NFI Group Inc.

Ladies and gentlemen, thank you for standing by and welcome to NFI Second Quarter 2025 Financial Results Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you would 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. Alternatively, you may submit your questions by the webcast. Please be advised that today's conference is being recorded and I would now like to turn the conference over to Stephen King. Sir, please go ahead.

Thank you, Michelle. Good morning, everyone, and welcome to NFI Group's 2025 Second Quarter Conference Call. Joining me today are Paul Subri, President and Chief Executive Officer, and Brian Duesnip, Chief Financial Officer. On today's call, we will give an update on our quarterly results highlighting -over-year improvement across numerous financial metrics, the strong demand environment for our products and services, and another increase to our backlog. We'll also provide an update on the various non-recurring and unusual items that impacted the quarter and recap our outlook. 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 our website. As we move through the slides via the webcast link, we will call out the slide number for those on the phone. On slide 2, we provide our cautionary or forward-looking statement 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 CDAR for more details. In the appendix of this presentation, we have provided a list of key terms and definitions that will be used on today's call. A reminder that NFI statements are presented in U.S. dollars, our reporting currency, and all amounts referred to are in U.S. dollars unless otherwise noted. Slides 3 and 4 provide a brief overview of our company. NFI is a global, independent bus and motor coach mobility solutions provider. We offer a wide range of propulsion-agnostic buses and coaches on proven platforms and we hold leading market share positions in transit and coach markets. More detailed information is available on our website. Slide 5 provides some brief insights into NFI's products and geographic mix and other milestones. I will now pass the call over to Paul to provide an overview of NFI's results for the second quarter.

Thanks Stephen. Good morning everybody. Thank you for joining us today. Second quarter was another strong continuation of our recovery and we expected, or were very excited to continue to see this momentum as we move through the remainder of this year. It was a busy quarter across our business as we successfully completed the refinancing of our first and second lien debt. We announced the consultation process for our Scottish manufacturing operations. We worked with our customers on supplying and navigating the constant changing U.S. tariff dynamics. We lowered our inventory of incomplete buses and missing seats that were as a result of improved seat supply. So today's call will discuss these events and highlight a number of non-recurring impacts we experienced in the quarter. Brian will give you quite a bit of detail. So I'm on slide 7 now and it's a summary of our Q2 results. Starting with demand, in the first quarter we recorded new orders of 822 EUs with 95% of them being firm orders. This highlights the continued strength in the demand driven by a supportive government funding both in Canada and the United States. Our total backlog comprised of firm orders and options now totalled 16,198 equivalent units worth $13.5 billion U.S. dollars. Our Q2 LTM -to-bill ratio was .9% and our option backlog conversion rate remained steady at .9% on an LTM basis. The strength in our demand metrics is primarily driven by North American public transit and public motor coach operators. Our Q2-25 results also demonstrate a positive trajectory with a 19% euro-euro increase in early adjusted EBITDA, a 7.6 million improvement in adjusted net earnings, and a .9% increase in return on invested capital. On the bottom of the slide you can see our total liquidity is now at 326.7 million with a significant increase driven by our recent refinancing, which Brian will recap again later on this call. One other significant item during the quarter was our announcement that Alexander Dennis had launched the required government formal consultation process with the government partners, the union partners, and our other stakeholders focused on consolidating production facilities in the UK to lower our overall manufacturing costs of Alexander Dennis. The driver for this activity is the rising number of UK and Scottish bus procurements being awarded to -UK-based bus OEMs and primarily from China. These importers have a significant cost advantage relative to domestic UK manufacturers as there is no requirement to support the local economy nor create or retain local jobs. We are working closely with the government partners in both Scotland and England to address this uneven playing field and remain optimistic that there will be increased focus on domestic manufacturing in upcoming competitions and specifically where taxpayer funds are involved in those procurements. While those government discussions continue, we are focusing on Alexander Dennis' cost to improve our competitiveness. We feel that actions that we've taken and that are continued to work on through this consultation will leave us in a much better position for 2026 and beyond. Slide 8 shows our supply chain health from the end of 2020 until now, highlighting our high impact, high and moderate risk suppliers. We currently have just one company, it's the same seat company we've had for a while, that we consider high risk, high impact. This is down from the peak of 50 concerned suppliers, high risk suppliers in 2022. This supply performance reflects the fantastic ongoing work of our sourcing, procurement and supplier development teams who are actively working directly with suppliers to improve delivery performance to our facilities. Slide 9 provides an update on this specifically on this seat disruption supplier or this disrupted supplier. We've seen progress over the past few months with a number of new flyer buses built yet missing seats, now down to 56 as of July 18th. This is a sharp decrease from the peak in November and a decrease from when we started reporting this issue last May. The supplier is still working on their recovery plan and we will continue to maintain active and deep engagement until the situation is fully resolved. As we reported before, a new Buy America compliant seat supplier began delivering seats to our production lines during this quarter. We expect them to ramp up their deliveries through the second half of the year, which now gives the market three seat suppliers helping to diversify risk going forward for this critical safety component on a bus. It also lowers our reliance on the challenge supplier as we increase our production rates. I'll turn it now over to Brian Duesniff to discuss our results in more detail. Over to you Brian. Thanks

Paul. I'm now on slide 10 and we'll quickly recap the recent refinancing transactions that we completed in the second quarter. We now have a new four-year first lien facility with $700 million in total borrowing capacity. This secured facility replaced and consolidated our previous North American and UK facilities into one and was completed with the syndicate of 10 supportive banks. In June, we announced the completion of our new five-year $600 million second lien notes. This was our first ever issuance of high-yield debt in the U.S. market and we were pleased to see strong demands for the notes from American, Canadian, and UK debt holders. Through this process, we received our first ever credit rating, obtained a double B- rating from S&P and a B-1 from Moody's. Both agencies commented on our stable outlook and potential upside from backlog execution and deleveraging. Net proceeds from the 2025 second lien debt were used to fully repair our existing higher interest second lien facility, a portion of the 2025 first lien facility, and other existing debt fees, issuance expenses. The goal of these new facilities was to provide greater visibility, increase liquidity, improve our covenants, and lower our interest expense. We're targeting liquidity north of $350 million, which as Paul mentioned is already at $326.7 million, and a total leverage ratio including all debt of 1.5 to 2.5. On slide 11, I want to explain the impact of several non-recurring and unusual expenses that impacted our second quarter earnings. As you can see on the chart, we reported a quarterly net loss of $160.8 million with a loss per share of $1.35, which normalizes to adjusted net earnings of $10.7 million or $0.09 a share. We've categorized the major items, which I will summarize. Starting with the 2025 refinancing, it had the following impacts, all of which are net of tax, a $7.5 million early repayment fee associated with the 2023 second lien facility, a non-cash loss of $29.8 million on debt extinguishment associated with the refinancing activities undertaken in 2023, and a net unrealized gain of $9.9 million related to prepayment options in the second lien debt. The plan of restructuring at Alexander Dennis in the UK resulted in a $10.2 million restructuring provision for employee reductions, a $10 million non-cash goodwill impairment, an associated $80.9 million non-cash intangible asset impairment, a $4.3 million non-cash impairment of property, plant, and equipment, and a $34.4 million write-down of deferred tax assets for the derecognition of tax assets associated with the Alexander Dennis UK operations. The impairments and the tax write-down reflect downward revisions to the longer-term financial projections for Alexander Dennis. Separately, we also had a $6.7 million adjustment related to seat supplier disruption, reflecting the impact on manufacturing labor and overhead and the impact of liquidated damages from certain customer contract delays. Our adjusted net earnings of $10.7 million is an improvement of $7.6 million, or 245% from our 2024 Q2. On slide 12, we recap quarterly deliveries. Transit deliveries were primarily down to the lower UK deliveries, reflecting the competitive market environment. In North America, deliveries were up year over year, but were still negatively impacted by seat supply disruption. Coach deliveries were down due to lower private sector deliveries in the quarter, mostly related to timing, with expectations of a strong second half of the year, which is consistent with the seasonal nature of the business. Collecting our improved backlog, we experienced a 27% -over-year increase in the average selling price for heavy-duty transit buses and a 20% increase in average coach selling price. We had another record quarter for low-floor cutaway bus deliveries with 197 equivalent units, which is up 30% year over year. The average selling price is up 10% with demand for the product continuing to be strong. Turning to slides 13, aftermarket saw a slight decrease in Q2, with gross margins of 26.4%. This was down year over year, reflecting a unique sales mix and an expected reduction in program-related revenue in North America. A reminder that customer program revenue was elevated in 2024, driven by certain large-scale midlife retrofit projects. In the manufacturing segment, gross margins saw an increase year over year, going from 8% to 10.6%, even with lower total deliveries. This reflects an improving backlog profile, flowing through quarterly results in a geographical mix with lower UK deliveries. Slide 14 walks through -over-year changes and adjusts at EBITDA with our reporting segments. Manufacturing EBITDA was up by 18.6 million, reflecting favorable sales mix and improved pricing. Similar to our previous quarter, an adjustment was made to recognize the adverse impact associated with seat supply disruption in North America. Our aftermarket segments saw a decline in EBITDA, driven by reduced sales volume, primarily from the North American program revenue as previously discussed. Corporate adjusted EBITDA declined by 2.8 million, primarily due to negative impacts of foreign exchange, including a lower US dollar and higher SG&A expenses. Turning to slide 15, you can see LPM adjusted EBITDA for both manufacturing and aftermarket segments from 2021 to 2025. Both segments have seen strong improvements. Our manufacturing segment recovery has been especially notable with $109 million improvement -over-year on an LPM basis. On slide 16, free cash flow was positive with a strong increase driven by many of the same items that impacted adjusted EBITDA. We invested $44.2 million in working capital in the quarter, driven by higher accounts receivable and finished bus inventory. This was offset by increases in deferred revenue associated with milestone payment structures now in place in North America transit and public coach. I'll now turn the call back to Paul to discuss our outlook. Thanks,

Brian. I'm now on slide 18. As we look at the rest of 2025 and beyond, we project that NFI will continue to grow revenue, gross profit, adjusted EBITDA, free cash flow, return on invested capital, and earnings. And I'll walk you through some key factors underpinning this continued momentum in our expected growth and comment on the key risk factors in our operating environment. On slide 18, we had 822 EUs in the quarter, helping drive 6,299 EUs in LPM orders. Our North American production slots remain in high demand with slots sold well now into 2026, and options are going all the way out to 2030. On slide 19, you can see the makeup of our backlog of over 16,100 equivalent units, of which 38% are firm and 62% are options. The firm orders provide significant visibility into our H2 and first quarter 2026 deliveries, while the options offer runway over the long term. Black line represents the total dollar value of our backlog. Over the past three years, NFI's backlog has grown by $8 billion, showcasing the significant and continuing demand for our products. Similar to the first quarter, we saw higher new orders for internal combustion engine buses, which has led to a slight decline in zero emission percentage of our total backlog, which now we think reflects the new US administration's platform and customer procurement activity. Our total backlog and firm option profile is displayed on slide 20. The chart shows the increase in average sales price, or ASP, per equivalent unit in our total backlog, including both firm and total options. The ASP has increased for both heavy duty transit buses, which is the dark blue line, sorry, in dark blue, and the motor coaches, which is in light blue. Year over year, average selling price for heavy duty buses was up .7% and up 68% since 2021. ASP for motor coaches was up .2% and .5% over the same time periods. We saw a slight increase in both transit and coach backlog average selling price this quarter, with a strong sales mix of new contracts that were awarded to NFI. Overall, these higher selling prices will continue to translate into our income statement over time. We saw this in the first half of 2025 and expect more improvement with approximately 60% of our annual adjusted EBITDA coming in the second half of this year. The bidding environment remains strong in North America, which is reflected in our bid universe on slide 21. We ended the quarter with a total active bid of 5,855 equivalent units. This includes 4,144 in the bids submitted and another 1,711 bids in process. The black line in the chart shows new awards to NFI. We saw some decrease from the previous quarter, which primarily is a result of timing of new proposals and the annual US funding being released in May of 2025. I'll point out that the correlation between bids submitted in the light blue and contract awards typically have a lag of a few quarters from the submission of the award. Our five-year expected public bid forecast, which is compiled from the Customer Fleet replacement plans, remains very strong at 22,769 equivalent units. This demand is driven by both available funding and the increasing fleet age, which nearly half of the North American bus fleet in service is now beyond 12 years of age. On slide 22, I want to highlight the positive funding announcements from the US administration for the fiscal year of 2025. The FTA released apportionments for $20.6 billion in total funding, with dedicated bus programs remaining at the same levels as we saw in 2024. This strong funding support should make for another positive year in the Low or No Emission Grant Program, where NFI was the named partner on nearly 340 million awards in 2024. Slide 23 shows our book to bill and option conversion ratios. NFI's overall option conversion ratio has improved significantly since a low in 2022, coming in again at .9% on an LTM basis. This is driven by increasing new order volume, exercised options, and our improved competitive positioning in the overall environment. Slide 24 reflects our guidance ranges for key metrics for 2025, which we have once again reaffirmed. We continue to project revenues of $3.8 to $4.2 billion to drive adjusted EBITDA ranging from $320 to $360 million for this year. The 25 guidance ranges for the selected financial metrics provide taking into consideration our -to-date performance and our current outlook, and specifically our well-defined master production schedule. NFI's 2025 guidance range does not include any material impact from tariffs or any further changes resulting from U.S. policy developments. On slide 25, we provide our latest views on the macro tariff environment, which as we saw yesterday evening, continues to be very fluid. During the quarter, we were directly impacted by tariffs on the imports of steel and aluminum to the U.S. and Canada, and tariffs associated with the imports of certain goods from outside of North America that is used in our Canadian and U.S. manufacturing and aftermarket businesses. In May, we saw an increase in the number of our suppliers issuing letters and invoices to NFI with updated prices reflecting tariffs as we begin to build this into our pricing for our new contracts and aftermarket sales. We expect the most significant tariff impact on NFI will be the indirect tariffs applied to component parts and raw materials imported in the U.S. by our suppliers, which are then products and components that we buy and install in our vehicles. A reminder that buses and coaches and shells continue to move across the -U.S. border continue to be tariff-free as they comply with the U.S. MCA agreement. For existing contracts, we are working closely with our customers to make them aware, show them our details, negotiate, and record current and as amended by the U.S., tariff price changes as we expect to pass on our contractual regulatory change clauses. There is some risk that we may not be able to pay recoup all tariff costs, and there could also be cash flow timing impacts as we await customer reimbursements for tariffs that we have paid. On an overall basis, though, we remain highly confident that tariffs will mostly be a pass-through item for NFI. We're actively watching the U.S. and Canadian trade discussions, and we'll evaluate any changes of any legislation that comes from this, and we'll continue to forecast that going forward. Closing on slide 26, a few comments to recap, and then we'll open the line today for questions. The first half of this year provided significant momentum. Our refinancing effort provided us with the right capital structure as we execute on our record multi-year backlog. Our seat supply, while still painful, is improving. Margin profile increased year over year, and we saw significant improvements in adjusted EBITDA and our return on the vested capital. NFI's total backlog of $13.5 billion provides significant opportunity, and our high option conversion rate and strong -to-bill ratios remain supportive of both our near-term forecast and our longer-term outlook. This quarter, NFI delivered our second-highest zero-emission bus deliveries in our company history, which reflects the strength of our product offerings and our operational performance. NFI's aftermarket business, well, slightly down in the first half of 2025, continues to be a very strong contributor, providing steady, recurring revenue streams and a solid margin foundation and solid free cash flow generation. As you've heard on this call and previous calls, the U.K. market demand for Alexander Dennis continues to be behind our expectations. We're taking actions there that will lower our costs and improve our competitiveness. Full year we expect declines in the overall U.K. market deliveries, but we have several active procurements underway that should support our 2026 performance. The Scottish government has recently committed to exploring all viable options to support Alexander Dennis' Scottish manufacturing operations. We will continue to engage with our government partners in both Scotland and England with the focus on our people and cost management as we complete the required consults consultation process and as we continue to support our customers. While the U.K. poses an overall challenge, that market represents approximately 15 percent of our total quarterly revenue and generates lower margins than our North American business. The aftermarket business in the U.K., however, which is reflected with NFI's aftermarket segment totals, continues to perform well based on our installed base. The overall public environment in North America remains fluid with changing dynamics related to trade, tariffs, and funding. As I've mentioned before, we were very pleased to see the U.S. administration's focus on advancing numerous funded projects through its America is Building Against campaign and through the release of the 2025 FTA apportionments. We continue to track trade developments and will continue to take all actions possible to ensure an appropriate response to tariffs. While there will be some headwinds, our domestic production, nimble aftermarket position and pricing, strong backlog, and the new contractual provisions that we have in our manufacturing contracts leave us feeling very well positioned for a solid second half in 2025. With that, I'll now open the line to questions. Michelle, please provide instructions to our callers. Thank you.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. And the first question will come from Chris Murray with ATB Capital Markets. Your line is open.

Good morning, folks. The first question, maybe just thinking about the ramp in the second half. Thanks for the update on the seat supplier. But I guess what I'm trying to maybe understand is sort of twofold. One, can you maybe walk us through and maybe even some granularity how the plan looks for the next, call it, couple quarters? And if you can talk a little bit about the rest of the supply chain outside of seats. And if there's any additional updates, you can give us on seats, other than like where you are as of today, even beyond July, that would be helpful. And then Brian, if you can just maybe remind us what the expectations are for leverage by year end, that would be great.

Thanks, Chris. That's a bunch of questions. But first, let's start with overall supply chain health. So, you know, the chart that we showed today, we're kind of down to one high risk supplier that continues to be that seat supplier that has been recovering and we continue to work with. I will tell you that, let's call it a year ago, that supplier provided almost 60% of our seats. We're now, through customer choices and through managing as best we can, in the back half of the year, that supplier is down to maybe 30 or 35% of our seats. So, our total reliance is less and their performance continues to get better. In terms of the other suppliers across our overall business, if you walked into our production facilities and you looked at the metrics boards and so forth, you look at the roll ups we see, across the company, we're now somewhere in the 99.5 to 99.6 range of parts available in station on time. And now that's kind of where we were pre-COVID. Of course, COVID, then supply chain hell and all the dynamics caused tremendous disruption to that, where that number dropped into the early 90s. And of course, missing one part is one thing, but missing key parts that have cascading issues, you know, if you don't have the seats, you can't install the stanchions and so on and so forth, has massive production impact. So, our labor efficiency is up as a result of really strong performance. We've talked a little bit today and in previous calls, beefing up our sourcing teams, our procurement teams added some really solid team members. And then of course, adding a significant resource to our vendor development or supplier support teams has really helped that performance level. So, we're back to pre-COVID in terms of the health of the supply chain. And I'll just always caution, highly customized, small batch, variable products will always by definition have complexity to get to 100% supply chain. In terms of the production, you know, and you noted kind of the second half lift over the first half, with the exception of, say, the private market in North America and maybe a little bit of the retail, private coaches in North America, a little bit of retail in the UK, all of our slots are effectively sold through the rest of the year. And now we're booking well into 2026. So, you know, I've used the expression before, but it's not to some extent, we have to sell retail units, but this is very much around execution of what's already under contract, what we've already done the engineering on and so forth, and well working on supply as opposed to worrying what we're going to sell. So, there is some retail dynamics in the motor coach business and a little bit of the Alexander Dennis business. The rest of the businesses we're feeling very comfortable on. I'll hand it over to Brian now to the questions you had for him.

Yeah, thanks, Paul. Yeah, with regards to leverage, we're, I think, at the end of Q2, we were 4.9, if you include the converts, so 4.9 total leverage. And then as we've said, you know, a number of times, we're targeting 1.5 to 2.5, and we're working toward that. We don't expect to get there by the end of the year. We expect it'll be sometime in, likely in 2026 that we'll get into that range.

Okay. That's helpful. Then just a couple of quick ones on top of that. You know, when corporate e-cada was a lot higher than I think we've seen it in some time, you know, normally this is kind of like a plus or minus to a minimum number. So I guess two things. One, you know, was that tied to a lot of the refinancing and restructuring issues? And just a magnitude of that, and should that settle down? And how should we think about that on a go-forward basis?

Yeah, so a couple of things in this quarter. We did have some effects that got to us there. And then the other piece is we do have some exposure through some of our comp programs to our own stock price, actually. And so with the appreciation in Q2, we had some added expense there just from our internal comp programs.

Okay. And so we would expect

second quarter. Just expect in the second quarter that we had a little bit more expense than we would normally expect. Okay.

Just what was the amount of the stock-based comp, roughly?

I don't have that figure in front of me now, but it was a chunk of the -over-year increase that we saw, which I think was around $3 million. I think most of that was related to the comp program. Okay, cool.

The last question is just really quick. There was a note in the press release about the fact you've taken over operation of the, I guess, the Alexander Dennis product at Big Rig. I guess two questions on that. Can you just maybe give us more colour on what that is or why that's happening? And what does that kind of say about what you're seeing in terms of demand on that double-decker product in North America?

Great question, Chris. And, you know, Kurt, it's a fairly small part of the business, so we didn't spend a lot of time with adults or communicate talking about it. Just a little context. There's about a thousand double-deckers that have been sold and operating in North America from Alexander Dennis over the years. The first couple of approaches to that when ADL showed up in North America, Dean, 20 years ago, was to use build partners, as they do in the UK and as they do for certain things in the Asia-Pacific region. Of course, that facility, that strategy then translated to when we acquired Alexander Dennis in 2019, they were operating their own facilities in the Elkhart, Indiana area. When COVID kicked in, the demand dropped dramatically for high-capacity vehicles, and so we made the decisions to rationalize the facility in Middlebury, Indiana, as well as there was a chassis facility in Toronto. Demand has recovered, and we originally weren't sure the pace at which it would recover. Now, that's two issues. Certain new customers wanting double-decks in their fleets, as well as the agent with the installed fleet and customers wanting to replace them. So, we made the decision to set up BRM to do this in Las Vegas. It was adjacent to, or down the street from the facility they already had. BRM's parent company, Big Rig Collision, is a repair-oriented facility, and they wanted to get into manufacturing.

So,

we worked on, as a partnership for about a year. That supplier couldn't deliver at the pace, performance level that we wanted. We made a deal to just absorb their people. We bought their work and process associated with it and put in some kind of a transition contract with them. As of about a month ago, we now are operating that facility. Demand and order book continues to grow both for double-deck diesel buses, which we're working on, and we're working on a new order book for double-deck electric buses in North America. So, it's not massive. There's, I don't know, 120, 130 people there. It's a brand new facility. Our supplier partner never really set it up and operated the way we wanted. It's now ours, and it's becoming and looking like, you know, very much like an NFI facility. And quite frankly, the outlook there is quite positive.

Okay. That's interesting. All right. I'll leave it there. Thanks, folks. Thanks, Chris. Thanks, Chris.

And the next question will come from Daryl Young with Stiefel. Your line is open.

Hey, good morning, guys. I just wanted to touch on the working capital in the quarter and maybe a little bit more color on that $40 million investment. I was under the impression it would be a little bit more neutral or maybe even positive working capital this year, but just curious what the outlook is for the remainder.

Yeah, Daryl. So, you know, working capital will continue to fluctuate in this normal course. We would, you know, look to build a little bit of working capital over the course of the year, and then, you know, with the private market and a little bit in the UK, private, sorry, private North American coach market and a little bit in the UK, have some seasonality where, you know, the inventory build in the middle of the year would then be relieved at Q4. We have had some, you know, additional noisiness there with some of the seating issues we've had, so we did relieve some in Q1 and we built a little bit back in Q2, but that would be the normal pattern would be kind of Q1, Q2, Q3, a little bit of growth and then relieve that in Q4, which, and we do expect that we will see a reduction in the fourth quarter this year.

Okay, and for the full year, are you anticipating being relatively neutral or will there be working capital investment?

Yeah, I think as you would remember, we, you know, we've talked about how we entered 2025 a little bit heavy, so despite the higher volume we expect in 2025, we do expect to be about neutral from a working capital standpoint, even with that volume increase between 2024 and 2025.

Okay, and then around the tariff commentary, you give a lot of great details. Just trying to flush out how real the risk is in the short term that some of your, maybe your margins are impacted or your cash flows impacted such that, you know, this is a real meaningful issue versus a be aware, you know, no one unknown type of thing.

Yeah, it's a good question. Of course, it's changing every bloody day depending on the impact of what we buy, where it comes from and the tariffs the US applies to these different jurisdictions. So, as we said in the script, you know, we've been dealing with the direct steel and aluminum tariffs. It's not massive, but we've been managing that and embedding in our price and there's no issue there, or we don't foresee an issue. The indirect taxes, as I alluded to, are really the biggest area of concern because we see that through a supplier invoice. You know, here's $8 for the windshield wiper, but then here's an extra portion of invoice that relates to the tariff. And of course, when the customer or the supplier provides that to us, we're paying them on certain terms. You know, we are current with all of our suppliers, but there could be a lag between when we're paying them and when we're paying them. We're paying them separately. So, it's, you know, here's the price for the bus and there's a secondary invoice for the calculated tariffs. We've hired one of the big accounting firms to help us audit our methodologies and our calculations and so forth that we can present that to the customers. We've had numerous communications with the customers. There is no question some of the customers have agreed with the methodology and are starting to pay the tariffs as required. Some of them are asking for more detail. It's very difficult to be able to say to customer X or Y, this specific dollar is for that specific part on your bus on this specific day. So, there's quite a thorough process of calculation and so forth. We haven't had a customer blatantly say, I'm not paying your tariffs, but there was a negotiation and a dance and a communicate that goes with that. As I kind of alluded, there could be, you know, a month or two of working capital of the tariff portion that gets delayed from when we pay it to when we actually get paid. At this point, we have no indication that we're not going to get paid the tariffs and that's why we refer to it in our script here as kind of a flow through type dynamic. But we are cautious and we are in our own minds managing our way through, you know, the whole tariff dynamic as it relates. And of course, as it changes, a tariff yesterday was X on one country and now it's Y. So, the parts that we have have a certain tariff. The parts that we bring in next week will have a different tariff for the same bloody part. So, you can just imagine how fluid the thing is. We are feeling very comfortable that it will, as I said before,

be a flow through. Got it. And presumably with 340 million of liquidity, you're feeling very good about no real cash. Yeah, yeah. No question

about that. The sheer size of the tariff, just to give you a macro context, if we annualize the tariff as of before yesterday, before last night, for all of that we buy that comes through indirect, there's somewhere in the neighborhood of a $40 to $60 million tariff run rate exposure or value. So, you know, the impact in the next little while could be $10 or $15 million in terms of total tariffs. It's not going to be, you know, we need $200 million to fund the tariff dynamic for a period of time.

Got it. That's super helpful. Thanks, Paul. I'll get back in the queue.

Thanks, Matt. And the next question will come from Jonathan Masayagin with CIBC. Your line is open.

Hi, good morning. If I'm not mistaken, this is the first time since early 2021 that you've had only one or fewer high-risk severe impact suppliers. And I know you talked a little bit about this, but looking long-term, how do you see supply risk evolving from here?

Well, thanks first of all for recognizing that because most of my hair has fallen out and I know it won't grow back. But our supply base and David White, who's the head of our supply, has done a phenomenal job with his team. And so some of it is just the uncertainty of our suppliers, the changes in the impact, the components, whether the globally sourced microprocessors, blah, blah, blah. We spent a lot of time going further to the supply chain now than we did before. We're working two or three levels down where before we just ordered an end item. We have built up our team to be able to look for alternates where they're available, to re-engineer parts where we might be able to. We're carrying more safety stock. We used to brag that we were kind of 78 days of inventory, pre-work and process. We got up to call it 25 or 30. We're now down in the early 20s. But we are laying in more inventory on the shelf, end line side, that we did before just to make sure that because the cost of non-productive labor and then offline and ripple effect of not built in station and so forth is massive. So never say never about supply dynamics for us just given the nature of high variability and high customization, but our team, our methodologies, our audit methodologies of our suppliers, another example, we used to spend a lot of time focused on delivery performance and quality. We've added company viability. We've added a whole bunch of other elements in our monthly assessments of all these suppliers. And we focused on the top 750 suppliers for the group. So it's always going to be issue. We feel way better about the position we're in and all the things we've done associated with it. We're actually feeling really good about the impact that will have on the second half productivity.

Thank you. That was very helpful. And one more question. What's your long-term vision for the UK market? Given the tough competitive landscape, do you think the consultation will be enough to maintain competitiveness?

It's a really good question. The game is still, I don't mean that disrespectfully, the process and analysis with the customers, with the governments is still happening. The root of the issue is historically ADL had a very significant number one market share position. The customers were mostly PLC or public companies that were buying with long histories, long visions, and so forth. Four of the top five customers in the UK are now private equity owned, which may have a different focus or time horizon on their businesses. The second issue, there hasn't historically been government funding to support purchasing because that market is private operators bidding on roots and then performing a public service and trying to make money off that operation. When the world started to move and shift to zero emissions, the Scottish and the English governments decided to help fund the transition to assist with their decarbonization plans. They've been helping with X percentages of dollars to pay the delta between an ICE bus and a zero emission bus. What they didn't do, and our frustration, is say if you're going to use taxpayer money to assist the operators, they really didn't put any requirement to have local capability, local jobs, local sourcing, no nothing. A privately held business that can buy a cheaper bus from China did just that. So the consultation is a very formal expression of we must go through negotiations with, as I said before, government, unions, our employees, and so forth. We've announced that what we want to try and do is rationalize the facilities in Scotland into less facilities inside the English facilities and so forth. I must tell you the Scottish government has really stepped up to try and work with us on ways of retaining the jobs. I think, my personal opinion is we're going to see any taxpayer-supported activities going forward will have way more job creation, economic benefit, supplier requirements in their selection criteria. So our whole dynamic around the consultation was to go after our competitors and our cost structure. The fleet needs to be replenished, and there still is very focused positions for both the Scottish and English governments on decarbonization. In the UK, you have more franchising moving from the central purchasing to purchasing within the individual mayors, and that will provide, in our opinion, more focus on that local or that domestic requirement. So we're not abandoning that market. It's an important market. We're a strong market position. We have spent lots of money to rejuvenate our platforms. We're now building all of our ICE as well as zero emission on all of our platforms ourselves, our own chassis. And quite frankly, we just have to adjust our cost base to improve our competitiveness. So anyway, we still think it's a very important market, although as I said in my script, it's really 15% of our revenue opportunities. So it's not massive. It's just an important element. The other dynamic is as we deliver those new products, gain experience and performance, there is still international opportunities we want to go after.

Okay, thank you.

And the next question will come from Cameron Dorksen with National Bank. Your line is open.

Yeah, thanks. Good morning. I want to ask about the, I guess, the guidance range for this year, 320 to 360 million, still pretty wide range. You know, obviously we're halfway through the year here, so I'm wondering if you can maybe describe, you know, what has to happen to get to, I guess, the low end of the range and what has to happen to get to the high end of the range. And it seems like a lot of variability given that you've got, I guess, better visibility on your delivery slots, at least for the second half of the year.

Yeah, so good question. So, you know, I think you would have noted that while we've made improvement in seating, we've not, you know, that number is not zero right now. And so, you know, we talked, you know, early in the year about kind of a Q2 getting to zero there. And obviously we didn't make that. And so that's some of the reason why you're seeing a bit of a wider range is that we just have some uncertainty there with, you know, what our pace of deliveries will be, particularly in the New Flyer Transit business in the second half of the year. So I think you're going to see, you know, that just kind of continue to be some variability and the range will stay where it is. And so with respect to the lower end and the higher end, really, you know, our businesses, you know, mainly about deliveries and that's what's going to determine kind of lower to higher end of the range there. And, you know, Q4 is always a bit disproportionate in terms of the number of deliveries we have with, you know, a strong coach delivery quarter. And that's why there's kind of more variability than you would normally see, you know, in a regular business. You know, we just have a little bit more uncertainty in the fourth quarter given, you know, that the business is you don't have a ton of visibility into those orders and you wind up getting a lot of them in Q4 and consequently delivering a lot in Q4.

Okay, that's helpful. And I just think about, I guess, the delivery profile here. I mean, obviously, you're not prepared to talk too much about 2026, but assuming that the seat situation is kind of cleared up by the end of the year, I mean, I know that there's been a target out there to eventually hit 6,000 unit deliveries. I'm just wondering if that's a realistic kind of goal for 2026. You know, how does the situation in the UK affect that kind of longer term target? Just any thoughts around kind of the delivery profile as we look ahead over the next 12 to 18 months?

Yeah, thanks, Kam. That's a good question. And yes, we had always kind of said we wanted to get back to that 6,000, which was kind of our final form of 2019 number when Alexander Danisgov included. So you do have a muted dynamic in the UK. That's one thing that will affect the 6,000. The other issue, as you've heard us over the last quarters, is our focus on zero emissions because they've been, you know, first challenged to get up to learning speed of building them, delivering them, commissioning with our customers, charging infrastructure, readiness, and so forth. So we're now way more focused on quality of earnings and quality of deliveries than pure quantum for the sake of it. So I would suggest that 6,000 is still kind of our target. I wouldn't kind of think we're headed there for 2026, but definitely, you know, 27 is probably more of the time we'll hit that rate.

Okay, that makes sense. And maybe just one quick final one for me, just thinking about the US funding. You talked a little bit about the low-no program, and it does seem as though the current administration is maybe more focused on the low as opposed to the no emissions. Have you had any customers that have orders in the book now that have changed from a ZEB bus to something else? I mean, I'm wondering if they're even allowed to do that. So just any thoughts around what you're seeing from your customers on how they might be using the low-impulsion system?

It's really a good question and worthy for a lot of discussion on it. But imagine you and I walked into a transit agency. They've been working to a five-year or a 10-year fleet replacement plan at some pace to move to battery electric or fuel cell electric, or in some cases, middle ground with hybrid electrics and so forth. So now you have a new government whose, you know, stated position on meeting zero-emission targets is not the same. You have funding dynamics locally and operating cost dynamics and so forth. We also just saw the release of the apportionment, whatever it was, a month or two ago, which reinforced the last year of the IIJ Act. So I would suggest we're really in the early phase of what you just asked about, Cameron, of that customer saying, so what are we really going to do here? With the launch of that program, we still put in, I can't remember, 150 or so proposals to customers to team for the low-no applications. I think we're probably going to see that customer, depending on if they do or don't get awarded that stuff, start to make those decisions on their next procurement as opposed to current procurements. There is no question we've still got some customers that today have zero-emission buses on order and they have a program to set up their charging infrastructure. And in some cases, holy smokes, our charging infrastructure is delayed, so maybe we don't need the buses as fast. That kind of stuff is just normal noise. And because we've got such a good backlog, we're able to adjust. There is, though, we think there is going to be less of a pressure and a focus. So right now, our total percentage of deliveries of zero-emission is somewhere, Stephen, in the mid-30s, right? Yes, 30. And so we have expected by 27, that might get up to 28, 29, that might get up to 40, 50 percent. We're not wondering whether that's going to be the case. I also believe certain operators that are well into the electrification journey are not going to stop and reverse. They may slow down the pace of adoption. So that's a lot of way to say the game is just really kind of started. But the additional money this year or the completion of that last year, IJ kind of level So that's the first step, and we've got people asking for it. The second issue is there's been a letter this past week or two weeks ago from the FTA to the operators to say, hey, we've been getting people asking us about our position as a federal government relative to zero-emission. And how should we think about that? So the FTA issued a letter to all the operators to say, if you want to change your plans on propulsion, whether you're already in RFP stage or you have options and so forth, tell us what you want to do and we'll evaluate them. And that's the first time we've seen that, because up to this point in time, there's been you know, you have a contract for an ICE engine or for a zero-emission. You can't make changes to the, carbon changes to the propulsion dynamic. You got to issue a new RFP and so forth. So that will also, you know, whatever they get back in terms of asked and requests will also signal what that might do to the overall adoption of zero-emission. So I'm not trying to elude the question, but it's kind of a little bit too early to answer. We do know that some of the larger operators, for example, New York and so forth, is really rethinking the pace at which they're going to adopt a zero-emission fleet. In New York, for example, there's 5,900 or 6,000 buses and so there's massive dollars at play. Hopefully, Ken, that gives you a little bit of color and you know, maybe next quarter we'll have better understanding of what the low-nose happened this year, what awards happened, whether it was more low and less low. We'll see on that.

Okay, that's super helpful. Appreciate the time. Thanks very much. Thanks, Ken.

And the next question comes from John Gibson with BMO Capital Markets. Your line's open.

Morning. Thanks for taking my questions here. Just first on manufacturing margins, obviously a nice jump here in Q2. Do you expect them to hold at these levels in the back half of the year? I guess what drove them higher this quarter? Just improved pricing, manufacturing, or any other factors here?

Yeah, great question. Paul alluded a little bit to better efficiency within our facility, so that certainly played a part where as we continue to get more continuity of supply and as we continue to heal a little bit from American seating, we're not all the way there, but that's led to better efficiency. So you've seen the labor efficiency contribution there. As we look at the back half of the year, we would expect more of that, and then of course volume as well heals a lot of stuff. And so as we see the second half of the year with our expectation increase of volume, we would expect that those margins would continue to push through and push upward.

Okay, great. And then Lachlan, for me, just as we think about the guide for the year, maybe asking this in a different way, how much of an improvement with your original seat supplier does meeting your guidance and supplies kind of back to normalized operations like Q4 or somewhere in the middle from where you're currently at?

Yeah, so the guidance that we've given in our expectation would be to get healthy with our seating supply sometime, you know, middle to end of Q3. And depending on how a few other factors go, that's about the timeframe when we would need to see that. And potentially we might narrow the range of guidance as we get on our Q3 call. And so that's our expectation as we go forward, and we're working hard toward that.

And the only thing I'd add, John, we have the benefit in the second half of our new seat supplier, a new Buy America compliant seat supplier has come online in Q2, and they ramp up more of the volume in the second half. So that's also a help to kind of our second half, having that more diversification in the seat supply.

Okay, great. I appreciate the responses. I'll turn it back here.

And the next question will come from Jonathan Goldman with Scotiabank. Your line is open.

Hi, good morning, team, and thanks for taking my questions. I apologize I joined a bit late. I just have a housekeeping one to start. On the 2025 guidance, was there any change to the underlying assumptions for EU deliveries this year, the 5,000 plus?

No, we have not changed any guidance with respect to that.

Okay, perfect. And then I guess, duck tailing on the previous question, like the unit profitability showed a significant step up, at least on my numbers, your EBITDA for EU is 50K, which is the highest in 2019. Throughput should be ramping the second half. Backload pricing is even higher than the latest pricing. Maybe there's a mix in there. But is it reasonable to think you're on your way to exceeding your prior peak profitability back in 2017?

Profitability as a met percentage of dollars per unit or percentage or sorry, just to clarify what you exactly mean.

Yeah, sorry. I guess I'm talking about on a per unit basis, EBITDA per EU. I think you were around 64, 65K back in 2017. The end of the quarter at 50 and it just seems like things are working in your favor.

So, a couple of just some context. When we were just pure new flyer, a transit bus, only in Canada and the United States, that was a very meaningful measure of the health of what we were building and bidding and building and delivering. And so, as we added Arbok, much smaller units, very different margin profile because in most cases the chassis provided. So, the percent dollar unit is per unit is low, but the percent per unit is higher. When we added MCI, it wasn't that materially different than the new flyer business. But when we added Alexander Dennis, the margin profile domestically and nationally are very different, both on a dollar and a percent basis. So, now part of the challenge to answer your question is we're dealing with all kinds of like averages and blend of all those kind of things. As volume has recovered, and Brian just alluded to this, yes, we worked on our overhead and cut our overhead where we could. But as volume comes up, the overhead recapture has as significant an impact as the actual pricing per unit. So, we haven't been giving, quote unquote, EBITDA per unit guidance. We're thrilled to see it recovering and growing. We're very encouraged by the quality of the pricing and the expected margins in our backlogs as well as that volume increase that captures more overhead. So, we would expect to see continued improvement in that EBITDA per EU at the global calculation perspective. So, again, not trying to be too elusive, but there's lots of things that come into that calculation, so it's not as simple as straight math.

You know, that's fair. There was some good color on those moving pieces. And I guess one more then on cash flows. Again, a lot of moving pieces in there. Can you help us parse out what would be a one-time cash expense or maybe an unusual element in the quarter, whether it's higher bank fees or redeeming debt? If you can give us kind of a global number of a drag on free cash flow, it's one time. And the second piece of this is on the cash taxes, left a bit high in the quarter. So, maybe anything there to call out and how we should think about cash taxes for the balance of the year.

Yeah, I think so. So, I'll take the first question first. So, in quarter, if you looked at a number of the adjustments, you know, most of that was non-cash, but you would have seen the prepayment or the payment associated with the early extinguishment of the second lien that we had prior to the refinancing. So, that was round figures, I think $10.8 million. And then the labor and overhead and a portion of liquidated damages. So, round figures, another $10 million would be cash affected as well. And I believe the balance of what was in the adjustments were non-cash. And so, those two things together, just round figures, were about $20 million worth of cash in Q2. And then with respect to taxes, we do have some high variability in our taxes in the different jurisdictions. And so, we will look kind of abnormally higher in taxes than you would normally expect if we were kind of balanced across all of our jurisdictions. There's certain tax attributes and interest expense limitations that are affecting us, which will have us at a bit of a higher tax rate, at least through 2025. And then as we get into 2026, we should be able to take advantage of some of the positive tax attributes in some of the other jurisdictions. So, hopefully that was helpful. No, that's good,

Coller. Thanks. It's good for modeling. I'll get back in Q.

I am showing no further questions at this time. I would now like to turn the call back over to Stephen for closing remarks.

Yeah, thanks. Thanks, everybody, for joining. And thanks, as always, for the questions. If you, you know, want to follow up, please reach out to us at any time or check the website for the latest information. And we look forward to talking to you all soon. Thanks so much and have a great day.

This does conclude today's conference call. And thank you for participating. You may now disconnect.