New Flyer positioned to weather the trade storm

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This article was published 13/02/2017 (3168 days ago), so information in it may no longer be current.

The messaging in Washington at Prime Minister Justin Trudeau’s visit to the White House Monday was remarkably calm when it came to trade between the two countries.

With $2 billion worth of daily two-way trade between Canada and the U.S., there was plenty of anticipation as to the tone of the discussion from the unpredictable U.S. President Donald Trump.

The commitment by Trump to “pursue the strong trading relationship” between the two countries was likely reassuring to Paul Soubry, the CEO of New Flyer. Despite its well-managed production and supply chain, there are not many companies in Manitoba more sensitized to the dynamic of U.S. trade policies than New Flyer Industries.

As the same time, the company is probably better positioned than most to withstand any headwinds that may erupt.

For decades, New Flyer has been relying on U.S. transit authorities’ ability to access U.S. federal funding to be able to purchase transit buses that are designed, engineered and partially built at its Winnipeg headquarters. And as such the company has gone out of its way to be compliant to the steadily increasing Buy America regulations.

Those regulations currently require that 60 per cent of the cost of the components and subcomponents be produced in the U.S. for those municipal transit authorities to be eligible for funding. That goes up to 65 per cent at the end of this year and to 70 per cent by 2020.

New Flyer has had two large production plants in Minnesota since the late ’90s and after its 2013 acquisition of North American Bus Industries (NABI), it has an additional production facility in Alabama.

As well, its highway coach division, Motor Coach Industries, has a plant just across the Manitoba-North Dakota border in Pembina, N.D.

In a report released this weekend, Trevor Johnson, an analyst with National Bank Financial, said, “If Trump were to increase Buy America requirements on a faster pace, NFI (New Flyer Industries) is relatively well-positioned given its large U.S. footprint (representing 70 per cent-plus of production) and ability to shift volumes from the large centralized Winnipeg facility as needed.”

About 90 per cent of its revenue is generated from U.S. sales and so even though the company’s Winnipeg head office is firmly established and is not going anywhere, the company has long demonstrated its ability to establish and manage an increasingly large U.S. production footprint.

In an interview with Bloomberg on Monday, Soubry said New Flyer has lived in “somewhat of a U.S. protectionist environment for some time” and is actively moving some Canadian supply to its U.S. facilities and subcontractors.

“The fact is the Canadian and U.S. economies are integrated like no other countries in the world,” Soubry said in an email. “If we need to make adjustments to a new NAFTA, we will do so accordingly.”

Johnson, who just increased his 12-month target price on New Flyer shares from $50 to $55, said while it is definitely something the company is exposed to, there is no question of the company’s ability to comply.

“All the other players on both the transit and coach side also have to deal with it,” he said. “No one is 100 per cent U.S. (made). They all buy parts from outside the the U.S. — India and China — which is where some of the parts are available.”

Regardless of the track record and accepted norm in international trade relations, there is obviously a heightened element of uncertainty with the Trump presidency and even though there are regulations in place with a runway out to 2020, something could happen.

“But everyone is in the same boat,” Johnson said. “It is an essential service and Trump does not want to see people not be able to travel around to their jobs and be productive.

“If he were to increase it (Buy American regulation) to 90 per cent, I think it would cripple a lot of other companies much more aggressively that it would New Flyer… I think they could accommodate any changes as well or better than their peers.”

In addition to a number of factors including the company’s brisk integration of its acquisition of MCI and the prospects of creating further cost savings in that operation, the company has indicated it would reach the 65 per cent American content mark by the middle of this year and Johnson said “management feels good about hitting” the 70 per cent total by 2020.

martin.cash@freepress.mb.ca