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Executives

Paul Soubry - President, Chief Executive Officer

Glenn Asham - Chief Financial Officer

Analysts

Kevin Chiang - CIBC

Chris Murray - AltaCorp Capital

David Tyerman - Canaccord Genuity

Trevor Johnson - National Bank

New Flyer Industries, Inc. (OTC:NFYEF) Q4 2013 Results Earnings Conference Call March 21, 2014 9:00 AM ET

Operator

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the New Flyer Industries Inc. 2013 year-end earnings 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 Mr. Paul Soubry, President and CEO. Please go ahead.

Paul Soubry

Thank you, Melissa, and morning, ladies and gentlemen. Welcome to the 2013 fourth quarter results conference call for New Flyer Industries. Joining me on the call today is Glenn Asham, our Chief Financial Officer. For your 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 further public filings with the Securities administrators for more details.

In a moment I will ask Glenn to take you through the highlights of our fourth quarter 2013 and our full-year fiscal 2013 financial results and following that, I will provide some insights into our 2014 outlook. Finally, we will open the call up to your questions.

Let me start off by talking a little bit about 2013 holistically. As you know, in 2008 and 2009, as the global economy started into a bit of a tailspin, we set out on an agenda to transform our company from an income deposit security or IDS, as we did not believe that it was sustainable and we believed a common share company focused on long-term stability, diversification [and growth] [ph] would direct our path for us.

The last five years has been very trying, but we have emerged successfully in 2013 retaining our market share leadership in both bus and parts. We have a healthier balance sheet. We have a significantly improved culture of operations and we have enhanced our profitability. Probably the one thing that we are most proud of is the fact that New Flyer continued to pay distributions to our shareholders in both good times and in bad for 101 consecutive months now or since our IPO in 2005.

Let me share a few more perspectives on 2013. As you know, New Flyer can trace its history and our roots back to 1930 and we are very proud of our company and our history. I do however think that 2013 will prove to be one of the most significant and transformational years in the 83 year history of New Flyer.

Last year, we completed a number of strategic transformations that are fundamental to the pursuit of our long-term objective. First, and as you know in January, we completed the sale of 19.99% of New Flyer equity through the issuance of treasury shares at a substantial premium to the 30 day volume weighted average share price of the TSX to the second largest bus builder in the world Brazilian-based Marcopolo SA. At the same time we launched an operational MOU aiming at improving our competitiveness and providing future opportunities. I am pleased to tell you Marcopolo has been a tremendous investor and has really helped us on the operational side with their deep knowledge of buses, technology, global OEMs, supply chain and other things that are proving to be helpful for us.

Two, within a month of closing that transaction, we successfully acquired the Orion parts business from Daimler Bus North America and subsequently integrated it into an expanded and relocated New Flyer parts distribution center in Kentucky.

Then, within five months we successfully acquired NABI, a heavy-duty transit bus parts and [many] [ph] parts and the bus manufacturer. As part of that transaction, we successfully renewed and amended our credit facility extending it into 2017.

Operationally we were very busy last year. We finalized the creation of a Winnipeg New Flyer campus reducing the number of the facilities over the last three years from five different buildings to just two which are across the street from each other and we rationalized our manufacturing facility into a single assembly line with improved cost, quality and efficiency performance.

We improved our Canadian Manufacturers and Exporters LEAN assessment score for the fifth consecutive year and we are now at 3.8 out of 5. It's pretty impressive considering we scored just 0.08 out of 5 back in 2008. We continue to learn and put in process and enhancements to improve our business and our competitiveness.

We launched the Los Angeles completion and service facility in support of our multiyear LA Metro contract and I am thrilled to report that we are now consistently delivering nine buses a week to LA Metro.

We set up the MiDi product line in our St. Cloud facility in support of our joint venture that we signed in 2012 with Alexander Dennis, and we now have production buses online with the first deliveries planned for next month.

Then we subsequently put in place agreements with ABC Companies and with Girardin Inc. in Canada, ABC in the U.S. to become the exclusive distributor of our private bus and shuttle operators using the MiDi bus as a new market to build and expand our product and our diversification. And we are very excited about launching those agreements.

So what about the heavy-duty market in 2013? What did it look like? We estimate that heavy-duty bus manufacturers delivered about 5,083 EUs in 2013 to both Canadian and U.S. operators. And that's essentially flat from the previous year 2012. Originally we had forecasted that to be slightly down.

New Flyer's estimated market share based on the number of EUs we delivered in 2013 was approximately 43%, which is an increase from the estimated market share we had of 32% in 2012. Our share was obviously helped by the acquisition of NABI and by the assignment of the final remaining Orion bus sales contracts prior to their departure in December 2012.

From a bidding perspective, we strategically took advantage of significantly improvement bid universe and we increased our total backlog from $2.7 billion at the end of the fiscal year 2012 to $3.7 billion at the end of fiscal 2013 and for the most part at reasonable prices.

As for the aftermarket segment, the acquisition of Orion parts and NABI parts business have increased the company share in that segment to approximately 28% for fiscal 2013 compared to just 18% in fiscal 2012. All of that and our continued commitment operational excellence has translated into very, very positive results for New Flyer for 2013.

With that, I will turn it over to Glenn who will take it you the financials.

Glenn Asham

Thank you, Paul, and good morning, everyone. I will be highlighting certain 2013 fourth quarter results and provide comparisons to the same period last year. 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's 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 74.8% for this quarter compared to the fourth quarter of 2012. The increase is primarily as a result of a 64.1% increase in total bus deliveries compared to 2012 Q4 deliveries and a sales mix with higher average selling prices. In addition to the NABI acquisition, bus deliveries during 2013 Q4 were positively impacted by the reduction of 47 equivalent units from the prior quarters' work in process total.

Revenues from bus operations increased 31.9% for fiscal 2013 compared to fiscal 2012. Revenue from bus manufacturing operations for fiscal 2013 also increased compared to fiscal 2012. This increase is due to a 32.3% increase in deliveries compared to fiscal 2012. 2013 fourth quarter aftermarket revenue increased 134.9%. This increase in revenue is primarily a result of increased volumes resulting from the Chicago Transit Authority mid-life overhaul program, incremental revenue from the Orion parts business and also incremental revenue from the acquired NABI parts business.

Fiscal 2013 aftermarket revenue increased 80.6%. Revenue from aftermarket operations for fiscal 2013 increased compared to fiscal 2012, primarily as a result of increased volumes resulting from the Orion parts business on March 1, 2013 and the acquisition of the NABI parts business on June 21, 2013.

Fourth quarter 2013 and fiscal 2013 bus manufacturing operations adjusted EBITDA increased 168.8% and 54.6%, respectively. Adjusted EBITDA increased primarily due to increased bus deliveries as a result of a successful effort to reduce year-end work in process, the addition of the NABI Bus operations and an increase of $4.9 million of investment tax credits realized when comparing the two periods.

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 operation margins.

2013 fourth quarter and fiscal 2013 aftermarket operations adjusted EBITDA increased by 121.9% and 58.5%, respectively. This improvement is primarily due to the additional adjusted EBITDA generated by the CTA mid-life overhaul program and the acquisition of NABI parts and Orion parts businesses. The percentage of revenue was negatively impacted by the expected lower than average margins from the CTA mid-life overhaul program.

2013 Q4 and fiscal 2013 net earnings increased by $9.8 million and $17.5 million, respectively. The company reported net earnings of $13.7 million in 2013 Q4 compared to net earnings of $3.9 million in the fourth quarter of 2012, primarily as a result of $16.3 million increase in earnings from operations, offset by increased income taxes. Similarly 2013 net earnings increased $17.5 million compared to fiscal 2012 net earnings.

The company generated free cash flow of CAD 15.7 million during 2013 Q4 while declaring dividends of CAD 8.1 million. This compares positively to the CAD 7.5 million of free cash flow and declared dividends of CAD 6.5 million in the fourth quarter of 2012. The amount of dividends declared increased in 2013 fourth quarter as a result of issuing 11.1 million common shares in fiscal 2013 to strategic investor Marcopolo. Management continues to expect the company's free cash flow should be sufficient to maintain the annual dividend rate of $0.585 per share which we pay on a monthly basis.

The company generated free cash flow of CAD 45.1 million during fiscal 2013, while declaring dividends of CAD 30.7 million as compared to free cash flow of CAD 27.1 million and declared dividends of CAD 33.1 million during fiscal 2012. The total dividends declared in fiscal 2013 is lower than fiscal 2012 as a result of reducing the annual dividend rate to $0.585 per common share effective all dividends declared after August 20, 2012. For fiscal 2013, the ratio of dividends to free cash flow was 68.1% compared to 122.1% for fiscal 2012.

During 2013 fourth quarter, the company decreased is liquidity position by $21.3 million, primarily as a result of increased non-cash working capital, primarily made up of accounts receivable related to increased bus deliveries at the end of 2013 Q4. The $23 million proceeds borrowed from the revolver during 2013 Q4 was primarily used for working capital needs.

With that, I will turn it back to Paul.

Paul Soubry

Thanks, Glenn. We remain committed to our stakeholder model for long-term success by focusing on developing the needs of shareholders, employees and customers, and we really believe we have got the right team and the right strategy. We are really pleased and really happy with our 2013 performance, and as you know and as you see the fourth quarter was exceptionally strong as Glenn described, a result of the high number of deliveries, the strong margin on the units that we did deliver, the reversal of long-term incentive plan provision, the material investment tax credits we realized and just to note that fourth quarter represented more than 50% of the all investment tax credits we realized last year. So, a really, really strong quarter.

However, for those that have been following New Flyer, you will know that we have guided since the release of our third quarter financial statements that 2014 will be somewhat of a challenging year for New Flyer. Let me explain for a bit.

During the fiscal crisis a few years ago, the number of active heavy duty transit bus procurements dropped noticeably in the period of 2009 to 2011, and so in order to fill production slots and stabilize facilities and operations, the company built buses, New Flyer built buses under existing contracts and from new contracts. And for the most part, we burned down our backlog.

In order to replenish decreasing backlogs in an environment of fewer procurements, prices from New Flyer other offered from -- from New Flyer and offers from other bus builders dropped dramatically. So a few of the contracts that we now have online and will have online for much of 2014 will be of lower margin. Now, we reiterate these are not money-losing contracts, just lower than average margins.

So as a result, we expect that our average margin for the orders planned for the production of 2014 will be lower than the average margins we received in 2013. This is not a surprise to us. This is something we understood as we moved into this fiscal year. While the active competition through the bid universe showed a slight decrease in the fourth quarter of 2013, we believe that the number of competitions to be released in 2014 will increase and recover. And notwithstanding the recent growth in backlog, we do not currently anticipate increase in our average weekly line entry rate of the 48 EUs for average delivery rate in 2014.

We reiterate our previous advice that the performance of the company are subject to significant quarterly volatility with margins being affected by factors such as bus type and length, propulsion system, contract rate and unique customizations required on a customer-by-customer basis. Based on our current projections, we anticipate that Q1 2014 adjusted EBITDA will be significantly less than Q4 2013 and likely lower than the first quarter of 2013, as a result of several factors, including such things as the number of deliveries in the quarter is to expected to be of 100 EUs less than the 635 units we delivered in 2013 Q4, the impact of lower margins due to some of the competitive and bidding environment I just discussed.

We currently anticipate that Q1 2014 adjusted EBITDA will include a reduction of the fuel tax credits as compared to the $4.9 million of investment tax credits realized in 2013 Q4. We do expect to realize the remaining $13.7 million investment tax credits over the next two to three years. However, the amount realized on a quarter-by-quarter basis will be volatile.

We believe it's more meaningful to evaluate the performance of the company by comparing the last 12 months results at the end of the current period against the previous period's last 12 months. We forecast that even with factoring in the lower expected results in Q1 2014, the company's LTM at the end of Q1 2014 is expected to approximate the LTM at the end of 2013 Q4

Going forward and with departure from the industry of Orion in 2012, we anticipate industry capacity to be more in line with demand and despite the ongoing pressure on margins we believe pricing on certain types of bus competitions has begun to normalize. In addition, we continue to pursue cost, sourcing and overhead synergies and savings in daily operations through our operational excellence initiatives. We currently plan to increase the average production line entry rate to approximately 49 EUs per week for the last three quarters of fiscal 2014 to offset the expected reduced deliveries in Q1 2014, but all that will be maintained our yearly average line entry rate of 48 EUs per production week.

Now we have had lots of discussion and questions around the status of the NABI Bus and parts operations. We launched an assessment of the NABI Bus business following its acquisition and spent good portion of the last half of 2013 in site visits by all parts of New Flyer operations groups and a number of visits from the NABI teams to New Flyer manufacturing facilities. The objectives were very much around benchmarking, looking for strengths and opportunities of the two organizations and looking for potential synergies and where the synergies have been available, we have executed such as some sourcing synergies and so forth. All of the groups continue to review and implement various initiatives that were identified during those benchmarking visits.

Now we have a number of priorities that we set based on return on investment, time and resources required to accomplish. Longer term synergies identified as major projects still have to be prioritized, assigned to specific leadership teams and scheduled for execution. Department heads in each organization are building relationships and we continue to do so with a lot of visits back and forth and that analysis will continue on a regular schedule to ensure that we continue to build on each other's strengths.

Like our bus business, New Flyer and NABI parts continue to operate separately with management teams continue to execute on their business plans and capture their synergies where possible. The focus right now has turned to trying to ensure that our information technology systems are standardized and will be the key to understanding future cost saving initiatives.

The aftermarket group has also initiated their own review of the NABI parts business and those integrations or opportunities around common expense categories, freight rates, packaging suppliers, vendor cost differentials and so forth are all detailed review and findings has begun.

So now we move on to 2014. We look forward to talking to you again in approximately six weeks as we prepare for our annual general meeting in Toronto in May. I am also proud to report that are Chairman, the Hon. Brian Tobin presented me yesterday with my five year pin and what seems like five years some days seems like 50. I am sure pleased and proud to be a part of this company. I am proud of our leadership team and we really look forward to the next five years.

Thanks for listening today and with that we will invite your questions. Melissa, can you please provide our callers with instructions?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Kevin Chiang of CIBC. Your line is open.

Kevin Chiang - CIBC

Hi, good morning, and thanks for taking my question, Paul and Glenn.

Paul Soubry

Hi, Kevin.

Kevin Chiang - CIBC

Just doing some back-of-the-envelope math here, when I look at your guidance that you have provided, it looks like the average EBITDA per bus in Q1 is going to be roughly $13,000, $14,000 per EU. Am I doing my math correctly there, firstly?

Secondly, if I am, that seems like a pretty dramatic decline in the margin per bus. So just trying to get a sense of how you see that trending through the balance of the year and into 2015?

Paul Soubry

Haven’t got to the - seen all your detail [not so] [ph] obviously, but I must say, your trend analysis is definitely bang-on.

Kevin Chiang - CIBC

Okay.

Paul Soubry

We would expect to see very little margins in Q1. As you know they have been volatile, period-to-period, but these are on the low side. Right now, our view, and again this changes as our production schedule may change during the back half of the year, but right now, our view would be Q1 would be the lowest quarter.

Kevin Chiang - CIBC

Okay, that's helpful. Then, I know you have reiterated your commitment to the existing line rate, I think in the past you have talked about, you would like to see three forward quarters of slots to be 100% full before you would look to raise that line rate to maintain your operational efficiency. How many near-term slots are available now? Or how many do you need to fill before you are comfortable in raising that line rate?

Paul Soubry

Tough to answer, in terms of doing that math, but a couple of insightful statistics and so forth, Kevin. A year ago we were literally eight or nine or 10 weeks from the point of open slots where we were introducing new contracts. So hurrying up doing the non-recurring engineering, hurrying up doing the supply chain and so forth. Our world, or our optimum case is 29 weeks. We are now operating around 20 weeks to line entry. So we clearly have a much, much better schedule stability in 2014 than we had in 2013.

But remember too that we are trying to ensure that we optimize the production slots both now at the NABI facilities and the New Flyer facilities and so we’re being very careful and cautious. This is why we were pretty aggressive in our conversations today and in our MD&A and in our press release, that given what we know right now, given what we are bidding on and so forth, we still do not believe that in the next foreseeable quarters that we plan to increase the production rate

The current open slots for this year going in the order of 400 or so between the total 2,400 or 2,500 slots across all of New Flyer and NABI.

Kevin Chiang - CIBC

Okay, that's very helpful. Then just last one for me. Saw a couple of the distribution agreements that you signed or amended over the past few weeks here. It looks like it will help increase your penetration into the private market. How big is that market in North America? And is it big enough that you can potentially leverage certain cost synergies in your supply chain that may be constrained today because of local by requirements, for example taking advantage of lower C dollars, selling to the private market. I would imagine there is no buy local constraints when you are selling into that segment.

Paul Soubry

Yes, you are exactly right, Kevin. So a couple things on that. Obviously the bill of material that we have now got locked down, if you will, for the public and the private offering of those buses is slightly different because of exactly what you just said that no requirements for local content on the private market. Having said that, we don't yet have the volume and therefore some of the purchasing leverage and cost efficiencies and so forth don't make their ways into it in the short term. To give the market some context, remember that what we are doing is two things with that product.

A, we are going after a segment we do not play with in any way shape or form today which is private shuttle, the small university type market where both Girardin and then ABC are very, very strong and have relationships in that space. And they are selling the MiDi now against a couple of other buses that are similar in some cases a Gillig bus is sold in those places, in some cases the ElDorado, some cases this new [Vincinity] [ph] bus that we are seeing now, built in China is coming in and so forth. We are also selling against a cutaway type operator, who is a truck based bus that has, for lack of a better word, a tent bolted on the back of the thing.

So what we expect is, and we have singled our business plan is to ramp or slowly ramp up the MiDi bus from 67 units up to 300 or 400 units a year, is what we think the current business plan. The market size, based on the addition of the public market that we think we can go after, the small transit, the private market, we think can be upwards of around 1,000 units a year. But that's a few years out until we find some maturity in our product in that space/

Kevin Chiang - CIBC

Perfect, and I will leave it there. Thank you very much.

Paul Soubry

Thanks, Kevin.

Operator

Your next question comes from the line of Chris Murray of AltaCorp Capital. Your line is open.

Chris Murray - AltaCorp Capital

Thanks. Good morning, guys.

Paul Soubry

Hi, Chris.

Chris Murray - AltaCorp Capital

Just then turning back to your guidance, just so I understand this a little bit, you basically said that Q1 EBITDA on 2014 should be substantially less than Q1 in 13, but then you have also said trailing four quarter through the end of Q4 should be the same as trailing four quarters to the end of Q1, which kind of implies that, just by definition, Q1 has to be Q1. So what am I missing? Is it basically the explanation is that Q1 will be lower just in bus manufacturing, but that aftermarket will offset it with the acquisition? Is that the right way to think about it?

Glenn Asham

Just to be clear, what have you said, Q1 of 2014 will be substantially lower than Q4 -- sorry Q1 2014 substantially lower than Q4 of 2013.

Chris Murray - AltaCorp Capital

Okay.

Glenn Asham

And will be less than Q1 of 2013 as well.

Chris Murray - AltaCorp Capital

Okay.

Glenn Asham

So it's going to be lower right, but when you look at, sort of approximate -- look at the [inaudible] number it will not go down substantially. But you are right, it will be on the bus manufacturing side that will see some lower earnings.

Chris Murray - AltaCorp Capital

Okay, but then as you said trailing four quarter should be fairly similar. So the impression that I am left with is, that Q1 2014 should be similar to Q1 2013.

Glenn Asham

Right, approximately, I guess.

Chris Murray - AltaCorp Capital

All right, cool. So, yes, just to put that out of the way, I guess a couple of questions for you, just in terms of filling up the rest of the year, one of the things that you have got right now in 2014, is you have got actually a fairly large backlog of options that are scheduled for expiry this year. So a couple of piece to this. One, historically the option conversion rates have been fairly high, usually above 90%. But I guess the question I have got is, even in thinking of this, it's not your option, aren't you guys almost better off letting some of those expire, because I am going to guess they are probably booked in times when the pressure was weak, and I guess, as part of that, maybe if you can discuss where your pipeline is? Can you replace some of those orders maybe with better margin contracts? So just any color around how that whole dynamic might work?

Paul Soubry

Well, that's a really good question, Chris, and you get to the root of our selling activities. First of all, as you know and with the discussions -- the marketing work we did with you recently, we continue to feel we are in a way better spot now than we were a year ago and so we can be a little bit more selective about where we try and sell options and so forth as opposed to last year where if somebody took an order, we will sell them whether it's a new order or an option at any time. Having said that, depending on the customer, depending on the contract, depending on when the option expires, we may or may not have enough lead time to win a new contract to put them online.

So I am not going to suggest that it's that easy that we can just let stuff expire. When we go through each one of those contracts, every one of them stands on its own. Clearly we are cautious of the margin. Some of those contracts have, or most of them have, purchase price escalation associated with inflation and so forth that we can bake into it and some of those contracts, the customer will change some of the specs around the bus, which allow us to reprice the bus and so forth.

I wouldn't say it's any different in our psyche of trying to fill those slots. Having said that, we are very conscious of trying to ensure that we mitigate the margin loss on it. The bid universe, as you saw and I think you picked up on a couple of your questions, while the total demand of the universe hung around, that 19,000, 20,000. The actual bids in process dropped off a little bit in fourth quarter and we have seen that starting to recover in the first quarter and there's lots of bids that we are now starting to see hit the street again. The problem is, those ones hitting the street won't be decided in time to be able to fill 2014 slots.

Chris Murray - AltaCorp Capital

Okay. So and then, I guess, just thinking about the option conversion rate then this year, certainly in 2013 you had the one contract that we have known about for some time that skewed the numbers but would your expectation be that he 2014 would be a normal conversion rates, above that 90% level that we have historically seen?

Paul Soubry

No, I don't think we are going to see that, Chris. Having said that, we did get rid of the albatross sitting in there. Again it's still a little bit too early to see what the conversion rates (inaudible). You remember that we saw some, originally in the first couple years of those multiyear contracts was, as you said, 95%, 98%. Then we had a period of time where it was 60s and 70s conversion rate. I would say that we are probably in that same kind of 60%, 70% conversion, 80%, the range, with the caveat that every customer is different with every situation associated with their funding, with their fleet renewal plans and so forth. But I don't expect it to be in the 90s.

Chris Murray - AltaCorp Capital

Okay, great, and then just one more question. Just talking a little bit about some of stuff that you guys have in the pipeline. Can you just give us some more update on where you maybe with your development of the all electric bus? And any sort of plans for this year? And what you are steering in the market in terms of uptick?

Paul Soubry

Sure. I think we been fairly transparent on this one. Our strategy on the electric is that we, and our philosophy and view is that that transit in inner-city is a perfect candidate for an all electric platform, whether it be a trolley like we see in Vancouver or San Francisco or Seattle and places like that, or whether it's a battery dominant bus. As we have been communicating with press releases and so forth, we have one New Flyer Xcelsior now offering and in service in Winnipeg running between the Manitoba Hydro offices shuttling people and we have a proof of concept, both at a depot level chargers, so an overnight charger as well an on-route charging type system.

There are two other major players in the U.S., entering the U.S. today offering their own bus with their own charging system. One is called Proterra, which is a start-up a couple years ago with composite bus and they have about, I don't know, six or seven, maybe more years, sorry 10 customers with proof of concept type offerings as well. And then there is another one called BYD which is a Chinese battery company that is now offering demo busses but they have not delivered a production bus yet in the United States.

We have another contract that we are just in the process of delivering which is two very, very heavy battery dominant buses to the City of Chicago and they will be delivered here in the second quarter. And then we have four more buses that are all based on Xcelsior platform that will have on route charging that would be delivered and operated by Winnipeg Transit here for the rest of the year.

So summary, we believe all electric is a very, very viable economic solution for public transit. We don't believe it is mainstream tomorrow or next year or the year after. We kid of see 2020 as the time where the economics, the battery check, charging, the cost, the storage, energy storage and so forth will make it economically viable. And our position is that we are not going to be left behind. We are at a very, very early stages of the R&D on this. But for the next couple of years, what we will be selling will largely be clean diesel. We have a good percentage of trolley work coming up the next couple years for Seattle and San Francisco. We believe that will have a good portion like last year. Probably about 35% of our buses were CNG. And we might see a little bit of slow down in some cases of the hybrid electric type buses.

Chris Murray - AltaCorp Capital

Okay, great, and then just, Glenn, a couple of quick questions, just on working capital. It did creep up, I guess with the high delivery level. Just what are your expectations, I guess, for working capital over the year? Should we be thinking that with those deliveries and the ramp down Q1, what are your thoughts, I guess, through the year on how that evolves and I guess, also where you guys are going to be maintaining your inventory level?

Glenn Asham

Okay, so, in terms of receivables, for sure, we are as high as the end of Q4. We do expect them to come down generally throughout 2014. Although I have to caution, right, every contract has its own payment terms. So there may be some bumps along there, but our general expectation just on smoother deliveries that we would see a reduction in the receivable.

Inventories, I guess, we think that where we are today or at the end of the year in terms of our online work [ph], that should be fairly sustainable. The question is around the finished goods and obviously it's easier to get the finished goods out at year-end when you are production lines are shut down for Christmas holidays than it is on a quarterly basis. So I would expect to see a small increase in the number of finished goods that are working through the business for Q1, Q2 and Q3.

Chris Murray - AltaCorp Capital

Okay, great, and then just one follow-up, just kind of housekeeping question, just in terms of scheduling. If we think about weeks of production in 2014, should we plan for the one week shut down at Christmas and the one week shutdown in the summer period as well?

Glenn Asham

Those decisions haven't all been finalized yet, but I would say that it would be the best estimate at this point.

Chris Murray - AltaCorp Capital

Okay, great. Thanks, guys.

Paul Soubry

Thanks, Chris.

Operator

(Operator Instructions). Your next question comes from the line of David Tyerman of Canaccord Genuity. Your line is open.

David Tyerman - Canaccord Genuity

Good morning, guys.

Paul Soubry

Hi, David.

David Tyerman - Canaccord Genuity

So just one clarification. When you guys say the LTM results should be similar for Q1 as where you were at Q4 2013, what do you mean by result? Is it EBITDA? Sales? EBITDA for bus?

Paul Soubry

Yes. I would say just EBITDA. We are looking at there.

David Tyerman - Canaccord Genuity

Okay, thanks. Okay, second question. On the 2014 margins, they are coming down for the reasons you described. I am wondering if you could give us some idea where you think they are coming down to? Are we looking at something more like 2012 kind of level for EBITDA for bus or are we going lower?

Paul Soubry

Definitely there are some cases, not all cases, where we are lower. Yes, we saw it. Look, obviously we still have a significant number of slots that we are going to fill in at the back end of the year. So there we can't really stake at how we are going to build it, see an opportunity to improving it or not. But is it's in the front half of the year, there is a couple contracts that are lower and then the rest are sort of in the ballpark. So where we have been running historically.

David Tyerman - Canaccord Genuity

Okay, so Q1 is going to be quite well. Does that drag into Q2? Or do you see some (inaudible)?

Paul Soubry

I would say there is some drag into Q2. Well, actually there is going to be some drag into all quarters, but it is going to become relatively less.

David Tyerman - Canaccord Genuity

Okay, fair enough. That's helpful. And then just on the aftermarket. The margins dipped down again and it might just be the mix because of the CTA contract. Is the kind of level we are seeing there, is where we should be thinking about going forward? Or is there some direction from there?

Paul Soubry

Glenn?

Glenn Asham

So I look at part of it is definitely CTA contract and that is because there is both a labor component and a parts component to that contract. It's not the same margin profile as other parts of the business.

David Tyerman - Canaccord Genuity

Sure.

Glenn Asham

In terms of margins on the pure bus business, I think we have seen a leveling off in that business. Now, David, remember the visibility in the parts business isn't the same as the bus business, right. You have 45 to 60 days view of the orders book in the parts business versus a very long tail on the bus business. But what you have seen so far --

Paul Soubry

As you characterized, to David's question, as you characterize the core transactional parts business seems to level off if not improved a little bit from margins. But the reason we are seeing a little bit of degradation is largely mix because we have taken on this incremental contract in terms of the fairly large mid-life program that has less inherent percent margin by the nature of the contract than a traditional market parts sale.

David Tyerman - Canaccord Genuity

Right, I understand that. So the mix element, are you kind of at the sustainable mix for the remainder of the contract now? Or would there be --?

Paul Soubry

David, I think that's a fair assessment.

David Tyerman - Canaccord Genuity

Okay, fair enough. And then you do have a reversal of the long-term incentive plan. What was the impact of that in dollars in Q4?

Glenn Asham

Yes. I think it was approximately $1.5 million. I think its in the MD&A. Again, I am sorry. I don't have that in my hand.

David Tyerman - Canaccord Genuity

Okay, that's fine. If its there, I will find it. And then can you just explain what was going on there?

Glenn Asham

Yes. So obviously, our long-term incentive plan is based on three year performance and its on hitting target. So we were constantly having to estimate where do we think we are going to perform against those targets to come up with the provision. As we completed our annual plan and long-range plan for the business in the fourth quarter of 2013 for the next three years. And I will just say, the guidance that we gave to the marketplace in terms of Q4 is showing a reduction in the earnings, especially in Q4, primarily. So that reduced earnings in Q4 also impacts how we think we will be able to perform against the overall targets over that three year period. So we attested a provision to that new target expectation. So effectively because there is three year overlap, I think we have an estimate on how we are going to hit the target on two of those targets that we have over-accrued for in some cases over the last two years. So that's all unwind in the quarter.

David Tyerman - Canaccord Genuity

Right, okay, and then, the last question I had is, just foreign exchange, the dollar has obviously changed quite a bit recently. Any thoughts on how that would impact you guys from a margin standpoint?

Glenn Asham

So if you look at it, obviously there is a rift in terms of the contractor already fixed priced in the backlog. So obviously on those Canadian dollars, there will be some margin erosion. Having said that, we do have some Canadian costs that are borne in our U.S. contracts. So there will be a small pickup on those contracts, but definitely we think there is going to be a net loss on the Canadian contracts that are in the backlog, a smaller portion of the backlog. On new business going forward, obviously, we have adjusted to the new current rate.

David Tyerman - Canaccord Genuity

Okay.

Paul Soubry

(Inaudible), our position, David, long-term, it's not that big of a deal because the Canadian portion of our business is small. The Canadian portion of the content, the material is relatively small, in the grand scheme of things. Unfortunately where we have stuff that's priced or stuff that's contracted in Canadian dollars today, we are going to get hit on. So we offset that natural hedge that Glenn was just talking about.

David Tyerman - Canaccord Genuity

Right. So just when I think about basically what, if I understand what you are saying correctly, you have got a bunch of U.S. dollar and puts on the Canadian contract that obviously hurting the margins. Any idea of the rough magnitude of the hit in 2014 from this?

Glenn Asham

Yes, it's hard to say, right, because we do have some mitigations in place. We do have ability to adjust on the price where we couldn't estimate that at this point. I would say though however that to the extent of the hit, it should be contained to 2014.

David Tyerman - Canaccord Genuity

Okay, fair enough. That's great. Thanks very much, guys.

Paul Soubry

Thanks, David.

Operator

Your next question comes from the line of Trevor Johnson of National Bank. Your line is open.

Trevor Johnson - National Bank

Hi, good morning, folks.

Paul Soubry

Hi, Trevor.

Trevor Johnson - National Bank

Just a quick one. Paul, you mentioned on the call and also in the MD&A, about seeing some signs or some evidence that the competition environment is getting back to the normal levels on the manufacturing side. Just curious what data points you are seeing there or what's supporting that view? Is it just you are seeing less crowded bids obviously because there are fewer players or is there feedback from operators? Just curious what makes you say that?

Paul Soubry

Well, we go through that period of three or four years there where we had a couple of competitors that were struggling a little bit. Our backlog was going down. So when we go through our build up of our cost and decide on what we are going to bid and so forth, we go around and around in trying to decide what is it going to take to win these kind of things. We chose the word normalization carefully because it's not like in the whole world prices have gone up, but we are seeing a little bit more rational approach for us and everybody else in terms of trying to secure that capacity. And so a couple of the competitions we have had recently, we have just chosen to raise our prices. And so we are trying to make sure that we are getting paid fair value for the service, the quality of the product and so forth. And we are trying to get far and smarter about making sure that we sell our capacity to customers that will pay for that value.

Trevor Johnson - National Bank

Do you get feedback after bids as to the winner and the pricing terms or any color on why you may have lost a bid?

Paul Soubry

Well, yes. They are all public. The vast majority of them we get scores, how we scored technically. We clearly know what we bid. In some cases the board of the customer will publish in their board meetings what all of the prices were and so forth. It's not universal that we see on every single bid, but there are times when most of the times we see how we score or how the pricing comparisons were. Its hit or miss, though.

Trevor Johnson - National Bank

And with the comments, you get the flavor or the sense that they are also trying to be a little bit more nimble with some price increases here and there where appropriate?

Paul Soubry

Well, it's a different environment. Our core customers have seen lots of crazy OEM situations over the last 10 or 15 years in the bus space of coming and going and coming going. So it's not lost to the customers when you lose a couple of OEMs in the space that you have got a fleet of their product. It's not a good thing from a so fleet supportability standpoint. So again, I can only tell you what we are doing, which is we are being far smarter at how we are pricing. We are far more comfortable based on where the order book is right now that we are going to sell our capacity to the right customers that fit our product mix and our performance, that pay for our performance and that kind of stuff. So that's why we chose that we are in normalization, as opposed to, I don't remember the exact words we have used over the last couple of years, but we have been bidding like crazy to make sure that we secure the order book.

Trevor Johnson - National Bank

That's great. Thanks, Paul.

Paul Soubry

Thanks, Trevor.

Operator

There are no further questions in queue at this time. I would turn the call back to our presenter for any closing comments.

Paul Soubry

Great. Thank you, Melissa. We really appreciate you joining us here today and we will be back in early May with our Annual General Meeting and our first quarter results at that time. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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