Q2 2024 NFI Group Inc Earnings Call

Operator: [inaudible] 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.

Operator: Good day, and thank you for standing by.

Operator: 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 hands is raised. To withdraw your question, please press star 1-1 again.

Operator: 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-one-one 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 and Investor Relations. Please go ahead.

Operator: Please be advised that today's conference is being recorded.

Stephen King: I would now like to hand the conference over to your first speaker today, Stephen King, Vice President, Strategy, Investor Relations. Please go ahead.

Stephen King: Thank you, Sean.

Stephen King: Thank you, Sean. Good morning, everyone. Joining me today are Paul Soubry, President and Chief Executive Officer, and Brian Dewsnup, our Executive Vice President of 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.

Stephen King: Good morning, everyone. Joining me today are Paul Soubry, President and Chief Executive Officer, and Brian Dewsnup, 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'll be using a presentation that can be found in the Investor section of our website. While we'll be moving the slides via the webcast link, we will also call out the slide numbers as we go.

Stephen King: We'll be using a presentation that can be found in the investor section of our website. While we'll 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 in today's call may be forward-looking and based on assumptions and anticipated results that are subject to uncertainty. 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 referenced today are not recognized earnings measures and do not have standardized meanings prescribed by International Financial Reporting Standards, or IFRS.

Stephen King: Starting with slide 2, I would like to remind all participants and others that certain information provided on today's call may be forward-looking and based on assumptions and anticipated results that are subject to uncertainty. 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 earning measures and do not have standardized meanings prescribed by International Financial Reporting Standards or IFRS. We advise listeners to review the risk-fast factors, financial definitions, and non-IFRS measure statements found in our press releases and other public violins, on CIDAR, for more details.

Stephen King: 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 detail. 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, refer to vehicles that do not have internal combustion engines.

Stephen King: A reminder that NFI statements are presented in US dollars, the company's reporting currency, and all amounts referred to are in US dollars unless otherwise noted.

Stephen King: On slide 3, we have included some key terms and definitions referred to in this presentation. Of note, zero emission buses or ZEMF refers to vehicles that do not have an internal combustion engine. 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.

Stephen King: 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. NFI Group is a global, independent bus and motorcoach 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.

Stephen King: Slide 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.

Stephen King: We also play a critical role in the global journey to reduce emissions through every ZEB that we design, build, and put into service. Since 2015, we've delivered over 4,000 EUs of VEBs 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.

Stephen King: Slide 7 provides NFI's latest zero emission statistics. Since 2015, we have 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 the EBS continues to accelerate, with a record 41% of our current backlog being ZBS, 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 at least 40% of our 2025 deliveries will be VGB.

Stephen King: Demand for ZEBs continues to accelerate, with a record 41 percent of our current backlog being ZEBs, and based on our analysis, more than 50 percent of anticipated North American Transit customer purchases over the next five years will be electric buses. I'll 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.

Paul Soubry: I will now pass it over to Paul to provide an overview of our results for the second floor. Thank you, Stephen. Good morning, everyone, and thank you for joining us today. I'm now on slide 9. This slide provides a summary of the second quarter of 2020-24-24 for NFI. Our financial results showed positive year of year improvement with double digit digit growth in vehicle deliveries and revenue, significant improvement in manufacturing margin performance. Our first quarter of net, of positive net earnings since 2021 and nearly 400% increase in adjusted EBITDA. Manufacturing margins saw significant improvement, reflecting in group pricing and production rates.

Paul Soubry: I'm now on slide nine. Manufacturing margins saw a significant improvement, reflecting improved pricing and production rates. 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 number ever of 5,421 EUs.

Paul Soubry: Margins were impacted by legacy inflections, 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 months booked to bill ratio remained strong at 107%, even as we increased deliveries by 31% over that period.

Paul Soubry: 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 U.S. dollars in total value, another record for NFI.

Paul Soubry: 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 growth by 19% year over year, reflecting a higher portion of zero-mission vehicles and the pricing actions we've taken in contracts from mid-22 onwards.

Paul Soubry: 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 onward. Our focus on managing 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 rate. On the supply front, we continue to work very closely with our suppliers to monitor performance with our dedicated supplier development program.

Paul Soubry: 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 warning harnesses for electric buses, being the primary areas of focus.

Paul Soubry: 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 microprocesses but rather isolated short-term delays we're actively managing with specific suppliers. We achieved our hiring plan in the quarter, even with the continued tough labor market, primarily in the United States.

Paul Soubry: These are not global supply type challenges like we have with microprocessions, but rather isolated short-term delays we're actively managing with specific. 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 mission 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 ZB supply base, bringing on additional suppliers from specific regions and partnering with larger, more established ZB component suppliers, such as Accelerup, BAE, Impact, and Valor.

Paul Soubry: 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 mission vehicles cannot be underestimated. Slide 10 shows a quarterly inventory balances compared to line entry rates. The line entry rates saw a 28% year of your increase and a 2% increase for the first quarter of 2024.

Paul Soubry: 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. We are being measured as we ramp up to ensure we do not build up excessive offline buses as they require significant rectification and outsize investments in work and process inventory and increasing interest expenses. Inventory balances were up 6% from the quarter, with work in process and raw material balances increasing, offset by lower finished goods.

Paul Soubry: 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 customer's abilities to inspect and accept this next generation of vehicle. 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.

Paul Soubry: 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 a certain safety stock of parts, reflecting very focused supply chain performance. 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 on that when I discuss our outlook a little later in the presentation. But for now, Brian will provide a deeper dive into our quarterly results. Over to you, Brian.

Paul Soubry: The increase in raw materials reflects the higher number of ZB plans 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.

Paul Soubry: The second quarter was a positive step in our recovery and growth.

Brian Dewsnup: Based on first half results, we are well positioned to deliver in our targets, and I'll provide more detail after when I discuss a look a little later in the presentation. But for now, Brian will provide a deeper dive into our quarterly results. Over to you, Brian. Thanks, Paul. Picking up on slide 11, our multi-year backlog remains strong with another quarterly increase in option orders, which now extend all the way to 2029. Fern orders are down slightly, reflecting higher deliveries in the quarter. Across all our product lines, we saw year-rear growth in deliveries, with low floor cutaway deliveries up by an impressive 73%.

Brian Keith Dewsnup: Thanks, Paul. Picking up on slide 11, our multi-year backlog remains strong with another quarterly increase in option orders, which now extend all the way to 2029. Firm orders are down slightly, reflecting higher deliveries in the quarter. Across all our product lines, we saw year-over-year growth in deliveries, with low-floor cutaway deliveries up by an impressive 73%. Turning to slide 12.

Brian Dewsnup: Turning this slide 12. Overall, gross margin improved year-rear from 7.3% to 11.9%. We're especially pleased to see the progression and manufacturing, which achieved an 8% gross margin by highest since the first quarter of 2021, and a significant jump from the 0.9% margin in the second quarter of last year. We project that manufacturing margins will see continued improvement as we move through 2024, driven by improved production efficiencies, stronger pricing, and contracts that were bid in 2023. And the fact that we now have materially delivered all legacy inflation impacted contracts. Aftermarket gross margin percentage was up year over year to 28.5%, but down slightly sequentially.

Brian Keith Dewsnup: Overall gross margin improved year-over-year from 7.3 percent to 11.9 percent. We're especially pleased to see the progression in manufacturing, which achieved an 8 percent gross margin, the highest since the first quarter of 2021 and a significant jump from the 0.9 percent margin in the second quarter of last year. We project that manufacturing margins will see continued improvement as we move through 2024, driven by improved production efficiencies, stronger pricing and contracts that were bid in 2023, and the fact that we have now materially delivered all legacy inflation-impacted contracts. Aftermarket gross margin percentage was up year over year to 28.5%, but down slightly sequentially. This decrease reflects higher public sector sales on large customer midlife overhaul projects.

Brian Dewsnup: The peak this decrease reflects higher public sector sales on large customer bin life over whole projects.

Brian Dewsnup: On slide 13, we provide segmented adjusted EBITDA. The manufacturing segment was up 313% year over year and was nearly equal to the aftermarket segment. This growth was driven was driven by higher deliveries and gross margin improvement. The aftermarket segment saw 18.2% year-over-year improvement and had a very strong first half of 2024, outperforming expectations.

Brian Keith Dewsnup: On slide 13, we provide segmented adjusted EBITDA. The manufacturing segment was up 313% year-over-year and was nearly equal to the aftermarket segment. This growth was driven by higher deliveries and gross margin improvement. The aftermarket segment saw an 18.2% year-over-year improvement and had a very strong first half of 2024, outperforming expectations. Turning to slide 14, we reported our first quarter of positive net earnings since the second quarter of 2021, with net earnings of $2.5 million, a year-over-year increase of 105 percent, or $50 million. However, positive earnings in both manufacturing and aftermarket segments were offset by corporate expenses. Adjusted per share was a positive $0.02 and $0.03 on an adjusted basis.

Brian Dewsnup: Turning to slide 14, we reported our first quarter of positive net earnings since the second quarter of 2021, with net earnings of 2.5 million, a year-over-year increase of 105% or 50 million dollars. Positive earnings and both manufacturing and aftermarket segments were offset by corporate expenses. Adjusted per share was a positive 2 cents and 3 cents on an adjusted basis. We also provided a chart on this page that reconciled net loss to adjusted net loss, including normalization items. I'd like to remind you that in our MBA and press release, we've included reconciliations for all non-IFRS measures.

Brian Keith Dewsnup: We also provided a chart on this page that reconciles net loss to adjusted net loss, including normalization items. I'd like to remind you that in our MVNA and press release, we included reconciliations for all non-IFRS measures. On slide 15, free cash flow was positive for the quarter and saw a 104% improvement from the same period in 2023. On slide 16, NFI's total liquidity was up $13 million from the first quarter, ending at $179 million despite higher volume. Total liquidity was positively impacted by the same items as free cash flow, offset somewhat by our investments in working capital.

Brian Dewsnup: On slide 15, free cash flow was paused for the quarter and saw a 104% improvement from the same period in 2023. Free cash flow was primarily driven by increased cash generated from operating activities and lower cash interest expense linked to the timing of payments on our second lien adventures. We did see a 22 million dollar investment in working capital during the quarter, reflecting the investments in inventory balances that Paul discussed, offset by increases in deferred revenue.

Brian Dewsnup: On slide 16, NFI's total liquidity was up 13 million from the first quarter, ending at 179 million despite higher volumes. Total liquidity was positively impacted by the same items as free cash flow, offset somewhat by investments and working capital. Overall cash generation allowed us to make a small payment in our North American and UK secured facilities in the quarter.

Brian Keith Dewsnup: Overall cash generation allowed us to make a small repayment on our North American and UK secured facilities in the quarter. On this chart, we also outline NFI's debt maturities. While we're focused on deleveraging our balance sheet by increasing adjusted EBITDA and delivering free cash flow to support debt repayment, we've also begun investigating options to reposition certain debt balances to other debt instruments. This may provide an opportunity to lower our overall interest expense.

Brian Dewsnup: On this chart, we also outlined NFI's debt maturities while we're focused on deleveraging our balance sheet by increasing adjusted EBITDA and delivering free cash flow to support debt repayment. We've also begun investigating options to reposition certain debt instruments that balances to other debt instruments. This may provide an opportunity to lower our overall interest expense. This is an initiative that we will be actively pursuing during the remainder of 2024 and hope to provide additional information on as we advance these efforts.

Brian Keith Dewsnup: This is an initiative that we will be actively pursuing during the remainder of 2024 and hope to provide additional information on as we advance these efforts. Finally, subsequent to the quarter end, we amended our performance agreement with Export Development Canada, increasing the capacity under our letter of credit support facility by $25 million, which is expected to support our liquidity and bonding going forward. This program includes a performance security guarantee of up to 90 million, which was previously up to 50 million.

Brian Dewsnup: Finally, subsequent to the quarter end, we amended our performance agreement with Export Development Canada, increasing capacity under our letter of credit support facility by 25 million, which is expected to support our liquidity and bonding going forward. This program includes a performance security guarantee of up to 90 million, which was previously up to 59 million. This is in place to cover standby letters of credit or letters of guarantees required as part of collateral packages provided to support surety bonds, which are typically required by transit agencies in North America, the support bus contract. He's collateral requirements have increased over the past couple of years, and we now have $94 million in outstanding letters of credit.

Brian Keith Dewsnup: This is in place to cover standby letters of credit or letters of guarantees required as part of collateral packages provided to support surety bonds, which are typically required by transit agencies in North America to support bus contracts. These collateral requirements have increased over the past couple of years, and we now have $94 million in outstanding letters of credit. I'll now turn the call back to Paul.

Paul Soubry: I'll now turn the call back to Paul. Thanks, Brian. On slide 18, we provide a summary of some of the key public demand metrics for North America. Total active bids of 6,792 EUs, including 3,153 EUs and bids already submitted, and another 3,609 of EUs that are bids, are now in process, is an increase from the first quarter of 2024. Year over year we saw a slight decline in total active bids driven primarily by the conversion of a very large awards from New York and New Jersey and from other customers to NFI that led to record orders for the first half of 2024.

Paul Soubry: Thanks, Brian. On slide 18, we provide a summary of some of the key public demand metrics for North America. Total active bids of 6,792 EUs, including 3,153 EUs in bids already submitted and another 3,609 EUs that are bids are now in process, is an increase from the first quarter of 2024. However, year over year, we saw a slight decline in total active vids driven primarily by the conversion of very large awards from New York and New Jersey and from other customers to NFI that led to record orders for the first half of 20

Paul Soubry: Our five-year expected public bid forecast is now 21,450 EUs, which is developed using customer fleet replacement plans and projections combined with active bids in process and supports our view that public bus and coach demand will continue to remain very strong, reflecting a strong funding environment. On slide 19, we provide a summary of key market updates. In the United States, the FDA announced funding for the 2024 Low or No Emission grants, commonly referred to as the NOLO program.

Paul Soubry: Our five year expected public bid forecast is now 21,450 EUs, which is developed using customer fleet replacement plans and projections combined with active bids in process and supports our view that public bus and coach demand will continue to be very strong, reflecting a strong funding environment. On slide 19, we provide a summary of key market updates in the United States. The FDA announced focus announced funding for the 2024 low or no emission grants, calmly referred to as the no low program. There were $1.1 billion in grants available for buses and associate infrastructure in 2024, and NFI expect to have another strong report performance this year.

Paul Soubry: There were $1.1 billion in grants available for buses and associated infrastructure in 2024, and NFI expects to have another strong performance this year, surpassing our previous record in 2023. We were named by a specific customer for over $200 million in grants. The announcements have been made by the FTA, and we're actively tabulating the results and plan to provide additional details to you in the short term. We've included a chart here from the American Public Transit Association that shows specific grant funding for bus and bus facilities and the low-node program.

Paul Soubry: So passing our previous record in 2023, we were renamed by a specific customer on over $200 million of grants. The announcements have been made by the FDA, and we're actively tabulating those all and plan to provide additional details to you in the short term. We've included a chart here from the American Public Transit Association that shows specific grant funding for bus and bus facilities and the Low No Program. As you can see in the chart, there has been a dramatic increase in dedicated funding through the Infrastructure Investment and Jobs Act to support the continued rollout of low or no-emission buses across the United States.

Paul Soubry: As you can see in the chart, there has been a dramatic increase in dedicated funding through the Infrastructure Investment and Jobs Act to support the continued rollout of low or no-emission buses across the United States. In Canada, the government recently announced details on its $30 billion Canadian public transit Fund, the largest public transit investment in Canadian history. The fund, which includes dedicated funding for large public transit systems, will be distributed over 10 years, starting in 2026. This funding is in addition to the over $17 billion in federal funding to support Canadian agencies that is already in place until 2027.

Paul Soubry: In Canada, the government recently announced details on its 30 million Canadian public transit fund, the largest public transit investment in Canadian history. The fund, which includes dedicated funding for large public transit systems, will be distributed over 10 years starting in 2026. This funding is in addition to the over Canadian 17 billion in federal funding to support Canadian agencies that is already in place until 2027.

Paul Soubry: In response to the growing Canadian demand for NFI products, NFI is now actively working on enhancements to our heavy-duty transit manufacturing footprint in Winnipeg. That would enable New Flyer to build complete transit buses for Canadian customers in Winnipeg starting in late 2025. In the United Kingdom, the Zero Emission Bus Regional Areas, or ZEBRA, program continues to drive electric and fuel cell bus procurements. Alexander Dennis has continued to secure new contracts with customers under the ZEBRA II program in England.

Paul Soubry: In response to the growing Canadian demand for NFI products, it is now actively working on enhancements to our heavy duty transit manufacturing footprint in Winnipeg. That would enable New Flyer to build complete transit buses for Canadian customers in Winnipeg starting in late 2025.

Paul Soubry: In the United Kingdom, the Zero Emission Bus Regional Areas or ZEBRA program continued to drive electric and fuel cell bus procurements. Alexander Dennis has continued to secure new contracts with customers under the Zebra Two program in England.

Paul Soubry: Finally, I'll provide an update on our continued efforts to strengthen the bus manufacturing industry within the United States. As we previously discussed, the FTA issued a Dear Colleague letter to transit agencies in February of this year that provided clarity on the ability to utilize progress payment structures within bus contracts, complete price adjustment to legacy firm contracts, and include price indexing on new firm contracts. It's also called for active efforts to reduce customization on new bus orders. We've begun incorporating milestone payment or billing payment structures into new contracts wherever possible at standard terms. This would provide payments through the build period of a new vehicle rather than the current process of receiving 100% of the purchase price following delivery, customer acceptance, plus 30 or more days for the final payment period.

Paul Soubry: Finally, I'll provide an update on our continued efforts to strengthen the bus manufacturing industry within the United States. As we've previously discussed, the FTA issued a Dear Colleague letter to transit Agency in February of this year that provided clarity on the ability to utilize progress payment structures within bus contracts, complete price adjustments on legacy firm contracts, and include price indexing on new firm contracts. It's also called for active efforts to reduce customization on new bus orders. However, these structures have only started to be introduced into new bids and contracts following the FTA Dear Colleague letter.

Paul Soubry: These structures have only started to be introduced into new bids and contracts following the FTA-Dear Colleague letter. We've also actively pursued progress payments on structures on contracts already in place, with reasonable success. It will take time for the impact of these new measures to fully reflect it and NFI's working capital balances and will continue to provide inside-ass things advanced. We anticipate that this will increase our, increase our deferred revenue balances as we move through 24 and into 2025.

Paul Soubry: We've also actively pursued progress payments on structures on contracts already in place with reasonable success. It will take time for the impact of these new measures to be fully reflected in NFI's working capital balances, and we will continue to provide insight as things advance. We anticipate that this will increase our deferred revenue balances as we move through fiscal 2024 and into 2025. For Fiscal 2024, we anticipate double-digit revenue growth, triple-digit adjusted EBITDA growth, and improved free cash flow. We anticipate zero-emission buses to be 30 to 35 percent of our total deliveries in 2024, growing to over 40 percent in 2025.

Paul Soubry: Turning to slide 20, based on our first half performance, we are confident in reaffirming our 2024 financial guidance and our 2025 targets. For fiscal 2024, we anticipate double-digit revenue growth, triple-digit adjusted eBJ growth, and improved free cash flow. We anticipate zero-mission buses to be 30 to 35% of our total deliveries in 2024, growing to over 40% in 2025. This is not implied that we will see a significant increase in ZB deliveries during the third or fourth cores of 2024. This is in line with our firm. This does imply that we will see a significant increase in ZBs during the third and fourth cores of this year, and this is in line with our firm backlog and expected production schedule.

Paul Soubry: This does not imply that we will see a significant increase in ZEB deliveries during the third or fourth quarters of 2024. And this is in line with our forecast. We will see an increase in cash CAPEX as we catch up on some of the deferred maintenance and as we invest in our continued new product development and growth projects.

Paul Soubry: We will see an increase in cash capex as we catch up on some of the different maintenance and as we invest in our continued new product development and growth projects. For our 2025 targets, we expect to achieve an adjusted eBJ greater than $350 million US dollars, and we expect to reach a $400 million annualized run rate by the fourth quarter of 2025. The multi-year growth in our financial productions is driven by a volume of accommodations or a volume recovery, production efficiencies, improved pricing, a shift away from legacy inflected contracts, and an increased number of higher margin zero-mission bus deliveries.

Paul Soubry: We have maintained our return on the vested capital target of greater than 12% for 2025, with the potential for outperformance on this metric as we can see improvements in our working capital investments and achieve customer and milestone payment support. On slide 21, with the first half of this year delivering 33 to 38% of our expected full-year adjusted eBJ, we continue to expect a strong third and fourth quarter, weighted heavier towards our typically busiest fourth quarter. We also show the continued projected improvement in gross margins as we move past those legacy-inflicted impacts of contracts, increased volumes, and deliver more zero-mission buses.

Paul Soubry: We have maintained our return on invested capital target of greater than 12% for 2025 with the potential for outperformance under this metric as we see improvements in our working capital investments and achieve customer milestone payment support. Now on slide 2022, I will make a few closing comments, and then we'll open up our call to analyst Q&A. We were very pleased with our first half of 2024 performance and, in line with our projections, especially the continued recovery of the manufacturing segment and the solid performance of our aftermarket.

Paul Soubry: Turning to slide 2022, we highlight the increasing average sale price or ASP per equivalent unit in our total backlog, which helps support our ability to reaffirm our guidance. This amount has increased for both heavy duty transit buses, the dark blue line, and motor coaches, the light blue line. Year over year, the average selling price for heavy duty buses in our backlog was up 17% and up 56% since 2021. ASP for coaches were up 11% or 19% over the same time periods. These average selling pricing increases were driven by a combination of higher eB orders, inflation-adjusted pricing, and improved margins in our new contract.

Paul Soubry: Now in slide 2022, provide a few closing comments, and then we'll open up our call to analysts' Q&A. We were very pleased with our first half of 2024 performance and in line with our projections, especially the continued recovery of the manufacturing segment and the solid performance with our aftermarket. We saw year-over-year growth at all of our major financial metrics with positive net earnings and free cash flow while maintaining a healthy liquidity position.

Paul Soubry: We saw year-over-year growth in all of our major financial metrics, with positive net earnings and free cashflow while maintaining a healthy liquidity position. I'm grateful and proud of our team, now back to nearly 9,000 employees, for remaining loyal to the company and working so incredibly hard to deliver these results.

Paul Soubry: I'm grateful that proud of our team now backed in nearly 9,000 employees for remaining loyal to the company and working so incredibly hard to deliver these results. While our recovery is well underway, we do not underestimate the work ahead of us managing the risk with a challenging operating environment. We continue to work together to achieve our plans to deliver for our customers, whom have been incredibly patient and flexible to accommodate both NFI specific challenges and our overall industry dynamics. I look forward to continuing improved and positive progress in the second half of 2024.

Operator: While our recovery is well underway, we do not underestimate the work ahead of us managing the risk with a challenging operating environment. We continue to work together to achieve our plans to deliver for our customers, who have been incredibly patient and flexible to accommodate both NFI-specific challenges and our overall industry dynamics. I look forward to continuing improved and positive progress in the second half of 2024, and we anticipate continued year-over-year recovery as we move into 2025.

Operator: We anticipate continued year recovery as we move in 2025.

Operator: Sean, please open the line for analyst questions and provide instructions to our callers to ask questions. Thank you, and at this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced.

Operator: Sean, please open the line for analyst questions and provide instructions to our callers to ask questions. Thank you. At this time, we will conduct the question-and-answer session. As a reminder to ask a question, you will need to 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. Please stand by while we compile the Q&A roster.

Christopher Allan Murray: To withdraw your question, please press star 1 once again. Yeah, thanks, folks. Good morning.

Chris Murray: And our first question comes from a line of Chris Murray with ATB Capital Markets. Your line is now open.

Chris Murray: Thanks, folks.

Chris Murray: Good morning. I guess the first question. I know I asked you in the last quarter, but just look at an aftermarket. Again, kind of a record performance, very, very strong, both top line and EBITDA margin. Again, you know, just, you know, can you talk a little bit of the sustainability of this going forward?

Paul Soubry: I guess the first question, and maybe, you know, I know I asked it in the last quarter, but just looking at aftermarket, again, kind of a record performance, very, very strong, both top line and EBITDA margin. Again, you know, just, you know, can you talk a little bit about the sustainability of this going forward? And, you know, should we kind of expect this is the kind of run rate performance we should expect through kind of the balance of 24 and into 25? I think that's a fair assumption, Chris.

Paul Soubry: And, you know, should we kind of expect this is the kind of run rate performance we should expect through kind of the balance of 24 and into 25.

Paul Soubry: I think that's a fair assumption, Chris.

Paul Soubry: As we moved through 23 and put our plans in place for 2024, we were trying to predict the kind of customer reactions, both public and private, to that period of time where we, and then therefore couldn't supply parts directly to them, given supply chain challenges. That hasn't been the case. Our customers continue to work on ensuring their pullout and the performance of the vehicles and the readiness of those vehicles. We continue to work on adding products that make sense to our offering and moving that product through the same rationalized infrastructure that Brian and his team did for so many years. We have a couple of struggling competitors, some that have gone away. You know, one of our competitors has left the U.S. market from a new product. One of them effectively shut their business down.

Paul Soubry: As we moved through 23 and put our plans in place for 2024, we were trying to predict kind of the customer's reactions, both public and private. To that period of time where we, and then therefore couldn't supply parts directly to them, given supply chain challenges. We saw after we projected that we may see a little bit of a flattening or slowdown of that growth. That hasn't been the case. Our customers continue to work on ensuring their pull out and the performance of the vehicles and the readiness of those vehicles.

Paul Soubry: We continue to work on adding products that make sense to our offering and moving that product through the same rationalized infrastructure that Brian and his team did for so many years. We have a couple of struggling competitors, some that have gone away. You know, one of our competitors has left the US market from new product. One of them effectively shut their business. So we now have some of those customers looking to us to try and fill a gap if we can provide parts for their vehicles. So we project that business to continue to be strong through 24 and 25.

Paul Soubry: So we now have some of those customers looking to us to try and fill a gap if we can provide parts for their vehicles. So we project that business to continue to be strong through 24 and 25. We'll continue to work on our cost base. The biggest area of opportunity is freight, and we continue to try and manage that. But I think you're going to continue to see a very strong top line and a reasonable margin throughout 24 and 25 in the aftermarket. One of the other questions I get a lot is, thinking about how earnings are improving, the capital structure for the company.

Paul Soubry: We'll continue to work on our cost base. The biggest area of opportunity is freight, and we continue to try and manage that. But I think you're going to continue to see a very strong top line in a reasonable margin throughout 24 and 25 in the aftermarket.

Chris Murray: That's awful.

Chris Murray: One of the other questions I get a lot is thinking about as earnings are improving is the capital structure for the company. I know when the release you talked about wanting to get back to a leverage ratio, kind of normalize somewhere between two and two and a half times.

Paul Soubry: I know in the release you talked about wanting to get back to a leverage ratio kind of normalized somewhere between two and two and a half times. However, things and material have changed in the last 12 months in terms of the turnaround of the company. And so we would expect that we'll have more options in the second half of the year, in the first half of 2025, in terms of refinancing our balances. And we think we'll be able to get a little bit lower rate. We do not expect to issue equity.

Brian Dewsnup: Can you walk us through your thoughts around the call at the unwind or the refinancing of the company. And while you're at it, I mean one of the questions we also get a lot of the time is, you know, is there any expectation you're going to have to issue additional equity to kind of get you back down into that two to two and a half range.

Brian Dewsnup: Yeah, thanks, Chris. I'll take that one.

Brian Dewsnup: So, you know, things in material changed in the last 12 months in terms of, you know, turnaround of the company. And so we would expect that we'll have more options in the second half of the year in the first half of 2025 in terms of refinancing our balances. We think we'll be able to get a little bit lower rate. We do not expect to issue equity. We believe that we can fund all of our working capital needs as well as our capital spending through cash flows that we generate. And I think we've, you know, you've seen the liquidity numbers for the second quarter.

Paul Soubry: We believe that we can fund all of our working capital needs as well as our capital spending through cash flows that we generate. And I think you've seen the liquidity numbers for the second quarter, and so I think we're well on our way to being a little bit more working capital efficient, along with benefiting from some of these milestone payments that we have alluded to in the FTA Dear Colleague letter. So just to be clear, we do not plan on issuing equity, or the second. Sorry, it becomes due at the end of 26 and therefore current at the end of the first quarter of 2025. So we've got a little bit of runway. The markets are open.

Brian Dewsnup: And so I think we're well on our way of being a little bit more working capital efficient, along with benefiting from some of these milestone payments that we have alluded to in the FTA Dear Colleague letter.

Brian Dewsnup: So just to be clear, we do not plan on issuing equity.

Brian Dewsnup: Okay. And then any plans on either being able to call or shift the senior, the senior secured or the, or the secondly. We're taking a look at a whole bunch of options right now, which are available to us now that we were doing a little bit better financially. So we'll continue to look at that, and we'll give you updates, you know, as the second half of the year progresses.

Paul Soubry: It's Paul, the senior. As you know, the senior secured doesn't come current, nor do the government loans until the first quarter, end of the first quarter of 2026. So, you know, the effort was to get, sorry, becomes due at end of 26 and therefore current the end of the first quarter of 2025. So we've got a little bit of runway. The markets are open. Our business is doing better. Brian and his team are working pretty aggressively now to try and assess a variety of options.

Paul Soubry: Our business is doing better. Brian and his team are working pretty aggressively now to try and assess a variety of options of what we would do next relative to refi. But, you know, there's nothing imminent you're going to hear about in the next day or two.

Paul Soubry: Of what we would do next relative to re five, but, you know, there's nothing in minutes you're going to hear about in the next day or two. We're actively looking at it. We're pleased that we're able to increase the volume through the business without sucking up working capital. And that has a lot to do with those milestone payments that Brian talked about. So, you know, we're actively looking at what to do and how to change potentially the shape of some of that debt.

Paul Soubry: We're actively looking at that. We're pleased that we'll be able to increase the volume through the business without sucking up working capital. And that has a lot to do with those milestone payments that Brian talked about. So, you know, we're actively looking at what to do and how to potentially change the shape of some of that debt. It sounds great.

Chris Murray: Okay, that sounds great.

Christopher Allan Murray: And I guess my last comment or last question is around production rates. And so I think in the release, you talked a little bit about maybe with the new Canadian program for federal spending that you're maybe reviewing, your capacity inside Canada, you know, there's also some other, I guess, some other opportunities, especially with what you have to expect is higher market share. But I also know that you've always been conscious about not trying to outrun the industry.

Chris Murray: I guess my last comment or last question, I guess, is around production rate. And so I think in the release to talk a little bit about maybe with the new Canadian program for federal spending that you're maybe reviewing. You know, maybe your capacity inside Canada; you know, there's also some other, I guess, some other opportunities, especially with what, you know, have to expect is higher market share. But I also know that you've always been conscious about not trying to outrun the industry that can be quite cyclical at times. So, you know, what we think about longer term, is there sort of a target kind of ideal of, you know, what the production level should be for the company, maybe beyond 24 and 25.

Christopher Allan Murray: That can be quite cyclical at times. So, you know, when we think about the longer term, is there sort of a target kind of ideal of what the production level should be for the company? Maybe even beyond 24 and 25.

Paul Soubry: So maybe it's a little more theoretical, but just trying to get an idea of where the terminal kind of production rate is optimized for you. There is a dynamic as we continue to shift from ICE engines into zero-emission engines. As you know, they're more complex. There are different types of zero-emissions.

Chris Murray: So, maybe it's a little more theoretical, but just trying to get an idea of like where the terminal kind of production rate is optimized for you guys.

Paul Soubry: Well, you know, let me start a little bit at the demand thing. I think in our remarks and some of the graphs, you saw how healthy both the US federal funding, specifically the Lono program, but also in the Canadian environment now with this longer term 30 billion dollar, you know, very, very material focus on long term and reinvestment and enhancement of Canadian public transit systems. There is a dynamic as we continue to shift from ice engines and to zero mission, as you know, they're more complex. There's different types of zero missions. There's different range dynamics, fuel cells, and all those other things.

Paul Soubry: There are different range dynamics, fuel cells, and all those other things. We still have a supply chain that has some challenges. And we don't want to run too fast. Having said that, we continue to increase the volume of orders quarter over quarter that go through our facilities. A Canadian program that would allow us to build zero emissions, you know, cradle to grave in Canada is something that we're now actively, actively investigating and thinking through in our facilities.

Paul Soubry: We still have a supply chain that has some challenges, and we don't want to run too fast. Having said that, we continue to increase the volume quarter of recorder that's going through our facilities. A Canadian program that would allow us to build Canadian zero missions, you know, cradle to grave in Canada, is something that we're now actively actively investigating and thinking through in our facilities. We've been talking to both the Manitoba government and the Government of Canada about ways to try and bring some of that capacity capacity back to Canada. It's probably 15 years, Chris, since we did an all-Canadian build of a public transit bus in Canada.

Paul Soubry: We've been talking to both the Manitoba government and the government of Canada about ways to try and bring some of that capacity back to Canada. It's probably 15 years, Chris, since we did an all-Canadian build of a public transit bus in Canada. So I'm not sure we're in a position yet to kind of give you any numbers.

Paul Soubry: So I'm not sure we're in a position yet to kind of give you any numbers. You'll see it really translates through our forecast and our guidance going forward as we increase that production rates. We're pleased with the pace that we're running at. We're challenged by a couple of suppliers today. You know, there's still wiring harness to continue to be a challenge. Even things that we would think wouldn't be a problem, like seat supply, the repeatability of seats. Some of those things continue to govern the pace at which we're ramping up the business. It's not a demand issue.

Paul Soubry: You'll see it really translate through our forecast and our guidance going forward as we increase those production rates. We're pleased with the pace that we're running at. We were challenged by a couple of suppliers today. You know, there are still wiring harnesses that continue to be a challenge.

Paul Soubry: Even things that you would think wouldn't be a problem, like seat supply and the repeatability of seats. Some of those things continue to govern the pace at which we're ramping up the business. It's not a demand issue. It's us trying to make sure that we're prudent about the rate at which we run it through and that we don't suck up working capital and use unnecessary liquidity by having stuff waiting for parts supply. So we're pleased. Look, we're recovering very well. The rates at MCI, Alexander Dennis is running well.

Paul Soubry: It's us trying to make sure that we're prudent about the rate at which we run it through and that we don't suck up working capital and use unnecessary liquidity by having stuff waiting for spark supply. So we're pleased. Look, we're recovering very well. The rates at MCI, Alexander Dennis, is running well. The R block business is actually ahead of its schedule in terms of planning its production rates and delivering them. And new flyers nicely coming along to the wrap up. We're probably back. You know, a production rates, you know, for for 2025 of that kind of 1500 to 1600.

Paul Soubry: The Arbok business is actually ahead of its schedule in terms of planning its production rates and delivering them, and New Flyer is nicely coming along to wrap up those volumes. We're probably back, you know, production rates, you know, for 2025 of that kind of 1500 to 1600 total EU production rate per quarter, which is effectively where we were in 2019. Okay, I'll leave it there. Thanks, folks. Thanks, Chris.

Paul Soubry: Total EU production rate per quarter, which is effectively where we were in 2019. Okay, I'll leave it there.

Chris Murray: Thanks, folks. Thanks, Chris.

Cameron Dirksen: Our next question comes from Cameron Dirksen with National Bank Financial. Yeah, thanks. Good morning.

Operator: Our next question comes from Cameron Doerksen with National Bank Financial. Yeah, thanks. Good morning.

Cameron Dirksen: Maybe just to kind of follow up on Krista's question, just around production rates and just maybe taking the more short-term view. Just wondering how you can sort of, you know, maybe give us a little more detail on, I guess, the next couple quarters, kind of how to split in kind of deliveries is going to break out for the remainder of the year. And also, you know, how should we think about the EBITDA generated by quarter the next couple quarters.

Cameron Doerksen: Maybe give us a little more detail on, I guess, the next couple of quarters, kind of how the split in kind of deliveries is going to break out for the remainder of the year. And also, you know, how should we think about the EBITDA generated, you know, by quarter the next couple of quarters? But, you know, you're going to see an improvement in Q3 and a more dramatic improvement in terms of volume and deliveries.

Cameron Dirksen: So, you know, again, we got to go business by business, which, you know, we won't do on this call, camera. It's a good question. You're going to see it sequentially go up over Q3 over what it was Q2. You're going to see it in Q4 higher than Q3. Q4 also has that dynamic that has really an Alexander Dennis and MCI impact of deliveries go up even higher in the fourth quarter just because of the way those things are paid for and tax appreciation strategies of our customers and so forth. But, you know, you're going to see an improvement in Q3 and a more dramatic improvement in terms of volume and deliveries income.

Paul Soubry: Okay. And, and I guess, I guess from a margin perspective, I mean, obviously there's, there's making differences on the manufacturing side. But would you expect the kind of sequential improvement, obviously in Q3, but then also a sequential improvement in the percentage margin in Q4? Yeah, I think that's a fair assumption. You also remember that we have two issues at play. One is the negative drag that we had on low margin or legacy contracts is now effectively behind us. There's still a few, but it's not material as we move through Q3 and Q4. So you'll see better margins, and then Q4 will have an even higher percentage of zero missions, which have a higher margin.

Cameron Doerksen: Okay, and I guess from a margin perspective, I mean obviously there are mixed differences on the manufacturing side, but would you expect the kind of sequential improvement obviously in Q3, but then also a sequential improvement in the percentage margin in Q4? Yeah, I think that's a fair assumption.

Paul Soubry: You also remember that we have two issues at play. One is the negative drag that we had on low margin or legacy contracts is now effectively behind us. There's still a few, but it's not material as we move through Q3 and Q4. So you'll see better margins.

Paul Soubry: And then Q4 will have an even higher percentage of zero emissions, which has a higher margin. So you'll see better volume and a higher margin in the fourth quarter as well. Okay, that's helpful. Maybe just sort of my second question is about the Alexander Dennis business. You've introduced a new set of EV buses there, seems like you're having some decent order success. Maybe you can just talk a little bit more about that market, what you're seeing as far as the opportunities there, and what the kind of production is with ADL. So any particular details you could provide would be great. Good question, Cam.

Paul Soubry: So you'll see better volume and better margin in the fourth quarter as well. Okay.

Cameron Dirksen: That's helpful. And maybe just sort of my second question is just around the Alexander Dennis business. You've introduced a new set of ED buses there. Seems like you're having some decent order success. Maybe you can just talk a little bit more about that market. So what you're seeing as far as the opportunities there. You know, where the kind of production is with ADL. So any any particular details you could provide would be great.

Paul Soubry: Good question, Kim. Just a little context for maybe some of the listeners that don't know the history, but when Alexander Dennis first in 2016, 17 got into zero mission vehicles. They partnered with B.Y.D. where B.Y.D. provided the entire battery electric chassis and Alexander Dennis put the body on it. As that progress, as that product kind of matured, and as the expectations of the operators in the UK for more range and better performance, we effectively made a decision not to go with B.Y.D. There's a two-axle double deck on our own electric chassis. We also still do them on our own diesel chassis and some very small, but some on hybrids.

Paul Soubry: Just a little context for maybe some listeners that don't know the history, but when Alexander Dennis first got into zero emission vehicles in 2016-17, they partnered with BYD, where BYD provided the entire battery electric chassis, and Alexander Dennis put the body on it. As that product matured, and as the expectations of the operators in the UK for more range and better performance grew, we effectively made a decision not to go with BYD anymore but to build our own chassis.

Paul Soubry: The Environment 500 is the three axle double deck, which we are now delivering electric chassis electric buses into the Asia Pacific region. And that is going well. We have launched a new product called the Environmental 100 EV, which is a smaller vehicle. It's about a 28-foot vehicle today sold almost exclusively in the United Kingdom, which has really hit the market with a lot of interest. We've got deliveries, we've got orders already; we've got deliveries already. It's kind of a market maker because it's smaller than a normal single-deck bus, and there's a lot of interest in the UK from it.

Paul Soubry: So it'll start to see deliveries that it already has. It'll see some in the third and the fourth quarter and wrap up next year. The last remaining product is their normal single deck bus, which is called an Environmental 200. It has different widths and different lengths. That the re-engineering of that chassis, it will be completed probably by the end of this year, with delivery starting in the second half of next year. So, as that market continues to recover, we think we're very well positioned from a product standpoint.

Paul Soubry: So as that market continues to recover, we think we're very well positioned from a product standpoint. I will make a comment, though, that while the UK is higher than North America on the pace of adoption of zero emission buses, there are also some customers that have ramped up orders for diesel buses. So it's, you know, the death of the diesel is a little bit premature in some people's minds. The opportunity for us is taking that technology and capability that we've developed in the UK and now leveraging it in global markets. And that's really the next chapter for Alexander Dennis.

Paul Soubry: I will make a comment, though, that while the UK is higher than North America on the pace of adoption of zero mission, there are also some customers that have ramped up orders for diesel buses. So the death of the diesel is a little bit premature, in some people's minds. But what the opportunity for us is taking that technology and capability that we've developed in the UK and now leveraging in global markets, and that's really the next chapter of Alexander Dennis. The aftermarket over there is done well. The business is recovering well both on volume and margin.

Paul Soubry: The aftermarket over there has done well. The business is recovering well, both on volume and margin. Okay, no, that's great detail. Appreciate the time. Thank you. Our next question comes from Tamy Chen with BMO Capital Markets. Hi, good morning.

Cameron Dirksen: Okay, no, that's that's great detail. Appreciate the time.

Cameron Dirksen: Thanks. Thanks, Cameron.

Tamy Chen: Our next question comes from Tammy Chen with BMO Capital Markets. Hi, good morning. Thanks for the question. Paul, a quick clarification here. I saw hearing mission buses were a lower margin rate. But higher EBDA dollars per unit is am I still understanding that right or zero mission buses are now also higher margin rate for you? Zero mission buses have a higher EBDA dollar per unit, but a lower margin percent. If I confuse you, that's my issue. Okay, got it. Yeah, thanks for clarifying. That was my original understanding. Okay, perfect.

Tamy Chen: Thanks for the question. Paul, a quick clarification here. I thought zero-emission buses were a lower margin rate but higher EBITDA dollars per unit. Am I still understanding that right, or are zero-emission buses now also a higher margin rate for you? Zero emission buses have a higher EBITDA dollar per unit. That's a really good question, and thanks for the opportunity to clarify. So the original meeting was in January at the White House, and then immediately thereafter, there was the issue of the Dear Colleague letter.

Tamy Chen: Then I wanted to revisit your comments about milestone payments that I think before maybe was last quarter. I got the impression that this part of the dear colleague letter may be the most challenging to implement, both of existing programs with existing customers. Yes, that's a really good question. Thanks for the opportunity to clarify.

Paul Soubry: So at the original meeting was in January in the White House. And then immediately there was the issue of the dear colleague. And all of the guidelines coming in that letter were the clarity around the contracts allow for milestone payments, the contracts allow for inflation adjustments, and so on and so forth. And what we tried to explain to our investors is, going forward, we will now, in every bid that we can and every contract, will be signed in trying to embed milestone payments. The reality is the stuff that we're bidding now; we don't build 12 to 18 months from now.

Paul Soubry: And all of the guidelines coming out of that letter were the clarity around the contracts allowing for milestone payments, the contracts allowing for inflation readjustments, and so on and so forth. And what we tried to explain to our investors is, going forward, we will now, in every bid that we can, in every contract that we sign, try and embed milestone payments. The reality is the stuff that we're bidding on now won't be built 12 to 18 months from now. So the impact is delayed.

Paul Soubry: So the impact is delayed. We also told our investors that what we were going to do is to go back to every customer that we had a contract in place or that was coming up in that we would start to build and try and negotiate milestone payments into it. Some customers have not wanted to do that. A number of customers have done that, and so we've been successful in North America. But I can also tell you in the UK, where government funding has helped them buy some vehicles, that we've been successful at already achieving some of those milestone payments, which is part of the reason why you see volumes going up.

Paul Soubry: We also told our investors that what we were going to do is to go back to every customer that we had a contract in place, or that was coming up that we would start to build, and try and negotiate milestone payments into it. Some customers have not wanted to do that, but a number of customers have done that. And so we've been successful in North America, but I can also tell you in the UK, where government funding has helped them buy some vehicles, that we've been successful at already achieving some of those milestone payments.

Paul Soubry: Which is part of the reason why you see volumes going up, and yet we're still being able to tread water on liquidity. Maybe Brian, you can give some color on the magnitude of what we've seen so far.

Brian Dewsnup: And yet we're still being able to tread water on liquidity.

Brian Dewsnup: Maybe Brian, you can give some color on the magnitude that we've seen so far. Yeah, I think if you dig into the financials, you can see, you know, round figures since the beginning of the year, we've been able to increase milestone payment balance by about 45 million dollars over the first half of the year. So, you know, it has been helpful. It hasn't changed our working capital by hundreds of millions, but it has been helpful in 2024. And as we've indicated earlier, some of the contracts that we're negotiating assigning today will have a bigger milestone effect, if you will, in 2025. But, you know, we are still actively pursuing milestone payments and contract negotiations and the work that we're doing in the second half of 2024.

Brian Keith Dewsnup: Yeah, I think if you dig into the financials, you can see the round figures since the beginning of the year. We've been able to increase milestone payment balances by about $45 million over the first half of the year. So it has been helpful.

Brian Keith Dewsnup: It hasn't changed our working capital by hundreds of millions, but it has been helpful in 2024. And as we've indicated earlier, some of the contracts that we're negotiating and signing today will have a bigger milestone effect, if you will, in 2025. But we are still actively pursuing milestone payments and contract negotiations in the work that we're doing in the second half of 2024.

Tamy Chen: I see, okay. Thank you, and thanks for the magnitude there.

Tamy Chen: And last question, I had it on the viewer admission buses. So I remember a few quarters ago, you had to redesign the area that contained the battery for better drainage. I want, you know, an example of one of the things that you're learning as you go in this newer area. And both in the press release and in the commentary you had this on the call, you called out the supply basis still nascent. All of these factors. So I just wanted to level something. How should we and investors think about as you do ramp up more and more of your admission buses? It's still a new area.

Paul Soubry: I think it's just difficult to understand what are still some of the risk areas, what parts of the list you provided, where are you the most with respect to the execution just because this is still a newer part. But it's going to quickly become more and more meaningful for your deliveries. And maybe you could also update us on the cash cycle for your admission buses. Because I think I would call you said they're longer than the diesel buses.

Paul Soubry: Thank you. So the first question or the first talk that you talked about was, I think your words were a redesign of the battery container or whatever that's put the cells in. A reminder of what happened there. We historically would buy modules that have been packaged; the cells have been packaged by a third party. And then we would embed them in some kind of a container. Internally, we call it a juice box. We make guards out of a fiberglass container. And inside that container are a series of battery modules that have also cooling going through there or heating, depending on the operating environment those batteries are working in.

Paul Soubry: What we found out, not just us, but every one of our competitors in the vast majority of the industry, there is a potential for the cooling system to have leaks inside those battery containers or, again, what we call a juice box. And if there is a leakage of coolant inside there, there is a possibility of a thermal event. So what we decided to do was to embed some kind of valve, if you will, that if there was a fluid inside the container, the valve would open up, and it would eject the fluid from that thing and therefore minimize the potential of a thermal event.

Brian Keith Dewsnup: So, what we decided to do was to embed some kind of a valve, if you will, that if there was fluid inside the container, the valve would open up, and it would eject the fluid from that thing, and therefore minimize the potential of a thermal effect.

Paul Soubry: So we did two things. We retrofitted the fleet that was in service, and then we made that as a standard part of our design of the vehicle. The other thing we would be doing on batteries going forward is we've been trying to now, we're not trying. We are actively and have had multiple sources of battery providers. For the first six or seven years of new flyers, maybe eight years of new flyer battery or fuel cell deliveries, we only had really one battery supplier. And we now have two active battery suppliers with two different types of batteries, all inside a similar juice box container.

Paul Soubry: So we did two things. We retrofitted the fleet that was in service, and then we made that a standard part of our design of the vehicle. The other thing that we've been doing on batteries going forward is we've been trying to now, we're not trying, we are actively and have had multiple sources of battery providers. For the first six or seven years of new flyers, maybe eight years of new flyer battery or fuel cell deliveries, we only had really one battery supplier.

Paul Soubry: And we now have two active battery suppliers with two different types of batteries, all inside a similar juice box container. So we now have options not only to have some price leverage, if you will, or competition among our suppliers, but also to build redundancy into our supply chain if there are any problems going forward. That's in the North American environment.

Paul Soubry: So we now have options not only to have some price leverage, if you will, or competition among our suppliers, but also to build redundancy into our supply chain if there are any problems going forward. That's in the North American environment. In the UK environment, our Alexander Dennis designed and built chassis have batteries that are provided as full contained units from a third party that is based in Poland and those that that company builds for a number of other manufacturers. We are actively and in process upsetting an alternate supplier for the Alexander Dennis battery supply as well.

Paul Soubry: In the UK environment, our Alexander Dennis designed and built chassis have batteries that are provided as fully contained units from a third party that is based in Poland. That company builds for a number of other manufacturers. We are actively pursuing and in the process of setting up an alternate supplier for the Alexander Dennis battery supply as well. So, as this thing evolves, the key, most expensive component of any zero-emission vehicle is the batteries, or in the case of a fuel cell, the fuel cell device.

Paul Soubry: So as this thing evolves, the key most expensive component of any zero mission vehicle is the batteries or, in the case of a fuel cell, a fuel cell device. And so we're continuing to learn from product service. We're continuing to try and build redundancy into those things. So you know, that's what we're really working on. The other dynamic that is probably the most complex than a zero mission vehicle when you get past things like the batteries of fuel cells is the electrical architecture. The complexity of the wiring harnesses and the electrical system goes up exponentially compared to a diesel vehicle.

Paul Soubry: And so, we're continuing to learn from product service. We're continuing to try to build redundancy into those things. So, you know, that's what we're really working on. The other dynamic that is probably the most complex in a zero-emission vehicle when you get past things like the batteries or fuel cells is the electrical architecture.

Paul Soubry: The complexity of the wiring harnesses in the electrical system goes up exponentially compared to a diesel vehicle. And we are continuing to work with alternative supply and advanced design companies to continue to improve those things, just like any product would continue to improve over time. We're seeing improved reliability, we're seeing better costing, we're seeing competitive tension from suppliers. This is what we do all day long.

Paul Soubry: And we are continuing to work with alternate supply and advanced design companies to continue to improve those things, just like any product would continue to improve over time. We're seeing improved reliability. We're seeing better costing. We're seeing competitive tension from suppliers. So this is what we do all day long. So we're quite pleased. It's not, you know, those products are not without challenges on the risks, but we're really starting to see both adoption rates go up and performance and readiness and reliability improved in the field.

Paul Soubry: So we're quite pleased. It's not, you know, those products are not without challenges and risks, but we're really starting to see both adoption rates go up, and performance, readiness, and reliability improve in the field. One of the dynamics when we first got into ZEB was that battery providers wanted us to pay them in advance of us building the vehicles to either secure the batteries up front or to buy the batteries or secure the capacity or buy the batteries. The discussion that we've had earlier about embedding milestone payments in contracts is mitigating some of that long cash cycle. Great, thank you.

Brian Dewsnup: And could you just talk about the cash cycle for the ZEBs? Yep, so the second part of your question is the cash cycle. So Brian alluded to this, and I come in a little bit. One of the dynamics when we first got in the ZEBs, we had battery providers wanting us to pay them in advance of us building the vehicles to either secure the batteries upfront or to buy the batteries, or secure the faster your buy the batteries. We also saw customers taking longer to accept and inspect those vehicles.

Paul Soubry: The discussion that we've had earlier about embedding milestone payments in contracts is mitigating some of that long cash cycle. We had hoped the industry would adopt a standard milestone payment schedule that has not happened. Every customer has a different milestone payment schedule. We are getting more professional, more aggressive in our proposals of giving a fair price, giving a balanced product, an exceptional service and so forth, but also being aggressive at our ask for milestone payments. We are dealing with government purchasing agencies, and so it's a negotiation. But we are pleased at the rate of acceptance, as I said, on the historical contracts we had.

Tamy Chen: And we have been pretty aggressive on our ask and our proposals going forward to reduce that overall cash cycle. And that's why Brian was alluded to. We've got about a $40 million net benefit so far this year on milestone payments, and we will see that to increase over time as milestone made me become a part of every contract whether it's diesel or a ZEB contract. Great, thank you.

Tamy Chen: Thanks very much.

Darryl Young: Our next question comes from Darryl Young with Stifel. Hey, good morning, everyone, and congrats on a good quarter. Thanks, Darryl.

Tamy Chen: Just wanted to touch on coach demand and ARBOC demand. You called out some pretty strong numbers, and I think it's probably recovering faster than any of us would have expected at the depths of the pandemic. So can you maybe just give us a bit of color here on where the coach demand is coming from? Is it travel trends and tour operators or anything there? And then, historically, I think coach has been the higher-margin product of the two.

Darryl Young: I just wanted to touch on coach demand and our box demand called out some pretty strong numbers. I think it's probably recovering faster than any of us would have expected at the depths of the pandemic. So can you maybe just give us a color here on where the coach demand is coming from? Is it travel trends and tour operators or anything there? And then historically, I think Coach has been the higher margin product of the two. Is that still the case with all the changes that have happened in the last couple of years? It's a good question.

Paul Soubry: Is that still the case with all the changes that have happened in the last couple of years? When COVID kicked in and all of these coaches were parked for a number of periods, we didn't build a private motor coach for probably two and a half years, and then we started that line back up. And it has recovered very well. There was rationalization in the private motor coach industry. There were some bankruptcies.

Paul Soubry: And of course, it's not really well detailed in our analysis or MDNA. Just some context, Darryl, for a reminder, pre-COVID, or when we first MCI became part of the family, we used to think about 60% of that business was private operators and 40% of was public operators. When COVID kicked in and all of these coaches were parked for a number of periods, we didn't build a private motorcoach for probably two and a half years. And then we started that line back up. And it has recovered very well. There was rationalization in the private motorcoach industry.

Paul Soubry: There were some bankruptcies. There were some acquisitions by larger operators of other operators and so forth. When we go to the trade shows, we'll go to see our customers. The rate that we're building MCI private coaches is now getting back up to in the neighborhood of 400 or so units a year. It's not really back up to maybe 600 or what it was at that time, but it has recovered probably faster than we thought. The government dynamic on motor coaches is very lumpy because it's a number of large agencies like New York, Dallas, Houston, New Jersey that buy in batches.

Paul Soubry: There were some acquisitions by larger operators of other operators and so forth. When we go to trade shows, we go to see our customers, the rate that we're building MCI private coaches is now getting back up to in the neighborhood of 400 or so units a year. It's not really back up to maybe 600 or what it was at that time, but it has recovered probably faster than we thought.

Paul Soubry: The government dynamic on motor coaches is very lumpy because there are a number of large agencies like New York, Dallas, Houston, New Jersey that buy and batch. And there's been a bit of a lull in the public motorcoaches for a while, but there are some good contracts that we've either won or that are in active procurement right now. So we're quite pleased at the recovery of the MCI business overall. We've invested about $10 million in that facility over the last year in a complete overhaul of the building in Winnipeg that allows us to build motorcoaches on a common line, which will give us, you know, some purchasing efficiency, some labor productivity, and so forth. So that's the moral code.

Paul Soubry: And there's been a bit of a lull of the public motor coaches for a while, but there are some good contracts that we've either won or that are in active procurement right now.

Paul Soubry: So we're quite pleased that the recovery of the MCI business overall. We've invested about $10 million in that facility over the last year in a complete overhaul of the building in Winnipeg that allows us to build motorcoaches on a common line, which will give us some purchasing efficiency, some labor productivity, and so forth. So that's motorcoach. On the R-Box dynamic, it is historically a low-floor cutaway business where we build a body and integrate it on top of a Ford or GM chassis. That market has recovered very well. Today, there's only ICE engines, and the demand of that market and the backlog of our block is well into, geez, almost the end of 25 or maybe 26 in terms of sold slots.

Paul Soubry: On the ARBOX dynamic, it is historically a low floor cutaway business where we build a body and integrate it out on top of a forward or a GM chassis. That market has recovered very well. Today, there's only ICE engines, and the demand for that market, and the backlog of ARBOC is well into, geez, almost the end of 25 or maybe 26 in terms of sold slots. It's really strong.

Paul Soubry: It's really strong. And we have increased that business production rates sequentially every quarter for the last year or so. And we think there's more opportunity to do so. The other part of our block was the introduction of medium class vehicles, both ICE vehicles we call the brand ECLIS or Zero Mission. The ICE original design of the ICE had a little bit of challenge in the marketplace, and demand slowed down, although we feel think there's an opportunity for that business to grow. We offered a zero mission vehicle that has not really had that much take up, but we still believe that the cutaway market will support the our block business plan for years to come and that there is upside as we continue to investigate the medium class vehicle specifically in zero mission.

Paul Soubry: And we have increased that business production rate sequentially every quarter for the last year or so, and we think there's more opportunity to do so. Do you have any concerns around reaching that 30% target, just given the supply chain? Look, there's always risk in the supply chain. Quite frankly, if we didn't have any supply chain challenges, we could ramp up the ZEBs contractually dramatically faster. People, skills, and trained skills are obviously an issue, but the supply chain is the governing factor. So we've guided for the second half of the year at the rates that we've put out. And every one of those slots is sold.

Darryl Young: Okay, that's that is good color.

Darryl Young: That that was it for me. So thanks very much, guys.

Operator: Thank you.

Operator: Our next question.

Krista Friesen: Our next question comes from Christa Freeson with CIBC. Hi, thanks for taking my question. I was just wondering on the Z deliveries this year. Obviously, it's a pretty significant ramp-up that you're guiding to in the back half. But do you have any concerns around reaching that 30% target, just given the supply chain? Issues maybe you're seeing specifically related to Z. Look, there's always risk on the supply chain, quite frankly. If we didn't have any supply chain challenges, we could ramp up the zebs contractually, dramatically faster. People skills trained skills is obviously an issue, but the supply chain is the governing factor.

Paul Soubry: So we've guided to our, you know, for the second half of the year to the race that we've put out. So every one of those slots is sold. We know which customer we're selling and building for, where we can. We've laid in advanced inventory or redundant inventory earlier than we then we've had in the past. You know, it's a custom made product that has both technical complexity and then inspector customer complexity and acceptance and dynamics. So there's there's always risk on that. We've given a full year range that we think has enough room to be able to handle both outside and downside risks.

Paul Soubry: We know which customer we're selling and building for where we can. You know, it's a custom-made product that has both technical complexity and then inspector or customer complexity, acceptance, and dynamics. So there are, there's always risks in that.

Paul Soubry: We've given a full year range that we think has enough room to be able to handle both upside and downside risks. We're crazy deep in managing the supply chain with our vendor development team, whether it's an ICE bus or a zero emission vehicle. At this point in time, we're comfortable with the rate that we've put out there for Q3 and Q4.

Paul Soubry: We're crazy deep in managing the supply chain with our vendor development team, whether it's an ice blast or a zero mission vehicle. At this point in time, we're comfortable with the rate that we put up there for Q3 and Q4.

Krista Friesen: Okay, great.

Paul Soubry: And maybe just further down the supply chain, is it? Because we historically had just-in-time inventory or point-of-use inventory, when you don't have a widget to put online, it has massive implications. You know, we're working incredibly hard to manage those customers. We have kind of four major vendors. We've added another one.

Paul Soubry: And maybe just further on the supply chain. Is it, is it that maybe you're just waiting an extra few days or a week for a part, or do you do some buses that are just sitting there and you don't know when that one part might show up. So, you know, we got a, this is an automotive as you know, you've been and you've seen we have a very sophisticated ERP system in the factory. We have customized bill of materials that have been signed off by the customer before we start the build. We have, you know, a very sophisticated vendor management system.

Paul Soubry: We have some suppliers that have shorted us by supplying a part on a date that they have proposed to supply to. and so because we historically had just-in-time inventory or a point-of-use inventory when you don't have a widget to put online it has massive implications. We continue to adjust the production schedule as best we can, but it's not like we can just stop building order A and build order B because all of the materials are bought for a specific customer. We're working incredibly hard to manage those customers. Two examples I gave you. One is a wiring harnesses, or I gave one of the guys earlier wiring harnesses.

Paul Soubry: We have kind of four major vendors. We've added another one, and quite frankly, we've ensourced some of that to our own manufacturing capability to build redundancy in the wiring harness system. Now in 22 and 23 we made the decisions to line enter buses where we knew the wiring harness was not coming on time, in the hopes that we could catch up. And the downside of what happened there is that we had way too many replication hours, and we had too many dollars tied up in work and process.

Paul Soubry: And quite frankly, we've insourced some of that to our own manufacturing capability to build redundancy in the wiring harness system. Now, on 22 and 23, we made the decision to line enter buses where we knew the wiring harness was not coming on time, in the hopes that we could catch up. And the downside of what happened there is that we had way too many rectification hours and we had too many dollars tied up in the working process.

Paul Soubry: The decision we've made this year is that if we know there's a part not coming that is that critical, like a wiring harness, we're not inducting the bus. So that's a big change in our operational strategy. So the supplier says he's supposed to have it on Monday. He now says Thursday. You know, we're trying to manage our way through their performance to their promise. Okay, great. That makes a lot of sense. Thank you.

Paul Soubry: The decision we made this year is if we know there's a part not coming that is that critical, like a wiring harness, we're not inducting the bus. So that's a big change in our operational strategy. So the supplier says is supposed to have it on Monday. He now says Thursday; you know we're trying to manage our way through their performance to their promises. If it's a part like a seat, for example, that's our other major part right now. We have a US supplier that is really struggling to make the seats delivered on time. We'll still induct those buses, but we're installing those seats offline, and we're quite frankly charging back to the supplier that the extra labor to do so, which we never did before in the past.

Paul Soubry: It'd be really hard to be generic about, you know, is it a day or two days or a month from when we get those parts.

Krista Friesen: We don't have buses lying around for long periods of time. What we're trying to do now is mitigate or govern the line entry of vehicles rather than trying to deal with an offline downstream like we did in the past. Okay, great. That makes a lot of sense. Thank you.

Paul Soubry: And maybe just on the ZEB backlog. I believe you said 41% of your backlog is now ZEBs. Is that split similar if we were to just look at the firm orders, or do you find the ZEBs skew to options? It's probably higher in the option. And, of course, that's just the nature of the big orders that we've seen in the last little while. You know, the first year's firm, and then the multi-year contracts are options.

Paul Soubry: And maybe on the ZEP backlog, I believe you said 41% of your backlog is now ZEP. Is that split similar if we were to just look at the firm orders, or do you find the ZEP skew to options? It's probably higher in the options. And of course, that's just the nature of the big orders that we've seen in the last of the wild. You know, the first year's firm and then the multi-years are our options. I would suggest that as we get through 24, 25, 26 where we continue to see that percent ramp up. It's a prior probably a higher percentage in the option pool than it is.

Paul Soubry: I would suggest that as we get through 24, 25, 26, where we continue to see that percent ramp up, it's probably a higher percentage in the option pool than it is; I don't have the data right in front of me.

Brian Dewsnup: I don't have the data right in front of me, which is a reminder. Chris said that everything that Paul mentioned around 2024, what's in our plan is in our backlog today. So that those that orders would be in the firm back. Okay, perfect.

Krista Friesen: Just a reminder, Krista, that everything that Paul mentioned around 2024, what's in our plan, is in our backlog today, so those orders would be in the firm backlog. This concludes the question and answer session. I would now like to turn it back to Stephen King for closing remarks. And this does conclude the program. You may now disconnect.

Krista Friesen: Thank you very much, and congrats on the recorder. I'll jump back in the queue.

Operator: Thank you.

Operator: This concludes the question and answer session.

Brian Dewsnup: I would now like to turn it back to Stephen King for closing remarks. Thanks, Sean. I did have one question through the web chat. And this is one for Brian from Jim Barlow. And you kind of entered it earlier, but I'll. We're out here.

Brian Dewsnup: How do you hope to reduce debt and increase funding to capital investments? Are you considering issuing debentures for private investors? Okay, thanks. Great question. So, as we mentioned earlier, we would expect to be able to fund, and we project to be able to fund all of our capital spending and working capital increases from that matter through just normal company cash flows and normal activities. We do not expect to have to go out and raise, you know, increased debt balances or issue equity in order to fund, you know, those aspects of the company. So we feel comfortable; we've projected out, you know, the back half of 24, 25, and 26 that we'll be able to fund all that with our cash flows.

Brian Dewsnup: Great, great. Thanks, Brian.

Operator: That puts an end to our conference call. Thanks everyone for joining. As always, you know, please reach out if you have any follow-up questions. All of our contact information is on our website as well. All of our financial information is there, our ESG information, and our supplemental financial package, which we hope helps people as they're doing it now. It's on the company. Thanks everyone, and have a great day. Talk to you soon.

Operator: And this does conclude the program. You may now disconnect.