New Flyer CEO Sees Growth as U.S. Buses Age

New Flyer Industries Inc., the largest transit bus manufacturer in North America, forecasts sales will rise about 32 percent after buying an Alabama-based competitor and as U.S. cities start to replenish fleets.

“The U.S. starved the upgrade of their fleets for a period of time,” Chief Executive Officer Paul Soubry said in an Aug. 30 interview in Winnipeg, where the company is based. “You’ve got more people now getting back on transit because jobs are back up and you’ve got states being a little healthier with their funds.”

New Flyer, founded in 1930 as Western Auto and Truck Body Ltd., is boosting output and plans to expand product lines and its parts business, which should drive sales to about $1.15 billion in 2013 from $872 million in 2012, the 50-year-old CEO said.

The company’s shares have gained 41 percent in the 12 months through yesterday, matching the 41 percent average advance of 15 global commercial vehicle companies tracked by Bloomberg. The Standard & Poor’s/TSX Composite index has gained 3.8 percent over the same time.

New Flyer agreed to buy North American Bus Industries for $80 million in cash on June 21. The purchase was funded by C$65 million in proceeds from Brazil-based Marcopolo S.A., the world’s second largest bus builder, which agreed to invest C$116 million in January and now owns a 20 percent stake.

Orders Surge

The purchase will help New Flyer increase bus production to about 2,400 a year from 1,800 and market share to 42 percent from 32 percent as the company adds a plant in Anniston, Alabama, as well as facilities in Winnipeg, and in St. Cloud and Crookston, Minnesota. Direct labor costs in Alabama are as much as 20 percent less than in Minnesota, Soubry said.

Many municipalities that deferred bus purchases because of tight budgets are now buying, Trevor Johnson, equity analyst with National Bank Financial, said in a telephone interview from Toronto on Sept. 4. New transit buses are more fuel efficient, and the federal government will subsidize the bulk of the purchase, he said.

“I’ve never seen it as active as it has been in the last six months and that’s just from municipalities saying, ’Yes, we want to buy 300 replacement buses over the next two years,’” Johnson said.

New Flyer’s new orders stood at 513 in the second quarter of 2013, compared with 90 in the second quarter of 2012, not including the NABI acquisition.

Parts Business

The company now has the largest share of the North American transit-bus market compared to competitor, Nova Bus, which is part of Volvo Group North America Inc., and Gillig Corp., based in Hayward, California, according to the company’s database and management estimates.

New Flyer’s share of the transit bus parts market also jumped to 34 percent from 18 percent with the NABI acquisition and its $29 million purchase of Orion assets from Daimler Buses North America in March, Soubry said. The average transit bus costs about $500,000 and for every dollar there is as much as $3 in repair costs over the life of the vehicle, he said.

“The margins in parts are twice what the margins of the buses are,” Soubry said. “It is a very important part of our business to increase the after-market size.”

Highest Valuation

Buses reach the end of their lifespan after 12 years and 18 percent of U.S. transit vehicles were older than that in 2011, according to the latest available federal transportation data. The average public transit bus was eight years old in 2011, the American Public Transportation Association said in an Aug. 15 report.

New Flyer’s price to earnings ratio of 42 is the highest of its 15 North American peers, according to data compiled by Bloomberg. The shares were unchanged at C$10.80 in Toronto at 10:58 a.m. today.

The recent rise in valuation is related to the positive outlook for bus demand in the U.S., Kevin Chiang, analyst with CIBC World Markets in Toronto, said in a Sept. 9 e-mail.

“While it will take some time for this to play out, the multiple reflects an improving sentiment,” he said.

Three analysts, including Chiang, recommend holding the stock, while one says buy and one says sell, according to data compiled by Bloomberg.

New Flyer’s posted net earnings of $1.7 million in the second quarter of 2013, down from $3.4 million a year earlier, primarily due to $3.3 million in additional acquisition costs associated with NABI and $600,000 in expenses related to Orion parts, the Winnipeg-based company said Aug. 6.

Shuttle Expansion

The bus manufacturer agreed to an investment from Marcopolo, based in Caxias do Sul, Brazil, to fend off competition, Soubry said.

“We went and said, ‘Hey, rather than you setting up or buying something why don’t you buy part of us and we’ll do it together?’” Soubry said.

The company will evaluate whether some of Marcopolo’s products, which include motor coaches and shuttles, may work in some North American markets, he said. The plan is to diversify and sell to private companies, such as airports and hotels, to reduce reliance on government contracts.

It’s unlikely the company will acquire more bus manufacturing businesses, though they may consider increasing their share of the parts market, National Bank Financial’s Johnson said.

“There’s a lot of smaller players out there who they could aggregate,” Johnson said. “Any of those could be potential targets.”

New Flyer is looking at alternate product providers, vertical integration and suppliers, Soubry said.

“At the same time we have to absorb and integrate and make sure we deliver on the ones we just acquired,” he said.

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