Few conference calls are as tense as the one Bombardier Inc. hosted this morning. For months, even years, the company has been putting on a brave face; today there was no hiding from the problems because the quarterly loss was so large, fuelled by massive writedowns.
At one point an analyst flat out asked why any investors should have any confidence in a turnaround, considering the board that oversaw the company's long downfall is still in place.
Rather than get heated, management seemed to have taken some media training and thanked every single analyst for their question each time they replied. They also did their best to respond with a positive outlook for the future, which made it more difficult to get a clear picture. Cutting through the spin, here are four important takeaways from the hour-long call:
The Quebec government gets warrants:
The news making headlines is Quebec's $1-billion investment in the C-series jet program, forming a joint venture with Bombardier in which the province will hold a 49.5-per-cent stake. What hasn't received much attention is the news that the government was also granted warrants to purchase up to 200 million Bombardier shares at a strike price of $2.21. That gives the government potential upside and a means to make a bigger profit if the entire company turns around. The strike price is also significant; $2.21 wasn't pulled out of thin air. That's the price at which public investors bought shares when Bombardier sold $1.1-billion of new equity in February.
This is the quarter when Bombardier got all the monsters out:
When a new chief executive officer starts at any company, the tendency is get all the bad stuff from the old regime off the books so the new team's performance can be judged more clearly. That's precisely what's happening right now with Bombardier. The biggest charges are: a $3.2-billion writedown on the C-Series program; a $1.2-billion charge for the Learjet 85 cancellation, even though it's near the testing phase; and a $353-million writedown that results from a mix of miscellaneous things. These numbers are big, but they're even more glaring when you put them in context. As one analyst noted, the $3.2-billion writedown on the C-Series is roughly the same amount as the initial capital expenditure expectations for the entire program. That stings.
Liquidity is king, and management knows that:
With a massive debt burden hanging over the company, management knows they need to do everything they can to assure investors – and customers – that they have the financial capabilities to bring the C-Series to market. At one point CEO Alain Bellemare noted that many of the recent actions, including the government funding as well as cancelling some programs to shore up cash, are " all about giving confidence that the C-series will be there," adding that customers need assurance that the program "will be in service for many, many years." Many people have been skeptical of that because of the cash crunch that will come when debt starts coming due. The C-Series program also isn't going to generate positive cash flow until 2020 at the earliest – plus it's going to need $2-billion in additional spending over the next two years. Bombardier stressed several times that once the government money is in, and a minority stake of its train arm is sold this fall – whether through an initial public offering or a private placement – it will have $5-billion in available liquidity. The $3.7-billion the company had at the end of third quarter "will be the low point for the foreseeable future," according to the chief financial officer.
Finally, management explained how the company got here:
Considering how much the company has changed in the past year, it's easy to get lost in the details, especially when trying to crunch cash flow projections. On the call management was asked to take a step back from it all and offer some colour on how everything went so wrong. Mr. Bellemare had a simple explanation: "The organization was overwhelmed by the number of programs." Investors have long focused on the C-Series, but internally the company was juggling so many balls – from the C-Series to the development of the Learjet 85 to producing the Global 5000/6000 business jet and more. The new plan is to streamline management's focus and deliver the baby that everyone knows the company's future hinges on: the C-Series. That's why the Learjet 85 project is being scrapped even though it's so close to testing. The market for planes of this type is now rather soft, and the program would have simply used more money that the C-Series program desperately needs.