NFI Group Inc.

Thank you, Jessa, and good morning, ladies and gentlemen. Welcome to the 2016 Second 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 be made available shortly after the call.

As a reminder to all our participants and others regarding this 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're advised to review the Risk Factors section found in the company's press releases and other public filings with the securities administrators for more details.

So as you will have seen from the financial statements and MD&A, New Flyer had another excellent quarter, and we remain encouraged with the market outlook and our business plan. The quarter featured an advantageous mix of customer builds, excellent operational performance at both New Flyer and Motor Coach Industries and continuous prudent expense management.

first and foremost, defending and growing our leading market position in the heavy-duty transit bus and motor coach markets and real concentrated focus on enhancing our competitiveness; two, we wanted to complete the integration of New Flyer and NABI aftermarket parts business, something we've been referring to as Project Convergence, with the primary milestone being the consolidation of the parts sales and operations functions into a single organization, which is now successfully complete and behind us; and third, learning about the motor coach business and actively developing a long-term integration and combination plan for the operations of the acquired MCI.

The combination of New Flyer and MCI is proving to be great marriage with aligned goals and parallel markets. Our objectives are clearly to offer bus operators the best products, services and value in the industry by migrating from just selling buses to providing solutions and delivering the lowest total cost of ownership to help our operators be successful.

Two, we're working together in common and -- in an approach to operate world-class businesses using lean principles, quality road maps and a safety culture. We want to become an employer of choice and we're well on our way.

And finally, to operate with the most appropriate and flexible capital structure to diversify and grow our business while delivering strong total shareholder return to our shareholders.

As I've stated last quarter, we have not seen any major surprises following our due diligence work on MCI, which was completed in 2015. We've been warmly welcomed by the MCI employees and customers who believe in the merits of our combination in that it now provides a long-awaited stability for MCI.

The message has been simple. We're a bus business that joins with another business -- bus business who wants to be in the bus business.

We're not financial investors. We're operators.

The focus so far has been on culture, on facility upgrades, investigating information technology harmonization potential, product quality and, first and foremost, customer service.

To date, MCI has performed to their acquisition -- our acquisition case, and we believe approximately $5 million of the initially targeted annual cost saving synergies of approximately $10 million have been achieved through this rationalization of corporate costs and the coordination of basic sourcing and purchasing activities. We are taking the necessary time to evaluate and assess the various strategic alternatives and scenarios before developing long-term further strategic actions for synergies and improved competitiveness.

It's important to take note the customized nature of the public transit bus and coach market, the increasing of U.S. content requirements resulting from the 2015 FAST Act in the United States, significant procurement synergies resulting from sourcing leverage are not easily attained.

Further, material changes must take into consideration an evaluation from several lenses such as current supplier agreements, customer-specified components, bus reliability and performance, aftermarket serviceability and spare part implications.

I'll ask Glenn now to take you through the highlights of our first -- of our financial results for the second quarter of 2016. And following that, I'll provide some insight into our 2016 outlook and our areas of focus, and then we'll open up the call to your questions.

So with that, I'll turn it over to Glenn.

Thank you, Paul, and good morning, everyone. I'll be highlighting certain 2016 second quarter results and provide comparisons to the same period last year.

I will focus my commentary on this call to providing key financial insights. We'll then allow more time and attention on our market, business and strategic efforts.

I would like to direct you to the company's full second quarter financial statements and management's discussion and analysis of the financial statements, which are available on SEDAR or the company's website.

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

dollars unless otherwise noted.

This is the second full quarter that the financial results of MCI are included in New Flyer's unaudited consolidated financial results. We have provided 2015 quarterly revenue and adjusted EBITDA data for MCI in the management's discussion and analysis of financial statements for information and comparative purposes.

The company generated consolidated revenue of $586.9 million in the second quarter of 2016, an increase of 56.5% compared to $375 million in the second quarter of 2015. Revenue from transit and coach, our manufacturing operations, increased 68.3%.

For the 2016 second quarter, compared to the second quarter of 2015, the increase is primarily as a result of a 53.5% increase in total new transit bus and coach deliveries and a 6.6% increase in the average selling price relating to those deliveries. The deliveries increased primarily as a result of the inclusion of MCI.

Aftermarket revenue increased 18.8% primarily as a result of revenues generated by MCI when compared to the second quarter of 2015, as well as the core aftermarket revenue in second quarter 2016 decreased 1.6% when compared to the pro forma aftermarket revenue of the core business in the second quarter of 2015. The 2015 second quarter core aftermarket revenue was determined by including MCI results from 2015 second quarter while excluding the revenue from the Chicago Transit Authority midlife overhaul program, which is now complete.

The company generated consolidated adjusted EBITDA of $80.3 million for the second quarter of 2016, an increase of 104% compared to $39.2 million during 2015 second quarter. Transit bus and coach manufacturing operations adjusted EBITDA increased 170% primarily due to increased deliveries and improved margins.

Contributors to the increase in margin in the period was a very favorable sales mix experienced in the last few quarters and -- combined with a full impact from the New Flyer and NABI product rationalization. Management cautions readers that quarterly transit bus and coach manufacturing adjusted EBITDA can be volatile and should be considered over a period of several quarters.

Aftermarket operations adjusted EBITDA increased 17.3% as a result of adjusted EBITDA generated from MCI's aftermarket business.

Net earnings increased 181% and earnings per share increased 164%. The company recorded net earnings of $34.7 million in the second quarter of 2016, representing an improvement compared to net earnings of $12.4 million in the second quarter of 2015 primarily as a result of improved earnings from operations, offset by the increase in finance costs and income tax expense.

The company's net earnings per share in the second quarter of 2016 was $0.58 compared to $0.22 generated during the second quarter of 2015.

During the second quarter of 2016, the company increased its liquidity position by almost $46 million primarily as a result of increased cash flows generated from operation. The company generated free cash flow of CAD 60.8 million during the second quarter of 2016 as compared to CAD 26.4 million in the second quarter of 2015.

This is primarily as a result of increased adjusted EBITDA.

The company declared dividends of CAD 14.2 million in the second quarter of 2016, which increased compared to CAD 8.4 million in the second quarter of 2015. This is a result of improved free cash flow payout ratio -- oh, sorry, resulting in an improved free cash flow payout ratio of 23.4% in the second quarter 2016 as compared to 31.9% in the second quarter of 2015.

The amount of dividends declared increased in the second quarter 2016 primarily as a result of conversions of debentures to shares and a 35.7% annual dividend rate increase, which was announced in May 2016. The current annual dividend rate is CAD 0.95 per share.

The company's policy of paying dividends changed to a quarterly basis. The first quarterly dividend on the shares in the amount of CAD 0.2375 per share was paid in July 2016.

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

Thanks, Glenn. As for an outlook for the remainder of 2016, our current master production schedule, when combined with our backlog and the orders we anticipate to be awarded by customers, is expected to be enable us to deliver approximately 3,450 units for fiscal 2016, which compares to 3,265 units in fiscal 2015, which is a New Flyer actual and a pro forma MCI combined.

The elephant in the room we're currently dealing with is MCI's contract in New Jersey Transit, or NJT, to build commuter coaches to replace older coaches now past their useful life and very, very expensive to maintain. As previously reported on July 11, 2016, the Governor of New Jersey issued an Executive Order that required an immediate and orderly shutdown of all ongoing work under the state transportation fund.

MCI's contract with New Jersey is to build 184 coaches in the first fiscal year, of which we had planned for 142 to be delivered in the calendar year of 2016. Coincidentally, on July 18, MCI had scheduled its annual summer shutdown for 3 weeks.

And during that period, there were no new production line entries. So now the workforce is back, to allow more time for acceptable funding resolution to be developed in New Jersey, we adjusted the MCI master production schedule to bring forward other motor coach customers into the schedule.

So with the employees back, it's now our plan to finish the New Jersey coaches online, already in process. There's approximately 85 in various stages of build and ready for delivery.

Unlike a construction crew, where manpower and equipment can be deployed to another project, MCI coaches are built on a production line, and they're intermingled with other customers' orders. So we are closely monitoring the situation, which includes an extensive investigation and discussion with New Jersey Transit officials, discussions and meetings with various members of the New Jersey legislature and, most recently, discussions at the highest level in the New Jersey Governor's office.

At this time, we have insufficient information to determine if our current 2016 annual delivery expectation is going to drop below the 2,450 (sic) [ 3,450 ] units for which we previously provided guidance, but there is always that risk. It's not a matter -- in our view, it's not a matter if they need the buses and want the buses.

It's a matter of timing.

As for our core aftermarket business, excluding, as Glenn noted, the CTA midlife overhaul review that was concluded last year, we maintain our guidance that revenues are approximately -- expected to grow for the year approximately 5% in fiscal 2016.

So ladies and gentlemen, thank you for listening today. We're really proud of our history and excited about our future.

Our company remains poised to continue as North America's leading provider of heavy (sic) [ heavy-duty ] transit buses, motor coaches and aftermarket parts.

With that, we'll invite your questions, and I'll ask Jessa if you can please provide our instructions to our callers.

Maybe just a little more color on the bus operations. EBITDA per EU is, I think, $66,000 this quarter.

I mean, you're making some huge leaps in that business in recent quarters. So just trying to get a better feel for what's sustainable.

How much is from mix? Sort of where the -- where does -- sort of what to think about in that business.

Well, Mark, if you go back 5, 7 and 10 years, we have focused on operational excellence. We've taken costs out of our business.

We've streamlined our facilities. We've in-sourced various activities that allow for a far more efficient and profitable fabrications of bus and so on and so forth.

But we always guide that every quarter will be different relative to mix. And there are times where we have product online that has been bid at the time, or a competitive situation where pricing is crazy aggressive.

And there's other times where we've been successful at winning customer orders that had very advantageous pricing. So there's a combination in that margin lift.

We put words very clearly in our material at this time to talk about an exceptional period of margin based on a certain mix of customers. We are confident that we've come a long, long way and we can continue very strong with our performance on the bus business and now the motor coach business on margins.

That's not to say that there isn't competitive pressures from our domestic competitors in the transit space as well as domestic and import competitors in the motor coach space, but we're comfortable that we're going to continue to perform at a high level relative to our historical margins.

Okay. And if you look at your master schedule for the remainder of the year, is there much in the way of change in mix for the back half versus in the first half or Q2?

For the most part, on the transit side, all of the slots are filled. We know exactly who we're going to build for and what we're going to build.

In the motor coach space, it's a little bit different. You have both public and private customers.

Of course, as I said before, the big elephant in the room is what happens with New Jersey and whether that impacts the rest of '16 and gets pushed into '17. But I'm personally comfortable that sooner or later, there'll be a resolution to the New Jersey funding, and it's a matter of timing.

There is always mix changes every quarter, and the back half is going to have different mix from the first half.

Okay. And just on the synergies for MCI, the $5 million, I'm just curious, sorry, was that $5 million identified or $5 million that's achieved and have -- if it's been achieved, have we seen any of the benefit in the P&L this quarter or to date?

So that's $5 million that has been achieved by the end of the quarter and, therefore, is available on a go-forward basis and an annualized basis. So there'll be some for sure in the quarter but not all.

Okay. Maybe I can sneak a last one on New Jersey then.

I'm just curious, how much can you actually pull forward in your schedule? I'm just curious, when does that sort of the 3,450 maybe become a real risk of not achieving that or there's risk that -- and I got that...

Yes. Great, great question, Mark.

And so it's not a matter of just us willingly or on our own pulling forward. You've got to have customer acceptance on those other customers given the fact that there's almost -- or effectively a 100% inspection requirement on government work.

Likely within the next month or 1.5 months is when we're going to have to make a call on the remainder of the year relative to any adjustments to that kind of 3,450 guidance.

Okay. And sort of the -- I think you said 80 or 85 was in production.

I assume there's no problem delivering those or for the customer to accept those.

Well, that's the issue, is the interpretation of the governor's stop order. Again, we've worked with New Jersey Transit, but the -- our interpretation of an orderly shutdown means completing the buses that are online and then, of course, process of working with New Jersey to find a way to make sure that they're inspected so that the minute the funding is changed -- or the new funding model is approved, there's -- nothing holds you back from delivering those buses.

Maybe just a first one from me just back on New Jersey. I'm just wondering, as you pull some of these buses forward and as you deal with some of the buses that are in the process of being produced, if you can provide any color on any type of margin impacts.

Or are the buses that are being pulled forward, are -- do they typically have a higher profitability than the New Jersey buses that are currently kind of stranded? And what type of working capital impact would you have if this thing is really delayed for a couple of months here?

Yes, great -- another great question, Kevin. Obviously, New Jersey is -- from a motor coach perspective, it's the single largest contract that anybody could have won or gone after.

And so as you may remember, MCI bid that prior to the New Flyer acquisition, and the margins are, obviously, far more aggressive -- or the pricing is far more aggressive and, therefore, margins are lower on New Jersey. But I go back to what I said before in terms of even if we pull stuff forward into the third quarter and pushed Jersey back out to the fourth depending on the funding resolution, you'll see quarterly noise.

But at the end of the day, that's all still part of our blend that we had planned for the year. So I'm not too worried about that side of it.

Yes, the margins are more aggressive.

That makes sense.

Yes. The second issue around working capital, you're absolutely right.

Jersey, it's all public information. Our contract with Jersey has milestone payments with it.

And of course, the stop work order basically means there's no funds coming out of Jersey regardless of what we do relative to schedule adjustments, finishing WIP and so forth. So the absolute worst case, Kevin, is that we've got a bubble of working capital that's something like, call it, 85 or 90 buses at roughly $400,000 a piece or so forth.

So there's -- and plus any material that we've acquired for New Jersey buses that don't make it on a bus in the period and so forth. So there's a $40, plus or minus, million working capital timing.

And of course, that's exactly why we have such a large revolver and a flexibility, because not just Jersey but every customer has timing issues and payment term differentials and so forth. But that's kind of some color on the magnitude that we're dealing with in the short term.

No, that's very helpful. And then maybe going back again to kind of the bus margins.

And as you pointed out in the MD&A, another strong quarter and positive mix was a tailwind again. If I were to ask it another way, when you look the -- when you look at your backlog and how much mix can vary in any given quarter, how much of your -- how much of that can impact margins?

Like, if I look at margins this quarter or any of the past couple of quarters, would mix be a 10% move, 15% move? Is there a way to kind of quantify it that way?

I'm not sure. Off the top of my head, I'm not sure I can give you a percentage.

But we had some advantageous contracts that came through the first half based on, again, as I described to Mark earlier, in terms of when they were bid, the types of products, the timing of the -- our delivery relative to our competitors, and all that stuff contributed to a really strong mix in the first half. And I'm not sure off the top of my head I can give you a percentage of how strong that was relative to what's in the backlog.

The good news, as we discussed last quarter and the quarter before, is the backlog for Flyer, for the transit business, the vast majority of any of that stuff that was bid in 2011 and '12 when we had extra competition, overcapacity, 2 businesses for sale in the marketplace, where we were bidding at prices which were clearly not sustainable as a company or as an industry, the vast majority of that stuff is out of our system. So when you look at the mix and the standard deviation or range, if you will, of our current backlog, it's nowhere near as dramatic or has that low end that we had in the past.

So that's why we're pretty confident about good, solid performance going forward for margins. But there will be mix quarter-over-quarter for sure based on certain mix of customers as well as pricing at that time.

Perfect. And maybe just a couple of quick ones from me here.

I've noticed used buses north of 100 these past couple of quarters, which is a little bit higher than what we saw quarterly in 2015. Just is anything specifically driving that, the higher number?

Yes. Pat Scully, who heads up the sales team at MCI, and his team have worked really hard.

And of course, our gang has got involved trying to find a way to make sure that, that used bus, preowned bus business turns faster. And so it's a matter of some buses have major overhaul or major surgery.

Some of them have, for -- pardon the expression, lipstick and eyeshadow and some of them that we take in our trains are junkers. And so a real conscious strategy to make sure that stuff turns and tied in with our service center strategy about how much we fix internally versus do with third parties.

I think it's what's helping us get faster turns and higher volumes. And that's really part of the strategy, to make sure that we don't have working capital lying around or have overvalued assets sitting that we then ultimately have to discount.

And so I'll chalk it up to the market is good and the economy is robust but also give a lot of credit to the MCI team of consciously trying to make that stuff turn faster.

That makes a lot of sense. And then just with the election year, are you seeing an impact south of the border in terms of demand or in terms of how the RFPs are looking?

No. If you go back to our bid universe, there's always the natural ebbs and flows of how much gets ordered in a cycle and so forth.

We range historically -- you may remember 4, 5 years ago we were in the kind of total bid universe of, call it, 10 to 12 to 13 units. For the last kind of always -- almost all the way back to 2014, we've been ranging in the 19,000 to 20,000 units that are in our bid universe based on RFPs hitting the street as well as stuff that our customers are telling.

So we're actually -- we're pleasantly pleased and surprised at how sustainable that bid universe and the opportunities are relative to where we were 3 or 4 years ago. And so that's why we continue to say we're pretty confident in the robustness of the market.

Now that could change with results of the U.S. election or any shock to the U.S.

economy. Right now, the outlook is very positive.

Just maybe turning to a little -- something a little bit different. I think as you mentioned you had a -- that you finished off Project Convergence, which has been in the works now for a couple of years.

I guess, first of all, any early thoughts on what -- the data that you're seeing? Any sort of trends that you may have discovered?

And just kind of first thoughts on opportunities in the aftermarket business.

Yes. So just -- I mean, Kev, you've seen it.

You've been close to it. But -- or Chris, sorry.

The convergence was all about following on what we called Project United, which was aligning, harmonizing and coming to a single product in the bus business. And of course, Wayne Joseph's team did a magical job of transforming the NABI facilities in Anniston to be all a New Flyer product.

So then, that set the stage for what we called convergence, was bringing the aftermarket parts businesses together, 2 completely IT -- different IT systems, different facilities, different inventory classifications, selling processes and so forth. So Ian Smart and his squad on the aftermarket worked on what we called convergence, and the first step was to get the right IT system in place on a new Oracle instance, if you will, for the aftermarket and then migrating the NABI stuff over.

The major milestone happened on July 18, which is where we've actually -- now running NABI and New Flyer parts as one entity called New Flyer Parts. And so we synchronized all that stuff.

So far, what we're seeing is there's clearly opportunity for working capital utilization improvement because now we're seeing all the stuff all on a common system with common part numbers and cross-references and so forth, which before we did manually, and, of course, you just can't do that efficiently. I think it's too early, Chris, to tell you what we think are our opportunities for cost optimization of the infrastructure selling parts.

We still, obviously, have the same number of warehouses and parts distribution centers and so forth. But the early indications are that there's some real opportunity to get good numbers around inventory utilization turns, working capital investments and so forth.

I think we'll be able to give you a little bit more color in the coming quarters on the benefits. I can tell you that other than getting the customer through the process of now changing the -- who the payee is and who the names are on their purchase orders and all that administrative stuff, the response from the customers have been very positive because we've got a much broader inventory pool to now pull from to fill their needs.

And so that's really been good. And I think Ian's done a magical job with our -- with integrating the 2, New Flyer and NABI teams, and that's been very, very successful.

So I have high hopes probably most importantly for customer satisfaction. And then I think there's opportunity for working capital utilization.

And then I think there might be over -- the next couple of years opportunity for the overhead associated with that business.

Okay, great. The other thing that was kind of neat to notice in the quarter and within the context that you're probably going to have to take a working capital hit in Q3, leverage was down to 2.2x.

And it was interesting. When you did the MCI transaction, you talked about wanting to be at, call it, 2x by the end of '17.

So we seem to be kind of getting to those targets a little bit earlier. You -- I guess now maybe raises the question because the answer for the last 6 months anyway is our focus is paying down debt.

But now we turn back to okay, so you're now generating a lot of cash flow. So I guess the -- what's the thought on what are we -- you going to do with it at this point?

Very topical and timely question, Chris. Obviously, we're really pleased with the debt paydown and the performance of the MCI team in applying [ph] the business and so forth.

A couple of things play into the next couple of quarters for sure: how New Jersey timing the working capital makes it through, the impact on that, first and foremost; second, we are going to spend money and, as you've seen personally, we're already spending money on the MCI facilities, the work environment. The IT systems is going to be a big nut, let's call it, I don't know, make it up $10 million over the next couple of years and so on and so forth.

Before -- until we have a better view of kind of that over the next quarter, I'm not sure we're in a position to go up and talk about more dividends or more M&A. But clearly, we've got a lot more flexibility going into the back half of the year than we originally intended, and that's a really great place to be.

As far as your next question or the insight of more M&A and more opportunities, obviously we're a bus business. We've gone from a single product of transit bus now to motor coach and a very significant strategy around the aftermarket and spare parts.

We continue to want to be a bus business, and so that's the realm and the scope of the areas we're looking. We think there's more opportunities around make, buy and things that we can do inside our business adjacent to the buses to make not only quality, safety, working capital all that efficient but also improve the margin on buses.

And so we're going to continue to look at that. And then, of course, now with MCI, the whole strategy -- the next-generation strategy about which coaches, where else we can play, other types of buses is all something we're actively working on.

But first and foremost, execution on our business plan is the first thing, no question. Second, focusing on making sure that MCI gets to the level that we want it to be.

Whether it's culture, facilities, product, IT systems is really where we're laser focused. So that's just some color on that.

Okay, great. And then just a couple of quick kind of housekeeping issues.

First of all, any contribution from used bus sales in the quarter?

Well, used bus sales, as I think we've talked about in the past, is a tool. And so while there are times when you can make money on used buses and there's times where it's challenged and you may lose some money based on what you gave in on the trade of the used buses and a subsidy to make sure you win the deal and so on and so forth, we don't see used buses as a -- really as a profit center.

We see it as a tool and an enabler for us to sell coaches. And so no material contribution, if you will, to our bus business P&L, that clearly, as we talked before with Kevin about utilization of the -- and turn of the used buses, it's starting to actually be very, very helpful for us.

Okay. So the net number was probably close to 0 then?

Effectively.

Okay, cool. And then just, because it's been an interesting sort of indicator of the private market, how's the fast-track inventory currently sitting over at MCI?

It's still in the range that they always set out. Just for those on the phone that don't maybe understand the terminology, the motor coach business usually builds a certain level of production each year that are -- is a generic standard bus built to a certain spec.

And then basically, as that bus is online and as it's sold to certain customers, we'll adjust it or customize it to the level that, that customer wants. Most of it is around interior, some electronics and maybe paint and color and decor.

The inventory ranges on fast track somewhere between, call it, 15 to, say, 30 or 35 at any one time, and those buses are effectively, call them, white shells, if you will, either at the factory or deployed forward to our service centers that we sell. So we continue to operate at exactly the same range and now, as MCI did for the last couple of years, on fast-track inventory.

Okay. So you're not running either at the high end or the low end of this figure point?

No. Now remember, many of the private operators will buy coaches at the end of the year to take advantage of accelerated tax.

And so most of the fast-track activity is more an H2 issue than an H1 issue. But we're not operating outside of bands that we've set up.

Just wanted to touch a little bit on the commentary around defending and growing market share and increased competitiveness. Has anything changed in terms of the competitive environment?

Like I'm just trying to figure out what the messaging is around that language in the press release.

Well, separate the markets just for a sec. From an OEM perspective in the transit space, we went through a period of time in, call it, 2010 to 2013, where there was just way too much capacity and we had 2 vendors for sale.

Then, of course, we had the opportunity of Orion going away, NABI becomes a part of Flyer. In the last year, we're seeing both GILLIG expanding their facility then -- and Nova, in our opinion, is getting even more aggressive on pricing.

So that was just a teller on that side of the business that we cannot take or lose sight of the fact that we've got to continue to get our costs down and we've got to continue to improve our competitiveness. On the motor coach side, the difference -- the big difference is that you have not only domestic competitors, such as Prevost owned by Volvo, but you have international players.

And so we have Van Hool importing buses from Belgium and Macedonia, you have Irizar now from Spain setting up -- has set up and doing well in Mexico now trying to sell buses in the U.S. You've got some Chinese manufacturers now every once in a while showing up selling buses.

You've got the Turkey business, that Temsa that's really made inroads in the coach space over the last couple of years. So that color or commentary was just trying to make sure that our investors realize it's not like it's a limited competitive dynamic.

We are continuing to be under pressure, and that's why we're not sitting back. We're taking a very aggressive position on our costs to build a bus, on our sourcing to get the material down and the overhead associated with this business to be competitive.

But in the last -- the rate of change in the competitive landscape in the last period of time, has that intensified? Or it's just, you know what?

It's always competitive? But if you're saying Nova is getting more aggressive, then I'm assuming they're going out bidding, they're trying to fill production slots and are prepared to sacrifice margin to do that.

There's always that dynamic at any one point in time, but there is one example of where we believe the pressure continues to get a little bit more aggressive, yes.

Okay. And then just thinking about MCI now that you've got it.

As you said earlier in your remarks, Paul, it's a bus company owned by a bus company who's in the bus business. Are your customers -- like are you seeing your market share go up there in any way just because of that?

And if you think about the pipeline or however you want to articulate it, do you have better visibility? Because some of -- that's a very different business than the transit business from a pipeline -- or from a backlog perspective.

It's a good question, Bert. But remember, it's not an elastic business.

It's not as if we pull a lever and then within the next quarter, you see volume increase. I can tell you I've probably with the sales team met 150 individual MCI customers, many at their facilities.

And the public customers in MCI are very much like New Flyer, and we understand that dynamic and the bid dynamics. But on a private operator perspective, these are people that have businesses that have been in business for 80, 100 years that were started by their grandparents and moved through their parents themselves.

The assets in the back of their facility or on the road are their personal equity. And so these people are confident that MCI is going to be around.

That we're standing behind the product, the warranty, that we're going to invest in facilities, we're going to invest in future products truly has been received extremely strongly. So that comfort that we're going to continue to do the right things for them and their own personal investment is -- really is resonating well.

I think we're going to see that transpire over quarters and years. It's not going to happen over 6 months.

Okay. And then just back to New Jersey.

85 in various stages. The worst-case scenario, I assume, is, those just get put on the books with no associated revenue recognized.

And then the 57 unfilled production slots, you then have to work to try and put something in there. And I'm not sure -- there's the pull-forward.

How much of a dent can you take out of those 57 production slots?

Good question. So this relates a little bit to what Chris was talking about because we have other customers that -- on the private side that we can try and pull forward to deal with that.

Then you have the reality of how much we want to put into fast-track inventory to be able to have finished goods that we can sell. The answer to your question how much of that, what percentage of that today, I do not know, but we're obviously simulating the hell out of that.

And then, of course, there's the employee relations side of it, right? We have the indirect resources and team members.

We've got the organized teams in Winnipeg and in Tampa [ph] that we need to work through and make sure that we're in compliance with those labor agreements and, of course, the states or the provincial laws and so forth. So the good news is my opinion on all this is that it's a timing issue, not a macro systemic issue.

New Jersey needs the buses. The current buses in their fleet are tired and expensive and inefficient and noisy and all that other stuff.

So we'll work our way through that. If we've got a hiccup in the second half, I'm comfortable we'll catch up in the first part of next year.

But we're going to do everything we can to minimize the impact on the key stakeholders. And it's not just our employees and it's not just our EBITDA, but we've got a supply chain.

For every dollar or every job in New Flyer or MCI, there are 6 jobs in the supply chain and there's lead times and all the stuff. So we're -- it's a very complex problem.

We're all over it, and I'm comfortable that we'll be able to manage through it.

Yes, no, I'm not questioning that at all, Paul. I think that -- what you've done so far in terms of vacation and all that kind of stuff.

I'm just trying to figure out the worst-case scenario, what happens. So your production schedule, you've got 84 in various stages so those will -- you'll finish through to completion.

So what's at -- what's -- and then the associated working capital that sits as -- and you've had this in the past, I think, stuff that's -- sits there waiting for customer acceptance. And then really the production schedule adjustment, the maximum would be 57.

Am I thinking about that the right way?

Yes, that's approximately right. I mean, the worst, worst case is you've got New Jersey finished and sitting there waiting for a sale, and then we find that we can't fill or adjust any other things, which isn't true.

I mean, we'll find a way to adjust a reasonable portion, if not all, of it if that's what it comes to.

I just want to ask a couple questions here. On -- with respect to New Jersey Transit, do you need to give customers incentives or anything to rejig the delivery schedule?

And how expensive are making those changes? I know there's a lot of planning and process that goes into that schedule.

Is it enough to make a significant dent in the EBITDA per bus for MCI?

No. So incentives -- every customer's different, and so we've got to be able to create -- remember, the stuff on the public stuff is all contractual, and most of it doesn't have a hard and fast delivery day.

It has a delivery window. And so Wayne does this on the new transit side all the time and then MCI does it on the public side with customers on the coach side where we'll adjust and work with them to get inspectors and all that stuff to able to adjust.

But financial incentives at this point, if any, are negligible. When it comes to the cost of jerking around our schedule and so forth, it's not really a cost issue.

It's more of a very, very diligent effort on -- mostly on the indirect team, supply, engineering, production management and so forth, to be able to reschedule the incoming material. And it's just hard work, blood, sweat and tears more than it is throwing a whole bunch of costs and EBITDA -- negative EBITDA impact at that.

Okay. And along those same lines, there's nothing in the New Jersey contract that would result in them compensating you for this change in schedule?

Well, no. I mean, these are all government contracts that have lots and lots of boilerplate stuff in there around ability to terminate for convenience, the ability to adjust schedules and so forth.

Candidly, that's farthest from our mind in terms of trying to jam a bill back at New Jersey for disruption. What we want to do is find a solution that they can live with, that we can live with, and then we can sell them the rest of the buses on this 1,200-unit contract that they want over the next 6 years.

And so the short term, I don't see it. And if we ever get to that, we'll find a way to work with Jersey to come up with an amicable solution.

Perfect, okay. Most of my other questions were answered, but with the conclusion of operation Convergence, is it fair to say that the same team that's put those 2 parts or divisions together will now be taking a close look at what can be done on the MCI and New Flyer parts businesses?

It's a good question, and it's one of the scenarios that we want to start considering because it's an IT issue and a major project. It's also a customer-facing dynamic.

I mean, a private motor coach operator that needs a fuel filter to be on the road tonight is very different than a transit agency that needs a whole bunch of them to put on a shelf over the next year. So we're going to look at all kinds of scenarios on what -- how much of material is common, how much of the vendors are common, how much of the systems and IT things we might be able to optimize and so forth.

Any of those kinds of things on the parts business, again, aren't happening tomorrow. Those are things that we're going to look at over the next year.

Customer service and satisfaction is absolutely the first priority before we do anything to jerk around with costs or overheads to try and grab a short-term synergy.

Just wondering, with respect to maybe some future R&D opportunities, I know it's early stage, but can you just talk to maybe kind of bigger picture? I mean, you had some success with the MiDi a couple of years ago.

That still continues. Is there any kind of ancillary bus market that you guys are maybe looking at that you can share?

Well, remember MiDi, what it was for. MiDi was an opportunity to learn how to do a JV.

MiDi was an opportunity to come up with a niche -- a very small niche product in a place that we weren't playing. MiDi was an opportunity to learn whether it'd be the sales of both public and private operators and so forth.

And it is what it is. When it comes down to the rest of the bus things, whether it's us organically coming up with something or whether it's us working through teaming or us acquiring, sure there's opportunities around different types of buses domestically, there's opportunities that now are presenting themselves around us playing outside of North America, which takes on a completely different dynamic.

And we are -- I'd say we're actively engaged and just trying to think about where we go next, all staying within the envelope that we're a bus business that wants to be some level of vertically integrated, that wants to lead those spaces. The other overlay on that whole thing is that we also are importers of buses now with MCI.

We distribute the Setra product line on behalf of Daimler. That's one that has -- something that we're really looking at.

Is there more there or a different approach? And then, of course, there's the other dynamic of our relationship with Marcopolo, who has bus body designs all the way up and down the spectrum of different types of buses.

Absolutely, we're looking at where else we can play in and when, at what time that fits within our DNA of wanting to be a market leader and to be a profitable and full-service bus business.

Yes, sorry. Just a couple of follow-up questions.

Just first on the aftermarket. On a pro forma basis, I think it looks like sales down year-over-year organically.

Was there any discussion around that? Or was there anything worth talking about there?

Or is it just sort of a timing thing?

No, I think there's just noise in the quarter and, again, just like the bus business, maybe not as amplified. There's big buys by certain customers at times that will move that up or down.

There's -- depending on the state, the city or country, there's different times when their budgets run out and then a new budgets starts and so forth. But there's nothing in there.

The only thing that is a big difference year-over-year is the reality of last year's parts business or aftermarket had some element of the Chicago midlife, which we no longer do. That contract is now completed.

Right. And I guess just back on New Jersey contracts or the situation, I think you said you're running a number of simulations on rescheduling.

I'm just curious, is there any sort of a hard date or a time when a decision needs to be made sort of on your end that we're going to move forward and sort of try to readjust here? And then maybe I'm getting ahead of that myself, but if you could do that and then, all of a sudden, they flip the switch back on again, sort of how easy is it to sort of toggle back and forth?

Or -- and would there any be risks sort of to maybe hitting deliveries in the New Jersey contract?

Great question. So delivery, first and foremost, is to make sure that the stuff that's in process and gets completed is inspected.

That's what our priority and focus is right now. The hard and fast date is not an actual day yet, but it's probably within the next month, as I said earlier, because not only do you have to worry about notification of employees if there's any disruption and so forth, but you also got all these suppliers that were currently planning and expecting to build certain level of parts.

We've already disrupted them a little bit by pushing out any future New Jersey builds and bring other stuff forward. But I would expect in the next 30 to 40 days we're going to have to make some tough discussions, decisions if the New Jersey government doesn't come up with a solution.

And remember, this isn't just a New Flyer issue, this is the entire New Jersey transportation fund. And so every road, bridge and crew, construction, this is a lot of pressure on this to get it done and get it done right.

We're just, unfortunately, one of the larger investments out of that fund.

Thank you very much, Jessa. Thank you, ladies and gentlemen, for joining us.

We're really pleased about where we're at. We've got some issues to deal with and look forward to talking to you next quarter.

Bye-bye.