NFI Group Inc. (NFI) Q2 2026 Earnings Call Transcript

Good morning, and thank you for standing by. Welcome to the NFI 2026 Second Quarter Fiscal Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To assure your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Stephen King. Please go ahead.

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

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

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

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

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone. You'll hear the audit message advising your hand is raised. We also ask that you wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. First question will be coming from the line of Chris Murray of ATB, Hornmark Capital Markets. Please go ahead.

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

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

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

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

Okay. I'll leave it there. Thanks, folks.

Thanks, Chris. Thank you. One moment for the next question. And our next question is coming from the line of Ty Collin of CIBC. Please go ahead.

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

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

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

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

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

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

Thanks, Guy.

Thank you. One moment for the next question. Our next question is coming from the line of Cameron Dirksen of National Bank. Please go ahead.

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

Yeah, thanks, Cameron. Overall, obviously, just touching on the backlog quickly, we feel very high confidence in terms of the backlog overall, sitting at that $12.5 billion level, and really where we're at relative to our firm orders and from a slotting standpoint, the funding bill itself is going to continue to support deliveries all the way out into the 28 slots with the current. So that obviously affords us time as this is going to continue to play through. Relative to your questions around agencies and uncertainty, we're not seeing any broad-based pause in customer activity. As I noted earlier, the fleet age is a critical factor for these agencies as they consider the need to get their fleets recapitalized. And with roughly 40% of the fleet now over the anticipated life for the buses themselves, that is driving the need for continued pursuit of new buses. And so when you couple those two together, we feel certainly confident. But we have not seen, to answer your question, very specifically a broad-based pause in terms of the customer activity.

Okay. No, that's good to hear. Just a second question, I guess, on the UK, the ADL. Obviously, there was some restructuring that occurred there. Have we seen, I guess, the positive impact on margins from that in your numbers at this point? And I guess, how are you feeling about the potential changes maybe in government policy there that might improve the competitive positioning?

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

Thank you. One moment, please, for the next question. Our next question is coming from the line of Mark Neville of Canaccord. Please go ahead.

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

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

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

Maybe just to go back on the guide, sorry to keep asking questions about this, but if I look at the second half guide, I think the sales, at the midpoint, sales would be up, I think, 17%. The revenues would be up roughly 17% year over year. EBITDA is closer to four. I can appreciate all the different moving parts around aftermarket and maybe some of the mixed issues, but is there any sort of incremental pressures within the business that we should be thinking about into 2027, or is it really some more of the stuff you've talked about?

Well, I think certainly it's quite a – Mark, thanks for the question. I think it's certainly quite a few of the things that we had mentioned earlier. I think it's also worth reemphasizing the point that in the second half last year, as you talk about those year-over-year comps, it benefited from Q4, which was our largest quarter ever, and frankly, it was a result of a lot that had built up over the course of the year with some of the operational challenges that had occurred. And so it does create a tougher comp in the second half when you consider that Q4, and I think that's a big contributor. Certainly for us, as we consider where we're at with the items that I mentioned earlier, In terms of the volumes, where we see those volume increases from where we're at in Q1 into Q2, we expect to see strong volumes, especially in the North America transit space here in the second half. But there is that tough comp that goes to that Q4 of last year.

Got it. If I could just ask one more question. John, you've been in the position or in the CEO role now, I guess, six, seven, eight months. it's great to see some of these improvements flowing through and just sort of curious if you were to categorize where you're at in terms of implementing these changes and just sort of bigger picture sort of how you see things evolving over the next year or two, three, whatever, but just in terms of the changes you're making and your vision for where you want to take things.

Yeah, absolutely. Thanks, Mark. Thanks for the question. It's been a busy certainly first seven months here for myself in terms of coming into the role. The focus certainly for the first half here has really been around just driving our operational execution, delivering terrific product and service excellence, culture and team, just in terms of our push towards an overall customer experience being really foundational to what we're trying to drive towards. And so, you know, those are our four strategic pillars that we talk about as a group. The ops piece has been a high-focus item, right, ensuring, you know, early on in terms of Q1 that we were doing some of the needed things around our supply base and resetting our operations to really deliver what we anticipated was going to be, you know, very strong Q2 and beyond relative to the volumes. You know, that's taking, but we've still got quite a bit of work that we need to go And that's going to be a continued focus. Operational excellence here is going to be an intense focus for us over the coming months and well into, frankly, for the near term. We've talked a lot as a group around driving customer experience, ensuring that our customers view our products as being best in class in terms of the service, the support, the quality that they see coming out the door. And so that has been an area of high focus of how do we talk about the full life customer experience from the commercial experience to the initial delivery to what they see in terms of service and quality. So that is a high area of emphasis for myself. And we're also now very focused around our strategy as a team. So as we look and we look further out, ensuring that we're taking the actions from a strategic standpoint that are going to be critical for us, what I will say is our focus within that remains very much around our operations and our execution as being an area of high focus. How do we ensure that we deliver on the volumes, that we deliver on the backlog, that we deliver the highest quality product that we can to our customers, and that we see as a result of that strong op leverage and incremental margins then flow through as we see those numbers evolve? So that's been the first half that's going to continue to be where I focus here going forward, but it's been a great first seven months, and I'm excited about what we have in front of us. Thank you.

Thank you.

One moment, please, for the next question. and the next question is coming from the line of Ken James of TD Cowan please go ahead thanks very much good morning just a question looking at the the guidance change for the year the indication and I'm thinking about adjusting the dog items here the increase due to improvements in overall gross margins as backlog is is converted and the benefits from increased overhead absorption should we interpret that to mean really the improvement in adjusting EBITDA as a function of sort of volume greater volume than in the previous guidance or are there specific things going on as well within kind of the margin profile whether it's manufacturing efficiencies and what have you that that are that are driving the the higher EBITDA guidance yeah i really do think, Tim, that volumes are certainly one of the most significant drivers for us.

In the past, we've talked a lot about mix and the impacts of Zeb, et cetera. I think you'll see within the material where we're at from a Zeb percentage standpoint. And certainly what I think it indicates in terms of where those are is that we continue to see profitability improvements relative relative to our backlog, and that has certainly played through. So when you couple that with the volumes that we're seeing, I think those are major impacts to us in terms of that EBITDA mention. But Brian?

Yeah, I'll just comment on, as we've seen greater what I'll call operational stability, whether it be supply, labor availability, and those types of things, you know we've naturally seen some better efficiencies within our kind of labor per equivalent unit and those types of things and so the improvements you're seeing really are both are contributing to that but but volume will always be a very important piece of our business okay that's helpful thank you my second question just just bigger picture here looking at the I guess the US market in particular and you talked a couple of times about the aging fleet and how that's obviously constructive for new deliveries um i don't want to be devil's advocate

here but i just want to kind of check my my thinking um is there any of course the other way to lower the average fleet age is is to retire units more quickly is there any indication you're getting uh um from customers that that might be an option is that just given sort of traffic flows and trends and economic conditions that they may just retire more older units and not necessarily replace those? Or do you feel, no, they really sort of, when they're thinking about, you know, lowering the fleet age, lowering the operating costs, it's more about they've got to bring in new deliveries at least to replace retirements kind of one for one?

Yeah, Tim, it's a great question. I think what we see relative to the agencies and the customer base that they're supporting that they're primarily focused on around the recapitalization and a continuation of that and less around how they may try and look at retirements, et cetera. So we do anticipate that this will continue as we've historically seen.

Yeah, and Tim, I would just say we've seen in the active bids still being above 6,000 units, the five-year outlook still above 26,000 supports that view, that we feel that, you know, those vehicles are going to be replaced. I think, you know, agencies always, when they extend, you know, life's a vehicle, the operating costs get higher, the parts spend gets higher. So I think to John's point, that is that drive to get some of those older vehicles replaced. So, no, we haven't seen anything, but it is a great question, but we haven't heard that from customers. That's super. That's really helpful. Thank you.

Thank you. One moment, please, for the next question. Next question is coming up from the line of Daryl Young. Steve will go ahead, please.

Hey, good morning, everyone. I just wanted to continue on this funding dynamic, and specifically your backlog is obviously huge, but when you look out to 2027, can you remind us how many of those slots are already scheduled or how many of the items in the backlog may be multiple years out? And then secondly, when you've seen an extension be announced in the past for funding, does that lead to sort of a flurry of activity and an immediate increase in order flow to make sure that transit authorities have their orders in the book?

Yeah, absolutely. So thanks very much, Darrell. Appreciate the question. First off, on the first half of your question, overall, we feel very strong about what we have in terms of slots. If you look at the firm orders that we have, I think that's a good reflection of it. But overall, in terms of 27, we are very well booked and, frankly, extending into 2028 as well. And I'm talking primarily on the North America side with that. And then relative to the shift that we may see in terms of extension activity, obviously we've had that firm level sitting there at 43 percent certainly gives us great confidence. It obviously gives us great support out to 2028 in terms of how those funding dollars can be used until then. And it also affords some time, so should there be a bridge or some level of extension, you know, for the U.S. government to work through that and to come to resolution, certainly with us having quite a bit of margin, right, before, you know, as we look for well into 28 before slots need to start being filled up again. So, overall, we feel good on that. You know, relative to activity as we approach it, I think it's very agency dependent in terms of what they may opt to do as they approach it, looking at what they have in terms of their fleet. Depending on their fleet age, they may need to lean in and ensure that they've got the coverage they'd hate to drop out, and then they find themselves delayed or having to move back into the queue in terms of their order. And so I would hate to give a broad answer to it, other than it's going to be very case-by-case as they approach it. Overall, we feel great confidence extending out into 28 in terms of what we've got relative to our backlog, our firm orders, et cetera. And certainly with the bipartisan support, we do expect a bridge or extension will occur, and we'll get the agencies where they need to be as that gets resolved.

Got it. Okay. And then just one more around the aftermarket. So you've obviously described FIFA as potentially a pull forward, but as ridership trends continue to increase and get back to sort of pre-COVID levels, would there potentially just be an element here where parts stays stronger for longer as ridership recovers? and maybe the FIFA dynamic is exemplary of what full utilization might do to bus issues?

Yeah, no, it's a great question, Gerald, especially as we talked about the aging fleet earlier, right? Obviously, that's going to be a, you know, that is a benefit to our aftermarket business. I think, you know, regardless of the FIFA piece, we've seen, you know, good growth in terms of our core business and across, you know, all of the agencies that we support. We just saw, you know, some unusual high around, you know, related to some of the agencies on the FIFA side. But otherwise, you know, we've still seen good growth from, you know, the overall aftermarket as well. You know, we expect that to continue on. And, you know, to the question you asked earlier, right, around, you know, timing and what some agencies may do. If there is a delay to someone in terms of the procurement, then obviously based on their age fleet, that does lend itself to more aftermarkets and part sales. and we're certainly well-positioned to be able to support those fleets as they age also. Great. Thanks very much.

Thanks, John. Thank you. One moment, please, for the next question. Next question is coming from the line of John Gibson of VML Capital Markets. Please go ahead.

Morning. Thanks for taking my questions. First one, on EBITDA for you, it declined slightly Q2 versus Q1. And was this just a delivery mix or anything else going on here? And how can we expect this to trend into year-end and maybe 27 based on your look?

Yeah, I think as we look at the second quarter, obviously volume up. So, you know, overall total dollars are up pretty significantly year over year. As we think about kind of on a per-EU basis, we delivered a fair amount of units in the second quarter that were coming out of inventory or coming out of WIP. And so those naturally bring overheads with them. And because we've had some production disruption, you know, a little bit of higher kind of labor per unit, those types of things dragging through, now that we've delivered most of what we've had in kind of offline WIP, we wouldn't expect to see that, you know, continue.

And, yeah, John, I think, as Brian mentioned earlier, as we continue to drive those efficiencies, more volume, you know, should continue to see, I think, that stronger improvement in the EBITDA per EU. I always just caution people, make sure you look at the LTM number just to take out some of that kind of quarterly dynamics that can impact it. But I think, yeah, as we've seen kind of from 25 to 26, continue to see that kind of EBITDA per EU number improving.

Got it, thanks. And just last one for me, just when you think of the mix of new orders or inquiries for buses, you know, Is it trending more towards diesel and away from ZEBs, or have you seen any further changes here?

Yeah, it's a great question, John. So we have seen some decrease in terms of the overall ZEB percentages. Look, we think overall the ZEB transition is, first off, we have high confidence in it in terms of the long term. We think there's likely to be some timing. We're seeing some of that in terms of push to the right. Some of that is based on agencies and their infrastructure, their readiness. You have certain agencies that are certainly going to continue their all-in push towards that ZEB transformation, and you have others that will, depending on what's happening from a policy or regulatory requirement, look to delay. Part of the reason is, as noted, to be able to support infrastructure and investment and timing to ensure that they get that right. Overall, as mentioned, we have high confidence in terms of the overall ZEB transition, but we do see it moving to the right here slightly. but it's, you know, from a percentage drop standpoint, you know, not a major player. Thanks a lot, guys. Congrats on the great quarter here. Thanks, John.

Thank you. There are no more questions in the queue. I would like to turn the call back to Stephen King for closing remarks. Please go ahead.

Yeah, thanks, Lisa, and thanks, everyone, for joining us this morning. As you heard, really, really strong quarter in Q2 and really pleased with the performance across the team and looking forward to the second half of the year. As always, if you ever have any issues, any questions that you want to bring up, please do reach out to us at any time. And looking forward to connecting again with the third quarter results.

This concludes today's programming. Thank you so much for joining. You may now disconnect.