New Flyer's (NFYEF) CEO Paul Soubry on Q1 2016 Results - Earnings Call Transcript

| About: New Flyer (NFYEF)

New Flyer Industries, Inc. (OTC:NFYEF) Q1 2016 Earnings Conference Call May 13, 2016 8:00 AM ET

Executives

Paul Soubry – Chief Executive Officer

Glenn Asham – Chief Financial Officer

Jon Koffman – Investor Relations

Analysts

Chris Murray – AltaCorp

Kevin Chiang – CIBC Capital Markets

Mark Neville – Scotia Capital

Stephen Harris – GMP Securities

Bert Powell – BMO Capital Markets

Operator

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I'd like to welcome everyone to the New Flyer Industries Inc First Quarter 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, Chief Executive Officer. You may begin your conference.

Paul Soubry

Thank you, Stephanie, and good morning ladies and gentlemen. Welcome to the 2016 first quarter results conference call for New Flyer Industries. Joining me today on the call is Glenn Asham, our Chief Financial Officer. For your information, this call is being recorded and a replay will be made available shortly after the call.

As a reminder to all of our participants and others regarding this call, certain information provided today maybe forward-looking and based on assumptions and anticipated results that are subject to uncertainties. Should any one or more of these uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary significantly from those expected. You are advised to review the risk factors found in the company's press releases and other public filings with securities administrators for more details.

As you can imagine, we’re very pleased with our performance in the first quarter of 2016 and remain encouraged with the overall market outlook and our business plan. The quarter featured excellent operational performance combined with prudent expense management and advantageous mix of customer builds. The combination of New Flyer and Motor Coach Industries is proving to be a great marriage with many common goals in parallel markets.

I am pleased to report that our due diligence work on MCI was thorough and accurate and no major surprises have been uncovered. We’ve been warmly welcomed by the MCI employees and customers, who believe in the merits of our combination and then it provides a long awaited stability to the MCI business, the message has been simple. We’re a bus business that acquired a bus business, who wants to be in the bus business. We’re not investors, we’re operators and so far so good.

As we have discussed in the past, New Flyer developed the capital allocation framework, which is reviewed regularly by the board to assess our strategic business plans and provide guidance on the appropriate strategy for our company’s capital allocations. As part of our ongoing review, I’m pleased to announce that yesterday the New Flyer Board of Directors approved an increase to our annual dividend rate by 35.7%, so it goes to C$0.95 per share from a current rate of C$0.70 per share, effective for dividends declared subsequent to the May 12, 2016.

I’ll now ask Glenn to take you through the highlights of our financial results for the first quarter and following that I’ll provide some insight into our 2016 outlook, areas of focus and then we will open up the call to your questions. With that I will turn things over to Glenn.

Glenn Asham

Thank you, Paul, and good morning everyone. I’ll be highlighting certain 2016 Q1 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 first quarter 2016 financial statements and management discussion and analysis of financial statements, which are available on SEDAR and the company's website.

I do also want to remind you that New Flyer's interim unaudited 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. This is also the first full quarter at the financial results of MCR and included in New Flyer's unaudited consolidated financial statements. We have provided 2015 quarterly revenue and adjusted EBITDA data for MCI in the management discussion and analysis of our financial statement for information and comparative purposes.

The company generates consolidated revenue of $553.3 million in 2016 Q1, an increase of 45.5% compared to $380.3 million during the first quarter of 2015. Revenues from transit bus and coach manufacturing operations increased 51.4% for the first quarter in 2016 compared to the first quarter of 2015. The increase was primarily the result of a 44.9% increase in total new transit bus and coach deliveries and a 1.1% increase in the average selling price related to those deliveries.

The deliveries increased primarily as a result of the inclusion of MCI and an extra week in 2016 first quarter as compared to 2015 Q1. After market revenue increased 26.4%, primarily as a result of revenues generated by MCI and the extra week when comparing to Q1 2015. As well the core after market revenue in 2016 Q1 increased 7% when compared to the pro forma after market revenue for the core business in 2015 Q1. The 2015 first quarter core after market revenue was determined by including MCI results for the first quarter of 2015, while excluding the revenue from the Chicago Transit Authority mid-life program, which is a non-recurring revenue stream.

Transit bus and coach manufacturing operations adjusted EBITDA increased 207.9%, primarily due to increased deliveries and improved margins. Contributors to the increase in margin is a favorable sales mix, improved pricing and the positive impact from product rationalization. Product margins can vary significantly between orders due to factors such as pricing, order size, propulsion system and product type and components specified by the customer. Management cautions readers that quarterly transit bus and coach manufacturing adjusted EBITDA can be volatile and should be considered over several quarters.

Aftermarket operations adjusted EBITDA increased 36.8% as a result of the adjusted EBITDA generated from MCI's aftermarket business, as well, the adjusted EBITDA as a percentage of aftermarket revenue during the first quarter of 2016, increased 1.5% when compared to the first quarter of 2015.

Net earnings increased by 108.1% and earnings per share increased to 100%. The company reported net earnings of $22.6 million in first quarter of 2016, representing an improvement compared to net earnings of $10.9 million in the first quarter of 2015, primarily as a result of improved earnings from operations offset by the increase in finance cost and income tax expense.

The Company’s net earnings per share in 2016 Q1 was $0.40 compared to $0.20 generated during the first quarter of 2015. During 2016 Q1 the company increased it’s liquidity position by $23 million, primarily as a result of increased cash flows generated from operation. The Company generated free cash flow of C$61.5 million during the first quarter of 2016, as compared to C$12.3 million in the first quarter of 2015. This is primarily as a result of increased adjusted EBITDA.

The Company declared dividend of C$10.4 million in 2016 first quarter, which increased compared to C$8.1 million in the first quarter of 2015, resulting in an improved free cash flow payout ratio of 17% from the first quarter of 2016, as compared to 65.8% in the same period in 2015.

As Paul noted earlier, effective for dividends declared after May 12, 2016, the board of directors has approved a 35.7% increase in the annual dividend rate from C$0.70 per share to C$0.95 per share. It is now the Company's policy to pay dividends on a quarterly basis. So the first quarterly dividend in the amount of C$0.2375 per share, if declared in June 2016, is expected to be paid in July 2016.

With that I’ll turn it back to Paul.

Paul Soubry

Thanks Glenn. The Company’s annual operating plan for 2016 ending January 1, 2017 is a 53-week period. And our plan this year is focused on a couple of major initiatives. First and foremost, and you see it in the results in the first quarter, the production stability and our ability to manage and execute to our master schedule, the ability to have lead time on the schedule planning material, completing non-recurring engineering has truly benefitted our operational performance.

Second, we continue to achieve cost and overhead savings as a result of our decision to focus exclusively on the Xcelsior platform for transit buses, as well as through all of our daily operational excellence initiatives.

Third completing the integration of the New Flyer NABI’s aftermarket business, what we call project to business, what we call Project Convergence, is well on its way and we’re on track mid-year for making it one company for transit bus parts. And finally, we’re at the deep process of analyzing and investigating both New Flyer and MCI for the right method and approach for combination and integration going forward. The Company’s production schedule combined with the current backlog and orders we anticipate for the company under new procurements is still expected of us to deliver new transit busses and coaches of approximately 3,450 during fiscal 2016, which compares to 3,265 for fiscal year 2015, noting that there’s an extra period, an extra week in the period. Nothing in our guidance we’ve provided so far has changed.

As for the aftermarket business, excluding the CTA mid-life overhaul revenue, year-over-year we also maintained our guidance that core parts revenue is expected to grow by approximately 5%. And so far results are right on track.

With respect to the integration of MCI, the Company continues to target annual synergies for the first few years of approximately $10 million through the rationalization of corporate costs, development of additional OpEx initiatives and the expertise we are applying on strategic sourcing initiatives. To date we’ve achieved about $3.0 million of those annualized synergy savings. We are taking our appropriate time to learn the motor coach business, to learn MCI as a company and to evaluate our competitors in the overall market.

We are assessing multiple scenarios for the future and as we’ve done in the past once we have a plan, we will disclose estimated synergies – additional synergies with the expected related cost and timeline to achieve them.

The company remains poised to continue with the leading provider of heavy-duty transit buses and motor coaches and a leading provider of aftermarket parts and supports in North America. Those were the outstanding we are very proud of our history and very excited about our future growth.

So thank you for listening today, with that we will invite your questions, Stephanie, we are going to handle some questions with people in the room here, I want to take first and then we will turn it over to you to take the questions online. All right?

Question-and-Answer Session

A - Jon Koffman

Okay. The first question comes from Chris Murray from AltaCorp.

Chris Murray

Thank you, good morning. So a couple of quick questions. First of all on the dividend, nice increase and I guess it implies a decent cash flow and some confidence in the business of our board. Any thoughts about was there any changed in thinking at the board level around targets or how we should think about the dividend moving forward either as part of earnings or free cash flow?

Paul Soubry

So as we talked on these calls and in the past, and in our MD&A, we about two years ago put in place what we call a capital allocation structure or framework that Glenn presented to the board and then we’ve been using its way to assess the business, the payout ratios, and the appropriate yield we think that’s required for our all type of share and so forth. We are not going to publicly describe the ratios and percentages but when we took our results and our forecast results for the rest of 2016 and into 2017 and 2018 and we start to relate that or lay it against our capital structure, we feel very comfortable that that size of a dividend increase was appropriate and sustainable.

Chris Murray

Okay. And I’m sure we’re talking about synergies a lot today but one of the things that we saw it was very interesting is looking at the MCI product line. Any thoughts about product development in the MCI world, product rationalization, new developments maybe applying some of the technologies you’ve learned in the transit bus and coaches, any sort of thoughts on that would be constructive?

Paul Soubry

Yes, it’s really a good question, Chris, because MCI has been around for a long time and there’s two core products there, the de-model which is the workhorse really in the public and the line haul type fleet and then there is the J model. And as we’re now 4.5 months into it and we look at where the MCI product fits in the market roadmap of our competitors and we import the Setra buses from Daimler at Germany, we are really, really deep and trying to understand the next 10-year plan. And somehow, someway we’d like to do the same thing we did at Flyer which is get the MCI products onto a common platform.

So that we’re trying to get our head on, as well as the full range of the products.We don’t play today in the low cost, smaller sized, motor coach space in North America, for example. So I would expect over the next months and years we’re going to be very clear on this product strategy, we’re not there yet but we’re deep in that analysis. Today we’re very competitive with the D and the J models but going forward we want to continue to really look at that product line.

Chris Murray

Okay, that’s all, I’ll turn over.

Paul Soubry

Thanks.

Jon Koffman

All right, next question is from Kevin Chiang from CIBC Capital Markets.

Kevin Chiang

Thanks, Jon, Paul and Glenn here, maybe just two from me. The first one being another quarter of good bus margins 10.3%, when I look at the seasonality of MCI it seems like the back half of the margins are sequentially stronger than the first half. Should we think of this, 10.3% as being the low point of the year or are there unique mixed issues we should be contemplating here in Q1 that had it higher than you would have otherwise assumed?

Glenn Asham

Sure, Kevin. For sure, I guess I don’t just talk [indiscernible] about the transit from the heavy-duty business. We definitely know that for our transit business and we had a strong mix last quarter and obviously a very strong mix this quarter, over the next quarter so we don’t see much change to that. But for sure as we get into the fourth quarter I mean the positive out to go[ph] there’sthat certainty. I guess a good news and we’re in a much better position in terms knowing what we’re going to produced right now but we still do have a situation where we’re paying on the needs of the customer contracts move out in and out in that – little bit further out.

So we would expect that we’re probably at a high in terms of the margins coming out of the mix and think its probably going to be fairly good over the next quarter or so, so but that is definitely a possibility that it starts dropping off depending on how that mix rounds or shapes up top say late Q3 and Q4.

Paul Soubry

The recent dynamic though, so as when we get to the fourth quarter that’s something to be new for us, where U.S. private operators will take advantage of accelerated tax and buy a good portion of their fleet in kind of November, December of each year. And so, we’re going back and look at the history of MCI, as Glenn said, we put the 2015 numbers in the MD&A, so you can kind of see comparatively. And so, if we do see maybe margins not as aggressive or as exciting as they are in the first quarter, we do see a good opportunity to offset that and balance that with strong MCI performance later in the year.

So, I would maybe characterize that we’re – that that average is healthy, strong. And as Glenn said, we’re, at this point in time, pretty encouraged for the rest of the year, most of the transits slots are first sold. So we know what’s going to be built and when, it’s the MCI side that has variability as 60% of it is transactional in nature.

Kevin Chiang

That’s helpful. And maybe just last one for me. Your aftermarket, your quarter revenue or organic revenue grew 7%. You’re guiding to 5% for the year. I presume the extra week produce that 7% number a little bit.

Paul Soubry

Yes.

Kevin Chiang

But how about reconcile the strong number out of the gate versus your number for full year and how conservative is that 5%?

Paul Soubry

Yes, you remember we said that heading into the year, right. The thing about the parts businesses is a good portion, and I’m going to stay 40 or 50 percentage is transactional in nature, hey I need – we will need that oil fields, or is need something so we’re selling all day along. We have a normal contractual business for certain customers have – we won the one, two-year, three-year or five-year contract always sell them a break part and so far. So we’re kind of in the position there with a planning and in an execution exercise.

Every once in a while, we will get a program where a customer will say hey I need a 1000 driver barriers or I need a whole bunch of stuff for a retrofit campaign and that’s really contributed to a very, very strong first quarter in addition to the extra week. But we’re excited about the parts business and [indiscernible] for a long-time getting both NABI and New Flyer on the same IT systems, the ability to buy appropriately, fulfill customers, and then manage the pricing and the relocation of the inventories across that big, big deals. So just some milestones by mid July, we will be on exactly the same platform. We’re well in the same – in process for the rollout of that, much like we did with the bus rationalization. And so I think that will help us in short good performance in this year.

Kevin Chiang

That’s very helpful. Thank you very much guys.

Operator

Okay. Next question comes from Mark Neville from Scotia Capital.

Mark Neville

Yes, sir. Maybe just a follow up on the after market. Do you have a sense maybe how much pricing placed [indiscernible] 7%?

Paul Soubry

I would suggest its more volume and mix that drove a very strong first. As I said, 40%, 50% of it’s transactional, so everyday we get a different price for a widget that comes over the line. And that business still has everything from a customer calling and saying I need one to sheets falling off the fax machine at night saying please raise your pricing and so forth. So there is lots of dynamics that will affect the pricing side of it. But I think when I look at the first quarter most of it was a volume oriented scenario.

Mark Neville

Okay. And then just the margin in that business has a nice improvement – what’s driving that [indiscernible] $3 million cost savings from the MCI or is it…

Paul Soubry

No. The synergies on MCI that we have identified so far are exactly as we had expected. A, we have had a couple of senior executives move on and some were – one was well known at the time of acquisition, the other one was just a result of looking at the integration of that individual chose to move on. But none of those synergies, the other part of the story comes from some of the strategic sourcing we've been doing. We've compared notes for example on our glue supplier and now we've got a better price across the company and our paint supplier and those kinds of things. None of it relate to – yet to the aftermarket.

Mark Neville

Okay. And then maybe just one follow-up on that. The $3 million or $10 million story, this may be the cadence of how that plays out in the savings, I mean you’ve done $3 million in Q1, I mean is this one year, two year…

Glenn Asham

And so first of all, we’ve identified…

Mark Neville

Okay…

Glenn Asham

And that is [indiscernible] not effective right, not all that $3 million in the Q1 was right.

Paul Soubry

Yes, so, our regional estimation was you know 18 to 24 months before we can put up our hand and say we've got the $10 million sustainable sales in the business.

Mark Neville

Okay. Okay, thanks.

Paul Soubry

Thanks Mark.

Operator

The next question comes from Stephen Harris, GMP Securities.

Stephen Harris

Thanks Jon and congratulations, great quarter guys. You covered some of my stuff, but some smaller items, I noticed the tax rate in the quarter was 35% probably was higher than we had modeled. Just wanted to get some color on to where that is and what you look at?

Paul Soubry

Yes, I would say we would consider the tax rate to be, our effective tax rate to be around 35% all in. I mean when you look at our business primarily our income tax by the U.S. tax jurisdiction, we pay Canadian tax but our structure is the model Canadian tax that same income is tax in the U.S. we got a foreign tax credit. So in fact our effective rate ends up being the higher than the two rates which is the U.S. rates, which we will model at around 35%. When you consider state – I’m sorry federal plus some state with a little bit of benefit from some Canadian income, which reduces a little bit. So overall 35% would be our go-forward look at what we believe the effective rate to be.

Stephen Harris

Perfect. And on the convertible debentures, I think, it was $40 odd million that got converted. On the convertible debentures, I think it was $40 odd million that got converted during the quarter.

Glenn Asham

Yes.

Stephen Harris

Was that being driven by just a decision about where the relative yield is for investors is this something you're encouraging somehow with anyone on it.

Glenn Asham

So there's been no actions by the company, obviously these debentures are well into the money. So some investor made a decision that I believe for the most part is the big chunk was one very large holder they decided that it was time for him to convert. So he I believe that individual is response I think for one out a couple of large block deals and made a decision that was timed and he ready to take the shares.

Paul Soubry

Totally a surprise to us, not a surprise but as Glenn said we had no action or no initiatives to try and convert that. And in our minds we were just going to let that run out. The unintended benefit or consequence of that is that now we've got some more liquidity in the marketplace that many investors in Flyer have been looking for and so we're kind of pleased that it's just naturally happening and flowing through their system.

Glenn Asham

I guess the question a little bit what happens from a go-forward basis because when that transaction was done the yield on the debenture was so higher than the yield on the share. Obviously with our dividend increase our yield on the share now is higher than on the debenture.

Stephen Harris

So that may accelerate more convergence?

Glenn Asham

Yes. I think so.

Stephen Harris

Okay.

Paul Soubry

Thanks, Stephen.

Jon Koffman

Next question comes from Bert Powell from BMO Capital Markets.

Bert Powell

Thanks, good morning guys. FX, MCI brings a new dynamic. Can you talk about how we should be thinking about FX in that business?

Glenn Asham

Sure. So their business, they have substantially more manufacturing in Canada as a result, in addition to their labor costs they have a lot more supply base in Canada than we’ve had. So that business is running a natural Canadian dollar outflow. As for a number of years our businesses on the trends that remains roughly a natural hedge when you consider all cash flow in terms of dividend. So as you may have read in our MD&A, we put out a hedge on that. We'll continue to start hedging on something that will become a little more active in the hedge that we initially put on was roughly about 80% of what we expected for 2018.

Paul Soubry

2016.

Glenn Asham

Sorry 2016. And we continue to monitor on active basis so we’ll sort of grow that hedges the book goes high. Our expectation is the overall business when you look at the two is we’ll continue to be a Canadian dollar outflow operation and when we do hedge that obviously. So in that environment a strengthening of the U.S. dollars regarding – sometimes weakening of the Canadian dollar it won’t hurts.

Bert Powell

Okay, thanks.

Glenn Asham

It’s sort of U.S. only.

Bert Powell

Thanks for that. And just back to the synergies the $10 million, how much of that is just simply corporate costs versus operational initiatives? Like my understanding was kind of heavily skewed towards corporate cost.

Glenn Asham

No, no, no there's probably rough order-of-magnitude 40% or 50% of it is going to be the obvious initial type procurement synergies like nuts and bolts, and paint and glue and those kind of things. And 40% or 50% whatever percent it will be it, will be corporate cost in terms of thinking about the combined coal. You have to – and this is why we're – the elephant in the room is this whole conversation about these, where are these big synergies going to come from? To be honest, until we decide what the real operating structure is going to look like, are we going to run MCI and New Flyer are we going to push everything together and have one manufacturing coal and one aftermarket or variations of those things, which we're taking our time to look at.

Its kind of imprudent to just throw up in our minds a big synergy number just give you a stat for example when we took all of the New Flyer procurement and we laid up against all MCI procurement above 30% of the suppliers are common, okay, so going back to anyone of those supplier saying give me more when they are already selling – they are selling the existing volume to us it is not going to give us any synergy or benefits. That 30% by quantity is about 50% or 55% of the spend. So there is a lot of work to get back in there.

And really understand what we can do make buy outsource, in-source change suppliers optimize and so forth. And at the same time, we are not going to make any short-term decisions to try and grab a synergy that may have a long-term product support implications for our business. And then there is the reality of changing somebody in the short-term and saying you sell me this widget for this bus today but we are selling somebody else’s parts in the aftermarket and then risking it discount or a change in the aftermarket pricing. So it’s a very much a holistic look at the long-term to take the right decisions for Flyer, MCI and for the customers.

If you go back to the NABI case where a lot of people look to and say, hey there was massive synergies there. A good portion of that with the reality is we stop building NABI buses and we use the capacity to build all New Flyer buses. So it truly went back to the supply chain to say you are now getting more of the same thing, give me a little something to help me make this thing happen and the reality of it, as we didn’t need two engineering teams and two supply teams and two finance teams and so forth because it was all exactly the same bus.

In the MCI case it’s not like its just one plus one and they were now building two, it’s a very complex thing. So back to the original question and it’s a good one and will be transparent over time, as we get our heads around this. We are going to continue to be very aggressive at executing to the plan of satisfying customers we are looking where we can on the corporate side, certain exact combinations and so forth that we could take synergy cost out and any of those natural or easy supply chain things. But we are not going to make dramatic changes that has – that creates operational risk for the business.

Bert Powell

So have you done the things like I know in Flyer you in sourced some of this deal…

Paul Soubry

Yes, yes.

Bert Powell

You took that away from Russell you’ve invested in laser plasma cutting, is there excess capacity start to…

Paul Soubry

Absolutely there is no excess capacity in Flyer its anything we're going to add more certain in-sourcing of certain things that make sense just take a part that we used to buy from somebody, sent to somebody else to paint it. So there's a fabrication, there's the packaging, the transport, the paint, the transport, the handling internally and so forth by investing $1 million in a flat sheet lasers in our factory build the part, paint it, put it on the bus. There's lots of savings.

In reality New Flyer MCI, its almost done in relatively the same level of that kind of in-sourcing but there's more to be had. So now the choices are do we invest in MCI facilities, do we invest in New Flyer facilities to do that or do we invest at a common facility to be able to feed both businesses. And get synergies through that way. And that's the analysis we're working on it, that stuff doesn't happen overnight. I mean there’s hundreds of thousand departments.

Bert Powell

What about Marcopolo because this is the opportunity to cut…

Paul Soubry

So Marco is interesting we continue to talk to Marco and of course. I think they've been a great investor in Flyer. They've been very supportive of all of our initiatives both operationally and strategically. Marcopolo, when we originally got in and you guys remember the story about hey, they buy stuff all over the world global supply chain. As part of the mix of comparing New Flyer, MCI and now Marcopolo where we can buy offshore, we're absolutely going to look at Marcopolo’s internal capability as will as their vendors to build help us do it. But again it's not like I can substitute a part tomorrow on tomorrow’s bus without having lifecycle identifications to do so. And we're not going to risk, our aftermarket business. And the customer initiatives and satisfaction with very, very quick savings, we're going to continue the fundamentals of improve the operations in-source and optimize where we can.

And then really do a long-term strategic sourcing to grab synergies that we think are may be after long-term.

Bert Powell

Its frustrating I know for you guys I don’t think kind of have a lot of clarity around that at the same time it's really exciting to see that there's a path for us to continue to improve our margins going forward. Like good fundamental operations and in-sourcing it is just going to take some time.

Jon Koffman

Okay. And other question from Chris Murray from AltaCorp.

Chris Murray

Yes, guys a couple of follow-ups actually. First of all Project Convergence, should we I guess finish mid year this year, any early thoughts or as progressing on what synergies out of that program would look like and any benefits that you can – you’re starting to see.

Paul Soubry

Yes, so just to make be crystal clear about when we say we are done with convergence the end game is today we sell parts to bus customers across North America from two different businesses NABI parts and the Flyer parts. The end game is this, all coming from one company, one IT system, one distributed inventory. So the synergies might be in some overheads and so forth, but I think the synergies are going to be more in working capital utilization, because now we’re going to be spreading and optimize the inventory and turn with across all of our parts. The other issue I think the single biggest impact is customer satisfaction.

And as we have talked in the past, in our wonderful industry every single part might have five, six, ten different part numbers that OEM of that part has one, we put a part number on it; our competitors put some customers for the part number. So today when we get requests for quotes, there are many times when we actually may say, no I don’t have that part, but we’ve got it on the shelves somewhere else in the different part number. So our ability to satisfy those customer needs faster, I think it’s absolutely biggest benefit, which should drive a little bit more volume, maybe some margin and then we will over time see some overhead associated with it.

Chris Murray

Any facility rationalization.

Paul Soubry

It sets up, Chris, to do that. We have some warehouses that are relatively close to each other. It sets us up for the potential to do that. But as of yet, we haven’t identified any specific one or a timing of those things. We have leases. We have people. We’ve got inventories locations and that’s next chapter. First and foremost is getting on the same systems.

Chris Murray

And then one last one for me. You had a competitor actually with a fairly decent sized medium duty bus order in Vancouver. I guess just some color around that order, where are you guys even in that competition or almost in the close competition or where we’re able to compete. And you know we haven’t heard a lot about median duty sales in loss for a while. Any sort of thoughts around how that development has gone that product line and whether or not that made your expectations?

Paul Soubry

Yes, so first and foremost the order that we weren’t successful on, we were in fact the leading bidder. But through subsequent negotiation and so forth, we refused to take that order because we’re not going to do the business at a loss. We have to be a sustainable business, want to support that product. So the pricing ultimately on that bus is – was not something that we wanted to entertain in, that’s A. And if a competitor can do that bus for a materially different savings there, our price point and be around to satisfy that customer, good on them, but that’s not the way we’re going to do the business. When it comes to medium-duty buses, as you know and as in the history, we originally thought maybe the market size of the medium-duty might be 800 to 1000 buses a year in North America.

Our assessment in the last year a bit is maybe that market is really more or like 400 or 500.We never imagined our JV with ADL to be a world leader in terms of 1000s of buses a year, we thought it was niche play to be able to A learn how to do a joint venture, learn how to do a body on chasse, learn how to work with another bus work baker in the world to be able to supplant and complement our product line, but it was never intended to be a massive market. We continue to deliver those buses. Price points are tough and margins are challenged, but it is a niche play for Flyer and so far we’re going to continue to stay and support those customers and build those buses.

Chris Murray

Okay. Is it the kind of thing that you’re seeing – is there anything that you can see in the MCI business [indiscernible] price and I know we talked about some of the offshore guys, you’ve got I think two international competitors…

Paul Soubry

Yes.

Chris Murray

Get into that. Are you seeing changes in dynamic on – around price or anything like that…

Paul Soubry

Yes, the only…

Chris Murray

Your model…

Paul Soubry

The only thing that is different and you imply there is – mentioned is that in the New Flyer case, we compete against domestic customers and most of it is governed by America with the exception of this medium bus, which is a very niche space and the competitor you referred to imports the bus built in China. In the Motor Coach space, they compete with the domestic competitor and they compete with import buses, because in the public environment there is no buy America or U.S. content type rules. One competitor has done very well entering that market tempts out of Turkey in the last four, five years to the tune of a couple of hundred buses or coaches a year with a size and a class of bus, a low price point, 35 foot coach as opposed to a traditional 45 foot coach.

MCI in the past has not gone after that space. One of other competitors then who out of Belgium and who’s build buses in Macedonia has responded with another their offering of a 35 foot coach. So, this is something we’re going to do as part of our product portfolio planning of what do we do within the various classes of buses, what do we do to think about more of a common platform to get our competitiveness improved and do we need to play in the space of 35. I think my first reaction is that 35 foot niche – and that’s 35. I think my first reaction is that 35 foot niche and a smaller bus niche in the coach market is much like the medium-duty bus in the transit space, it's fairly small.

Chris Murray

Okay.

Paul Soubry

But, you'll hear more and see more as we spend more time in one of our major objectives in 2016 is to do a product horizon and the next 10-year plan for both New Flyer and MCI to think about what goes into that portfolio.

Chris Murray

Okay. Thanks guys.

Jon Koffman

Okay. Follow-up question from Mark Neville from Scotia Market.

Mark Neville

Yes, may be just a couple of points of clarification the New Jersey contract for MCI is the notice to proceed for the 184 this year. What would sort of the delivery number be, is that a delivery number or?

Glenn Asham

No, so first of all fantastic new and exactly as it was represented by MCI and KPS in terms of three buses that went out for early trial, a very large quantity of options, wait till the buses get through the validation period, we’ll give you the first order for the first year which they do a year, by year, by year. So the initial order of 184 is for the fiscal year of New Jersey. But so – I don’t know 80% of that actually gets delivered in the calendar year of 2016. The first buses actually go online, I think next week.

Mark Neville

Okay.

Glenn Asham

But that is an absolute huge contract and is going exactly as we had hoped it would and as it was represented by MCI.

Mark Neville

So those 140 give or take for 2016 is that in your guidance?

Glenn Asham

Yes.

Mark Neville

It is, okay. So if we to look at the guidance, I mean Q1 very strong for deliveries and typically, seasonally weaker quarter, we’re layering this on in the back half.

Glenn Asham

Not layering on.

Mark Neville

Well its…

Glenn Asham

But MCI was building buses for Jersey last year on another contract, right. That contract is done. Now you've got this new contract, the difference being it's a multi-year contract, with lots and lots of volume over the next five years, six years, right?

Mark Neville

Okay. Yes.

Glenn Asham

So some of it is replacement of what was being built last year for New Jersey or other public customers. It's not truly additive….

Mark Neville

Sure.

Glenn Asham

To the run. And quite honestly, there are always situations that New Flyer and MCI where there's a volume in a window of time that we could ramp up production if we really wanted to.

Mark Neville

Okay.

Glenn Asham

But we've been crystal clear that it's about stability of production and operations. And we are far more interested in a quality products and profitability than we are just chasing volume.

Mark Neville

Okay.

Glenn Asham

The other dynamic and I'll say it again and again, for every job that's in New Flyer and MCI, there’s six jobs in the supply chain. And the last thing we want to do is have the supply chain start doing whipsaw by us ramping up volume and slowing it down or ramping it up because then the stability of the supply chain is a concern. So schedule stability is absolutely number one and we’ll take schedule stability to deliver profitability more than we’ll go after a short-term ups and downs.

Mark Neville

Okay I guess from getting at Q1 very strong and seasonally good quarter, you are talking about stability, but still think there is room for thirty four fifty to go higher, maybe there isn’t?

Glenn Asham

Well, absolutely there’s potential to do so.

Mark Neville

Right.

Glenn Asham

There is capacity inside our machine.

Mark Neville

Yes.

Glenn Asham

But you know I've said this a thousand times we are not going to increase capacity in the short term if it's not sustainable.

Mark Neville

Okay.

Operator

Any follow-up questions?

Mark Neville

So just sort of more general one. You've had MCI now for four months. Whenever you’re doing an acquisition, is it round of the surprises, it couldn't bad with operational or people wise or financial or whatever. I mean can you just give us some example of on both the positive and the negative side, anything that you just come across that you didn’t expect?

Glenn Asham

Great question. So a couple of things that may be in hindsight we – it was right in front of us. First of all, MCI one-time head market shares 50%, 60%, 70% in the public and private markets. And now the market share is 35%, 40% in that range of the delivered products every year. So MCI over the years, I don't want to use the expression too extremist but kind of lost its way in terms of being the absolute clear market leader.

And we saw that going in we knew it. Now that we're inside and looking at it you can see that over the years maybe lack of sufficient investment in product, in facilities, in IT systems, and so forth, the success of the businesses is in the last couple of years is truly on brute force as opposed to the proper investment in the facilities and so forth. And you'll see that when you walk through our tours today they do some fantastic things on project management and on schedule management, and on the build of the product. But I think there's more opportunities to invest in the work environment to continue to improve quality, and delivery, and performance, and so forth, as well as improve the margins on the business.

The most exciting thing, to be quite honest, is not I guess measurable in terms of the P&L or the cash flow but the response from the employees has been unbelievable. Finally, in [indiscernible] I want to take here, but there's these two businesses they’ve been around for 80 years in the same city and never the two will meet and yet we're doing the same thing in parallel markets. And so and I said it in my opening remarks, when we came and they said hey you're a bus company too and you want to be a bus company this isn't about flips and it's not about turnarounds and it’s not about – this is about operating together, the response of employees has been unbelievable.

And the other thing that surprised me is the same thing from the customers. And the reason I say that is 60% of the market is private operators. And the more get to know the private operators these are family-owned business for the most part, whose grandfathers, or fathers, or mothers started these businesses and their wealth is in these assets inside their businesses. A teetering MCI over the years had them worrying about the value of their businesses. And I can't tell you how many customers have come up and seen us at shows, come to the plant, have gone to see saying, we are thrilled to see a bus business being involved and want you to take this somewhere. So we're really excited.

Quite honestly though Steven, we haven’t found anything of any material nature, financially, balance sheet, cash flow anything that hasn’t been as it was represented in the due diligence, very positive.

Jon Koffman

Okay. There appears to be no more in person questions. So I will now ask Stephanie to check if we have any additional questions from callers.

Operator

Certainly, [Operator Instructions] I’m showing that we have no questions on the phone lines at this time.

Jon Koffman

Thank you, Stephanie. Thank you ladies and gentlemen, we look forward to talking to you again, next quarter. Bye-bye.

Operator

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

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