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Report on Business Bombardier slashes profit, revenue outlook by US$1-billion, deepening investor concern

Bombardier Inc. slashed its financial estimates for 2019 on the back of continuing struggles in its rail unit, deepening investor concern that chief executive Alain Bellemare’s five-year turnaround can stay on track.

A slower production increase and cost pressure on some big train contracts hurt first-quarter profit and revenue and makes up most of the US$1-billion cut to the 2019 sales forecast, Bombardier said in a statement Thursday. The timing of aircraft deliveries will also weigh on performance for the first three months, though the company said it should be able to recover the shortfall through the year.

Among those big contracts is a US$630-million deal to supply new rail cars for New York’s Metropolitan Transit Authority, where Bombardier was “a bit late” with its deliveries, former Bombardier rail unit president Laurent Troger told investors last December. Andy Byford, the head of the transit agency and former CEO at the Toronto Transit Commission, has described the difficulties with Bombardier’s train deliveries as “gruelling” and “depressing.”

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Mr. Troger has since left the company.

“I think there is some concern that they haven’t cleaned up these issues” first flagged last November, said Michael Willemse, senior research analyst at Taylor Asset Management, which owns Bombardier shares. People started to question Mr. Bellemare last fall and they’re going to question him until he gets through these problems, he said.

Bombardier now expects its 2019 total revenue to come in roughly US$1-billion lower than it originally expected, representing a 5.5-per-cent drop to roughly US$17-billion. The company also reduced its adjusted earnings before interest, taxes and depreciation estimates for 2019 by roughly 10 per cent to between US$1-billion and US$1.15-billion.

Bombardier’s shares closed Wednesday at $2.48, down 15 per cent on the Toronto Stock Exchange. They tumbled as much as 25 per cent earlier in the day, the biggest intraday drop in five months.

Bombardier is in the midst of a five-year turnaround plan led by Mr. Bellemare that has seen him raise more than US$7-billion from governments and public markets, sell businesses and cut thousands of jobs. After some encouraging signs of progress in 2017 and the first half of 2018, the manufacturer’s stock was starting to climb higher.

But the plan was dealt a setback last November, when the company lowered its cash-flow estimates and announced it would cut 5,000 jobs and sell two more assets in search of cost savings.

At its annual investor meeting last December, Bombardier highlighted five big rail contracts that were proving problematic in different ways. They included the US$630-million contract for New York’s Metropolitan Transportation Authority in which Bombardier experienced production-related delays at its factories, and a US$1.8-billion contract with Swiss Federal Railways in which the company faced regulatory authorization issues.

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Bombardier’s train division has also been beset by unresolved ethics issues. The World Bank and Sweden’s National Anti-Corruption Unit are currently looking into how a Bombardier-led consortium won a US$340-million deal six years ago in Azerbaijan.

At the time Mr. Troger’s departure was announced Feb. 7, Bombardier had lost half of its market capitalization in six months. While the shares had started to recover, Thursday’s developments are reviving pressure on the stock and raising more questions about management’s abilities to execute.

“This progress took a step back last year with the unexpectedly weak [third quarter],” Royal Bank analyst Walter Spracklin said in a note. “Now with this warning, we believe [it] will take another step back."

Bombardier said Thursday its first-quarter train-division revenue is expected to drop 11 per cent year-over-year, reflecting a slower production increase, which defers revenue. Adjusted margins on earnings before interest and taxes for the business, which have typically hovered around 8 per cent for the past several quarters, will come in at 4 per cent, Bombardier said.

That implies the company had to take a charge on some of the value of the train contracts, Mr. Willemse said. He said many people expected that charge to come during the fourth-quarter report released in February. When it didn’t, Bombardier stock gained.

Bombardier said its full-year train-unit revenue is now expected to be US$750-million lower than its original full-year guidance, which now totals US$8.75-billion. Two-thirds of this reduction was attributed to slower production expansion and the remaining one-third stems from currency fluctuations.

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The train unit delivers the largest proportion of Bombardier’s revenue. Its business-aircraft division is the next biggest unit, and its revenue projections of US$6.25-billion for 2019 have not changed.

Bombardier has also lowered its full-year revenue projections for its commercial-aircraft division, the smallest of its four units, by US$250-million – or 18 per cent. The drop stems from fewer expected airplane deliveries.

Despite the latest developments, BMO Nesbitt Burns analyst Fadi Chamoun says Bombardier remains on an upward trajectory.

“While there are no assurances that legacy contracts won’t have further impacts on [train-unit] results in future quarters, we believe that these contracts are in the later stages and the backlog quality has improved in recent years, which should lead to greater stability in margins,” he wrote in a research note. However, he lowered his share price estimate to $4.25 from $5.

The rail unit ended the quarter with a backlog of about US$33.8-billion, Bombardier said. The company has expressed confidence it will win more contracts going forward as rail transportation increases in popularity and importance in major cities.

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