Bombardier Inc.’s stock fell as much as 22 per cent on Thursday as the company reported a quarterly loss and announced it will invest hundreds of millions into its struggling transportation division.
The Montreal-based company also adjusted some of its 2019 financial targets — including its forecast for earnings before interest and taxation (EBIT) — due to the rising costs tied to several key rail projects. Bombardier announced that it will invest between $250 million and $300 million into its transportation division to ensure those late-stage rail projects are completed and delivery schedules are met. The investment will include adding manufacturing and engineering capacity, the company said.
Bombardier executives sought to reassure investors and analysts on Thursday that the company will overcome the challenges at Bombardier Transportation (BT) and achieve the goals outlined in its five-year turnaround plan.
Chief executive Alain Bellemare said on a conference call that the turnaround plan, which he launched shortly after joining the company in 2015, is still on track and that “significant progress” has been made on the key rail contracts.
“But first we do have some challenges to resolve, mainly in the U.K., Germany and Switzerland,” he told analysts.
“Completing these projects will take a bit longer than expected and we are consuming more resources.”
Bombardier now expects free cash flow for the year to be negative $500 million, compared to a previous expectation of between break-even and negative $250 million. It also lowered its EBIT forecast from $1 billion to between $700 million and $800 million. Its EBIT margin for BT was lowered from eight per cent to five per cent.
‘Threatening to derail management credibility’
RBC Capital Markets analyst Walter Spracklin wrote in a note to clients Thursday that the guidance revisions come at “a tough time” for management, which has been trying to “reassert credibility following the disappointing developments in Bombardier Transportation that began late last year.”
“We believe the current operational issues within five key legacy projects are threatening to derail management credibility,” Spracklin wrote.
Bank of America Merrill Lynch analyst Ron Epstein asked management on Thursday’s call whether the company is able to achieve the targets set out in the transportation division.
“I think the elephant in the room is why should anybody believe this is an eight per cent margin business sustainably?” Epstein said.
“Who is to say in three years there’s not going to be five more contracts that are a problem?”
Bombardier’s stock fell as much as 22 per cent to $1.78 shortly after the Toronto Stock Exchange opened Thursday. It closed trading at $1.91, a decrease of nearly 16 per cent.
The plane and train manufacturer has drastically changed its operations over the last year, but has still struggled to overcome the challenges facing the transportation division.
In February, the company announced that transportation president Laurent Troger — who had been with the company since 2004 — would be stepping down and replaced by Danny Di Perna. Two months later, the company cut its revenue forecast, largely due to slower production at BT.
Bellemare expressed confidence on Thursday that Di Parna will be able to achieve the targets set out in the five-year turnaround plan.
“Let me assure you that we fully understand what needs to be done and we’re taking the right actions,” Bellemare said.
“Danny and the team are aggressively driving their detailed action plans. When we complete our turnaround plan in 2020, we will transform BT into a global business capable of delivering strong and sustainable financial performance.”
The Montreal-based company, which reports earnings in U.S. dollars, posted an adjusted net loss of $47 million for the three month period ending June 30. The loss amounted to four cents per diluted share compared to a profit of $70 million a year earlier, or two cents per share.
With files from the Canadian Press