Mr. Paul Soubry reports

NFI ANNOUNCES FIRST QUARTER 2024 RESULTS

NFI Group Inc. has released its unaudited interim condensed consolidated financial results for the first quarter of 2024. All figures are quoted in U.S. dollars unless otherwise noted.

Key financial metrics for the quarter and for the last 12 months are highlighted herein.

"Our financial results continued to show positive improvement in the seasonally slower first quarter, with double-digit growth in vehicle deliveries and revenue, significant improvement in margin performance, and a record total backlog with a value of nearly $12-billion. While certain legacy inflation impacted deliveries had a negative impact on quarterly results, we have completed the majority of those remaining contracts, which is expected to drive margin growth as we move through 2024," said Paul Soubry, president and chief executive officer, NFI.

"Customer demand was at record levels, as we secured the highest new quarterly contract awards in NFI history with over 5,400 EUs [equivalent units] of new additions to our backlog. The aftermarket segment also delivered another period of record results, highlighting the strength and resiliency of our global parts businesses. Within the manufacturing segment, our team remains laser-focused on improving production efficiencies, delivering to our customers and driving volume drop-through as we significantly increase our annual deliveries, capitalizing on the improved pricing and product mix within our backlog.

"The operating environment continues to see challenges related to labour availability and overall supply chain health, two areas that we are actively managing. Supplier performance has seen significant improvement, and, while the first quarter did see year-over-year delivery growth and aftermarket outperformance, certain deliveries planned for the quarter were pushed into the second quarter of 2024, primarily driven by timing of final customer acceptances. Our recovery was supported by the addition of 210 new team members primarily in manufacturing roles.

"Our focus on working capital management was another bright spot, with improvements in working capital days both year-over-year and sequentially from the fourth quarter of 2023. This helped us maintain a strong quarter ending liquidity position, even as we increased new vehicle starts. Our teams are advancing discussions with customers regarding proposed changes to U.S. contract structures, including progress payments and milestone billings, pricing adjustments, and changes to customization levels. We saw some benefit from taking these actions during the quarter and expect they will provide further positive benefit to working capital investments as we build these new terms into future contracts.

"Over all, we are confident in our ability to execute to our plan and reaffirm our 2024 expectations for double-digit growth in revenues and deliveries, triple-digit growth in adjusted EBITDA [earnings before interest, taxes, depreciation and amortization], and positive free cash flow generation in the second half of the year."

Liquidity

The company's total liquidity position, which combines cash on hand plus available capacity under its senior first lien credit facilities (without consideration given to the minimum liquidity requirement of $50-million), was $166-million as at the end of Q1 2024, down 12 per cent from the end of 2023 Q4. Total liquidity position was positively impacted by cash generated from operating activities, offset by interest expenses, repayments on obligations under capital leases and capital expenditures, which required the company to make draws on its North American and U.K. secured facilities.

NFI generated $10-million in cash flows from working capital in the first quarter of 2024, as higher vehicle deliveries lowered finished goods and work-in-process (WIP) inventory. These reductions were offset by an increase in raw material balances, which remain elevated, reflecting higher input costs for ZEB components and higher carrying balances to support consistent supply. Working capital was also impacted by a reduction in overall deferred revenue balances, from the recognition of prepayments on final deliveries and from a reduction in provision balances to cover warranty campaign activities.

NFI expects that its total liquidity position may decrease slightly during the second quarter of 2024 as WIP and finished goods inventory balances increase as production rates increase. The company remains focused on cash and liquidity management, including efforts to accelerate deliveries and customer acceptances, accelerating customer payments through the pursuit of advance payments and deposits wherever possible, and improving supplier payment terms. NFI believes that its existing liquidity supports the execution of the company's operational and strategic goals, including planned increases in production rates and investments in zero-emission products and electric propulsion technology.

Segment results

Manufacturing segment revenue for Q1 2024 increased by $177-million, or 46 per cent, compared with Q1 2023, driven by higher new vehicle deliveries, higher average sales prices per unit and product mix. The company continued to see improvement in supplier performance and on-time production in Q1 2024.

Manufacturing adjusted EBITDA improved by $21-million, or 91 per cent, compared with Q1 2023. The improvement was driven by higher deliveries, favourable sales mix and a lower number of legacy inflation-impacted deliveries. Manufacturing adjusted EBITDA as a percentage of revenue showed continued improvement, increasing from (6 per cent) in Q1 2023 to (0.4 per cent) in Q1 2024.

At the end of Q1 2024, the company's total backlog (firm and options) of 14,783 EUs (firm and options) increased by 40 per cent from the end of Q4 2023, and increased by 47 per cent from the end of Q1 2023. The increase was driven by record awards in the quarter, offset by higher deliveries. NFI also had 365 EUs of new firm and option orders in bid awards pending (where NFI had received notification of award from the customer, but formal purchase order documentation had not yet been finalized) as at the end of Q1 2024.

Backlog for Q1 2024 has a total dollar value of $11.7-billion, and the average price of an EU in backlog is now $790,000, a 19-per-cent increase from Q1 2023.

Aftermarket segment delivered another quarter of record results with revenue of $160-million, an increase of $21-million, or 15 per cent, compared with Q1 2023, driven by increased volume in North American public and private markets, and the impacts of heightened inflation on parts pricing. In Q1 2024, aftermarket adjusted EBITDA was $38-million, an increase of $8-million, or 27 per cent, year-over-year, stemming from improved sales volume, pricing adjustments and favourable product mix. Aftermarket adjusted EBITDA as a percentage of revenue was strong at 23 per cent, compared with 21 per cent for the same period in 2023.

Net loss, adjusted net loss and return on invested capital

In Q1 2024, the net loss of $9-million decreased by $37-million from Q1 2023, improving by 80 per cent, with improvements in vehicle deliveries, revenue, favourable sales mix and adjusted EBITDA offset somewhat by higher interest and financing costs.

Adjusted net loss for Q1 2024 of $16-million improved from Q1 2023 adjusted net loss of $38-million, driven by the same items that impacted adjusted EBITDA and net loss, adjusted for unrealized fair market gains related to foreign exchange, the company's interest rate swap and the prepayment option on second-lien debt, plus other normalization adjustments including non-recurring restructuring and past service and pension costs.

Q1 2024 ROIC increased by 6 per cent from Q1 2023, primarily due to the increase in adjusted EBITDA and a slight decrease in the invested capital base. The decrease in invested capital is primarily driven by a decrease in long-term debt balances as the company completed a comprehensive refinancing plan during Q3 2023. Also contributing are increases in cash balances as the company generated cash from its operating activities during Q4 2023 and Q1 2024.

Efforts to strengthen bus manufacturing in the United States

During the quarter, NFI continued to advance efforts championed by the American Public Transportation Association (APTA) and the U.S. Federal Transit Administration (FTA) to support more competitive and stable bus manufacturing capacity in the United States. These activities included discussions on pricing adjustments to legacy inflation-impacted contracts bid from 2020 to 2023, the incorporation of progress payments (deposits, advances and milestone payments), pricing adjustments to future contracts to reflect price inflation or deflation, and a potential reduction in vehicle customization through the establishment of standard specifications and best practices.

NFI has experienced some success from these efforts and during the quarter, completed some price adjustments on legacy contracts and progress payment structures with certain customers. The company will continue discussions with customers on incorporating progress payments into existing contracts and has begun to build progress payments into new contracts wherever possible. Management expects these actions may have a positive impact on NFI's financial performance in future periods, especially as it relates to working capital investments.

Outlook

Management anticipates continued positive improvements to revenue, gross profit, adjusted EBITDA and free cash flow, a shift to net earnings from net loss, and improvement in ROIC over the next 12 to 24 months, as the company ramps up production, delivers on its backlog, and benefits from the growing demand for its buses, coaches, parts and Infrastructure Solutions services.

Management believes market demand is evident through NFI securing record new quarterly orders of 5,421 EUs in Q1 2024, the company's North American active bids of 5,410 EUs and the current five-year forecasted demand within the company's North American bid universe of 21,350 EUs. This bid activity is expected to drive additional backlog growth throughout 2024, and revenue growth in the medium and longer term. In addition, demand within private coach and international transit markets has also seen strong growth driven by increasing ridership, travel and return-to-work initiatives. These demand factors are expected to drive additional new orders in 2024.

ZEB demand has remained strong, with an increased number of ZEB bids and the number of EUs per ZEB bid increasing, as transit agencies are progressing from pilot or trials to more active deployment and operation of ZEB fleets. NFI expects active ZEB bids to remain high through the coming years based on government funding levels supporting state, provincial and municipal ZEB adoption targets.

NFI is working closely with its suppliers to monitor supply chain performance, and, due to the company's strong backlog, has been able to provide longer-term production visibility to its supply base for the remainder of 2024 production. As part of NFI's supplier development program, the company provides a risk rating to all its key suppliers based upon their on-time delivery performance and other factors. NFI has seen a significant decline in the number of moderate and high-risk suppliers driven by a combination of overall improvements in global supply chain health and actions taken by NFI's supply and sourcing teams. The company appointed a dedicated vice-president of supplier development in early 2024 who has continued to strengthen NFI's supply oversight.

In Q1 2024, NFI continued increasing new vehicle production rates and hiring new team members to support this increase. While there has been significant positive improvement, the labour market within the United States and the United Kingdom remains challenging. NFI plans to continue to ramp up production and add personnel on a phased approach throughout 2024, with gradual head count additions ensuring that the ramp-up is matched to consistent supply and labour availability. NFI successfully added 210 team members during the quarter, primarily in production related roles.

Gross margins and other profitability metrics are expected to improve production rates and bus and coach deliveries increase, WIP is reduced, and as the remaining inflation-impacted legacy contracts are completed. NFI anticipates that nearly all of the remaining legacy inflation-impacted contracts will be delivered during the second quarter of 2024. The company has seen signs of commodities and raw material costs easing and anticipates that contracts in NFI's backlog now reflect appropriate, inflation-adjusted costing and pricing.

Financial guidance and targets

NFI reiterates its previously provided financial guidance for Fiscal 2024 and targets for 2025 as disclosed on Jan. 17, 2024. As NFI disclosed in its fourth quarter 2023 financial results, the company expects to deliver approximately 35 per cent of annual adjusted EBITDA in the first half of 2024, with approximately 65 per cent of annual adjusted EBITDA expected to be delivered in the second half of the year. First quarter 2024 results were in line with these overall expectations. These seasonality expectations are based on expected production ramp-up, the timing of certain ZEB deliveries, impacts of legacy inflation-impacted contracts and sales mix.

NFI's guidance and targets are subject to the risk of supply disruptions being extended and/or exacerbated and the risk of additional supply disruptions affecting key parts or components. In addition, the guidance and targets do not reflect potential escalated impact on supply chains or other factors arising directly or indirectly as a result of continuing conflicts in Ukraine, Russia, Israel, Palestine and the Middle East. Although NFI does not have direct suppliers in these regions, additional supply delays, possible shortages of critical components or increases in raw material costs may arise as the conflicts progress and if certain suppliers' operations and/or subcomponent supply from affected countries are disrupted further. In addition, there may also be further general industry-wide price increases for components and raw materials used in vehicle production as well as further increases in the cost of labour and potential difficulties in sourcing an increase in the supply of labour.

Annual general meeting of shareholders, and board of directors update

NFI's annual general meeting of shareholders will be held virtually on Friday, May 3, 2024, at 11 a.m. (EST).

After nine years and upon the completion of the company's shareholders meeting, Phyllis Cochran will retire as a member of the board of directors and chair of the audit committee of NFI. The board of directors extends its sincere thank you to Ms. Cochran for her contributions, dedication and leadership as a director, audit chair and partner to NFI.

Anne Marie O'Donovan, FCPA, FCA, ICD, is being nominated as a new independent director on NFI's board. Ms. O'Donovan served as the executive vice-president and chief administrative officer, global banking and markets, at Scotiabank from 2009 to 2014, and the senior vice-president and chief auditor of Scotiabank from 2005 to 2009. Ms. O'Donovan is also a former partner at Ernst & Young LLP. She is the chair of the board of Aviva Canada Inc., chair of the audit committee of Cadillac Fairview Corp., and serves on the board and chairs the investment committee of CMA Impact Inc., a subsidiary of the Canadian Medical Association. She is a past director, chair of the audit committee and chair of the compensation committee of Indigo Books & Music, Inc. and director and chair of the audit committee of MDC Partners Inc. If Ms. O'Donovan is elected to the board, she will also become the chair of the audit committee of NFI.

The materials for the shareholders' meeting and voting instructions have been sent to shareholders in advance of the meeting and are available on NFI's website. The meeting website for the webcast is available at the same link.

Environmental, social and governance update

NFI's environmental social governance report for 2023 will be released on the company's website in May, 2024.

As of the end of Q1 2024, NFI employed 8,776 team members across its global locations, up from 8,566 as of the end of fiscal 2023.

First quarter 2024 results conference call and filing

A conference call for analysts and interested listeners will be held on Friday, May 3, 2024, at 8:30 a.m. Eastern Time (ET). An accompanying results presentation will be available prior to market open on Friday, May 3, 2024, NFI's website.

For attendees who wish to join by webcast, registration is not required; the event can be accessed on-line. NFI encourages attendees to join via webcast as a results presentation will be presented and users can also submit questions to management through the platform. The results presentation will be available on NFI's website.

Attendees who wish to join by phone must preregister. An e-mail will be sent to the user's registered e-mail address, which will provide the call-in details. Due to the possibility of e-mails being held up in spam filters, NFI highly recommends that attendees wishing to join via phone register ahead of time to ensure receipt of their access details. A replay of the call will be accessible from about 12 p.m. ET on May 3, 2024, until 11:59 p.m. ET on May 2, 2025. The replay will also be available on NFI's website.

About NFI Group Inc.

Leveraging 450 years of combined experience, NFI is leading the electrification of mass mobility around the world. With zero-emission buses and coaches, infrastructure, and technology, NFI meets today's urban demands for scalable smart mobility solutions. Together, NFI is enabling more livable cities through connected, clean and sustainable transportation.

We seek Safe Harbor.