Asking investors and ratings agencies to look beyond a “difficult” year ahead, Bombardier executives on 24 November rolled out a five-year plan that promises to increase topline revenues by around 40% while doubling profit margins by the end of 2020.
The five-year plan revealed during the company’s annual “investor day” in New York reveals key details of a new leadership team’s strategy to recover from recent setbacks that include the cancellation and $2.6 billion writedown on the Learjet 85 programme and a $3.2 billion charge and $1 billion Quebec-funded cash injection into the CSeries.
But it also provides a glimpse of the company’s razor-thin margin for error over the next five years, as executives hope to transform the company’s buying and operating practices while restoring its reputation in critical debt markets.
The first step of the plan seeks to boost profit margins by lowering internal and supplier costs. So Bombardier will transfer low-skill work packages from high-cost centres of excellence in Canada and Northern Ireland to cheaper facilities in Mexico, Morocco and India. The company plans to renegotiate long-term agreements with key suppliers, promising higher volumes in return for pricing discounts. And Bombardier plans to consolidate procurement activity from segment- and even programme-level buying agents.
At the same time, Bombardier will focus on making a “flawless” entry into service and production ramp-up of the CSeries, while remaining on track to complete development of the Global 7000 business jet. A formerly three-year ramp-up to full-rate production over three years has been stretched to five years, with Bombardier delivering 255-315 CSeries aircraft over that period, including up to 120 in 2020 alone.
The slower ramp-up gives Bombardier more time to sign fleet orders with “marquee” airlines, with United Airlines’ acknowledged interest in the CS100. With 243 firm orders in the backlog and commitments for nearly another 400 aircraft, the ramp-up extension gives Bombardier’s sales team time to complete such deals.
But the five-year plan also exposes Bombardier’s thin margin for error. The financial strategy assumes that Bombardier can renegotiate $3.5 billion in debt that matures between 2018 and 2020, including about $1.4-1.5 billion that comes due in 2018 alone. But first Bombardier must persuade ratings firms to restore an investment-grade credit rating.
That’s not something Bombardier can achieve with a PowerPoint presentation and promises of a five-year internal transformation.
Instead, Bombardier must demonstrate over the next four to six financial quarters that the company deserves a better rating. And that means the company must introduce the CS100 on time to Swiss and demonstrate that the aircraft performs reliably in service and can be produced at even the slower rate that Bombardier has promised.
The plan also includes sustaining the company’s existing aerospace product lines at flat delivery rates over the five-year period. Fred Cromer, chief executive of Bombardier Commercial Aircraft, says that projection reflects a “conservative” forecast, and he hopes to deliver more Q400 turboprops and CRJ900 regional jets than currently anticipated. But executives acknowledge that the forecast is “sensitive” to negative changes in the macroeconomic environment.
If Bombardier executes the plan as shown, revenues will grow from $18 billion today to $25 billion by 2020. Operating profit margins will rise from 3-4% to 7-8%. And the company will have a mature production system with the CSeries and Global 7000 driving sales and profits for the next two decades.
To get there, however, the company, must struggle through a tough year ahead, with 2016 expected to result in lower revenues, reduced profits and the pressure of maintaining schedules on both development programmes. The picture improves in 2017 with the CSeries through the development stage, but still intense pressure on the Global 7000 programme and the CSeries ramp-up. If those milestones are completed successfully, Bombardier believes it can make a case to the ratings agencies, paving the way to refinance the debt covenants owed from 2018 to 2020.
“Four to six quarters from now, we’ll be in a position to make that case,” says John DiBert, Bombardier chief financial officer.
Source: Cirium Dashboard
