NFI Group Inc.

Paul Soubry – President and Chief Executive Officer Glenn Asham – Chief Financial Officer

Mark Neville – Deutsche Bank Chris Murray – AltaCorp Capital Kevin Chiang – CIBC Daryl Young – TD Securities Stephen Harris – GMP Securities Trevor Johnson - National Bank Financial

Thank you, Matt, and good morning, ladies and gentlemen. Welcome to the second quarter 2017 results conference call for New Flyer Industries.

Joining me on the call today is our Chief Financial Officer, Glenn Asham. For your information, this call is being recorded, and a replay will be 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’re advised to review the risk factors found in the company’s press releases and other public filings with the security administrators for more details. Well, we were very pleased with our second quarter 2017 performance, and we remain encouraged with the overall market outlook and continue to be confident in our business strategy, our business plan and our competitiveness.

The second quarter featured excellent operational performance combined with prudent expense management and is helped by an advantageous mix of customer contracts, all conspiring to make it New Flyer’s highest adjusted EBITDA quarter ever. At the start of 2017, we implemented a business unit-focused organization with divisional presidents responsible for New Flyer transit bus, MCI motor coach and a combined aftermarket parts business.

We’ve been very pleased with this decision, which has resulted in ownership and accountability at the right level of our organization. Our objective was to find a way to think big but act small, and the results have been enhanced focus on customers with improved speed of decision-making and reaction time.

Glenn will now take you through the highlights of our financial results for the second quarter, and following that, I’ll provide some insight into our outlook including an update on our delivery guidance, and then we’ll open up the call to your questions. With that, I’ll turn things over to Glenn.

Thank you, Paul, and good morning, everyone. I’ll be highlighting certain 2017 second quarter results and provide comparisons to the same period last year.

I will focus my commentary on this call to provide 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 second quarter financial statements and management’s discussion and analysis of 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, the Company’s functional currency, and all amounts are referred to in U.S.

dollars unless otherwise noted. Before I comment on the operating results for the quarter, I would like to make a comment on the strengthening of the Canadian dollar over the past few months and the impact it has had on New Flyer’s stock price.

Our company is fundamentally a U.S. dollar business that trades in Canadian dollars.

While the underlying earnings and cash flow remain strong, the valuation of operating results in – and the variance of Canadian dollar share price has been impacted by the weakening of the U.S. dollar relative to the Canadian dollar.

This has resulted in a decline in the share price since June 2017. Our hedging strategy has been focused on trying to naturally hedge where possible and appropriately aligning currency inflows and outflows and by using swaps and currency instruments to mitigate impacts from cash flow, not EBITDA.

Paul has also noted organizational changes made at the start of the year. As a result of these changes effective January 2, 2017, the service function, which was previously managed as part of the aftermarket operations, is now the responsibility of the transit bus and coach manufacturing operations.

To improve comparability, the related prior year segment information has been restated to reflect these changes. The company generated consolidated revenue of $613.4 million in the second quarter of 2017, an increase of 4.5% compared to $586.9 million during the second quarter of 2016.

Revenues from new transit bus and coach manufacturing operations increased 6.6% for the second quarter of 2017 compared to the second quarter of 2016. The increase is primarily a result of an 8.7% increase in total new transit bus and coach deliveries, offset by a 1.8% decrease in average selling price related to those deliveries.

Aftermarket revenue decreased 5.7%, primarily as a result of customers’ inventory reductions, budgetary constraints and fleet modernization impacts. Transit bus and coach manufacturing operations adjusted EBITDA increased 11.1%, primarily due to increased deliveries and improved margins.

Contributing to increase in margin in the period is favorable sales mix, cost-saving synergies related to the MCI acquisition, continued cost reductions achieved through the company’s operational excellence initiatives and the integration of the MCI and the full impact of the New Flyer and the NABI product rationalization. Aftermarket operations adjusted EBITDA decreased 8.7%, primarily as a result of lower sales volume and a slight decrease in margins when compared to the second quarter 2016.

Net earnings increased by 23.1%, and earnings per share increased 19%. The company reported net earnings of $42.8 million in the second quarter of 2017, representing an improvement compared to net earnings of $34.7 million in the second quarter of 2016.

This was primarily a result of improved earnings from operations and reduced interest, offset by increase in income tax expense. This resulted in net earnings per share in the second quarter 2017 of $0.69 compared to $0.58 per share generated during the second quarter of 2016.

During 2017 second quarter, the company increased its liquidity position by $26.1 million, primarily as a result of increased cash flows generated from operations. The company generated free cash flow of CAD 52.9 million during the second quarter 2017, decreased by 13% compared to CAD 60.8 million in the second quarter of 2016, primarily as a result of the increased cash capital expenditures and timing of current income tax expense when comparing the 2 periods.

The company declared dividends of CAD 20.4 million in the second quarter of 2017, which increased compared to CAD 14.2 million in the second quarter of 2016. PP&E cash expenditures in 2017 Q2 have increased by 37.3% compared to 2016 second quarter, primarily as a result of investments in facilities to fund a variety of OpEx, in-sourcing and continuous improvement programs.

Finally, management believes that a return on invested capital, or ROIC, is an important ratio and tool that can be used to assess possible investments against related earnings and capital utilization. The ROIC during the second quarter of 2017 on a last 12 months basis was 14.9% as compared to 14% during the last 12 months ended July 3, 2016.

With that, I’ll turn it back to Paul.

Thanks, Glenn. Our 2017 annual operating plan is primarily focused on enhancing our competitiveness to maintain and grow our leading market position in North America heavy-duty transit bus and motor coach markets and our aftermarket parts distribution business.

As a result of solid public customer orders and excellent MCI private market sales, we once again increased our line entry rate and now expect to deliver approximately 3,800 equivalent units of new transit buses and new motor coaches during fiscal 2017. In total, this is an increase of 8.2% over our fiscal 2016 deliveries.

The elimination of the MiDi program in the quarter at our St. Cloud, Minnesota facility had gone very well and successfully freed up people, floor space, capacity and management time.

With a healthy schedule, low leverage and solid liquidity, we now plan to invest a total of PPE expenditures in the range of approximately $55 million to $65 million during fiscal 2017. As Glenn explained, we continue to invest in the MCI facilities, the office, the shop and are focused on enhancing the quality of source, zero defect and 5S production culture there.

In the quarter, we launched our information technology harmonization efforts in both the MCI OEM business and the aftermarket business. In addition to investing capital for basic in-sourcing projects at both New Flyer and MCI to continue, we recently approved a significant investment program to – of approximately US$25 million in New Flyer of America’s Anniston, Alabama facility in the second quarter of 2017.

Two primary objectives: first, to expand the main facility, relocate the frame weld capability to that facility and enhance and expand our part fabrication and small parts paint capability; the second is to create and launch the vehicle innovation center singularly focused on the development of electric and autonomous buses that will be formally announced and opened later this year, likely in October 2017. Excellent progress has been made on our transit bus electrification and fuel cell propulsion efforts with a number of pilot contracts in process.

The MCI engineering team has also been very busy developing their 35-foot J-model and J-model electric coach, both of which remain on track and on budget for their prototype schedules. MCI’s product enhancements that have been embedded in the model year 2018 coach that were launched just last month have been extremely well received, and those model year 2018s are currently on the production line.

MCI is also in the process of opening a Bay Area, California service center for opening in early Q4 2017. It’s a spectacular facility with a great location and has been extremely well received by the numerous coach operators and employment shuttle companies in the region.

As announced on June 1, 2017, New Flyer acquired Carlson Engineered Composites or what we call Carlson and the asset of its affiliated U.S. companies.

Carlson was a privately owned company headquartered in Winnipeg, but also had facilities in Minnesota and Alabama. The acquisition of Carlson, together with the company’s ownership of Frank Fair Industries, the Winnipeg composite business that was owned by MCI, permits us now to have control over close to 90% of our fiberglass reinforced polymer or FRP requirements for both our OEM business and our aftermarket.

Carlson’s U.S. facilities will also contribute to our complying with the increased U.S.

content requirements under Buy America regulations resulting from the 2015 FAST Act for the purchase of transit buses and motor coaches by U.S. federally funded transit agencies.

And as we know, those U.S. requirements go from 60% currently to 65% January 1, 2018, and to 70% January 1, 2020.

The companies are now exploring sharing best practices in composites and FRP parts manufacturing, optimizing processes and most importantly building a road map to pursue new technologies and part manufacturing. There are still a number of key FRP parts manufactured by third-party suppliers that we are currently evaluating for repatriation, and we’re continuing to look at new technologies for cost savings, quality and performance enhancements.

Our total backlog is now 9,901 equivalent units with 3,588 being firm orders and 6,313 being options. This does not include the various state schedules or standing offers, if you will, that New Flyer is named on.

Our public customer option conversion rate in 2016 was 79% and year-to-date is approximately 90%, all of which has given us the confidence to increase the build rates that I spoke of earlier. But one thing is for sure: the competitive environment in both transit bus and motor coach has intensified in the last year or so.

We’ve seen some aggressive bidding by all to secure volumes, but not at the same level as we saw with some of the outrageous pricing that we experienced in 2011 and 2012. The bid universe remains consistent with management’s estimates of a total market of deliveries growing since 2013 at approximately a 5% CAGR.

The other issue is it’s still very early to know the impact of electric-powered buses in North America and as they move to mainstream over the next 10 to 15 years. First, the volumes to date are very small.

For example, management estimates in 2016 is that the transit bus industry had only 288 EUs of Zero-Emission buses, which are either trolley electric, battery electric or fuel cell electric that were delivered, of which New Flyer had 73% of that delivery share. At this point, our total five-year bid EUs, both firm and options, for Zero-Emission buses is still under 8%.

Second, the market does not yet know what to expect for mature pricing, margins, cost base, warranties and so forth from electric buses, which may also have an impact in the way that we sell buses, for example, selling the buses and leasing the batteries as a concept. Total shipments by our aftermarket parts business in Q2 2017 decreased by 3.3% compared to the previous quarter and decreased 6% compared to Q2 of 2016.

However, new gross orders received in Q2 2017 increased by 4.2% compared to the previous quarter. Surveys and interviews with a number of large customers, primarily on the public side, indicated combination of parts orders and sales effects ranging from, first, specific inventory reductions set out by many transit agencies to reduce their working capital; second, budgetary constraints that limit spending, and that changes customer to customer; and finally, fleet modernization impacts for a number of large customers that we’ve delivered to has reduced their short-term need for certain spare parts.

So with our core business continuing to perform and each has an opportunity for EBITDA and cash flow growth, we continue to look for additional M&A opportunities to diversify and grow our business. Strong liquidity and low leverage provide us flexibility as we look for the right opportunity.

There have been some smaller transactions in the North American bus space, primarily cutaway builders and van-type completions centers, and no question, the multiples are higher than what we experienced in the past with Orion parts, NABI or MCI. Ladies and gentlemen, thanks 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-duty transit buses, motor coaches and aftermarket parts.

With that, we’d be pleased invite your questions. Matt, can you please provide instructions to our callers?

Hey, good morning guys. I just want to start with the OE business.

I’m just curious, I mean, is there something specific to mix in Q2 that sort of drives the EBITDA per EU higher? Maybe it’s a coincidence, but I guess, this year and last, we’ve seen a little bit of lower selling prices but much higher EBITDA.

So I’m just – again just curious is there something specific to Q2?

No, in all honesty, it is truly a coincidence. I mean, there’s a number things that have conspired to change average selling price and obviously our EBITDA delivery.

The selling price, we’ll continue to remind investors, is largely a function of the mix of the types of buses, but also the option level and the customization. So when customers put on enhanced camera systems or voice enunciation systems and so forth, it can drive up the price quite dramatically, but doesn’t have a lot of impact on the margin because it’s really a cost plus pricing environment.

The cost side of the business, we’ll continue to point to a number of things: the quality of our backlog that it’s been over the last couple of years; the very aggressive and consistent cost-reduction initiatives that we’ve been taking in our facilities through operational excellence and 5S; and then the whole concept of optimization of our supply chain, some of it is strategic sourcing and some of it has been in-sourcing to be able to build a part, paint a part and put it on the bus as opposed to buying it and getting it painted and handling it and moving it and so forth. And so those kinds of things have been really helping the margin improvement.

And unfortunately, or fortunately, it is a coincidence that our last year Q2 was the strongest quarter in the year and the Q2 this year was very strong as well.

The only part in the business that could, and it’s relatively small just due to the timing of shutdowns and the seasonality of the business, Q2 will always be one of the strongest from a production standpoint, which leads to better leveraging of our expenses, so that helps slightly. But other than that, that would be very little, I think, specifically related to the quarter.

Okay, that’s helpful. I guess, I’m just curious I don’t think there are any New Jersey deliveries this quarter.

I’m just – does that help the margin at all?

Yes, there’s – one – following the dynamics of the suspension of the contract last year, the release of that suspension, the catch-up of deliveries, we continue to build at exactly the production rate every single quarter throughout this year. And then, of course, as we get close to the end of this year, we’ll expect the production delivery for the third year of that contract for next year.

Great. But is the margin on that, the contract, a bit lower margin?

If you look at purely the bid margin, that was bid very competitively. I think one of the issues we’re seeing though is that the efficiencies being gained on a contract that size are slightly outperforming what was originally anticipated.

But I would say overall, that is not a contributor.

Okay, that helps a lot. I guess, just on the aftermarket business, you mentioned a few of the issues, the inventory initiatives, which, I guess, stay on shorter term, but budgetary constraints and fleet modernization, sound like these could be longer-term headwinds.

So just curious how you think – again, I think, you – at the beginning of the year, you were thinking sort of flattish or maybe little growth for industry. I’m just curious if that’s still your expectation and how long you sort of think maybe these headwinds persist.

Well, look, our experience is that our aftermarket parts business over the last three or four years has grown dramatically. We had the core Flyer business and then you add the Orion business and then the NABI parts and now MCI and there is no question that some of the largest operators in our [indiscernible] have been very significant deliveries and continue to take them are taking 15, 17-year-old bus off the road and so the parts dynamics associated with that are absolutely less.

But there is getting – the reality is a number of our customers and their public operators in most cases are getting aggressive at trying to reduce their working capital and the costs tied up with parts on the shelf and then potentially obsolescence and so forth. At the end of the day, it’s very – it’s almost an impossible market to predict because in the transit bus world, many buy parts that go on a shelf and are planning for a fleet replacement and so forth.

And in the motor coach world, most of the parts sales are transactional in nature, a coach needs something specific either or preventative – or a planned maintenance or an unscheduled and they need that. So they’re not buying parts for the shelf.

And so while we’ve seen headwinds on the volumes, we’ve continued to go after the cost and we continue to go after the efficiency at which we sell. The reality of it is that Brian Dewsnup that’s running the – the President of our Parts business, is in the process of slamming together those two businesses, the New Flyer Parts and the MCI, which includes physical looking at the warehouses and so forth, it includes the IT harmonization and organizational structure and supply agreements and so forth, and it’s not a light switch.

It’s going to take us some time to be able to bring the whole business together. So look, it’s unfortunate that the volumes are not up.

The margins have been very healthy, but we remain very confident in our parts business and our opportunities going forward.

And can you maybe just remind me or remind us the budget you used to mention, budgetary constraints, just how – where the financing for that comes versus new orders for the transits?

Yes. So in the motor coach world, obviously the private operators, it’s a private business-making decisions about buying buses, leasing buses, financing buses and then what parts they carry.

In the public world, 80% of the capital costs can be paid for by the FTA and 20% by the local municipality or states depending on how they fund their capital acquisition. All of the spare parts are driven and paid for by those local municipalities and – so the pressure on any of them continuing to try to reduce the operating cost of those cities and the transit agencies, here’s an area where they feel there’s an opportunity to cut their costs or to reduce their working capital deployed.

Okay, that’s helpful. And maybe if I can just sneak one last one in, I guess.

You mentioned multiples a bit higher of late on some of the smaller deals you’ve seen. I know you’ve traditionally been pretty disciplined in what you’ve done that, I’m just curious, now that you guys get a bit of a higher multiple, if you’d be willing to sort of maybe go up and pay a bit more for something strategic or maybe not?

Yes, look, at the end of the day, Mark, we – hopefully we can continue to send the strong message that we believe there’s growth, there’s earnings, there’s cash flow in our core businesses and we’re not taking our eye off the ball to chase M&A for the sake of it. We’ve put in an organizational structure leadership to drive those businesses to continue to perform.

When it comes to growth, we have this wonderful and enviable opportunity of having a very low leveraged balance sheet, we’ve got strong cash flow and we’ve got the liquidity opportunities, and so absolutely, it’s likely we’re going to have to pay higher than we paid in the past, but we’re not just going to go up and chase something that doesn’t fit our core, our strategic plans, our cultural approach and so forth. And so we wanted to put that sentence or that paragraph into our wording because the reality that is the market, whether you’re buying a bus business or whether you’re buying a trucking business or something, multiple have crept up in the last couple of years and it’s just an obvious statement of the reality of the market.

Right, okay. All right, thanks a lot for taking my call.

Thanks, Mark.

Thanks guys, good morning. Can we just talk a little bit about the bump in production, and I guess, just trying to understand sort of the pacing on how the rest of the year is going to go.

So I guess, a couple of things on this. One, can you remind us sort of any sort of shutdown plans whether or not you’ll be shipping it out like that?

And I guess, the next question is in terms of the increase in production rate, is it – if you want to give us some color on maybe transit versus coach and just maybe some more description on each of the markets just so we can understand maybe where this is going to.

Sure. So in total, as I think I said, it’s about an 8% increase year-over-year.

And as everybody knows, we increased it going into the year, we increased it at the end of the first quarter and now we increased in the second. A couple of things conspired to do that.

The stability of the order book heading through 2017 into 2018 and into 2019 gave us confidence that we could increase the run rates, specifically in the transit bus business, without increasing and then decreasing and having to worry about that. So we felt very comfortable based what was in the order book that we could do that.

At the same time as Wayne Joseph, the President of the Transit Bus business, and his team migrated out of the minibus business in St. Cloud and as the sophistication and maturity of the Anniston, Alabama facilities, which was the former NABI facility, continues to go really at the learning curve on building the Xcelsior buses, we feel very comfortable that we could naturally increase the transit buses in the second half.

On the motor coach side, you’ll know that roughly 35% plus or minus of the business is scheduled slots much like the public market in transit where we know the contract, we know we’re going to build and so forth. The rest of it is for private operators that literally buy one, two buses at a time, sometimes maybe five or ten if it’s a larger operator.

But so in that transactional environment, the health of the number of quotes that we see, the customer response to the new products that we’ve been introducing and the model year 2018 features and so forth, the quality of the build and so forth gave us confidence again to tweak the run rates of building those. Now we did have, as Glenn described, shutdowns, if you will, different strategies on motor coach and on transit bus.

Motor coach goes for a much longer shutdown in the summer and New Flyer less so. In December, Glenn remind me here, we have another week effectively of a shutdown for both businesses at the end of the month.

Correct, in the quarter. Plus in Q3, MCI has a shutdown for three weeks.

Yes.

And on the Flyer side, the shutdowns at Flyer are fairly well staggered across the year, goes pretty much one week shutdown per quarter because we stagger the summer shutdown over the Q2-Q3 period.

Okay. So I guess, the – what we’re trying to understand here, so we should assume that call it the third of the volume that historically has been MCI, you’ll be down for both three weeks of the quarter in Q3, maybe a week of New Flyer and it’s fair to think that then we’ll still expect the Q4 back end loaded at MCI just in terms of a seasonal pattern?

Yes, absolutely from a delivery perspective. The reality of it is we are increasing the run rate of the businesses in the second half of 2017.

Okay, good. And then, I guess, just kind of the natural question on this then.

Transit certainly pretty healthy backlog and stuff like that. But I mean, does this imply – and we’ve had this discussion before.

Does this imply that MCI is actually regaining market share? Or is it just the whole market’s growing at faster rate than you possibly had seen before?

We did see MCI recover one point of share in calendar fiscal 2016. We’re feeling very comfortable in our competitive position, but we really don’t know until the end of the year relative to the total delivery.

So I think it’s a combination of market growth and some share growth as well, but we don’t know the actual hard numbers until the end of the year.

Okay, great. Just thinking about, I guess, the next thing and it’s maybe a bit of a discussion around the efficiency that you’re starting to gain in the manufacturing operation.

One of the things we’ve always liked to look at was inventory levels, and even at a higher production rate, the inventory levels on a unit basis seem to be incrementally coming down. Any thoughts around even as you increase production rate, what the natural rate’s going to be?

I know when it was just the transit manufacturing bus, we had seen some pretty good improvements then, as you said, you added NABI and the Anniston operation, now MCI. What’s the natural rate of inventory that you think you’re going to need to carry?

And where can we get that down to?

So if I look at it, definitely there, on the transit side, the efficiencies in that business has resulted in sort of a lot less off-line WIP at the end of any quarter. So very little of that, so – and the line rate really shouldn’t drive much increase in inventory because it’s really a velocity issue flowing through the line.

On MCI, it’s really dependent on the timing of the sales. There could be some fixed goods – finished goods in the [indiscernible] that could drive it slightly higher, but I think overall we should see a little bit lower there as well.

Chris, also remember that for the last couple of years, Wayne’s team has had effectively MiDis that were being built and in stock, to some extent. We also have high variability of every customer in how they accept and the pace at which they accept and inspect, so you’ll always have noise in that level.

The only area where we really kind of have excess, if you will, or a block is where we build a shell in Winnipeg and ship it to the United States, so you’ve got a few extra units there for – being shipped to Crookston for completion. In the MCI world, you have a little bit of that on the D coach for the public customers, but MCI actually has inventory of finished buses that will range from 20 to 30 and sometimes go up to 35 and sometimes go down to 5 depending on where in the selling cycle and whatever based on the standard J-model.

Does that help?

Yes, no. That’s useful.

And then just one last one for me just on the capital spending. So you’re going to step up, you talked – you gave us a little bit of granularity on what that’s going to be for, I think, you mentioned like $25 million for some work around the NABI facility and the new bus center.

Can you maybe give us sort of more color? And what I’m trying to get a handle around it is, has there been a shift in kind of the maintenance capital requirement?

What’s project-based? And what’s the timing of some of that spend?

And how should we start thinking about that spend into 2018? Because, I mean, frankly, one of the things that we’ve seen is sort of the pacing of capital spending sometimes can be maybe slower than originally forecast.

And just understanding maybe what the return profile of those investments are going to look like?.

Okay. So the pacing, I guess, that is a bit of a question mark.

The goal is to get most of this done by the end of the year. There probably will be some carryover into next year that we’ll see.

So we put the range on it. A lot of this is going to be more longer term in focus in terms of returns so, for example, the things we’re doing for the innovation center, we’re not going to see immediate paybacks coming from that.

It’s going to take us a long time to see recovery. The things that we’re doing in terms of in-sourcing, we would expect sort of the same type of paybacks as all the projects we’ve been running, so we think those are going to be fairly short-term.

In terms of splits, so roughly half the CapEx that we’re looking at is on this innovation center, that’s going to be very long-term type benefits. The other half is going to be – is related to in-sourcing and there where we should see benefits in 12 months to 18 months.

Okay. And you’ve always…

And CapEx, I put that in a – it’s tough to say because we make – we sort of have sort of an ongoing general-type improvements in terms of in-sourcing and those type activities. But in terms of the maintenance CapEx, I put that in the range of $25 million to $30 million.

Every single one of those investments, Chris, has been put against the filter of a WACC and our strategy in terms of the IRR or return on invested capital a little bit north of our thresholds.

Okay. So really the way to think about it is these are specific identified projects that have a return and the maintenance number really is just – it’s just sort of staying there.

So is it fair to think that you think that $25 million to $30 million run rate is kind of the baseline into 2018, and then we’ll deal with any special projects after that?

That would be correct.

Okay, great. Thanks, guys.

Thanks, Chris.

Hey, thanks for taking my question here. Maybe just a clarification on Chris’ last question around the CapEx.

So just to clarify, the $55 million to $65 million, was that in addition to the maintenance CapEx?

No, that’s total CapEx…

That’s total, okay, that’s what I thought. Okay, that’s helpful.

And does that suggest then when you think of the MCI synergies that you have out there to the extent some of these investments are related to that, how should we think about the absolute, I guess, synergies for MCI relative to the numbers you’ve disclosed?

So most of the programs we’re talking about today that is the bulk of the CapEx are related to the New Flyer operations, so primarily in the Anniston facility. That would have no effect on the MCI synergy numbers that may be available to us.

Okay, that’s helpful. So I still want to dig into this whole innovation center you’re building in Alabama.

It sounds like it’s around electric vehicle technology. I’m wondering does that change how you think about owning the IP around your buses?

Traditionally, I think people have looked at New Flyer in this industry as an assembler of technology. Do you see a shift in your strategy there?

And is this being driven because you see the market moving towards that? Or is this something you think your customers will require when they eventually order more electric vehicle buses, they’ll want their OEMs to also be manufacturing the battery, for example.

Do you see that as being the driver to this initiative here?

So we would characterize as ourselves as designers, integrators and manufacturers of buses. And today, historically, we’ve evolved with the market on the different types of propulsion systems or engineer – air conditioning systems or camera systems and so forth.

I think with our investments in Alabama of another $25 million does a couple things: first of all, a good part of it is to extend the facility, as we said, to bring the weld and some of the parts manufacturing into the main facility to optimize that business. The second part of it is this vehicle innovation center that you’ll hear a lot more about as we get closer to October when we plan on a grand opening.

But what it really is, is a recognition that electric boxes, autonomous drives and so forth is a pretty serious ultimate long-term shift of our business, and we’re making a commitment to do that. In some cases, absolutely, we will continue to own IP just like we own IP associated with putting a bunch of parts together to make a natural gas bus work.

We’ll own the IP associated with battery management systems and how an electric bus or a fuel cell bus works. Having said that, we have no desire to make batteries.

We believe that our strategy is to be able to be the world’s best buyer and evolver as the technology changes. Today, we effectively buy cells or packets, if you will, and package that together and for our own battery management system.

But being neutral and efficient as that technology and the cost and the price and so forth changes, we’ll continue to evolve our position and our buying and our strategy associated with that. But no question going from a diesel to a diesel hybrid or to a natural gas is a smaller step change than going into an all-electric bus.

And so this is investment is an acknowledgment that we’re there. We’re playing just like anybody else in this game.

And as I said before, it’s still very small. I mean, the reality of the number of electric buses delivered last year and this year is very small.

And the total bid universe, the firm and options is less than 8% of the total bid universe for the next five years. So it’s not like its big light switch that’s going to go from diesel or hybrid to electric overnight.

It’s going to be long drawn-out process, but this is an investment to allow us to enhance our ability with our partners and the different suppliers to be able to teach, educate and work with our customers in what that evolution of electric bus looks like. But yes, we will continue to have some IT just like we do today.

That’s helpful. And I guess, the genesis of the question is, I guess, some of the upstart competitors, I guess, they would view themselves as a battery company and the buses, I guess, the vehicle in which they’ll look to demonstrate this technology.

Do you see that being a competitive disadvantage then over time? Or was there a risk when you look out not necessarily in the near-term as you mentioned it’s not necessarily a big part of your backlog today, but do you see transit authorities requiring that, I guess, combination from their bus suppliers at some point?

Well, at the end of the day, we believe the customers will continue to want to customize their products for their own geography, topography, weather, route structures and all those things that make those customizations continue to happen, and we continue to believe that there is not one- size-fits-all when it comes to a transit bus. And so being deep in the ability to build our own battery may satisfy some customers, but not all customers.

It is, and what we’ve seen so far, the ability to make the battery and the cost of that battery is a very small percentage in the grand scheme of things of the – or relatively small in the whole bus. The ability of the bus structure to last, the ability of the doors and the air-conditioning systems to be robust, the ability to do the maintenance and so forth, it’s not just the battery if somebody makes that.

The other dynamic is some of our competitors are trying to differentiate on charging and so forth and some of them have structural dynamics associated with their buses that we think will be challenging, the location of the batteries and the axle weights and all the other stuff. Look, our view is it’s not revolution in electrification and autonomy.

It’s going to be evolution, and we’re positioned like we have been for the last 20 years or 30 years to evolve and to be able to continue to evolve with those customers. In New York City, for example, we have diesel buses, we have natural gas buses, we have hybrid buses, and soon we’ll have electric buses all based on the same platform.

And they’re not buying 500 electric buses tomorrow, they’re buying 5 or 10. And so our ability with that common platform allows that customer to evolve, test, choose, adapt, change and so forth as opposed to being stuck to a closed loop of somebody’s technology or charging system without flexibility.

So we see it as truly a competitive advantage in our end.

That’s great color. And last one for me, not to beat the margin, I’m changing course here a little bit, not to beat the margin question to death.

But when I look at the margin profile in the second quarter, call it 8,000 to 10,000 per bus on average higher than the trailing three quarters. If I were to kind of look at the buckets between mix and the cost savings, I’m just trying to get a sense of how we should be thinking about – how much mix impact that lift in the second quarter relative to some of the structural savings you highlighted there, Glenn.

Well, what I would think about is go and look at our investor deck and go and do your math on LTM margins and look at that trend more than the noise of any one individual quarter. We’re far more comfortable knowing what the pricing of the stuff is in our backlog, the opportunities for cost savings and efficiencies and that trend is really where we’re managing the business around as opposed to the volatility is higher or lower in any one quarter.

All right. That’s it for me.

Great quarter guys. Thank you.

Thank you.

Good morning, guys.

Hello.

Most of my questions have been answered at this point, but maybe just one quick one on the aftermarket business. Just wondering how you guys are thinking about your market share currently?

Well, it’s a fantastic question. It’s something that we really, really grapple with.

When we were just New Flyer parts, we did kind of a top-down, bottom-up customer by customer, competitor by competitor to try and recalculate share. The problem is you have leakage.

You have truck guys selling parts every once in a while. You have online ordering from consumables or replacement-type parts like filters and so forth that you can’t calculate.

You’ve got local distributors and so forth. So share is very difficult to calculate.

We do try and we’ll continue to try and come up with ways of doing that by literally going to the large transit agencies, looking at their spend, going through [indiscernible] looking at their budgets and all the other stuff. I would say, we would say and we continue to say that our rough market share of all of the parts that get sold is somewhere in the 30% to 35% of the available parts sale.

And again, there are certain types of parts that go into transit or motor coaches that go direct. You have, for example, Cummins that doesn’t sell all their parts through us, they sell them through their dealers and those go on our buses, but we can’t really be definitive about how much spend over there.

It’s very difficult.

Okay, excellent. And assuming you’re fairly confident in terms of stability of that market share over the last year or two?

Yes. Look, as I said before to one of the questions and maybe in our prepared remarks, we’re busy bringing these businesses together.

We definitely think there’s cost opportunity, efficiency of working capital, efficiency of supply chain by having a combined business, but it’s going to take us another 1.5 years to finish that, if you will, to the point we’re that much more comfortable. The size of our spend, and we’re going to continue to balance volume and share with margin, it’s a very important attribute of our business and a very, very important part of our strategy.

Okay. Excellent, that’s it for me.

Thanks. Great quarter.

Yes.

Thank you.

Congratulations, guys. Very good quarter.

Just wanted to ask a couple of questions. First on the electrification, and I guess, the Zero-Emission buses.

Has there been any change in your thinking of the timing of orders, and I’m not talking about the 2s and 3s, but where we get to a point where we see orders for 25s and 50s and 100s. Is that something that really you don’t see until 2020 and beyond?

Or is that something that may happen before then? I’d like to think that was a question.

It’s a good question, Stephen. We’re still, in our words, maybe we’re still in this pilot proof of concept, try-it type environment and most of the opportunities have been two buses or somebody, I forget, one customer had two buses with 200 options.

We’ll see ones where there are special grant-based programs in the United States for five buses or 10 buses. There have been a couple, around 30 or 40, but really negligible in terms of quantum.

I think we’ll start to see that in the next two to three years for sure where we’re going to see some of those bulk-type orders. But put yourself in the transit agency’s perspective.

As romantic as that sounds, you now have to think not just about the bus, you’ve got to think about where the power comes from. You’ve got to think about your maintenance infrastructure and training.

You’ve got to think about your depot and how you charge these things that night and where they locate. You’ve got to think about what routes you put them on because you may have on route charging and so forth, which is why I think in parallel to proofing and validating that electric buses work and make sense in that environment, I think the transit agencies are working on holistic capital strategies to be able to modify and adapt their infrastructures, which is why it’s not a light switch.

And is there any consensus emerging around that where are they thinking of sort of in the field chargers or systems where batteries have to be

It’s a good question, Stephen. There’s a lot of stuff that if you would have asked us that question three or four, five years ago when we started the electric buses, we were – based on the battery density, the cost per kilowatt and so forth, the robustness of the batteries, we would have said, geez, most of them are going to be en route type charging.

Now we’re finding with the density, the price, the location of the batteries and so forth that more – and we see this in the marketplace, more batteries having no charging en route, but only depot charging makes a lot of sense. Our belief is that, again, everybody’s going be different and everybody depending on their operating environment is going to have either – a number of different approaches.

One size is definitely not going to fit all.

Okay. If we could shift a number of my questions were answered, but you talked about, in the coach business, the momentum behind the new 2018 models.

Is that enough to make a material impact on the business? And what is it that you did to – in 2018 to make those more attractive?

Well, there’s a number of features on the buses. There’s a whole new cockpit for the driver.

There was a glass cockpit and configurable that has been really well received by the operators. There’s lighting dynamics that change interior on the bus.

There is the seating layouts. We modified the lavatory and created a bunch, about 20 inches more, of legroom that can be distributed across that whole side of the bus to either have legroom or add more seats.

There’s rear windows. There are some reliability things that have been enhanced and so forth.

So we think it – it’s so far been very, very well received. The orders have been very healthy, and we’ll continue to adapt the production volume as that goes.

And is that a kind of thing that you do every four or five years? So this is an upgrade that will run you for a while?

Or how often do you make changes of this sort of magnitude?

In the transit bus world, we don’t think of model years. We think of taking that reference bus in our vernacular and adapting it to the customer’s specification and it’s constantly changing.

In the motor coach world, it’s far more like truck or automotive where you have model years. Now in the MCI environment, a number of the features that we put in, in 2018 were pent-up from potentially lack of investment by MCI in 2015, 2016 and 2017, so there was a number of things.

But we will continue to evolve the bus to the model 2019 year and model 2020 with those continued enhancement of features. It happens every year in the coach world.

Okay. And finally, if we could turn to the aftermarket parts business.

That’s an area where the numbers have been maybe a touch below what The Street has been expecting for a number of quarters. And is there a way we should be thinking about this differently?

Is any of this related to sort of an underlying runoff of the Orion parts business as there are fewer of those buses on the road? Is there a way we should thinking about this in terms of a longer-term growth rate that’s maybe different than what we had thought in the past?

And I’m not thinking so much about guidance for 2017, but looking to 2018, 2019, beyond. What do you think the potential is for this business?

Well, look, there’s a sales dynamic that absolutely is impacted by the fact that no more Orion buses were built after 2012 and no more NABI buses were built after 2015 or something. And so in the Orion case, I’ll get the numbers directionally correct.

There’s like 10,000 Orions on the road and there’s 8,500 or sort of NABIs on the road. And over the next 15 or 20 years, those things, in theory, will go to zero.

So there’s definitely that. And the build rate when you added NABI, New Flyer and Orion together, combined, is slightly higher than the current build rate of New Flyer.

So you have some of those dynamics. But as I said before, you also have the cost opportunity at our end by bringing the businesses together, both from an overhead as well as from a parts distribution center as well as a combined procurement opportunity from that perspective.

So we’re not growing at the pace that we grew before. It’s a massive part of our business from an EBITDA perspective, fundamentally critical to a customer satisfaction environment.

But based on our current plan, it’s not a growth story in the parts business. It’s an EBITDA and cash flow, customer service story.

Okay, great. Thank you very much.

Thanks, Stephen.

Hey morning guys. It seems like the autonomous bus market is pretty early stage right now.

There’s been a few articles and rumblings here and there. Is that a fair statement like no one’s really trying to make a big move on this right now?

Everyone just kind of sizing up the market and the opportunity and then spending the next couple of years figuring out how to capitalize on it?

Here’s our view, Trev. In our lifetimes, we’re going to see – I think we’re going to see autonomous buses.

But when you talk to transit agencies in that environment about autonomous buses, if you’re talking about a small bus circulating on a university campus, we’ll see that in the next couple of years. If you think about an autonomous bus downtown New York City or LA, we don’t – maybe a pilot or two, we don’t see that being in the short term.

There’s a security issue. There’s safety.

There’s control. There’s traffic.

There’s all kinds of dynamics that will make that – that will have headwinds against that kind of stuff. In the motor coach world, there are already things that are autonomous-like that are starting to make their way in.

And in fact, in the motor coach world, we may see it potentially sooner. You’ve got mostly highway driving, which has the dynamic.

You already have things like adaptive cruise control and lane departures and all this other stuff like we start to see in our cars. But again, it’s not like you and I sitting in our car making decisions to put it on autonomous drive.

You’ve got 55 to 60 passengers in the back. There’s lots of dynamics that make that, in our mind, inevitable eventually, but it’s not going to be fast.

That’s helpful, thank you. And then just maybe just refresh us on the opportunities to potentially tuck in or tuck under some of your supply chain from an M&A standpoint.

Is there still some low-hanging fruit there from maybe buying some of your suppliers?

Well. So we did that just recently, Trev, with this Carlson opportunity.

It’s fortuitous that they were headquartered in Winnipeg and this business grew with us over the last number of years, setting up, first, the facility in St. Cloud, Minnesota and then after the NABI acquisition setting up in Anniston.

So it was a natural. Then you have the complexity and pressure of higher Buy America requirements, and you overlay with that the fact that MCI has their own facility named frank Fair.

So the combination of all that made that the obvious choice. So on our minds, there’s tuck-ins in terms of that kind of stuff that may be available, but there’s the continued picking off of cherry parts, if you will, or real parts that we can fabricate, bend, paint, whatever and literally place on the bus right beside it and eliminate all of the handling and all the warehousing and all the movements and freight costs and quality issues and so forth.

So we’ll continue to do both of those, and I think that continues to be both available in the New Flyer environment as well as the MCI. And of course, we’re very conscious, for example, in the Carlson case, it also makes parts for aftermarket business.

So we’ll continue to look at those kinds of things.

Thanks, Paul.

Thanks, Trev.

Good morning. The contributors to EBITDA margin this quarter, the cost-saving synergies and the operating initiatives beyond the mix of contracts, did the contribution from those change in Q2 from Q1 this year?

Yes, can you repeat? You broke out there.

Can you – sorry, can you repeat the question, please?

Just on the cost-saving synergies and operating initiatives, did the contribution to margin improve in Q2 versus Q1 of this year?

There’s no real big add. So I would say the OpEx improvements in the quarter are relatively consistent with Q1.

Okay, thanks. And Paul, in your opening remarks, you highlighted that competition in transit bus and MCI has increased over the past year.

If you look at the solid backlog of orders, how did the margins on those compare to the margins over the past 12 months?

The quality of what’s in our backlog obviously has a fairly consistent trend and average, if you will. There’s definitely volatility order by order, customer by customer.

It’s mostly New Flyer backlog with the exception of the MCI environment have public customers like New York – or sorry, like New Jersey or Houston, those kinds of customers. But I would say the profile of our current backlog is consistent with what we’ve seen over the last 12 months.

Okay, And one last question. The new option awards are down significantly over the first half versus last year although the pending orders are up.

Is your market intelligence providing you with a sense of why there are fewer option awards?

Well, if you go back into some of our materials over the last couple of years, a few years ago, what was happening in the transit environment is we had, for lack of a better word, there was a little bit of gaining going on. The opportunity for a customer, a transit agency, to put a contract in place for firm and loss of options and then any manufacturer, they don’t want them shopping the options to somebody else.

Just to be extreme, there was one example of a competitor of ours where they had contract with customer for one firm and 900 options. And clearly the FTA felt that’s not what intention of the program, the funding and the options has really intended to do.

So they came out with what they call a dear colleague letter, which sets the guidelines in which options can be put into a contract and how they can be assigned. And what that really forced or changed in the industry is we now have more contracts, more bids and less options, because if you’re not named on the competition and you’re not named on the file as an initial player, it’s almost impossible to transfer the options.

So consequently, we’re seeing less option per contract and more number of contracts. And then, of course, you overlay that with our conversion rate, the fact there’s less options and it’s more restricted to certain customers means the probability of using those options is higher, which I think, last year, we had 70% something and this year we’re 90% year-to-date on option conversion.

Okay, thanks for your comments.

Great, thank you.

Yes, guys, thanks. So sorry, just one follow-up.

So when we think about this production rate increase, the extra 500 units, and call it, the 8% year-over-year, one of the things just as we think about margins going forward, I just want to confirm this. So you’ll have the variable cost, the material cost of the production, direct labor I’m assuming for the assembly.

But are there any additional overhead costs you have to incur for that production rate increase? Or is that just basically going to fall out on margin?

No, look, it’s not linear, but there’s absolutely overhead costs, whether it be program managers. Remember that every bus is different, so the amount non-recurrent engineering, whether it’s two buses or 200 buses, is still the same level of work.

They supply people, to some extent, then there’s a dramatic environment of, and again, every customer’s different, around field service. There are definitely indirect costs that come as the volume goes up.

It’s not as if there’s a straight drop-through.

Okay. But I mean, what percentage of, if you think about the cost of the manufacturing, what percentage would actually be fairly flat as you increase this volume?

Really no specific number. I guess, Paul sort of detailed the area that we’re going to see some cost increase.

Where you could see a big overhead shift is if we have to start adding shifts to our production, and at this point, the increases that we’re looking at is not required of that. So the increase on a relative scale would be on the lower side.

Okay. And so, I guess, the way to think about it then is what level of capacity utilization are you at right now in the facilities?

And basically is, I guess, my question is, is this basically it in terms of production rate increase before you kind of have to start thinking about either additional factories or capital investments or anything like that?

I would say directionally, yes. But remember, mix, not just the type of bus, but the 40-foot versus the half – two halves that have been articulated have an impact on capacity.

And then as Glenn articulated, one of our facilities is basically a two-shift operation, the other two are single-shift operations. And so there’s dynamics that allow us to add capacity, but then is it sustainable and what overheads go with that?

So we’re in the higher range of our capacity, but we’re not out of physical capacity.

Okay. And then just to confirm one thing.

The expectation should be that this increased run rate through the second half that should carry through into 2018. Correct?

Correct.

So on a natural year-over-year, we should expect a higher delivery rate in 2018 versus 2017 with the higher rate in the first half?

Our current assumption is, as we’ve done every year, is we build our next year based on the current volume and then we look at the order book and we look at the backlog and the number of bids. And as we’ve been saying forever, if you see us increase our run rate, we have confidence that it’s sustainable.

Okay. So maybe a different way to ask this question then, what’s your slot utilization looking at right now looking over the next, call it, 12 to 18 months?

I don’t know the answer to that right now, Chris.

Okay, great. All right, thanks guys.

Thank you.

Thank you, Matt. Ladies and gentlemen, thank you for your time and listening today and your questions.

We also again would point you to our website and our filings, and look forward to talking the next quarter. Thank you.