Supply chain issues rattle NFI Group

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This article was published 21/09/2021 (1254 days ago), so information in it may no longer be current.

In the unforgiving world of capitalist economics NFI Group did the unthinkable — it had to declare that this year it would not grow as much as it previously forecast it would.

After providing guidance of a certain level of growth this year, the Winnipeg-based bus maker announced late Friday afternoon the supply chain disruption was even worse than it thought and said it would be walking back its previous performance forecast for the year by about 20 per cent.

The market punished the company on Monday, sending its stock price down 23.6 per cent.

It was perhaps small comfort for the leadership at NFI that both the TSX and the Dow Jones Industrials average endured sharp drops on Monday.

NFI (formerly New Flyer Industries) is the market leader in North America and the U.K. (the latter thanks to its ownership of the famous double-decker bus company Alexander Dennis Ltd.) in both heavy duty urban transit buses and highway motor coaches, but it’s the only one of its competitors that is publicly traded. Therefore it is obliged to disclose such significant operational issues.

In a note to clients, Cameron Doerksen, an analyst with National Bank of Canada Financial Market, said, “We suspect NFI’s largest competitors in North America are equally impacted.”

The company’s statement after the close of trading Friday said it experienced a rapid deterioration in availability of all sorts of critical components caused by increasing global supply chain challenges.

Rather than tie up cash starting production of vehicles that it might not have the parts to complete, it decided to scale back production across the board.

Paul Soubry, the company CEO, said, “In response to these disruptions, we have made the prudent, yet difficult, decision to temporarily reduce new vehicle input rates through the additional idling of certain facilities and adjusting production in others. These temporary actions will assist in controlling costs and preserving cash flows until supply availability and delivery reliability improve.”

Analysts were almost unanimous is seeing the move as a temporary blip, although the expectation is that the issues will persist well into 2022.

Doerksen said, “NFI’s decision to slow production to avoid building work in progress inventory (and using cash) is the right one, and we view these supply chain issues as temporary and largely out of the company’s control.”

Chris Murray of ATB Capital Markets, said, “While we anticipate that the impact of the pandemic will result in some choppiness in results over the near-term, longer-term we see the company having a dominant position in electric vehicles in its class for several years.”

But the abruptness and severity of the cutback caught some off guard.

In a note to clients, Murray said, “The announcement comes as a surprise, particularly given management reaffirmed confidence in both its supply chain and ability to meet prior full-year guidance with its second quarter results on August 4th.”

However, all things considered, the only real surprise, perhaps, is that NFI was so transparent as to admit it.

In a story in Forbes magazine this month, it said, “Massive dislocations are present in the container market, shipping routes, ports, air cargo, trucking lines, railways and even warehouses. The result has created shortages of key manufacturing components, order backlogs, delivery delays and a spike in transportation costs and consumer prices. Unless the situation is resolved soon, the consequences for the global economy may be dire.”

Shortages of things like computer chips and printed circuit boards have created log jams in the production cycles of everything from automobiles to children’s toys.

Doerksen pointed out the fact that NFI’s U.S. business — by far its largest market — is dependant on the Buy America regulations that require more than 70 per cent of its components to be sourced in the U.S., further limiting its ability to come up with workarounds when there’s a shortfall in some parts.

The company said its actions will result in significant cash on hand in the fourth quarter.

“In addition,” Soubry said, “We are fortunate that the majority of the vehicles impacted by these disruptions will not result in lost sales as most are contractually sold and are now planned for delivery in 2022.”

Many analysts lowered their target price on the stock for this year, but not all of them.

One of them, Jonathan Lamers of BMO Capital Markets, said, “While we expect the market to react negatively to the guidance cut, we believe parts shortages are a transitory recovery pain and our target price is unchanged.”

 

martin.cash@freepress.mb.ca