The wheels come off at NFI Group

12-05-2022
The wheels come off at NFI Group

Despite order backlog, a perfect storm of operational troubles

 

At first glance, you’d think that Winnipeg-based NFI Group Inc. (TSX: NFI) is the right company in the right place at the right time. Instead, the company has been hit by Murphy’s law: “Anything that can go wrong will go wrong.”

NFI is a leading independent provider of sustainable public transit solutions, specifically buses and motor coaches. Its battery-electric and fuel cell-electric vehicles are in more than 110 cities in six countries and have completed over 70 million electric service miles. The company proudly proclaims on its website that it is “leading the evolution to zero-emission mobility.”

NFI operates in both Canada and the U.S. Apart from Winnipeg, it has Canadian facilities in Ontario and U.S. operations in Alabama, Minnesota, Washington, and New York. Product names include New Flyer, MCI, Alexander Dennis, and ARBOC. The company has 3.5 million square feet of production space and the capability of manufacturing up to 8,000 vehicles per year, powered by everything from clean diesel and natural gas to a range of hybrid and electric products.

The buyers are out there. The company has a near-record backlog of 4,150 units. But it all seems to be falling apart.

As the switch to electric vehicles intensifies, you’d expect a company like NFI Group to be flourishing. It’s not – quite the opposite. At this point in time, the firm looks more like a candidate for bankruptcy than an up-and-coming transportation disrupter.

The company’s woes are reflected in its share price. In April 2018, the stock was trading at almost $60. A year ago at this time it was around $20. It closed Friday at $9.78, down about 52% in the past 12 months.

What’s happening? On Oct. 24, the company released a third-quarter preview that can only be described as dismal. NFI expects adjusted EBITDA in the quarter to be between -$15 and -$17 million. For the full year, the company is guiding towards an adjusted EBITDA loss of $40-$60 million.

Full-year revenue is projected as coming in between $2.0-$2.2 billion, down from the previous estimate of $2.3-$2.6 billion.

“The third quarter was another very challenging period as we saw strong demand for our products and services, offset by continuing supply disruption resulting in production inefficiencies and the inability to complete and deliver contractually committed buses. In addition, we continued to experience short-term margin pressure from higher inflation and surcharge driven input costs,” said CEO Paul Soubry.

In response, the company is implementing a five-part action plan to attempt to stop the bleeding. This includes:

  1. A two-week freeze on new vehicle starts at New Flyer in hopes that suppliers can deliver the needed parts to complete projects already underway.
  2. Following the end of the freeze, the company will only increase production once confidence in supply chains has improved.
  3. NFI will work with suppliers and sub-suppliers to search for alternate or substitute parts where possible, increase production line parts inventories, and develop longer lead times to better support new vehicle production.
  4. Continue cost cutting initiatives, including overhead reduction. The company has already closed two production facilities, one fabrication facility, and nine parts distribution locations.
  5. Discuss additional financing solutions with its bankers and government partners.

The company says that demand for its products is strong and that is expected to continue into 2023. But strong demand doesn’t translate into revenue if it can’t deliver its products.

NFI described these problems as “near-term headwinds” and reiterated its guidance for 2025 of between $3.9-$4.1 billion in revenue and adjusted EBITDA of $400-$450 million.

Investors are clearly taking this optimistic forecast with a large grain of salt. The stock has continued to languish, even in the midst of a strong market rally.

Despite all this bad news, the stock continues to pay a quarterly dividend of $0.0531 per share ($0.2124 a year) to yield 2.2%. The dividend was slashed by about 76% last December, but it’s surprising it hasn’t been eliminated completely. That could be the next step in management’s austerity plan.

NFI shares could enjoy a huge recovery in the next few years if the company can turn this mess around. Based on what we’ve seen to date, don’t bet on it.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. To take advantage of a 50% saving on a trial subscription and receive the special report “The Tumultuous Twenties,” go to https://bit.ly/bwGP20s.

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Content © 2022 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.