NFI Group Inc

TSX:NFI

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the New Flyer Industries Inc. 2018 First Quarter Results Conference Call. [Operator Instructions]Paul Soubry, President and CEO, you may begin your conference.

[Paul Soubry, President, CEO & Non]

Thank you, Lisa, and good morning, ladies and gentlemen. Welcome to the 2018 First Quarter Results Conference Call for New Flyer Industries. Joining me on the call today is our Chief Financial Officer, Glenn Asham. For your information, this call is being recorded, and a replay will be made available shortly after the call.As a reminder to all of our participants and others regarding this call, certain information provided today 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 with the securities administrators for more details.I'll start off this morning with a -- an overview of our quarter; Glenn will speak to the financial results and some metrics; and then I'll finish up with some market insights and a little bit of our outlook. Following that, we'll open up the call to your questions. And if our voices are little raspy this morning, forgive us. We were up late watching the Winnipeg Jets win game 7.So with that, I'll hand it over to Glenn. Sorry, actually, I can give you an update first. Yes, I apologize. All right. So overall, our markets remain healthy, and we continue to be confident in our market position, our strategy and our business plan. We'd another strong quarter of deliveries with 993 equivalent units of new buses, coaches and cutaways in Q1 2018 compared to 892 equivalent units in the first quarter of last year. This is the first full quarter to include ARBOC bus deliveries. New awards received in the quarter totaled 736 equivalent units or 5,858 equivalent units for the last 12 months. And at the end of the quarter, our total backlog was 11,548 units, of which 3,997 were firm and 7,971 are options. Now that equals $5.75 billion of backlog or approximately 2.7x our current annual production rate. A further 904 units were in award pending, where we've been notified by our customer that we're the successful bidder, but we have not yet received formal documentation and, therefore, we cannot yet add them to our backlog. We do so as soon as we receive those contract documents.Overall, our adjusted EBITDA in the quarter was up over last year's Q1. And as Glenn will explain in a little more detail, we had a very strong manufacturing quarter and parts were down, but something that we're -- we are not overly concerned with. We'll continue to remind investors that our business is lumpy and mix has significant impact on both our manufacturing and parts businesses. We continue to invest in areas of our company, including product development, facility upgrades, part fabrication capabilities, IT harmonization. And for 2018, again Glenn will give you some details, but we've increased our level of capital investment.We continue to focus on OpEx and synergy efforts at our recently acquired fiberglass businesses or fiberglass reinforced plastic, or what we call FRP, in order to optimize that portion of our business. So the combination of what was Frank Fair and Carfair and Sintex-Wausaukee Composites, now all branded as Carfair, will provide us with a much better control of our cost, time and quality of virtually all of our FRP needs, which is a very delicate and yet critical portion of our material supply stream. In addition, it also has helped us with our U.S. content requirements that are now part of the increased Buy America as a result of the 2015 FAST Act. And as you may remember, those levels went from 60% to 65% at the end of 2017, and a further 5% is required by the end of Q4 2019.We also launched OpEx efforts with our recent acquisition of ARBOC the cutaway -- low-floor cutaway bus manufacturer and the original efforts are focusing on plant layout and production flow. Our parts business leadership team continues to evolve its business to address the needs of its very diverse bus and coach customer base. This newly integrated organization has now branded as NFI Parts, and it'll maintain its focus on supporting original equipment manufacturer business as well as targeting new opportunities.Also in the quarter, on January 31, we hosted an Investor Day at our Anniston, Alabama facility, and we showcased our production facility and our new Vehicle Innovation Center, or VIC, which is a state-of-the-art lab with virtual learning spaces, driving simulators and other interactive exhibits that will help us and the market evolve electric, autonomous and telematic technologies for buses. In the quarter, we also came to an agreement, a milestone agreement, on a new collective bargaining agreement with our New Flyer transit bus manufacturing workforce at the Winnipeg plant. This contract is a 5-year deal, and that's the first time ever that we've been able to get an agreement for this site longer than 3 years. With that agreement, there was a retroactive adjustment to the pension plan, which resulted in a charge in this quarter's earnings related to past service costs, which Glenn will talk about. We're actively working on 2 other CBAs that are currently in negotiation. Glenn will now take you through the highlights of our financial results for the first quarter of 2018, and following that, as I said before, we'll give you a bit of an outlook and then open the call for questions.Now I can hand it over to Glenn.

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

Thank you, Paul, and good morning, everyone. I'll be highlighting certain 2018 first quarter results and provide comparisons to the same period last year and focus my commentary on key financial insights.I would like to direct you to the company's full first quarter financial statements and management discussion and analysis of financial statements, which are available on SEDAR or the company's website. I do want to remind you that our interim unaudited financial statements are presented in U.S. dollars, the company's functional currency, and all amounts are referred to in U.S. dollars, unless otherwise noted.Organizational changes to better align business functions with operating savings were made last year and implemented in 2 phases. In 2017, the over-the-counter parts sales were moved from the coach operations to aftermarket operations. In 2018, the service function comprised of technical service management and customer training, which was previously managed by the aftermarket operations, of MCI only, was moved to the coach manufacturing operations. To improve comparability between periods, the related prior year segment information has been restated to reflect these changes.The company also generated -- the company generated consolidated revenue of $578.7 million for the first quarter 2018, an increase of 1.2% compared to $572.1 million during 2017 first quarter. Revenues from manufacturing operations increased by 0.6% for 2018 first quarter compared to the first quarter of 2017. The increase in first quarter 2018 revenue primarily resulted from 11.3% increase in new transit bus, coach and cutaway deliveries compared to 2017 Q1 deliveries as well -- sorry, as well as the inclusion of revenue to third party for the fiberglass component operations. Volume increased as a result of higher transit bus deliveries and the inclusion of ARBOC deliveries, offset by a reduction in motor coach deliveries. Motor coach deliveries are seasonal and comparatively strong in the fourth quarter and softer in the first quarters. However, in the 2017 first quarter, deliveries were stronger as a result of recovering New Jersey Transit deliveries following a contract deferral in 2016. Additionally, management believes that tax changes in the U.S., related to accelerated depreciation, resulted in seasonally stronger 2017 Q4 sales, followed by a weaker 2018 Q1. The decrease in average selling price for the quarter is the result of combining normal volatility in the transit bus and motor coach sales mix and now the inclusion of ARBOC's units, which have a substantially lower average selling price.Aftermarket revenue increased 4.1% primarily as a result of seasonality and sales mix. Total adjusted EBITDA for the quarter totaled $73.8 million, which represents an increase of 3.4% compared to $71.4 million in the corresponding period in 2017. Manufacturing operations adjusted EBITDA increased 11.1%, primarily as a result of increased deliveries, improved margin and inclusion of ARBOC's operations. Contributors to the decrease in margin included favorable -- sorry, contributors to the increase in margin included a favorable sales mix and continued cost reductions through the company's OpEx initiatives.Aftermarket operations adjusted EBITDA decreased 13.1% due to sales mix and costs involved in consolidating New Flyer and MCI parts business. Net earnings decreased by 24.7% and earnings per share decreased by $0.13, primarily as a result of a $3.9 million past service cost adjustment net of tax related to the collective bargaining agreement, which was -- which commenced on April 1, 2018, and a $2.8 million net of tax unrealized foreign exchange loss on current monitor items. The impact of these 2 events to net earnings was $0.11 per share.The liquidity position of $204.1 million as at April 1, 2018, decreased as compared to liquidity of $222.3 million at December 30, 2017. The decrease in liquidity relates to change in noncash working capital. Changes in noncash working capital are primarily a result of seasonality and are expected to be timing temporary in nature.The company generated free cash flow of CAD 52.4 million during the first quarter 2018, a decrease of 2.4% compared to CAD 53.7 million in the first quarter 2017, primarily as a result of increased cash capital expenditures, offset by a decrease in current income tax expense. The company declared dividends of CAD 20.5 million in the first quarter 2018, which increased compared to CAD 14.7 million in the first quarter 2017.Property, plant and equipment cash expenditures in the first quarter of 2018 increased by 84.4% compared to 2017 Q1, primarily as a result of investments in facilities, increased part fabrication in the new Shepherdsville, Kentucky facility and as a result of in-sourcing and continuous improvement programs. Management believes that ROIC is an important ratio and metric that can be used to assess investments against the related earnings and capital utilization. ROIC for the last 12 months ended April 1, 2018, was 15.4% compared to 14.6% during the last 12 months ended April 2, 2017, improving primarily as a result of a decrease in the effective tax rate under U.S. tax reform effective December 22, 2017, as well as the improved net operating results.With that, I'll turn it back to Paul.

[Paul Soubry, President, CEO & Non]

Thanks, Glenn. Yesterday, in Toronto, we held our Annual General Meeting and pleased to report that we had our highest attendance ever at one of these meetings for us. At the meeting, our shareholders approved a name change of our publicly traded company from New Flyer Industries Inc. to NFI Group Inc. And we asked to make this change to better reflect the multi-platform nature of our business that now includes transit buses built by New Flyer, motor coaches built by MCI, cutaway shuttles and medium-duty buses built by ARBOC and aftermarket parts and parts fabrication under the brand of NFI Parts. So we'll now be working on launching an identity and a brand for NFI Group, but make no mistake, we want our focus to remain on our bus and parts brands directly with our customers.At the AGM, I explained to our group how pleased we are with our strategy, our execution in our business, and we remain committed to maintaining and profitably growing our leading market positions in bus manufacturing and aftermarket parts through enhanced competitiveness with a laser focus on quality, customer satisfaction and operational efficiency.Looking back almost 10 years ago, in 2009, we chartered a course to optimize, defend, diversify and grow our business: optimize our facilities, processes and products; defend our market-leading positions; diversify our business; and grow our revenue, our EBITDA and our cash flow, all with a mission of delivering consistent and increasing total shareholder returns. And we're very proud of our last year's -- last number of years performance. We're also watching our business migrate from just being a bus builder to a solution provider. And the why of our business has evolved providing solutions or leading solutions to move groups of people safely, efficiently, responsibly and in style. In 2017, our market shares were as follows: New Flyer transit buses, 43%; MCI motor coaches, 43%, which is up from 37% at the acquisition in 2015; and approximately 64% of low-floor cutaway buses sold. Make no mistake though, while we want to grow share, we're not interested in chasing volume for its own sake. Profitable return and customer satisfaction have guided us. We've lost some bids in the last 12 months where we felt pricing was unrealistic and not sustainable. New Flyer launched the CHARGE version of our Xcelsior transit bus on a proven 35- and 40-foot and 65-foot platforms and response has been fantastic. E-bus orders, while increasing a little, continue to be proof-of-concept or trial programs for the most part, but I'm really pleased with where we're at on our electrification and fuel cell agenda.Overall, our markets continued to be fairly robust and healthy. On March 23 of 2018, the U.S. Congress passed the [ 28th ] fiscal year budget, which included appropriations for public transportation of $13.5 billion. APTA, or the American Public Transit Association, of which we're very involved with, has recently indicated that the federal budget is a big win for public transit. According to APTA, the total appropriations of $13.5 billion is the largest amount appropriated for public transportation in an annual spending bill and the largest ever 1-year increase with more than $1 billion over last year, we think a sign of health supporting replacement of fleets and upgrades.Based on an aging fleet, overall economic conditions, expected and customer fleet replacement plans and active anticipated procurements, we continue to believe and expect procurement activity through Canada and United States will remain stable through 2018. On the MCI front. Two days ago, we announced that New Jersey Transit had issued a purchase order for year 3 of its 6-year contract to manufacture and deliver an additional 182 commuter coaches for an approximate value of nearly $100 million. MCI expects to have completed all year 2 deliveries of that contract by the end of May, and will begin production of the year 3 coaches starting in September of this year. In our private markets, the U.S. tax reform, as Glenn indicated, did have an impact on our Q4 2017 orders, which then had a flow-through impact on Q1 2018. And given MCI volumes are roughly or on average 2/3 private and 1/3 public, MCI continues to adjust the production line rates accordingly of the Model D and Model J buses. MCI also continues to develop the plan and expand its product portfolio. The new D45 CRT LE or what we call the vestibule coach, which really is a game changer from a mobility perspective with revolutionary improvements of how to support people loading and unloading, has undergone its testing at the bus facility in Altoona and is currently performing very well. So therefore, once passes will qualify as a vehicle eligible for purchase using FTA funding.MCI is also in the process of detailed and heavy testing and certification of its 35-foot or J3500 MCI coach. And MCI is also in the process of now completing its first prototype of a J Model electric coach, where the bus is actually -- is itself driving and now starting its advanced testing phases. Now production capability MCI to support the new models of coaches continues and will be in place after the summer shutdown, so that we can start production in the second half of 2018 with deliveries of some of those programs early in 2019. As population ages and ease of access and mobility becomes more of a focus, we also believe the demand for low-floor cutaway and medium-duty buses with greater accessibility will grow from its current level of only approximately 5% of the total cutaway market. We're really pleased with the acquisition we completed last year of ARBOC, and we estimate that ARBOC delivered 64% of all low-floor cutaway buses in 2017. The other attraction we had to ARBOC was its new launch of a medium-duty bus that they title Spirit of Equess, and that bus is currently completing its testing at the FTA facility at Altoona. We're really, really pleased with customer response of the technical specs of the bus, but also the price point compared to other available medium-duty buses, some built domestically or one imported from China, and we anticipate deliveries to start in the second half of 2018.Overall, our master production schedule, combined with our current backlog and orders anticipated to be awarded under new procurements, is expected us to maintain our guidance to deliver approximately 43 -- 4,350 units during fiscal 2018. Now production rates always vary quarter-to-quarter due to production mix and timing. So with our production schedule, our low leverage, solid liquidity, we continue to focus on PPE investment. And as Glenn mentioned, we estimate that to be in the range of 6 -- we estimated it to be in the range of $63 million to $73 million. Now that's about $8 million higher than we originally disclosed in our forecast, as the revised range now includes what was carried over from 2017 and not completed, but also money to be spent on PPE investments in our newly acquired composite business.And although our parts, sales and margins remain difficult to forecast, we expect the market -- the parts market to maintain relatively be -- to be relatively stable in fiscal 2018. We're encouraged by the increasing gross parts already received in the quarter, but the reality is, quarter-to-quarter volatility is normal and typical for this business segment. Our parts teams launched a new website offering state-of-the-art online sales primarily focused on private markets, and it also has new distribution features, freight options and so forth. And while adjusted EBITDA for parts was low in the quarter, we're not worried about that segment of our business. We make a good return on parts sales, but customer satisfaction is key, especially during a phase of combining our businesses. So that when our customers go to buy another bus, we're first in line. We continue to be focused on an established customer base to provide best value and support, and we also continue investing in a number of incremental business programs in the parts world, specifically a number of vendor-managed inventory contracts that we expect to be in place later this year. We previously announced the closure of one of our redundant parts distribution centers that's located in Hebron, Kentucky. We are doing that in July of 2018, and we'll continue to assess further opportunities for cost reduction and consolidation once the New Flyer and MCI parts business are fully harmonized with a common IT system, which we expect to complete later this year. Actually, on Monday, I was in Kentucky. I visited the Louisville parts distribution center, and nearly 50% of the parts from Hebron are now successfully moved and stocked in Louisville. So we're well on our way to making that July date. Finally, with our current overall NFI Group business performance, a healthy backlog, we continue to investigate M&A opportunities for additional long-term growth and diversification. We've actively evaluated both domestic and international opportunities within the definition of a bus business as well as within our supply chain and our aftermarket. We've looked at targets, and we continue to do so. But as I have in the past, any investments or acquisition we make will be strategic, prudent, measured and appropriate. Finally, as was mentioned, NFI Group board approved yesterday an increase to our annual dividend to CAD 1.50 a share, which is up 15.4% and reflects the confidence we have in this business. Ladies and gentlemen, thank you for listening today. We're proud of our history, we're excited about our future and we continue to be poised to be North America's leading provider of buses. With that, we'll invite your questions, and I'll hand it over to Lisa, where you can please provide instructions to our callers.

[Operator]

[Operator Instructions] Our first question comes from the line of Mark Neville from Scotiabank.

[Mark Neville, Analyst]

Just on the EBITDA per EU in the -- on the bus side, if I'm backing out ARBOC, I'm getting about 58k, 59k per bus. It's a healthy number, but it looks like it took a little dip down last -- from the last couple quarters. And it feels like Q1s, for whatever reason, is typically the seasonally weakest. I mean, is there a reason for that? Or is there anything in the mix that you can speak to in the quarter?

[Paul Soubry, President, CEO & Non]

Glenn?

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

I'll let Paul jump in after mine. I guess, a couple comments. For sure, it's always volatile quarter-by-quarter. The one impact, because we include all our SG&A with -- for our corporate within the bus manufacturing operations, you do -- when you have a seasonally low period like we did this quarter, obviously, you have less expense leverage. So that's part of it. But we do have some just volatility and variation in our mix just quarter-by-quarter.

[Paul Soubry, President, CEO & Non]

There's nothing systemic in there, Mark, that would say there's movement or changes in mix that's not normal in the variation.

[Mark Neville, Analyst]

No, the SG&A explanation helps a bit. On that New Jersey contract you just mentioned, again, it sounds like the gap from June to September, did you also have that last year, just so we avoid maybe some dip in Q2?

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

The New Jersey contract, so if you go back in 2016, ancient memory now, the contract was deferred. We had a whole number -- and we continue to build because we felt that this contract would ultimately get built. So eventually, New Jersey got their funding straightened out. The contract got put back into place, and we began to ship and trying to catch up all the backlog of buses we had built up. We did not catch up everything, and we had some buses that fell into Q1. So that Q1 '17 is when we finished the catch up of the buses that built up.

[Paul Soubry, President, CEO & Non]

Going forward though, Mark, your question about year-over-year, MCI and New Flyer has different approaches to, let's call them, summer shutdowns. And New Flyer has a smaller kind of shutdown window, and MCI has always had a number of weeks in the summer. So what we do is in the public world, where you don't have model years, we basically will adjust to try and have a level flow, and after the shutdown on the private side, we start to build model '19 year coaches. And so yes, that happens every year.

[Mark Neville, Analyst]

Okay. And so yes, I guess, my question, there's not going to be again a small dip in Q2 because of the New Jersey contract you saw something similar last year, hopefully?

[Paul Soubry, President, CEO & Non]

No. No difference in terms of the quarter-to-quarter -- quarter-over-quarter pricing.

[Mark Neville, Analyst]

Okay. On the aftermarket, it's been 2 or 3 quarters now some good year-over-year momentum. You're still calling or talking about a flat market. So I'm just curious if it's maybe you just being a bit conservative or you think you're gaining some market share or it's just too difficult to call the market?

[Paul Soubry, President, CEO & Non]

Well, it's really hard, and we've talked about this on other calls and in our investor days and so forth. The visibility of the total spend on parts is impossible to get our heads around because my silly examples of a windshield wiper, you can buy it from me, you can buy it from my competitor, you could probably buy it from a broker, you could buy on the Internet, and so it's impossible to know. And we do our best to try and go back into the transit agencies and look at their maintenance spends and their year-over-year budgets and so forth, but it's so hard. So we're trying to stay in signal. We don't see any structural changes to the business in terms of the way people are buying parts, and it is so volatile quarter-over-quarter. If we're selling a bunch of stuff that is low dollar, that has no margin on the thing in a quarter and there's a batch buy and so forth, they can influence every single quarter differently. And so -- but again, we're trying to signal we don't see any changes in the market. We had a quarter where we had actual volume uplift, but we had a high mix of low-margin stuff, but it's not like it's fundamentally changing our business.

[Mark Neville, Analyst]

Okay. And maybe just on the closure, the Kentucky DC. Again, you've talked about that before. But have you put an estimate on sort of cost savings you might expect to see through the business from closing that?

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

Yes. Well, I guess, just in terms of facility costs, that is probably in the neighborhood of $1 million. And then the question becomes when we consolidate all the labor, is there some supervisory that we have duplication? Don't really have a feel for that yet. We're going to get the thing up and running, and then we'll assess.

[Paul Soubry, President, CEO & Non]

There's also some cost in there to shut it down, right? Like we made a deal with bunch of employees. We gave them several months' notice. We put in some retainage packages to stick around and help us transition and so forth. So savings will be offset at least in the quarter to some extent by cost going out to transition those people.

[Mark Neville, Analyst]

Yes. Maybe just one last one then. I guess, there were some industry press on the design of electric buses, the placement of batteries, what makes the most sense. I'm just curious to get your -- maybe your thoughts or your opinion on, if you wish to share them?

[Paul Soubry, President, CEO & Non]

No, it's a really good question, Mark. So our approach has been and continues to be, we've been building heavy-duty transit buses for 80 years. We've chosen the structure. And when we introduced low-floor buses in North America in the early '90s, we've chosen a structure where traditionally, you have an engine in the back, but you also have load on top of the buses, whether it'd be CNG, tanks or fuel cell stuff or trolley stuff and so forth, and we tested the hell out of that bus. And so our strategy when we first started electrification was to try and use exactly the same weight profile and distribution, and so we put -- depending on the size and quantity of batteries, we put them in edging compartment, in some cases, we've had them under the seats, in some cases, on top of the roofs and so forth. So the center of gravity, if you will, and the weight distribution on the bus has been consistent across all of our models. We have competitors that have buses in the floor and much like a Tesla car does. And their strategy and approach is to build a composite structure and put them in the floor and when you had 150 kilowatts of battery, that was fine. Now that we're getting in the range of 400 to 500 kilowatts, you now have weight challenges on those buses in terms of total weight, but also axle and weight distribution. And I will say and our team will stand by me, there's not one solution that is best. We're really feeling comfortable with our solution and what we've done. We had an incident with one bus, where we had a driver that was recklessly driving the bus, and it flipped off to [indiscernible] looked at it, but that changed nothing to do with the safety, the design, the performance, the efficiency of our buses, and we're very confident with where we're at.

[Operator]

Our next question comes from the line of Chris Murray from AltaCorp Capital.

[Christopher Allan Murray]

So if we can go back to the Q1 manufacturing numbers because I think there's a little bit of confusion, we're trying to straighten out. So I've got a lot of parts to this question. So maybe we'll try to take it one at a time. So first of all, can you tell us how many of the ARBOC buses were actually delivered in Q1 that made up part of this mix?

[Paul Soubry, President, CEO & Non]

120 or something.

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

I think it was around 130. It's in the MD&A, so I'm just trying to find that. 135.

[Christopher Allan Murray]

135, okay, cool. All right. So as we started walking through here, and I guess, part of trying to understand where the numbers are going to go, with ARBOC in there, you've got a lot of different mix items. So I guess, I just want to walk through the revenue pile a little bit. So first of all, you've also now got the FRP program bringing in revenue, still small at this point. So I guess, 2 questions on that. One, $4 million a quarter, is that kind of the runway we should be thinking about? And at what margin does that actually come in at?

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

Yes. So a couple of things. Number one, we bought this FRP business primarily for ourselves, and it did have some external customers. Our focus is not on trying to generate external revenue from this. We're out to support our products. And in fact, in some of the -- in some portion of the business, in order to start dealing with some of our added volume requirements, we started -- we have had to turn some of that external revenue away. So it's always going to be a small amount in terms of revenue, I mean, I think it was $3 million or something for the quarter. I wouldn't see it growing much from that. And while there'll be some margin, you've got to remember, we bought this business or the part of the business we bought was an asset sale, distressed business. So it was not making a whole lot of money on its external sales. And so we're in the process of lowering the cost of that business, so it'll improve, but again, very little profitability.

[Christopher Allan Murray]

Okay. So basically, think that like used or preowned coach kind of marginal or 0 type of profitability at this point, is the way to think about it?

[Paul Soubry, President, CEO & Non]

Yes. Absolutely, Chris.

[Christopher Allan Murray]

Okay, great. All right. So when we go back to look at the numbers, so you said about 135 units. I know you talked about kind of 500 units for ARBOC this year. That is a bit of a step-up from what you saw at Q4 or even the run rate through '17. Should we assume that you're still aiming at that 500 number? Or should we be thinking of a slightly higher number at this point?

[Paul Soubry, President, CEO & Non]

No, at this point, we're still forecasting about -- we haven't changed our full year forecast, Chris. And the number that we've got in the MD&A and then, of course, our quarterly releases and so forth still has [us at that. And if that changes, we'll just change that number quarter-over-quarter. It is not like New Flyer. It's probably more like MCI where it's transactional in nature, not as much contractual in nature and much, much shorter lead times. So it's not like we're able to fill out a year of production slots. If we look at that number, just going forward, we'll obviously change that guidance.

[Christopher Allan Murray]

Okay. And should we be thinking -- like is there any particular seasonality like a shutdown or something like that we should be thinking about? So like you'll normalize to the 500 with a drop out of a couple of weeks in Q3. Is that the way to think about it?

[Paul Soubry, President, CEO & Non]

Yes.

[Christopher Allan Murray]

Okay. Okay. So just looking at that. And then just trying to go back maybe even to Mark's earlier question. So trying to understand the core manufacturing margin. If I think about transit and the coach buses, the margin did look a little bit down. So you're basically thinking part of that is due to volume and mix in a weaker Q1. Is that the way to think about it?

[Paul Soubry, President, CEO & Non]

Absolutely. And again, every quarter, however many orders we deliver in that quarter, 30 or 40 or 50, every one of them is going to have a very different volume and different margin associated with it. And so we've had lots of quarters where everybody's all excited about fantastic margins, and this one is not as great but systemically, nothing is different.

[Christopher Allan Murray]

Okay. All right. Because, I mean, the other thing that has us a little concerned is your ROIC number. I know you talked about like Q2 -- Q1 of last year. But I think the one that we're looking at is sort of the most recent print, which was 15.8%, and now you're 15.4%. So despite some of the noise in manufacturing, we're trying to understand why the ROIC is actually going backwards?

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

So a couple of things there. Number one, we did have some heavy investment in working capital. So the invested capital is higher. We think that is really just seasonality and temporary and look to reduce it. Secondly, obviously, we have $100 million of capital related to ARBOC. We bought that business on a -- based on its growth potential, so there -- as a result, its return on invested capital is not at the same levels as the rest of the business today. However, we believe we're going to continue to grow that business, and we'll get the return on this capital heading back towards to that same direction.

[Christopher Allan Murray]

Okay, that's helpful. Just kind of a question about sort of your outlook on the market. You used the term you see orders this year being stable, which is a bit of a change from previous terminology, and I don't want to read too much into it of being robust. Is that a way that you guys are trying to give us an indication that you think this, call it, supernormal book-to-bill rate that you've been enjoying is going to slow down and maybe normalize more around kind of replacement?

[Paul Soubry, President, CEO & Non]

I wouldn't suggest we changed the words signal anything different other than we're feeling based on the funding environment, the orders we got, the competitions we're seeing, yield, there's nothing changing in this space. And if we had a tragedy like 9/11 that would fundamentally change a whole bunch of stuff or if we had a real systemic shift on funding that changed, like there's nothing different today in the health of our business of any materiality that we -- than we had last quarter or the quarter before. There's always things that change in terms of -- the tax issue changed last year. Some of the commercial buyers of motor coaches pulled stuff into December to take advantage of the full year tax -- accelerated tax depreciation, which impacted maybe some over [indiscernible] in the first quarter, okay, so that's -- but in the grand scheme of things, it's not material to the overall total business.

[Christopher Allan Murray]

Okay. And then last question. Something that came up at the AGM yesterday was kind of interesting. There's some commentary that you had around maybe testing out some Marcopolo product for use in North America. Can you give us a bit more of an explanation about what you're actually doing there? And is this sort of a trial to see if you can do some development work through ARBOC?

[Paul Soubry, President, CEO & Non]

Well, it's a really good question, Chris, and yes. I mean, we haven't press released because at this point, we're evaluating. So the story goes as follows. We got -- Marcopolo made investment in 2013. It was a cash investment as well as some strategic MOU-type stuff, let's compare supply chains, let's look at product portfolios, and everybody will remember we had first right of refusal on their products and so forth. But because New Flyer and then MCI, we never had any experience with cutaway or body-on-chassis type buses. We really didn't have an opportunity to demo, to assess Marcopolo products in North America. So when the ARBOC opportunity came along and now that we're learning a lot from Don Roberts and his team about how to build a cutaway, how to build a much lower cost medium-duty bus, how a dealer network works in terms of selling and trade-ins and stocking and those things, we went back in partnership with our friends at Marcopolo, and said, "What have you got in that class that we might want to consider?" And so we've brought 2 Marcopolo, let's call them, kind of small to medium-duty shuttle buses. One's a low-floor, one's a high floor, and we brought it to North America. And we're marching people through the buses to say, what do you think of the styling? What do you think of the design? What do you think of the technical specs? What do you think about -- if it's for a public world, you'd have to have Buy America compliance. If it's for a private world, you wouldn't. Price points and all those things. And so this is just part of our -- as we've grown up from just a transit bus to multiple platforms, this is just good solid research to see if there's an opportunity based on some products that are already designed and crazy successful in Latin America.

[Christopher Allan Murray]

Okay. And is this the kind of thing that -- I mean, you alluded to public market versus private. But is this the kind of thing where you basically take distributor right and use the ARBOC network? Or is it something that you actually start thinking about, do you build yourself?

[Paul Soubry, President, CEO & Non]

I guess, Chris, I don't have an answer for you yet, but you could think about the entire spectrum. In theory, we could import buses. The other end of the spectrum is we could license the designs and build them completely in America and anything in between. But we're still first trying to determine whether the products, the 2 buses that we bought, they're very different. The 2 buses that we brought to North America, or whether there's a their there, whether people in the market thinks that there's an opportunity to sell this product. And then there's the whole issue like our wonderful learning experience with Alexander Dennis about Americanizing an international product is not trivial.

[Operator]

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

[Cameron Doerksen, Analyst]

A question on the -- I guess, the electric -- all-electric motor coach. You put out a press release last night, and it sounded like there's some good progress there. I'm just wondering if you can maybe describe -- are you actually seeing, I guess, pull from customers for that type of product? And who are the potential customers of an all-electric coach? Is it more transit agencies? Or is it private operators?

[Paul Soubry, President, CEO & Non]

That's a really good question, Cam, and, of course, we have the benefit of the learning that we've had over the last, well hell, since the '70s here at New Flyer dealing with buses that have electric motors and batteries, and then within the last couple of years, pure battery electric and then fuel cell electric and so forth. The pull comes from -- primarily from 2 places. One is public transit agencies that are following the same theme that you have in transit buses around emissions and clean and green, and so on and so forth. So there's absolutely some of the transit agencies that want this. Now there's not a lot of transit agencies that operate coaches, and most of them are New York, New Jersey and others where you're shuttling people into the cities. And so in those scenarios, you got to really think about capacity and range, charging strategies and so forth. The primary draw and pull so far is coming from Silicon Valley. And so we talked, and we did at our Investor Day a little bit, but in Silicon Valley, it's gone from kind of 0 employee shuttles to something like 680 buses or motor coaches that are shuttling people to Apple and Facebook and Google and so forth, all day long. So these buses are operating for a couple of hours in the morning. They're operating for a couple of hours at night. The people that get on are professional but only have a briefcase, they don't have luggage. And the range is very well known, the capacity is known and so forth. And so as we opened up a service center in the Bay Area, as we've been able to sell more diesel coaches, as we looked at our product lineup there, the ability to electrify a coach, to be able to do that range in a green-type approach, really has a lot of those operators and those companies specifically very interested in it. And so this is not rocket science or inventing things from a New Flyer and MCI perspective. It's more of applied engineering based on learnings that we have, so we're really excited. They like our bus, they like the design, they like the layout, they like the efficiency and so forth. And if we get add one more opportunity for a propulsion choice, we're pretty pleased with it.

[Cameron Doerksen, Analyst]

That's great. Just maybe to follow up. I mean -- I guess, where are your competitors on an all-electric coach? Or have you got a decent lead on them in developing something?

[Paul Soubry, President, CEO & Non]

So we have a Chinese competitor that has an electric coach, and they've been demoing it, and we have another one that is, we're hearing, planning to come to North America and start building here with an electrical -- an electric platform. If the transit world is in really early phases of demoing and trials and charging strategies and so forth, the motor coach world is behind it. It's really early stage evaluation.

[Cameron Doerksen, Analyst]

Okay, very good. And maybe just one final one from me just on staying with the electric theme here. Maybe can you just update us on the progress of, I guess, electrical infrastructure standardization? I know there's some trials going on right now, and know that's a big sort of sticking point for potential customers is having some standardization across all-electric buses. Maybe you can just talk a bit about that.

[Paul Soubry, President, CEO & Non]

Yes, that's a really good point too, Cam. We've been talking quite openly for the last, I'm going to, say, 1.5 or 2 years trying to really get together FTA and the U.S. operators and the competitors and so forth to be able to come to a standards definition. And so we think by the end of this year or even into '19 that we'll have consensus on what those standards are. Europe's ahead of us, where they already have agreed to certain standards and what we're proposing and where we're at seem to be pretty close, if not identical, which would be fantastic. The other dynamic around adoption of electric buses, well, some people in our industry keep talking about, "Hey, they should be all tomorrow and so forth," not only the price of the electric buses and sure, they've come down, but there is a premium to diesel or to natural gas. The bigger issue in our perspective around adoption has to do with infrastructure. And so I used an example at our AGM and in other meetings in the last couple of days, we've put 5 buses into New York City that go across -- on a trial basis, that go across Manhattan. These buses go -- I can't remember the width of the island, but on average, they're 2.9 miles an hour and they're loaded with people and so forth. But it took us 9 months and 13 different transit agencies to -- or 13 different civic agencies to sign off on our ability just to put 2 chargers in place. And then you think about it on a bigger scale, the cost of the infrastructure and possible power stations and on and on and on, who's going to pay for that? And that's one of the dynamics that it's easy to talk about just the bus makes sense, but is the economics of the system and the funding that's going to really pace adoption. Hopefully, that color is helpful.

[Operator]

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

[Kevin Chiang]

Maybe just on the EBITDA per EU not to beat a dead horse, but in your disclosure, you noted, I guess, from an apples-to-apples pro forma comparison, that your margins were up roughly 2,500 year-over-year in the first quarter, and I'm just wondering is that the kind of lift we should expect through the year as we account -- even as we account for mix? Or should that accelerate because you had a more challenging mix scenario in the first quarter of this year? Or maybe you get accelerated cost savings as we get to the back half of the year? Just trying to level set the 2,500 versus how we should think for the remainder of the year?

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

No. I think, the figures we're taking about are things at the franchise, for example, the SG&A, right? Well, we'll get better leverage out of those SG&A as we get to higher volume quarters. So that'll provide for a little bit better. The mix is always questionable, whether it's going up or down. We continue to focus on OpEx initiatives. And just going back to Chris Murray's question on the ROIC, the other question that I might've forgotten to mention, our capital expenditures that we've been booking over the last couple quarters, we anticipate to get earnings or margin enhancement out of all that, right? So that has deteriorated upfront the ROIC, for example, but we would see that as now be a contributor to our overall margin enhancement strategy that we've been on for the last few years. So I think what we could see is some marginal improvements as we continue to step forward, but nothing dramatic.

[Kevin Chiang]

Good. And then...

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

Other than mix, right? I mean, the mix could be volatile.

[Kevin Chiang]

Right. No, that's helpful. And then when I look at, I guess, over the past 3 years, you have seen a slippage in your market share within the heavy-duty transit market, but obviously, your deliveries are increasing here. And I guess, this seems like the individual that's taking share from both you and some of the other players is Nova. And I'm just wondering are you seeing them do anything differently from a competitive perspective or maybe just some overall competitive dynamics? Is there anything changing here given how healthy the market seems to be, and given how the funding environment is shaping up here over the next couple of years?

[Paul Soubry, President, CEO & Non]

Well, I think you nailed it, Chris. We have an increasing market, albeit not drastic, but the whole market's gone up. The competitive intensity has grown. And so we're -- for example, Nova's increased their volume, GILLIG's increased their volume, ElDorado's increased their volume, and we've tried to make conscious trade-offs about volume versus customer stats and profitability. But I can point to 3 or 4 competitions in the last year where we've lost by $75,000 to $100,000 a bus by somebody bidding for that. I don't know how you make any money and how you sustain your business. But -- so if that's what it takes to maintain share, we'll pass on that, and we're going to focus on our core customers and our core performance and the profitability of our business. How you bid $75,000 to $100,000 less than us is incredible, especially on volumes in some cases that are 300 or 400 bus orders. Now whether that's a change in the industry, I'm not so sure. Some of our competitors have been doing that for years on certain orders and I guess, that's their prerogative. But the competitive intensity, let's say, overall is more intense today than it was 3 or 4 years ago when NABI became part of us and when Orion went away. And then, of course, the next chapter in our lives with the electrification, we do have new competitors, but their ability to ramp up to volumes and so forth is something we haven't yet seen. So we'll watch it and we'll -- but at the end of the day, I maintain we're about performance of the business, quality products but profitability and returns so we can invest in new products, not about just chasing some of that crazy volume.

[Kevin Chiang]

Are you finding that a lot of this increased pricing competition is happening out -- it sounds like it's outside of your core customer base suggesting that maybe your core customers' pricing is maybe at the low -- is lower down on the list of things that decide whether they place an order with you or not? Is that a fair comment?

[Paul Soubry, President, CEO & Non]

No. I mean, there are some of our core long-standing customers that just came back to us and said, "I have a price that's $90,000 less than your bus. Sorry, guys. I can't justify that to my taxpayers," and I get it. So some of these bids that we've lost are to some core customers. In contrast though, we've won some customers that were competitors of other people, which is why we've been able to kind of hover on our market share, but dramatically improve our profitability.

[Kevin Chiang]

Okay. That's a fair point. And just last one from me. When I think of uses of excess capital, I think you've talked about M&A and the pipeline there and how you look at that. You raised your dividends. You're underlevered versus your target and your willingness to go above the top end of that target on the right deal, you've made well known. If we think of 2019, CapEx rolls over, let's say, M&A is still pretty quiet, how should I think of excess capital? Is it primarily through the dividend and maybe accelerate that? Or does a buyback become more relevant post this elevated CapEx spend if M&A doesn't show up in the next 12 to 18 months?

[Paul Soubry, President, CEO & Non]

Well, you must have been sitting in our board meeting yesterday because that's exactly the conversation we have. First and foremost, we're going to continue to invest in our business, and we've demonstrated that. We've been very transparent about product enhancements or facility optimization or part fabrication, and that's why our CapEx is up. We're going to continue to try and live in that world of 2 to 2.5 from a flexibility -- from a leverage perspective, but it's going to be volatile based on where we're at in the cycle. The M&A is absolutely on our radar, and we've been fairly transparent. But we're not going to just overpay for assets that we like. And I go back to -- it took us 3 years to buy NABI, it took us a year and a bit to get MCI. And so we're going to take our time to do it right. And the dividend, we believe to be an important part of our strategy. And then the other -- which is why we increased it a little bit. And then the other dynamic is we continue to have deep conversations about and the appropriateness of an NCIB with our board. And so I've told the shareholders for a couple of years, we didn't want to do that because we didn't think we're in a position relative to liquidity and the size of our business that made any sense. And now we're getting to a territory where the conversations around NCIB are very deep on the board agenda and trying to see whether that's prudent. Having said that, we want to continue to grow and diversify our business, and so we're spending time and effort on appropriate M&A to -- for the future of our company.

[Operator]

Our next question comes from the line of Jonathan Lamers from BMO Capital Markets.

[Jonathan Lamers, Analyst]

With the significant changes to the MCI D model being made this year, will your D line be taking more downtime this summer than it did last year?

[Paul Soubry, President, CEO & Non]

No, not more, Jonathan. The changes that we're making to the new D, it's hard to articulate without a kind of a flowchart of that thing. But think of it this way. The D and the J are 2 completely different lines. The new D is going to be built on the J line. The old D doesn't go away until we're finished building the current contracts. The one primarily that's in front of us is New Jersey, which worst case, can go to 2022. And so we have been spending money at the shutdown at Christmas, we're spending more money at this summer shutdown to continue to put in common fixtures on the J line in Winnipeg to handle the new Ds. So the shutdown won't be any different time duration, but that's a lot -- where a lot of the CapEx in MCI is going.

[Jonathan Lamers, Analyst]

Okay. And just, Paul, you made some comments earlier about adjusting the production rates appropriately on the D and the J. Could you elaborate on that a little bit more? Have you seen some softness in the private sector demand for the J? And maybe can you...

[Paul Soubry, President, CEO & Non]

Every single year -- well, every single quarter, we are tweaking the D and the J volumes and the production rates and, of course, that has -- it's easy to say but very difficult to do because you have people moving across the plant that today worked here, tomorrow works there and then you have the bumping dynamics and so forth. So we don't make those adjustments lightly. The dynamic of the -- as Glenn and I both discussed earlier, of the U.S. tax reform that we felt had an impact on our fourth quarter deliveries, that had a rollover impact in the first quarter, has had us look at slowing the J down a little bit and increasing the D to handle the new -- or the purchase order we just got for New Jersey. The other dynamic that you have to keep in the back of your mind is that we build J models for a certain level for stock, and that stock can range from 20 or 30 buses in stock to 50, 60, 80, 90 depending on the timing and whatever, how many are on our shelf. And because of that first quarter dynamic, we're going to slow the J a little bit down, and we're going to increase the D. Whether there's softness in commercial private orders that's systemic beyond the first quarter, fourth quarter impact, I'm not so sure we know yet.

[Jonathan Lamers, Analyst]

Okay. So it sounds like you have inventories that support whatever orders are in Q2, albeit taking down the J line, right, a little bit?

[Paul Soubry, President, CEO & Non]

Yes, and also keep in mind, Jonathan, I think -- I can't remember if Mark asked this question earlier, but the other dynamic is the buses we build today are a model '18 production year. The buses that we build after summer shutdown are model '19. So you don't want to build too many '18 models because some people might say, then I'll wait for a '19 model, which is again why we always adjust the D and the J lines to kind of synchronize with the short-term demand and the market conditions as opposed to a long-term production rate.

[Jonathan Lamers, Analyst]

Okay. And Glenn, would you have the contribution to EBITDA from ARBOC for Q1?

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

We haven't disclosed that. And we don't intend to disclose that. We did provide last year's so that you could sort of set a benchmark, but that number has not been disclosed.

[Jonathan Lamers, Analyst]

Right. So I mean, the deliveries are up 55% year-over-year...

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

Yes, I think the way you can look at it is, I guess, you can come up with an estimate of the EBITDA from 2017. That would be a proxy as the model going forward.

[Jonathan Lamers, Analyst]

Okay. So there's like no significant changes in ARBOC's earnings to flag versus...

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

No, no. There may be later on in the year as we start introducing and seeing some sales from the medium-duty coach. But right now, it's primarily cutaway business, and therefore, last year's very representative.

[Jonathan Lamers, Analyst]

Right. And just to clarify. In the aftermarket segment, were the aftermarket SG&A margins up at all? Or were they maintained flat this quarter, and we just saw the gross margin come down?

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

There were some in the SG&A, not a whole lot. It's primarily on the gross profit side.

[Jonathan Lamers, Analyst]

And if I could just ask about this funding increase for public transit. Did you receive any indication as to how much of the increase is available for buses versus rail and other forms of transit?

[Paul Soubry, President, CEO & Non]

I don't have that in front of me here. That's something maybe we can look at providing. Off the top of my head, I don't know the ratios and whatever. I guess, the point we were trying to make is, the strong support from the U.S. government continues, both in the FAST Act as well as the funding and appropriations bills, but we can try and see if we can come up with that.

[Jonathan Lamers, Analyst]

Like, I just -- it sounded quite positive that the funding was up 8%. So I was a little surprised to -- that the market was kind of characterized as stable versus robust last quarter. Like I would have thought that, that could have...

[Paul Soubry, President, CEO & Non]

Yes, but remember too...

[Jonathan Lamers, Analyst]

Higher level of orders going forward.

[Paul Soubry, President, CEO & Non]

Remember, too, Jonathan, that you get into a scenario that if the funding goes up today, it's not elastic. It takes transit agencies 12 months or 9 months to put a competition together. And so if you're working on a plan for your fleet to do X buses and Y upgrades and X midlives and so forth, and there's a little bit more funding coming in, it's not like it increases the volume tomorrow. And again, to Chris' point, and I guess, lesson learned from my end, using the word stable versus robust and so forth, I guess we're going to have to be a little bit more careful about how people read into that stuff. I don't think you should read into that. We're comfortable with the funding. We're comfortable with the number of competitions. I'll always, on the public side, point back to the bid universe, which is always very volatile. But we've got a really healthy number of competitions going on in active and in what people tell us they're going to buy over the next 5 years. And with that kind of a funding statement by the government, maybe we'll see people starting to say, "Hey, last time, I talked to you, I think I'm going to buy 100 buses over the next 5 years, now it's 120." Like that's where it'll first transpire is any uptake in the -- what people tell us they think they're going to buy beyond their current budget window.

[Jonathan Lamers, Analyst]

And one other question, if I can. On these capital projects that you're undertaking, the Alabama facility to be completed in January, the Kentucky parts fabrication facility, I think you said that will be done by the end of 2019. Can you update us on whether those target dates are still accurate? And perhaps the returns you expect from these projects whether in terms of paybacks or IRRs relative to your other in-sourcing projects?

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

So projects are all on schedule. In fact, the first parts have started to come off from the Shepherdsville facility. Obviously, it'll ramp up throughout the year as we put more...

[Paul Soubry, President, CEO & Non]

And into next year.

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

And into next year. So all on schedule there. The Alabama facility, all on schedule, looking forward to getting that in place, a lot of the equipment, and you saw is already in place when -- from when we did our Investor tour in January, so you've already seen that. So moving along very well. Don't see any changes in our targets as we sort of said. It will be -- both those projects are going to be contributors to our margins on a go-forward basis. We looked at these projects no different than we'd look at an M&A target and so there's got to be justified through return on investment and payback periods. And I would say that the paybacks on these projects would be much in line with the other projects we completed over the past 3, 4 years.

[Paul Soubry, President, CEO & Non]

The other dynamic though, Jonathan, on that stuff is, it's as much offense as defense from our perspective. In-sourcing of parts that we can make through our [ home ] line that we can reduce the cost is fantastic, and we hope to get margin off it. The other dynamic, as we talked in the question earlier, is as competitive intensity ramps up, we got to keep going after our cost base to compete. And so if we've got to give some away on price in the short term and in the long term and so forth, having that ability to reach our cost base is absolutely critical. We based every single one of our business cases on current volume and current pricing of those individual subcomponents. So you shouldn't expect massive increases in EBITDA. All it takes is a couple of competitions with tough pricing that allows us to compete. But we're really pleased with the performance. And as Glenn said, we're absolutely on schedule for all of the major projects that we've got going on.

[Operator]

Your next question comes from the line of Stephen Harris from GMP Securities.

[Stephen C.A. Harris, Head of Research]

Just had one quick one and a follow-up on what Chris was talking about, about deliveries. When I look at your numbers, the 4,350 guidance for the year, quite frankly, I struggle to get our number down to that level. And I'm just wondering is there anything we're missing? Is there any capacity issues or any constraints that you're aware of? Or would you just characterize your guidance as being maybe on the conservative side?

[Paul Soubry, President, CEO & Non]

I don't want to say, it's too conservative. Obviously, we're trying to be prudent in the guidance we provide out there because we don't provide EBITDA guidance, and so we're trying to be prudent in how we approach that. The other dynamic, and I think, Steve, we saw this when we walked everybody through the Alabama facility, plant capacity is only part of the issue because it's specifically in the public world, every bus is different. Nonrecurring engineering that we do or with our suppliers is also a limiter as well as the high variation of the supply chain. And so we've got to -- and then ultimately, when we finish the bus or as we build the bus, the other limiter in capacity is inspectors, and we've talked about over the years where we got to -- we can build at a much faster rate, but the customer can't inspect nor accept and induct those business at a certain rate. And so we govern our output not only by our productive capacity but all those other variations whether it be, as I said, the nonrecurring engineering, the supply chain, or the customer. [indiscernible] they've been pretty transparent. There's more capacity in our facilities, but we're hesitant to jack it up in any quick manner because it's got to be sustainable, and so that's why you see this build backlog, at the same time, as we're increasing production rates.

[Stephen C.A. Harris, Head of Research]

Okay. All right. So -- and when you think about these issues, are any of them sort of tangible and affecting your business right now? Or are they sort of concerns on the radar that you need to be worried about but aren't actually affecting your ability to operate today?

[Paul Soubry, President, CEO & Non]

Well, I don't see -- I can't think off the top my head anything that is different than it's been last year or the year before. But Glenn talked earlier about it inflates working capital in the quarter. If you build X buses for a customer that have -- can't take acceptance of them, you build up receivables, and we're not worried about getting paid, it's just a matter of timing. You got other dynamics that have changed with certain customers in the U.S. where 10 years ago, they used to give us milestone payments, and they paid for the bus as we built it. Now that has gone away with the exception of maybe 1 or 2 contracts, and we get a dynamic of what's called retainage where certain customers actually are holding back tens of millions of dollars and drip feeding it once all the buses are delivered. But I wouldn't say any of those are massively systemic issues, but they do impact every quarter and because every customer is different, not only the spec but how they pay, how they inspect, it's not like a normal tractor manufacturer where they punch off the line, and they're very consistent. This is a building houses on an assembly line, highly, highly variable, everything about the technical, the inspection, the building and so forth. But to your point, I can't think of anything that's structurally different today other than maybe those payment term type things that -- than as there was couple of years ago. And this is also a dynamic that some of our competitors that are new to our industry are getting their heads around. We don't get to just decide what the bus looks like and build it. We've got to integrate that unique spectrum requirements into a very, very complex product and then you've got to build it, and then you go through a very sophisticated and detailed inspection process, which every customer is different at.

[Operator]

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

[Daryl Young, Mining Research Associate]

So first question relates to, with the rising environment and increased deliveries across the industry, are you guys seeing any input cost inflation or anything that would impact potentially the margins that are actually in the backlog currently? Because I know in the past, you've mentioned the margins in the backlog are kind of consistent with 2017 levels.

[Paul Soubry, President, CEO & Non]

That's a great question. I don't think there's anything we can point to other than maybe steel pricing. But I'll go back to -- look, steel pricing is going up, and we're in a period of 5, 6 years or whatever where it was crazy low, and then we have been dealing with the dynamics of tariffs or possible tariffs and so forth. But the -- in a materiality perspective, the cost of raw steel that we buy that puts into a bus is how much, Glenn? $10,000?

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

Yes. For our frame on the side of the bus.

[Paul Soubry, President, CEO & Non]

$10,000, $15,000, and so if it goes up 10% or 15% or 20%, yes, it has an impact on COGS, but it's not massively material. And because when we bid that bus, we went back to our supply chain and said, "Sell me an axle," and in that axle is that supplier's having to deal with the commodity prices. So the next bus that we quote, they're going to give us a different price, which we're then going to build into our COGS and then we're going to manage our margin on top of that. But it's not as if I'm buying a whole bunch of commodities or raw materials that have a differential -- a massive differential on my current backlog.

[Daryl Young, Mining Research Associate]

Okay, great. So then kind of fair to say that the margin profile this year would look similar to the last 12 months, which is kind of what you guys are saying?

[Paul Soubry, President, CEO & Non]

Yes, and then the caveat of look it's -- everything's different, right, and every customer is different. And if it's a -- I don't know, a trolley bus where 2 of us are bidding compared to a diesel bus where 5 of us are bidding, sure you're going to have margin differentials. But nothing systemically inside that bucket or that mix.

[Daryl Young, Mining Research Associate]

Okay, perfect. So the next question would be on aftermarket. Some of these new vendor-managed inventory programs you're talking about as well as the recent MV Transportation contract, are those going to effectively stabilize the revenue profile but at the cost of margins? And then what does that mean when you say lower margins? Is that 20%?

[Paul Soubry, President, CEO & Non]

Well, that's absolutely part of dynamic that's already inside some of our results because we do have some vendor-managed inventory contracts. So you absolutely trade-off, let's call it, not surety, but confidence in volume for a differential margin. But at the same time, there's a balance sheet impact because as we can -- we grow our inventory business or our VMI business, we're now into planning inventories for an appropriate customer and volume rather than guessing who needs what and then having a whole bunch of stuff on the shelf that may or may not turn. And so the deal with the one you just talked about, you got a dynamic where we're only selling certain parts of them today. Now we've got a broader basket of parts, which hopefully can drive up more volume, and yes, there may be a margin tradeoff. But that so far is a very small part of our business. It may grow.

[Daryl Young, Mining Research Associate]

Okay, perfect. And then in terms of the electric buses. Plant capacity, obviously, we said is not an issue, but as -- if -- as the ramp-up of electrification happens, is there going to be additional CapEx that needs to go into your facilities to convert to a greater proportion of electric vehicles on the production lines?

[Paul Soubry, President, CEO & Non]

So we, today, in 2 of our 3 systems, let's call it, Winnipeg, Crookston, and St. Cloud and Anniston on the New Flyer side, 2 of the 3 are already capacitized to build an electric bus right beside a diesel bus or a natural gas bus. We -- as part of our capital profile for this year and next, we will continue to make all those plants electric bus build or fuel cell bus build capable. And those are $1 million here and $1 million there. It's not like it's $50 million or big dollars. MCI, exactly the same thing. So it's all within our current capital spend that we've got planned.

[Daryl Young, Mining Research Associate]

Right, okay. And so no real change to the sustaining CapEx profile going forward?

[Paul Soubry, President, CEO & Non]

No.

[Daryl Young, Mining Research Associate]

Okay, perfect. And then fair to say then that as the existing capital investments come through, the ROIC heading into 2019 should -- directionally would kind of trend back upwards?

[Paul Soubry, President, CEO & Non]

Yes.

[Glenn Asham, Executive VP of Finance, CFO & Treasurer]

Correct. Obviously, the investment comes first and the benefits later on. So...

[Operator]

We have no further questions in queue. I'll turn the call back to the presenters.

[Paul Soubry, President, CEO & Non]

Great. Thank you, Lisa. Much appreciate. Ladies and gentlemen, really appreciate you calling in and very detailed questions today. Look forward to speaking you -- speaking with you at the next quarter in August. Have a great day. Go Jets.

[Operator]

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