Bombardier sees improved profit next year as cost-cutting takes hold

Share

Bombardier Inc. says it expects to improve profit and grow revenue next year as it cranks up sales of rail equipment and C Series planes while the benefits of a deep cost-cutting effort take hold.

The Montreal plane and train maker released financial guidance for fiscal 2017 after the close of markets Wednesday. It expects to tally earnings before interest and taxes in the range of $530-million (U.S.) and $630-million next year before special items, a roughly 50 per cent improvement over 2016. The profit target will be driven mostly by restructuring initiatives launched by chief executive officer Alain Bellemare, who replaced Pierre Beaudoin in the job in February of last year.

"I think these numbers will be viewed as a positive sign by investors that the company's restructuring plan is having some of the results that they anticipated," said Chris Murray, an analyst with AltaCorp Capital in Toronto. "But there's going to be a lot more details that we need in order to factor through all the risk."

"The strong momentum achieved in 2016 will continue into 2017," Mr. Bellemare said in a statement. "We've set a strong foundation for growth and our focus in 2017 will be on unleashing the value of our portfolio and creating shareholder value through solid execution."

The shares fell 1.6 per cent in Toronto trading to end the day at $1.91 before the guidance was published. They've gained 23 per cent this year.

Senior executives for the Montreal-based plane and train maker are scheduled to meet investors and analysts in New York City Thursday morning at 8 a.m. to update them on the company's turnaround plan. They will reaffirm the company's previous forecast to break even on a free cash flow basis by 2018 and achieve $25-billion in revenue by 2020.

Mr. Bellemare pulled the company back from the fringe of insolvency last year as it struggled to develop three new planes with diminishing resources. He's now trying to rebuild earnings amid concern about production delays for its flagship C Series airliner, ongoing softness in the market for luxury aircraft and and tough competition bearing down on its rail business.

In its guidance, Bombardier said it expects to spend $250-million to $300-million in 2017 on restructuring efforts to improve its operations and cut costs. It will take a charge in that range as a special item, the company said.

The plane maker also said it expects to burn between $750-million and $1-billion in cash next year, a significant year-over-year improvement in free cash flow usage as development costs on the C Series plane decline. Meanwhile, consolidated revenue is expected to grow by low single digits on the back of growth in the rail business and the ramp up of the C Series program, the company said.

Bombardier tapped the public markets last month for the first time in nearly two years, selling $1.4-billion (U.S.) in bonds due in 2021 at an interest coupon of 8.75 per cent. The proceeds were used to pay off two sets of senior notes due in 2018, giving Mr. Bellemare and his team the breathing room to execute his plan.

Bombardier said it will likely deliver 135 business jets and as many as 85 commercial airplanes next year, fewer than many analysts like Fadi Chamoun at Bank of Montreal were expecting.

"Demand in aerospace is weak, which we think is holding back the pace of profit improvement," Mr. Chamoun said in a research note, noting the company's cash usage remains high. "We see this outlook as mixed overall."

That plan is multi-faceted but at its core involves making Bombardier, a multinational with plants on several continents, a smaller and more competitive manufacturer. The company has announced two major workforce cuts this year alone affecting 14,500 people across its business lines.

While Bombardier is cutting in some areas, it is growing in others.

The C Series program in particular has come a long way over the last 12 months. A year ago, Bombardier was living an order drought for the aircraft and having trouble convincing buyers it would be around in the long term to support the plane. A $1-billion investment pledge from Quebec in the program provided that reassurance and the company subsequently won key orders from Delta Air Lines and Air Canada.

Both C Series models are now carrying paying passengers for launch customers Swiss and Air Baltic. They've received safety certifications by air transport authorities in Europe, Canada and the United States following the U.S. Federal Aviation Administration's airworthiness validation of the larger CS300 plane this week.

"There are airlines around the world that are very interested in the C Series aircraft family but have ben waiting for in-service operational experience before committing to the program," C Series program head Rob Dewar said in a statement Wednesday. "We are confident they will really like what they see."

In addition to winning new orders for the C Series, management now has to navigate a critical period where the company ramps up production of the airplane. Bombardier will lose money on its first series of airliners as it works through that phase.

Delays in shipments of the C Series engines from supplier Pratt & Whitney forced Bombardier in September to slash its delivery schedule for the airplanes this year. The company has said it believes it can make up the delays and has so far stuck to previous public commitments to deliver between 30 and 35 C Series in 2017.