NFI Group's (NFYEF) CEO Paul Soubry on Q4 2018 Results - Earnings Call Transcript

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About: NFI Group Inc. (NFYEF)
by: SA Transcripts
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Earning Call Audio

NFI Group Inc (OTCPK:NFYEF) Q4 2018 Earnings Conference Call March 14, 2019 8:00 AM ET

Company Participants

Stephen King – Group Director, Corporate Development and Investor Relations

Paul Soubry – President and Chief Executive Officer

Glenn Asham – Executive Vice President and Chief Financial Officer

Conference Call Participants

Chris Murray – Altacorp

Cameron Doerksen – National Bank Financial

Steven Harris – GMP Securities

Jonathan Lamers – BMO Capital Market

Daryl Young – TD Securities

Operator

Good morning. 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 Inc. Fourth 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. Stephen King, Group Director, Corporate Development and Investor Relations, you may begin your conference.

Stephen King

Thank you, Lisa. Good morning, everyone, and welcome to NFI Group's fourth quarter 2018 and full year results conference call. This is Stephen King speaking. Joining me today are Paul Soubry, President and Chief Executive Officer; and Glenn Asham, Executive Vice President and Chief Financial Officer.

For your information, this call is being recorded, and a replay will be made available shortly after the call. Details on the replay can be found on our press release and on our website. As a reminder to all participants and others regarding this call, certain information provided today may be 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're advised to review the risk factors found in the company's press releases and other public filings on SEDAR for more details. In addition, I'd encourage all participants to review the audited 2018 financial statements and the associated management discussion and analysis that are posted to our website and on SEDAR. We'll start today's call with Paul providing an overview of the quarter and the year, then Glenn will speak to the financial results and Paul will finish up with market insights and NFI's outlook. Following that, we'll open the call to analyst questions.

I'll now hand it over to Paul.

Paul Soubry

Thank you, Stephen, and good morning everyone. In fiscal 2018, NFI Group saw record deliveries and record revenue. We defended our position in heavy-duty transit bus, increased our market share position in motor coach and we grew overall deliveries and finally increased our aftermarket parts business. In the year, we delivered 4,313 equivalent units, up 12.7% from 2017, the highest number of units we’ve ever delivered. We'll then review the financial results in detail, I would like to highlight that in fiscal 2018, we delivered significantly stronger adjusted EBITDA margins than our peer group. We generated solid free cash flow. We grew our dividends declared by nearly 19% and we returned over C$179 million back to our shareholders through a combination of our dividends and through normal course issuer bid.

Regarding return cash to shareholders, we're pleased to announce that yesterday our board approved an increase in our annual dividend rates up 13.3% with a new annual dividend rate of $1.70 per share. We feel this new dividend rate is sustainable given our delivery guidance, our strong free cash flow generation and our lower capital expenditures planned in fiscal 2019.

While fiscal 2018 was another solid year, it was not without its challenges and headwinds, a few issues of note. First, the pressure on new and pre-owned motor coach margins impacted us. Second, the full impact of Daimler's termination of MCI’s agreement to distribute and service Setra motor coaches in North America and third the startup losses associated with the launch of our Shepherdsville parts fabrication facility.

In aggregate, the Setra DRA cancellation and Shepherdsville start up negatively impacted our adjusted EBITDA in 2018 by $8.7 million. Despite this, adjusted EBITDA was down year-over-year, but only less than 1%. Overall, we look back on fiscal 2018, a period where we worked through several challenges as we made significant investments to strengthen our business. Looking forward, we're excited about our competitiveness and our future. As we wrapped up 2018 and we began this year, we continued to be very, very busy. Here are just a few highlights of what we've been working over the past few months to improve our competitiveness.

In November, New Flyer’s 60-foot fuel cell-electric excels your bus model. It became the first and only 60-foot fuel cell-electric bus to complete the FTA Altoona testing program. This revolutionary articulated vehicle is now in production and eligible for FTA filing.

Second during the fourth quarter of 2018, we efficiently completed the expansion and renovation of our Anniston, Alabama facility, which included the addition of the 76,000 square foot production space. Even that has allowed us to increase onsite parts fabrication, increase our volume throughput and optimize our royalty capabilities directly on production line as opposed to these facilities down the street. Third, the Shepherdsville parts fabrication facility operated an NFI subsidiary KMG Manufacturing and continues to ramp up its operations. We'll utilize the acronym KMG as referred Shepherdsville throughout this call.

We now have over 230 people working at KMG making parts today for New Flyer, for ARBOC and for NFI Parts. And in the second half of 2019, we expect KMG will fabricate parts for all NFI Group companies and will reach full production by the end of the year. KMG is also expected to generate positive EBITDA contribution in late 2019 and beyond. I’ll note that in the vision to the positive financial benefit that we saw strategic investments to help New Flyer, MCI and the rest of our business increase U.S. material content requirements going from 65% to 70% through Buy America that goes into effect October 2019.

Fourth, in November 2018, ARBOC’s Spirit of Equess became the first medium-duty purpose-built transit bus passed the FTA’s Altoona test. And in February of 2019, the Equess is awarded a state contract from Florida Department of Transportation, which could result up in 500 orders for Equess over the next five years. We've already received orders of this new contract and from other supporting Equess. Then NFI Parts went live in mid November after a long – a year long IT harmonization effort that moves all components of the parts business onto the common IT platform network. Our harmonized IT platform has a few follow on efforts, but will now enable NFI Parts to realize the system efficiencies seamlessly supply transit coach and our third-party customers and serves as a platform to launch our VMI Solution. Finally, in January 2019, we became the first North American bus manufacturer to offer a comprehensive charging infrastructure service through the launch of New Flyer Infrastructure Solutions.

We’re designing this new team to meet the needs of clients who’re asking us to provide not only the bus, but also full turnkey solutions that included the advisory, the reconnaissance, the support through utilities and seating and so forth and the associated charging infrastructure. We feel that the infrastructure solutions team will help us to improve our ZEB offering to provide a better service to customers looking to implement battery-electric buses in the future. And finally, in January 2019, we announced that we had doubled our NCIB, or normal course issuer bid, up to 10% of the public quote. As of December 31, 2018, we have repurchased nearly 2.2 million shares of a total of 5.5 million shares now allowed to repurchase under the amended NCIB.

Glenn will now take you through the fiscal 2018 financial results and following that I'll provide some more insights on our outlook and then we'll take your questions. Over to you Glenn?

Glenn Asham

Thank you, Paul, and good morning everyone. I will be highlighting certain fiscal 2018 results and provide comparisons to the same period in 2017. I would like to direct you to NFI's audited 2018 financial statements and management discussion and analysis of those financial statements, which are both available on SEDAR or NFI’s website as this support my comments.

I do want to remind you that our audited financial statements are presented in U.S. dollars, the company’s functional currency, and all amounts referred to are in U.S. dollars unless otherwise noted. Please note that two organizational changes were made in 2017 and 2018 to better align business functions within operating segments, details of which are provided in the management's discussion and analysis. To improve the comparability between periods, the related 2017 segment information has been restated to reflect these changes.

NFI generated consolidated revenue of $2.52 billion for fiscal 2018, an increase of 5.8% when compared to fiscal 2017. Revenue from manufacturing operations increased by 6.4%, primarily from higher transit bus volumes, higher average transit bus selling prices and the full year contribution of ARBOC, offsets by lower new and pre-owned coach volumes and lower average coach selling prices. Daimler's termination of the DRA also led to a $7.7 million decrease in new coach revenues.

Revenue from aftermarket operations increased by 2.1% primarily due to a higher volume and the addition of ARBOC offsets by the termination of the DRA. Total adjusted EBITDA for fiscal 2018 was $315.4 million was down by 0.8%. Manufacturing operations adjusted EBITDA increased by 1.5% primarily as a result of higher transit volumes and full year contribution of ARBOC offsets by pricing pressure on new and pre-owned coach sales, KMG start-up losses and the impact of the termination of the DRA.

Aftermarket operations adjusted EBITDA decreased by $6.1 million due to lower margin and the $1.2 million impact of Daimler's termination of the DRA, which took effect for NFI Parts on July 1, 2018. Net earnings decreased by 16.5% and earnings per share of $2.56 decreased by 16.3%, primarily due to increased depreciation expense, higher interest costs, past service cost adjustment, foreign exchange translations and the previously mentioned impacts on adjusted EBITDA. Higher interest costs in the period were primarily related to the strategic initiatives including the acquisition of ARBOC and its share repurchase on the company's NCIB.

Adjusted net earnings during fiscal 2018 decreased by 13.5% compared to 2017 and adjusted earnings per share were down 13.3%. Our liquidity position of $355.4 million as of December 30, 2018, increased compared to $222.3 million at December 31, 2017. The increase was driven by the new unsecured revolving credit facility that NFI entered into in October 2018, which increased the amount available to be drawn. I'll say this increase was the amount of capital return to shareholders, dividends and repurchase of shares under the NCIB as well as increased capital expenditures.

The company generated free cash flow of $159.9 million during fiscal 2018, a decrease of 0.9%, compared to fiscal 2017 the increase was primarily due to higher plan to capital expenditures and an increase in interest cost, partially offset by lower current taxes. The company declared dividends of C$90.3 million in fiscal 2018, which is an increase of 18.7% from the same period in 2017 and represents a payout ratio of 42.9% versus 36.8% last year. As outlined in yesterday's press release, the board increased our annual dividend rate by 13.3% to $1.70 per share for dividends effective after March 13, 2019.

Property, plant and equipment cash expenditures increased by 34.5% compared to fiscal 2017, primarily as a result of planned capital investments in KMG and Anniston and investments from other continuous improvement and in-sourcing programs. Return on invested capital, or ROIC, for the period ended December 30, 2018 was 13.7% as compared to 15.8% for fiscal 2017. The lower ROIC was primarily impacted by investments made in KMG and Anniston, which are expected to generate benefits in 2019 and beyond.

With that, I'll turn it back to Paul.

Paul Soubry

Thanks, Glenn. As I mentioned when I started the call and as Glenn outlined during his financial discussion, NFI achieved several record milestones in 2018. We maintained our 43% share of the heavy-duty transit bus market and we grew our leading share of our motor coach market to 45%. Aftermarket revenues increased and ARBOC continued to grow. While there were many positives in 2018, there were a number of adverse impacts. No excuses. We've tackled these issues head-on, but as we look to 2019 we see opportunities to grow both our top-line revenue and our adjusted EBITDA.

Looking at overall markets, we expect heavy-duty transit to remain healthy. Market grew by 2.7% in 2018 and we expect that to maintain our leadership position in 2019 and beyond. Zero emission buses are an area of particular focus for our customers in transit. They currently represent approximately 5% of our total backlog, but they're growing segment of the market. In the last year, we were awarded a number of contracts including orders from several major cities in North America such as Toronto, Boston, Minneapolis, New York, Seattle, Vancouver and Montreal. To complement our buses, as I discussed earlier, we launched this infrastructure solutions team to further strengthen our offering and our competitiveness.

Within transit we expect active bids to increase through 2019, but cautioned that individual awards may be smaller in size with fewer options or shorter contract terms. This is primarily driven by the transit agencies assessing their fleet replacement plans and considering how they will approach the ZEB programs going forward. While it's early in 2019 we've already seen an increase in the number of active bids across the different types of propulsion relative to the fourth quarter of 2018. In addition, our total bid universe, which is developed through detailed conversations with public customers across the continent regarding fleet renewal plans remains near record levels.

We're very comfortable with the approach we've taken to offer all types of propulsion systems from clean diesel to diesel hybrid to natural gas and now zero emission electric, all on the same bus platform. Our Xcelsior is unequaled in the industry allowing customers to migrate to zero emission buses over time and at their own pace as they obtained additional funding required for infrastructure investment and candidly more expensive buses. We maintain our view that ZEB adoption will be an evolution, not a revolution, and we're in full position to deliver for the industry.

Well, the private motor coach market has seen some challenges. We continue to grow our share of that business and are pleased with our investments in the last few years in new products and innovations to drive future growth. The MCI motor coach business was negatively impacted as we've discussed a number of times today by Daimler's termination of the Distribution Rights Agreement and from challenges in pre-owned coaches as market values declined in 2018. We're pleased to put the DRA behind us, but frequency analysis [ph] to focus on our efforts entirely on MCI motor coaches.

During the year, we adjusted the value of the pre-owned Setra motor coach pool to reflect market values. We liquidated our inventory of Setra vehicles and we added new leadership to run our pre-owned coach business and our manufacturing operations. We expect the demand for low-floor cutaway and low-floor medium duty buses to continue to grow and we feel ARBOC will be a beneficiary of this growth. A particular focus for us in 2019 is ARBOC’s Spirit of Equess, a medium duty bus, which has a higher EBITDA for EU then ARBOC’s traditional low-floor cutaway vehicles. And Equess expected to represent between 10% and 15% of ARBOC’s total deliveries in 2019. We are delivering as we speak.

NFI Parts continues to focus on a number of strategic initiatives to counter competitive intensity and deliver profitable growth. These initiatives include additional focus on vendor managed inventory or VMI programs, enhanced product offering and capitalizing on the previously mentioned implementation of a common IT platform across the aftermarket business. NFI Parts secured six VMI programs during 2018, which are now being implemented and continues to pursue several additional opportunities across North America.

In January, we released our delivery guidance of 4,455 EUs for our total company for fiscal 2019, an increase of 3.3% over fiscal 2018. We have reaffirmed that our guidance which sees growth in all of our product deliveries. Our guidance is supported by the strength of our backlog and the visibility provided by secured contracts and inspection conversions and expected new wins. We also reaffirmed our PPE expenditures were expected to be in the range of $50 million to $60 million, a significant decrease from fiscal 2018. Our expectations for delivery growth, free cash flow conversion and decreased capital expenditures in fiscal 2019 supports the board's decision yesterday to increase our annual dividend rate by 13.3% or $0.20 up to $1.70 per share. This dividend is another example of our commitment to return cash to shareholders.

It's important to remind analysts and investors that our business has grown through additions of MCI and ARBOC and has also changed the seasonality of our results. Due to the nature of our end markets, annual production and vacation schedules across our business. We now see the first and the third quarters as slower periods compared to the second and fourth quarters of each year. These seasonality factors will be reflected through our financial results for those respective periods. Within NFI Parts, sales remain difficult to forecast on a quarterly basis as there are typical quarter-to-quarter volatility.

I want to advise everyone that the first quarter of 2019 will see deliveries impacted by several unusual factors. We experienced adverse winter weather at our facilities in Minnesota and North Dakota, which caused both New Flyer and MCI to miss production days and customer inspection visits. We also experienced production inefficiencies in the first quarter as we launched several new products, specifically New Flyer’s battery-electric and fuel cell, Zero Emission Buses as well as MCI’s J3500and D45 CRT LE, which also went into production full time in the first quarter.

Finally, during the quarter, ARBOC experienced some supply issues on certain General Motors and Freightliner chassis. ARBOC has worked up with the chassis OEMs and now expects the overdue chassis to begin being delivered later this month and into April. The chassis delay is not expected to impact our overall delivery guidance for the year, but will move some of the deliveries we expect in the first quarter into the second quarter.

As I previously mentioned, fiscal 2018 results were negatively impacted by several factors, including Daimler's termination of the DRA and the set-up loss associated with our KMG facility. Looking forward, we expect the impact of the termination of the DRA to be significantly reduced, and we expect KMG to continue negatively impacting our adjusted EBITDA during the first half of 2019. But it's expected to breakeven status in the second half of the year and then begin providing a positive return on our investment.

As I said before and will continue to repeat, we're really confident in NFI's future. We're excited about our leading positions in core markets, the strength of our backlog, our free cash flow generation, our liquidity, the acquisitions we've completed and the multi-million dollar investments we've made to improve our products, our facilities and protect our margin. We continue to focus on providing strong cash returns to shareholders, increase dividend in our NCIB. In addition, we continue to investigate acquisition opportunities, both domestic and international. But as you've seen from our track record, any investment you make will be strategic, prudent, measured and appropriate.

As we always do, we also want to remind investors and analysts that we encourage you to take a longer-term view on our business and not to focus on specific quarters. Our business can see significant mixed impacts in volatility from quarter-to-quarter. But the strength of our business is the visibility afforded to us from the nature of our public customer contracts, our leadership positions in core markets and our proven history of being able to deliver margin improvement from the investments that we’ve made.

Now before I turn the call over to our operator for questions, as you for questions, as you will have seen in our press release, I wanted to pass along the news that Glenn Asham, our CFO, has formally announced that he'll retire effective March 31, 2020. It's been an absolute pleasure to work with and learn from Glenn over the past ten years as we've grown this company from a $900 million revenue to now over $2.5 billion. Glenn has been with the company since 1992 and has been pivotal part of our success and our growth. We formally started the process of search for Glenn's replacement, and we're working with global executive recruitment firm, Korn Ferry, hoping to have somebody in place by the end of this year.

With that, I'll turn it over to our operator, who can provide you with detailed instructions on how to ask a question. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Chris Murray from Altacorp. Your line is open.

Chris Murray

Thank guys. Good morning. I guess just turning back to your commentary around the coach market. Paul, I guess, a couple pieces of this. First of all, you talked about a little bit of softness, but there's also some of softness, but there's also some moving parts, I think, with some of your customers. But at the same time, you're also talking about being able to grow market share and maybe flatter, choppy market. Can you just give us some color on some of the dynamics that you're seeing and your expectations on how we can kind of square all the moving pieces if you can as we go into 2019?

Paul Soubry

Thanks, Chris. Well, as we talked many times, the coach market is not like transit. The transit, they act the same, they buy the same, the biggest difference is the size of the customer, and therefore, the level of customization and complexity. In the motor coach market, you got a number of sub segments, and so each of the sub segment have had their own pluses and minuses and challenges, but probably the two single biggest issues that have impacted not only us but the industry in 2018, one is the continued change dynamic around line haul or specific type operators that move city to city or point to point, and they continue to be under pressure and we've seen, for example, in Western Canada, for instance Greyhound pull out service. We've seen the various service changes in the United States.

So that's one segment where there was usually annual buys or some batch of buys that we at the industry could plan on kind of slowed down. The other dynamic relates to a couple of – two charter operators in the past year, and we've always seen people come and go in the space. But in the last year and a bit, we've seen a couple of the larger guys go under. And so that does a couple things. It changes the immediate demand for what may have wanted or needed for new coaches. It then also puts their current fleets into liquidation mode whether they sell them back to people like us or whether they sell it to third-party sellers or whether they'd go to auction.

And so we saw a little bit of turbulence in the fourth quarter, for example, with one of the operators, selling their preowned coach, or their fleet through auction. We were pleased to see the prices that those buses went at auction in terms of the market value. Having said that, certain customers that we expected to sell new coaches to decided to buy a year or two-year-old coach at auction, which then eliminated our opportunity or competitor’s opportunity to sell a new coach. So those are some of the things that have caused that market to have some blotchiness.

On the positive side, we continue to see the employee shuttle dynamic specifically in the Bay Area and other parts of the Seattle, for example, and even some on the East Coast that are using employee shuttle to move people , so there's a little bit of a pickup from that space. And then the limo guys are also the people that have moved up from black cars to SUVs to smaller buses and now to motor coaches that are hosting and shuttling executives in conferences, and those kind of things around cities that have picked up a little bit. All that to say that we saw for the first time now in six or seven years, the total industry dropped a little bit in 2018. I think we're in the same mode for 2019. There's no reason to believe that is going to drop dramatically, but there's no reason that we see or demand that will help them recover.

Chris Murray

Okay, great. But at the same time, you still think that you're going to be able to be able to gain – like you gained a couple points in the market share. I think you said you in your note stuff 45%. Historically…

Paul Soubry

Just on that, Chris, when you think about when we got involved in MCI in 2015, no disrespect to the team in MCI or to the previous owners, but there was many years of lack of investments in new product. And so we were in catch-up mode to try – and for example, upgrade a lot of the model dynamics around our J coach. We didn't have a 35-foot coach. We didn't have a successor for our very successful D-Model coach. And so we think that those investments, combined with the work that we're doing on how we satisfy customers, field service, how we’re running our factories and allow us to grab share. The problem is the overall markets dropped a little bit. The good news is we've made those investments, and we really believe that we can really compete and grab share.

Chris Murray

Okay, thanks. Talking other new product developments, just in the Spirit of Equess, now actually you had some buses out in the field with customers, any thoughts or feedback on the performance of that? And has that also opened up some additional opportunities for you?

Paul Soubry

It really has, Chris. You know the history well, and many shareholders do. We tried a joint venture with a company years ago medium-duty class vehicle. And I think in hindsight, there was some flaws in the way we set up that JV, but one of the issues is that we ended up trying to sell effectively a heavy duty design and cost of bus in a medium duty space. So the biggest issue, I think, was the price point. And so what we really like about Equis is it truly is a medium-duty bus, designed and tested to a 10-year life cycle, cost and building materials that are U.S.-oriented, that are really appropriate. And so we're seeing both the class, the size, the style, the design of the bus really kind of sit well with the customers as well as the price point.

And it's sold through a dealer and so we've got great, great response from the primary dealer Creative Bus Sales, who's been very aggressive in helping us finish the design and perfect the bus but also now start to sell the thing. So we've got a couple of orders that we've already been delivering to them and their dealership network for demos and some direct customer sales. And I think this contract that we got onto in Florida, a great example of on those kind of state standing offers with a product that is really appropriate for that price point. So as we said in our notes, we think Equis then will be kind of 10% to 15% of our deliveries this year if the dynamic that's very different for ARBOC because we're not buying somebody else's chassis. We're making our own chassis.

And so with that, our KMG facility is doing a lot of the metal fab and welding of the chassis for its brother company, if you will, or sister company with ARBOC, which then enhances our profitability on a per-unit basis. So we're quite encouraged by not only its competitiveness, but the profitability of it.

Chris Murray

Well that is great. And if can just kind of squeeze one more in just really quickly on CapEx. So you talked about $50 million to $60 million. Historically, maintenance CapEx has always been in the $25 million to $30 million range and that has been moving up. What's the balance of the capital spending plan for this year?

Glenn Asham

So there's a couple of pieces, and you're right. I mean, our maintenance spend as we've done with sourcing has come up a little bit, and I would probably pick up that sort of maintenance and sort of ongoing and enabling projects we're doing, probably in the neighborhood of $35 million to $40 million a year. We do have some completion capital on KMG in 2019. That's in the range of really around I believe $5 million, $5 million to $7 million, and then we are looking at some other – anything about that, we're looking at some potential derivative programs in source to further reduce cost.

So whether we get to all those projects this year, we'll see. So that's why we have the range of $50 million to $60 million near the top end is because we have not been able to validate this from some of these projects we're looking at.

Chris Murray

Okay, thank you. It’s helpful guys. I’ll pass it on.

Paul Soubry

Thanks Chris.

Operator

Our next question comes from the line of Cameron Doerksen from National Bank Financial. Your line is open.

Cameron Doerksen

Thanks very much. Good morning.

Paul Soubry

Hey Cam.

Cameron Doerksen

Question on the pre-owned selling price, I mean it was way down year-over-year and a lot lower from previous quarters in 2018. It feels like there's something unusual there, but maybe you can just comment on that. And what your expectation for the pre-owned selling prices going forward? I know you're trying to manage this, but this is a breakeven business, and it was a pretty dramatic drop in Q4?

Paul Soubry

Yes, most definitely. So a couple of things. When you think about pre-owned coach and our MCI dynamic in the world, it's the only part of our business that has that trade in or pre-owned coach dynamic. The rest of them we sell out right I mean once we deal with kind of used vehicles.

So a couple things happened. When Daimler terminated MCI, we saw a dramatic drop in the customers' valuation of Setra. So we do kind of two things. A, we did mark-to-market and we based on industry numbers and valuation, we did of bluebook on a regular basis, and so forth. But now we start the year basically, rough numbers, Cameron, don't quote me on exact but call it 100 preowned coaches in our pool that are specifically varied Setra, and the preowned value start to really drop on.

So we have the dynamic are try to A, mark-to-market what those values are; but B, have to get rid of those things. So we were very aggressive in liquidating those preowned. So we ended the year with call it 15 or 20 of those 100 left, and we took a substantial hit to basically get out of the program.

Going forward now, what we're doing is we're effectively, when we take Setra in on trade we're effectively putting on the balance sheet at nothing. So we're taking any pain on the trade on Setra because they materially dropped in value in the marketplace. We're taking at the point-of-sale in the new coach rather than historically where we bought the thing back and then try to figure what we can sell it for and adjusted the market.

So when you look at our whole preowned coach pool call it 350 to 400 units in the pool, when we started the year last year, one quarter of that was Setra and probably two thirds of it is MCI coaches, and then we've had a few other competitors coach that we may have taken in on trade. As we start this year now, we effectively have really no Setras left or very, very small. The vast majority of our pool is MCIs. And so we're in a much, much better position this year and shouldn't be seeing those dramatic swings as we move into 2019. I hope that helps.

Cameron Doerksen

Yes it does. If I'm looking at kind of – so I guess really the impact is all Setra in Q4. And if we look ahead to 2019, the preowned price you kind of revert to – or the selling price that you have for preowned should tend to revert to a more historical type number.

Paul Soubry

The only caveat I'll put on that though, Cam is the overall industry health and demand. And some of the examples I gave in terms of Chris's questions, if the market slows down more than a couple of percent, the same thing is going to happen not only in the new, but on the preowned, which may push some of the valuations down over time. And as I said, we use a fairly stringent and repeatable process of blue book values and market values to effectively mark-to-market throughout the year and then again at year end. And so we don't expect to see that drop off like we saw last year and that specifically dropped related to the Setra dynamic, but you just never know based on the overall market health.

Cameron Doerksen

Okay, no, that's fair enough. May be just second question from me, just on the New Flyer infrastructure business that was announced earlier this year. I'm just wondering if you can talk about how many clients have you got to that are – you’re looking to use this service? What has the reception been from the transit agencies? Are they pretty receptive to having you guys help them out and kind of evaluating and helping them with their all electric needs?

Paul Soubry

Well, it's a really good question. And I will say that when we started getting into electric buses, I wouldn't have suggested this would have been on our radar because historically we sold the bus and we never had to worry about the customer's infrastructure, whether it's diesel fueling or natural gas, and so forth. As we and our competitors have started to deliver electric buses there's multiple different approaches from transit agencies. In some cases they rely on us to do it all and in some cases they say well we'll take care of the infrastructure. And then you guys just sell off the buses and we'll work it out.

And some of the case studies we've had over the last year or two, we find ourselves in a disconnect. So the agency or the operator has undersized the chargers or the agency and us included have underestimated the complexity of getting chargers installed, either in depots, or in-service, on en route, and so forth. And I think I've given some examples in the past where, we, for example, in New York City, it took us 13 to 14 different city agencies to sign off on the installation of two chargers, which delayed the project for nine or 10 months.

And so it became crystal clear that not every customer is going to take us up on taking a prime position with them to manage source scopes back the charging infrastructure. But a lot of them will. And so already I can just think of a couple, we've sold a bunch of buses now to Boston and in that case our ITS team will be the prime team that manages all of the subcontractors, works with the utility companies, works with the transit agency to put those charges in place. Another one, for example, we have a contract with Fort Worth and not exactly the same.

We're starting to get inquiries from transit agencies that are saying, hey, we're early in the journey. We've gone to your vehicle innovation center, and we get it now that it's fairly complex, and there's a lot of moving parts. Could you consult to us on helping us walk through the scoping, who’s, what type of chargers, how should we think about en route versus depot and those kind of things.

So I think so far, we're using it where we're selling buses, and we're bundling the charges and taking far more responsibility. And then in some cases, I think we're going to be using our vehicle innovation center and infrastructure solutions to help earlier in the stage and evolution of deciding, helping scoping, costing, all of this kind of things. So we're the first ones to come out of the blocks with that kind of well-defined fully integrated service and remain to be seen, but we're quite bullish so far in how the response has been from customers.

Cameron Doerksen

Okay, that's good. Thanks very much.

Paul Soubry

Thanks Cam.

Operator

Our next question comes from the line of Steven Harris from GMP Securities. Your line is open.

Steven Harris

Good morning gentlemen. Just had a couple of follow-up questions. First, on the used coach side, again, want to focus on that average selling price for a pre-owned coaches. And can you give us a sense where most of the way through the first quarter, what sort of rebound, if any have you seen in Q1? And basically what you think is going to happen for the balance of the year.

Do you think that the impact we saw of those bankruptcies and the Setra transaction, et cetera, is essentially behind us? And you're only dealing with the softness in the industry. And in which case should you see those prices really come back a bit?

Paul Soubry

Well, I wish – as you said, we're kind of halfway through the quarter, Steve, and I wish we had bigger sample size to be able to kind of point to some very specific case studies. The impact as we discussed earlier, the impact was pretty material for last year. And you think about kind of two dynamics the value of the trade that we put on it, and then ultimately hang onto this preowned coaches and trying to figure out how to sell it. And we often talk about them as independent, the preowned coaches are new, but as you just commented and as I did before, they're very interrelated on valuations. I think it’s too early to be able to say, plus the other dynamic is as we know and we have this massive amount of deliveries in fourth quarter, both new and preowned and the first quarter is relatively soft. Everybody has kind of started the year, they've bought their product whatever whether it's new or preowned and the demand really doesn't pick up other than there was larger or longer term kind of deals that were already in play.

I think that question we’ll be able to answer better after we get through the half year to try and kind of give a feeler indication. I'm not sure I've seen anything I can point to, to say there has been a rebound or a continued degradation, because the volume hasn't been material enough to build a point to it. But we are being way more aggressive internally at how much value we put on preowned when we take it back. And when we do, we're taking any variation or about it back on margin of the new coach sale as opposed to bring it in and putting our balance sheet and having to worry about significant mark-to-market as the bus ages on our balance sheet.

Steven Harris

Okay. And then may be just as a follow-up to that, if you separated out the impact of Setra, what's used MCI bus percentage change will look like on a year-over-year basis? Because that's 137,000 down to $56, 000 – $58,000 number is a – it's a bit of an eye opener.

Paul Soubry

Well, I think the next blue book valuation comes out at the end of this month or at the beginning of next month and that's the next kind of point in time, where we see not just what we've sold pre-owned coaches for, but what the industry is sold pre-owned coaches for. So I think that's probably a better point in time Steven to kind of giving you an indication of “year-over-year”. And again I'll point to that softness and the materiality of the quantum in the first quarter is relatively small relative to the full year. The first quarter just is not enough of a sample size to comment on year-over-year changes.

Glenn Asham

And I think the MCIs that were liquidated in Q4 through the Cavallo bankruptcy where we saw as they maintain their value fairly well. The MCI is relative to some of the other...

Paul Soubry

The other question, I think I commented that, when we saw the auctions of couple of those fleets go through – the liquidation through auction houses, our teams were pleased with what used either two or three year old used or five or six year old used or even older were being selling at. We didn't see a further drop-off on what that mark-to-market was.

Steven Harris

Okay, good. And I'm wondering if you could give us a little more color on – you've identified a potential for I think the soft Q1, you've talked about the seasonality of the business, which I don't think was anything new, the idea that Q1 and Q3 are softer quarters, Q2 and Q4 are stronger. Are you seeing the business now being more seasonal than it had been in the past, apart from just the acquisition of ARBOC? Or is there something else you're trying to tell us with that message about seasonality?

Paul Soubry

No, it’s really good. I'm glad you brought it up actually because, not all of our analysts, investors – and our opinion have really thought through the seasonality in the last year and so we found ourselves in certain quarters to be kind of out of whack on expectations. And so we just wanted to remind that that community, that you really got to look at the sum of the parts and the reality of the seasons relative to our overall performance when people are managing I guess, expectations. And we’re just trying to call that out as a please keep that in mind, because it's not like it was when it was just transit at New Flyer, which we didn't have any seasonality other than when we had certain, for example, summer shutdowns or Christmas shutdown or holiday shutdown, that kind of stuff. It clearly has taken on a new world for us when we brought on MCI primarily.

Steven Harris

Great. If I could have one more, just the – a little more detail about the chassis problem at ARBOC and just what's going on there with GM and how have they resolved it? What's the cause of behind that?

Paul Soubry

Yes, it's a good question as well. So ARBOC created their business largely based on GM chassis and have had done some through Chrysler chassis in the last year. They've now migrated. They also build their cutaways on the Ford Chassis. The Ford Chassis have all the cutaways in North America is probably 90% of the market, but we didn't have Ford certification. We were building our stuff only on GM and Chrysler. So now that Don and Rob and the team over at ARBOC have been able to get the Ford certification and be able to sell their products on Ford. We're able to kind of approach ourselves to a broader marketplace.

The GM chassis specifically is the chassis not sold to us directly. It actually goes through dealers just the way the automotive and the truck world works. And so you're kind of a victim of some to extent of how and when they build chassis and in some cases we'll work with our customers and those dealers to pre-buy and hold inventory and so forth over the years. As ARBOC has grown and of course last year was 500 something units and previous year was 350 units, the quantum now takes on kind of a new dynamic. And so we basically had a scenario where some of the chassis that we had expected to be delivered or wanted to be delivered for specific bill were delayed from GM.

I'm not blaming it that's a massive issue, but the reality is there are certain units that we could have built in Q1 and deliver it that we did. The guys have resolved that they now have the chassis supply on route, and so they will be starting to come in March and April and we'll catch up in the second quarter. The other dynamic that is a positive one for ARBOC is that they won a contract for our customer in LA for 50 units that are being built on Freightliner chassis.

And historically the built on Freightliner chassis that was a diesel chassis, this customer wanted a vehicle that we like, it's got good margins, we’re impressed with but it's built on a Freightliner natural gas chassis and because it's the first time, they provided that to us, Freightliner had to do some additional testing, which is perfect for us. We want to make sure that thing has all of the fuel efficiency and dynamics that we had intended and cross-sell to our customer. So that testing is almost completed, it's ongoing in those chassis and they'll now show up mid-to-late April.

And the same dynamic with the GM that we've kind of had to jerk around and be inefficient to some extent in the plant waiting for the chassis to show us and then we'll start building those in May and June and July and catch up on that order. That order is for 50 vehicles. It's quite material to ARBOC with a good profit and margin profile. So it's not like it's massively systemic issues, it's just we're a victim of kind of two situations on a business that has gone from 350 to 500 growing and so we just got to manage our way through it.

Steven Harris

Great. Thank you.

Paul Soubry

Thank you.

Operator

Our next question comes from the line Jonathan Lamers from BMO Capital Market. Your line is open.

Jonathan Lamers

Good morning. A follow-up on the used coach pricing, it wasn't clear to me. Is MCI continuing to maintain trade-in values for used coaches firm as these market prices decline?

Paul Soubry

I'm not sure Jonathan. I understand, but let me just kind of articulate how that works. So we go to a customer and we try to sell them a new coach. He said, well, I've got a used coach and I think it's worth X. We would then go back and look at the history of that model and type of propulsion and options and so forth of what we've sold for. We'd go to the blue book and look at the range and the quantum of that kind of thing and we'll come up with what we think is a fair trade-in value.

We'll provide that to the customer and then we'll effectively be in a negotiation of price of new coach as well as value of used coach. And so every situation is different. The new demand in the marketplace or the things we talked about before were a number of used coaches hit the marketplace in batches will have impact on the valuation that we provide. What we're being more aggressive on now is that once we buy that thing back, independent of what we pay for it or the discount we give to the customer, we're being far more aggressive of what we put on our balance sheet for. Does that help?

Jonathan Lamers

My question was about the margin that you're capturing on a new coach sale, where the customer trades-in, whether the trade and subsidies are getting richer as these used ASPs are coming down?

A - Paul Soubry

Well, I would say every situation is different. I don't know if we can point to any trend of margin degradation and so forth. As the market gets a little bit tighter, less units are sold there's obviously price pressure on the margin on new coaches.

Jonathan Lamers

Thanks. On transit, Paul, you made some comments about the order outlook in your opening remarks, and I just want to know how you plan to manage production at your transit plants over 2019, if the order is due come in low – if the customer to continue to focus on evaluating battery and electrics. Is there a minimum backlog level you need to maintain? Could you talk a little bit about your production plans?

Paul Soubry

Well, the backlog is far more an impact for 2020 and 2021 than it is for 2019. The vast majority of the slots for 2019 are under contract from our options that the customers are effectively planning to execute and therefore we've designed slots for it. It’s not like 2019 has a lot of, if any open slots from a transit perspective. The future though is that if the order slow down a little bit, we will absolutely start to burn faster into our backlog, when you look at the number of options that we have in 2020, I don't remember from top of my head if it's over 2000, I think the number of options, we've got a lot of add-VAS for beyond the 2019 year.

The issue inside our production facilities and some of the inefficiencies we had in the first quarter at New Flyer relate primarily to now that you've got full electric buses on all of our production lines, building electric bus has its new dynamics, you're proving out all of some of the tooling and infrastructure you've put in place. You've now got a slightly different supply chain that you're having to rely on that are starting to ramp up, there's a learning curve and a training curve not only for our people and our inspectors, but also the customer inspectors that they have never inspected a electric bus before and so some of those things have conspired to have some challenges, if you will efficiencies in the first quarter. But at this point in time I am not worried about filling slots in our transit bus business in 2019.

Jonathan Lamers

Right. And from a customer perspective is there federal funding available today for electric infrastructure beyond recharging stations or the depots? And how are the transit agencies handling the funding for that?

Paul Soubry

So as you know, the electric bus deliveries continued to be fairly limited relative to the total number of whatever it was, 6,700 units delivered last year. And the way the transit agencies have worked that for the vast majority of it is they'll apply for special funding for the price over and above the normal diesel or natural gas bus and they'll apply for special funding for the infrastructure side.

Part of the reason that we and maybe different than some of our competitors, we think it'll be more evolutionary than revolutionary, as that there are those two incremental funding dynamics that got to find their way into mainstream, which is why, where only 5% of our backlog is electric buses and the funding methodologies through the FTA have not – fundamentals have not changed relative to who's going to pay for the infrastructure. And so we think that'll be the pacing issue for adoption over not necessarily the technology associated with electric bus.

So a short answer to your question is it's all based on special initiatives, and special grants, and so forth either from the FTA or the EPA or anything local in some of these cities and states but it is not main-stream.

Jonathan Lamers

And then the current FAST Act extends until the end of 2020 and so this would relate to orders that customers would be considering for delivery in 2021 and beyond. Is that what's happening to the order? I'm sorry, the market for orders?

Paul Soubry

Well, some of the reasons that we believe that our active bids are down, I can just walk into the average transit agency in the United States or in Canada for that matter that had a fleet replacement plan and whether they are operating diesels or natural gas or whatever. And now the political masters and the communities are saying we want zero emission buses and so the transit agencies are starting to say, okay, a) what routes, what range, what battery size, what conditions and so forth. So and by the way that bus is more expensive.

And then the other issue is who's going to pay for this infrastructure? So the FAST Act when it expires, I mean it was never intended today to deal with any of that or never funded to deal with those incremental costs. And so part of our issue as not only NFI, but also our industry associations like APTA are working with the FTA and so forth, how might the next replacement of the FAST Act deal with infrastructure requirements in addition to the rolling stock dynamic. And so we're actively working with all of the associations, and lobby groups, and so forth to help provide a discussion.

In the interim, that's why we – one of the reasons we launched infrastructure solutions to be an active participant in helping our customer because it's not as simple as some other notice with respect to politicians that saying we're going to put an electric bus in the road, it sounds romantic, but it's not trivial, everything from how you charge it, how you maintain it, how you diagnose it, it's more expensive, so where's the funding and all those issues. And so I don't think we can point to specific things that are going to be triggers, it's going to be more transitionary.

So I don't know what the replacement for the next FAST Act is going to look like. We're very encouraged with what we hear, when we walked through the halls of D.C., and we hear positive discussion about the continued investment in city infrastructures and so forth. But there's a lot of work to be done just to figure out how that's going to get paid for which again is why we think it's going to be evolutionary, not revolutionary.

Jonathan Lamers

Thanks. And Glenn, just a couple of quick questions on the Q1 outlook. Do you expect those start-up costs to be higher or lower in Q1 and Q2 versus Q4?

Glenn Asham

So we're starting to put more and more volume into that business. So we would expect that over time these quarter-by-quarter costs that will be in production – will be reducing.

Jonathan Lamers

Thanks. And how many – do you have an account for how many production days were lost at Crookston, St. Cloud and Pembina due to the weather?

Paul Soubry

I believe it was two or three days, but still right [indiscernible] at the time the facility where they deliver all of the public coaches for a motor coach. And then I've gotten two or three days in the Minnesota parts for transit.

Jonathan Lamers

Okay. Thanks for your comments.

Operator

[Operator Instructions] Our next question comes from the line of Daryl Young from TD Securities. Your line is open.

Daryl Young

Good morning guys.

Paul Soubry

Hi Daryl.

Daryl Young

Just want to get a little bit of context around the public transit orders and some of the change in the language to say that it's – you're expecting smaller, smaller size orders and fewer options and shorter contract terms. Is that a change in customers or – and is there any profitability changes with smaller orders?

Paul Soubry

It's really a customer issue and it relates with what we were talking before. Imagine you are transit agency with 100 buses and somebody says you're going to start buying electric buses your fleet replacement plan didn't contemplate that. So now you're trying to figure out how you're going to use money and so forth and so, that's why instead of the years, sort of the periods where we saw, you know, 800,000 units, 200 a year times, five years, those kinds of things.

We're seeing a lot of agencies dabble and say well we'll put the diesel order or this natural gas order on hold and we'll put out an RFP for five or seven or 10 electric buses and we'll try it and we'll see how it works and we'll learn from it and so forth. We were trying to point to that more just the blotchiness of that as opposed to the impact on profitability. I'd remind you that the way we and the industry work for the most part is we get these detailed specifications from our customer. I want this camera in this window, in these seats, in this floor, and all the crazy things that we customize. We then go get a cost to build materials from us and our suppliers and we'll add a target dollar margin to that and will vary that margin based on the competitive situation.

So I don't see those kinds of dynamics around, smaller orders impacting profitability in the short-term. It will depend on how long that goes on, before we start to see significant orders, but right now I can't say that that's impacted the way we had been in the profitability that we're seeing per unit.

Daryl Young

Okay. And then in terms of the year-over-year increase in the margin in the transit business, is that something you expect to go forward or is that more of product mix in the quarter?

Glenn Asham

So a number of factors obviously, we will see some change in mix, which would be not – a mix going into 2020 and late 2019, as we haven't seen in the last couple of years now. But to be a fairly small impact, obviously the other issue on margin is how quickly we get some of the new products back to efficient level of production and how quickly do we get the KMG facility wrapped up to its potential.

So in terms of the overall margin expectation, I don't think we're expecting a major swing, I mean there's obviously some mix that's going to drive things down but we should have taken action in terms of a lot of our in-sourcing activities and try to offset some of that in lower costs.

Daryl Young

Okay, got it. And then one final question. In terms of the ramp up of the production lines for the new products, are you guys kind of over the hump on that or are you anticipating that leading into Q2 as well?

Paul Soubry

So, rough order of magnitude, MCI’s volume hasn't fundamentally changed, but you've got some new products going down so it's not ramp up, its implementation. Again its different you're proving our tools now and all this other stuff that you tried to do your best before we put it online, but reality is building a 35 footer right next to a 45 footer has some dynamics around efficiency that stuff we think will work well its way out throughout the year.

On the New Flyer side we did two things. We did ramp up the day-to-day production volume kind of roughly 58 or so units to 60 so we've got a volume increase, but you also got a mixed dynamic as I described before and so again that person that installed an engine now having to worry about installing a battery system and all the wiring and so forth, it's just taking a time to get the labor efficiency back to the nineties and certain percentages that were working at before.

I don't think those are long-term systemic issues, I think those are implementation and transition issues, we're laser focused on it. Consequently, and again it's not just that, you've got inspectors. And so the inspector now is looking at something that he didn't see before, it was very different. And so the time and the speed of which he gets through the machine is a little bit slower. But I think those are issues we'll work through 2019 that are not going to be long-term problems for us.

Daryl Young

Okay, thanks. That's it for me.

Paul Soubry

Great. Thank you

Operator

We have no further questions. Thank you. I will turn the call back to the presenters for closing remarks.

Paul Soubry

Well, great. Thanks everyone for your questions and for joining us. I'd note that we will have an updated IR presentation on our website and if you have any other questions, feel free to reach out to me and Stephen King anytime. Thanks and have a great day.

Operator

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