Bombardier to pour millions into train engineering to overcome bottleneck

MONTREAL – Bombardier Inc. shares plunged Thursday after it lowered its 2019 profit forecast and announced hundreds of millions in spending to push through a bottleneck at its train-making unit following earnings that came in below analysts’ expectations.

The news triggered a nearly 16% drop in the transportation giant’s stock price to close at $1.91 on the Toronto Stock Exchange.

The Montreal-based company plans to spend an additional US$250 million to US$300 million this year to ramp up train production, raising investment in manufacturing and software engineering at Bombardier Transportation, its biggest division.

“We are going through a number of teething issues,” chief executive Alain Bellemare said on a conference call with investors. “We are going through a bottleneck.

“The trains have been a little bit of a setback,” he said, noting that holdups are “mostly on the software side.”

Bombardier continues to struggle with a handful of contracts in Germany and the United Kingdom, part of the US$33.6 billion backlog at its rail unit, which saw adjusted core earnings fall 37 per cent year over year to US$146 million last quarter.

Analysts continued to question on-time project delivery. “This nine-inning transformation now looks like it’s in extra innings,” said Credit Suisse analyst Robert Spingarn during the call.

The hitches in train production gave analysts pause as the company renews its focus on its rail and business jets, having cemented its departure from commercial aviation after three decades in the sector with a US$550-million deal to sell its floundering regional jet program to Mitsubishi Heavy Industries Ltd. in June.

“We believe that Bombardier’s cash flow will improve into 2020 as it makes progress on delivering on the challenging rail contracts and as Global 7500 1/8business jet 3/8 deliveries ramp up,” said National Bank of Canada analyst Cameron Doerksen, despite “the higher-risk programs currently being delivered.”

The company boosted its backlog of business jets by about $400 million last quarter, aiming to deliver between 15 and 20 of the new US$73-million jetliners this year.

Nonetheless, challenges in the train segment prompted the company to bump down its core adjusted earnings guidance for 2019 to between US$1.2 billion and US$1.3 billion, from US$1.5 billion and US$1.65 billion.

The announcement came as the train-and-plane maker reported a US$36-million net loss and a US$47-million adjusted loss for the quarter ended June 30.

The loss, reported in U.S. currency, amounted to four cents per diluted share before adjustments and compared with a year-earlier profit of $70 million or two cents per share.

Bombardier’s adjusted loss was also equal to four cents per share. Revenue reached $4.31 billion, up one per cent compared with $4.26 billion a year ago.

Analysts had predicted an adjusted loss of two cents per share and revenue of $4.09 billion, according to financial markets data firm Refinitiv.

Last month, Bombardier announced it would lay off half of the 1,100 workers at its Thunder Bay, Ont., manufacturing plant.

Two of the plant’s major contracts – for the Toronto Transit Commission streetcars and Metrolinx GO Transit rail cars – are slated to wind down by the end of the year.