By NICOLAS VAN PRAET
Friday, December 7, 2018
Alain Bellemare's five-year turnaround effort at Bombardier Inc. was never going to be an incident-free, perfect line of progress. But the chief executive has found out how low the market's tolerance is for missteps.
The Canadian plane and train maker has lost half its market capitalization over the past six months as the company got swept up in broader market anxiety, particularly over heavily indebted corporations. The decline accelerated when Bombardier unexpectedly cut its cash flow forecast during its Nov. 8 earnings report, a roughly US$600-million miss the manufacturer blames on delays in train deliveries and expects to start making up in 2019.
Mr. Bellemare and chief financial officer John Di Bert have been trying to limit the damage in private meetings with investors over the past month. At a gathering with analysts and investors Thursday broadcast on the internet, the entire senior management team tried to reverse the negative sentiment. But as suggested by Bombardier's share price, which ended the day down another 1 per cent, it will take more than words to win back skittish shareholders.
"I think it'll be tough for [the company] to come back from this for a little while," Dan Fong of Veritas Investment Research said, adding the market will want to see the next earnings report before concluding that management has liquidity under control.
"The stock might bounce around until we see a couple of quarters and see that cash coming back."
Since becoming CEO, Mr. Bellemare has profoundly reshaped Bombardier. He raised more than US$7-billion from governments and public markets to stave off worries about insolvency, sold off businesses such as the QSeries turboprop to focus on assets with higher growth potential and cut thousands of jobs as the company exits a heavy product development phase. The aim from the beginning, and reaffirmed Thursday, is to build a multinational that will generate US$750-million in free cash flow and earnings before interest, taxes, depreciation and amortization of US$2.25-billion on revenue of US$20-billion by 2020.
Quarter after quarter since he started in 2015, Mr. Bellemare has largely delivered the financial targets he set for the company. That, in turn, has buoyed market confidence in his team and restored credibility to a company that had lost the trust of investors under previous management.
Last month's earnings report, however, exposed just how shaky that trust is. In addition to the cash flow miss, Bombardier said it would cut 5,000 jobs, sell two key assets and hunt for more cost savings. Its shares promptly plummeted 24 per cent. They lost another 20 per cent after Quebec's securities regulator, the Autorité des marchés financiers (AMF), said on Nov. 15 it is probing stock transactions by Bombardier executives made under a newly implemented Automatic Securities Disposition Plan, although the stock has recovered some ground since.
Mr. Bellemare is now trying to convince the market that the cash slip is a minor event and that the larger plan to fix the company remains intact. In a Nov. 28 report, Fitch Ratings downgraded Bombardier's credit ranking to Bfrom B, saying the company's debt levels will decline more slowly than planned because of the cash flow deterioration in 2018 related to working capital requirements.
The CEO began Thursday by renewing his financial goals for 2020 and introducing updated guidance for 2019. The company said it expects to tally a 10-percent increase in revenue next year, to at least US$18-billion, as it ships more trains and begins deliveries of its new Global 7500 long-range luxury jet. Earnings before interest, taxes, depreciation and amortization is expected to climb 30 per cent year over year, to at least US$1.65-billion. Bombardier predicts it will break even on free cash flow for 2019 including one-time items. The company should end 2018 with about US$3-billion in cash.
"Bombardier is a much stronger company [today]," Mr. Bellemare told analysts gathered in New York later on Thursday. "We are confident in our ability to deliver on our 2020 objectives. And we're even more excited by the runway that we're creating and the value that lies beyond 2020."
Addressing the AMF review, Mr. Bellemare said the company's securities disposition plan was set up in August, when long-term incentives granted to senior executives in 2015 began to vest. Although some shares have been sold under the two-year plan, members of his management team still hold the vast majority of their long-term incentive awards, Mr. Bellemare said. "We are confident that we did everything the right way."
Mr. Di Bert emphasized the work done by management over the past three years to grow Bombardier's product backlogs with quality contracts while improving the company's cost structure and profit picture. "We're entering 2019 with a business that structurally generates meaningful cash flows," he said.