we’re not going to increase the run rate at New Flyer or NABI or the combined business until we have effectively three quarters in a row sold out.

We want to make sure that there is longevity of the production and operation plans rather than worrying about ramping up for short term demand and not having the ability to back fill that stuff in the long term.

So our current plan and our projected plan at this point going to 2014 now some of the bids that we continue to work on may change that, is to continue roughly around the same production rate that we’re out right now which is 36 at New Flyer and 12 at NABI.

Chris Murray - PI Financial Corporation

Okay. Thank you.


Thank you. Our next question comes from Chris Bowes from Canaccord Genuity. Please go ahead.

Chris Bowes - Canaccord Genuity

Hi, good afternoon. Just quickly on the bus manufacturing operations, the EBITDA per unit was a little bit light and seems that we are at least through first half of this year running at the low 20,000 a bus range, is that where we’re going to stay do you think or can you talk a little where you think the EBITDA per unit is going to move in the back half of the year?

Glenn Asham

I guess I could speak specifically, as you know we don’t give specific guidance on margin because that’s a production schedule moves around that and has an impact on it.

Chris Bowes - Canaccord Genuity

So that reduces I think?

Glenn Asham

Yeah, definitely we feel we’re at a low point today, fairly extensive with what we saw in the first quarter of this year. So directionally we’re filling as we see our order book filling and see our continued efforts on reducing our process we feel that we’re at a low point rate and can do it on go forward basis. Again depending on the mix of contracts that will have the impact as to when we see those improvements.

Paul Soubry

Chris, the reason we are a little bit sketchy and a little bit cagey on kind of stuff is mix has a huge issue and it’s not just the mix of customer contracts, it’s mix between Canada and U.S. which have different pricing environment and it’s also mix of 44 foot and 60 foot buses which has different EBITDA type profiles. Again it will be on labor utilization and efficiencies and those kinds of things.

Just recently we’ve been able to secure as I mentioned to Chris Murray a moment ago we’re basically at about 50 open slots for the rest of the year. We’re very comfortable with the margin that we see and the pricing that we put in place for the contracts in the back half of the year where we kind of we believe that the low part of the year was really was in the second quarter and we feel more comfortable about the back half.

Chris Bowes - Canaccord Genuity

Right, thanks for that. And just one for you, would you say that mix had a negative impact this past quarter?

Glenn Asham

Absolutely, I mean again the penny on the type of contract depending on 40 or 60 mix all those issues and we can see that forever, we have a very broad customer mix and a very broad prior portfolio that will always have mix issues. And there are times when unfortunately had a number of contracts back to back on top of each other that will provide great quarters or difficult quarters. So that’s why we really feel much better that our LTM adjusted EBITDA is now starting to turn and we feel comfortable going in the back half.

Chris Bowes - Canaccord Genuity

All right, thanks. And may just one last one, I’m looking at the MD&A and it looks like in the nine days between the acquisition and the end of the quarter NABI generated revenues of 8.4 million and a loss 2.3 million, can you maybe walk me through it seems like very large number for nine days?

Glenn Asham

Yeah, first of all most of that loss at all prices all the cost associated with doing the diligence so we in total close to $4 million provision for acquisition cost. So that's a significant piece of it, obviously we’re dealing with that one week period so it’s actually 30 good deliveries in that period and I think there is number of 15 so that’s something a little bit above their expected line rate. Again really one week, nine days worth of business. I really read a whole lot of to that number at this point.

Chris Bowes - Canaccord Genuity

Fair enough, most of the due diligence was done or the cost going up?

Glenn Asham

No, for the most of our debt that's all wrapped going forward.

Chris Bowes - Canaccord Genuity

All right, thanks very much.

Glenn Asham

Thank you.


Thank you. Our next question comes from Bert Powell from BMO Capital Market. Please go ahead.

Bert Powell - BMO Capital Market

Thanks. Paul, it looks like on at least relative to Q1 back in NABI you did better in your ending inventory for the quarter and you guys cited lower rent, with NABI now what’s your reasonable expectation for inventory levels given that you have a bit about tough quarter in here, we think Q3

Glenn Asham

No, great question and of course as you know and I think we mentioned in previous calls that the due diligence on NABI was a little delicate given the direct competitive nature of the businesses. Clearly the efficiency with both through a quarter and at quarter end has been a little bit better at New Flyer than at NABI. I think we finished the quarter I think it was won by a unit or two we are around 186 at New Flyer and 120 something whatever at NABI. Wayne Joseph our EVP of the bus and the operation business here is now kind of diving deep to understand mix. It’s a very different business burden and in due course we and [inaudible] will join. New Flyer will do 111 contracts or 115 contracts at a year and have 25 to 30 builds going on at one time.

NABI at this point in time has like three or four builds and when a certain customer has the inspection issue or there is parts issue or so forth the [whip] can build up very quickly. I’m not sure we are at a point now where we can systematically say, what we really think the on-going [whip] should be given the NABI profile. I can tell you that Wayne continues to run New Flyer targeting quarter end to be roughly kind of 190 plus or minus on the unit side and we feel comfortable we can stay within that range.

I’m not sure we know really enough above the NABI operation, the customer mix. I would suggest that, that number of 120 something is probably on the high end of the range of what we expect NABI to run at from working process and therefore cash utilization.

Bert Powell - BMO Capital Market

Okay, perfect. And then just if I look at the margins the gross margins in the bus manufacturing business in the quarter they were up relative to Q1 there, they are at I guess a decent level in the relative total last six quarters anyways. And you talked about decreased manufacturing cost and lower overhead, yeah, the G&A kind of hurt in the quarter in terms of bringing the EBITDA margin down.

So I’m just wondering going forward how much more traction do you think there is in some of those cost initiatives to drive the gross margin up and to the extent you can I wouldn't mind understanding a little bit more about G&A impact this quarter beyond what was the FX delta?

Glenn Asham

Yeah, so I guess I’ll take the G&A question first. I was sitting in the -- in the MD&A we highlighted a number of the changes, lot of [inaudible] heightened tighten specific strategic initiatives and it wouldn’t be expected to increase. Where we have seen some increase in our SG&A and really that ties to sort of the change in the direction of the business.

In 2012 as the business was obviously reporting lower earnings and reducing earnings with the long term incentive plan that the company has and we were over provisioned than we saw a bunch of recoveries in those provisions during 2012, which took down the expense rate relative to the run rate. This year obviously we’re providing for that plan on a regular, on an all-in basis. So you have a situation where the 2012 SG&A was probably too low and then the 2013 is little more representative.

In terms of sort of the cost improvements we have, I mean that some of these things were -- the list is never ending, right? We continue to identify new projects that we can go after. We think we have a list of opportunities this year that is equal to the list that we had last year. And we will continue to go after those and each one you sort out case by case right, and how much can you get but we are comfortable that and a lot of them are insourcing so we are actually adding some cost on the manufacturing overhead in order to achieve them but we are comfortable that the ones that we are facilitating are all ones where we can improve the contribution margins or gross profit margins on the bus contracts in excess of the overheads that we have to put on, so positive to the business.

I know that probably doesn't give the type of detail that you are looking for but we see it has a source of additional earnings as we continue to go forward.

Paul Soubry

Well, let me it's Paul, let me just give you a point at the contacts. We, almost half of our builds at this point are CNG which requires effectively a galvanized steel frame that sits on top of the bus as the paints go in. For years we were buying that from a third party we did the math, weld shafts, we figured out how we can effectively weld up that frame, send it out, get it galvanized and do it and save something like $1,500 to $2,000 a bus.

So we add to add some direct labor, we have to add some overhead to manage this, the cell that builds this thing which brings up our overhead a little bit. We have done that, it's in-house, New Flyer's reduced cost and therefore better margin based on that. When we get in to look at NABI we find also they actually send this out and have somebody else completely the CNG technique.

So we have now relooked at our roadmap of where they are things that we think we can bring in for NABI as far as the New Flyer volume and now the NABI volume. And it’s premature for us to and even then I am not sure we get into too much granular detail on these types of calls but we are really getting strategic about where we can take advantage of what we already insource but also look at where we need to invest to potentially insource some other things.

We are also really comparing on the sourcing side things that we buy from supplier A and NABI buys from supplier B and our purchasing teams are literally as we in the last couple of days building list of things to go after.

I wouldn’t suggest there is ridiculous savings that are coming up but there are literary hundreds of dollars per bus or thousands of dollars a bus sitting here on a number of different initiatives that we are going to continue to work on. And we’ll see that kind of trickle not really in 2014 because most of what we are planning to build the rest of the year we have already locked in pricing and so forth with suppliers.

Bert Powell - BMO Capital Market

Okay and just last question with the aftermarket this quarter obviously you guys are telegraphing that there was a bump-up related to the warehouse switch and then the Chicago contract is starting. So [total] run rate at Chicago starting, can you maybe help us think about what’s the right level of run rate for the sales this quarter given it's difficult for us to kind of gauge what the impact would have been from both of those things? I know you don’t want to give guidance but it just would be helpful if we get something to kind of delineate it a little better.

Glenn Asham

Yeah, I guess sort of the best way in terms of coming up with any sort of run rate is to look at sort of the expected annual volume of the various operations. So if we look at historically the Orion operation was a 50 million plus annual revenue swing. The New Flyer business is a 120 million plus and then obviously you got to layer on top of that the new Chicago contract is roughly $80 million over a three year period.

I guess we would suggest that we have seen a bit of a slower start up to that contract. So there is very little in Q2 of revenue being generated from that overhaul contract. You will see us getting into it and in Q3 and Q4 at a higher level but we will also see that where we originally were looking at sort of getting it done over 24 months we are maybe looking now over a 30 month period.

Bert Powell - BMO Capital Market

Okay, thanks.

Paul Soubry

Thanks Bert.


Thank you. Our next question comes from Kevin Chiang from CIBC. Please go ahead.

Kevin Chiang - CIBC

Hi, thanks. Most of my questions have been answered but maybe just following up Chris' question earlier. I know you are guiding towards, you mentioned that looks like margins are not top tier but when we think of order activity picking up and the new -- we were positive on that front, is there some sort of a lag we should be thinking about when we look at revenue per bus and margins, is there a six month lag or twelve months lag before we see those unit metrics moving higher or kind of turn-on a dime here and essentially the next quarter see some pretty material improvement?

Paul Soubry

No, you are not going to see that Kevin. As you know and as I just kind of signaled, NABI stuff they are building for the rest of the year has been priced previously and costed previously. The same could affect New Flyer, we only have 50 slots open this year and all that benefits A, the slot we will sell will be based on option conversion where we know the price and we effectively know the cost.

So you won’t see any of the bus margins really dramatically change in any way, shape or form for the rest of this year. We are starting to see a little bit of recovery in some of this, maybe on the pricing, some of it maybe on the costing on the parts business. As you know and if you look back over the last couple of years that’s been on a bit of slide just from competitive intensity and so forth but I think we’ve also have done some things we look at the way we priced and how we are positioning the New Flyer kind of service offering in the parts business, and that's shown a little bit of recovery. But the bus you won’t really see dramatically different numbers in the rest of this year.

Kevin Chiang - CIBC

Great, that’s it for me, thank you.

Paul Soubry

Thanks Kevin.


Thank you. (Operator Instructions). There are no further questions at this time, please proceed Paul.

Paul Soubry

Thanks Saloni and ladies and gentleman, we will terminate this call. Thank you for listening. It feels a heck of a lot better now than it did a year ago in terms of the ability for us now to execute on our strat plan, the investment by Marcopolo allowed us to transact very quickly on Orion and NABI. We know that we have very much the focus on execution in a recovering market but we continue to look at opportunities of where we can take New Flyer. So look forward to talk you next quarter. Thank you.


Ladies and gentlemen this concludes your conference call today. We thank you for participating and we ask that you please disconnect your lines.

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