New Flyer's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 9.13 | About: New Flyer (NFYEF)

New Flyer Industries Inc. (OTC:NFYEF) Q3 2013 Earnings Call November 7, 2013 2:00 PM ET

Executives

Paul Soubry - President and CEO

Glenn Asham - Chief Financial Officer

Analysts

Bert Powell - BMO Capital Markets

David Tyerman - Canaccord Genuity

Operator

Good afternoon. My name is Lisa and I will be your conference operator today. At this time I would like to welcome everyone to the New Flyer Industries Incorporated Third Quarter Results. (Operator Instructions).

Thank you. Mr. Paul Soubry, you may begin your conference.

Paul Soubry

Thank you, Lisa and good afternoon, ladies and gentlemen. Welcome to the 2013 third quarter 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 may be 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 third quarter 2013 financial results and following Glenn’s remarks, I will provide some commentary on our market, the New Flyer order activity, strategic project, backlog, and outlook. After that we’ll open up the call to your questions.

And with that I will turn things over to Glenn.

Glenn Asham

Thank you, Paul and good afternoon everyone. I will be highlighting certain 2013 third 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 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 39.8% for this quarter compared to third quarter of 2012. The increase is primarily as a result of a 49.5% increase in total bus deliveries compared to 2012 third quarter, offset by a sales mix with lower selling prices.

Aftermarket revenue increased 100.6%. The increase is primarily a result of incremental revenue from the Orion parts business and the recently acquired parts business of NABI Parts, LLC. Bus manufacturing operation's adjusted EBITDA increased 65.4%, primarily due to the addition of the NABI bus operations. Profit margins can vary significantly between orders due to factors such as pricing, order size and product type. Adjusted EBITDA from bus manufacturing operations per equivalent unit can be volatile on a quarterly basis and therefore, management believes that a longer term view should be taken when comparing bus manufacturing operations margins.

Aftermarket operations Adjusted EBITDA increased 91% primarily due to the addition of the NABI parts and the Orion parts businesses offset by margin compression as a result of pricing pressure in the market. The aftermarket operations Adjusted EBITDA for 2013 third quarter was normalized for non-recurring transitional costs of $400,000.

Net earnings increased by $6.3 million. The company reported net earnings of $7.8 million in the third quarter 2013 and increased compared to net earnings of $1.5 million in the third quarter 2012, which is primarily as a result of the $6 million increase in earnings from operations and the $2.7 million increase in non-cash recoveries caused by the favorable impact of foreign currency translation resulting from the weakening Canadian dollar but somewhat offset by increased income taxes to the higher end.

The company generated free cash flow of C$13.1 million during the third quarter 2013, while declaring dividends of C$8.2 million. This compares positively to the C$5.9 million of free cash flow and declared dividends of C$7.5 million in the third quarter of 2012. The amount of dividends declared increased in 2013 third quarter as a result of issuing 11.1 million common shares in 2013 year to date period to our strategic investor Marcopolo SA. Management continues to expect that company’s free cash flow should be sufficient to maintain the current annual dividend rate of C$0.585 per share which is paid monthly.

During 2013 third quarter, the company improved the liquidity position by $7.1 million, by generating cash from operating activities of $16.4 million which was offset by $11.9 million of cash used for investing and financing activities and a $2.6 million reduction of letters of credit outstanding. The $7.5 million repayment of the company’s revolving credit facility during the third quarter 2013 does not factor into the change in liquidity position.

With that, I will turn it back to Paul.

Paul Soubry

Thanks, Glenn. I’d like to first take a few minutes to talk about our strategic activities, our third quarter order activity and backlog, pipeline and then provide some insight into our outlook. While we are happy with our Q3 2013 results, we want investors to understand that industry dynamics continue to put pressure on both sustainable volumes and return as we look into 2014.

Industry headwinds afforded a number of key opportunities for us to leverage the company’s leadership position, to pursue scale, product excellence and technology development. In 2013, the company completed a number of significant corporate development initiatives, which you are all well aware, and they include: the sale of a 19.99% ownership stake and the implementation of a strategic MOU with the world's second largest bus builder, Marcopolo S.A.; the acquisition of the Orion aftermarket parts business from Daimler Buses North America; and the acquisition of North American Bus Industries, Inc. from an affiliate of Cerberus Capital Management L.P. After only a few months the management believes that it has made solid progress on the integration initiatives with results largely meeting management's expectations and assumptions.

For example, in Q2 and Q3 2013, the Orion parts business has been fully integrated into New Flyer parts and is operating on plan and to our acquisition pace. We’ve had a few bumps on the road here and there but for the most part, we experienced no material surprises and the integration has gone well.

We also initiated an assessment following the acquisition of the North American Bus Industries or NABI. The assessment included NABI site visits by all of the New Flyer operations groups and visits to the three New Flyer manufacturing sites by all the NABI leadership team, the objective being to determine strengths and opportunities in the two organizations and to identify all potential synergies. All of the groups will be reviewing and implementing various initiatives identified during the assessment based on priorities that we assessed and developed.

Priorities will be set based on return on investment, time and resources and longer term synergies that will be identified as major projects will be prioritized, and assigned to specific leaders and scheduled for completion. Department heads in each organization are building relationships and sharing best practices and we are learning a lot from each other. Visits and analysis will continue on a regular schedule to understand each other’s processes and controls and to continue to build on our strengths.

With respect to the New Flyer aftermarket group, they also worked on initiating a review in cooperation with NAB’s aftermarket business team. The review has already included common expense categories including freight rates and packaging supplies, vendor cost differentials for similar part, market coverage and commonality of bid opportunities where bidding/quoting overlap may exist. A detailed review of the findings has just begun.

New Flyer and NABI continue to operate separately with management continuing to execute on the business plans and capture synergies in the short term where possible, with a focus on long term information technology systems as the key to understanding future cost saving initiatives and opportunities. No material adverse issues have been discovered so far in the integration and acquisition of NABI.

Also in Q3 2013, the company announced its plans for expansion of its Winnipeg Aftermarket Parts facilities, its Publications, Customer Training and New Product Development Center, in the creation of what we call the New Flyer Campus. The company entered into a lease of the facilities for office, shop and warehouse space across the street from the New Flyer main plant in Winnipeg. This has resulted in a reduction in the number of Winnipeg facilities - first from five buildings down to three over the last three years and will be just down to two buildings. Management believes that this campus approach can only facilitate better communication, collaboration and internal networking to make New Flyer a better business.

When it comes to the market, management believes transit market continues to show positive signs of recovery. Of the number of large bids we were awarded in the third quarter of 2013 at New Flyer one new order totaling 2431 equivalent units as well as the total New Flyer bid universe remains relatively high at 19,941 equivalent units with a total number of active equivalent units, so whether it’s a request for proposals received by New Flyer or we’ve actually submitted a proposal to a customer at the end of the third quarter was 8,177 units compared to only 5876 units at the end of September 30 of last year.

The total New Flyer backlog at the end of the third quarter was 9,890 equivalent units, which is an increase of 15.9% from the backlog at the same time – sorry at the end of the second quarter of this quarter. The firm portion of the total backlog at the end of Q3 is made up of 2,748 units which has increased 22% compared at the end of Q2 2013. The total value of our current backlog at the end of Q3 2013 is $4.6 billion, which compares to $3.7 billion at the end of Q2 2013. This has translated into a New Flyer to book to bill ratio and we define that as a new order intake from both firm and options divided by deliveries the last 12 months or an LTM basis. The book-to-bill ratio at September 29, 2013 was 309% as compared to only 33% at LTM on September 30, 2012. A ratio of above 100% implies that more orders were received than filled, which indicates a very strong demand.

The company has been very active over the last few years as it continues to lead heavy-duty transit bus industry in both Canada and the United States, and we continue to execute on our strategic plan by investing to pursue long term stability, diversification and future growth. Notwithstanding the recent growth in awards and resulting backlog, management does not yet expect to increase line entry and delivery rates in 2014. This is primarily because the company’s firm orders are not sequential, and by that I mean they cannot all be built in 2014. But the option portion of the awards will be exercised over the life of the contract. Further, the time from award to production is not immediate and can take up to 12 months before the firm portion of the contract gets to be line entered in production. This creates a time lag before any sustainable increases in production rates can be achieved. Throughout the year there will always be weekly and monthly fluctuations on actual rate [ph].

At this point in the year, three quarters into the year, nearly two-thirds of the next year’s production slots at both NABI and New Flyer are filled, which is substantially better than the number of production slots that we had to build for 2013 at this point last year. However there are still open production slots in 2014 and management currently plans to maintain the present average production line entry rate of approximately 48 equivalent units per production week.

As we highlighted many times over the last few years, the number of active heavy duty transit bus procurement noticeably dropped owning to the financial crisis that began in 2008. And so to fill production slots, stabilize our facilities and operations, the company built buses under the existing awards and used up our backlog. In order to replenish that backlog in an environment of fewer procurements, prices naturally for new contracts declined and in some cases dramatically. A significant portion of New Flyer’s order backlog is comprised of orders obtained during this time period and management expects on average, that margins on orders planned for 2014 production will be lower than the average margins achieved during the period of excess capacity.

Management also continues to remind that product mix of 30 or 45 foot buses versus 60 foot [ph] buses will have an ongoing impact on average EBITDA margin on a weekly, monthly or quarterly basis. Starting in 2012, however, the New Flyer backlog both firm and options started to achieve substantial recovery, which management believes was the beginning of a new purchasing cycle in the industry, similar to the purchase cycle we saw back in 2007 and 2008. Management believes that transit agencies are again getting into a cadence of multi-year procurements, which occur over a certain period of time and typically five years in the US. With the departure from the industry of Orion in 2012, management expects capacity will be more aligned with demand going forward.

Finally, I need to mention that management is very encouraged by efforts to grow the aftermarket parts business, which includes the organic growth of New Flyer, the addition of Orion and the addition of NABI Parts LLC.

Despite the pressure on margins that I talked about, the company continues to pursue cost and overhead savings in our daily operations through operational excellence initiatives and as part of the long term NABI integration and platform strategy development which we are actively working on. Management expects the company will continue to remain in compliance with all credit facility covenants and will continue to be able to maintain dividends that we have at current levels.

So thanks for listening today. And with that, I will invite your questions. So Lisa, please provide our callers with instructions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Bert Powell from BMO Capital Markets.

Bert Powell - BMO Capital Markets

Just couple of questions, just to help us with your commentary around the backlog as it impacts margins in 2014. Are you communicating that that should be down relative to the last 24 month and profit in 2014 to come back or are you saying that this is down relative to – when the bus manufacturing was closer to 8% EBITDA margins? Trying to get a sense of whether this is flattening or continuing down?

Paul Soubry

We will put it this way. A question good. First of all, as I mentioned our known build slots for next year is a higher percentage now than it was the previous year. So we have much better insight into what we plan to build and as you know, we've said very vocally that we are not really that keen on trying to ramp up production rate until we see that thing is sustainable. That’s the first issue.

The second issue is the margin that we currently see based on that work, and of course, it changes every day with – now what we currently have is a fill slot in a certain period can be pushed forward – pulled forward or pushed back, some of them get pushed back into following years. So the current mix that we have both firm and options, essentially we have to win for 2014 will be lower margins we expect than 2013.

Bert Powell - BMO Capital Markets

Are we talking much lower or just kind of marginally lower?

Paul Soubry

As you know we are not in the guidance game, we will be very careful not to mislead the investors – provide guidance that we’ve then got to manage and correct and so forth. There are contracts that are materially lower. There are contracts that are slightly above, there are contracts that are in close with our average. We also have certain units that we expect to build next year that are currently based on options that we bid in ’11, ’12, or ’13. We are not going to give a range in order to – but you need to know that the margins we see will be lower than 2013.

Bert Powell - BMO Capital Markets

And Paul, I fully appreciate though it’s a guidance issue, I just want to make sure that at the same time we are not going to be – investment community is not going to be too far off the market.

Glenn Asham

Also just remember, even to make that statement, we will obviously make that with some assumptions around how we build all those one-third slots.

Bert Powell - BMO Capital Markets

Fully appreciate that. So if you start to edge out of your backlog or look beyond ‘14 – ’14 going to be the trough, is that the kind of that cohort coming through, does that get worked off in’14 and substantially ‘15 is where you can start to head back up?

Paul Soubry

Yes, I think you could make it assessment or interpret that from what we are saying, and at the end of the day, fundamentally we are now in a position where we are literally building stuff that we bid at a very, very aggressive time in our industry where capacity clearly outstrips demand by quite a bit. And of course, as everybody else was trying to balance returns with volumes in our shot and try to balance margins and so forth. As we said and as you know, the industry dynamics have changed in terms of the number of players, the recovery of the number of orders and so forth. And so what we are seeing in terms of price pressure today, is different than we saw a year ago.

Bert Powell - BMO Capital Markets

And just last question from me and I am going to apologize if I have this wrong. But when I look at the book, the orders that you booked for this quarter, it seems to me that the average price per EU jumped up significantly. And I know this is – these wins are what you had or what NABI had. First of all, have I got that right? And if I do, what’s going on there?

Glenn Asham

Yes, you do have it right. And it really comes down to the mix of business that we are booking right. So obviously if we are booking hybrid, or we are booking poly, that’s driving the average price up. If we are booking particularly diesel buses, that’s driving the average down. So really I would say more a factor of the mix of product types than anything else.

Bert Powell - BMO Capital Markets

Would those typically be a better margins?

Paul Soubry

So put it this way, across the backlog, as we have seen over the last couple of years, it’s been brought to down and as we have at the current state, there is today a wider range of margin around the bidding, around the average, it’s more efforts to it. Now in some cases depending on the competitive intensity, depending on the specifications of customers and so forth, we can see better or worse margins. In general and the way we plan our business, we operate on effectively like a cost to build up type of scenario where we take the customer spec and average in expected door of preferred margins per EU independent of whether it’s a diesel or hybrid, a trolley and so forth, there can be aberrations to that, but that’s really the way we think of it. So I wouldn't think of that addition to the backlog at higher prices, generally having a higher margin associated with it.

Operator

Your next question comes from David Tyerman from Canaccord Genuity.

David Tyerman - Canaccord Genuity

I just wanted to follow up on Bert’s question on margins. So when we are thinking of margin, are we thinking in terms of EBITDA per EU, is that what I should be thinking and by my calculation, the last 12 months number was 24,000 per EU. So is that what you were referring to in terms of lower in 2014 than in 2013?

Glenn Asham

I mean obviously that’s the implication and we are talking about looking at really -- the margin in fact trickled down, there’s other activities that we are looking at, still have them completed, but you are correct in looking at the EBITDA per unit and it’s going to drop because of the mix of orders. Now what we don’t know yet and what we are seeing and working on is what are the cost savings that we can implement and to offset some of those margin reductions.

Paul Soubry

Just a little color, David, we rolled the parts – as we look at pace on the slots that we’ve solidified for next year, and the assumed average margin for the rest of the slot was crystal-clear that that portion of our backlog that we bid at a competitive time is lower margin. So in addition to looking at volumes, and we told you we’re nervous and cautious about wanting to pick up volumes that are not sustainable. We are also actively looking at potential for integration and synergy costs with the acquisition and corporate activities. But we also continue to look at savings that come out of our business as part of the investments we make over the last couple of years on insourcing, on repatriation of processes, operational excellence in total.

So to say that we’ve got our 2014 plan nailed is incorrect. But we felt it very prudent to give our shareholders insight that the starting point of the price in the margin heading into 2014 is definitely lower than what we have seen in past years.

David Tyerman - Canaccord Genuity

So then just sort of pushing forward, you are saying that we may be heading back to a better period, maybe like back in 2007, 2008, EBITDA per EU used to well north of 30,000. Is that what you're seeing now on a typical order or is it just the more difficult world now and maybe that kind of number is difficult to get to in the future or now?

Paul Soubry

Yes, we’ve given you a specific number, David. I think my – our perspective on that is kind of as follows. As I mentioned to Bert, we are kind of in a different place relative to the competitive intensity. We and others have -- in the industry have secured orders that make, for lack of a better word, desperate type of effort [ph] to ensure you secure. Volumes have kind of changed the dynamics of how we think of competition and so forth. We have taken up upon ourselves to do a couple of corporate activities that require to ensure that we optimize the overhead costs associated with it. So that work isn’t complete and as I highlighted in my remarks, we are hot and heavy, I mean we are 90 days in to NABI and we are very pleased with what we see so far. There’s lots of opportunities but we’ve got to drill those to the ground.

The other thing that’s encouraging is we've been able to get volume comfortably back and at least a portion of it sold next year. In addition, the bid universe has not evaporated. We are still up over 19,900 and still have 8000 in the active and there seems to be another wave of good solid order activity that should allow us to rethink volume going forward, to rethink the cost base we have and so forth. So we are nervous and shy being – we’re able to put any numbers out but directionally we feel ‘14 is a year that we kind of put in this stuff through the machine and the backlog. The good news is we should have less contracts and customers next year because there’s some high-volume contracts that we've announced like Wal-Mart is running through NABI, or Washington [ph] granting NABI a big LA contract running through New Flyer facilities which should allow us to get some labor efficiency and overtime optimization and overhead spend and so forth. 2015 and go forward of course, it’s a long way away but we still better about those periods of time on a both volume and margin perspective.

David Tyerman - Canaccord Genuity

Just one other question. Historically when I talked to you guys, I was under the impression that firm part of the contract was third of what would be produced in the next year or so, in fact, I think at one time, your predecessor had said people don't really put firm orders in beyond the one in your timeframe. Sounds like some of that’s changing. Is it – how long would the firm backlog be stretched to now roughly?

Paul Soubry

Yes, great question. So we've got right now at the end of the quarter we got 2,700 EUs in our firm backlog. There is always adjustments and pluses and minuses as that happen kind of on a day to day transaction of business. Roughly I would say 1600 or 1700 of those orders we will build next year, then the rest of them will be bled out over the next three or four year, five years depending on each individual contract. So any one contract it could have a firm portion that is 20 this year, 20 next year, that are all firm. So maybe there is a little bit different than in the days back in ’05, ’06, ’07 when the first contract that were multi-year hit the street, where they really only put firm in the first year, we do now see customers doing firm orders in years two, three, four and five. It’s not huge but it is good. That’s why we got 2700 EUs in the backlog, that’s why we can’t go ahead and build all those things tomorrow.

David Tyerman - Canaccord Genuity

And just to clarify that, just slightly and then certainly [indiscernible]. The 2700 does include 204, that is going to go away, right?

Paul Soubry

That’s correct. Yes, if our customer literally later this month doesn’t do any of that contract, we have been signalling long and clear that there is 240 --

Glenn Asham

But the total 1800 equivalent units, and the options.

Paul Soubry

240 of them are in the options.

David Tyerman - Canaccord Genuity

So the 1600 to 1700, you are talking about for next year, the remainder excluding that 240 would be in a 3 to 5 year timeframe?

Paul Soubry

That’s right, David.

Operator

And we have no further questions in queue. I will turn the call back to the presenter.

Paul Soubry

Thank you very much ladies and gentlemen for joining us on the call today. Our next scheduled communication is January 15 when we put out orders for the fourth quarter of 2013. And then we will be releasing our fourth quarter results in March of 2014. Thanks for your time and have a great day.

Operator

This concludes today’s conference call. You may now disconnect.

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