NFI Group Inc. (NFI) January 7, 2026 Conference Transcript

All right, folks, why don't we get started. First of all, welcome to the 14th Annual Institutional Conference. Today is going to be the diversified day. Today we are also happy to have our partners at Cormark Securities also co-sponsoring our event. And they will actually be doing some of the firesides today. With me this morning in our first presentation is with NFI Group and Stephen King, who is their Vice President of Strategy and Investment Relations is joining me.

With that, Steve, welcome. why don't uh i'll let you kick it off and a little intro for nfi sure sure so thanks chris and thanks everybody for coming and thanks for having us um i'll say that our new ceo john sap and our cfo brian send their regards unfortunately they couldn't make this conference but we hope to get john the new ceo out in front and meeting investors as we get cut through kind of q1 in 2026. So yeah, NFI, we are a bus manufacturer and coach manufacturer, so a mobility solutions provider. We're the largest transit bus manufacturer in North America. So you'll see our buses, Toronto, LA, New York, New Jersey, California markets. And then you'll also see our coaches, our MCI coaches around the markets. And we're the largest aftermarket parts provider for transit buses and coaches in north america and we also have an international business which is in the uk and asia pacific markets and uh you know we've got a lot there was a lot of news i think as we ended december so happy to talk through some of those things today and uh really looking forward to the conversation great um so let's start with kind of like how q4 wrapped up a lot of a lot of discussion around the fact that a lot of stuff got pushed into the quarter gonna have to be I think in your words or Paul's words, a record quarter to make it all work.

So can you give us any update on kind of how things went?

Yeah, yeah. So, I mean, obviously it's still, you know, early and all the accounting teams and finance teams finalizing numbers and doing that work. You're exactly right. Based on our guidance of $320 to $340 million of EBITDA for 2025, that would have been a record for us, a quarterly record of either 105 to 125 million of EBITDA in Q4. And we've seen that over the last few years where seasonality has definitely become more of an issue, where the fourth quarter is a much busier period. And this year, 2025, that was especially true because we had some units that we'd planned for, you know, kind of Q2, Q3 delivery that shifted into Q4. And so, yes, very busy fourth quarter and our business is interesting as well because it's often very back-end loaded where December is the busiest month so a lot of units getting shipped in at the end of the year and so I think you know things went well you know there's still you know still navigating through some issues and always some some disruptions on supply chain and and getting things finalized and shipped to customers but I think we had a strong into the year and you know so obviously we'll report results in March but yeah we did definitely expect the big quarter and i think we did did see kind of that that quarter kind of come in well that's great um one of the issues around there was um around american seeding um and that was a seed supplier you actually took control of um how has that process been going yeah yeah american seeding has been interesting i'm now a proud board member of american seeding company um so we we have a joint venture with one of our largest competitors at gillig which you can imagine is always an interesting uh kind of exercise and activity um so we took control the end of october and since then i think we've seen a lot of progress uh so we you know that business had a lot of challenges around systems you know following process following manufacturing uh kind of know-how and knowledge and so we put in place an independent management team uh an external consultant that we've engaged because you know concerns around antitrust and that kind of governance perspective and so they've been making a lot of great strides. It takes time. It can never be fast enough. I think that's always a challenge with something like that. But we have seen progress and we've seen them start to get things more into the system, start to get people back onto kind of regular processes, starting to get much better adherence to that and getting control of inventory, getting control of kind of everything in those two plants. Our ultimate plan there, one of the challenges they've had, they were in two different facilities they had planned to move to a new facility they got stuck and still have the two plants so we're trying to expedite that consolidation because anytime you have manufacturing across multiple planes it's just more complicated so we want to have it all under one roof and so that is still our target for 2026. uh so we've been making good strides there um you know i think you know it's still seat i think you'll still hear us talk about it with Q4 results, the navigation and the investment and the progress that we've been making. But my hope is, as we move into 2026, you don't have to hear me talk about seats a lot on our investor calls, and hopefully we'll be able to kind of put that one behind us, and it'll be more talking about the investment in the JV rather than seat disruption and those types of things.

Okay, well, good. So, seats being kind of like one of the big outstanding, how's the rest of the supply chain been holding up for you? Because that has been a bit of an issue.

Yeah, so we've been seeing tremendous progress on the supply chain side. We'll always have some inherent risk in our business because low volume, highly customized, high dollar value units that we ship. But we have seen, you know, if you look at our charts that we provide in our materials, you know, at our peak, there's something like 70 or 80 kind of high risk suppliers. Now we're down to three, one of those being seeding. One of those was battery supply, which I know we'll talk about later. And then another was a metal fabrication company, which we were just able to repurpose and position to a new supplier. So feeling much, much better about the supply chain. And I think the good thing about 2026, 2027 is we have such a strong backlog now that we're able to give more visibility to the supply chain. And we've invested a lot of resources, too, in supplier development. That's been a real big focus 2023, 2024, 2025, having teams that are more on site at suppliers, you know, hand in hand with suppliers, making sure we're looking at those warning signs that we saw with American seeding, making sure we're addressing things earlier. We're at tier two, three, and four levels now of the supply chain, where before we didn't often need to get that deep. Now we're heavily engaged with our suppliers, and we know if they're missing a component, we can get that over here for them, and we do more of that coordination. So like I said, I think we're in much better position. I just always caution, there's always some risk, because in some cases, we only have a single supplier, like a Cummins engine. There's only the one engine supplier. Ballard Fuel Cell, for example, is our only fuel cell supplier. So we always have some of that. But I think, thankfully, the team is much more kind of cohesive and much more on top of kind of the supply chain and the supply chain development. So feeling good as we enter 2026 around kind of the overall supply chain. And I think the kind of hangover from the pandemic feels like it's, you know, I think things are getting much better. There's always I think some things will always be different from where they were before. But we've seen a lot more improvement in kind of our suppliers' capabilities.

Okay, good. So that brings me kind of my first question about 2026. You know, I know we'll probably get some more formalized guidance when you report in March, as I said.

But how would you want to characterize or shape, you know, how the business is actually able to perform now, you know, between backlog, the aftermarket performance, the different segments? you know how how should we think as investors about you know your ability to execute on what feels like should be a pretty big growth here yeah yeah great question so you're exactly right if I go back to 2019 you know we've done a big acquisition that year so pro forma we delivered around 6200 units of buses and coaches globally and then you know we saw that go down as low as the three thousands during the the kind of worst periods in 2022 and so we were you know negative 60 million of EBITDA 2022 we got that up to 60 million positive 2023 214 million 2024 and then a target 320 to 340 for 2025. so we've seen a lot of growth kind of through the period now i know you know if you go back to where we were it's not back to where we want to be but but we have seen significant recovery and i think as we look at 2026 we continue to see that trajectory of of growth and that expectation for performance improvement so i know analyst consensus is kind of around 395 million for 2026. we haven't given our formal guidance yet but there's a few factors that i think will drive growth from 25 to 26. you're exactly right when you talk about the backlog like we have tremendous visibility for what we're going to deliver in 2026. i think it's one of our strongest years ever in terms of the units and the production slots that are sold in the North American business. And so that gives us a lot more confidence around what we're going to do. 2026 is the first year of our all-Canadian build. So this was a project we launched in 2023. Kind of had nothing to do with tariffs. Thankfully, it's worked out well. But we wanted to do full bus builds in Canada because the Canadian market had gotten a lot stronger and Canadian investment in public transit. So this is the first year, 2026, where we'll have about 190, 200 units coming through that all canadian build so that's kind of additional production capacity that we didn't have in 2025. um we were continuing to ramp up production in the core new flyer north american transit bus business and so we'll see that i think benefit in 2026. uh the arbok shuttle bus business continues to do extremely well so i think we'll see some growth there uh the uk business which was down in 2025 definitely had some headwinds some competitive challenges is we've had some good progress on some orders from customers that will help support volumes in 2026. And then the coach business has some big Canadian customers this year on the public side. Private, we'll talk a little bit when we talk about tariffs, there's a little bit of a headwind in that space. So we're navigating some of that. But largely, we do see kind of unit growth from 2025 to 2026, and better unit economics. Because that is one thing as well that we've seen with the backlog now is the profitability per unit, the average sale price per unit has all increased. So all that to say, I can't give you a number, but I would say that I would expect growth from kind of 25 into 26. And you're exactly right. As we get to Q4 results in March, we'll be able to hopefully give you a bigger update on kind of what we expect for the full year.

Okay, good.

One of the parts of the business that was aftermarket, and that's actually been surprisingly resilient, you know, should we be expecting, you know, kind of more growth over where we were, or just kind of more of the status quo yeah aftermarket's been a tremendous uh part of our business and then for everybody in the room that's just kind of the sales of parts on a bus so if a window gets smashed or it gets into an accident or brake pads and filters those types of components we we sell all of those for all the transit agencies in north america and coach operators as well and that business yeah kind of pre-pandemic was around 70 million of EBITDA got to 150 million last year so just saw tremendous growth throughout kind of that period of disruption some of that was demand and customer programs and you know kind of purchases of parts and components but some of it was also cost reduction on our side so we went from I think it was 36 stocking locations to six and went to more of a kind of large distribution model versus having parts and various components and service centers we went to kind of more of a large distribution center hub uh model and so that's worked really really well um we did see a little bit of slow down this year uh not tremendous but you know we didn't see the growth that i think we'd hoped in 2025 and some of the aftermarket now i think part of that is driven by what we call program revenue and a lot of that is customers were you know eight years into a bus's life because a bus generally has kind of a let's say 15 year average life um kind of eight years into its life they'll do a retrofit where they'll replace a whole bunch of components on the bus and so we had some of those programs in 2024 which didn't repeat in 2025 so it was a bit more of core growth that we saw offsetting some of that program revenue as we head into 2026 i know there are some of these other programs coming up again and so i think that will help drive growth in that business um so i think yeah overall we definitely still see that as a kind of growth opportunity just probably more kind of low single digits versus what we've seen in, you know, kind of the 20, 15% type annual growth. It's probably more slower from here, but definitely still very strong kind of recurring revenue base that really sets us up well for kind of that EBITDA generation as we go forward.

Sounds great. Any questions in the room? Okay, so I guess the next question for me, and maybe we should talk about the battery thing, And just kind of maybe if you can maybe recap kind of what the issues were and I guess the solution now and how we should think about the impact go forward.

For sure, for sure. So I've got 10 minutes here. I'll try to be quick. The battery recall. So we, you know, we were kind of new entrants in the battery space. Early, early players kind of led the industry in that transition from ice to kind of electrification. And so one of our battery suppliers is a company called Exalt, which was a smaller manufacturer. It was acquired by a larger company, Freudenberg, a German conglomerate, in 2021-2022 time frame. And so we had about 1,300 buses out in service with these Exalt batteries on them. And they had a Generation 1, 2, and 3 version of that battery. So they kind of advanced their technology, went from Gen 1 to Gen 3. The Gen 3 buses were the ones that were impacted by the battery recall. and and what it was it looked to be a cell failure in the batteries when they were being charged so if you left the bus on a charger and it kind of same as when your cell phone reaches 100 percent if you leave it there again i'm no engineer but the electricity there's just continuous kind of push of electricity and so what was happening was there was a cell degradation there that could cause a thermal event and a fire and so we did see that on a few buses uh kind of 2024 time frame 2025 so that led to a battery recall so about 700 buses and coaches were impacted by this recall and in our view it was a supplier challenge versus a you know we're integrators largely of of components and so this was definitely viewed as more of a supplier challenge so we had to issue a provision with our q3 results for about 229 million dollars reflecting the cost to replace the batteries on those buses plus some additional support costs for the generation one and two batteries at the same time the exalt supplier announced they were winding down their operations so obviously a you know interesting situation where you have a recall ongoing a customer or a supplier that's winding down operations and then us having all these buses that need service so we were able to put in place a program where we were going to replace the batteries with another suppliers batteries American battery solutions our other primary battery supplier for North America and then we reached a settlement with exalt for the costs associated with the battery recall and so thankfully we were able to get a 75 to 80 percent recovery against that 229 million dollar provision a hundred million dollars of that was a cash payment that we received right before the end of 2025 that really funds all of the recall through 2026 the expenses and part of 2027 so it's great from a cash flow perspective because this recall as you can imagine to replace the batteries on 700 buses takes time so it's going to take about 18 to 24 months and we start q1 kind of q1 q2 2026 time frame in addition to the cash payment we also received battery cells so they had a relationship the the supplier with a kind of leading global cell manufacturer and so we're going to be able to take those cells and partner with another supplier to use those for future battery electric buses so it's a very interesting outcome because you kind of have cash component that helps fund a lot of the expenses then you have cells that will help offset battery costs in the future and then we have also taken over a small facility and some people which helps advance our kind of battery technology expertise in the space so i think a good outcome from where we were kind of q3 and so with q4 results you'll see us record all the transactions related to that and set up the inventory and the cash payment and all those types of things but definitely has been an interesting journey the last few months and we were really happy to get that all settled in december and be able to put that behind us because i know that was definitely a big overhang for a lot of folks it was the concern of what does that settlement look like what does that recall how does that impact your 26 27 results yeah that's a great question we're not going to do anything at our facilities our production facilities so it's not going to disrupt our bus production we have a series of service centers throughout north america there's about eight or nine of them and so we're primarily going to do the work at those service centers and they're in hubs we have one here in toronto and we have in ontario we have one in you know florida we have one in la so there's that's kind of where the work is primarily going to be done and thankfully like i said it's it's a long tail like it will take time um so that's kind of the plan is that it shouldn't have any impact on production exactly yes you can safely operate them today we've just given guidance of just unplug the battery once it reaches kind of 75 state of charge and don't leave it on the charger overnight so so that's been working for for most of our customers we've had a couple of kind of said I'm going to park now. That's a small handful of buses for a period of time, but the majority of customers are continuing to operate through this kind of period.

Good. The other announcement that came on the back of that is Paul Subry was retiring and a change in CEO. So just any thoughts around kind of the change and what to expect as we go into early 26?

Yeah, yeah. Great question. So, yeah, so Paul, 16 years as CEO of NFI, joined in 2009, you know, helped guide the company from, you know, kind of a small transit bus manufacturer into the, you know, leading player in North America, consolidated the industry, diversified into different markets. So Paul is retiring. He's going to be with us for one year as an advisor to John Sapp, our new CEO. So Paul, you'll still see him around a bit. He'll still be helping kind of that transition, which is great because I think that, you know, he's got so much institutional knowledge. He'll definitely be a help there for John. You know, Paul was 63. So, you know, I was getting kind of older, kind of, and then I think was ready kind of making that move into retirement. John, our new CEO, really interesting guy. And I, you know, I can't wait for him to kind of meet people one-on-one, you know, over the next year. So he comes to us from Eaton Corporation, where he was the head of their aerospace division. So about a 12,000-person team globally, had seen tremendous growth the last couple of years under his leadership. He is making the move to Winnipeg, which is great for us, I think. and, you know, as a Canadian company, that he's going to be based out of our Winnipeg headquarters. He's also a really interesting guy, former Top Gun fighter jet pilot, so kind of like Maverick and those guys. And then he was also a linebacker, I think, in college football, university stays, and then just has a tremendous track record in the aerospace industry. So I think we'll, you know, we're really excited to get him on board. I think his focus areas as he comes into the role, we're lucky in that demand is not really an issue. So we don't have a revenue challenge or, you know, we don't really need to go out and get a lot of new orders. Obviously, we'll continue to do so. But we have such a strong backlog. It's all about execution. And so I think for John, that's the focus is on operational execution, operational excellence, and the customer experience. As you can imagine, the past few years, be it, you know, supply chain disruption, inflation, then tariffs, then the battery recall, you know, we've had some difficult conversations with customers. And so I think John just really wants to kind of strengthen those relationships, make sure customers understand we're on the right path, we're their partners, we want to see, you know, continued success together. So I think that's something that comes really well from the aerospace industry, where you have those kind of long-term relationships. So I think that will be a focus and then I think, you know, just kind of helping us navigate through the political environment in which we currently operate kind of that government relations piece as well.

Okay, great. So maybe two quick questions before as we wrap this up, I guess I have to ask you the balance sheet question just at least once. So, you know, over the last few years, you know, leverage has been a bit of a challenge, but you probably you'll finish the year somewhere in that two to two and a half range plus or minus on working capital. You know, historically, always been a very low capex model. So you know, just back the envelope, there's probably going to be a fair amount of free cash flow coming. How do we think about, you know, as you guys get back to call it a more normal earnings pattern, you know, use of use of capital, what to think about it through 26 and 27. And where leverage should be?

Yeah, yeah. Great question. So you're exactly right. We target one and a half to two and a half total leverage. So that includes everything, leases, all debt, because if you look at our materials, you see multiple leverage numbers, and some of that's for bank purposes, first lien, second lien, but total, one and a half to two and a half. And you're exactly right, Chris. Our expectation, our hope is that we'll be able to get there. And the battery recall makes things a little interesting because then we have this kind of large upfront cash payment, which will help with kind of liquidity and leverage calculations because we're putting that kind of debt reduction kind of immediately, and then we'll draw on the revolver as we do the recall. So that is the expectation. And historically, we've converted kind of 40% free cash flow conversion from EBITDA. And so if you go back to 2016, 2017, 2018, you're exactly right. The business generates a significant amount of free cash flow. And we had dividends. We had share buybacks. We did acquisitions. And so I hope that, you know, we are kind of on that trajectory where we will see significant free cash flow. Deleveraging is the top capital allocation priority. We want to get that back below, you know, kind of two and a half times. and I think we want to live in a world where we don't ever go above two and a half times again because you know at times in the past we've done it for acquisitions we've accelerated above that and gotten to the threes and three and a halves and I think the new norm is we want to be in that one and a half to two and a half target range at all times so a little early you know I can't say anything you know about when we'll start a dividend or anything like that but I think you know we'll look at capital allocation as soon as we get to that one and a half to two and a half the next big component of our balance sheet that we need to focus on is our convertible debentures. So they come due January 2027. Right now, they're only 5% interest, $33 conversion price. We don't have to do anything urgently, but that's kind of the next piece that we're Sounds good.

Well, tell you what, really quickly, last thoughts for 2026 for investors.

Yeah, so last thoughts. So I think, you know, I kind of summarized what we, the growth expectations that we see. We know it's been a bumpy road, you know, kind of 2023, 24, 25. But like I said, don't want to lose sight of the tremendous, you know, kind of improvements that we have seen going from negative 60 million in 2022 to 320 to 340 million in 2025 with expectations for additional growth in 2026. So we're feeling really, really excited about this year. I think really great to have, you know, a new CEO come in and kind of drive some change and see some things is that he sees opportunities, feeling extremely strong and strengthened the backlog, and that's a multi-year backlog that goes from 26, 27, 28. The great news about funding, while government funding announcements, the funding is kind of announced in 2024, 25, 26, that funds 27, 28, 29. So even if you're concerned about funding, we already have a multi-year runway as they develop a new five-year funding act. So feeling very, very kind of well positioned. and my hope is that yeah it will be a bit of a smoother year in in 2026 i used to have a full head of hair in 2023 and it's been a few painful years um so so i think you know i think we're on the right track and i think we're on the right trajectory and looking forward to this time next year hopefully being able to talk about a great uh 2026 sounds great thanks very much steve