Q1 2012 BOMBARDIER INC Earnings Conference Call (English)
May 10, 2012 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
BBD.B.TO - Bombardier Inc
Q1 2012 BOMBARDIER INC Earnings Conference Call (English)
May 10, 2012 / 07:00PM GMT
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Corporate Participants
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* Shirley Chenier
Bombardier, Inc. - Senior Director IR
* Pierre Beaudoin
Bombardier, Inc. - President, CEO
* Pierre Alary
Bombardier, Inc. - SVP, CFO
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Conference Call Participants
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* Walter Spracklin
RBC Capital Markets - Analyst
* Cameron Doerksen
National Bank Financial - Analyst
* Noah Poponak
Goldman Sachs - Analyst
* Joe Nadol
JPMorgan - Analyst
* Turan Quettawala
Scotia Capital - Analyst
* Benoit Poirier
Desjardins Capital Markets - Analyst
* David Newman
Cormark Securities - Analyst
* Elizabeth Grenfell
Bank of America Merrill Lynch - Analyst
* Stephen Trent
Citi - Analyst
* David Tyerman
Canaccord Genuity - Analyst
* Chris Murray
PI Financial Corp. - Analyst
* Tom Astle
Byron Capital Markets - Analyst
* Anthony Scilipoti
Veritas Investment Research - Analyst
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Presentation
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Operator [1]
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(spoken in French). Good afternoon, ladies and gentlemen, and welcome to the Bombardier conference call. Please be advised that this call is being recorded.
(spoken in French). I would now like to turn the meeting over to Ms. Shirley Chenier, Senior Director Investor Relations. (spoken in French). Please go, Ms. Chenier.
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Shirley Chenier, Bombardier, Inc. - Senior Director IR [2]
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Thank you, Operator. (spoken in French). Good afternoon and welcome to Bombardier's conference call intended for investors and financial analysts.
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Unidentified Company Representative [3]
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(interpreted) I also welcome the media representatives who are with us today. You will have an opportunity to ask questions later during this call when we open the media question period.
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Shirley Chenier, Bombardier, Inc. - Senior Director IR [4]
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Shortly Mr. Pierre Beaudoin, President and Chief Executive Officer, and Mr. Pierre Alary, Senior Vice President and Chief Financial Officer, will discuss Bombardier's financial results for the first quarter ended March 31, 2012.
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Unidentified Company Representative [5]
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(interpreted) This conference call is broadcast live on the Internet and is also interpreted in French and in English.
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Shirley Chenier, Bombardier, Inc. - Senior Director IR [6]
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You can access the broadcast on our website at www.Bombardier.com, and a webcast archive of the integral version of this call will be available within the next 24 hours.
Slides for this presentation in English and French are equally available on our website. And all dollar values expressed during this conference call are in US dollars, unless stated otherwise.
I also wish to remind you that during the course of this conference call we make may make projections or other forward-looking statements regarding future events or the future financial performance of the Corporation. Several assumptions were made by Bombardier in preparing these statements and we wish to emphasize that there are risks that actual events or results may differ materially from these statements. For additional information on such assumptions, please refer to the MD&A released today.
Please also note that I am making this cautionary statement on behalf of of each speaker whose remarks today will contain forward-looking statements. Pierre Beaudoin will now begin the presentation.
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [7]
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(spoken in French).
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Unidentified Company Representative [8]
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(interpreted) Good morning and welcome to this conference call.
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [9]
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I would like to make a few comments before we get -- we answer your questions.
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Unidentified Company Representative [10]
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As anticipated, we have lower revenues in the first quarter.
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [11]
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Our revenues reduced in the first quarter, given the transition of the Vision Flight Deck for the Global 6000 and Global 5000, and we had fewer deliveries in commercial aircraft.
But despite these lower revenues, we were able to contain costs and it permitted us to generate $190 million of net income or $0.10 per share compared to $220 million last year or $0.12 per share.
We have a strong -- we had a strong cash position of $3.2 billion, bringing our total liquidity level to $4.6 billion, and a strong solid backlog at $55.2 billion.
In Aerospace, we had a good level of orders with 28 commercial aircraft and 40 business aircraft for a book-to-bill of 1.8. And we are seeing already some increased sales given our increased sales force in commercial aircraft with PrivatAir for the CSeries, Garuda for CRJ1000, and Eurolot for the Q400. And there is many more campaigns in the pipeline.
In Transportation we are also seeing good level of order activity in all segments and geography, especially in Europe and North America. With many tenders in the pipeline we continue to expect to deliver a book-to-bill of 1 for the year. And we have a strong backlog of $31.9 billion, representing three years of revenue.
Now I would like to let Pierre Alary walk you through the results.
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Pierre Alary, Bombardier, Inc. - SVP, CFO [12]
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Thank you, Pierre. Aerospace revenue for the first quarter totaled $1.5 billion compared to $2.2 billion last year. The decrease is mainly due to lower delivery of business aircraft due to the transition to the Global 5000 and Global 6000 with our new Vision Flight Deck. It is also due to lower delivery of commercial aircraft due to lower production rate and to the timing of financing availability for a customer.
Deliveries are expected to ramp up during the course of the year to reach our delivery guidance of approximately 180 business aircraft and 55 commercial aircraft for the full year.
Q1 EBIT margin is at 6.1%. But excluding the impact of this year litigation gain, EBIT would be at 4.5%, in-line with our guidance of approximately 5% for the full year.
BT Q1 revenue totaled $2 billion compared to $2.5 billion last year. This lower level of revenues is due to the completion of major projects ahead of ramping-up of production of new contracts, and also to a negative currency impact. EBIT margin is at 6.2% compared to 6.9% last year, mainly due to a lower absorption of SG&A and R&D expenses.
On a consolidated basis Q1 revenues totaled $3.5 billion, while EBIT reached $215 million. The net financing expense is nil compared to $36 million last year. The reduction is due to an interest income resulting from a successful resolution of a litigation amounting to $17 million. It is also due to lower interest expense on long-term debt, lower amortization of our Letter of Credit facility costs and lower accretion on provision.
Our effective income tax rate was 11.6% for the first quarter, due to the positive impact of the recognition of income tax benefit related to tax losses and temporary differences. As a result, net income totaled $190 million, which represents an EPS of $0.10 compared to $0.12 last year.
Now looking at the free cash flow. As it is the case typically in the first quarter, we had a cash flow usage which amounted to $712 million.
Aerospace cash flow used for operating activity amounted to $200 million, resulting from an increase in inventory, mainly due to the transition of the Global 5000 and Global 6000, and to the delay of commercial aircraft due to the timing of financing availability for a customer.
This increase in inventory was partially offset by an increase in advances as our book-to-bill ratio was well above 1. The investment in our various programs in Aerospace amounted to $372 million for the first quarter.
Transportation cash flow usage for the first quarter amounted to $100 million compared to $168 million for the previous year.
As we are in a period of significant investment, we are proactively managing our liquidity. During the first quarter we have put in place a new EUR500 million revolving credit facility available for cash drawing for Bombardier Transportation. We also issued new bonds for $500 million, of which $150 million has been used for the repayment of the May 2012 bond maturity.
In addition, we have extended the availability period of our Letter of Credit and available credit facilities by an additional year to May and June 2015. These transactions clearly demonstrate the confidence the financial markets have in our business plan and contingent liability strategy.
Having a solid liquidity position of $4.6 billion, and having no major debt maturity before 2016, are insuring us the financial flexibility to support our development program.
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [13]
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So, to conclude, 2012 is an exciting year for Bombardier. First of all, in Transportation our execution issue on the three specific contracts are getting solved and measures have been taken to avoid these types of problems in the future. We continue to target 8% EBIT margin for 2013 and expect it to generate -- and expect to generate free cash flow for the years generally in-line with profitability.
In Aerospace we anticipate an increased level of orders and deliveries and advances through the year. We maintain our guidance of 5% EBIT margin for the current year, with delivery of 180 business aircraft and 55 commercial aircraft. And we continue to expect significant cash flow from operations in order to substantially fund our estimated $2 billion of investment in new programs.
We are making good progress on our product development in Aerospace with the first assembly of the Learjet 85 and the CSeries this year. Finally, we have had -- been successful in several sales campaigns since the beginning of the year, as exemplified by our recent Letter of Intent with WestJet for up to 45 Q400s, and we expect to continue to build on this momentum. Thank you.
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Shirley Chenier, Bombardier, Inc. - Senior Director IR [14]
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Thank you, Pierre. We will now start the question period for analysts and investors. In order to keep the duration of this call reasonable, I will ask you to limit yourself to one question to give everyone a chance to participate. If you have any remaining questions at the end, and if time permits, you can get back in queue, or if not, you can contact me directly after the conference call.
We can now start with the first question. Operator?
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Questions and Answers
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Operator [1]
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(spoken in French). (Operator Instructions). Walter Spracklin, RBC Capital Markets.
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Walter Spracklin, RBC Capital Markets - Analyst [2]
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Just on -- I guess, my question will revolve around your new order or your existing campaigns. I know investors right now are looking for indications that, yes, we are at the lower end of the new order cycle and looking for any signs of comfort or optimism in those campaigns.
And I was wondering, Pierre, you mentioned that in the back half of the year you do expect a significant increase in new orders. Perhaps if I can broaden my question to discussing any existing campaigns that might be meaningful, where you are optimistic, particularly on the RJ front. And perhaps as well if you could comment specifically on your Transportation campaigns that we have been -- that we know about, the Crossrail and some of the Indian contracts that look to be quite meaningful in the back half of the year.
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [3]
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Yes, let me start with Aerospace. First of all, I think we are off to a very good start with 40 business aircraft and 28 commercial. Because you must not forget last year in business aircraft in the first quarter there was a large order from one customer, NetJets, which maybe skews the comparison, but we consider 40 and 28 to be a very good quarter.
And, also Guy said this morning that we have -- if you consider that this year not only do we have 28 orders, but in all if you count the LOIs, plus the options, we are talking about 110 so far this year. So good momentum on the commercial side.
There is many campaigns -- you know, it is not our policy to discuss specific campaigns. One you know, WestJet, that still needs to get closed, so it would not be in our backlog. It is only an LOI at this point, but the customer has announced they're going with us. So that is one example.
Another example, as you know, in the US right now there is major reorganization going on, because one airline is in Chapter 11 and there is a lot of discussion on how they're going to grow -- not only this airline about how they're going to grow their RJ fleet to replace their 50 passenger -- grow in terms of size.
And because we have a significant cost advantage on our competitor, whether it is the CRJ900, the CRJ700 when scopes are limited at 70 seats, or the CRJ1000, I think we are very well-positioned to participate when this gets going in the US.
And we feel it is coming in the near future. I can't tell you the timing, because there are a lot of play, but I think that is an area where you have a lot of opportunities.
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Walter Spracklin, RBC Capital Markets - Analyst [4]
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Can you talk about rough size of that one, or no?
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [5]
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Well, it is not that one. It is many airlines looking to move from 50 passenger jets to 70, 80, and depending where the scope clause will happen. And I think what I would ask you to do on this is look at the 50 passenger airplanes that are getting at the end of their financing -- 12 years, 15 years, and you get an idea of how many will be replaced for larger regionals.
So that is for -- and then the other aspect that Guy has spoken about quite a bit is how much we reinforce our team in emerging markets, and we are seeing a lot of opportunities that -- with ongoing discussions. So I feel quite bullish about our commercial aircraft order for the year.
And for business aircraft, basically, the momentum is continuing for us for large -- and starting on the Challenger side, with some pickup on the Learjet at this point. So we think we are out for a good year of order and the first quarter represents that.
On Transport, you know there is two large potential orders in the US, where we have been chosen as the preferred bidder, which would be New York and BART. BART, the Board meeting is going on right now. We hope that they make a decision to award us the contract.
As far as we are concerned, they can make either the decision to award the contract, delay, but I don't think they have the ability to delay much, or restart the process. So we are hoping that they will make a decision to go forward. This process has lasted long enough. And then I think we will continue to be very well-positioned to win on this one, like we are in New York.
Besides that we have quite a few campaigns in Europe, because you know that we have won some large contracts a few years ago, and these customers have options. A good example is in the first quarter we announced Deutsche Bahn taking more double-deck in the first -- exercising some options in their framework contract. So we expect more of that during the year.
So I think from an order perspective we will be good positioned to be a book-to-bill of 1 in Transport, and in Aerospace to build momentum so that we can increase -- eventually increase our volume.
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Walter Spracklin, RBC Capital Markets - Analyst [6]
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Okay, that is my one question. Thank you very much.
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Operator [7]
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Cameron Doerksen, National Bank Financial.
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Cameron Doerksen, National Bank Financial - Analyst [8]
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A question on Transportation. The revenue was fairly weak in the quarter, especially, I guess, in Asia-Pacific markets. I assume that the bulk of that is China. I'm just wondering if you could maybe talk about what has gone on there, specifically with regards to the ZEFIRO train, where that is ramping. And then when do you expect a rebound in Asia-Pacific, and in China market specifically?
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [9]
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Well, first, yes, revenue was lower in Transport. A couple of things to monitor during the year. Of course, the euro, when we translate these revenues into US dollars, something we can't predict, as you fully well understand, is the euro. So that has influenced the total number of revenue.
And like you pointed out, Asia-Pacific, it is in China. It is not a slowdown but we are ramping up the ZEFIRO 380. And as we have discussed before, there is discussions going on in China about how many 380 -- within the contract of the high-speed that we took a few years ago on the 380 they will actually take some 250 stainless steel cars and some aluminum -- a 250 kilometers train.
And right now the order for additional 250 stainless steel, which is the train we make already, has come to an end. We are going to reaccelerate towards the latter part of the year. So there is kind of a slowdown for a few months in China -- not permanent, but a slowdown. So that will affect our revenue; it is a question of timing.
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Cameron Doerksen, National Bank Financial - Analyst [10]
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Okay, that is perfect. Thanks very much.
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Operator [11]
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Noah Poponak, Goldman Sachs.
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Noah Poponak, Goldman Sachs - Analyst [12]
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Just a question around the segment margin outlook. I interpreted your prepared remarks to mean that you intend to get to 5% for the year at Aerospace without the $23 million gain in the quarter. Is that correct?
And then on the Transportation side, I think the wording with the initial outlook there was working toward 8% in 2013. To me that meant 2012 would be higher than 2011. Can you just say if you expect 2012 to be flat, down or up versus 2011? Thank you.
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [13]
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Well, we will remain with the forward-looking statement that we had made -- like we do at year-end call, which was in March. And that is all I am saying is Aerospace we had planned to be at 5%. We are confirming that we will be at 5%, or that is the forecast that we have for the year.
There is a lot of work still to be done, three quarters in front of us. I think take the guidance we gave you in March and that is what I am saying, 5%.
And in Transport we always said we are targeting to be at 8% for 2013, and we did not make a guidance for this year.
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Noah Poponak, Goldman Sachs - Analyst [14]
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So you cannot say whether or not the 5% at Aerospace includes or does not include the gain this quarter?
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [15]
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Well, at this point I am saying that I felt confidence in delivering the 5%. Of course, we had not planned for this amount when we gave you the guidance, but I think going with a 5% is accurate enough at this point.
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Noah Poponak, Goldman Sachs - Analyst [16]
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Okay, thank you.
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Operator [17]
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Joe Nadol, JPMorgan.
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Joe Nadol, JPMorgan - Analyst [18]
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Pierre, I was wondering if you could give just your qualitative update of how things are going on the CSeries testing; confidence in the first flight by year-end; your enthusiasm as you look at the air show coming up in terms of potential orders, et cetera. Thanks.
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Shirley Chenier, Bombardier, Inc. - Senior Director IR [19]
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Joe, which one do you want to ask for?
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [20]
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I will cover it.
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Shirley Chenier, Bombardier, Inc. - Senior Director IR [21]
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You will cover it all?
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [22]
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I will cover -- I will be nice and cover it all, Shirley.
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Shirley Chenier, Bombardier, Inc. - Senior Director IR [23]
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You're lucky, Joe.
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [24]
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I am very enthusiastic about the CSeries. We see parts; we see components coming; suppliers; jig testing components. We are getting close to June where our complete aircraft, the CIASTA, that we call, will be -- essentially all the systems will be commissioned and we are starting the testing.
So all of these things are very exciting, because we see a real aircraft. We see stuff going on on the assembly line to start preparing to assemble the first aircraft. So a high level of enthusiast. I feel confident about our date at the end of the year to fly it before the end of 2012.
Now I will just caveat it that I have been through a few aircraft programs at Bombardier, and I have watched others do it. There is a lot of complexity at putting these things together. So no red flags, nothing indicates that we won't be on time. But I just want to impress upon all of you that these are very complex projects and that we have to take it step by step. But so far I feel very good about the CSeries and the progress we are making.
For the orders, you know, we are in a good position with the order level at this point. We have 2.5 years of orders. We have -- if we count the options in the LOI we are at around 300. Like I always said, the customers decide the timing of when is the next order for the CSeries. But I feel we are in a great position to start production with the level that we have. We will get more before the start of production, and some may be timed right for events, and may not be.
The important is to get the orders to continue to diversify our portfolio of airlines that have bought this airplane, and to continue to get quality order with the right pricing to meet their business case.
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Joe Nadol, JPMorgan - Analyst [25]
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Thanks.
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Operator [26]
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Turan Quettawala, Scotia Capital.
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Turan Quettawala, Scotia Capital - Analyst [27]
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I guess my question is on BT as well, just wondering on their revenue profile for the balance of the year. I guess for the last two or three quarters the revenue has been weak at BT because of ramp-up. I am just wondering if you can provide some clarity on how this will play out through the balance of the year? And how should we think about revenue, I guess, maybe on an ex currency basis for the full year for BT? Thank you.
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Pierre Alary, Bombardier, Inc. - SVP, CFO [28]
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For BT for the full year what we anticipate is that, excluding the foreign exchange impact, the revenue to be slightly lower than last year, within a single-digit variation.
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Turan Quettawala, Scotia Capital - Analyst [29]
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That is great. And I guess would it be more backend loaded, Pierre, so more Q3/Q4? Like is Q2 a down quarter? Can you get that granular here?
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Pierre Alary, Bombardier, Inc. - SVP, CFO [30]
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Yes, yes.
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Turan Quettawala, Scotia Capital - Analyst [31]
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Okay. Great, thank you very much.
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Operator [32]
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Hamzah Mazari, Credit Suisse.
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Unidentified Participant [33]
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It is actually Andrew here speaking on behalf of Hamzah. I just had a quick question on free cash flow. It was negative in Q1, so I just wanted to know how confident do you feel about free cash flow going into the year, and if there is any added guidance?
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Pierre Alary, Bombardier, Inc. - SVP, CFO [34]
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We look at free cash flow and our guidance remain as we have mentioned with the fourth-quarter results. Basically in the Aerospace we are generating free cash flow from operation sufficiently, or at a level that would basically finance the investment in our major program, or in our program for about $2 billion. So, essentially, breakeven or close to be breakeven.
While on the Transportation that the cash flow -- free cash flow should be aligned with profitability.
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [35]
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Just to add, when we talk about cash flow, in the first quarter we delivered four Global family aircraft. Last year we had delivered about 15. So just -- and of course the Global is very popular, and it is our plan to get back to a more regular production after the Vision has been certified. So you can just do the math, 10 aircraft or so waiting to be delivered, there is just a lot of cash just tied up there, but they are sold aircraft.
So it is a transition thing. That is why when Pierre talks about the cash flow for the year, you have to consider first quarter as being a little bit different than what you're used to.
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Unidentified Participant [36]
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Great. Thank you very much.
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Operator [37]
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Benoit Poirier, Desjardins Bank Capital Markets
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Benoit Poirier, Desjardins Capital Markets - Analyst [38]
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My question is related to the Global family. As you just mentioned, these deliveries are down from 15 to 4 in the quarter. I understand a good portion is related to the introduction of the new Global Vision Flight Deck, but is the issue resolved and how fast can you ramp up deliveries?
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [39]
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Well, first of all, there was no issue. No new issue with the Global Flight Deck, it is just a transition. And certifications, because we had not obtained FAA certification in the first quarter, or just towards the end, and you could not deliver the airplane from the completion center if we did not have FAA certification.
So we will correct the situation right away in Q2. But to catch up, if you want, the 10 or so aircraft that were not delivered in the first quarter, it is going to take a few quarters.
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Benoit Poirier, Desjardins Capital Markets - Analyst [40]
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Okay, perfect. That is it. Thanks.
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Operator [41]
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David Newman, Cormark Securities.
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David Newman, Cormark Securities - Analyst [42]
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Just a question on the delay to the financing for one of your customers. This is becoming more of an issue, especially for future sales, like the CSeries? And some of the lessors have been talking about the lack of RVGs and discounts, et cetera. Maybe, Pierre, you could just comment on that. And on this particular issue with the financing is this becoming more of a problem for potential buyers?
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [43]
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I would not relate the events of the first quarter to, I guess, your comments about more difficulty of financing aircraft. This was a particular timing situation with this customer. We thought we could get it all timed and approved for first quarter, and it doesn't take many -- much things to delay it so that you fall -- you are missing some paperwork, you don't get the proper approval, and then it doesn't get done.
So that was a very specific issue. As far as financing, I think this is something that we need to be very close to like we have always been. I think we are good at that. And the other point is that EDC has been very supportive, but it is for sure we can't count on EDC for all of the deliveries, so we're very active at developing new sources of financing. Like, for example, the CRJ900 that we are delivering -- or we have on order from China Express in China -- they will be financed by AVIC Leasing.
So there is an example where we are developing some Chinese alternatives, and basically we are going after new sources of financing. But we think we will be able to get all of the potential orders financed for what we see in front of us.
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David Newman, Cormark Securities - Analyst [44]
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And you are sticking to your guns on the RVGs and on the discounting to keep the margins and the prices up on the CSeries?
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [45]
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We are not giving these kinds of support, if that is your question.
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David Newman, Cormark Securities - Analyst [46]
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Very good, thank you.
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Operator [47]
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Ron Epstein, Bank of America.
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Elizabeth Grenfell, Bank of America Merrill Lynch - Analyst [48]
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It is Elizabeth in for Ron. We are just kind of curious what gives you the confidence that you will reach your guidance of 180 BizJets and 55 regional jets when you only delivered 16% of BizJets in the first quarter and then there were only 13% of your regional guidance in the first quarter?
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [49]
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Well, first of all we have -- our Skylines are booked, so we know the customers. And the delays that we suffered in the first quarter were very easily identified mainly to the Global platform. And also in the first quarter -- since we usually have a very big fourth quarter, in the first quarter we always have a little bit less aircraft.
So when we look at all of the deliveries, when they are planned, the customer names on them, we see the amount of aircraft we give you in our guidance.
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Elizabeth Grenfell, Bank of America Merrill Lynch - Analyst [50]
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So is the regional backlog sold out for the year?
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [51]
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The regional backlog is essentially sold out. There may be a couple of units still to be finalized, if you want, but for the 55 I feel very good where we stand.
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Elizabeth Grenfell, Bank of America Merrill Lynch - Analyst [52]
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Okay, thank you.
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Operator [53]
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Stephen Trent, Citi.
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Stephen Trent, Citi - Analyst [54]
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Good afternoon everybody and thanks for the time. I am going to stick with the rules of just one question here, and I'm going to keep it very simple. At the end of your prepared remarks I believe you said something about a Letter of Intent signed for Q400s, but I thought you said WestJet. I just couldn't understand -- I didn't hear properly the name of the airline you mentioned.
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [55]
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I am sorry about that. It was WestJet. Last week they announced that they chose us as the manufacturer for their new regional airline, and they chose the Q400s, so we have a Letter of Intent. Now we need to work through a purchase agreement.
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Stephen Trent, Citi - Analyst [56]
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Perfect. I just wanted to confirm that that was the airline which I was thinking of. So I will leave it at that, and thank you for the time.
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Operator [57]
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David Tyerman, Canaccord Genuity.
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David Tyerman, Canaccord Genuity - Analyst [58]
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My question is on the Business Jet delivery guidance, the 180 units. When I look across the portfolio, I see very low backlogs on the Learjet and Challenger. And Pierre, I think you said that it would take a while to catch up on the Global. So I am wondering if you can help us understand where are we going to see the growth this year -- since you are going from growth compared to the 11-month period last year -- given low backlogs on Learjets and Challengers and Globals taking a while to catch up?
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [59]
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Well, first of all, if you take the Globals and the Challengers, essentially the products we have to deliver this year are sold, so that is not a question of getting backlog. Getting backlog is more for next year.
So on Learjet, there are still some work to do, but we see their prospects in front of us, and I feel very confident that the 180 is going to get done.
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David Tyerman, Canaccord Genuity - Analyst [60]
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So can you give us an idea of where it is skewed -- is it to the larger cabin then, it sounds like?
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [61]
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You mean quantities per model?
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David Tyerman, Canaccord Genuity - Analyst [62]
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Yes.
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [63]
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I don't think we have split that up. But like we have said now for quite some time, the Lears and the Challengers are popular.
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David Tyerman, Canaccord Genuity - Analyst [64]
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The Lears and the Challengers?
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [65]
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Oh, did I say Lear, I am sorry. The Globals and the Challengers are very popular.
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David Tyerman, Canaccord Genuity - Analyst [66]
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Okay, the larger body. Thanks.
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Pierre Beaudoin, Bombardier, Inc. - President, CEO [67]
------------------------------
I am sorry about that.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [68]
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No problem.
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Operator [69]
------------------------------
Chris Murray, PI Financial Corp.
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Chris Murray, PI Financial Corp. - Analyst [70]
------------------------------
I was just wondering if you could give us perhaps a bit more of an update on where you stand with the Lear 85 program? And just some updates on plans for first flight and maybe entry into service.
------------------------------
Pierre Beaudoin, Bombardier, Inc. - President, CEO [71]
------------------------------
Yes, entry into service for the Lear 85 is end of 2013; that is what we are planning at this point. Generally it takes about 12 months to do a flight test. We haven't announced the first flight, but you can do the math from there. Because the reason we are not precise on this is that during a development program we constantly reevaluate if we need to compress something nor lengthen something.
Where we are today is that we are essentially very advanced on all the structure. So whatever we are doing in composite is going very well. We have made significant progress in the last few months. So for the structure of the airplane we feel very confident. And that was the high-risk part of this aircraft, because the rest of the systems are pretty conventional.
We are using very modern engines, for example, but they are being flown on other aircraft on the market. We are using hydraulic systems that we know very well. All of the systems on this aircraft today are being tested on suppliers' jigs, and that is going well. So shortly we are going to start to put things together.
------------------------------
Chris Murray, PI Financial Corp. - Analyst [72]
------------------------------
Okay, are you running an integrated test system for the Lear 85, like you are for the C?
------------------------------
Pierre Beaudoin, Bombardier, Inc. - President, CEO [73]
------------------------------
No, we don't. We haven't gone down that on a business aircraft yet. And, no -- and we feel that because the big risk element with the Lear 85 was the composite aircraft, this is where we put all of the emphasis. The other system -- like I said, we chose a system that we understand, know and feel confident about.
------------------------------
Chris Murray, PI Financial Corp. - Analyst [74]
------------------------------
Okay. Thank you.
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Operator [75]
------------------------------
Walter Spracklin, RBC Capital Markets.
------------------------------
Walter Spracklin, RBC Capital Markets - Analyst [76]
------------------------------
Just a follow-up question. This one is for Pierre Alary on the new financings that you have gotten. I know you don't typically give us guidance on the covenants, but whenever -- I find whenever you do have that seasonality in your free cash flow that shows a fairly pronounced usage, I do often get kind of knee-jerk calls in about the strength of the covenants, and if you might in any given quarter flip offside on them.
I was wondering if you could talk to us a little bit about the agreements that you have with your bankers and how much flexibility quarter-to-quarter -- especially given that seasonality, how much flexibility that is engendered in those covenants?
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [77]
------------------------------
One thing I can mention to you is that, obviously, our bankers, we provide them with our physically budget and start plan, so we give them a three-year view. We give them a budget showing our quarterly -- where we anticipate to be on a quarterly basis. And we just issued a new revolver looking at all those revised figures.
And, obviously, I wouldn't accept a covenant where I would trip on the first quarter, for example. So it takes into account the seasonality.
------------------------------
Walter Spracklin, RBC Capital Markets - Analyst [78]
------------------------------
And, also, the potential, like you saw with the business -- the Transportation division last year, where you had some, I guess, delivery issues that really threw it off last year, I guess, you're comfortable with the threshold being maintained even if a seasonal aspect comes in, in addition to perhaps an operational or a delivery issue as well if it gets compounded?
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [79]
------------------------------
Yes. The answer is yes, because we are making some stress tests to make sure that we don't get caught. So, yes. So that when we are saying we are proactively managing our liquidity that is effectively a part of it.
------------------------------
Walter Spracklin, RBC Capital Markets - Analyst [80]
------------------------------
Great, great. Thank you very much.
------------------------------
Operator [81]
------------------------------
Noah Poponak, Goldman Sachs.
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Noah Poponak, Goldman Sachs - Analyst [82]
------------------------------
Just a couple of follow-ups. On the topic of the financing challenged commercial aircraft customer, can you say specifically if those aircraft have delivered already in Q2 to that customer, and if not, if they have financing or if they are still looking?
------------------------------
Pierre Beaudoin, Bombardier, Inc. - President, CEO [83]
------------------------------
The issue is essentially resolved, but they are not delivered.
------------------------------
Noah Poponak, Goldman Sachs - Analyst [84]
------------------------------
So do they have financing?
------------------------------
Pierre Beaudoin, Bombardier, Inc. - President, CEO [85]
------------------------------
Yes.
------------------------------
Noah Poponak, Goldman Sachs - Analyst [86]
------------------------------
Okay, great.
------------------------------
Pierre Beaudoin, Bombardier, Inc. - President, CEO [87]
------------------------------
But you know --.
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [88]
------------------------------
There is some paperwork to be put in place. So the solution is identified, and it is being processed.
------------------------------
Pierre Beaudoin, Bombardier, Inc. - President, CEO [89]
------------------------------
We believe the agreements are all there and it is being processed. I think that is the right term. So I just want to be careful, like absolute until all the papers are signed.
------------------------------
Noah Poponak, Goldman Sachs - Analyst [90]
------------------------------
Very fair. And then just back to the discussion around --
------------------------------
Shirley Chenier, Bombardier, Inc. - Senior Director IR [91]
------------------------------
Sorry, only one. Can you give me a call back after?
------------------------------
Noah Poponak, Goldman Sachs - Analyst [92]
------------------------------
Sure. I thought the rules changed in the follow-ups, but I will hop back in the queue.
------------------------------
Operator [93]
------------------------------
Tom Astle, Byron Capital Markets.
------------------------------
Tom Astle, Byron Capital Markets - Analyst [94]
------------------------------
I have a question just on the program tooling costs. I think you ended the quarter with a total of about $3.5 billion. Maybe you could just give us a view of how that may play out through the balance of the year. Obviously, you have been adding about $250 million per quarter. I assume that will continue for the balance of the year?
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [95]
------------------------------
Yes, we anticipate to spend $2 billion in total, being CapEx that goes into fixed assets, but that is probably plant and equipment, and the development that goes into the tooling as part of the intangible. So we are adding those -- on two lines $2 billion. And on the other side we have our regular amortization.
------------------------------
Tom Astle, Byron Capital Markets - Analyst [96]
------------------------------
So you expect to end the year at well over $4 billion on the program tooling costs?
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [97]
------------------------------
I haven't made the math, but yes.
------------------------------
Tom Astle, Byron Capital Markets - Analyst [98]
------------------------------
Okay, thanks, that is all I had.
------------------------------
Operator [99]
------------------------------
Anthony Scilipoti, Veritas Investment.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [100]
------------------------------
My question is in regard to the commitments and contingencies note. Just looking at the numbers for trade-in commitments and conditional repurchase obligations. And maybe Pierre Alary, you can give us some color on exactly what is leading to the growth in the number? What is in there, and how should we interpret this from the standpoint of the Company's liquidity, et cetera? Thanks.
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [101]
------------------------------
Well, these are commitments that we would take aircraft upon delivering the new aircraft. So it is a use that would come as a partial payment, if you like. So as we know which aircraft is coming we have the time to remarket the aircraft. It is within our internal guidelines. And that is -- it is at the level where we feel comfortable that we are able to manage it.
And the agreement is that -- you know, it is in relation to the market value, so it is not like we are taking commitments over that would be a price over fair market value.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [102]
------------------------------
But these would extend until the new aircraft are delivered, correct?
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [103]
------------------------------
Until the new aircraft are delivered. So to a certain extent you should look at it in relation to the backlog. So having $2 billion with more $20 billion of backlog, it is not that significant.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [104]
------------------------------
And then the trading commitments what aircraft are there compared to the conditional repurchase obligations?
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [105]
------------------------------
Well, the trade-in, the trade-in, you mean on the balance sheet?
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [106]
------------------------------
No, just, is it -- are the ones that are trade-in commitments are those business jets or regional jets or either?
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [107]
------------------------------
It is mostly business.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [108]
------------------------------
Okay, and the repurchase obligations, those are mostly regional, right?
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [109]
------------------------------
No, the repurchase obligation, these are in relation to the Flexjet program.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [110]
------------------------------
Okay.
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [111]
------------------------------
That is very different, and that is the agreement after -- it is either a five-, six- or seven-year period, depending on the agreement we have with the customer. And it is at -- again, it is in relation to market value with a provision to be able to have the flexibility to remarket and so on.
------------------------------
Pierre Beaudoin, Bombardier, Inc. - President, CEO [112]
------------------------------
That is the nature of the fractional.
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [113]
------------------------------
That is the nature of the fractional. So this one it is perfectly normal that -- you know, it is something that we do on an ongoing basis.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [114]
------------------------------
So you have an internal guideline that says how much you can take in. And you look -- and the way we should look at it is so your backlog goes up by $1.3 billion and the trade-in commitment went up by $400 million or something? $400 million.
------------------------------
Pierre Beaudoin, Bombardier, Inc. - President, CEO [115]
------------------------------
It is very hard. Also it depends which aircraft we sold. If we sold a Global, typically you would take a bigger aircraft in trade with a Global, because it is likely a customer already has a large aircraft. So it is very hard to say necessarily linked to the amounts you gave us. But we have some very strict guidelines and we operate within those.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [116]
------------------------------
Okay, thanks.
------------------------------
Operator [117]
------------------------------
David Tyerman, Canaccord Genuity.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [118]
------------------------------
Just a question on the Aerospace investments, this year the $2 billion. I was wondering if you could give us an idea of the split between intangibles, the tooling and the PP&E? The PP&E was really low in the quarter it looks like.
------------------------------
Pierre Beaudoin, Bombardier, Inc. - President, CEO [119]
------------------------------
Did we never give this here? But what I can tell you is that you will have more PP&E as the year passes, because we're getting ready to build [new FLs]. We are getting ready to build the assembly facilities of the CSeries. So all of these plans are being worked on now, and we will start getting executed. I can't tell you which quarter, but as it comes, it comes later on.
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [120]
------------------------------
The question was on spending?
------------------------------
David Tyerman, Canaccord Genuity - Analyst [121]
------------------------------
Just a rough idea of the $2 billion -- is three-quarters of it intangibles and one-quarter PP&E? And it sounds like it is to come from what you were saying.
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [122]
------------------------------
Well, we are not specific to it, but we do show a split, if you like, the actual number.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [123]
------------------------------
No, I can see that, and you didn't spend much on PP&E, but it sounds like you're going to as the year goes along.
------------------------------
Pierre Beaudoin, Bombardier, Inc. - President, CEO [124]
------------------------------
We have tooling is coming in -- hard tooling, which would be -- the PP&E, you have got building, so I don't know which quarter they are coming in, but that is going to grow for sure.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [125]
------------------------------
Okay, thank you.
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [126]
------------------------------
We thought before the -- for example, on the CSeries what is the tooling and what is property, plant and equipment in totality, so it gives you a feel as to the proportion.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [127]
------------------------------
Okay, that is helpful. Thank you.
------------------------------
Operator [128]
------------------------------
David Newman, Cormark Securities.
------------------------------
David Newman, Cormark Securities - Analyst [129]
------------------------------
Yes, just a bit of a sensitive one. But obviously the Superjet tragedy done in Malaysia, is there -- were you up against them on campaigns at all? And I know that you are putting -- or helping to facilitate a lot of used CRJs into the Russian market. And they were even talking about perhaps a variant that might have been in the 100- to 150-seat market. Is there any potential, I guess, chance that you might be able to continue to put CRJs as a safer aircraft into that market, and any impact it might have on campaigns that are out there?
------------------------------
Pierre Beaudoin, Bombardier, Inc. - President, CEO [130]
------------------------------
Well, I think you have to be careful here not to interpret anything. We have to know what happened.
------------------------------
David Newman, Cormark Securities - Analyst [131]
------------------------------
Yes, exactly.
------------------------------
Pierre Beaudoin, Bombardier, Inc. - President, CEO [132]
------------------------------
A very sad event. So for any time that happens in the aviation industry it is bad for the whole industry. Are we against them in campaigns? It happens. So we have been against them, for example, in Mexico when Interjet decided to go with the Superjet.
And I think for us Russia will continue to be a good market for used CRJ200s, because they are looking for aircraft that have a good monthly cost to replace some of the older aircraft.
------------------------------
David Newman, Cormark Securities - Analyst [133]
------------------------------
Right.
------------------------------
Pierre Beaudoin, Bombardier, Inc. - President, CEO [134]
------------------------------
And as we get our CRJ700, 900 and 1000 certified in Russia -- and the Q400, because we're making progress there, but it is not yet done -- then I think we will be able to compete with them in Russia, and hopefully win some campaigns.
------------------------------
David Newman, Cormark Securities - Analyst [135]
------------------------------
Very good. And just, Pierre Alary, the tax rate for the year, what do you anticipate it might be? It has been moving around a bit.
------------------------------
Pierre Alary, Bombardier, Inc. - SVP, CFO [136]
------------------------------
Well, actually it is very difficult to predict, especially quarter-to-quarter, but our rate of 20% to 25% that is what we typically anticipate.
------------------------------
David Newman, Cormark Securities - Analyst [137]
------------------------------
Very good. That is it for me. Thank you.
------------------------------
Shirley Chenier, Bombardier, Inc. - Senior Director IR [138]
------------------------------
Operator, do we have any more questions?
------------------------------
Operator [139]
------------------------------
There are no further questions at this time.
------------------------------
Shirley Chenier, Bombardier, Inc. - Senior Director IR [140]
------------------------------
Okay, thank you. So this concludes the question period intended for investors and analysts. We will now open the question period for media representatives.
------------------------------
Editor [141]
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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.
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