NFI Group Inc.

Paul Soubry - President and CEO Glenn Asham - Chief Financial Officer

Chris Murray - AltaCorp Capital Khaled Al Omar - CIBC World Markets Trevor Johnson - National Bank

Thank you, [Esteja] [ph], and good morning, ladies and gentlemen. Welcome to the 2015 first quarter results conference call for New Flyer Industries.

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

As a reminder to all of our participants and others regarding this conference call, certain information provided today maybe 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 significant from those expected.

You are advised to review the risk factors found in the company's press releases and other public filings with securities administrators for more details. So we are very pleased with our Q1 2015 results and it’s a -- as a team and a broader group of New Flyer and the NABI team that came on its gratifying to see our focus and hard work, and an investment in OpEx, and targeted improvements continue to improve our returns.

As you know, New Flyer has transitioned from a pure high-yield company that went public in 2005 as an income deposit security to now a company seeking to provide capital growth with appropriate dividend yield as we transition to a common share structure. As part of that evolution, we are pleased to announce that the New Flyer Board of Directors yesterday approved our first annual dividend rate increased since we converted to common share.

Our annual dividend will now be C$0.62 per share, up from the current rate of C$0.585 per share effective for dividends declared subsequent to the May 6, 2015 and we will continue to pay these dividends monthly. Also as part of our evolution, we’ve had some change to our Board of Directors.

At our Annual General Meeting later today, our slate collection has three Board members retiring and two new Board members being added. We sincerely want to thank Mr.

Wayne McLeod for his leadership of the New Flyer audit committee for the past 10 years since day one of the IPO in 2005 actually. And Ms.

Patricia Jacobsen and Mr. Bill Millar, who for the last six and three year respectively served on the Board and brought tremendous experience and insight into both the Canadian and U.S.

transit markets. We are very excited about the depth of experience and capability of the candidate that we are standing for election today and Ms.

Krystyna Hoeg and Ms. Phyllis Cochran.

We have also achieved a very important milestone in Q1 2005 on our people front. On April 11, 2015, we announced that members of the uniform main collective bargaining agreement at our Winnipeg facility had ratified a new collective bargaining agreement by voting 88% in favor.

This new three-year contract commenced on April 1, 2015 and will expire on March 31, 2018, and replaces the previous three-year agreement that was in place. With that, I will now turn it over to Glenn who will take you through the highlights of our financial results of the quarter and following Glenn's update, I'll provide some commentary on the market, the New Flyer activity, outlook and order book.

After that we'll open the call up to your questions. And with that, I will turn it over to you Glenn.

Thank you, Paul, and good morning, everyone. I will be highlighting certainly 2015 first 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 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 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 revenue of $380.3 million for the first quarter 2015, an increase of 17.4%, compared to $323.9 million during the first quarter of 2014.

Quarter-over-quarter, New Flyer bus deliveries increased 3.2% for this quarter, compared to the first quarter of 2014. Average selling price per equivalent unit increased 12.2%.

The increase in average selling price is a result of change in the product sales mix, which included more sales of hybrid buses and fewer articulated buses. We continue to remind investors that the average selling price per equivalent unit can be volatile when comparing two fiscal quarters as a result of sales mix.

Aftermarket revenue increased 22.8%. The increase in aftermarket operations revenue is primarily a result of increased volumes from the Chicago Transit Authority mid-life overhaul program and increased sales due to aging fleet.

The CTA mid-life overhaul program stream of revenue is expected to continue until June 2015. Excluding the CTA mid-life overhaul program, the revenue from aftermarket operations for 2015 Q1 was $73.1 million compared to $66.4 million in Q1 of 2014, which represents an increase of 10% in the aftermarket core business.

Bus manufacturing operations adjusted EBITDA increased 90.1%, primarily due to increased margins when comparing the two periods. Management had anticipated and previously provided guidance that, on average margin on orders planned for production in fiscal 2015 are expected to be higher than the average margins achieved during fiscal 2014, even though investment tax credit or ITCs that are available were substantially reduced in 2015, compared to 2014.

In 2015, Q1 bus manufacturing operations realized adjusted EBITDA of $25,700 per equivalent unit compared to $14,000 per equivalent unit in the first quarter of 2014 and $23,500 per equivalent unit in fiscal 2014. Newflyer fully realized all remaining ITCs during 2015 first-quarter of $0.2 million or $300 per equivalent unit.

In comparison, 2014 first quarter and fiscal 2014 as a whole, adjusted EBITDA including investment tax credits of $1,800 per EU and $4,800 per EU, respectively. Adjusted EBITDA from bus manufacturing operations per EU can be volatile on a quarterly basis and therefore management believes that longer term view should be taken when comparing bus manufacturing operations margins.

Aftermarket operations adjusted EBITDA increased 40% primarily due to the additional adjusted EBITDA generated by the CTA mid-life overhaul program and overhaul better profit margins. Management believes that aftermarket operations core business is improving as a result of improved parts market fundamentals and the benefits to the product mix that has resulted from a broader portfolio of services and parts offerings to customers.

Net earnings increased by 97.9% and earnings per share increased by 100%. The company reported net earnings of $10.9 million in the first quarter 2015, representing an improvement compared to net earnings of $5.5 million in first quarter of 2014, primarily as a result of improved earnings from operations offset by the increase in non-cash charges, finance costs and income tax expense.

The company’s net earnings per share in 2015 Q1 was $0.20 per share compared to $0.10 per share generated during the first quarter 2014. During 2015 Q1, the company increased its liquidity position by $17.1 million primarily as a result of increased cash flows from change in non-cash working capital, which is primarily made up from a decrease in accounts receivables and increased income taxes payable and offset by decreased deferred revenue and accounts payable.

The company generated free cash flow of $12.3 million during the first quarter 2015 as compared to $10.6 million in 2014 Q1, primarily as a result of improved earnings from operation. The company declared dividends of C$8.1 million in both the first quarter of 2015 and first quarter of 2014.

The company's free cash flow payout ratio of 65.8% in the first quarter of 2015 improved as compared to 76.8% during the first quarter of 2014. As a result of the improvement in operating results and the company's outlook, the board has approved an annual dividend increase to C$0.62 per share from the current rate of C$0.585 per share, effective for dividends declared subsequent to May 6, 2015.

Management believes that the new dividend rate has been established at a sustainable level although such distributions are not assured. The company pays dividends monthly and therefore the company expects to pay a monthly dividend of C$5.167 per share, compared to C$4.875 per share previously.

With that, I'll turn it back to Paul.

Thanks Glenn. Let me start this section here by talking a little bit about our current bid pipeline, our order activity and our backlog.

With respect to the total bid universe at the end of Q1 2015, it had decreased quarter-over-quarter but we are really encouraged to see the number of active use at the end of the first quarter in 2015, increased by 338 EUs or 5% compared to the previous quarter. This increase is consistent with our expectations of forecasted bid activity and the decrease in the total bid universe was primarily a result of the significant amount of works, some 1,492 EUs during the first quarter and a decrease in the forecast procurements of 583 or just 3% of the total bid universe in the quarter.

This volatility in the total bid universe is fairly normal and we do not believe it’s indicative of the shift in future order activity. We remain positive about the robust market.

From a book-to-bill perspective, which is defined as new, firm, and auction orders divided by deliveries, LTM 2015 Q1 was 119%. As a reminder, a ratio above 100% implies that more orders were received than filled, indicating an increasing demand for new products.

And we’ve now exceeded a 100% percent for eight of the last nine quarters. And finally, from a total backlog perspective and options, we ended Q1 2015 at 7,193 EUs, which are valued at just over US$3.57 billion, compared to 6,745 EUs, which were valued at $3.39 billion at the end of 2014 Q4.

We see this as positive news. From a manufacturing standpoint, we continue executing our transition plan for the bus production at our Anniston, Alabama facility on the legacy NABI bus models to the Xcelsior platform.

We are on target to complete this transaction in the second half of 2015, which drives continued improvement in our market competitiveness where we can leverage combined bus volume, production synergies and purchasing for greater efficiencies. We continue to invest in total approximately $20 million in combined direct operating costs and capital expenditures and we can expect to complete the transition and utilizing our operating cash flows in our current credit facilities to fund it.

As of the end of the first quarter, we have incurred $4.4 million of costs and invested about $4.8 million of CapEx and we anticipate these expenditures to be paid back through captured cost reductions and synergies. Currently, we expect the annualized cost savings to be approximately $12.2 million once our transition is fully implemented.

So now a little bit of our outlook for 2015. You have seen in our first quarter results and improvement in bus margins.

As we noted previously, we anticipate this increase to substantially mitigate the lack of adjusted EBITDA derived from the company's investment tax credits, which was substantially realized during fiscal 2014. As Glenn noted earlier, we realized $11.7 million of ITCs in fiscal 2014 and realized the final $0.2 million in the first quarter of 2015.

With respect to production rates, they continued to vary from quarter-to-quarter due to sales mix and product mix and for 2015, the effective transitioning the bus platforms in Anniston, Alabama manufacturing facility. Our current backlog and our orders anticipated rewarded by customers under new procurements are expected to enable us to continue operating at that corporate average line entry rate of approximately 51 EUs per production week for fiscal 2015.

From an aftermarket perspective, we had forecasted core parts revenue growth, which is happening and we expect to continue that for 2015. And just like the New Flyer NABI bus business competition, we continued to rationalize our aftermarket parts businesses into a combined business unit and work to identifying capture efficiencies over time to continually improve our customer satisfaction levels and our competitiveness.

Both projects remain on schedule. New Flyer remains committed to stakeholder model for long-term success and we are focused on balancing the needs of our shareholders, our employees and our customers.

We’ve got great people and we believe in our team and our strategy. We continued to feel that market pricing in certain competitions or bus competitions has normalized.

But as I said last quarter, I wouldn't say that competitive intensity has dropped off, nor are our competitors standing still. So, we will continue to pursue these savings in operations through ongoing OpEx continuous improvement and strategic sourcing initiatives.

Now, many have asked about the status of the U.S. federal government pensions for funding and the Buy America U.S.

material content requirements. Unfortunately, there's not much really new reported at this time.

As we all know when second GROW AMERICA Act was proposed with healthy funding increase for transportation spending, which continues to also include a proposed increase in the U.S. material content requirements.

While an aging fleet and proposed increase in federal budgets could bode well for transit properties and their ability to buy new buses, the potential increase in U.S. material count remains an obvious concern to all manufacturers and sub-suppliers.

This is an industry issue and not a New Flyer issue. And we continue be active in Washington and with our trade associations.

For now, our industry is of the current belief that extensions to the existing MAP-21 funding bill are likely as the U.S. Congress and Senate continue investigations and debate around a sustainable long-term funding model and approach for transportation.

We are very proud of the fact that New Flyer has paid dividends for 114 consecutive months since New Flyer’s initial public offering in August of 2005, and we are really excited to be able to announce today the increase in our dividend for the first time since converting from an IDS structure a few years ago. It’s comforting to our team and to our Board to see that shareholders continue to show confidence in New Flyer, but it’s not lost in us that while investors determine day-to-day share price, only we can determine our long-term value by doing the right things and doing things right.

As I said before, we are committed to create our future. We are not going to let it just unfold.

While we seek additional diversification opportunities and growth potential for New Flyer, our priority for 2015 is clear and that is to successfully complete our investments in Project United, which is the bus combination and Project Convergence, our aftermarket combination to improve our performance and enhance our competitiveness. We are continually working to be cheaper, faster, smarter, and better, and we are really proud of our history and excited about the future of New Flyer.

So thanks for listening today. With that, I will invite your questions.

And [Esteja] [ph] maybe you can provide instructions to our callers.

Thanks, guys. Good morning.

Hey, Chris.

Just I guess the first question is just I think one of the things that took me by surprise a bit was the performance in aftermarket and the margin, even with the CTA. Can you just give us some more color around how sustainable that type of margin level is going to be as we move through the year?

I would have expected that it would have been a little lower because the CTA revenues have been at a lower than average kind of margin level. And do you guys have any sort of thoughts on where that number is?

I mean, historically you’re kind of like just a little bit north of 20%, do you think that’s something that we should be aiming at?

Well, thanks for recognizing that, Chris. As you know, when we bought NABI and we started the process of determining the strategy for both bus business and the parts businesses, we decided to kind of run through process.

As we got through the decision on the bus and then ultimately to bring the parts businesses together, we’ve been working really, really hard at our systems. We are deeply involved in integrating the IT systems on the aftermarket as well as the bus business.

We’ve gotten way smarter and cooperative internally and using data from the original Orion bus purchase or parts purchasory from NABI from New Flyer to be very strategic about the portfolio we’re offering customers, how we are buying it, where we’re stocking inventory, how we are pricing it, and so forth. And so we had forecasted moving into 2015 as you know that we thought we could see the core parts business performance improve.

And so these numbers don’t come as a surprise for us. It’s delicate and difficult to say that that’s going to sustain.

But I would tell you we’re very confident in getting better and better on how we buy and sell, but also that there is opportunities from a cost and infrastructure perspective longer-time as we bring those two parts business together. So bit of a long answer.

But we remain positive that that is a big, big part of our business and will continue to be a focus and our performance didn’t just happen. I think we went and made that happen.

Okay. Great.

And then just -- and on the couple things just on a dividend. You sort of alluded to the fact that your dividend as a percentage of free cash flow came down below 70%.

But I guess maybe thinking forward, I mean first of all, it was bit of a surprise that you guys increased the dividend, although there has been some discussion about use of cash. But in your discussions at the Board, is there now sort of thinking about kind of target ratios, be at a percentage of EPS or percentage of free cash flow that you just want to target the dividend at, just in terms of regular growth in the absence of maybe meeting cash for acquisitions or anything else?

Well, I appreciate the question on that. And I call tell you Glenn and I have not been to the investor call or investor meeting in the last year and a bit where the question, the desire of the interest and potentially more dividends hasn’t come up.

As we’ve told our investors and our analysts over the last year this has been a very hot topic, well debated at the Board. We are not going to disclose our exact formulas and methodologies, but I can tell you that we are now in a methodology of a regular review where before as we’re moving for the IDS structure, we just kind of put the whole dividend discussion on hold, on ice.

The confidence in our free cash flow performance and our payout ratio allowed us to have a very candid conversation with the Board that now is the time to start move in that direction. And we are building that framework to allow us to have that regular review.

We consciously made a decision to be a yield payer. As an old IDS we were effectively just a yield oriented play.

And now we believe we got that really nice combination of a fair and reasonable yield with an upside on equity appreciation. So it will now continue to take a more prominent role at the Board conversation around this on a regular basis not just on a haphazard basis.

And candidly, the Board had a really good bet and came up unanimously on this dividend increase today.

Okay. Great.

And then I guess the last question I’ve got for you is more -- and this maybe goes to kind of trying to -- that valuation question. One of the things I think we started talking a little bit about is return on capital for you folks.

And there’s a couple of parts to that, I mean part of it you expecting once some of the integration is done, there’s some gains to be had there. But I guess how are you folks thinking about kind of return on capital and how to drive that in terms of perhaps expanding your multiples and really driving the share price?

I mean there’s two pieces of that, part of it is looking at the capital base. And I think there’s things like the term loan that comes up in '17 that maybe is up for debate.

But then the other piece of it is, is how do you continue to drive operating margins just so that whole number becomes more meaningful over time?

Well, look you fall with us for a long time. And the story as we are in IDS was a 100% around payout ratio.

We lived and died by finding a way to pay those dividends every quarter -- for every month sorry. As we change the structure and in line with that, we changed the way that the executive team are compensated to a long-term methodology around return on invested capital.

We are transitioning the NABI and New Flyer business under one platform, which means that we have access within our machine today both of the NABI platform phasing out with incremental whip to phase in the New Flyer buses. So we are not going to get too far ahead of ourselves on promises of huge increases on ROIC, but candidly, there’s a transition window that allows us get to more steady state by 2016.

And then the conversation around the converts, around the debt level, around other stuff comes into view. But right now, we are very comfortable with where we are at, and this transition project, the two of them actually are going very well, they are on plan.

And so again, we'll have another conversation about those kinds of levers that we can use to increase ROIC once that gets through the system.

Do you have any targets that you have internally that you’ll be willing to share? Or is this something that maybe you think you can start disclosing on a regular basis just so we can start to see how it would evolve over time?

Yes. Look today everybody has their own calc of their ROIC.

We do have a target that we are working to from a business plan perspective both in the short-term and into our LRP. It's not something we are going to put on, on the Internet at this point in time and it maybe something we discuss and consider in the future.

But it’s gone from kind of a non-discussion to a very, very important discussion at the Board table. And the Board is changing the way they were comped, is a strong measure that that's a key focus for the business for the long-term.

All right. Great.

Thanks, guys.

Thanks, Chris.

Hey, guys. This is Khaled calling in for Kevin.

Okay.

Seems like your average sales price preview and margins have been trending higher in bus manufacturer over the past few quarters and I know some of this is mix, but how should we be thinking about margins and sales price, as you kind of move through the low margin backlog in this segment?

Great question, because there are a number of factors at play here. The first one is the reality that we always have volatility at price depending on whether it's a diesel bus or a hybrid or natural gas and in fact, now we’ve got some trolleys, which are very expensive coming into play and so forth.

So don’t get too excited about that volatility and change. That’s the first issue.

The second issue is, it is reality as we have seen over the last three or four years and continues, that the more and more electronics that our customers are asking to put on buses, camera systems, counters, voice annunciaters and on and on and on, can really truck up the average selling price by 23, 30, 50, 100 grand depending on their configuration. So those two things are always going to be in play depending on the mix at that one point in time.

We are very difficult to be able to give you a feeling for, if we had a list price to be able to say the price is now moving up by X percent, because the nature of the product it is highly, highly customized for every single and it’s a bid-based market, where we take their specifications, we cost it and then we strategize both what the price we’re going to offer. So that’s why in our documentation and in our discussion here today, we continue to say that we’re feeling better about the markets response to our fair price for the value and the quality and the things that we’re offering.

Its hard to say that prices for the same like product are up year-over-year, it feels better and it feels like the competitive dynamics and the rationality of the market as it settles out is in a good place and that’s why we’re fairly positive and robust on our results now and what we thing could happen in the rest of 2015.

Okay. Great.

Thanks for the color. That is my question.

Yeah. Thank you.

Hey. Good morning, guys.

Hey, Trevor.

Just wondering can you give an update on client feedback as you’ve more since you just the standard Xcelsior platform. Just curious there has been any update in terms of their response and feedback?

Yeah. Really good question, Trevor.

And so kind of what’s happening there is we went out very aggressively and candidly and transparently when we thought we made that decision. We were very conscious of the number of buses that are on the road, just some staff at the highest level.

When Orion left the market there was about 10,000 Orion buses on the road that will manage the parts. When NABI -- when we made the decision for NABI to transition into Flyer, there was about 8000, 8500 buses on the road.

We knew exactly which customers had buses on order, which customers we have been bidding in NABI product for and so forth. And so, at the end of the day, it’s a specification-based business.

So the customers have been very, very receptive. We have brought them to our facilities, show them the way we’re building buses.

We have done lots of discussions with them on the difference between an Xcelsior and a NABI product. You'll remember the investors -- will remember that New Flyer was probably the first in the market to kind of refresh the product and that’s how Xcelsior was born back in a way until [9010] [ph] and the NABI products were just ready for refresh.

So most of those NABI customers, when we show them Xcelsior, when we show them what plans were, we really didn't get a much negative feedback, we agreed to build out the contracts that were in place and that’s going well. There's a few customers where we've actually pulled their orders ahead and pushed their orders back or transition some of the their orders from a NABI product to a New Flyer product in compliance with all the federal rules and so forth.

But I would suggest that the response has been overwhelmingly positive. There are few customers that are disappointed and naturally so.

They’ve got a NABI fleet and so now fleet commonality for future purchases goes away. But that's why that aftermarket strategy for us to support the hell out of those customers is so critical going forward to continue to win their buses advice.

So long answer but again, really I think we've got through this one very well. Market response has been good.

It hasn't affected our overall win rate as a company combined. So, we're ready to continue to execute.

And as you get better making these buses, I mean you already are. But is there an opportunity to continue to streamline the process?

I'm guessing the guys are probably better putting these together just given that the consistency and being able to kind of work things accordingly, just given the standardized platforms. Is that at all fair statements?

Yeah. True, Trevor.

We’ve given that color around the synergies and the savings and the sourcing efficiency that we think that are happening already. I will tell you that the number of hours to build a New Flyer bus is less than what it took to build a NABI bus.

So there is a learning curve we've got to get up to and then there is a benefit of actually left hours actually in the bus. And you're absolutely right.

There is definitely an efficiency over time and a consistency, not just from the cost, but from a quality build performance and all other stuffs. So, we think the numbers we’ve put out are achievable and we think there maybe some more as we finish this project to bringing the buses together.

Yeah. And maybe just quickly on MiDi.

Just curious again, appetite there, feedback, how your sales teams doing, going out with that product?

Great question. We’ll remind everybody that the MiDi was something of a market maker.

It was a product that was very successful with Alexander Dennis in the international markets. Something that we refer to as a medium-duty bus, although was tested to a 12-year life, no different than our heavy-duty bus.

It's a market maker because that market really doesn't exist today. Most buses are either a 40, 30, 35 foot heavy-duty competing for those sales, or a kind of a bus build and based on the truck chassis.

So, I’d be lying, as I said last quarter that we wished the sales was faster and the market uptick was faster than it actually is. The customers that have them are very, very pleased and we’ve got an awesome testimony last week from Alaska who had been testing the bus through the winter.

Performance, wide, heat, all those other things were fantastic. So, we’re still positive about the product is little bit slower.

And so we’re looking at our channels, at our selling processes, at the price and value offerings and we are going to continue stay committed to that.

And then just last, wanted just a big picture, we know the other two big competitors in the stake. Any commentary on what’s happening just with kind of the scraps that are left from a marker share standpoint?

Do you see it being really competitive there, new entrance, different technologies, just anything color on that will be great?

Sure. Well, we have two very good competitors.

One that is, is the number two market share company Gillig in California. It’s a very, very solid entrepreneurial product support, customer support oriented company.

They’re a very good competitor. For most part, we are focused on large sophisticated customers and for the most part, they’re focused on smaller distributor travel agencies and we compete in the middle.

They’ve announced a while ago, they’re increasing their capacity and adding or building a new facility. And so that will only just make sure that we continue to be efficient effective and so forth to compete with them.

The other major competitor is Nova Bus which is owned by Volvo Truck & Bus, headquartered in Quebec with facilities in New York. Nova is taking on some difficult and delicate customers in the last couple of years.

We know that they had some challenges but again a very solid company, good products and so our operators and customers in the marketplace have the benefit of some solid players for choice. When it comes to the new entrants, there has been a little bit of activity by two major players that are focused primarily almost exclusively or totally exclusively on Electric Buses, BYD, the global battery leader of China is now actively selling all Electric Buses in the U.S.

And the other one is Potrero which is an upstart to the start of the company years ago selling a composite bus that is only all electric. So they are very good companies, very aggressive albeit the all electric bus market is still in its early stages in R&D phases and so far.

So at the end of the day that just motivates us to continue to do what we are doing, which is cost reduction, efficiency quality, and focus. The good news for Flyer, those new technologies we can offer you exact the same bus platform, either that was a diesel with a hybrid, with natural gas, with trolley or now all electric and so.

We think that we’ve got probably the best total offering with that bus platform variations, position system variations but also really with their aftermarket support. So as we said in our materials, I wouldn’t say competitive intensity has fallen off the map.

We got good solid players and that only force us to get better.

Hey, Paul. Thanks so much.

Thanks Trevor.

Hi. Thank you, Esteja.

Ladies and gentlemen, thank you for joining our call today. And we look forward to speaking with you again next quarter.

Have a great afternoon. Thank you.