NFI Group Inc.

Good day, and thank you for standing by. Welcome to the NFI 2024 Q2 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Stephen King, Vice President, Strategy Investor Relations. Please go ahead.

Thank you, Sean. Good morning, everyone. Joining me today are Paul Subri, President and Chief Executive Officer, and Brian Dusnip, our Executive Vice President, Finance and Chief Financial Officer. On today's call, Paul and Brian will provide an update on our second quarter results, including significant year-over-year improvement across our financial metrics, and provide an update on the operating environment, market demand, and our outlook. 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 investor section of our website. While we will be moving the slides via the webcast link, we will also call out the slide numbers as we go. Starting with slide two, I would like to remind all participants and others that certain information provided on today's call may be forward-looking and based on assumptions and anticipated results that are subject to uncertainties. Should any one or more of these uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary significantly from those expected. In addition, certain financial measures we reference today are not recognized earnings measures and do not have standardized meanings prescribed by International Financial Reporting Standards, or IFRS. We advise listeners to review the risk factors, financial definitions, and non-IFRS measure statements found in our press releases and other public filings on CDAR for more details. A reminder that NFI 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. On slide three, we have included some key terms and definitions referred to in this presentation. Of note, zero emission buses, or ZEVs, refers to vehicles that do not have internal combustion engines. This includes battery electric, hydrogen fuel cell electric, and trolley electric buses. Equivalent units, or EUs, is a term we use for both production slots and delivery statistics. Slides 4, 5, and 6 provide a brief overview of our company. More detailed information is available on the NFI Group website. NFI Group is a global independent bus and motor coach solution provider that is leading the evolution to zero-emission mobility. We are purpose-driven and exist to build vehicles that move the world's most precious cargo. We exist to move people. We also play a critical role in the global journey to reduce emissions through every ZEB that we design, build, and put into service. Slide 7 provides NFI's latest zero-emission statistics. Since 2015, we've delivered over 4,000 EUs of ZEBs that have completed over 195 million electric service miles in more than 150 cities in six countries. Our infrastructure solutions team has also installed over 495 electric bus chargers, totaling more than 80 megawatts of capacity since 2018. Demand for ZEBs continues to accelerate, with a record 41% of our current backlog being ZEBs, and based on our analysis, more than 50% of anticipated North American transit customer purchases over the next five years will be electric buses. We continue to project that at least 40% of our 2025 deliveries will be VEB. I will now pass it over to Paul to provide an overview of our results for the second quarter.

Thank you, Stephen. Good morning, everyone, and thank you for joining us today. I'm now on slide nine. This slide provides a summary of the second quarter of 2024 for NFI. Our financial results showed positive year-over-year improvement with double-digit growth in vehicle deliveries and revenue significant improvement in manufacturing margin performance, our first quarter of net positive net earnings since 2021, and nearly 400% increase in adjusted EBITDA. Manufacturing margins saw significant improvement reflecting in pricing and production rates. Margins were impacted by legacy inflation, margins were impacted by legacy inflation impacted deliveries, though we have now materially completed all of those remaining contracts which will help drive further margin growth as we move through 2024. On the demand front, we had new orders of 1,114 EUs in the first quarter, a 21% increase from the previous year. As expected, the new awards were down from the first quarter where we recorded our highest awards ever of 5,421 EUs. Our trailing 12-month book-to-bill ratio remained strong at 107%, even as we increased deliveries by 31% over that period. Our option backlog conversion rate also showed continued recovery, now reaching 52% for the second quarter of 2024. NFI's aftermarket segment delivered yet another quarter of record performance, with $162 million in revenue and $35 million of adjusted EBITDA, both up 18% year-over-year. These results were primarily driven by increased volume in North America, pricing improvements, and continued product mix development. Our quarter ending backlog saw a slight decrease in units, but an increase to 11.8 billion US dollars in total value, another record for NFI. The average selling price for vehicles in our backlog also continued to grow by 19% year over year, reflecting a higher portion of zero emission vehicles and the pricing actions we've taken in contracts from mid 2022 onwards. Our focus to manage working capital was another bright spot with improvements in working capital days both year over year and sequentially. This combined with positive free cash flow generation helped us maintain a strong quarter ending liquidity position even as we increased our production rates. On the supply front, we continue to work very closely with our suppliers to monitor performance with our dedicated supplier development program. While we've continued to see a reduction in the number of moderate and high risk suppliers, there have been delays for certain components, including seats and wiring harnesses for electric buses, being the primary areas of focus. These are not global supply type challenges like we have with microprocessors, but rather isolated short-term delays we're actively managing with specific suppliers. We expect these types of delays will continue through 2024 as our suppliers ramp up their operations alongside our production increases and as we increase the percentage of zero emission production at NFI. Our strong backlog has helped us mitigate some of these risks by providing longer-term visibility to our suppliers. In addition, we have continued to strengthen our ZEB supply base, bringing on additional suppliers from specific regions, and partnering with larger, more established ZEB component suppliers such as Accelera, BAE, Impact, and Ballard. We achieved our hiring plan in the quarter, even with the continued tough labor market primarily still in the United States. We expect we'll continue to add new team members in 24 and 25, but at much lower rates than we did in 23 and the first half of this year, as we now focus on driving production rates higher through improved labor efficiency. The training demands to bring new people up to speed on our production lines with zero emission vehicles cannot be underestimated. Slide 10 shows the quarterly inventory balances compared to line entry rates. The line entry rates saw a 28% year-over-year increase and a 2% increase for the first quarter of 2024. This reflects our ongoing production ramp-up. The increase was driven by healthy backlog, strong continued customer demand, and improving production efficiencies. The ramp-up is a phased approach, matching consistent supplier performance with labor, trained labor availability, and ensuring a trained workforce continues and our customers' abilities to inspect and accept this next generation of vehicles. We are being measured as we ramp up to ensure we do not build up excessive offline buses, as they require a significant rectification and outsize investments in work and process inventory and increasing interest expenses. Inventory balances were up 6% from the quarter, with work and process and raw material balances increasing offset by lower finished goods. The increase in raw materials reflects the higher number of ZEBs planned for the second half of the year. And we've continued to carry certain safety stock of parts, reflecting very focused supply chain performance. As our supply chain health improves, and as we continue to reduce high risk suppliers, we anticipate that we'll be able to lower these additional redundant safety stock levels over time. The second quarter was a positive step in our recovery and growth. Based on first half results, we are well positioned to deliver on our targets. And I'll provide more detail after when I discuss our outlook.