NFI Group Inc.

Paul Soubry - President, Chief Executive Officer, Director Glenn Asham - Chief Financial Officer

Kevin Chiang - CIBC Dave Tyerman - Canaccord Genuity

Thank you, operator, and good afternoon ladies and gentlemen . Welcome to the 2014 third quarter results conference call for New Flyer Industries.

Joining me on the call today is Glenn Asham, our Chief Financial Officer. And for your information, this call is being recorded and a replay will made available shortly after the call.

As a reminder to all participants and others regarding this conference call, certain information provided today may be forward-looking and based on assumptions and anticipated results that are subject to uncertainties. Should any one or more of these uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary significantly from those expected.

You are advised to review the risk factors found in the company's press releases and further public filings with the securities administrators for more details. Let me start today’s call by saying that we’re really pleased to see the efforts of our company have been rewarded with another solid quarter.

Glenn and I are actually doing this call today from our Ontario, California completion and service center that was established in 2014 to support our L.A. metro program and also to support other local and regional customers.

Clearly, this facility is world-class, and we’re getting great results in our L.A. metro customer satisfaction.

In a minute, Glenn will take you through the details, but a few comments to set the stage. Through some very hard work and cost management by our bus team to mitigate a few of our low margin contracts this year, and encouraging results from our aftermarket parts business, we exceeded our own expectations for the quarter.

Overall, revenue was up 18% year over year and adjusted EBITDA was up 5% year over year. Bus manufacturing revenue was up 12% year over year, with adjusted EBITDA down 21%, which was expected given the contract mix that we’re currently billing, and aftermarket parts revenue was up 41% year over year, with adjusted EBITDA up 54% year over year.

As you also know, almost one year following our acquisition of NABI, and after careful study, we announced a plan to synchronize the NABI and New Flyer transit bus onto the Xcelsior platform to improve our competitiveness and enhance our field and product support. ur project teams are fully staffed, and I must tell you that it’s going very, very well.

Customer response has been overwhelmingly positive. We’ve just come back from the Association of Public Transit Authorities, or APTA’s, triennial conference, which was held in Houston, Texas and had over 17,000 attendees.

We were very proud to have been placed front and center in the convention hall, and clearly, New Flyer is the transit bus industry leader. We’re keen to gain share for the New Flyer MiDi, which was on display, that was developed through a JV with Alexander Dennis and is based on the very successful E200 platform.

It’s a little bit slower than we originally hoped, but we’re gaining momentum so far and we’ve delivered approximately 50 MiDis to both public and private operators. The MiDi is built in the U.S., Buy America compliant, and supported completely by New Flyer’s North American infrastructure.

We’re really proud of our efforts to diversify and add value to New Flyer customers. For example, we’ve now successfully completed over 700 buses on the mid-life program with the Chicago Transit Authority, with approximately 400 buses left on program, and we’re performing at or better than the targets we set.

Recently, we’ve been focused on the evolution of our bus propulsion offerings. In addition to diesel, hybrid, trolley, natural gas, and fuel cell, we’re now delivering all-electric, battery powered buses.

New Flyer has extensive experience with buses with electrification. We have over 4,500 buses in service over the last 20 years, trolley, multiple hybrid types, and fuel cell.

And candidly, a battery bus is technically less complicated than other electric type buses. We have taken a calculated, prudent and engineered approach with proven components and suppliers for battery electric bus offering.

This is not a new bus, and our focus was to allow operators to evolve to a battery electric with a proven bus platform. New Flyer has taken the system integrator role, like we’ve done with our trolleys or natural gas, and we’ve followed an open architecture approach to allow both depot and on-route rapid charging to provide maximum and optimum flexibility for customers.

So very simply, we took our proven Xcelsior bus and we substituted the transmission for an electric motor. We substituted the engine and its cooling and after treatment for powered electronics.

We substituted the fuel tank for batteries and charger interfaces, and finally, the mechanically driven accessories have been replaced by electric accessories. The end result is a New Flyer Xcelsior bus with virtually no structural changes.

Same load, same [unintelligible] capacity, same bus parts, and same driver experience. And candidly, other than the bus being quieter, most people could not tell the difference between our electric bus and our diesel bus, which is exactly what our customer and operator wants.

We’re really excited about the electrification agenda, and we’ll be sure telling you more about it as we go through this new chapter. For now, I’ll turn it over to Glenn, who will begin our call by taking you through our financial results and following that, I’ll come back on and give you some commentary on the bid pipeline, our third quarter activity, funding, and a bit of an outlook.

After that, we’ll open up to your questions. So, over to you, Glenn.

Thank you, Paul, and good afternoon everyone. I will be highlighting certain 2014 third quarter results and provide comparisons to the same period last year.

I will focus my commentary on this call to providing key financial insights that will then allow for more time and attention on our market, business, and strategic efforts. I would like to direct you to the company’s full financial statements and management’s discussion and analysis of financial statements that are available on SEDAR or the company’s website.

I do want to remind you that New Flyer’s financial statements are presented in U.S. dollars, the company’s functional currency, and all amounts are referred to in U.S.

dollars unless otherwise noted. The company generated consolidated revenue of $360.8 million for the third quarter of 2014, an increase over 17.7% compared to $306.5 million during the third quarter of 2013, primarily due to decreased production and aftermarket volumes.

Bus revenue increased 12.3%, primarily due to increased bus deliveries and increased average selling price. Quarter over quarter, New Flyer bus deliveries increased 7.6% for this quarter compared to the third quarter of 2013.

Deliveries this quarter totaled 621 equivalent units compared to 577 equivalent units during the third quarter of 2013, even though deliveries in 2014 were negatively impacted as a result of delayed customer bus inspection and final acceptance, in respect of a few contracts. As a result, finished goods inventory at the end of the third quarter 2014 included 90 equivalent units.

Management expects to recover these deliveries by year-end. Average selling price per equivalent unit increased 4.3%.

The increase in the average selling price is a result of changes in the product sales mix, which included fewer articulated buses. The average selling price can be volatile when comparing quarters as a result of sales mix.

Aftermarket revenue increased 40.7%. The increase in revenue from aftermarket operations is primarily a result of increased volumes from an improved aftermarket parts market.

Bus manufacturing operations adjusted EBITDA decreased 20.9%. 2014 third quarter bus manufacturing operations adjusted EBITDA of $12.6 million, or 4.5% of revenue, decreased compared with 2013 third quarter bus manufacturing operations adjusted EBITDA of $15.9 million or 6.4% of revenue.

The decrease was expected and management has previously provided guidance about a lower than average margin and a temporary spike in bus inventory levels at the end of 2014 Q3. The third quarter of 2014 adjusted EBITDA also decreased as a result of an accounting provision made for the expected payment of $2.6 million for the 2012 performance share units, where the threshold performance level is now expected to be achieved.

These units vest based on cumulative EBITDA from 2012 to 2014, inclusive, relative to performance targets. Earnings in the prior two years were below targets, and management did not expect to achieve the minimum earnings target over the three-year period, and therefore no provision was made for these performance units in prior periods.

As a result of improved earnings, which exceeded management’s expectations, these performance units are now expected to vest and accordingly, a provision has been recorded. Aftermarket operations adjusted EBITDA increased 54%, primarily due to increased volumes and higher profit margins as improved general market fundamentals have more than offset lower than average margins generated by the CTA mid-life overhaul program.

Net earnings increased by 30.8%. The increase in net earnings in 2014 Q3 is primarily as a result of the increase in income tax expense, offset by an increase in the unrealized foreign exchange loss.Net earnings per share in the third quarter of 2014 was $0.18, an increase of 28.6% from net earnings per share of $0.14 generated during 2013 third quarter.

The company generated free cash flow of CAN44.4 million during 2014 year to date, as compared to CAN29.4 million in the 2013 year to date period. The company declared dividends in 2014 year to date of CAN24.3 million as compared to CAN22.6 million in the 2013 year to date period.

The key cash flow payout ratio of 54.7% in 2014 year to date improved as compared to 76.9% during 2013 year to date. Management believes that sufficient free cash flow will be generated to maintain the current dividend rate of $0.585 per share, which is paid monthly.

During 2014 Q3, the increased investment in noncash [unintelligible] such as increased bus inventories, resulted in a $15 million draw on the company’s revolving credit facility. With that, I’ll turn it back to Paul.

Thanks, Glenn. So I’ll provide a few comments on the economy and the pipeline and our bid activity, and then a little bit on the outlook.

We remain encouraged with the economic recovery in the U.S. The U.S.

Bureau of Labor Statistics reports that U.S. unemployment reduced further in the quarter, ending with a rate of 5.9% in September as compared to 7.2% in September of 2013.

So we’re feeling really good about the underlying elements of the workforce using transit to get to work. While we do not have a new U.S.

federal funding bill, with a multiyear perspective, we do expect the FTA funding to remain at current levels, and as we all know, the interim funding is in place until May of 2015. From an E.U.

perspective, for a bid universe, the total bid universe at the end of the third quarter 2014 was almost 22,000 EUs, an increase compared to roughly 20,000 EUs at the end of 2013 Q3. And that’s a really positive increase, and something that we had actually anticipated.

Even better for us is the number of active EUs, which is defined as the request for proposals received and in process at Flyer, and the proposals that we’ve submitted and are awaiting customer action, at the end of 2014 Q3 has increased by 34% compared to Q2 in 2014. So we’re starting to see, as we expected, more of these bid opportunities hit the street, and we anticipate the amount of bus procurement activity by public transit agencies throughout Canada and the U.S.

to remain robust based on our expected customer fleet replacement plans and the active procurements. Our book-to-bill ratio in 2014 Q3, on an LTM basis, which is defined as the new, firm, and auction orders divided by our deliveries in the period, was 62% compared to 309% during Q3 2013.

But it is expected to recover in the next few quarters based on the pending awards and the current active competitions we’re involved with. Our LTM book-to-bill ratio has exceeded 100% for six of the last seven quarters, and so we’re not too disappointed with one quarter.

A little bit of outlook insight. We believe that pricing in certain types of our bus competitions is normalizing, but we also continue to see competitive intensity continues to be high as New Flyer and our competitors jockey to build their order book.

We’ve continued our pursuit to enhance our bus market competitiveness through ongoing cost and overhead savings and from our decision to focus on the Xcelsior bus platform at the NABI facility as well as in our daily operations through our operational excellence initiatives. Our backlog, and the orders anticipated to be awarded to New Flyer under the new procurements are expected to enable us to continue to operate at a corporate average line entry rate of approximately 51 EUs, which includes MiDi, per production week, for the rest of fiscal year 2014 and to remain stable at this level for 2015.

We continue to caution that actual production rates may vary from quarter to quarter due to sales mix, and may also be impacted somewhat in 2015 by the introduction of Xcelsior at our Anniston, Alabama facility. As Glenn reported, we’re encouraged by the progress of our aftermarket parts business.

The combination of the New Flyer organic growth and the acquisitions of Orion Parts and NABI in 2013 has delivered to our expectations. And just like the bus business, that team is actively working to synchronize both New Flyer NABI parts and are investing in common IT platforms and common customer interfaces.

The expected result is some cost synergy, some working capital optimization, but for us and most importantly, it’s improved customer support and response. So what’s our plan for the next quarter and beyond?

Well, we’re going to keep doing what we’re doing. We’re going to keep investing in Lean, we’re going to keep working to be flexible and customer focused and enhancing our cost competitiveness.

We believe strongly that ensuring stakeholder balance, our employees, our customers, and shareholders is the key for long term and sustainable success. We continue to gain investor confidence with our stock price fully recovering from its low points in 2011 and 2012.

In good times and in bad, we’ve paid our distributions and dividends to shareholders, and now we’re up to 108 consecutive months since August of 2005, when the company went public. Customer satisfaction’s healthy, and while we’ve had issues here and there, New Flyer has risen to the occasion.

Everyone has market issues or product issues, or makes mistakes, and even more so with as complicated and customized product as a bus, but we believe that it’s how we respond and deal with these issues that’s the real measure of customer satisfaction, and our scoring is very high. Finally, I believe that our relationship with the New Flyer team and our team members at all of our sites is healthy, and engagement is high.

Our employee turnover is down, our absenteeism is down, our labor efficiency is up, and our safety record remains at industry-leading levels. To end this discussion and open it up to questions, I thought I’d share with you a little short story that I think reflects the culture that we’re continuing to build at New Flyer.

A few years ago, we were looking for an opportunity to have all New Flyer sites work together on a common opportunity, and we chose the United Way program as a platform that we can use everywhere to bond together and to do something for somebody else and others in our community. This year, we hit a record level.

Our team raised $258,000 and we had 90% employee participation, which I think is something that we can really be proud of as a company and as a team. So thanks for listening today.

With that, I’ll invite your questions. Operator, maybe you could please provide instructions to our callers.

Maybe just on the finished goods, I know you’ve highlighted this the past couple of quarters, and you seem confident that you’ll be able to reverse this. But are you seeing maybe more red tape related to inspections?

Or do you think this is a one-off issue? And if you are seeing inspections taking longer than historically, how do you see that impacting your working capital as you progress through the next 12 months, let’s say?

So we’ve been very clear that we had a balloon starting really in kind of first and second quarters of this year. Wayne Joseph and the ops team are very, very focused.

We’re working with the customer. We’ve recalibrated inspection criteria and acceptance methodologies.

And we’re just going to continue to march through it. I don’t think we can say there’s an industry trend or a different bureaucratic process.

It really relates to a specific one customer, one contract relationship. It’s just unfortunate, and we’ve got to work our way through it.

I’d say we’re not in a position to say exactly what our year-end inventory will be on the bus side of the business, but based on everything we’re seeing, I think it’s fairly clear that our levels will be lower than they were at the end of the third quarter. And so in terms of working capital, that will obviously provide a positive impact, either by the end of the year or very shortly thereafter.

Just in terms of how we should be thinking about EBITDA margins per EU in the fourth quarter, as you mentioned, it sounds like there might be some costs associated with dealing with this customer. And just given the significant increase in deliveries as you unwind your working capital there, should we expect margins to decline sequentially?

They’ve been kind of flat Q3 versus Q2. Any impact on margins we should be thinking about in Q4 or are the levels we’re at now pretty good?

As you know, predicting quarter by quarter is difficult given the contract mix that we have at any point in time. We’re still running out some of those lower margin contracts in some of our facilities, so there’s a mix issue.

I think we won’t see any reductions, nor will we see any significant increases until we get into next year.

Also, Kevin, the completion of this [whip] is not like we have to throw a whole bunch of extra cost to it. These are buses that are built, they’ve gone through our inspection, they’ve got to go through some additional customer inspection, we may have to work off a few snags or repaint a small area or whatever on the bus, but it’s not like we’re throwing huge costs at it.

The pain really is more seen on the working capital than it is on the EBITDA margin.

It sounds like you’re pointing to a pretty good lift in the overall fundamentals in the bidding universe. I’m just trying to get a sense of, you had highlighted this piggybacking issue that I guess some of the regulators pointed to.

How do you see that impacting the bid universe, because it sounds as though the total number of options that get added to a potential RFP will be much lower moving forward than in the past, and just when you guys do your book-to-bill, you do include the options in that ratio analysis. How do you see that impacting your book-to-bill, just the overall bidding universe overall?

First of all, if you really dissected - again, which we do every week - but if you really dissected the bid universe, even though there’s been changes in the approach and what the FTA believes is acceptable for piggybacking, what we’re seeing is a smaller quantity per competition, but more competition. So net-net, it’s probably about the same.

Now, it’s a pain in the butt from our end in terms of the sheer number of more bids we’re working on and that add to the complexity of us trying to decide pricing strategies and so forth, but the reality is, we don’t see those numbers change. The book-to-bill issue really is a little bit of we’ve found ourselves in a quarter where a number of the ones that we thought we would get not only awarded, but then go through the approval cycle and actually get the paperwork got delayed.

And we’ll continue to have those every quarter, but it just seemed to really burden us specifically in the third quarter. We’re feel pretty good about what’s kind of in the award cycle pipeline right now, what we feel about it in terms of some other awards, and we’re kind of signaling we feel better about the fourth quarter LTM than we clearly did in the third quarter.

First, I’m just trying to get a line on what your normal finished goods inventory should be. It’s kind of all over the place the last year or so.

You’re right, it has been all over the place. I guess the first thing I would say, at the end of the year, it will definitely be lower because we won’t be operating those [unintelligible] so you’ll see it come down a little bit there.

However, outside of that quarter, I would say you can really safely look at approximately one week’s production.

So around 50 then, in that area. Second question, just thinking about the margins for next year, it sounds like the backlog is emptying out the low margin stuff.

Do you have a sense of what kind of improvement we could be seeing next year?

I guess the first comment is we don’t have the full production schedule booked for next year, so it’s only really the front half, and as you know, we don’t provide specific guidance on orders. For what is booked, we see some improvement for sure, but we have to look at the competitive intensity too, that we’re going to face as we fill the second half.

We also have a number of options that are left in the backlog from those very competitive periods, and some of those options we actually do expect to get exercised, so there will be some balancing between some of the higher profitability work we have in our firm today, and will be impacted, to some extent, depending on how those options get exercised. So long answer, no specific guidance, I know, but it’s really hard to pinpoint where we’re going to finish, or see next year.

Just asking on that one comment you made, you said competitive intensity for the second half, are you anticipating any change in that?

I would say we’re not going to see any change. It’s still all the same big players, but everyone wants work.

They want to [sign] to keep their backlogs full, so as Paul has said, we have seen some normalization. I would not suggest that we’ve seen any big lift in pricing as a result of a smaller number of players.

So should I take from that that there are some players out there that might be in not such a great backlog position looking into the second half of next year, that might cause them to be a bit more aggressive?

I guess you could look at it that way. I think given what we talked about a minute ago, where we’re starting to see more competitions with maybe a total less number of EUs, both firm and option, per competition, you know, us and others are trying to make sure that as we go through this healthy cycle of bidding and bid universe that we’re building up our backlog.

I think Glenn’s point can’t be underestimated. We found ourselves, as the industry went from five players, if you will, five main players, down to kind of three of us, with Orion going away and NABI become part of Flyer.

You know, us and others, from the outside, would have expected some level of real price elasticity. And we’re still, I think, in that feeling out period, where we and others are trying to fill our backlog, so we use the word a little bit of normality in terms of the pricing, but it really hasn’t rebounded to the point where we can point to, you know, improved margins from price, which is why we spent so much time focusing on trying to improve margin through cost reduction.

Fair enough. And when I hear you talk about the pipeline and so on, you’ve been pretty bullish for a little while now.

Is it your expectation that there should be enough demand there to be able to fill out everybody’s backlogs within the next year or so, and maybe give you some room for some increases on production rates at some point here?

Maybe so. Yeah, we kind of feel that way, but remember kind of our plan.

We fundamentally said we’re going to rationalize our platforms. We’re going to basically slow down and stop building what was the legacy NABI products and were going to make sure that the New Flyer products are built across all those facilities.

So our view right now, and the guidance we’ve given, is we’re planning to keep our volumes flat for the next year, but to do a really, really good job of execution, bringing cost out of it. And so we’re probably a year away from being able to say fundamentally two issues.

Are we ready for volume increase, and B, do we have enough backlog to have a sustainable run rate increase? We’re confident that we can fill.

While they’re not all filled, you know, as Glenn said, a little over half of our next year is sold. We’ve got lots of high probability stuff in there, we’ve got options, and so forth.

We’re feeling good about the run rate to keep them flat for the year, but we’re not at a point where we really want to jeopardize our rationalization plan by saying we can jerk up or jack up those volumes So we’re really, really focused to try and focus on the cost side. Hopefully we’ll get two things in the next window.

We’ll see our backlog start to grow, and we’ll start to see a little bit of price recovery, which to us would be fantastic, with the cost focus.

Thank you. Well, I appreciate everybody listening today.

We’ll at this time terminate the call, and we look forward to speaking to you again next quarter.