Bombardier CEO sees rail unit speeding up after 'system choked'

[MONTREAL] Bombardier Inc., North America's biggest maker of passenger rail equipment, will rely on standardization to help make up for chronic delays and deliver trains to customers faster, said Chief Executive Officer Alain Bellemare.

The company has amassed a US$34 billion backlog of future rail contracts, amounting to more than three years of output. But it's also racked up delays on a string of high-profile contracts, piled on debt and last month warned it would miss a key cash-flow target, sowing doubt about the outlook for its turnaround plan.

"We took on a lot,'' Bellemare said Friday in an interview at Bloomberg headquarters in New York. "The system choked. The system didn't have the manpower and the capability to support all this growth at the same time.''

Bombardier is counting on rail, its largest business, to contribute half of the US$20 billion in sales that the company is targeting for 2020. Bellemare has his work cut out: The division has been plagued by stumbles on high-profile projects in Toronto and New York. Bombardier plunged early last month after citing unexpected capital needs at the rail business forced the company to pare its profit forecast.

Faced with delays on rail contracts in cities such as London and New York, Bombardier invested about US$100 million to increase output by about 20 percent this year. Adjusted debt has risen to about US$9.5 billion after years of heavy investment in new aircraft and train programs.

Bid Blocked

Because of its record for delays, Bombardier was blocked last year from bidding for a US$3.2 billion New York subway-car contract. In Toronto, deals to supply light-rail vehicles and streetcars to the city have been plagued by missed deadlines -- to the point where the city's Metrolinx transportation agency eventually placed an order with Bombardier rival Alstom SA.

"We underperformed,'' Bellemare said of the issues involving shipments to New York's Metropolitan Transportation Authority. "Here in New York we have had some delivery challenges that have been upsetting to the customer. When you are in regaining mode, you need to prove that you can deliver on your new commitments. And that's what we are doing.''

Bombardier rose 3.7 percent to C$2.26 at 3:37 p.m. in Toronto. The shares fell 27 percent this year through Thursday, compared with a 1.9 percent rise in Canadian industrial stocks.

Less Customization

Bellemare's strategy to cut delivery times rests in part on a greater standardization of systems and equipment. The company's trains now have as much as 70 percent of their technology in common, up from about 25 percent three years ago, according to Chief Financial Officer John Di Bert.

While unique products require five to eight years to build and deliver, more standardized "platform-based'' products require just two to three years to reach customers, according to a presentation made to investors Thursday.

"We have been creating and developing trains in a perhaps overly customized way in different parts of the world,'' Di Bert said in the interview. "Every region had its engineering and design capabilities, its manufacturing capability, its sales force and its supply chain. With common technology, the speed to market is cut by more than half.''

Pretax profit margins in the rail unit, which will represent about 8.5 percent of 2018 revenue, will likely climb to more than 9 percent by 2020, the company said Thursday.

BLOOMBERG