Bombardier Inc. shares nosedived after it lowered its financial forecasts for the second time this year due to persistent challenges in its rail division, a move that left analysts questioning the latest assurances from the plane and train manufacturer after a series of disappointments.
The Montreal-based company said Thursday it needs to invest an additional US$250 to $300 million in its train division in order to complete five major projects that have already been delayed significantly. As such, it expects to burn through $500 million in cash in 2019, at least twice as much than previously predicted when it lowered its guidance in April.
Bombardier’s stock price dropped more than 16.30 per cent on the Toronto Stock Exchange on Thursday to end the day at $1.90.
The cash injection is the latest strategy in a series of attempts to right the transportation division, which underwent a change in leadership in February. Chief executive Alain Bellemare credited the division’s new president Danny Di Perna for devising the plan after conducting a six-week assessment of its entire operations.
“It took us a bit of time to understand fully what needed to be done,” Bellemaire said on a conference call with analysts, adding he fully supports Di Perna.
“Let me assure you that we fully understand what needs to be done and we’re taking the right actions,” he said.
Between $50 and $75 million will go directly towards the five difficult projects, particularly in the U.K., Switzerland and Germany. Almost all of the trains are built and nearly complete, Bellemare said, but Bombardier needs to hire software engineers and increase production capacity in order to get the jobs done. The rest will fund costs of disruption such as inefficiencies in overhead and customer settlements.
Still, executives admitted there is still some risk the challenges could bleed into 2020, the last year of Bombardier’s five-year turnaround plan.
“Using a baseball analogy, this nine-inning transformation looks like it’s in extra innings,” Credit Suisse analyst Robert Spingarn said on the call.
Chief financial officer John Di Bert said Bombardier said he expects this is a “low point” and that the outlook will get better.
But some analysts continued to question why the executives have confidence in the transportation division, where adjusted profit margins have hovered around 5 per cent.
“How is any outsider supposed to believe that ultimately this is an 8 per cent margin business?” Bank of America Merrill Lynch analyst Ronald Epstein said on the call.
Bellemare emphasized changes to the train segment, pointing to a new standardized platform that will work on multiple projects and the fact that Bombardier keeps winning contracts.
“There is no reason to believe this business cannot deliver solid high single digit performance,” Bellemare said.
National Bank analyst Cameron Doerksen also remains confident in the division’s turnaround based on the lower risk profile of its recent contract wins, he noted to clients.
While the “disappointing” guidance revision means “management will need to rebuild credibility with investors by executing over the coming quarters,” Doerksen noted that Bombardier will eventually get cash flow once it delivers its trains.
Bombardier’s prospects looked immediately brighter in its aerospace division, where it is on track to deliver 35 to 40 business jets by the end of the year.
“The aerospace results and guidance looked OK,” Citi analyst Stephen Trent noted to clients. “Even as these issues reflect necessary investment-related adjustments and not a business loss, this does not mean that the company is not gradually moving toward better, long-term operational results.’
Bombardier restructured the division spring to focus on business aircraft and shed its commercial aviation assets, completing the sale of the Q400 series in the second quarter. It also announced the sale of the CRJ series to Mitsubishi.
For the second quarter, Bombardier reported a net loss of $36 million of 4 cents per share. Overall revenue increased 1 per cent to $4.3 billion while adjusted earnings before interest, taxes, depreciation and amortization dropped 7 per cent to $312 million.
Copyright Postmedia Network Inc., 2019
