(The National Post published the following article by Sean Silcoff on its website on March 31.)
MONTREAL — Bombardier Inc. is no longer a growth company intent on doubling revenue every five years, new chief executive Paul Tellier says in an interview to be published tomorrow.
“This is no longer the business we are in,” Mr. Tellier says in an interview with National Post Business magazine.
“The business we’re in is stability, consolidation, increased profitability, reduced costs …
“Whether the revenue line goes up or down slightly at this point in time is no concern of mine. The mandate that I have is to change the culture.”
Mr. Tellier’s assessment contrasts sharply with the optimistic forecasts of his predecessor, Robert Brown, and chairman, Laurent Beaudoin, and confirms what many analysts have said for months.
Mr. Beaudoin said in the early 1990s he hoped to double Bombardier’s revenue every five years, and Mr. Brown — who replaced him in 1999 — reiterated that goal 16 months ago.
The plane, train and snowmobile maker’s strong revenue and profit growth over the past decade — particularly in its aerospace business — made its stock one of the most widely held in Canada, and many analysts valued it more like a high-growth technology stock rather than a cyclical industrial products manufacturer.
At one point, Quebec’s Bombardier family was Canada’s second richest, with an estimated net worth of$6-billion. Their stake in the company is now worth less than $850-million.
But some long-time Bombardier watchers say the trends that fuelled the firm’s explosive growth in the 1990s won’t be repeated soon. Bombardier sold many private jets during the long bull market. But dot-com fever gave way to post-Enron sobriety, and many of those jets are now for sale, driving down prices 20% and cutting into already weak demand for new product. The business could remain soft for years, some feel.
Meanwhile, Bombardier’s regional jet business now appears to be maturing after most major airlines stocked up on the small commercial planes following their introduction a decade ago.
There are only one or two billion dollar orders left before the business becomes more cyclical and is marked by replacement orders and the odd fleet upgrade — similar to the market faced by wide-bodied jetmakers Boeing and Airbus.
“There was a perception the growth rate there would be sustainable — and it wasn’t,” says Robert Fay, an analyst at Canaccord Capital.
With the highly indebted company engulfed in a serious financial crisis and its stock trading at eight-year lows, Mr.Tellier, the former head of Canadian National Railway Co. and a Bombardier director since 1997, is trying not just to manage down expectations, but restore its liquidity and investors’ shaken faith.
On Thursday, he will unveil an action plan aimed at restoring market confidence and putting Bombardier on sound footing, which some believe is a difficult challenge given Mr. Tellier has been working without a full-time chief financial officer and faces intense time pressure to get up to speed on one of Canada’s largest and most complicated companies.
Bombardier has already cut 3,000 jobs this month in its aerospace division and another 350 posts in its railcar manufacturing business. Aerospace employees in Montreal now say they are worried they will have to reopen their collective agreement and give up concessions, as Bombardier unions in Toronto and Wichita, Kan. have done.
Of key concern is Bombardier’s credit rating. Both Moody’s Investor Service and Standard & Poor’s cut Bombardier to one level above “junk” status this month, after it warned profit and cash flow for the year ended Jan. 31 would come in well below expectations, at 40¢ to 45¢ a share (before special items) and $800-million, respectively.
The company is expected to report its first quarterly loss in seven years on Thursday and take significant writedowns.
Analysts expect Bombardier will have to sell more than $1-billion in equity, dispose of some assets and possibly cut its dividend. It must also strengthen its balance sheet and cut the size of its financing business to meet the concerns of credit rating agencies and soothe lenders worried by the firm’s high debt and exposure to the devastated aerospace industry. War in Iraq, high oil prices and now an international health scare could cut demand for air travel further and drive more airlines into bankruptcy protection, possibly starting with American Airlines this week.
If Bombardier’s credit rating sinks to “junk” status, it would trigger several provisions that may force it to find more than $1-billion in cash and new financing arrangements. A further credit rating downgrade would increase its cost of borrowing and cut off access to those institutional investors restricted to lending to investment-grade companies .
Company spokeswoman Dominique Dionne said no decisions have been made about the action plan, which goes to the board of directors on Wednesday.
But in the Feb. 14 interview, after he had been on the job one month, Mr. Tellier offers a few telling insights into some of the changes that could be coming.
Key among them is the possible disposal of Bombardier Capital, the company’s financing arm, which has $11-billion in debt and is seen as one of the company’s greatest concerns, given its exposure to the economic downturn and the aerospace sector.
“Is Bombardier Capital core to our activities? I don’t think so,” Mr. Tellier says.
“If there’s a perception that Bombardier Capital is a big black box, then maybe we shouldn’t be in the big black box business. It would make our financial statements easier to understand.”
Mr. Tellier further suggests the division could be sold in its entirety “maybe sooner” than the one to two years from now.
While some analysts have suggested Bombardier should sell its recreational products business (best known for its Sea-Doo personal watercraft and Ski-Doo snowmobiles) or spin it out in a public offering, Mr. Tellier says he isn’t so sure.
“People are saying, ‘Does Bombardier have a balance-sheet problem? Given that recreational products is a good business, they could sell it. It’s an easy business to sell,’ Do we have to sell it? I don’t think so … It could fetch a very good value, but we’re not there.”
Mr. Tellier also told the magazine he hopes to reform the company’s accounting practices and make the firm’s financial statements simple enough so a high school student could understand them.
Bombardier’s four businesses are subject to four different accounting methods, and its aerospace and financing divisions are notoriously difficult to penetrate because the company provides so little disclosure, analysts say.
Mr. Tellier also wants to make the company a model of corporate governance, in part by ensuring all board committees are chaired by outside directors.
Two of the board’s four committees are now chaired by insiders.