Bus company's big order book likely to get it past recession

NEW Flyer Industries' order book is as big as it's ever been, the bus maker has a larger share of the North American bus market than any company has had since the 1960s, and Flyer is the leading supplier of high-demand alternative-fuel buses.But budgets everywhere are tight, competitors are not sitting still and the cycle of strong funding for public transit is expected to start heading in the other direction later this year.

That's why Paul Soubry, who takes over as chief executive officer of New Flyer on Monday, faces plenty of challenges despite the sweetheart run the company has been on.

But unlike Barack Obama, who will be facing massive deficits and a deep recession when he is sworn in as president of the United States on Tuesday, Soubry will take over operation of the Winnipeg bus company just as it is nearing the possible end of a growth cycle, but probably with enough orders to fuel it through to the start of the next cycle.

The company's year-end order book has a backlog the equivalent of 9,531 buses worth about $4.1 billion, almost 40 per cent larger than it was at the beginning of 2008, giving Flyer work well into 2013.

Although David Tyerman, an equity analyst with Scotia Capital, said expectations are that there will be a pause in industry orders and a considerable slowdown later this year that will continue through much of 2010, the huge order backlog is expected to keep production at its plants in Winnipeg and Minnesota humming along at a steady clip until orders pick back up again.

"There is the potential for another strong period of orders (after the coming pause)," Tyerman said. "It is not at all clear to me when production would have to slow. It may not have to for the foreseeable future."

Tyerman said the company saw the trend approaching and its intention was to secure enough orders going into it so it could maintain production at a stable pace.

"It was a conscious decision and effort on the part of the entire company to be well-positioned for a slower period," he said.

Peter Sklar, an analyst with BMO Capital Markets, noted in a report Friday that there were virtually no new orders in December and that the backlog intake is heavily weighted for the years 2012 and 2013, suggesting there may not be any increase in the build rate beyond what has already been achieved.

New Flyer has about 45 per cent of North American market share and analysts expect that it is a defensible share, even though Quebec bus maker Nova Bus is setting up a New York state production operation to compete on more U.S. work.

But New Flyer is in an enviable position as a Canadian manufacturer that exports 80 per cent of its production to the United States. Even though that country is experiencing a deep recession, New Flyer's customers may not be forced to soften their demand.

Chris Prentice, a consultant with IBI Group in Toronto, an urban and transit planning firm, said that after the recessions of the late '80s and early '90s, public transit continued strongly.

"There is a priority for public transit today from all levels of government of every political stripe and they are all supportive of public transit," he said. "As long as the money keeps flowing, we will be OK."

Even that dynamic may eventually be in New Flyer's favour. While many businesses must face lean times because of the credit crunch, transit funding will probably benefit from the infrastructure stimulus packages in the United States, with $10 billion or more in targeted funding.

"One of the reasons the unit price is down may be that people are worried that some of the big backlog will go away and the states won't have the money to pay for some of the orders that are in the backlog," Tyerman said. "This kind of money will help alleviate some of those concerns."

New Flyer units were up 42 cents to $9.30 on Friday, climbing back up towards the 52-week high of $12.79.

Tyerman said investors never like to see a successful CEO depart a company and John Marinucci's six-and-a- half years running Flyer was seen as a success in every respect.

"New Flyer thrived under Marinucci and his management team," Tyerman said. "To see him leave makes investors nervous. It always happens. There will be a period of wait and see what the new guy can do."

But by all accounts, Soubry ought to be up for the challenge. His management of Standard Aero into a global leader in the aircraft engine overhaul and repair business generated enviable productivity results. It is exactly the kind of track record Marinucci was looking for to take New Flyer to the next level of manufacturing excellence.

Tyerman said Marinucci believes that Standard Aero was further along that path towards manufacturing excellence than New Flyer was, and so the expectation, with Soubry at the helm, is that the voyage will continue along a well-charted course.

martin.cash@freepress.mb.ca

Republished from the Winnipeg Free Press print edition January 17, 2009 B6