Industryweek 12371 Bombardier C Series Family

Bombardier Jumps as Slowing Cash Burn Shows Turnaround on Track

Nov. 10, 2016
Financial results suggest that CEO Alain Bellemare is finally making headway in overcoming cost overruns and a delay of more than two years on the all-new $6 billion C Series aircraft.

Bombardier Inc. (IW 1000/220) surged the most in six months after forecasting annual profit at the high end of its previous outlook as the maker of the much-delayed C Series jetliner slowed the rate at which it had been burning through funds.

Higher operating cash flow and reduced investment following certification of the CS100 and CS300 models of the marquee aircraft are driving the improvements, the Montreal-based company said in a statement Thursday. Earnings before interest, taxes and special items this year will be $350 million to $400 million, compared with a previous forecast of $200 million to $400 million, Bombardier said.

“We are gaining confidence in Bombardier’s ability to meet its long-term margin targets,” Cam Doerksen, an analyst at National Bank Financial in Montreal, said in a note to clients.

The results suggested that Chief Executive Officer Alain Bellemare is finally making headway in overcoming cost overruns and a delay of more than two years on the all-new $6 billion C Series, a model intended to compete with planes from Boeing Co. and Airbus Group SE. Bellemare, who was hired in February 2015 with a mandate to restore profit, announced this year’s second round of major job cuts in October.

The widely traded Class B shares climbed 5.6% to C$1.88 at 11:49 a.m. in Toronto Thursday after earlier advancing as much as 7.9%, the biggest intraday gain since April 28. Bombardier, which also makes trains, advanced 33% this year through Wednesday, more than twice the 13% gain of Canada’s benchmark S&P/TSX Composite Index.

Turnaround Plan Makes Progress

Bellemare unveiled plans three weeks ago to cut 7,500 jobs, saying they were needed to ensure competitiveness and improve profit margins. Both rounds are likely to save $500 million to $600 million a year by the end of 2018, executives said on a conference call Thursday. The company is about 80% through its February drive to cut 7,000 jobs, Bellemare said.

“We’re executing on every single piece of our turnaround plan,” Bellemare said Thursday in an interview. “We are largely done de-risking the company.”

Now that the C Series is in service, Bombardier has one development program left, the Global 7000 business jet, he said. “And we are focused on that. We have this thing under control.”

Bombardier will provide more details on its financial goals for 2017 at a Dec. 15 investor day in New York.

“Management’s cost transformation initiatives are taking hold and we believe investor confidence will continue to improve as this management team executes and delivers on its targets,” Walter Spracklin, an RBC Capital Markets analyst, said in a note to clients.

Bombardier expects to generate free cash flow in the fourth quarter, meaning it’s likely to end the year with about $3.5 billion in cash on hand and available liquidity of about $4.5 billion, Chief Financial Officer John Di Bert said in the interview with Bellemare.

“We’ve improved our liquidity, and we are well-positioned for refinancing” debt that matures in 2018, he said.

The company has $1.4 billion of bonds coming due that year. Bombardier had about $9 billion of long-term debt as of Sept. 30 and $4.4 billion of accessible liquidity, after Quebec injected $1 billion for a 49.5 percent stake in the C Series program.

The manufacturer spent $320 million of its free cash in the third quarter, compared with $816 million a year earlier. Analysts watch the liquidity figure closely as Bombardier works through costs for programs such as the C Series and the Global 7000. Bombardier has predicted it will start generating free cash flow in 2018.

‘Future Profitability’

Bombardier posted an adjusted loss of $10 million in the third quarter, essentially breaking even on a per-share basis. Analysts had expected a 3 cent loss, according to the average of estimates compiled by Bloomberg. Revenue dropped 9.7% to $3.74 billion, while analysts predicted $3.95 billion.

The third-quarter performance “suggests Bombardier’s underlying cost restructuring actions are on or ahead of plan, potentially positioning the company for better-than-expected future profitability as volumes begin to build for the C Series and Global” jets, Nick Heymann, an analyst at William Blair & Co., said in a note to clients.

Full-year revenue will be about $16.5 billion, at the low end of the company’s forecast range, while Bombardier maintained its outlook for cash-flow use at $1.15 billion to $1.45 billion.

In the rail business, earnings before interest and taxes will exceed 6.5% of sales this year, up from a previous goal of more than 6%, Bombardier said. Profit in the business-jet unit is expected to be stronger than the previous outlook of about 6% of sales.

Bombardier said its loss in commercial aircraft will be $100 million less than the $550 million previously forecast.

In September, it slashed its 2016 forecast for deliveries of the C Series, saying delays in shipments of Pratt & Whitney engines would cause the planemaker to burn through cash more quickly than expected. Seven of the new aircraft are now slated to be handed over this year instead of the 15 previously planned.

Last week, Bombardier flew its Global 7000 business jet the first time, a milestone for the delayed aircraft that puts the company on track to begin deliveries in 2018. The $72.8 million jet remains on track to make its commercial debut in the second half of 2018.

By Frederic Tomesco

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