NFI Group Inc (NFYEF) (Q3 2026) Earnings Call Highlights: Record $420 Million LTM Adjusted ...

Negative Points

• Zero-emission vehicle deliveries declined to 17.6% of total deliveries, and customer adoption remains less linear, with some agencies favoring diesel, CNG, and hybrid vehicles.

• Medium-duty and low-floor cutaway deliveries fell by 84 units due to timing of fleet replacements and record prior-year deliveries.

• A $33.8 million non-cash impairment was recorded on battery cells from the 2025 settlement, and the company plans to sell them over 12-18 months, with proceeds uncertain.

• The year-to-date effective tax rate was elevated at 55.8% due to dual resident status and deferred tax asset status of UK entities, impacting net earnings.

• Free cash flow remains pressured by battery recall cash outflows and UK restructuring costs, with working capital investment expected to be negative for the year.

Q & A Highlights

Q: With manufacturing margins very strong in Q3, is there anything unusual in that result, and how should we think about the path to the updated 2026 guidance and Q4? A: CEO John Sapp attributed the strong quarter to improved production linearity, particularly in North American transit and motorcoach, which drove fixed cost leverage and reduced reliance on a large Q4 catch-up. He noted Q4 should still be one of the strongest quarters, and the guidance updateraising the low end of the 2026 adjusted EBITDA range to $395 million while maintaining the high end at $415 millionreflects confidence in continued linearity and operational improvements.

Q: Can you define "linearity" and explain how sustainable this rate of improvement is as you move from Q3 into Q4 and toward 2027-2029? A: CEO John Sapp explained linearity means materials arrive on time, the supply base is healthy, and the workforce has parts to build buses to completion without units waiting for components. This drives labor efficiency, reduces overtime and rework, improves quality and signature cycles, and supports consistent customer flow. He said the improvements position NFI for growth into 2027, with formal guidance expected early next year.

Q: With the supply chain operating better and ramping up, is 5,500 to 6,000 buses still a production run-rate target over the next 12 to 24 months? A: CEO John Sapp declined to confirm specific run-rate numbers but said NFI has high confidence in additional North American transit volume in 2027, expects continued motorcoach growth after a 50% year-over-year Q3 increase, anticipates subtle growth at ADL, expects ARBOC to remain strong in 2027 with a higher return in 2028, and sees low-to-mid single-digit aftermarket growth.

Q: Free cash flow was weaker than expected with several one-time items. How should we think about cash generation relative to deleveraging to the 1.5x to 2.5x target by early 2027? A: CFO Brian Dewsnup said NFI paid more taxes in 2026 than expected due to battery recall-related charges that did not flow through tax statements, with some reversal expected in 2027 as the recall provision burns down and battery cells are sold. UK restructuring outflows should not recur, and working capitalcarried higher than desiredshould see modest continued improvement, though it may fluctuate between quarters.

Q: Can you parse how much of the 190 basis point manufacturing gross margin improvement came from mix versus price versus executional factors? A: CFO Brian Dewsnup said supply chain health helps labor efficiencies and overall financials, pricing improvements are flowing through year-over-year, and the backlog is being built with healthy margins expected to roll into 2027. Higher volume also improves fixed cost utilization and overhead absorption, and NFI expects volume lift in its bigger business areas in 2027.

Q: ZEB mix is down considerably. Can you offset the lower average selling price with higher diesel volume throughput, and how are you planning for 2027? A: CEO John Sapp said NFI's propulsion-agnostic strategy has ensured per-bus economics gain traction regardless of propulsion type, with margin impact largely compensated across the business. About 40% of Q3 orders were ZEB variants, but adoption remains agency-dependent, and NFI can flex production accordingly.

Q: How could the shifting political landscape in the U.S., at both the federal and state/local levels, impact transit funding discussions? A: CEO John Sapp said transit funding remains bipartisan-supported, noting strong positive language on IIJA replacement even under prior Republican control and promising House subcommittee proposals. He remains optimistic that support will continue given needs across red and blue states and municipalities. IR head Stephen King added that with IIJA extended to December 11, 2026 and midterm elections ahead, another extension is the most likely scenario while Congress advances the next surface transportation bill.

Q: Can the same linearity and efficiency changes be implemented at ADL in the UK, and what would that mean for its margin profile in 2027? A: CEO John Sapp said UK footprint and cost-structure resets should begin showing benefits in Q4 and into 2027, though linearity there is more of a 2027 play due to workflow shifts. The ADL team has made strong progress on product parity for newer EV variants versus long-serving competitor models, giving confidence in 2027 profitability. He also flagged potential tailwinds from the new UK Prime Minister's emphasis on local production, though this is not in the plan.

Q: On the battery cell sale, do you expect it to happen in 2027, all at once, or phased over several quarters? A: CEO John Sapp said NFI targets a 12-to-18-month cycle, expects timing toward the near-term end, and aims for impact before the 2028-2030 timeframe when the cells would have been utilized. IR head Stephen King added the sale will likely occur in tranches rather than one bulk transaction.

Q: What are the working capital expectations this year, including battery recall outflows? A: CFO Brian Dewsnup said the battery recall is being executed over 2026 and 2027, with roughly a third of the cash expense in 2026 and the balance in 2027, creating cash headwinds in both years. He confirmed the prior expectation of roughly flat working capital investment year over year, plus the recall outflow, implying a negative working capital year of about $35 million.

Q: Leverage was static this quarter but trending in the right direction. Once you reach the 1.5x to 2.5x target range, how should we think about capital allocation? A: CEO John Sapp said capital allocation strategy remains under discussion and will be shared with investors at the appropriate time. All options are under considerationdividends, buybacks, and continued investmentwith investment in operational execution and positioning the business a high priority.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .