Alstom Flags Cash Burn From Lingering Bombardier ‘Skeletons’

(Bloomberg) -- Alstom SA Chief Executive Officer Henri Poupart-Lafarge expects costly and painful months ahead as the rail-equipment maker works to turn around the flagging operations of the Canadian rival it acquired.

Alstom is detailing on Tuesday a path for improving profitability for the combined group after the Bombardier deal was sealed in January. The French company is forecasting a cash drain in the first half of this year and a return to pre-acquisition margin levels only in the 2024-2025 fiscal year, according to a statement.

The shares fell as much as 8.2% in early trading in Paris, the steepest intraday drop since March last year, and were down 4.3% at 11:53 a.m. local time.

There will be “no more skeletons” going forward, the CEO said in an interview, with provisions for problematic contracts related to Bombardier capped at the roughly 1.08 billion euros ($1.3 billion) already announced. “The key element is to turn around Bombardier.”

Alstom has won major train orders in recent months, benefiting from a wave of investment in carbon-free transport across the globe. But integrating Bombardier's business following the 5.5 billion-euro takeover has been a rocky process right from the start.

Kitchen Sink

The cash outflow “is clearly a negative surprise,” Morgan Stanley analysts Katie Self and Ben Uglow wrote in a note, calling the forecast “an effective kitchen sink” that could mark a low point for integration of Bombardier.

Alstom is forecasting negative cash flow in the first half of this fiscal year of between 1.6 billion euros and 1.9 billion euros, according to the statement. This will lead to “significant” negative free cash flow for the full year.

The cash burn is due to higher spending needed to make up for delivery delays and mismanagement related to ex-Bombardier orders, Poupart-Lafarge said. These are in countries like the U.K. and Switzerland and will require Alstom to raise train deliveries by 35%.

What Bloomberg Intelligence Says

Alstom's guidance of negative cash flow of 1.6-1.9 billion euros in 1H of fiscal 2022 relates to Bombardier's loss-making projects, yet it should mark a low point in the company's integration. The magnitude came as a surprise, as it far exceeds the 1 billion-euro size of these problematic programs. Ebit margin may take three years to reach pre-deal targets.

-- Mustafa Okur, BI industrials analyst

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Alstom disclosed in May that the full-year profit margin for its legacy operation reached 8% compared with 2.7% for Bombardier.

“Bombardier had unsound relations with suppliers and customers,” Poupart-Lafarge told analysts during the presentation, responding to questions on the cash burn and absence of specific guidance for this fiscal year.

“The No. 1 priority is to keep the company under control,” he said. “The last thing we want to do is transform into fire fighters running around the planet” dealing with project issues.

On the brighter side, Alstom is looking at additional spending in the U.S. on infrastructure under the Biden administration as “upside potential,” he said earlier in the interview. “It could definitely be a game changer.”

In Europe, the biggest markets will be Germany along with Italy, Spain and Portugal -- southern countries set to spend under the region's post-pandemic economic stimulus package.

Key Highlights

• Alstom sees significant negative free cash flow this fiscal year including between negative EU1.6 billion and negative EU1.9 billion in the first half
• “Stabilization” of Bombardier legacy contracts in two or three years
• Adjusted Ebit margin to reach between 8% and 10% from 2024-25 onwards vs 5% pro forma
• Yearly positive free cash flow toward mid-term target
• Order backlog stands at 74.5 billion euros
• Goal to expand global market share by 5 percentage points to 36%: CEO

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