NFI Group Inc

TSX:NFI

Earnings Call Transcript 2018-Q4

[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. Fourth Quarter Results Conference Call. [Operator Instructions] Stephen King, Group Director, Corporate Development and Investor Relations, you may begin your conference.

[Stephen King]

Thank you, Lisa. Good morning, everyone, and welcome to NFI Group's Fourth Quarter 2018 and Full Year Results Conference Call. This is Stephen King speaking. Joining me today are Paul Soubry, President and Chief Executive Officer; and Glenn Asham, Executive Vice President and Chief Financial Officer. For your information, this call is being recorded, and a replay will be made available shortly after the call. Details on the replay can be found in our press release and on our website.As a reminder to all participants and others regarding this call, certain information provided today may be forward-looking and based on assumptions and anticipated results that are subject to uncertainties. Should any one or more of these uncertainties materialize or should the underlying assumptions prove incorrect, actual results may vary significantly from those expected. You are advised to review the risk factors found in the company's press releases and other public filings on SEDAR for more details. In addition, I'd encourage all participants to review the audited 2018 financial statements and the associated management discussion and analysis that are posted to our website and on SEDAR. We'll start today's call with Paul providing an overview of the quarter and the year, then Glenn will speak to the financial results, and Paul will finish up with market insights and NFI's outlook. Following that, we'll open the call to analyst questions. I'll now hand it over to Paul.

[Paul Soubry, President, CEO & Non]

Thanks, Stephen. Good morning, everyone. In fiscal 2018, NFI Group saw record deliveries and record revenues. We defended our position in heavy-duty transit bus, increased our market share position in motor coach, and we grew ARBOC deliveries, and finally increased our aftermarket parts business. In the year, we delivered 4,313 equivalent units, up 12.7% from 2017, the highest number of units we've ever delivered.While Glenn will review the financial results in detail, I'd like to highlight that in fiscal 2018, we delivered significantly stronger adjusted EBITDA margins than our peer group. We generated solid free cash flow, we grew our dividends declared by nearly 19%, and we returned about CAD 179 million of cash to our shareholders through a combination of our dividends and through a normal course issuer bid.Regarding returning the cash to shareholders, we're pleased to announce that yesterday, our board approved an increase in our annual dividend rate of 13.3% with a new annual dividend rate of $1.70 per share. We feel this new dividend rate is sustainable given our delivery guidance, our strong free cash flow generation and our lower capital expenditures planned in fiscal 2019. While fiscal 2018 was another solid year, it was not without its challenges and headwinds. A few issues of note: first, the pressure on new and preowned motor coach margins impacted us; second, the full impact of Daimler’s termination of MCI agreement to distribute and service Setra motor coaches in North America; and third, the start-up losses associated with the launch of our Shepherdsville parts fabrication facility. In aggregate, the Setra DRA cancellation and Shepherdsville start-up negatively impacted our adjusted EBITDA in 2018 by $8.7 million. Despite this, adjusted EBITDA was down year-over-year by only less than 1%.Overall, we look back on fiscal 2018 and the period where we worked through several challenges and made significant investments to strengthen our businesses. Looking forward, we're excited with our competitiveness and our future.As we wrapped up 2018 and we began this year, we continued to be very, very disciplined. And here are just a few highlights of what we've been working over the past few months to improve our competitiveness. In November, New Flyer's 60-foot fuel cell-electric Xcelsior bus model became the first and only 60-foot electric bus to complete the FTA Altoona testing program. This revolutionary articulated vehicle is now in production and eligible for FTA funding.Second, during the fourth quarter of 2018, we efficiently completed the expansion and renovation of our Anniston, Alabama facility, which included the addition of a 76,000 square-foot production space. These investments allowed us to increase on-site parts fabrication, increase our volume throughput and optimize our welding capabilities directly on our production line as opposed to a leased facility down the street. Third, the Shepherdsville parts fabrication facility operated by NFI subsidiary KMG Manufacturing continues to ramp up its operations. We'll utilize the acronym KMG to refer to Shepherdsville throughout this call. We now have over 230 people working in KMG making parts today for New Flyer, for ARBOC and NFI Parts. And in the second half of 2019, we expect KMG to fabricate parts for all NFI Group companies and will reach full production by end of the year.KMG is also expected to generate positive EBITDA contribution in late 2019 and beyond. I'll note that in addition to the positive financial benefit that we saw strategic investment to help New Flyer, MCI and rest of our business increase U.S. material content requirements going from 65% to 70% through Buy America that go into effect October 2019.Fourth, in November 2018, ARBOC's Spirit of Equess became the first medium-duty purpose-built transit bus pass the FTA's Altoona test. And in February 2019, the Equess was awarded a state contract from the Florida Department of Transportation, which could result up into 500 orders of Equess over the next 5 years. We've already received orders off this new contract and from others for the Equess.This NFI Parts went live in late November after a long -- a year-long IT harmonization effort that moved all components of the parts business onto the common IT platform of Oracle. The harmonized IT platform had a few follow-on efforts, but will now enable NFI Parts to realize consistent efficiencies, seamlessly suppliable transit -- sorry, seamlessly supply transit coach and our third-party customers and services at platform to launch our VMI solutions. Finally, in January 2019, we became the first North American bus manufacturer to offer a comprehensive charging infrastructure service through the launch of New Flyer Infrastructure Solutions. We designed this new team to meet the needs of clients who were asking us to provide not only the bus but also all turnkey solutions that include the advisory, the reconnaissance, the support through utilities and cities and so forth and the associated charging infrastructure. We feel that the infrastructure solutions team will help us improve our ZEB offer and provide a better service to customers looking to implement battery-electric buses in their fleet in the future.And finally, in January 2019, we announced that we had doubled our NCIB, or Normal Course Issuer Bid, up to 10% with the public float. As of December 31, 2018, we had repurchased nearly 2.2 million shares of the total 5.5 million shares now allowed to purchase under the amended NCIB. Glenn will now take you through the fiscal 2018 financial results and following that, I'll provide some more insights on our outlook, and then we'll take your questions. Over to you, Glenn.

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

Thank you, Paul, and good morning, everyone. I will be highlighting certain fiscal 2018 results and provide comparisons to the same period in 2017. I would like to direct you to NFI's audited 2018 financial statements and management discussion and analysis of those financial statements, which are both available on SEDAR or NFI's website as they support my comments.I do want to remind you that our audited financial statements are presented in U.S. dollars, the company's functional currency and all amounts referred to are in U.S. dollars unless otherwise noted.Please note that 2 organizational changes were made in 2017 and 2018 to better align business functions within operating segments, details of which are provided in the management discussion and analysis. To improve the comparability between periods, the related 2017 segment information has been restated to reflect these changes.NFI generated consolidated revenue of $2.52 billion for fiscal 2018, an increase of 5.8% when compared to fiscal 2017. Revenue from manufacturing operations increased by 6.4%, primarily from higher transit bus volumes, higher average transit bus selling prices and the full year contribution of ARBOC, offset by lower new and preowned coach volumes and lower average coach selling prices. Daimler's termination of the DRA also led to a $7.7 million decrease in new coach revenues.Revenue from aftermarket operations increased by 2.1%, primarily due to a higher volume and the addition of ARBOC, offset by the termination of the DRA. Total adjusted EBITDA for fiscal 2018 was $315.4 million was down by 0.8%. Manufacturing and operations adjusted EBITDA increased by 1.5%, primarily as a result of higher transit volumes and full year contribution of ARBOC, offset by pricing pressure on new and preowned coach sales, KMG start-up losses and the impact of the termination of the DRA.Aftermarket operations adjusted EBITDA decreased by $6.1 million due to lower margin and the $1.2 million impact of Daimler's termination of the DRA, which took effect for NFI Parts on July 1, 2018. Net earnings decreased by 16.5%, and earnings per share of $2.56 decreased by 16.3%, primarily due to increased depreciation expense, higher interest costs, past service cost adjustment, foreign exchange translations and the previously mentioned impacts on adjusted EBITDA.Higher interest costs in the period were primarily related to strategic investment in the acquisition of ARBOC and share repurchases on the company's NCIB.Adjusted net earnings during fiscal 2018 decreased by 13.5% compared to 2017, and adjusted earnings per share was down 13.3%. Our liquidity position of $355.4 million as at December 30, 2018, increased compared to $222.3 million at December 31, 2017. The increase was driven by the new unsecured revolving credit facility that NFI entered into in October 2018, which increased the amount available to be drawn. Offsetting this increase was the amount of capital returned to shareholders, dividends and repurchase of shares under the NCIB as well as increased capital expenditures.The company generated free cash flow of $159.9 million during fiscal 2018, a decrease of 0.9%. Compared to fiscal 2017, the increase was primarily due to higher plant and capital expenditures and an increase in interest costs, partially offset by lower current taxes.The company declared dividends of CAD 90.3 million in fiscal 2018, which is an increase of 18.7% from the same period in 2017, and represents a payout ratio of 42.9% versus 36.8% last year.As outlined in yesterday's press release, the board increased our annual dividend rate by 13.3% to $1.70 per share for dividends effective after March 13, 2019.Property, plant and equipment cash expenditures increased by 34.5% compared to fiscal 2017, primarily as a result of planned capital investments in KMG and Anniston and investments in other continuous improvement and insourcing programs.Return on invested capital, or ROIC, for the period under -- for the period ended December 30, 2018, was 13.7% as compared to 15.8% for fiscal 2017. The lower ROIC was primarily impacted by investments made in KMG and Anniston, which were expected to generate benefits in 2019 and beyond. With that, I'll turn it back to Paul.

[Paul Soubry, President, CEO & Non]

Thanks, Glenn. As I've mentioned when I started the call and as Glenn outlined during his financial discussion, NFI achieved several record milestones in 2018. We maintained our 43% share of the heavy-duty transit bus market, and we grew our leading share of our motor coach market to 45%. Aftermarket revenues increased, and ARBOC continued to grow. While there were many positives in 2018, there were a number of adverse impacts. No excuses, we've tackled these issues head-on. But as we look to 2019, we see opportunities to grow both our top line revenue and our adjusted EBITDA. Looking at overall market, we expect heavy-duty transit to remain healthy. The market grew by 2.7% in 2018, and we expect that to maintain our leadership position in 2019 and beyond.Zero-emission buses are an area of particular focus for our customers in transit. They currently represent approximately 5% of our total backlog, but they're a growing segment of the market. In the last year, we were awarded a number of contracts including orders from several major several cities in North America such as Toronto, Boston, Minneapolis, New York, Seattle, Vancouver and Montréal. To complement our buses, as I discussed earlier, we launched this infrastructure solutions team to further strengthen our offering and our competitiveness.Within transit, we expect active bids to increase through 2019, but caution that individual awards may be smaller in size with fewer options or shorter contract terms. This is primarily driven by the transit agencies assessing their fleet replacement plans and considering how they will approach the EB programs going forward. While it's really in 2019, we've already seen an increase in the number of active bids across the different types of propulsions relative to the fourth quarter of 2018. In addition, our total bid universe, which is developed through detailed conversations with public customers across the continent regarding fleet renewal plans remained near record levels. We're very comfortable with the approach we've taken to offer all types of propulsion systems from clean diesel to diesel hybrid to natural gas and now zero emission electric, all on the same bus platform. Our Xcelsior is unequaled in the industry, allowing customers to migrate to zero-emission buses over time and at their own pace as they obtain additional funding required for infrastructure investment and candidly more expensive buses.We maintain our view that the ZEB adoption will be an evolution, not a revolution, and we're in full position to deliver for the industry. While the private motor coach market has seen some challenges, we continue to grow our share of that business and are pleased with our investments in the last few years in new products and innovations to drive future growth. The MCI motor coach business was negatively impacted, as we discussed a number of times today, by Daimler's termination of the distribution rights agreement and from the challenges in preowned coaches as market values declined in 2018. We're pleased to put the DRA behind us. It now -- frankly, allows us to focus our efforts entirely on MCI motor coaches. During the year, we adjusted the value of the preowned Setra motor coach pool to reflect market values. We liquidated our inventory of Setra vehicles, and we added new leadership to run our preowned coach business and our manufacturing operations.We expect the demand for low-floor cutaway and low-floor, medium-duty buses to continue to grow, and we feel ARBOC will be a beneficiary of this growth. A particular focus for us in 2019 is ARBOC's Spirit of Equess, a medium-duty bus which has a higher EBITDA per EU than ARBOC's traditional low-floor cutaway vehicles. And Equess is expected to represent between 10% and 15% of ARBOC's total deliveries in 2019. We are delivering as we speak. NFI Parts continues to focus on a number of strategic initiatives to counter competitive intensity and deliver profitable growth. These initiatives include additional focus on vendor managed inventory, or VMI, programs, enhanced product offering and capitalizing on the previous mentioned implementation of a common IT platform across the aftermarket business. NFI Parts secured 6 VMI programs during 2018, which are now being implemented and continues to pursue several additional opportunities across North America.In January, we released our delivery guidance of 4,455 EUs for our total company for fiscal 2019, an increase of 3.3% over fiscal 2018. We have reaffirmed that our guidance which sees growth in all of our product deliveries. Our guidance is supported by the strength of our backlog and the visibility provided by secured contracts and expected conversions and expected new wins. We also reaffirmed our PPE expenditures were expected to be in a range of $50 million to $60 million, a significant decrease from fiscal 2018.Our expectations for delivery growth, free cash flow conversion and increased capital expenditures in fiscal 2019 supports the board's decision yesterday to increase our annual dividend rate by 13.3% or $0.20 up to $1.70 per share. This dividend is another example of our commitment to return cash to shareholders. It's important to remind analysts and investors that our business has grown through additions of MCI and ARBOC and also changed the seasonality of our results. Due to the nature of our end markets, annual production and vacation schedules across our business, we now see the first and the third quarters as slower periods compared to the second and fourth quarters of each year. These seasonality factors will be reflected through our financial results for those respective periods. Within NFI Parts, sales remain difficult to forecast on a quarterly basis as there are typical quarter-to-quarter volatility. I want to advise everyone that the first quarter of 2019 will see deliveries impacted by several unusual factors. We experienced adverse winter weather at our facilities in Minnesota and North Dakota, which caused both New Flyer and MCI to miss production days and customer inspection visits. We also experienced production inefficiencies in the first quarter as we launched several new products, specifically New Flyer's battery-electric and fuel cell zero-emission buses as well as MCI's J3500 and D45 CRT LE, which also went into production full time in the first quarter.Finally, during the quarter, ARBOC experienced some supply issues on certain General Motors and Freightliner chassis. ARBOC has worked up with the chassis OEMs and now expects the overdue chassis to begin being delivered later this month and into April. The chassis delay is not expected to impact our overall delivery guidance for the year but will move some of the deliveries we expect in the first quarter into the second quarter.As I previously mentioned, fiscal 2018 results were negatively impacted by several factors, including Daimler's termination of the DRA and the set-up losses associated with our KMG facility. Looking forward, we expect the impact of the termination of DRA to be significantly reduced, and we expect KMG to continually -- continue negatively impacting our adjusted EBITDA during the first half of 2019, but it's expected to breakeven status in the second half of the year and then begin providing a positive return on our investments. As I said before and will continue to repeat, we're really confident in NFI's future. We're excited about our leading positions in core markets, the strength of our backlog, our free cash flow generation, our liquidity, the acquisitions we've completed and the multi-million dollar investments we've made to improve our products, our facilities and protect our margin. We continue to focus on providing strong cash returns to our shareholders with increased dividend and our NCIB. In addition, we continue to investigate acquisition opportunities, both domestic and internationally. But as you've seen from our track record, any investment we make will be strategic, prudent, measured and appropriate. As we always do, we also want to remind investors and analysts that we encourage you to take a longer-term view on our business and not to focus on specific quarters. Our business can see significant mixed impacts and volatility from quarter-to-quarter. But the strength of our business is the visibility afforded to us from the nature of our public customer contracts, our leadership positions in core markets and our proven history of being able to deliver margin improvement from the investments that we make. Now before I turn the call over to our operator for questions, as you will have seen in our press release, I wanted to pass along the news that Glenn Asham, our CFO, has formally announced that he'll retire effective March 31, 2020. It's been an absolute pleasure to work with and learn from Glenn over the past 10 years as we've grown this company from a $900 million in revenue to now over $2.5 billion. Glenn has been with the company since 1992 and has been a pivotal part of our success and our growth. We formally started the process to search for Glenn's replacement, and we're working with global executive recruitment firm, Korn Ferry, hoping to have somebody in place by the end of this year. With that, I'll turn over to our operator who can provide you with detailed instructions on how to ask a question. Thank you.

[Operator]

[Operator Instructions] And our first question comes from the line of Chris Murray from AltaCorp.

[Christopher Allan Murray]

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

[Paul Soubry, President, CEO & Non]

Thanks, Chris. Well, as we've talked many times, the coach market is not like transit. Transit, they act the same, they buy the same. The biggest difference is the size of the customer, and therefore, the level of customization and complexity. In the motor coach market, you have got a number of subsegments, and so each of the subsegments have had their own pluses and minuses and challenges, but probably the single -- the 2 single biggest issues that have impacted not only us but the industry in 2018, one is the continued change in dynamic around line haul or specific type operators that move city to city and point to point. And they've continued to be under pressure and we've seen, for example, in Western Canada, our friends at Greyhound pull out service. We've seen various service changes in the United States. So that's one segment where there was usually annual buys or some batch of buys that we and the industry could plan on that have kind of slowed down. The other dynamic relates to a couple of tour charter operators in the last year, and then we've always seen people come and go in the space. But in the last year and a bit, we've seen a couple of the larger guys go under. And so that does a couple things. It changes the immediate demand for what they might have wanted or needed for new coaches. It then also puts their current fleets into liquidation mode whether they sell them back to people like us or whether they sell it to third-party sellers or whether they go to auction. And so we saw a little bit of turbulence in the fourth quarter, for example, with one of the operators selling their preowned coach or their fleet through auction. We were pleased to see the prices that those buses went at auction in terms of the market value. Having said that, certain customers that we expected to sell new coaches to decided to buy a year or 2-year-old coach at auction, which then eliminated our opportunity or our competitor's opportunity to sell a new coach. So those are some of the things that have caused that market to have some blotchiness. On a positive side, we continue to see the employee shuttle dynamic specifically in the Bay Area and other parts of Seattle, for example, and even some on the East Coast that are using employee shuttles to move people and so there is a little bit of a pickup from that space. And then the limo guys are also the people that have moved up from black cars to SUVs to smaller buses and now to motor coaches that are hosting and shuttling executives in conferences and those kind of things around cities that have picked up a little bit. All that to say that we saw, for the first time now in 6 or 7 years, the total industry drop a little bit in 2018. And I think we're in the same mode for 2019. There is no reason to believe that's going to drop dramatically, but there is no reason to -- that we see or demand that will help that recover.

[Christopher Allan Murray]

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

[Paul Soubry, President, CEO & Non]

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

[Christopher Allan Murray]

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

[Paul Soubry, President, CEO & Non]

It really has, Chris. You know it is a -- you know the history well and many of the shareholders do. We tried a joint venture with a company years ago on a medium-duty class vehicle. And I think in the hindsight, there were some flaws in the way we set up that JV, but one of the issues is that we ended up trying to sell effectively a heavy-duty designed and costed bus in a medium-duty space. And so the biggest issue, I think, was the price point. And so what we really like about Equess is it truly is a medium-duty bus, designed and tested to a 10-year life cycle, costed and bill of materials that are U.S. origin, that are really appropriate. And so we're seeing both the class, the size, the style, the design of the bus really kind of sit well with the customers as well as the price point. And it's sold through a dealer, and so we've got great, great response from the primary dealer Creative Bus Sales, who's been very aggressive in helping us finish the designs and perfect the bus, but also now start to sell the thing. And so we've got a couple of orders that we've already been delivering to them and their dealership network for demos and for some direct customer sales. And I think this contract that we got onto in Florida is a great example of getting on those kind of state standing offers with a product that is really appropriate for that price point. So we -- as we said in our notes, we think that Equess then will kind of be 10% to 15% of our deliveries this year. It's a dynamic that's very different for ARBOC because we're not buying somebody else's chassis. We're making our own chassis. And so, in fact, our KMG facility is doing a lot of the metal fab and welding of the chassis for its brother company, if you will, or sister company over at ARBOC, which then enhances our profitability on a per unit basis. So we're quite encouraged with not only its competitiveness but the profitability of it.

[Christopher Allan Murray]

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

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

Sure. So there's a couple of pieces, and you're right. I mean, our maintenance spend as we've done insourcing has come up a little bit, and I guess I would probably peg that sort of maintenance and sort of ongoing enabling projects we're doing, probably in the neighborhood of $35 million to $40 million a year. We do have some completion capital on KMG for -- in 2019. That's in the range of, I believe, around $5 million, $5 million to $7 million. Then we are looking at some other -- anything over and above that, we're looking at some potential further programs to insource to further reduce costs. So whether we get to all those projects this year, we'll see. So that's why we have the range of $50 million to $60 million for -- near the top end is because we've been able to validate the savings from some of these projects that we're looking at.

[Operator]

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

[Cameron Doerksen, Analyst]

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

[Paul Soubry, President, CEO & Non]

Yes, most definitely. So a couple of things. When you think about preowned coach and our MCI dynamic and world, it's the only part of our business that has that trade-in or preowned coach dynamic. The rest of them we sell outright and we don't have to deal with kind of used vehicles. So a couple things happened. When Daimler terminated MCI, we saw a dramatic drop in the customers' valuation of Setras. So we did kind of 2 things. A, we did mark-to-market and we do that based on industry numbers or valuations. We did that blue book on a regular basis and so forth. But now we start the year, basically, are rough numbers, Cameron, don't quote me on the exacts but say call it 100 preowned coaches in our pool that are specifically related as Setra, and the preowned value start to really drop on them. So we have the dynamic of trying to: A, mark-to-market what those values are; but B, we've got to get rid of those things. And so we were very aggressive at liquidating those preowneds. So we ended the year with, call it, 15 or 20 of those 100 left, and we took a substantial hit to basically get out of the program. Going forward now, what we're doing is we're effectively -- when we take a Setra in on trade, we're effectively putting on the balance sheet at nothing. So we're taking any pain on the trade-in on Setras, because they've materially dropped in value, in the marketplace. We're taking it at point-of-sale of the new coach rather than historically where we bought the thing back and then tried to figure out what we could sell it for and adjusted the market thing. So when you look at our whole preowned coach pool call it 350 to 400 units in the pool, when we started the year last year, 1/4 of that was Setra and then probably 2/3 of it is MCI coaches, and then we've had a few other of our competitors' coaches that we may have taken in on trade. As we start this year now, we effectively have really no Setras left or very, very small. The vast majority of our pool is MCIs. And so we're in a much, much better position this year and shouldn't be seeing those dramatic swings as we move into 2019. I hope that helps.

[Cameron Doerksen, Analyst]

Yes, no, that does. But if I'm looking at kind of -- so I guess really the impact was really all Setra in Q4 and if I look ahead at 2019, the preowned price should kind of revert to -- or the selling price that you have for preowned should kind of revert to a more historical type number?

[Paul Soubry, President, CEO & Non]

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

[Cameron Doerksen, Analyst]

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

[Paul Soubry, President, CEO & Non]

Well, it's a really good question, and I will say that when we started getting into electric buses, I wouldn't have suggested this would have been on our radar because historically, we sold a bus and we never had to worry about the customers' infrastructure whether it's diesel fueling or natural gas and so forth. As we and our competitors have started to deliver electric buses, there's multiple different approaches from the transit agencies. In some cases, they rely on us to do it all, and in some cases they say, well, we'll take care of the infrastructure, and you guys just sell us the buses and we'll work it out. And some of the case studies we've had over the last year or 2, we find ourselves in a disconnect. So the agency or the operator has undersized the chargers or the agency, and us included, have underestimated the complexity of getting chargers installed either at depots or in-service on en route and so forth. And I think I've given some examples in the past where we -- for example, in New York City, it took us 13 and 14 different city agencies to sign off on the installation of 2 chargers, which delayed the project for 9 or 10 months. And so it became crystal clear that not every customer is going to take us up on taking a prime position with them to manage, source, scope, stack the charging infrastructure, but a lot of them will. And so already I can just think of a couple. We've sold a bunch of buses now to Boston. And in that case, our ITS team will be the prime team that manages all of the subcontractors, works with the utility companies, works with the transit agency to put those chargers in place. Another one, for example, we had a contract recently with Fort Worth where that's exactly the same. We're starting to get inquiries from transit agencies that are saying, "Hey, we're early in the journey, we've gone to your vehicle innovation center, and we get it now that it's fairly complex, and it's -- there's a lot of moving parts. Could you consult to us on helping us walk through the scoping, whose -- what type of chargers, how should we think about en route versus depot and those kind of things." So I think so far, we're using it where we're selling buses, and we're bundling the chargers and taking far more responsibility. And then in some cases, I think we're going to be using our vehicle innovation center and infrastructure solutions to help earlier in the stage and evolution of deciding, helping scoping, phasing, costing, all those kind of things. So we're the first ones to come out of the blocks with that kind of well-defined, fully integrated service, and it remains to be seen, but we're quite bullish so far in how the response has been from customers.

[Operator]

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

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

Just had a couple of follow-up questions. First, on the used coach side. Again, I want to focus on that average selling price for preowned coaches. And can you give us a sense, we're most of the way through first quarter, what sort of rebound, if any, have you seen in Q1? And basically, what do you think is going to happen for the balance of the year? Do you think that the impact we saw of those bankruptcies and the Setra transition, et cetera, is essentially behind us and you're only dealing with the softness in the industry? And in which case, should you see those prices really come back a bit?

[Paul Soubry, President, CEO & Non]

Well, as you said, I wish -- as you said, we're kind of halfway through the quarter, Stephen. I wish we had bigger sample size to be able to kind of point to some very specific case studies. The impact, as we discussed earlier, the impact was pretty material for us last year. And you think about kind of 2 dynamics, the value of the trade that we put on it and then ultimately hang on to this preowned coach and then try to figure out what how to sell it. And we often talk about them as independent, the preowned coach and the new, but as you just commented and as I did before, they're very interrelated on valuations. I think it's too early to be able to say plus the other dynamic is -- as we know, we have this massive amount of deliveries in fourth quarter, both new and preowned. And the first quarter is relatively soft. Everybody has kind of start of the year. They've bought their product whatever, whether it's new or preowned, and the demand really doesn't pick up other than there was larger or longer-term kind of deals that were already in play. I think that question we'll be able to answer better after we get through the half year to try and give a feel or an indication. I'm not sure I've seen anything I can point you to say there's been a rebound or a continued degradation because the volume hasn't been material enough to build a point to it. But we are being way more aggressive internally at how we -- how much value we put on a preowned when we take it back. And when we do, we're taking any variation we're worried about it on -- at -- on margin of the new coach sale as opposed to, bringing it in, putting it at our balance sheet and then having to worry about significant mark-to-market as the bus ages on our balance sheet.

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

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

[Paul Soubry, President, CEO & Non]

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

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

And I think the MCIs that were liquidated in the Q4 through the Cavallo bankruptcy, what we saw was they maintained their value fairly well. The MCI's relative to some of the other peers.

[Paul Soubry, President, CEO & Non]

Yes, no question. I think I commented about that. When we saw the auctions of a couple of those fleets go through the liquidation through auction houses, our teams were pleased with what used either 2- or 3-year-old used or 5- or 6-year-old used or even older were being selling at. We didn't see a further drop-off on what that mark-to-market was.

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

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

[Paul Soubry, President, CEO & Non]

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

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

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

[Paul Soubry, President, CEO & Non]

Yes, it's a good question as well. So ARBOC created their business largely based on GM chassis, and had done some through Chrysler chassis. In the last year, they've now migrated to be -- to also build their cutaways on Ford chassis. The Ford chassis of all the cutaways in North America is probably 90% of the market, but we didn't have Ford certification. We were building the stuff on the on GM and Chrysler. So now that Don and Rob and the team over at ARBOC have been able to get the Ford certification and be able to sell their products on Ford, we're able to kind of approach ourselves to a broader marketplace. The GM chassis specifically, the chassis is not sold to us directly. It actually goes through dealers, just the way the automotive and the truck world works. And so you're kind of a victim to some extent of how and when they build chassis. And in some cases, we'll work with our customers and those dealers to prebuy and hold inventory and so forth over the years. And ARBOC has grown and, of course, last year was 500-some units and previous year was 350 units, the quantum now takes on kind of a new dynamic. And so we basically had a scenario where some of the chassis that we had expected to be delivered or wanted to be delivered for specific build were delayed from GM. I'm not blaming it that that's a massive issue, but the reality is there are certain units that we could have built in Q1 and delivered that we didn't. The guys have resolved that. They now have chassis supply en route and so they'll be starting to come in March and April and we'll catch up in the second quarter. The other dynamic that is a positive one for ARBOC is that they won a contract for a customer in LA for 50 units that are being built on a Freightliner chassis and historically, they built on a Freightliner chassis that was a diesel chassis. This customer wanted a vehicle that we like. It's got good margins we're impressed with, but it's built on a Freightliner natural gas chassis. And because it's the first time that they provided that to us, Freightliner had to do some additional testing, which is perfect for us. We want to make sure that thing has all of the fuel efficiency and dynamics that we had intended and promised and sold to our customer. So that testing is almost complete. It's ongoing and those chassis will now show up mid to late April and the same dynamic was the GM one that we've kind of had to jerk around and be inefficient to some extent in the plant waiting for the chassis to show up, and then we'll start building those in May and June and July and catch up on that order. That order is for 50 vehicles. It's quite material to ARBOC with a good profit margin profile. So it's not like it's massively systemic issues, it's just we're a victim of kind of 2 situations on a business that has gone from 350 to 500 to growing and so we just got to manage our way through it.

[Operator]

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

[Jonathan Lamers, Analyst]

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

[Paul Soubry, President, CEO & Non]

I'm not sure, Jonathan, I understand, but let me just kind of articulate how that works. So we go to a customer and when we try and sell them a new coach. He said, well, I've got a used coach, and I think it's worth X. We would then go back and look at the history of that model and type of propulsion and options and so forth of what we've sold for. We go to the blue book and look at the range and the quantum of that kind of thing, and we'll come up with what we think is a fair trade-in value. We'll provide that to the customer, and then we'll effectively be in a negotiation of price of new coach as well as value of used coach. And so every situation is different. The new demand in the marketplace or the things we talked about before where a number of used coaches hit the marketplace in batches will have an impact on the valuation that we provide. What we're being more aggressive on now is that once we buy that thing back independent of what we paid for it or the discount we give to the customer, we're being far more aggressive about what we put in our balance sheet for. Doe's that help?

[Jonathan Lamers, Analyst]

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

[Paul Soubry, President, CEO & Non]

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

[Jonathan Lamers, Analyst]

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

[Paul Soubry, President, CEO & Non]

Well, the backlog is far more an impact for 2020 and 2021 than it is for 2019. The vast majority of the slots for 2019 are under contract firm or are options that the customers have told us they're effectively planning to execute, and therefore, we've assigned slots for. It's not like 2019 has a lot of, if any, open slots in the -- from a transit perspective. The future though is that if the orders slow down a little bit, we will absolutely start to burn faster into our backlog. When you look at the number of options that we have in 2020, I don't remember it off the top of my head, it was over 2,000, I think, the number of options. We've got a lot of at-bats for -- beyond the 2019 year. The issue inside our production facilities and some of the inefficiencies we had in the first quarter at New Flyer relate primarily to now that you've got full electric buses on all of our production lines, building electric bus has its new dynamics. You're proving out all or some of the tooling and infrastructure you put in place. You've now got a slightly different supply chain that you're having to rely on that are starting to ramp up. There's a learning curve and a training curve not only for our people and our inspectors, but also the customer inspectors that have never expected an electric bus before and so some of those things have conspired to have some challenges, if you will, on efficiencies in the first quarter. But at this point in time, I'm not worried about filling slots in the transit bus business in 2019.

[Jonathan Lamers, Analyst]

Right. And from the customer perspective, is there federal funding available today for the electric infrastructure, the en route charging stations or the depots? And how are the transit agencies handling the funding for that?

[Paul Soubry, President, CEO & Non]

So as you know, the electric bus deliveries continue to be fairly limited relative to the total number of, whatever it was, 6,700 units delivered last year. And the way the transit agencies have worked the for the vast majority of it is, they'll apply for special funding for the price over and above the normal diesel or natural gas bus and they'll apply for special funding for the infrastructure side. Part of the reason that we -- and maybe different than some of our competitors, we think it will be more evolutionary than revolutionary is that there are those 2 incremental funding dynamics that got to find their way into mainstream, which is why we're only 5% of our backlog is electric buses. And the funding methodologies through the FTA have not changed relative to who's going to pay for the infrastructure. And so we think that will be the pacing issue for adoption over not necessarily the technology associated with electric bus. So a short answer to your question is it's all based on special initiatives and special grants and so forth either from the FTA or the EPA or anything local in some of these cities and states, but it is not mainstream.

[Jonathan Lamers, Analyst]

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

[Paul Soubry, President, CEO & Non]

Well, we -- some of the reasons that we believe that our active bids are down is I can just walk into the average transit agencies in the United States who had -- or in Canada, for that matter, that had a fleet replacement plan, and they were operating diesels or natural gas or whatever and now the political masters and the communities are saying we want zero-emission buses. And so the transit agencies are starting to say, okay, A, what routes, what range, what battery size, what conditions and so forth. So -- and, oh, by the way, that bus is more expensive, and then the other issue is who's going to pay for this infrastructure. So the FAST Act when it expires, I mean it was never intended today to deal with any of that or never funded to deal with those incremental costs. And so part of our issue as not only NFI but also our industry associations like APTA and working with the FTA and so forth is how might the next replacement of the FAST Act deal with infrastructure requirements in addition to the rolling stock dynamic. And so we're actively working with all of the associations and lobby groups and so forth to help provide a discussion. In the interim, that's why we -- one of the reasons we launched infrastructure solutions to be an active participant in helping our customer because it's not as simple as some -- no disrespect to politicians, but saying we're going to put an electric bus on the road is -- sounds romantic but it is not trivial. Everything from how you charge it, how you maintain it, how you diagnose it. It's more expensive so where's the funding and all those issues. And so I don't think we can point to specific things that are going to be triggers. It's just going to be more transitionary. So I don't know what the replacement for the next FAST Act is going to look like. We're very encouraged with what we hear when we walk through the halls of D.C., and we hear positive discussion about the continued investment in city infrastructures and so forth, but there's a lot of work to be done to figure out how that's going to get paid for, which again is why we think it's going to be evolutionary not revolutionary.

[Jonathan Lamers, Analyst]

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

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

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

[Jonathan Lamers, Analyst]

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

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

Yes, I believe it was 2 or 3 days, but...

[Paul Soubry, President, CEO & Non]

Right.

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

2 or 3 days at the Pembina facility, where they deliver all the public coaches for motor coach and then again 2 to 3 days in the Minnesota plants for the transit.

[Operator]

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

[Daryl Young, Mining Research Associate]

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

[Paul Soubry, President, CEO & Non]

It's really a customer issue, and it relates to what we were talking before -- imagine you are a transit agency with 100 buses and somebody says you're going to start buying electric buses, your fleet replacement plan didn't contemplate that. So now you're trying to figure out how you're going to use money and so forth, and so that's why instead of the years or periods where we saw 800, 1,000 units, 200 a year x 5 years, those kind of things, we're seeing a lot of agencies dabble and say well, we'll put the diesel order or the natural gas order on hold, and we'll put out an RFP for 5 or 7 or 10 electric buses, and we'll try it and we'll see how it works and we'll learn from it and so forth. We're trying to point to that more just the blotchiness of that as opposed to the impact on profitability. I'll remind you that the way we and the industry works for the most part is we get these detailed specifications from a customer. I want this camera and this window and these seats and this floor and all the crazy things that we customize. We then go get a costed bill of materials from us and our suppliers, and we'll add a target dollar margin to that and we'll vary that margin based on the competitive situation. So I don't see those kind of dynamics around smaller orders impacting profitability in the short term. It will depend on how long that goes on or before we start to see significant orders. But right now, I can't say that, that's impacted the way we've been and the profitability that we're seeing per unit.

[Daryl Young, Mining Research Associate]

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

[Paul Soubry, President, CEO & Non]

So a number of factors, obviously. We will see some change in mix, which should be probably not as rich of a mix going into 2020 and late '19 as we have been seeing in the last couple of years. That should be a fairly smaller impact. Obviously, the other issue on margin is how quickly do we get some of the new products back to an efficient level of production, and how quickly do we get the KMG facility ramped up to its potential. So in terms of the overall margin expectation, I don't think we're expecting a major swing because of timing and there is obviously some mix that's going to drive things down, but we have taken action in terms of a lot of our insourcing activities to try to offset some of that and lower the costs.

[Daryl Young, Mining Research Associate]

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

[Paul Soubry, President, CEO & Non]

So rough order of magnitude, MCI's volume hasn't fundamentally changed, but you've got some new products going down and so it's not some ramp-up, it's implementation. Again, just different proving out tools now and all those kind of stuff that you try to do your best before you put it online. But the reality is building a 35-footer right next to a 45-footer has some dynamics around efficiency. But that stuff we think will work its way out throughout the year. On the New Flyer side, we did 2 things. We did ramp up the day-to-day production volume from kind of roughly 58 or so units to 60. So we got a volume increase but you also got a mix dynamic as I described before. And so again that person that installed the engine now having to worry about installing a battery system and all the wiring and so forth, it's just taking the time to get the labor efficiency back to the 90s and so a percentage that we were working at before. I don't think those are long-term systemic issues. I think those are implementation and transition issues. We're laser-focused on it. Consequently -- and again, it's not just us, you've got inspectors. And so when the inspector now is looking at something that he didn't see before was very different and so the time and the speed of which it gets through the machine is a little bit slower. But I think those are issues we'll work through '19 that are not going to be long-term problems for us.

[Operator]

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

[Stephen King]

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

[Operator]

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