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

Good morning, and thank you for standing by. Welcome to the NFI 2026 Second Quarter Fiscal Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Stephen King. Please go ahead.

Thank you, Lisa. Good morning, everyone, and welcome to our Q2 conference call. Joining me today are John Sapp, President and Chief Executive Officer; and Brian Dewsnup, Chief Financial Officer. On today's call, we will recap the quarter, which included continued operational recovery, strong year-over-year earnings growth, margin expansion, meaningful cash generation and further progress in our deleveraging strategy. John will provide an overview of business performance, demand, strategic priorities and our outlook, including an increase to our 2026 guidance ranges. Brian will walk us through financial results, cash flow, liquidity and capital structure updates. This call is being recorded, and a replay will be made available shortly. We will be referring to a presentation that can be found in the Financials and Filings section of the NFI Group website. As we move through the slides via the webcast link, we will call out the slide number. On Slide 2, we provide our cautionary or forward-looking statements and note that certain financial measures referenced today are not recognized earnings measures and do not have standardized meanings prescribed by International Financial Reporting Standards, or IFRS. We advise listeners to view our press releases and other public filings on SEDAR for more details. A reminder that NFI's statements are presented in U.S. dollars, the company's reporting currency, and all amounts referred to are in U.S. dollars unless otherwise noted. Slide 3 to 5 provide a brief overview of our company. A quick reminder for new listeners is that NFI is a bus and motor coach manufacturer and total mobility solutions provider. We offer a wide range of buses and coaches on proven platforms and are North America's largest bus and coach provider. We hold market-leading positions and offer the industry's strongest aftermarket network. I will now pass it over to John.

Good morning, everyone, and thank you for joining us today. I'm picking up on Slide 7. The second quarter represented another important step forward for NFI and showcased the strength of our backlog and aftermarket business, which delivered a record quarter. During the quarter, we delivered 1,232 equivalent units, a 14.5% year-over-year increase. Revenue increased 18.6% to approximately $1.03 billion and adjusted EBITDA increased 47% to $104 million. Also significant to highlight that net earnings were $17.4 million compared to a net loss of $160.8 million in the prior year. A couple of key themes to what drove our strong second quarter. First, we saw continued improvement in our unit economics from the conversion of backlog supported by higher overhead absorption as we increased production rates. Another bright spot was our aftermarket business that holds strategic value by supporting customers throughout the full life cycle of their fleet. Aftermarket's offering of parts, training, service, field support remains a key differentiator for NFI. Operating performance translated into improved liquidity, ending at $520 million and a reduction in leverage to 2.8x. Brian will get into details, but working capital was a big contributor in the quarter as we were able to unwind some inventory carried over from Q1 of '26 and also saw strong receivable collections. This improvement came even as we had some extended receivable balances associated with tariff recovery and that we had cash outflows of $7.2 million associated with the battery recall campaign. We completed full battery replacements on 37 buses in the quarter, bringing the total up to 49 since the launch of the campaign. Moving to Slide 8, we highlight the quarterly and LTM deliveries by product lines. Transit bus deliveries increased 22% in the quarter to 911 EUs, primarily driven by higher North American production in sales and somewhat offset by lower U.K. deliveries. On an LTM basis, transit deliveries increased by 4% to 3,099 EUs. Motor coach deliveries increased 7.6% to 142 EUs, supported by higher public motor coach volumes. On an LTM basis, motor coach deliveries increased 11.1% to 682 EUs, reflecting higher public and private motor coach deliveries over the period. Medium-duty and low-floor cutaway deliveries were 179 EUs, a decrease of 9.1% compared to the prior year quarter following several quarters of elevated demand and record level activity. The LTM number reflects this outperformance with an increase of 13.6%. I'll now pass it over to Brian to go through the second quarter results before we get into a detailed look at our outlook.

Thanks, John. As John covered some of the key performance metrics, I'll focus on segment details. Turning to Slide 9. Manufacturing gross margin increased to $98.2 million or 11.5% of revenue compared to $75.2 million or 10.6% last year. The improvement was driven primarily by improved sales mix as we converted a stronger backlog, combined with higher deliveries and better fixed cost absorption. Gross margin was down slightly from Q1 2026, primarily due to the impacts of high overheads as we unwound work in process inventory. Aftermarket gross margin increased to $55.3 million or 31.4% of revenue compared to 26.4% in the prior year. The improvement reflected sales mix, benefits of higher volume from the FIFA World Cup, pricing and tariff management. Overall, gross margins of $153.5 million were up 32% from the second quarter of 2025. Margins as a percentage of revenue was 14.9%, an improvement of 150 basis points from last year. On Slide 10, gross margin performance helped drive a 47% increase in overall adjusted EBITDA. Manufacturing adjusted EBITDA was $70.7 million, and on an LTM basis, the segment is up to $276 million, which is a record result. This was driven by the same items that benefited gross margin and the carryforward of some units originally planned for delivery in the first quarter of 2026. Reflecting the items that supported gross margin improvement, aftermarket adjusted EBITDA increased to $42.3 million, up 38.6%. On an LTM basis, aftermarket adjusted EBITDA was up 4% to $136 million. On Slide 11, operating cash flow and free cash flow were both positive in the quarter. Net cash generated by operating activities was $159.1 million compared to cash used in operating activities of $69.6 million in Q2 2025. Free cash flow was $20.7 million compared to $15.7 million last year. Cash flow improvement reflected stronger results from operations, lower cash interest payments and favorable working capital movements. As mentioned, we did get a boost here from the unwind of work-in-process inventory and receivable collections. We do expect that we will have to make investments in working capital in the third quarter as we build up inventory for a seasonably busier fourth quarter. On Slide 12, we walk through the adjustments to achieve adjusted net earnings with all amounts shown net of taxes. Most significant item to highlight is the restructuring charges taken at Alexander Dennis. This reflects the previously announced charges to Scottish manufacturing operations as we match our capacity and cost structure with current demand. On Slide 13, we summarize total leverage, liquidity and return on invested capital. Total leverage, which includes all debt instruments, was at 2.81x. The benefits of outperformance in the quarter and working capital improvements did help drive a significant reduction. As we do expect investment in working capital in the third quarter, we will likely keep leverage around these levels, but we are still very well positioned to achieve our leverage target of 1.5x to 2.5x as we head into 2027. Liquidity was up approximately $193 million year-over-year, reflecting the strength of our cash position. Return on invested capital continued its strong trajectory ending Q2 at 13.6%, a 130 basis point improvement from the first quarter of 2026, driven by positive cash generation and lower average invested capital. On Slide 14, I'll just walk through 2 important financing actions that we completed after quarter end. First, we amended and extended our first lien facility by 1 year to July 2030. Second, we completed a private placement of CAD 350 million senior unsecured notes due July 2033 with an interest rate of 6.625%. We used the proceeds of the notes to repay the existing CAD 50 million Manitoba loan, which carried an interest rate of 7%, and we also made repayments on our first lien facility. We expect to redraw under the first lien facility in January 2027 to repay outstanding principal amount of the convertible debentures, which is currently CAD 338 million. These events improved our overall debt maturity profile and position us well to address the January 2027 maturity. They also continued our journey toward an unsecured debt structure. I'll now turn the call back to John to discuss our outlook.

Thanks, Brian. Picking up on Slide 16, we summarize the strategic value drivers that helped drive our first half performance and support our expectations for further growth in the second half. Operational excellence continues to support margin expansion with stronger supplier performance contributing to labor efficiency gains. Across NFI, our team remains focused on customer centricity. That means delivering quality and reliability, improving delivery and acceptance processes, supporting customers through the full vehicle life cycle and ensuring our service, field support, training and aftermarket capabilities are aligned to customer needs. These activities are all contributing to profitable growth and sustainable demand. As Brian mentioned, in July, we took actions to strengthen our balance sheet, and we are well on our way towards our target leverage range. Given our strong first half and expectations for the remainder of the year, we have increased our guidance for 2026. Our new range sees a tighter band on revenue and adjusted EBITDA increasing to $385 million to $415 million, reflecting growth of 15% to 24% from 2025. We've also increased our expected cash CapEx range to $55 million to $65 million, reflecting investments we're making in new products and facilities to support future growth and our customer-centric approach. As we look ahead to the balance of fiscal 2026, we expect year-over-year improvements in our third quarter results, although it is important to note that Q3 is typically a seasonally slower period due to summer vacation shutdowns at our manufacturing facilities and slower customer acceptance activity during the holiday season. This, combined with our strong second quarter performance, leads to expectations for a modest sequential decline in deliveries and revenue. The fourth quarter is traditionally our strongest period of the year, driven by higher delivery activity in both private coach and international transit markets, and we expect that to be the case again this year. Just a reminder that in the fourth quarter of 2025, we had heightened activity as some units shifted into that period due to supply disruption, which is not a factor as we've seen and expect -- which is not a factor we've seen or expect to see this year given our improved production and delivery linearity. Slide 17 to 20 provide the latest updates on market conditions, order demand and our backlog. I won't go through them in detail, but I will mention a few key points. We continue to see support from public funding environments in the U.S., Canada and the U.K. In the U.S., the Infrastructure Investment and Job Act matures in September 2026, although funds will continue to be spent well into 2028. Work continues on the next surface transportation funding bill and significant progress has been made through the proposed Build America 250 Act. While the goal is to finalize prior to the end of the year, there are still numerous steps required prior to full approval. Historically, if the next bill isn't complete as the existing funding bill expires, there will be an extension, although that must also go through a government approval process. In Canada, funding support remains strong, and our all Canadian build facility has been very busy meeting demands from customers across the country. In the U.K., overall government support and market demand remains elevated, although foreign competition makes for a more challenging market. We've taken the right steps to normalize our cost structure and recent government changes are encouraging for the potential to see increased focus on domestic manufacturing through franchising models. On Slide 18, we highlight that the demand environment remains healthy. At quarter end, active bids in our North American public bid universe were 6,195 EUs, a 6% increase from the same time last year. And the 5-year forecasted customer demand was 26,000 EUs. These demand indicators provide continued visibility for new orders and future production activity. On Slide 19, our total backlog was 14,483 EUs with a value of approximately $12.5 billion. We saw a small decrease in backlog as we increased our second quarter deliveries and had slower quarterly new orders, which we feel reflects customer timing rather than changes in the demand environment. Firm backlog orders were 6,271 EUs and options were 8,212 EUs. This backlog provides multiyear visibility and supports our confidence in continued production and earnings growth. Average prices also remained strong in both transit and motor coach. Before we close, I want to provide the latest views on the macro tariff environment. On Slide 21, we have identified the major tariffs that are present and applicable to our industry. While tariff structures continue to evolve, we've continued to actively engage with customers to discuss pricing impacts and have been negotiating and updating pricing to reflect tariff costs where applicable. Our view remains that tariff exposure is manageable, supported by our localized manufacturing footprint, contractual structures, pricing actions and aftermarket distribution capabilities. Our guidance includes the impact of current and known U.S. and Canadian tariffs, including the proposed Section 338 tariffs announced in July, but does not reflect potential future tariff or trade policy changes. With respect to IEEPA and refunds, this remains a developing situation. We're actively monitoring it and working with advisers and government partners. Our intent is to do what is right for customers and to meet any contractual obligations required within respect to refunds. Wrapping up on Slide 22, a few final comments. First, Q2 was a strong quarter with revenue and adjusted EBITDA growth, positive net earnings and strong cash generation. Second, manufacturing recovery continues, supported by higher North American production, improved vehicle economics, stronger backlog conversion and better overhead absorption. Third, aftermarket delivered a record quarter and continues to demonstrate the value of NFI's life cycle support model. First half performance was supported by FIFA World Cup activity and creates a tougher second half comparison. Fourth, our balance sheet is stronger. Liquidity ended at $520 million, leverage improved materially and the recent financing actions position us well ahead of the January 2027 convertible debenture maturity. Finally, we increased our 2026 guidance. We now expect revenue of $4 billion to $4.2 billion and adjusted EBITDA of $385 million to $415 million. With that, I will now open the line for questions. Operator, please provide instructions to the callers.

[Operator Instructions] First question will be coming from the line of Chris Murray of ATB Cormark Capital Market.

Maybe starting with the guidance and just maybe unpacking this a little bit. So certainly, a very good quarter. Maybe you can comment on whether or not actually it was better than you expected when you originally set your guidance. So, just trying to get a couple of pieces of this. One, in the guidance and how you're thinking about kind of the quality of the margin that will be coming out of manufacturing. But also, if you could maybe make some comments, I just want to make sure that on aftermarket, it feels like this is kind of a onetime event, particularly with that margin impact. But if you just want to maybe clarify how to think about this on a go forward and how it fits into at least your view on the balance of the year.

Yes. Thanks, Chris. I appreciate the question. The first part of your question there relative to what we anticipated for Q2 and how the quarter played through for us and relative to our overall expectations for the year. Look, our expectations certainly are high for the year in terms of the guidance there that we've set coming into the year at -- in terms of the range that was there. And certainly, it was reflective of what we anticipated to do in Q1, which was certainly a resetting of key operations and also ensuring supply chain health as we were going to continue to see volumes ramp up as we came into the second quarter. And that certainly has played through for us. As you look at the transit volumes, those numbers were very strong, especially on the North America front, we're very pleased with what we've been able to do in terms of generating the growth. And so overall, we were very pleased with the execution that we had from an operational standpoint that really supported what we saw in terms of Q2. An important part also of that was clearing through some of the old seating issue, which really put behind us and that also allowed for us to then clear through some additional WIP in the quarter, which was certainly a lift. And we may have been able to clear through that WIP a little bit faster in the year than we may have anticipated. So, we saw a little bit of lift then in Q2 as a result of that. Relative to the World Cup, we were very -- in the aftermarket specifics of your question, we were obviously prepared as we came into the year that there could be some lift, but we weren't sure exactly how that would play through in terms of the transit agencies. And the end result was obviously something that was that was favorable for us in terms of Q2. I think the -- relative to the full year, then the -- what will be close watch for us is to see how that plays through because our expectation, of course, is that key transit agencies that had that World Cup impact, we may see some reduction in terms of their needs in the second half as they bought ahead, if you will. Relative to the manufacturing, your question there around what we're seeing in terms of margins, we continue to see improvement in terms of our manufacturing margins. We see the health of our backlog as that's continued to improve over the years, and we got -- have moved away from some of the very steep inflationary pressures, and we've seen the backlog continue to improve. But also as the volumes have gone up, obviously, that's going to give us some of the benefit that we see relative to absorption, et cetera. So, overall, I think it's a great quarter. I think relative to the guidance, there's a few things for us to be cautious about here in terms of the second half that we noted relative to the aftermarket piece, I think some of the pull ahead that was noted, I think how quickly we were able to work through some of our extended WIP. And frankly, Q2 is the longest quarter that we have in terms of manufacturing days as well. So, all of those play through. We're pleased with what we're able to do here from a guidance standpoint, and we've got a lot of work to do here yet in the second half.

That's helpful. My second question, just turning maybe to the balance sheet. Congratulations on getting the new piece of financing in. It looks like it's a pretty attractive number. I think you actually made the comment that it's actually less expensive than your first lien, which is interesting. So, as we think about kind of the evolution and next steps, you're kind of within striking distance of, call it, rolling off some weaker quarters to that leverage target. Can you walk us through how to think about the next steps? I think you talked about the converts. You've got the funding in place now to redeem those at maturity. But just sort of curious about how you're thinking about the trade-offs around perhaps retiring some of the second lien and if you can retire that in pieces and how capital allocation priorities, what kind of opportunities you see once you get into that kind of, call it, normalized leverage range with adequate liquidity, how to think about that into '27?

Yes. Great question. So, we're really pleased that our positioning now. We're really happy that we're able to get that deal done and be prepared for Q1 and the repayment of the convertible debentures. So, our real focus has been on deleveraging, and we're going to continue that throughout the balance of the year. As we mentioned in the discussion, we do expect some fluctuations in working capital. And so we'll always try to minimize working capital, but we do expect that we may see some increases in Q3 as we prepare for the Q4 seasonality. With respect to kind of next year and beyond, our main focus is to get within that 1.5 to 2.5 range. And then once we get into that range, obviously, it opens up some options for us. And so we'll address that when we get there. But our main focus is to generate cash flow in the second half of the year, get some stability within our working capital. And then, of course, we're well positioned to address the converts in early next year. And then thinking about our high yield, we have some options. We'll see where the market is next summer when we enter into a call period for U.S. high yield, and we'll take appropriate steps when we get there. It's hard to speculate on what rates will be and how the math works when we get there.

And our next question is coming from the line of Ty Collin of CIBC.

Congrats on a strong quarter. Maybe just wanted to return to the guidance and ask the question a little differently. So, I mean, just given the updated range, I'm curious how you would sort of frame the high end and the low end and what you would highlight as kind of the biggest risk factors in the second half of the year and maybe where the areas of opportunity might be as well?

Yes. Great question, Ty. Thanks. Yes, absolutely. So, let me talk a bit on the -- relative to the low-end framing. There are still risks, of course, that are out there that we're facing into in the back half of the year. We've done a lot in terms of our operational execution that has allowed for us to derisk that bottom half. I think the work that we've done within our supplier management group to include rate readiness activities to include our risk assessments of the supply base have us in a very healthy place certainly and gave us confidence in terms of lifting that bottom half. But supply risk is out there, right? As we -- as these buses come together, the amount of material requirements that we have always poses that potential. And so that would be one area that would be a caution for us certainly as we head into the second half. Certainly, there is the potential impact of other unforeseen issues that could emerge. But overall, it's really around continued execution within that supply base from an operational standpoint. We're also very closely watching Coach, the coach space to ensure that we see the private orders come through that we are anticipating. And there is, of course, some risk in terms of the total value that we may see from that or a range, I should say. And so depending on where those come through, that could have some effect for us, and that is then reflected with the lower end. But again, we feel obviously confidence building, and that's allowed for us to bring that lower end up. On the higher end, what I would note is, we've been really pleased. I would probably use some of those same points relative to the work that we've been able to do on our operational execution. It was an outstanding quarter. We talked about it during the last call, the need for us to do some key things to really drive the efficiency within our shops to ensure work was happening on station, material availability that has built. And so as a result, we had a strong quarter that allowed for us also to work through some of that age group as well that was able to play through. And all of those give us confidence in terms of the process shifts that we've made, the support we've applied to our supply chain team. And as that continues to build, then that gives us some confidence to the point where we may -- that we see the upper range of that bumping up like we did.

Okay. Great. That's super helpful color. And then maybe just digging a little deeper on the implied margin specifically. So, if I take the, the midpoint of the revised guidance ranges, it looks like it implies a second half EBITDA margin kind of in the mid-9s versus you were running in the low 10s in the first half of the year and even north of that in the second half of last year. So, is there any kind of structural or seasonal reasons that we should expect margins to step down maybe aftermarket is part of that? Or is that kind of just baking in some conservatism as you just mentioned, from a margin standpoint?

I think certainly, the aftermarket effect would be mixed in there as aftermarket is typically a higher margin. We also have in Q4, we'll see a greater mix of private coach as well as Alexander Dennis units, and those will come in at a little bit lower margin than North America. So that mix would affect it as well.

Okay. Great. And if I could just sneak in one more. John, I'd be curious to -- and I appreciate the comments around the funding picture earlier in the call, but I'd be curious to get your sort of just high-level view on what you're seeing out of the Bill 250 bill, how you're viewing that? And also based on your conversations with your customers, how they're sort of thinking about that and responding to it so far?

Yes. No, it's a great question, Ty. It's certainly something that we're highly focused on. Look, it's obviously a lengthy process. We've had high engagement with industry, industry partners and also with various government folks to continue to learn and to share our thoughts in terms of where things are projected to go. So, those have all been very positive dialogue, and we're frankly very optimistic in terms of where things are at relative to the process and for a number of reasons. One is the overall funding bill, I believe, has very strong bipartisan support. It's going to take time for it to continue to be negotiated through. So, we're obviously watching that closely. And depending on whether or not it's able to complete funding before September, whether or not there will need to be some level of extension or a bridge, I think, is certainly a watch item for us. But I think what gives overall confidence is, again, that bipartisan support overall around the necessity, these fleets are aging. And the agencies are, I think, are and other industry players are obviously going to be vocal relative to the need for their recapitalization and the support that they depend on in terms of this federal funding. And I think that is a big piece of why we see overall broad support in terms of the need for continued funding. We've been pleased with, as we've seen some of the draft language around the different elements that could be included with it. And so all of that considered, we'll be anxious to see how it continues to play through, heavily engaged certainly to support providing our view of how we can best support what they're trying to get accomplished with the funding bill, and we'll be anxious to see how it plays through here in the second half.

Our next question is coming from the line of Cameron Doerksen of National Bank.

Just wanted to maybe follow up on the transit funding question. Obviously, the backlog is down sequentially. Just wondering if maybe some of the uncertainty around the longer-term funding is having an impact on your transit agency customers' willingness to commit to new orders. Just what are you hearing from the transit agencies as far as the funding outlook? Because obviously, that would be good to have a longer-term visibility on that from their perspective. And then we've got some shorter-term funding proposals here, which, in some cases, are looking to slash public transit funding. So just thoughts about what the impact has been on the orders activity for you.

Yes. Thanks, Cameron. Overall, obviously, from a -- just touching on the backlog quickly, we feel very high confidence in terms of the backlog overall, sitting at that $12.5 billion level. And really what -- where we're at relative to our firm orders and the -- and from a slotting standpoint, right, the funding bill itself is going to continue to support deliveries all the way out into the 2028 slots with the current. So, that is -- obviously gives us -- affords us time, right, as this is going to continue to play through. Relative to your questions around agencies and uncertainty, we're not seeing any broad-based pause in customer activity. As I noted earlier, the fleet age is a critical factor for these agencies as they consider the need to get their fleets recapitalized. And with roughly 40% of the fleet now over the anticipated life for the buses themselves, that is driving the need for continued pursuit of new buses. And so when you couple those 2 together, we feel certainly confident. But we have not seen, to answer your question very specifically, a broad-based pause in terms of the customer activity.

Okay. Got it. That's good to hear. Just second question, I guess, on the U.K. and the ADL. Obviously, there was some restructuring that occurred there. Have we seen, I guess, the positive impact on margins from that in your numbers at this point? And I guess, how are you feeling about the potential changes maybe in government policy there that might improve the competitive positioning?

Yes. Great question, Cameron. Thanks. The -- first off, we've done a lot, as noted here in the first half of the year around really repositioning our Alexander Dennis business from a cost standpoint. And those adjustments are going to continue to play through. So, it's going to take some time for us to see that benefit. So specific to your question, we are certainly seeing some impact, but we'll see that impact continue to develop here over the course of the year. Those changes were key for us. It was really a reset around this competitive environment to ensure that we position Alexander Dennis for being able to deliver successfully the profit levels that we expect of the business within that competitive environment, as you noted. And so when you couple that with great product and terrific service experience from our customers and being able to price and win accordingly, we do expect to see that business really start to -- from a profitability standpoint, delivering to the expectations that we have of it. The -- we also have done that work and that reset with the ability and the flexibility for us to increase that production and have some agility in terms of some of the decisions and how we've executed in some of that reframing. So, we are -- and as you noted, right, very closely watching what's happening from a political standpoint to see whether or not there could be some policy shifts there that could give us some tailwind. We haven't built this plan based on that meeting those tailwinds. We built it within the current competitive dynamics. But if they -- if we did see some benefit relative to that policy, we've positioned the business to be able to scale back up to the levels needed to be able to address a great opportunity of additional volumes if they were to pursue a path of more localization.

Our next question is coming from the line of Mark Neville of Canaccord.

Congrats on the quarter. Maybe just first question, just around the free cash and the working capital. Just there's still a sizable inventory position as usual, and then there's still some WIP or quite a bit of WIP. I appreciate you'll need to build some inventory in Q3. But I'm just curious sort of structurally and longer term, is there more opportunity to reduce sort of WIP or bring down inventory? Or are you sort of at the position that you need to be?

Yes, that's great question. So that's something that we always take a look at balancing, making sure that we have enough inventory to support our customers, particularly in the aftermarket business. We do believe that there is opportunity and I talked a little bit earlier about continuing to work on cash generation. That's really what I was referring to. Our inventory balances have grown significantly over the past couple of years, and that's something that we'll look to work down. It is a balance as we need to make sure a lot of private motor coach sales can be very transactional if you have inventory. So we want to make sure that we have enough inventory to take advantage of those opportunities. But we do see opportunities over half 2 and beyond to continue to reduce inventory and generate cash through that.

I think I'd say too with the supplier performance getting better, that's hopefully going to be another tailwind on -- we don't have to have as much safety stock extra supply. So, hopefully, we'll continue to see that benefit the inventory number as well.