Investors question turnaround mission over Bombardier cash flow worries
Debt-strapped firm to cut 5,000 jobs, sell turboprop unit and training business
Bombardier’s ongoing turnaround was dogged by old worries about the firm’s balance sheet Thursday as a lower cash flow projection cast doubt over the debt-strapped firm’s prospects.
Bombardier announced plans to cut 5,000 jobs — including 2,500 in Quebec and 500 in Ontario — and to sell both its turboprop unit and a training business as it continues to strive for a future in trains and luxury jets.
The company also unexpectedly altered its cash flow guidance, suggesting it will only break even in 2018 after the proceeds of a $625-million land sale are included. Though the previous goal was to break even without this injection, Bombardier chief executive Alain Bellemare cited a need for working capital at the company’s rail business for altering the target.
“During the earnings and cash flow building phase of our turnaround, we will continue to be proactive in focusing and streamlining the organization, and disciplined in the allocation of capital,” said Alain Bellemare, president and chief executive officer.
The market did not share the CEO’s enthusiasm, sending shares of the aerospace firm tumbling. The stock plunged 24.5 per cent, closing at $2.41 per share in Toronto, as the cash flow issue drove new concerns about Bellemare’s mission to reshape the Montreal based firm.
For investors the unexpected shift pressed on an old nerve, said David Tyerman, transportation and industrials analyst with Cormark Securities.
“Bombardier has had problems historically and the problem is often that their balance sheet gets into trouble because they chew up a lot of cash,” he said. “So this is tapping into a long-standing concern. It did come out of the blue and with a company that has a fair bit of debt. It’s a sensitive issue.”
Bombardier is carrying $9.5 billion in adjusted debt, much of it built up through cost overruns and delays tied to the development of its Global 7500 private jet and the CSeries narrow-body airliner.
“Investors won’t like the big chop to cash flow guide, which raises questions (regarding) management credibility and ability to complete a successful turnaround,” Cai von Rumohr, an analyst with Cowen Equity Research wrote in a note to clients.
Bellemare is pursuing an aggressive strategy in a bid to build Bombardier’s future around trains and private planes. The firm ceded 50.1 per cent of the CSeries airliner to European giant Airbus Group SE earlier this year and the long-range Global 7500 business jet is set to debut next month.
It has also slashed costs, selling off non-core assets and streamlining processes. The asset sales announced Thursday will bring in about $900 million. The company still holds its CRJ regional jet program, where it will focus on reducing costs while exploring “strategic options” for the future, the company said.
The turnaround drive has brought with it thousands of job cuts. The latest round, announced Thursday, will yield annual savings of $250 million by 2021, the company said.
“This is very bad news, it sends a worrisome message about the future of the industry,” Renaud Gagne, head of the Unifor labour union’s Quebec branch, said in a statement. “We are in the dark as far as what comes next.”
Since Bellemare took the reins in 2015, the company has improved its profitability and made strides toward its 2020 objectives, analysts say. Bombardier’s profit margin (EBIT margin) on its rail division rose to 9.3 per cent last year compared to 5.6 per cent in 2015. Meantime, the profit margin in its business jet division rose to 8.4 per cent from 4.4 per cent over the same period.
“From a business jet standpoint Bombardier appears to be in a much better position now compared to a few years ago,” Daniel Hall, senior valuations analyst with FlightAscend Consultancy said in an email. “Speaking to the market there is definitely a lot more confidence with Bombardier — they are also in better shape with regards to delivery numbers and orders.”
Bombardier is better able to compete with the smaller firms in the luxury jet business than it was with aerospace giants like Airbus Group, said Tyerman. The segment also holds more room for growth for the firm, he added, pointing to the much higher profit margins of competing firms like Gulfstream Aerospace Corporation.
Its rail division operates in a different competitive landscape, facing a much larger competitor in China’s CRRC Corp. And it could soon be up against another larger firm if German industrial group Siemens AG and French rival Alstom SA follow through on plans for a merger, though that problem is unlikely to emerge for several years, Tyerman said.
“They’ve done a lot of good stuff but this is a company with a lot of debt,” Tyerman said. “It’s like a homeowner who makes a lot of money but has a massive mortgage. You’re still only a short way away from disaster. That’s the big issue here.”