NFI Group Inc

TSX:NFI

Earnings Call Transcript 2022-Q4

[Operator]

Good day and thank you for standing by and welcome to the NFI 2022 Fourth Quarter and Full Year Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to today's speaker Stephen King, Vice President, Strategy and Investor Relations. Please go ahead.

[Stephen King, Vice President, Strategy & Investor Relations]

Thank you, Michelle. Good morning, everyone and Welcome to NFI Group's Fourth Quarter and Full Year 2022 Results Conference Call. This is Stephen King speaking. Joining me today are Paul Soubry, President and Chief Executive Officer; and Pipasu Soni, Chief Financial Officer. We will start today's meeting by delivering a land acknowledgment, also known as a territorial acknowledgment. I acknowledge that I resides, the NFI's headquarter in Treaty 1 territory, the original lands of Anishinaabeg, Cree, Oji-Cree, Dakota, Lakota, Dene peoples and the birthplace and homeland of the Metis Nation. We respect and give honor to the indigenous peoples’ history on this land and recognized First Nations Metis in Inuit peoples ongoing contribution in our neighborhoods and communities. We acknowledge our relationship with indigenous people in Canada and throughout the world and unique relationship that is committed to truth and reconciliation.

Today's call will be a little longer than our usual quarterly calls with approximately 40 minute to 45 minutes of presentation, followed by question-and-answers. We want to provide a detailed update to our investors and stakeholders, so we will discuss how we finished 2022, provide information on the record bid and funding environment, and update on supply chain and on our longer-term outlook and anticipated financial recovery.

This call is being recorded and a replay will be made available shortly. We will be using a presentation that can be found in the Investors section of our website, while we will be moving the slides via the webcast link, we will also call out the slide number as we go through the deck for participants on the phone.

Starting with Slide 2, I would like to remind all participants and others that certain information provided on today's call may be forward-looking and based on assumptions and anticipated results that are subject to uncertainties, should anyone -- any one or more of these uncertainties materialize or should the underlying assumptions prove incorrect, actual results may vary significantly from those expected. You're advised to review the risk factors found in NFI's press releases and other public filings on SEDAR for more details.

One item to note is that, in order to allow our external auditors to complete their final normal course audit procedures, the audit -- the audited financial statements are expected to be filed on SEDAR and the company's website by the end of this week. We do not anticipate any changes between the information provided today in the final auditing. We also want to remind listeners that NFI's financial statements are presented in U.S. dollars, the company's functional currency and all amounts referred to are in U.S. dollars, unless otherwise noted.

On Slide 3. We've included some key terms and definitions referred to in this presentation. Of note, Zero Emission Buses or ZEBs consists of battery electric, hydrogen fuel cell electric and trolley electric buses equivalent units or EUs is a term that we use for both production slots and delivery statistics. The majority of our vehicles represent one equivalent unit on articulated 60 foot transit bus takes two production slots and is therefore equal to two equivalent units.

For those of you new to the NFI story, we'd like to provide background over the next few slides. With over 450 years of combined experience, we are a leading independent global provider of sustainable bus and coach solutions. We are leaders in our core markets, which includes North American heavy-duty transit coach and aftermarket, U.K heavy-duty transit and aftermarket and the world leader in double deck transit buses.

On Slide 5, we outlined the evolution of our offering and the ecosystem we offer our customers and partners. At our core are our vehicles, complex and customized for mass transportation. They are supported by industry leading aftermarket parts and service. We pride ourselves on being thought leaders in our space and drivers of workforce development and training, with special focus on creating opportunities for a diverse, equitable and inclusive workforce.

With the evolution of new technology, including battery and fuel cell electric propulsion, we've seen increased demand for our connected vehicle technologies, including telematics, diagnostics, autonomous or advanced driver assistance systems, as well as vehicle financing and infrastructure support. Our infrastructure solutions business works directly with customers to assist them in determining needs and commissioning and electric vehicle and infrastructure. A business that is installed over 340 chargers with more than 58 megawatts of capacity.

Turning to Slide 6, our stakeholders presented in the wheel on the left, drive our strategic and organizational decisions and our values are at the core of our operations. We concentrated on achieving a balance and delivery for all our stakeholders and this wheel was especially helpful as we made difficult decisions during the COVID-19 pandemic and associated supply disruption.

On Slide 7, we provide a brief snapshot of our history, including the numerous acquisitions that have built NFI Group. As you can see, on a pro-forma basis, we were nearly a $3.2 billion revenue business in 2019. The past few years have been challenged due to the -- first due to COVID-19 pandemic followed by a global supply chain disruption impacting our delivery volumes, but we envision that we will exceed our pre-pandemic levels with a target to deliver approximately $4 billion of revenue by 2025. This view is supported by the expected benefits of increased demand, higher ZEB sales and international expansion, items we will discuss in detail this morning.

Slide 8 provides information on the diversification of our business. North America remains our largest market, but we've seen significant expansion of our international business, in both the UK and Europe plus contribution from Asia-Pacific regions, all driven by our 2019 acquisition of Alexander Dennis. Heavy duty transit in both North America and UK remain our largest product segments with the majority of those sales go into public entities or entities that received funding from public government. Aftermarket businesses, both in North America and internationally are also critically important drivers of revenue, significant margin performance over the past three years.

Finally, as you'll hear numerous times throughout this morning's call. We are seeing continued and rapid growth and demand for ZEBs with a higher portion of revenue coming from these electric vehicles, which is expected to grow significantly in the near and long term. This transition to electric vehicles, what we call the [Zebolution] (ph) is exciting for NFI as we are leaders in this space.

Slide 9 provides statistics on our capabilities and performance ZEBs. The more than 2,725 electric vehicles we've delivered since 2015 have completed over 100 million electric service miles in a 120 cities across six countries. Finally, as I previously mentioned, demand for electric vehicles is accelerating. In our North American bid universe 51% of anticipated customer purchases over the next five years are for electric vehicles. When I started with NFI in 2018, this was just 18%.

Putting all this together, on Slide 10 is NFI's investment rationale. As discussed, we have leadership positions in attractive markets that are transitioning into electrification with record bid demand and government funded tailwind. We expect that this will grow both top line revenue and bottom line earnings as our business drives significant earnings volume leverage. We have decades of experience and track record, which is critical to our customers and a key differentiator when compared to new market entrants.

While we are leaders in zero emission battery and fuel cell electric propulsion, we are propulsion agnostic and also offer legacy diesel, CNG and diesel hybrid electric options. We can support our customers throughout the transition to zero emission as our facilities have propulsion agnostic product line. This is another key differentiator for many of our competitors.

Finally, while there have been challenges over the past few years. We anticipate significant financial recovery with growth, potential outperformance relative to our peers and industry standards as we move through 2023, 2024 and 2025.

I'll now pass it over to Paul and Pipasu, who will discuss all of these factors in detail and recap the fourth quarter and fiscal 2022.

[Paul Soubry, President & Chief Executive Officer]

Excuse me. Thank you Steve, and good morning, everyone. I'll begin on Slide 9 with a summary of fiscal 2022. We saw record demand for our products and services, juxtaposed with continued supply chain disruption, associated production inefficiencies and the impacts of inflation and the impacts of inflation and rapid foreign exchange movements. Our financial results reflect those realities, with declines in certain performance metrics, paired with outperformance in growth metrics. The aftermarket segment was a significant bright spot for us in 2022 delivering profitability, while navigating through its own level of supply challenges.

A few highlights for the quarter. Strong growth in active procurements, up 45% -- sorry 54% year-over-year. Our highest new order performance since 2017 with over 5,700 equivalent units, a 23% increase year-over-year, this was the second highest level of annual orders in the past 16 years. We grew our backlog by 9% year-over-year, finishing at $5.6 billion with a book-to-bill ratio of 134% for fiscal 2022. Zero emission buses made up 23% of our full year deliveries, up from 18% in 2021 and a record 29% of our backlog.

We achieved milestones of more than 100 billion zero emission miles driven on NFI buses and coaches, 100% increase from 2021. 51% of our total North American bid universe is now zero emission buses and this represents over 3,100 units a year over the five year outlook, supporting our view of significant increase in demand for electric buses going forward. We achieved our target of $67 million of NFI forward savings and $75 million when combined with cash flow savings, hitting our target in 2022 one year earlier than originally projected.

We completed two amendments to our credit agreements and subsequent to the year-end entered in new loan agreements with the Government of Manitoba and Export Development Canada, which Pipasu will discuss later in this meeting.

Finally, even in the face of pandemic and supply chain related challenges, we saw quarterly aftermarket revenue increased 2% and generate a solid 17.9% adjusted EBITDA margin. Even with one less week of operations during a 52 week financial year versus 53 weeks in 2021.

On Slide 13 and 14, we provide graphs that tell the story of our supply disruption and the inefficiencies they created. First on Slide 13, our supplier risk ratings. This data is compiled from a detailed risk assessment process that monitors and evaluates the risk and potential impact of supplier disruption. To do this, we review our suppliers financial strength, we monitor their past delivery performance, we're proactively understand the tiered supply and other risk factors. We categorize all suppliers based on these risk factors and consider severe impact suppliers as those who could result in line shutdowns, lower production rates or significantly impact to bus completion online.

We navigated through 2020 and started 2021 without major disruption from any severe impact suppliers, basically a similar performance to what our supply chain has delivered for years. In late 2021, this turned with 50 high-risk suppliers across NFI, this impacted key components such as windows, air conditioning units, emission systems, plastics, hoses and many key electrical components which contained microprocessors. While we saw improvement during the second quarter of 2022 and we're encouraged, critical electrical components remained a significant challenge with some additional challenges arising in the third and the fourth quarters of 2022 from things such as wiring harnesses, electrical hybrid drive systems and inverters for electrical buses.

These disruptions then form the graph on Slide 14. There are quarterly vehicle entry rates, line entry rates or otherwise stated as the number of new vehicle builds that we start in our production facilities each week and quarterly WIP dollar investments. Line entries should be in approximately the 1,500 units a quarter range similar to 2019, reductions in 2020 and 2021 were driven by the pandemic and then supply disruption. This was even worse in 2022 with line entries hitting a low of 714 units in the fourth quarter of last year. This data shows that our facilities were inefficient and our teams were frustrated as they could only build partially completed vehicles. Growing work in process of buses and coaches and missing several components. The good news is that, as we exit the fourth quarter, while we line entered fewer vehicles we completed and delivered many vehicles that were missing components previously, lowering our overall WIP by $127 million. We have not sat ideally as we have dealt with these supply challenges.

Slide 15, we outline our proactive responses. First to help offset the impacts of inflation and working capital investments, we sort out pricing adjustments and customer deposits or prepayments where possible. We've had significant success in both areas. Two, we lowered our production line entry rates and our staff levels to better match production with demand and to focus on WIP reduction. Three, we found certain alternate suppliers where possible, and in some cases going down fourth levels of our supply chain to find alternate parts from our suppliers. Five, we increased our inventory of raw material components to improve parts availability on the production line where possible.

For certain components moving from six days of just-in time or part to reduce inventories to somewhere between 15 day and 20 days, where applicable. We increased our lead times to suppliers, that was typically a six week to eight week lead time has now been increased to 10 week to 12 weeks for many components and even longer for others, which is a huge lift for our engineering supply teams, who work on highly customized vehicles.

And finally, we continue to drive our cost reduction efforts and since 2020, NFI Forward has achieved $67 million of annualized cost savings compared to 2019 baseline levels. This required that we reduce over 2,000 positions across our company and closed nearly 25 individual sites. There were extremely difficult people decisions that impacted our teams, we defend our position not to cut deeper as if we were to shutter additional facilities or even do more severe layoffs, there is a high likelihood that we would not be able to recruit the staff [indiscernible] required to facilitate our recovery. We would also not be able to deliver significant new order wins to grow the backlog.

With those details in mind. I'll now ask Pipasu to dive into the details on the financial results before I provide you with an update on our outlook and guidance.

[Pipasu Soni, Chief Financial Officer]

Thanks, Paul. Picking up on Slide 16, we outlined the backlog growth Paul discussed on the top section of the slide. With 4,576 EUs or farm orders, we have essentially sold out our 2023 production slots in North America and UK transit, plus cutaways with good visibility into 2024. We also have options out to 2027 providing significant visibility for future years.

In the bottom section we outlined the deliveries. The quarterly and full year, deliveries were down within heavy-duty transit and motor coach reflecting supply disruption, cutaway sales were up in the quarter and a bright spot was higher average sales price across all segments as we started to see more inflation adjusted contracts flow through our facilities.

On Slide 17, we provide our EBITDA, cash flow and liquidity measures. As expected with a challenges discussed, our adjusted EBITDA was down in the quarter and for the full year, reflecting lower delivery volumes, product mix, production inefficiencies and the impact of inflation on certain legacy contracts. Free cash flow decreased primarily driven by lower adjusted EBITDA year-over-year.

As the team focus on executing controllable items, we achieved a year-end liquidity position of $173 million versus our target of $100 million, primarily driven by inventory unwind, while liquidity is down year-over-year. This is a combination of lower capacity under our amendments a $262 million reduction and in November 2021, we completed an equity raise and convertible debenture issuance making for a tough comparison period.

Turning to Slide 18,we provide a year-over-year adjusted EBITDA bridge, several broad events impacted our 2022 results. Lower volumes, not receiving government grants in 2022 versus $56 million received in 2021, pricing surcharges and inflation, and the impact of inefficiencies. We do not anticipate these items will repeat at the same level in 2023 and beyond.

Slide 19, shows our gross margins by quarter from 2019 to 2022. Aftermarket recovered well from the pandemic but saw some pressure in 2022 due to inflation and freight impacts. Manufacturing margins reflect inefficiencies and heightened inflation. These impacts became more visible in the third quarter of 2021 and we believe hit bottom in the second quarter of 2022, with some improvements to finish the year. This is a positive sign as we anticipate significant improvement as we move into 2023.

On Slide 20, we outline the impact to our net loss and adjusted net loss. Our net loss for the quarter increased significantly driven by goodwill impairment charges from the Alexander Dennis manufacturing and ARBOC cash generating units. These impairment charges came from increases in interest rates, impacting discount rates and then timing of our anticipated recovery shifting from 2022 and 2023 into 2024 and 2025. We normalize for this charge plus mark-to-market adjustments on our interest rate swaps and other non-reoccurring items.

I'll now provide an update on our credit amendments, and the ongoing discussions to secure a new multi-year credit agreement. On Slide 22, we provide details on the amendment that was completed in December 29, 2022, providing a covenant waiver until June 30th, 2023. The table provides the covenants that are in place during the waiver period.

In January 2023, we were able to secure new loans with the Government of Manitoba and EDC that provided an additional $87 million in proceeds plus a new $100 million Surety bonding facility. Photos of the announcement held with representatives from the Government of Manitoba and the Federal Government of Canada are on Slide 23.

Turning to slide 24, we provide our view on the timeline to execute new credit agreements. NFI will be seeking multi-year agreements that provide capacity flexibility and covenants match to our anticipated financial performance and recovery. We are targeting completion prior to June 30, 2023. We have completed the first three steps in the process and are in detailed discussions with our banking partners to advance the new agreements.

On Slide 25, we summarize our capital allocation priorities, while we work to complete new agreements. We remain focused on cash management liquidity and strengthening our balance sheet. Proceeds from the Manitoba facility and the EDC facility received in January 2023 will provide additional liquidity. As well, the continued unwind of working capital, primarily related to investments in WIP and raw material inventory. While there will be benefits from the inventory unwind, they will be somewhat offset by the impacts of lower deferred revenue where we received customer prepayments and deposits in 2022.

In total, we anticipate that we will see a net inflow of cash from working capital in 2023 mostly in the first half of 2023, additional inflows will be dependent on other advances and prepayments received from customers. We are exploring other potential opportunities to generate cash flows including capital market activities. On this front, we have issued a shelf prospectus that would allow for a capital market transaction in a more efficient manner, should we choose to pursue those options.

I'll now turn the call over to Paul to discuss outlook and financial guidance.

[Paul Soubry, President & Chief Executive Officer]

Thanks, Pipasu. Picking up on Slide 27. NFI plays a critical role in public transportation, which acts as a spinal cord for cities decreasing congestion, increasing access and providing more equitable outcomes, all while lowering emissions.

Turning to Slide 28. This was the split, when U.S. Vice President, Kamala Harris and Nuria Fernandez, Administrative of the Federal Transit Administration recently visited our St. Cloud facility, it was a special event that rallied our team and placed significant focus on NFI's role. In the words of Vice President, Harris, you're not just building better buses, you're building a better America and our key to the future of public transportation. I can't think of a better endorsement and relevant words as we speak about our outlook.

On Slide 29 at our January 2021 Investor Day, and last year during our fourth quarter results call, we mentioned several actions and milestones that will drive our future recovery and performance. On this slide, we highlight what has happened since that time and the numerous positive that has been achieved even in a difficult operating environment, that help strengthen our view of 2023 and beyond. We will maintain new vehicle production rates at lower levels through the first half of 2023 as supply chains are not completely healthy, but dramatically improving. We anticipate that we will ramp up production in the second half of this year.

We anticipate that the strong bid environment will continue as we now have over 10,500 EUs and active bids currently in the market and a growing bid universe driven by very, very strong government funding. Finally, NFI has completed the majority of its legacy contracts bid in 2020 and 2021 that are impacted by heightened inflation. Some depressed margin contracts will be included in our 2023 results primarily in the first half, but these make up less than 20% of NFI's firm backlog and we expect that they will be completed by the end of 2023.

I'll now explain some of our drivers for a longer-term outlook. On Slide 31, we provide our active bid universe and orders. As you can see, following a period of depressed bids in 2020, we have seen a consistent increase in bid activity through 2021 and 2022 that is converted into orders for New Flyer.

On Slide 32, we highlight our impressive 2022. The highest number of new orders since 2017 for 5,786 equivalent units. This is the second highest year of new orders in the past 16 years. These were also many multi-year orders from major Canadian and U.S. customers and significant zero emission bus orders from customers in the United Kingdom and Hong Kong.

On Slide 33, we show that these orders drove our book-to-bill ratio to 134% for the second year that we were above 100%, while some of this performance came from lower deliveries. Our strong order book provided the majority of this book-to-bill growth. Order conversions were down in 2022 as some customers allowed over options of diesel buses and natural gas buses to expire, as they focused on our new zero emission technology.

Slide 34 provides the five-year outlook from North American bid universe along with the active bids. As you can see from the chart in addition to active bids, the five-year outlook for procurements has another 20,000 units, providing a total bid universe over 30,000 units. This supports and reinforces our view that vehicle demand will continue to be at high levels going forward.

Turning to Slide 35, we show that we are the leaders in zero emission buses in North America, the UK and New Zealand. With electrical wheels in service and/or on order with 17 of the top 25 transit agencies in North America, and all of the largest operators in the United Kingdom, plus additional units on order in Hong Kong. We have completed pilot programs for many of these large customers who are now moving to larger multi-year zero emission bus orders. We expect this transition will benefit NFI for years to come.

While we are leading this space we aren't complacent. On Slide 36, we highlight some of the advancement we’ve made in our 2022 bus strategy and with the launch of three new electric vehicle models following the launch of six new electric vehicle models in 2021. As we move into 2023, we will roll out our new battery platform for North America, continue to advance the game changing Alexander Dennis Enviro 100 bus platform and secure additional contracts for Alexander Dennis's future proof next generation battery program. This is a radical step for Alexander Dennis that is expected to drive significant orders and activity of 2025 and beyond and significantly enhanced margin. All very exciting advancements on our Zebolution roadmap.

I'll note that as we discussed battery programs, we have strategically chosen to be smart buyers of technology and supplier agnostic on our battery cell and modules, given the need to be agile while we rapidly deal with changing technology. We are experts at integrating electrical propulsion systems into our overall vehicle systems and this is not an easy task. And it supports our customers providing them with confidence and stronger performance for the long term. Going forward, we expect that our continued focus on being value creators in the battery pack and integration space will create margin enhancement opportunities as we deliver higher volumes of zero emission vehicles with ultimate flexibility.

Turning to Slide 37, we are in an environment of record government investments in public transportation. With all of our core end markets driving the heightened bid environment. Looking first at the U.S. the Landmark $1 trillion Infrastructure Investment and Jobs Acts or IIJA is the successor to the historic FAST Act, and is the main funding mechanism used by U.S. transit agencies for new vehicle purchases. It generally provides 80% of the capital for our new bus and provide up to a 100% under certain other programs. As you can see from the chart the IIJA provide 64% higher funding than the FAST Act and much higher funding levels than older funding programs. This reflects the higher cost of zero emission vehicles and the associated infrastructure.

In addition, certain bus programs have seen massive funding increases. This was on display in the low and no emission grant program or what we refer to as Low-No, which has grown from $180 million of funding under the FAST Act to over $1.1 billion under the IIJA. NFI has been a significant beneficiary from the Low-No go program. In 2022, NFI supported the successful application for almost $200 million grants awarded to 15 different public transit agencies. In January 2023 the FTA announced that there'll be another $1.2 billion in Low-No program support for 2023. This is important as many of the grants awarded in 2022 have not yet resulted in firm contracts. So the Low-No program is expected to generate contracts and backlog for NFI, for years to come.

The IIJA has already started to drive significant order activity and is the primary factor that supports our view that the market will cover -- the North American transit bus market will recover to deliver between 6,000 and 6,500 units a year, as we move through the funding period, with a higher percentage coming from higher margin battery and fuel cell-electric buses.

On Slide 38, as we look at Canadian funding which is also a record in size and scale, there are commitments to replace 5,000 ICE buses with zero emission through the dedicated annual funding and specific funding through the Canadian Infrastructure Bank. We have seen announcements from new programs in Edmonton, Ottawa, Brampton and Calgary through the CIB.

In addition there was a tri level government funding announcement for investments of over $500 million by the Winnipeg Transit system. We are proud to be selected as Winnipeg's partner on their first battery electric order for up to 174 equivalent units announced in January 2023, Canada has historically been a strong market for NFI and we see tremendous opportunity for growth through the major investments being made by federal, provincial and municipal governments in this country.

Finally on Slide 39, we provided an outlook on the UK market, where the government has also made significant commitments with a goal of putting 4,000 new U.K build zero emission buses into service. While the pandemic and changes in government leadership have slowed the timing of these announcements and funding, we've seen initial distributions through the ZEB specific programs supporting orders at Alexander Dennis for 355 electric buses.

In 2022, the UK government's continued to solidify their commitment to invest in improvements to bus transportation with an announcement that GBP7 billion would be invested to overhaul and level up major local transport schemes in 31 countries and city -- counties -- sorry, and city regions outside of the London area. This should be another significant win for our industry. UK vehicle deliveries were low prior to the pandemic as operators weighted on the rollout of government funding for electric vehicles.

Delivery levels will be somewhat muted in 2023 before seeing growth through 2024 and 2025, we expect a larger percent of these vehicles will be battery and fuel cell-electric buses creating an opportunity for even higher revenues, improved gross margin and enhanced adjusted EBITDA at Alexander Dennis. In addition to the UK, Alexander Dennis continues to grow its zero emission presence in Hong Kong and New Zealand and also pursuing exciting opportunities in other international jurisdictions that are expected to help grow our business as we head to 2025.

I'll now turn the call back to Pipasu to tie all these macro environmental factors and specific funding initiatives to our financial guidance and targets.

[Pipasu Soni, Chief Financial Officer]

Thanks, Paul. Picking up on Slide 40, I'll walk us through our multi-year financial guidance and the critical drivers. We felt it was critical to provide the expected trajectory of our business as we are now seeing stronger signs of the supply disruptions are easing. As noted, fiscal 2023 is viewed as a transition year. There will be growth from 2022, but we will operate at lower production levels in the first half of 2023 prior to ramp up in the second half. We will be impacted in 2023 from certain legacy inflation impacted contracts that are being delivered. We do anticipate that the inflation impacted contracts will be completed in 2023 with 2024 and 2025 returning to more normalized pre-pandemic margins.

We anticipate strong growth in ZEB sales, based on backlog and expected new orders. We expect increased industry deliveries in North America and the UK driven by government funding in 2024 and 2025. We have and expect, we will continue to see the benefits of NFI Forward throughout the period, somewhat offset by inflation. And we anticipate increased CapEx spending in 2024 and 2025 following lower periods in 2021, 2022 and 2023.

Putting all this together in the table, we anticipate adjusted EBITDA of $30 million to $60 million in 2023 followed by a significant increase to $250 million to $300 million in 2024 driven by production and volume recovery and a revised 2025 target of approximately $400 million. We have revised our targets for 2025 down slightly, mostly a function of the impact of supply disruption and inflation in 2021 and 2022 being longer and deeper than what we could have foreseen when we originally set these goals, with expectations that we'll exceed $400 million in adjusted EBITDA as we get into 2026 and we also expect ROIC of greater than 12% for 2025.

Slides 41 and 42 provides statistics and metrics that support the assumptions I mentioned above. On Slide 41, you can see that ZEBs as a percentage of our total deliveries have been increasing rapidly, going from 8% in 2020 to 23% in 2022 with expectations for additional growth in 2023 and beyond. ZEBs as a percentage of our backlog have also been growing quickly, doubling in size from 2021 to 2022.

Slide 42, highlights that our backlog pricing is also up significantly, with heavy duty backlog, average unit price is up 26% since the beginning of 2021 and coach pricing up 11% since that time. This reflects a combination of higher ZEB orders plus inflation adjusted pricing being reflected in our new contracts.

Turning to Slide 43. We want to make it clear that, while these targets may seem aspirational, as we look at our pre-pandemic results, it is not a long road to $400 million of adjusted EBITDA. The bridge shows that the majority of our growth comes from volume and mix. As we've discussed throughout this morning's call the funding environment bid activity increased demand for ZEBs and our existing backlog with options to 2027 support our views for these benefits.

In addition, we've already achieved our NFI Forward target targeted savings of $67 million with potential for additional benefits from a few smaller projects under NFI Forward 2.0. While history cannot be an indicator of the future, we believe that the NFI story we experienced in 2015 to 2018 will be a similar one, if not better, that we see in 2023 to 2025. Some of the factors that drove our outperformance during those years included operational leverage efficiencies, multiyear contract benefits and profitable vehicle product mix underpinned by a strong aftermarket business.

In addition, since that time we've increased insourcing through Carfair from fiberglass and KMG for a variety of components keeping more margin in-house. Acquired Alexander Dennis providing an international growth platform in both manufacturing and aftermarket that now makes up over 25% of our revenues and enhanced our services, including infrastructure solutions, connected vehicles and more advanced web-based aftermarket part sales performance.

I'll now turn it over to Paul to close.

[Paul Soubry, President & Chief Executive Officer]

Thanks, Pipasu. I hope that these materials and our discussions that you've heard this morning, it's clear to everyone that while the past couple of years have been challenging, our future is bright. No one could have predicted the disruption and headwinds that we saw in 2020 through 2022, and while the world remains volatile, we have seen significant signs of improvement and the path ahead for NFI becomes clearer. As we've done since the beginning of the pandemic and through supply disruption, we remain focused on our people and the bigger picture, and we will deliver for stakeholders today and in the future.

In closing, on Slide 44. Let me recap our investment thesis. First, we are the leaders in our markets, both in market share, in vehicle technology, in aftermarket support and track record. Our business is benefiting and will continue to benefit from historic investments in public transit specifically zero emission buses going forward. We have deep customer relationships, significant expertise in design and manufacturing of complex customized vehicles with integrated technology from multiple -- multitude of suppliers, we drive our business through operational excellence, a commitment to lean and in-source components where it makes financial and strategic and operational sense. We have the facilities, we've invested in the capabilities and the product lines and we have them in place to drive our recovery with significantly lower overhead and SG&A now in place.

We're focused on capital allocation priorities to delever our business and once and for all strengthened our balance sheet. We are poised for significant improvement in our financial results and as we execute to our plan and deliver on our strong backlog, our record bid activity and our delever -- and deliver our volumes will leverage our business. We believe in our targets and the fact that we will see significant return on invested capital growth moving forward. The entire team at NFI is focused on the task at hand. As always, we're proud of our history and excited about our future.

With that, we'll now open the line for analyst questions. Operator, please provide instructions to our callers.

[Operator]

[Operator Instructions] One moment for our first question. Our first question comes from the line of Chris Murray with ATB. Your line is open. Please go ahead.

[Chris Murray, ATB Financial Markets]

Yeah. Folks, good morning. Just maybe talking a little bit about your guidance for a couple of pieces. So I guess, the first piece is, just trying to understand, maybe some of the other moving parts, especially in 2023. So you've talked a little bit about the fact that, I think if we go back to the credit facility disclosures, maybe EBITDA in the first half had a loss of about $35 million and then the ramp in the second half. Can you kind of walk us through what the cadence looks like in this guidance? And as part of that, you've been running about, call it, $20-ish million in EBITDA a quarter in the aftermarket business, can you just sort of walk us through how that's going to progress through 2023 as well?

[Pipasu Soni, Chief Financial Officer]

Okay. Hey, Chris. This is Pipasu. So a couple of things. We do expect our NFI parts to be somewhere in that range which you just kind of described, roughly a little bit lower than $20 million, the first three quarters and then obviously kind of getting into that a little bit higher mode as we get into that last quarter, which is pretty typical.

In terms of the businesses, Paul, kind of mentioned this, but this is a day, we are kind of dealing with the hangover that we've got with the inflation contracts. So if we kind of think of our mix, especially in our North America business, one of the things that we're dealing with today is the fact that we have half of our contracts that have some inflation adjustment that we're trying to work through as we get through the first of this year. So that's kind of what's happening right now. And then we expect that recovery kind of in that back half. So does that answer your question or maybe I missed one or two points?

[Chris Murray, ATB Financial Markets]

Yeah, I'm just trying to understand if there's. I mean, so much better I think maybe just to paraphrase relatively flat, maybe a bit of a step in Q4 for aftermarket and then kind of triangulating losses of up to $35 million in the first half and kind of -- kind of backfill as we go. Should we expect there is going to be any sort of Q4 step up or any -- historically, I think back to the days of when you guys have the coach business that was very Q4 heavy or should this be more of an orderly ramp into 2024.

[Pipasu Soni, Chief Financial Officer]

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

[Chris Murray, ATB Financial Markets]

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

[Paul Soubry, President & Chief Executive Officer]

So the -- you asked good question Christian, in 2023 as you articulated as we tried to explain in the call, We still have work burping through the system, primarily in the first half of this year that was bit year-to-year ago where we have hyperinflation and FX dynamics that have come through the system and will depress margins in the first part of this year. that starts to show back to some level of normality in the second half of the year. As we get through 2023 -- sorry 2024 and 2025, the work that we expect in that window, stuff that we're actually bidding on now will bid on in the next year.

We have taken a fairly aggressive position with not only trying to get firmer, tougher, clear quotes from our supply community. We have embedded our costing with any of the elevated inflation that we've already had plus anything that we expect to have. We have tried to add a level of conservative orphism where it makes sense and we have gotten way more focused on trying to work with our customers about how PPI and any of those indices will make their way through it to our prices going forward. So we're in an environment where we're A; recovery, B; trying to bid based on reality of what prices and costs are going to come into our COGS.

We're in a stronger bid environment right now. I mean, we have because of the demand profile we have less, what we'll call competitive irrational pricing, and so we're seeing a lot more reasonableness in the quotes that we're providing and our customers -- competitors are providing. The customers there is no question are aware that prices have gone up dramatically as a result of input costs. So that's kind of how we reflected both in how, what we think our margins will be, but also how we've tried to price going forward. Lots of components in that but we're actually quite comfortable in what we're seeing in terms of our proposed bid margins on the awards we're getting today based on stuff we've been in the last six months, we're really encouraged about the next chapter 2024 and 2025, which was reflected in our guidance.

[Chris Murray, ATB Financial Markets]

Okay. I mean, I guess, maybe a different way to ask the question, when I look at your 2019 pro forma results on, arguably for 2024, which is going to be higher revenue, you actually have a lower EBITDA margin but aftermarket should be fairly flat. So I'm just trying to understand, is there something in 2024 that's going to structurally keep those margins in place. I mean, you've given us a bridge on where you get for 2025, but is there still kind of drags into 2024 that will be going through the manufacturing business?

[Paul Soubry, President & Chief Executive Officer]

We don't see that quite frankly, what we're seeing in terms of how we're pricing today in the margins, we see that happening. Couple of things are going to continue to happen in 2024 and 2025 that will be differential to what we saw in 2018 or 2019. Number one, we have a higher percentage of zero emission and as we've described, the margins on zero emission whether it'd be battery electric for any customers that want trolley electric or fuel cell electric, the margins are noticeably higher. The second issue is that, we are still continuing the ramp up of our business through 2024. So the unit growth will continue through the start of this half -- second half of this year and through 2024 and into 2025 to get back up to -- close to, not exactly the close to pre-pandemic levels.

[Chris Murray, ATB Financial Markets]

Okay, I'll leave it there. Thanks so much.

[Paul Soubry, President & Chief Executive Officer]

Thank you, Chris.

[Operator]

Thank you. And one moment for our next question. Our next question comes from the line of Cameron Doerksen with National Bank. Your line is open. Please go ahead.

[Cameron Doerksen, National Bank]

Yeah, thanks very much. Good morning, everyone.

[Paul Soubry, President & Chief Executive Officer]

Hi Cameron.

[Cameron Doerksen, National Bank]

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

[Paul Soubry, President & Chief Executive Officer]

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

[Cameron Doerksen, National Bank]

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

[Paul Soubry, President & Chief Executive Officer]

So, yeah, so I think as Pipasu mentioned, in kind of our cash needs, yes. So as you look at the forecast, we had a pretty significant unwind of inventory $127 million in Q4, which helped us to outperform our liquidity expectations to end the year as we look at the first half of 2023. we expect some still continued inflows from unwind of inventory, but a little bit off that, a little bit muted by some of the deferred payments that we received in 2022. The deferred payments and advances from customers, as we look at the first half of 2023. We also expect, as Chris mentioned, to be more of a negative EBITDA position so then that would have a cash burn when you look at EBITDA then negative EBITDA, interest, CapEx, leases somewhat offset, like I said by the unwind of inventory.

As we get into the second half of the year, we start to ramp up production now Q3 and Q4 generally speaking, we typically our investors and working CAP in Q3, and then an unwind in Q4 as we deliver a lot of the inventory and deliver a lot of the vehicles. But all that to say, if you look at the kind of the view is that. Yeah, first half is probably a more working cap inflow and the second half, maybe a bit of an outflow on working CAP from a cash perspective. And then when you look at expectations for adjusted EBITDA in the $30 million to $60 million range, and you've got interest, CapEx and leases on top of that. That's the way to think about. I think the cash burn in 2023.

[Pipasu Soni, Chief Financial Officer]

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

[Cameron Doerksen, National Bank]

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

[Pipasu Soni, Chief Financial Officer]

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

[Cameron Doerksen, National Bank]

Thank you.

[Pipasu Soni, Chief Financial Officer]

Thanks Cam.

[Operator]

Thank you. And one moment for our next question. Our next question comes from the line of Kevin Chiang with CBIC. Your line is open. Please go ahead.

[Kevin Chiang, CIBC World Markets]

Hey. Thanks. Thanks for taking my question. I was wondering when you look at your backlog, we saw the option conversion fall pretty dramatically in 2022. I suspect some of that was supply chain issues, the other being maybe some of the backlog or options associated with ICE vehicles, maybe less desirable as everyone transition to ZEBs. I'm just wondering, when you look at the potential demand out there through your backlog, what type of conversion rates do you think you'll be expecting, as things normalize between your ZEB which I suspect would be pretty high versus ICE, do think they rebound or do you think they kind of continue to hover at levels you've seen in the past couple of years here as those transit agencies make this fleet conversion?

[Paul Soubry, President & Chief Executive Officer]

Thanks, Kevin. First of all, not one of the reductions of the auction conversion has anything to do with supply chain or us not able to deliver robust, absolutely no correlation or no impact.

[Kevin Chiang, CIBC World Markets]

Okay.

[Paul Soubry, President & Chief Executive Officer]

It is a 100% around the continuous evolution of the fleet replacement plans at transit agencies. So if you take a customer that put an order with us with a five year contract back in 2018 or 2019 and 2020, that was a five year view that had a certain level of either natural gas buses or electric or -- sorry diesel buses, they've now go to their board and the board now got pressure on more zero emission deployment, they've now got a completely different avenue for federal funding. They have built the desire to want to accelerate or participate earlier in zero emission is the only driver associated with the burn down of some of those diesel or natural gas options. Absolutely, we expect that conversion rate to recover as our backlog of now zero emission or even hybrid-electric buses continues to grow. A number of operators who wanted or expected a diesel or natural gas that aren't ready for full zero emission or are moving to electric hybrid. So, we absolutely expect that to get back up into the north of 50% ratio. And if you look at the total number of backlog that we've added, even with the burn down of options. We've actually increased our overall backlog, it's quite dramatic. So we're not worried about that demand side and it is absolutely nothing to do with our performance or the supply chain dynamics.

[Kevin Chiang, CIBC World Markets]

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

[Paul Soubry, President & Chief Executive Officer]

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

[Kevin Chiang, CIBC World Markets]

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

[Paul Soubry, President & Chief Executive Officer]

Well, Let's talk of supply chain in isolation and so we tried to comment on that at some of our comments today. The number of suppliers that are in what we called Red or high risk and high impact categories dropped dramatically over the last couple of months. We were in a world of hurt -- quite frankly for most of 2022. That's not to say we're out of the woods. We still have some issues with certain suppliers, and we still have certain suppliers in the United States for example, that are not delivering electronic components that have people dynamics that impact, their ability to deliver.

But the position, we're in today and what we forecast project going forward. In addition to supply chain health, what we're doing to enhance that, for example, longer windows in terms of the engineering timeline or giving ourselves a broader time to be able to do supply chain and working with longer supply lead times. All those things are giving us more and more confidence. Yes, there are still a couple that are of a concern, but we're not -- we're in a materially different place.

The discussion we've had today about changing dynamics associated with customers, to go back in time when we had diesel buses and we introduced the hybrid-electric buses. It was materially higher withdraw on the businesses. And at that time the FTA allowed for milestone payments or early payments to fund the working capital. We're now having very encouraging conversations with the FTA to be able to fund the higher working capital associated with the zero emission or specifically the battery components on buses.

The other dynamic is our aggressiveness in working with customers on how we bid or how we negotiate payment terms to effectively try and change that dynamic as well. So I am cautiously and comfortably optimistic, that the working capital draw will be commensurate with the growth of the business, not impacted by the supplier performance.

[Kevin Chiang, CIBC World Markets]

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

[Paul Soubry, President & Chief Executive Officer]

Well, so there's a couple of dynamics. Rewind a couple of years ago, we only had one source of battery supply. We're now actively testing and ready deployed by the end of this year a second source of battery supply different types of batteries, cylindrical cells with a different provider ABS then just pouch cells with our partners XALT and those -- those people that have made already made commitments to some extent, like in the case of ABS, they've already pre-purchased a certain quantity of batteries for the next couple of years to run through their supply chain to ultimately provide a battery modules to us we've also then decided in the UK case, that Alexander Dennis' source of battery supply is going to be different and diversified from what we do in North America to allow us kind of multiple sources to build to manage our way through that.

Also keep in mind that, our quantity of batteries is for let's call it a couple of thousand buses a year as opposed to a couple of thousand cars a day or trucks, a day and those kind of things. So yes, it is a concern for the longer term given the whole conversion of the entire world fleet of whatever vehicles to zero emission. We are really trying to make sure that we've got multiple sources and trying to continue to be, let's call the expression we use "cell agnostic" to allow us to pivot faster, rather than committing to only one technology or one source. As this game starts to unfold. It is no question or reality in a risk, we feel pretty comfortable with the position that we're in and the strategic choices, we've made.

[Kevin Chiang, CIBC World Markets]

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

[Paul Soubry, President & Chief Executive Officer]

Thanks, Kevin.

[Operator]

Thank you. And one moment for our next question. Our next question comes from the line of Daryl Young with TD Securities. Your line is open. Please go ahead.

[Daryl Young, TD Securities]

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

[Stephen King, Vice President, Strategy & Investor Relations]

Yes. So I think the funding environment, what we've seen just given the massive size. I guess the IIJA and UK funding environments, it definitely helped I think support a lot of transit agencies confidence in their abilities to execute on their fleet -- their fleet renewal plans or project plans or capital plan. No doubt there are some transit agencies definitely built a lot of the ridership impact throughout the pandemic and then into the recovery. We have seen from NAFTA go back to kind of 70% plus in North American transit across the board for those that have reported, in the UK, I think kind of a similar level, it's kind of 70% pre-pandemic. We've definitely seen a lot of movement of people going back to the office if it's a hybrid or move away from work-from-home. So I think ridership stats are starting to increase. There's always a concern in a recessionary environment, will they have that extra 20%.

Now the good news I think is with some of the new funding that we've seen, either through the IIJA or some of the proposed funding in the Kingdom is that they may be able to get 100% for some of the vehicles. So they may not even have to have that 20% commitment. So I would say, we haven't seen anything or heard anything from our agencies that gives us any concern about their ability to fund our capital plans, as we've seen bid activity, record levels 10,500 active bids at the end of the fourth quarter. And the five year outlook continues to remain strong. So our discussions with transit and see they still see the view that they're going to execute their capital plans and that the funding is sufficiently there to support that view.

[Paul Soubry, President & Chief Executive Officer]

I'll also add Daryl, that we continue to try and keep in mind that these are government public transit agencies specifically in North America and while ridership crush them through the pandemic and has been slowly recovering, a public transit agency is working to a five year or 10 year fleet replacement plans and every city single -- City Mayor, every Governor, when we had the visit from the Vice President or the FTA administrator, in addition to the environmental impact of the type of propulsion, they're all massively interest in reducing congestion and improving flows in cities. And so whether they're dealing with today's realities of lower ridership, they're also trying to find a way to get more and more people through public transportation through those cities over the next five year or 10 years.

So they are time horizon, notwithstanding short-term funding dynamics and so forth, is a lot longer than normal private business that will adjust capacity or adjust plans in the short-term to dealing with more short-term dynamics. So we kind of sit there and talk to an agency about their propulsion dynamic, but also the city congestion dynamic. And then the whole telematics and preventative maintenance and parts of them less stuff to try and improve reliability and reduce overall op costs, that are effectively mitigating some of what they may have lost in the farebox.

So I would argue that from a defensive and a protective environment, not protective but an environment of public transit, there is more and more pressure and more and more desire to get people on public transit rather than to shrink public transit agencies. Notwithstanding every city is going to deal with their local funding and ridership dynamics uniquely. I think that is what Stephen said his reflects the strong federal investment, but also the strong bid universe that we've continued to see.

[Daryl Young, TD Securities]

Got it, that's great color. Thanks guys.

[Paul Soubry, President & Chief Executive Officer]

Thank you. Daryl.

[Operator]

Thank you.

[Stephen King, Vice President, Strategy & Investor Relations]

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

[Paul Soubry, President & Chief Executive Officer]

Well, so we know every single supplier and we've rated every single supplier we are digging deep in terms of, I mean, we have an order book, we have a schedule that's effectively sold out for the entire year, almost every single slot. Our supply chain knows that, they know, which customers, which builds, they know what month what line entry rate and so forth. So we are really proactively trying to effectively do a couple of things. A; ensure that we are -- we have the production schedule in place and on time. We're continuing to work with those customers in trying to mitigate any of the additional price changes that we've seen in the past. We continue to try and allow longer production times or longer pre-production times today to allow their source of supply to provide -- to provide on time. We have worked, where we can on alternate sources of supply not only at the prime level to us or Tier 1, but Tier 2 and Tier 3 and Tier 4 suppliers,

We have, where we can and where it's appropriate moved from roughly five day, six day, seven days of point of use inventory online to in some cases we're migrating to 15 day or 20 days of inventory online. And so all those things contribute to the fact that we feel much more confident in the back half of this year to start to grow our production rates. The other side of that equation is people and we continue to have excess people for today's production rates inside our business as we burn down to deal with, with WIP production, which will give us additional capacity in the second half. And quite frankly, it's not like we need to hire thousands and thousands of people to make our meet our second half production schedules, we probably across the business have somewhere in the neighborhood of 150 people to 200 people to hire, to be able to deliver to that.

So, not an insurmountable task to be able to run to that interest rate in the second half. We're very confident on margin profile of that business as we work through the rest of 2023 and into 2024. So, thanks for that question.

[Stephen King, Vice President, Strategy & Investor Relations]

Okay. I think, Michelle. That was it for questions on our end.

[Operator]

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

[Stephen King, Vice President, Strategy & Investor Relations]

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

[Operator]

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