NFI Group Inc. (NFI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the NFI 2022 Fourth Quarter and Full-Year Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to today's speaker, Stephen King, Vice President of Strategy and Investor Relations. Please go ahead.

Thanks you, Michelle. Good morning, everyone, and welcome to NFI Group's fourth quarter and full-year 2022 results conference call. This is Stephen King speaking. Joining me today are Paul Soubry, President and Chief Executive Officer; and Pipasu Soni, Chief Financial Officer. We will start today's meeting by delivering a land acknowledgment, also known as a territorial acknowledgment. I acknowledge that I reside that NFI's headquartered in Treaty 1 territory, the original lands of Anishinaabe, Cree, Oji-Cree, Dakota, Lakota. Dene peoples, and the birth place and homeland of the Metis Nation. We respect and give honor to the indigenous peoples' history on this land and recognize First Nations, Metis and Inuit peoples' ongoing contribution in our neighborhoods and communities. We acknowledge our relationship with indigenous people in Canada and throughout the world, a unique relationship that is committed to truth and reconciliation. Today's call will be a little longer than our usual quarterly calls with approximately 40 to 45 minutes of presentation followed by question-and-answer. We want to provide a detailed update to our investors and stakeholders. So we will discuss how we finished 2022, provide information on the record bid and funding environment and update on supply chain and on our longer term outlook and anticipated financial recovery. This call is being recorded, and a replay will be made available shortly. We will be using a presentation that can be found in the Investors section of our website. While we'll be moving the slides via the webcast link, we will also call out the slide number as we go through the deck for participants on the phone. Starting with Slide 2. I would like to remind all participants and others that certain information provided on today's call 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 NFI's press releases and other public filings on SEDAR for more details. One item to note is that in order to allow our external auditors to complete their final normal course audit procedures. The audited financial statements are expected to be found on SEDAR and the company's website by the end of this week. We do not anticipate any changes between the information provided today and the final audited statement. We also want to remind listeners that NFI's 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. On Slide 3, we have included some key terms and definitions referred to in this presentation. Of note, zero-emission buses or ZEBs consist of battery electric, hydrogen fuel cell electric and trolley electric buses; equivalent units or EUs, is a term that we use for both production slots and delivery statistics. The majority of our vehicles represent 1 equivalent unit on articulated 60-foot trains a bus takes 2 production plus and is therefore, equal to 2 equivalent units. For those of you, new to the NFI story, we'd like to provide background over the next few slides. With over 450 years of combined experience, we are a leading independent global provider of sustainable bus and coach solutions. We are leaders in our core markets, which includes North American heavy-duty transit coach aftermarket, U.K. heavy-duty transit and aftermarket and the world leader in double deck transit buses. On Slide 5, we outlined the evolution of our offering and the ecosystem we offer our customers and partners. At our core are our vehicles, complex and customized for mass transportation. They are supported by industry-leading aftermarket parts and service. We pride ourselves on being thought leaders in our space and drivers of workforce development and training with special focus on creating opportunities for a diverse, equitable and inclusive workforce. With the evolution of new technology, including battery and fuel cell electric propulsion, we've seen increased demand for our connected vehicle technology, including telematics and diagnostics, autonomous or advanced driver assistance systems as well as vehicle financing and infrastructure support. Our Infrastructure Solutions business works directly with customers to assist them in determining needs and commissioning electric vehicle and infrastructure, a business that has installed over 340 chargers with more than 58 megawatts of capacity. Turning to Slide 6. Our stakeholders presented in the wheel on the left drive our strategic and organizational decisions and our values are at the core of our operations. We concentrate on achieving a balance and delivering for all our stakeholders. And this wheel was especially helpful as we made difficult decisions during the COVID-19 pandemic and associated supply disruption. On Slide 7, we provide a brief snapshot of our history, including the numerous acquisitions that have built NFI Group. As you can see, on a pro forma basis, we were nearly a $3.2 billion revenue business in 2019. The past few years have been challenged due to the first to the COVID-19 pandemic, followed by a global supply chain disruption impacting our delivery volumes. But we envision that we will exceed our pre-pandemic levels with a target to deliver approximately $4 billion of revenue by 2025. This view is supported by the expected benefits of increased demand, higher ZEB sales and international expansion. Items we will discuss in detail this morning. Slide 8 provides information on the diversification of our business. North America remains our largest market. But we've seen significant expansion of our international business in both, the U.K. and Europe plus contribution from Asia Pacific regions, all driven by our 2019 acquisition of Alexander Dennis. Heavy-duty transit in both North America and the U.K. remained our largest product segments, with the majority of those sales going to public entities or entities that receive funding from public governments. Aftermarket businesses, both in North America and internationally, are also critically important as drivers of revenue, significant margin performance over the past 3 years. Finally, as you hear numerous times throughout this morning's call, we're seeing continued and rapid growth in the demand for ZEBs with a higher portion of revenue coming from these electric vehicles, which is expected to grow significantly in the near and long term. This transition to electric vehicles what we call the ZEvolution exciting for NFI as we are leaders in this space. Slide 9 provides statistics on our capabilities and performance ZEBs. The more than 2,725 electric vehicles we've delivered since 2015 have completed over 100 million electric service miles in 120 cities across 6 countries. Finally, as I previously mentioned, demand for electric vehicles is accelerating. In our North American bid universe, 51% of anticipated customer purchases over the next 5 years are for electric vehicles. When I started with NFI in 2018, this was just 18%. Putting all this together on Slide 10 is Enterprise Investment rationale. As discussed, we have leadership positions in attractive markets that are transitioning to electrification with record bid demand and government funding tailwinds. We expect that this will grow both top-line revenue and bottom line earnings as our business drives significant earnings volume leverage. We have decades of experience and track record, which is critical to our customers and a key differentiator when compared to new market entrants. While we are leaders in zero-emission battery and fuel cell electric propulsion, we are propulsion-agnostic and also offer legacy diesel, CNG and diesel hybrid electric options. We can support our customers throughout the transition to zero-emission as our facilities have propulsion-agnostic product lines. This is another key differentiator for many of our competitors. Finally, while there have been challenges over the past few years, we anticipate significant financial recovery with growth, potential outperformance relative to our peers and industry standards as we move through 2023, 2024 and 2025. I'll now pass it over to Paul and Pipasu, who will discuss all of these factors in detail and recap the fourth quarter and fiscal 2022.

Thank you, Steve. Good morning, everyone. I'll begin on Slide 9 with a summary of fiscal 2022. We saw record demand for our products and services, juxtaposed with continued supply chain disruption, associated production inefficiencies and the impacts of inflation that wrapped foreign exchange movements. Our financial results reflect those realities with declines in certain performance metrics paired with outperformance in growth metrics. The aftermarket segment was a significant bright spot for us in 2022, delivering profitability while navigating through its own level of supply challenges. A few highlights for the quarter. Strong growth in after procurements, up 54% year-over-year. Our highest new order performance since 2017 with over 5,700 equivalent units, a 23% increase year-over-year. This was the second highest level of annual orders in the past 16 years. We grew our backlog by 9% year-over-year, finishing at $5.6 billion with a book-to-bill ratio of 134% for fiscal 2022. Zero-emission buses made up 23% of our full year deliveries, up from 18% in 2021 and a record 29% of our backlog. We achieved milestones of more than 100 million zero emission miles driven on NFI buses and coaches a 100% increase from 2021. 51% of our total North American bid universe is now zero-emission buses. And this represents over 3,100 units a year over the 5-year outlook, supporting our view of significant increase in demand for electric buses going forward. We achieved our target of $67 million of NFI forward savings and $75 million when combined with cash flow savings, hitting our target in 2022, one year earlier than we originally projected. We completed 2 amendments to our credit agreements and subsequent to our year-end, entered in new loan agreements with the Government of Manitoba and Export Development in Canada, which Pipasu will discuss later in this meeting. Finally, even in the face of pandemic and supply chain-related challenges, we saw quarterly aftermarket revenue increased 2% and generated a solid 17.9% adjusted EBITDA margin, even with 1 less week of operations during a 52-week financial year versus 53 weeks in 2021. On Slides 13 and 14, we provide graphs that tell the story of our supply disruption and the inefficiencies they created. First, on Slide 13, our supplier risk ratings. This data is compiled from a detailed risk assessment process that monitors and evaluates the risk and potential impact of supplier disruption. To do this, we review a supplier's financial strength. We monitor their past delivery performance, work proactively to understand their tiered supply and other risk factors. We categorize all suppliers based on these risk factors and consider severe impact suppliers as those who could result in line shutdowns, lower production rates or significantly impact bus completion online. We navigated through 2020 and started 2021 without major disruption from any severe impact suppliers, basically a similar performance to what our supply chain had delivered for years. In late 2021, this turned with 50 high-risk suppliers across NFI. This impacted key components such as windows, air conditioning units, emission systems, plastics, hoses and many key electrical components which contained microprocessors. While we saw improvement during the second quarter of 2022, and we're encouraged, critical electric components remained a significant challenge with some additional challenges arising in the third and the fourth quarters of 2022 from things such as wiring harnesses, electrical hybrid drive systems and inverters for electrical buses. These disruptions inform the graph on Slide 14. There are quarterly vehicle entry rates, line entry rates or otherwise stated the number of new vehicle builds that we start in our production facilities each week and quarterly WIP dollar investments. Line entries should be in approximately the 1,500 units a quarter range similar to 2019. Reductions in 2020 and 2021 were driven by the pandemic and then supply disruption. This was even worse in 2022 with line entries hitting a low of 714 units in the fourth quarter of last year. This data shows that our facilities were inefficient and our teams were frustrated as they could only build partially completed vehicles, growing work in process of buses and coaches and missing several components. The good news is that as we exited the fourth quarter and while we live entered fewer vehicles, we completed and delivered many vehicles that were missing components previously, lowering our overall WIP by $127 million. We have not sat ideas we have dealt with these supply challenges. Slide 15, we outline our proactive responses. First, to help offset the impacts of inflation and working capital investments. We sought out pricing adjustments and customer deposits or prepayments were possible. We've had significant success in both areas. Two, we lowered our production line entry rates and our staff levels to better match production with demand and to focus on WIP reduction. Three, we found certain alternate suppliers where possible and in some cases, going down 4 levels at our supply chain to find alternate parts from our suppliers. Five, we increased our inventory of raw material components to improve parts availability on the production line where possible. For certain components moving from 6 days of just-in-time or part of use inventories to somewhere between 50 and 20 days where applicable. We increased our lead times to suppliers and with typically a 6 to 8-week lead time as they've increased to 10 to 12 weeks for many components and even longer for others, which is a huge lift for our engineering supply teams who work on highly customized vehicles. And finally, we continue to drive our cost reduction efforts. And since 2020, NFI Forward has achieved $67 million of annualized cost savings compared to 2019 baseline levels. This required that we reduced over 2,000 positions across our company and closed nearly 25 individual sites. There were extremely difficult people decisions that impacted our teams. We defend our position not to cut deeper as if we were to shutter additional facilities or even do more site layoffs, there was a high likelihood that we would not be able to recruit the staff as required to facilitate our recovery. We would also not be able to deliver significant new order wins and to grow the backlog. With those details in mind, I'll now ask Pipasu to dive into the details on the financial results before I provide you with an update on our outlook and guidance.

Thanks, Paul. Picking up on Slide 16, we outlined the backlog growth Paul discussed on the top section of the slide. With 4,576 EUs of firm orders, we have essentially sold out our 2023 production slots in North America and U.K. transit plus cutaways with good visibility into 2024. We also have options out to 2027, providing significant visibility for future years. In the bottom section, we outlined the deliveries. The quarterly and full year deliveries were down within heavy-duty transit and motor coach, reflecting supply disruption, cutaway sales were up in the quarter and a bright spot was higher average sales price across all segments as we started to see more inflation-adjusted contracts flow through our facilities. On Slide 17, we provide our EBITDA, cash flow and liquidity measures. As expected, with the challenges discussed, our adjusted EBITDA was down in the quarter and for the full year, reflecting lower delivery volumes, product mix, production inefficiencies and the impact of inflation on certain legacy contracts. Free cash flow decreased primarily driven by lower adjusted EBITDA year-over-year. As the team focused on executing controllable items, we achieved a year-end liquidity position of $173 million versus our target of $100 million, primarily driven by inventory unwind. While liquidity is down year-over-year, this is a combination of lower capacity under our amendments, a $262 million reduction and in November 2021, we completed an equity raise and convertible debenture issuance, making for a tough comparison period. Turning to Slide 18. We provide a year-over-year adjusted EBITDA bridge. Several broad events impacted our 2022 results, lower volumes, not receiving government grants in 2022 versus a $56 million received in 2021, pricing surcharges and inflation and the impact of inefficiencies. We do not anticipate these items will repeat at the same level in 2023 and beyond. Slide 19 shows our gross margins by quarter from 2019 to 2022. Aftermarket recovered well from the pandemic that saw some pressure in 2022 due to inflation and freight impacts. Manufacturing margins reflect inefficiencies and heightened inflation. These impacts became more visible in the third quarter of 2021. And we believe hit bottom in the second quarter of 2022, with some improvements to finish the year. This is a positive sign as we anticipate significant improvement as we move into 2023. On Slide 20, we outlined the impacts to our net loss and adjusted net loss. Our net loss for the quarter increased significantly driven by goodwill impairment charges from the Alexander Dennis manufacturing and ARBOC cash-generating units. These impairment charges came from increases in interest rates, impacting discount rates and in timing of our anticipated recovery shifting from 2022 and 2023 into 2024 and 2025. We normalized for this charge plus mark-to-market adjustments on our interest rate swaps and other nonrecurring items. I'll now provide an update on our credit amendments and the ongoing discussions to secure a new multiyear credit agreement. On Slide 22, we provide details on the amendment that was completed in December 29, 2022, providing a covenant waiver until June 30, 2023. The table provides the covenants that are in place during the waiver period. In January 2023, we were able to secure new loans with the government of Manitoba and EDC that provided an additional $87 million in proceeds, plus a new $100 million surety bonding facility. Photos of the announcement have held with representatives from the government of Manitoba and the Federal Government of Canada, are on Slide 23. Turning to Slide 24. We provide our view on the timeline to execute new credit agreements. NFI will be seeking multiyear agreements that provide capacity, flexibility and covenants matched to our anticipated financial performance and recovery. We are targeting completion prior to June 30, 2023. We have completed the first 3 steps in the process and are in detailed discussions with our banking partners to advance the new agreements. On Slide 25, we summarize our capital allocation priorities. While we work to complete new agreements, we remain focused on cash management, liquidity and strengthening our balance sheet. Proceeds from the Manitoba facility and the EDC facility received in January 2023 will provide additional liquidity as well the continuing unwind of working capital, primarily related to investments in WIP and raw material inventory. While there will be benefits from the inventory unwind, they will be somewhat offset by the impacts of lower deferred revenue where we received customer prepayments and deposits in 2022. In total, we anticipate that we will see a net inflow of cash from working capital in 2023, mostly in the first half of 2023. Additional inflows will be dependent on other advances and prepayments received from customers. We are exploring other potential opportunities to generate cash flows, including capital market activities. On this front, we have issued a shelf prospectus that would allow for a capital market transaction in a more efficient manner, should we choose to pursue those options. I'll now turn the call over to Paul to discuss outlook and financial guidance.

Thanks, Pipasu. Picking up on Slide 27. NFI plays a critical role in public transportation, which acts as a spinal cord for cities decreasing congestion, increasing access and providing more equitable outcomes, all while lowering emissions. Turning to Slide 28. This was display when U.S. Vice President, Kamala Harris and Nuria Fernandez, Administrative Federal Transit Administration recently visited our St. Cloud facility. It was a special event that rallied our team and placed significant focus on NFI's role. In the words of Vice President, Harris, you're not just building better buses; you're building a better America and are key to the future of public transportation. I can't think of a better endorsement and relevant words as we speak about our outlook. On Slide 29, at our January 2021 Investor Day and last year, during our fourth quarter results call, we mentioned several actions and milestones that would drive our future recovery and performance. On this slide, we highlight what has happened since that time and the numerous pauses that has been achieved even in a difficult operating environment that helps strengthen our view of 2023 and beyond. We will maintain new vehicle production rates at lower levels through the first half of 2023 as supply chains are not completely healthy, but dramatically improving. We anticipate that we will ramp up production in the second half of this year. We anticipate that the strong bid environment will continue as we now have over 10,500 units in active bids currently in the market and a growing bid universe driven by very, very strong government funding. Finally, NFI has completed the majority of its legacy contracts bid in '20 and '21 that are impacted by high inflation. Some depressed margin contracts will be included in our 2023 results, primarily in the first half. But these make up less than 20% of NFI's firm backlog and we expect that they will complete it by the end of 2023. I'll now explain some of our drivers for longer term outlook. On Slide 31, we provide our active bid universe and orders. As you can see, following a period of depressed bids in 2020, we have seen a consistent increase in bid activity through 2021 and 2022 that has converted into orders for New Flyer. On Slide 32, we highlight our impressive 2022, the highest number of new orders since 2017 for 5,786 equivalent units. This is the second highest year of new orders in the past 16 years. These were also many multiyear orders from major Canadian and U.S. customers and significant zero-emission bus orders from customers in the United Kingdom and Hong Kong. On Slide 33, we should -- we show that these orders drove our book-to-bill ratio to 134% for the second year that we were above 100%. While some of this performance came from lower deliveries, our strong order book provided the majority of this book-to-bill growth. Order conversions were down in 2022 as some customers allowed older options of diesel buses and natural gas buses to expire as they focused on our new zero-emission technology. Slide 34 provides a 5-year outlook from North American bid universe along with the active bids. As you can see from the chart, in addition to active bids, the 5-year outlook for procurements has another 20,000 units, providing a total bid universe over 30,000 units. This supports and reinforces our view that vehicle demand will continue to be at high levels going forward. Turning to Slide 35. We show that we are the leaders in zero-emission buses in North America, the U.K. and New Zealand. With electrical vehicles in service and/or on order with 17 of the top 25 transit agencies in North America and all of the largest operators in the United Kingdom, plus additional units on order in Hong Kong. We have completed pilot programs for many of these large customers who are now moving to larger multiyear zero-emission bus orders. We expect this transition will benefit NFI for years to come. While we are leading this space, we aren't complacent. On Slide 36, we highlight some of the advances we made in our '22 bus strategy and with the launch of 3 new electric vehicle models following the launch of 6 new electric vehicle models in 2021. As we move into 2023, we will roll-out our new battery platform for North America, continue to advance the game-changing Alexander Dennis and viral 100 bus platform and secure additional contracts for Alexander Dennis' future-proof next-generation battery program. This is a radical step for Alexander Dennis that is expected to drive significant orders and activity of 2025 and beyond and significantly enhanced margin; all very exciting advancements on our ZEvolution roadmap. I'll note that as we discuss battery programs, we have strategically chosen to be smart buyers of technology and supplier agnostic on our battery cell and modules, given the need to be agile while we rapidly deal with changing technology. We are experts at integrating an accessible Propulsion Systems into our overall vehicle systems and this is not an easy task. And it supports our customers, providing them with confidence and stronger performance for the long term. Going forward, we expect that our continued focus on being value creators in the battery packet integration space will create margin enhancement opportunities as we deliver higher volumes of zero-emission vehicles with ultimate flexibility. Turning to Slide 37. We are in an environment of record government investments in public transportation with all of our core end markets driving the highest -- heightened bid environment. Looking first at the U.S., the landmark $1 trillion Infrastructure Investment in Jobs Act, or IIJA is a successor to the historic FAST Act and is the main funding mechanism used by U.S. transit agencies for new vehicle purchases. It generally provides 80% of the capital for a new bus and provide up to 100% under certain other programs. As you can see from the chart, the IIJA provides 64% higher funding than the FAST Act and much higher funding levels than older funding programs. This reflects the higher cost of zero-emission vehicles and the associated infrastructure. In addition, certain bus programs have seen massive funding increases. This was on display in the low and no-emission grant program or what we refer to as low no, which has grown from $180 million of funding under the FAST Act to over $1.1 billion under the IIJA. NFI has been a significant beneficiary from the low-No-Go program. In 2022, NFI supported the successful application for almost 200 million grants awarded to 15 different public transit agencies. In January 2023, the FTA announced that there'll be another $1.2 billion in low-no program support for 2023. This is important as many of the grants awarded in '22 have not yet resulted in firm contracts since the low-no program is expected to generate contracts and backlog for NFI for years to come. The IIJA has already started to drive significant order activity and is the primary factor that supports our view that the market will cover the North American transit bus market will recover to deliver between 6,000 and 6,500 units a year as we move through the funding period with a higher percentage coming from higher-margin battery and fuel cell electric buses. On Slide 38, as we look at Canadian funding, which is also a record in size and scale, there are commitments to replace 5,000 ICE buses with zero emission through the dedicated annual funding and specific funding through the Canadian Infrastructure Bank. We have seen announcements from new programs in Edmonton, Ottawa, Brampton and Calgary through the CIB. In addition, there was a tri-level government funding announcement for investments of over $500 million by the Winnipeg Transit System. We are proud to be selected as Winnipeg's partner on their first battery electric order for up to 174 equivalent units announced in January 2023. Canada has historically been a strong market for NFI. And we see tremendous opportunity for growth through the major investments being made by federal, provincial and municipal governments in this country. Finally, on Slide 39, we provide an outlook on the U.K. market, where the government has also made significant commitments with the goal of putting 4,000 new U.K.-built zero-emission buses into service. While the pandemic and changes in government leadership have slowed the timing of these announcements and funding, we've seen initial distributions through the ZEB specific programs, supporting orders at Alexander Dennis for 355 electric buses. In 2022, the U.K. government's continued to solidify their commitment to invest in improvements to bus transportation with an announcement that GBP 7 billion would be invested to overhaul and level up major local transport schemes in 31 countries and city county stories and city regions outside of the London area. This should be another significant win for our industry. U.K. vehicle deliveries were low prior to the pandemic as operators waited on the rollout of government funding for electric vehicles. Delivery levels will be somewhat muted in 2023 before seeing growth through '24 and '25. We expect a larger percentage of these vehicles will be battery and fuel cell electric buses, creating an opportunity for even higher revenues, improved gross margin and enhance adjusted EBITDA at Alexander Dennis. In addition to the U.K., Alexander Dennis continues to grow its zero-emission presence in Hong Kong and New Zealand and also pursuing exciting opportunities in other international jurisdictions that are expected to help grow our business as we head to 2025. I'll now turn the call back to Pipasu to tie all these macro environmental factors and specific funding initiatives to our financial guidance and targets.

Thanks, Paul. Picking up on Slide 40, I'll walk us through our multiyear financial guidance and the critical drivers. We felt it was critical to provide the expected trajectory of our business as we are now seeing stronger signs as the supply disruptions are easing. As noted, fiscal 2023 is viewed as a transition year. There will be growth from 2022. But we will operate at lower production levels in the first half of 2023 prior to ramp-up in the second half. We will be impacted in 2023 from certain legacy inflation impacted contracts that are being delivered. We do anticipate that the inflation impacted contracts will be completed in 2023 with 2024 and 2025 returning to more normalized pre-pandemic margins. We anticipate strong growth in ZEB sales based on backlog and expected new orders. We expect increased industry deliveries in North America and the U.K. driven by government funding in 2024 and 2025. We have and expect we will continue to see the benefits of NFI Forward throughout the period, somewhat offset by inflation. And we anticipate increased CapEx spending in 2024 and '25, following lower periods in 2021, '22 and '23. Putting all this together in the table, we anticipate adjusted EBITDA of $30 million to $60 million in 2023, followed by a significant increase to $250 million to $300 million in 2024, driven by production and volume recovery and a revised 2025 target of approximately $400 million. We have revised our targets for 2025, down slightly, mostly a function of the impacts of supply disruption and inflation in 2021 and 2022 being longer and deeper than what we could have foreseen when we originally set these goals, with expectations that will exceed $400 million in adjusted EBITDA as we get into 2026 and we also expect ROIC of greater than 12% for 2025. Slides 41 and 42, provides statistics and metrics that support the assumptions I mentioned above. On Slide 41, you can see that ZEBs as a percentage of our total deliveries have been increasing rapidly, growing from 8% in 2020 to 23% in 2022 with expectations for additional growth in 2023 and beyond. ZEBs as a percentage of our backlog have also been growing quickly, doubling in size from 2021 to 2022. Slide 42 highlights that our backlog pricing is also up significantly, with heavy-duty backlog, average unit price is up 26% since the beginning of 2021 and coach pricing up 11% since that time. This reflects a combination of higher ZEB orders plus inflation-adjusted pricing being reflected in our new contracts. Turning to Slide 43. We want to make it clear that while these targets may seem aspirational as we look at our pre-pandemic results, it is not a long road to $400 million of adjusted EBITDA. The bridge shows that the majority of our growth comes from volume and mix. As we've discussed throughout this morning's call, the funding environment, bid activity, increased demand for ZEBs and our existing backlog with options to 2027, support our views for these benefits. In addition, we've already achieved our NFI Forward targeted savings of $67 million, with potential for additional benefits from a few smaller projects under NFI Forward 2.0. While history cannot be an indicator of the future, we believe that the NFI story we experienced in 2015 to 2018 will be a similar one, if not better, that we see in 2023 to 2025. Some of the factors that drove our outperformance during those years included operational and leverage efficiencies, multiyear contract benefits and profitable vehicle product mix underpinned by a strong aftermarket business. In addition, since that time, we've increased in-sourcing through car repair from fiberglass and KMG for a variety of components, keeping more margin in-house, acquired Alexander Dennis providing an international growth platform in both manufacturing and aftermarket that now makes up over 25% of our revenues and enhanced our services, including infrastructure solutions, connected vehicles and more advanced web-based aftermarket parts sales performance. I'll now turn it over to Paul to close.

Thanks, Pipasu. I hope that these materials and our discussions that you've heard this morning, it's clear to everyone that while the past couple of years have been challenging, our future is bright. No one could have predicted the disruption and headwinds that we saw in 2020 through 2022. And while the world remains volatile, we have seen significant signs of improvement and the path ahead for NFI becomes clearer. As we've done since the beginning of the pandemic and through supply disruption, we remain focused on our people and the bigger picture. And we will deliver for stakeholders today and in the future. In closing, on Slide 44, let me recap our investment thesis. First, we are the leaders in our markets, both in market share, in vehicle technology, in aftermarket support and track record. Our business is benefiting and will continue to benefit from historic investments in public transit, specifically zero-emission buses going forward. We have deep customer relationships, significant expertise in design and manufacturing of complex customized vehicles with integrated technology from multiples -- a multitude of suppliers. We drive our business through operational excellence, a commitment to lean and in-source components where it makes financial and strategic and operational sense. We have the facilities. We've invested in the capabilities and the product lines. And we have them in place to drive our recovery with significantly lower overhead and SG&A now in place. We're focused on capital allocation priorities to delever our business and once and for all strengthen our balance sheet. We are poised for a significant improvement in our financial results. And as we execute to our plan and deliver on our strong backlog, our record bid activity and deliver our volumes will leverage our business. We believe in our targets and the fact that we will see significant return on invested capital growth moving forward. The entire team at NFI is focused on the task at hand. As always, we're proud of our history and excited about our future. With that, we'll now open the line for analyst questions. Operator, please provide instructions to our callers.

[Operator Instructions] Our first question comes from the line of Chris Murray with ATB.

Yes. Just maybe talking a little bit about your guidance for a couple of pieces. So I guess the first piece of this, just trying to understand maybe some of the other moving parts, especially in '23. So you've talked a little bit about the fact that I think if we go back to the credit facility disclosures, maybe EBITDA in the first half of a loss of about $35 million and then the ramp in the second half. Can you kind of walk us through what the cadence looks like in this guidance? And as part of that, you've been running about call it, $20 million-ish in EBITDA a quarter in the aftermarket business. Can you just sort of walk us through how that's going to progress through '23 as well?

Okay. Chris, this is Pipasu, so a couple of things. We do expect our NFI parts to be somewhere in that range, which you just kind of described in that roughly a little bit lower than $20 million. The first 3 quarters and then obviously kind of getting into that a little bit higher mode, as we get into that last quarter, which is pretty typical. In terms of the businesses, Paul kind of mentioned this. But at the end of the day, we are kind of dealing with the hangover that we've got with the inflation contracts. So if we kind of think of our mix, especially in our North America business, one of the things that we're dealing with today is the fact that we have half of our contracts that have some inflation adjustment that we're trying to work through as we get through the first of this year. So that's kind of what's happening right now. And then we expect that recovery kind of in that back half. So does that answer your question? Or did I maybe miss 1 or 2 points?

Yes. I was just trying to understand if there's -- I mean -- so it's fair to think maybe just to paraphrase, relatively flat, maybe a bit of a step in Q4 for aftermarket and then kind of triangulating losses of up to $35 million in the first half and kind of backfill as we go. Should we expect there's going to be any sort of Q4 step-up or any -- historically, I think back to the days of when you guys had the coach business, it was very Q4 heavy. Or should this be more of an orderly ramp into '24?

Yes. I mean at the end of the day, we do expect a little bit of a step-up. Obviously, our Alexander Dennis business has a step-up in Q4 as well as we do have some of that happening in the Coach business as well. So the way we're kind of thinking about it is, obviously, the first half will be somewhat flat -- flattish. We get that lift to get to our guidance range kind of in that Q3 and Q4 time frame with Q4 being our strongest quarter.

Okay. And then my second question, just going back to the 2025 target. So you kind of kept the revenue target in there. But you've gone to the low end of the range of your EBITDA target. Again, sort of thinking about longer-term margin profile, I appreciate there's been some stuff that's happened in 2020 and 2021 with inflation in parts costs. Given that we're far -- we're relatively far enough away from there; can you talk about the pricing environment or your ability to pass those costs on as we get into later years? Because I would assume that at this particular point, you don't have a lot of '25 billed yet. But maybe help me understand what you guys can do or what leverage you can pull to work on margins just through pricing?

That's a good question, Chris. In '23, as you articulated and as we tried to explain in the call, we still have work working through the system, primarily in the first half of this year that was bid a year or 2 a year ago where we have hyperinflation and FX dynamics that have come through the system and will depress margins in the first part of this year. That starts to show back to some level of normality in the second half of the year. As we get through '23 -- sorry, '24 and '25, the work that we expect in that window is stuff that we're actually bidding on now will bid on in the next year. We have taken a fairly aggressive position with not only trying to get firmer, tougher, clearer quotes from our supply community. We have embedded our costing with any of the elevated inflation that we've already had plus anything that we expect to have. We have tried to add a level of conservatism, where it makes sense. And we have gotten way more focused on trying to work with our customers about how PPI and any of those indices will make their way through into our prices going forward. So we're in an environment where we're A, recovery; B, trying to bid based on reality of what prices and costs are going to come into our COGS. We're in a stronger bid environment right now. I mean we have, because of the demand profile; we have less, what we'll call competitive irrational pricing. And so we're seeing a lot more reasonableness in the quotes that we're providing and our customers -- or our competitors are provided. The customers, there is no question are aware that prices have gone up dramatically as a result of input costs. So that's kind of how we've reflected it, both in how -- what we think our margins will be, but also how we've tried to price going forward. Lots of components in that, but we're actually quite comfortable. And what we're seeing in terms of our proposed bid margins on the awards we're getting today based on stuff we've bid in the last 6 months, we're really encouraged about the next chapter, '24 and '25, which reflects in our guidance.

Okay. I mean I guess maybe a different way to ask the question. As I look at your 2019 pro forma results on -- arguably for '24, which is going to be higher revenue, you actually have a lower EBITDA margin, but aftermarket should be fairly flat. So I'm just trying to understand is there something in '24 that's going to structurally keep those margins in place? I mean you've given us a bridge on where you get to for '25. But is there still kind of drags into '24 that will be going through the manufacturing business?

We don't see that, quite frankly. What we're seeing in terms of how we're pricing today and the margins, we see that happening. A couple of things are going to continue to happen in '24 and '25 that will be differential to what we saw in, say, '18 or '19. Number one, we have a higher percentage of zero emission. And as we've described, the margins on zero emission, whether it be battery electric for any customers out on trolley electric or fuel cell electric, the margins are noticeably higher. The second issue is that we are still continuing the ramp-up of our business through 2024. So the unit growth will continue through the start of this half -- second half of this year and through '24 and into '25 to get back up to close to, not exactly the close to pre-pandemic levels.

Our next question comes from the line of Cameron Doerksen with National Bank.

So I guess a question on capital needs. You filed the base shelf prospectus earlier this week. I'm wondering if you can maybe just go into a little more details on why now. I guess maybe I'm wondering, is this related to early discussions you're having with the lenders on the credit agreement? Is this something that they've requested that you do? I'm just wondering what sort of the context around why you filed this now.

Yes. Thanks, Cameron. So as you know, we are going through the continued discussions with our banking partners on putting a new multiyear longer-term credit agreement in place. As we mentioned on the call, from a capital perspective and capital inflows obviously focused on unwinding inventory and looking at additional things if it's sales leaseback and advanced payments and additional customer deposits. As Pipasu mentioned, we are considering and we always consider capital markets activities. We haven't had a shelf in place before. But we thought it would be smart to put one in place just to have it in case that we do need to pursue anything down that path and would help with timing. I wouldn't say there's -- it's driven primarily by the credit. But I would say it's mostly focused on as we look at the next couple of years and we look at our multiyear credit agreement, we're focused on putting that in place first. That's definitely our priority. And that shelf can assist if we did have to go down that path, for any kind of capital market action.

Okay. I guess just on that front, I mean, I just wonder if you can just talk a little bit more about the, I guess, the working capital trends. You've mentioned you expect to generate, I guess, for the full year cash from working capital. Maybe you can just talk about your expectations as sort of by quarter, I assume you'll probably generate cash from working capital in the next couple of quarters. But what are the cash needs as you ramp back up production in the second half of the year?

So yes, so I think as Pipasu mentioned kind of our cash needs, yes. So as you look at the forecast, we had a pretty significant unwind of inventory, $127 million in Q4, which helped us to outperform our liquidity expectations to end the year. As we look at the first half of '23, we expect some still continued inflows from unwind of inventory, but a little bit offset, a little bit muted by some of the deferred payments that we received in 2022, the deferred payments and advances from customers. As we look at the first half of 2023, we also expect, as Chris mentioned, to being more of a negative EBITDA position. So then that would have a cash burn when you look at EBITDA, then negative EBITDA, interest, CapEx, leases somewhat offset, like I said, by the -- unwind of inventory. As we get into the second half of the year, we start to ramp up production. Now Q3 and Q4, generally speaking, we typically are investors in working cap in Q3 and then an unwind in Q4 as we deliver a lot of the inventory and deliver a lot of the vehicles. But all that to say, if you look at the kind of the view is that, yes, first half is probably more a working cap inflow and second half, maybe a bit of an outflow on working cap from a cash perspective. And then when you look at expectations for adjusted EBITDA in the $30 million to $60 million range, and you've got interest, CapEx, leases on top of that, that's the way to think about, I think, the cash burn in '23.

Yes. I think maybe just to add to this real quick, a couple of things. Paul had kind of mentioned this, Stephen has kind of mentioned this as well. But we are being a little bit more aggressive on prepayments as well. As we kind of think about it, we do expect that second half of the year, especially, we will have a little bit more working capital. But at the same time, we do have a significant number, amount of WIP that will kind of lessen that burden to a certain degree. So today, when I think about working capital, we are expecting somewhat of an unwind as we get through the year, but maybe not to the level that we had this year.

Okay. That's helpful. And just final quick one for me, just on, I guess, the minimum EBITDA covenant that you have right now. So I guess it first gets tested on March 31. Maybe you can get with 2 months done in the quarter, what level of confidence do you have that you'll be under that covenant?

I mean I'm extremely confident at this stage. I feel good about where we're at as a business, especially on that type of covenant and to be able to perform in the first quarter, we feel good.

Our next question comes from the line of Kevin Chiang with CIBC.

I was wondering, when you look at your backlog, we saw the option conversion fall pretty dramatically in 2020. I suspect some of that was, supply chain issues. The other being maybe some of the backlog or options associated with ICE vehicles, may be less desirable as everyone transitions to ZEBs. I'm just wondering, when you look at the potential demand out there through your backlog, what type of conversion rate do you think you'll be expecting as things normalize between your ZEB, which I suspect would be pretty high versus ICE? Like do you think they rebound? Or do you think they kind of continue to hover at levels you've seen in the past couple of years here as transit agencies make this fleet conversion?

Thanks, Kevin. First of all, not one of the reductions of the option conversion had anything to do with supply chain or us not able to deliver a bus, absolutely no correlation and no impact. It is 100% around the continued evolution of the fleet replacement plans at transit agencies. So if you take a customer that put an order with us with a 5-year contract back in 2018 or 2019 or 2020, that was a 5-year view that had a certain level of either natural gas buses or electric -- or sorry, diesel buses. They've now gone to their Board. And the Board has now got pressure on more zero-emission deployment. They've now got a completely different avenue for federal funding. The desire to want it accelerate or participate earlier at zero-emission is the only driver associated with the burn-down with some of those diesel or natural gas options. Absolutely, we expect that conversion rate to recover as our backlog of now zero emission or even hybrid electric buses continues to grow. A number of operators who wanted or expected a diesel natural gas that aren't ready for full zero emission are moving to electric hybrid. So we absolutely expect that to get back up into the north of 50% ratio. And if you look at the total number of backlog that we've added, even with the burn down of options, we've actually increased our overall backlog. It's quite dramatic. So we're not worried about that demand side. And it is absolutely nothing to do with our performance or the supply chain dynamics.

Okay. So it seems like you're pretty comfortable that even on the ICE side, you'll see some decent option conversions as we kind of get through the next few years here. As you pointed out, not all transit agencies are prepared to go 100% in the near term?

Well, I'll just point to Toronto, for example, significant contracts last year awarded to us on hybrid electric, which is really seen as a step or a bridge ultimately to zero emission. But in addition to the buses, and as we've talked many times, the charging infrastructure and the energy draws, there's a multiyear strategy and capital investment platform that's required to do that. So there is no question that we're seeing a drawdown on the diesel or the natural gas type options. We're still seeing some be put in place. But the quality of our backlog going forward and the high percentage of it that is zero emission has gave us a lot of confidence that the conversion rate will rebound into the neighborhood we've seen in the past years.

That's helpful. And then just trying to -- as I think of the cadence over the next, I guess, 3 years here inclusive of 2023. If I look at 2024, and I know you don't want to get too specific in terms of what, how EBITDA trends each quarter in 2023. But let's say, in Q4, you're somewhere in the area of $40 million of EBITDA just to throw a number out there for Q4. That does suggest maybe 2024 could see almost a doubling of earnings on a run rate basis, first of what you're exiting 2023 at? What does that mean for working capital? And when you look at that that additional ramp-up in 2024, just how much of the supply chain, and how much more does the supply chain need to improve to get there? Are you comfortable that the current operating environment allows you to inflect pretty significantly here as you enter into, I guess, next year?

Well, let's talk about the supply chain in isolation. And so we tried to comment on that in some of our comments today. The number of suppliers that are in what we call red or high-risk and high-impact categories dropped dramatically over the last couple of months. We were in a world of hurt, quite frankly, for most of 2022. That's not to say we're out of the woods. We still have some issues with certain suppliers. And we still have certain suppliers in the United States, for example, that are not delivering electronic components that have people dynamics that impact their ability to deliver. But the position we're in today and what we forecast to project going forward, in addition to supply chain health, what we're doing to enhance that, for example, longer windows in terms of the engineering time line or giving ourselves a broader time to be able to do supply chain and working with longer supply lead times, all those things are giving us more and more confidence. Yes, there's still a couple that are of a concern. But we're in a materially different place. The discussion we've had today about changing dynamics associated with customers. I go back in time when we had diesel buses. And we've introduced hybrid electric buses; it was materially higher withdraw on the businesses. And at that time, the FTA allowed for milestone payments or early payments to fund the working capital. We're now having very encouraging conversations with the FTA to be able to fund the higher working capital associated with the zero-emission or specifically the battery components on buses. The other dynamic is our aggressiveness in working with customers on how we bid or how we negotiate payment terms to effectively try and change that dynamic as well. So I am cautiously and comfortably optimistic that the working capital draw will be commensurate with the growth of the business, not impacted by the supplier performance.

No, that's helpful. And maybe just lastly for me. When you -- as you kind of ramp through here, do you have a large inventory of battery packs ready to go. Just it feels like that seems to be -- just broadly speaking, the commercial vehicle OEM sector, some kind of ongoing, I guess, broadly ongoing concerns around the ability to source more batteries over time, just given the large transition of all vehicles to electric. Is that something you're looking to hold more inventory of than maybe some of your other critical supplies here? And do you have an update in terms of like how much you're holding today and how much visibility that gives you as you ramp up through 2023?

Well, so there's a couple of dynamics. Rewind a couple of years ago, we only had one source of battery supply. We're now actively testing and ready to deploy by the end of this year, a second source of battery supply, different types of batteries. Cylindrical cells with a different provider, ABS than just pouch cells with our partner [indiscernible]. Those people then have made -- already made commitments to some extent, like in the case of ABS, they've already pre-purchased a certain quantity of batteries for the next couple of years to run through their supply chain to ultimately provide the battery modules to us. We've also then decided in the U.K. case that Alexander Dennis' source of battery supply is going to be different and diversified from what we do in North America to allow us kind of multiple sources to be able to manage our way through that. Also keep in mind that our quantity of batteries is for, let's call it, a couple of thousand buses a year as opposed to a couple of thousand cars a day or trucks a day and those kinds of things. So yes, it is a concern for the longer term given the whole conversion of the entire world fleet of whatever vehicles to zero emission. We are really trying to make sure that we've got multiple sources and trying to continue to be, let's call the expression we use cell-agnostic to allow us to pivot faster rather than committing to only one technology or one source as this game starts to unfold. It is no question a reality and a risk. We feel pretty comfortable with the position that we're in and the strategic choices we've made.

That's it for me. Best of luck as you get through 2023 here and obviously, a very strong demand environment.

Our next question comes from the line of Daryl Young with TD Securities.

Most of my questions have been answered, but just one last follow-up. Ridership trends have been improving in some of the larger gateway cities. But I'm just curious if you're seeing what kind of pain you're seeing on the transit authorities in those major gateway cities from the fair box? And what that means for their ability to fund their 20% CapEx of future EVs just given the cost profile going so much higher? I know there's obviously tons of federal funding out there. But just what that means at the transit authority level in their operating budgets.

Yes. So I think the funding environment, what we've seen, just given the massive size, I guess, of the IIJA and then the U.K. funding environments, definitely helped, I think, support a lot of transit agencies confidence in their abilities to execute on their fleet renewal plans or project plans or capital plans. No doubt there are some transgenes definitely built a lot of the ridership impact throughout the pandemic and then into the recovery. We have seen from APTA, I think we're back to kind of 70% plus in North American transit across the board for those that have reported. In the U.K., I think kind of a similar level. It's kind of 70% pre-pandemic. We've definitely seen a lot of movement of people going back to the office if it's a hybrid or move away from work from home. So I think ridership stats are starting to increase. There's always a concern in a recessionary environment of yes, will they have that extra 20%. Now the good news, I think, is with some of the new funding that we've seen either through the IIJA or some of the proposed funding in the United Kingdom is that they may be able to get 100% for some of their vehicles. So they may not even have to have that 20% commitment. So I would say we haven't seen anything or heard anything from our agencies that gives us any concern about their ability to fund their capital plans. As we've seen bid activity, record levels, 10,500 active bids at the end of the fourth quarter and the 5-year outlook continues to remain strong. So our discussions with transit agencies, they still see the view that they're going to execute their capital plans and that the funding is sufficiently there to support that view.

I'll also add Daryl that we continue to try and keep in mind that these are government public transit agencies, specifically in North America. And while ridership crushed them through the pandemic and has been slowly recovering, public transit agency is working to a 5-year or a 10-year fleet replacement plan. And every city single city mayor, every governor, when we had a visit from the Vice President or the FTA Administrator. In addition to the environmental impact of the type of propulsion, they're all massively interested in reducing congestion and improving flows in cities. And so while they're dealing with today's realities of lower ridership, they're also trying to find a way to get more and more people through public transportation through those cities over the next 5 or 10 years. So their time horizon, notwithstanding short-term funding dynamics and so forth, is a lot longer than normal private business that will adjust capacity or adjust plans in the short term, dealing with more short-term dynamics. So we kind of sit there and talk to an agency about their propulsion dynamic, but also the city congestion dynamic and then the whole telematics and preventative maintenance and parts and all stuff to try and improve reliability and reduce overall op costs that are effectively mitigating some of what they may have lost in the fair box. So I would argue that from a defensive and a protective environment, not protective, but an environment of public transit; there is more and more pressure and more and more desire to get people on public transit rather than the shrink public transit agencies. Notwithstanding every city is going to deal with their local funding and the ridership dynamics uniquely. I think that is what Stephen said is reflects the strong federal investment, but also the strong bid universe that we've continued to see.

Sorry, we have one question from our chat from an investor. So the question goes precisely what factors led you to believe that supply chain issues can enable a ramp-up of production in the second half of 2023 and your confidence level in this ramp-up?

Well, so we know every single supplier, and we've rated every single supplier. We are digging deep in terms of -- I mean we have an order book. We have a schedule that's effectively sold out for the entire year, almost every single slot. Our supply chain knows that. They know which customers, which builds they know what month, what line entry rate and so forth. So we are really proactively trying to effectively do a couple of things: a, ensure that we are -- we have the production schedule in place and on time. We're continuing to work with those customers in trying to mitigate any of the additional price changes that we've seen in the past. We continue to try and allow longer production times or longer preproduction times today to allow their source of supply to provide -- to provide on time. We have worked where we can on alternate sources of supply, not only at the prime level to us or Tier 1, but Tier 2 and Tier 3 and 4 suppliers. We have where we can and where it's appropriate, move from roughly 5, 6, 7 days of point-of-use inventory online to, in some cases, we're migrating to 15 or 20 days of inventory online. And so all those things contribute to the fact that we feel much more confident in the back half of this year to start to grow our production rates. The other side of that equation is people. And we continue to have excess people for today's production rates inside our business as we burn down a deal with WIP production, which will give us additional capacity in the second half. And quite frankly, it's not like we need to hire thousands and thousands of people to meet our second half production schedules. We probably across the business have somewhere in the neighborhood of 150 to 200 people to hire to be able to deliver to that. So not an insurmountable a task to be able to run to that increased rate in the second half. We're very confident on margin profile of that business as we move through the rest of '23 and into '24. So thanks for that question.

Okay. I think, Michelle; that was it for questions on web.

And I'm showing no further questions on the phone lines.

Okay, great. Well, thank you, everyone, for joining us this morning. Please, as always, continue to visit our website where all of these materials can be found and please do contact us at any time. Should you have any questions, our investor contact details are all available on our website. Thank you so much for joining, and have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.