Q2 2012 BOMBARDIER INC Earnings Conference Call (English)
Aug 09, 2012 AM EDT
BBD.B.TO - Bombardier Inc
Q2 2012 BOMBARDIER INC Earnings Conference Call (English)
Aug 09, 2012 / 02:00PM GMT
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Corporate Participants
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* Shirley Chenier
Bombardier Inc. - Senior Director, IR
* Pierre Beaudoin
Bombardier Inc. - President and CEO
* Pierre Alary
Bombardier Inc. - SVP and CFO
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Conference Call Participants
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* Cameron Doerksen
National Bank Financial - Analyst
* Joe Nadol
JPMorgan - Analyst
* Noah Poponak
Goldman Sachs - Analyst
* Fadi Chamoun
BMO Capital Markets - Analyst
* Hamzah Mazari
Credit Suisse - Analyst
* Walter Spracklin
RBC Capital Markets - Analyst
* Steve Hansen
Raymond James - Analyst
* Benoit Poirier
Desjardins Capital Markets - Analyst
* Turan Quettawala
Scotiabank - Analyst
* David Newman
Cormark Securities - Analyst
* David Tyerman
Canaccord Genuity - Analyst
* Chris Murray
PI Financial Corp. - Analyst
* Stephen Trent
Citi - Analyst
* Tim James
TD Securities - Analyst
* Scott Deveau
The National Post - Media
* Sean Silcoff
The Globe and Mail - Media
* Ross Marowits
The Canadian Press - Media
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Presentation
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Operator [1]
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Good afternoon, ladies and gentlemen, and welcome to the Bombardier conference call. Please be advised that this call is being recorded.
I would now like to turn the meeting over to Ms. Shirley Chenier, Senior Director, Investor Relations. Please go ahead, Ms. Chenier.
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Shirley Chenier, Bombardier Inc. - Senior Director, IR [2]
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Thank you, operator. Good morning and welcome to Bombardier's conference call intended for investors and financial analysts.
(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.
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 second quarter ended June 30, 2012.
(interpreted) This conference call is broadcast live on the Internet and is also interpreted in French and in English.
You can access the broadcast on our website at ir.bombardier.com, and the webcast archives 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. 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 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 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 and CEO [3]
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(interpreted) Hello and welcome to the conference call.
I would like to make a few brief comments before answering questions on second quarter. We had mixed results in the second quarter, with low revenue and EBIT, but a higher level of orders and better free cash flow on a consolidated basis. We expect full-year results to be in line with our previous guidance.
In aerospace, revenues were higher at $2.3 billion versus $2.1 billion last year, with overall deliveries at 62 compared to 56. We saw a very strong level of orders in business aircraft at 134 orders, including an order from NetJets for 100 Challengers, with options for another 175. This order is valued at $2.6 billion, or $7.3 billion if all the options are exercised, and represents the largest business jet order ever in our history.
In addition, a long-term servicing agreement was concluded, which has the potential to generate another $2.3 billion of revenue if all the options are exercised.
At commercial aircraft, momentum continues, with 174 agreements to date this year, of which 72 are firm. They represent a wide area of products and are destined for many regions of the world.
The CSeries program is progressing well, with most of the system installed on Aircraft 0, and we are in a position to start complete testing this month.
In transportation, as expected, revenues were lower due to timing and completion of certain large contracts, while major new orders are still in the startup phase. We expect full-year revenues to be lower, in the single-digit range as per -- sorry, to be lower -- we expect full-year revenue to be lower as compared to last year, in the single-digit range, as our previous guidance.
On the order front, we continue to see a good level of activities, with $2.9 billion of new orders in this quarter. We confirm our leadership in North America market with two major contracts, the BART in San Francisco and MTA in New York, for a total of $1.5 billion.
We're making good progress in many large contracts, such as the ZEFIRO 380, which has started successful trial runs and is demonstrating excellent dynamic behavior. The assembly of the ZEFIRO V300 in Italy has started, and the Regio 2N train has been presented to the French region and to the SNCF and is now in testing.
Now I'd like to ask Pierre Alary to walk you through our results.
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Pierre Alary, Bombardier Inc. - SVP and CFO [4]
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Thank you, Pierre. Good morning. Aerospace revenue for the quarter totaled $2.3 billion compared to $2.1 billion last year. This 9% increase results from a higher level of deliveries in business aircraft, partially offset by lower level of deliveries of commercial aircraft.
EBIT totaled $102 million or 4.5% of revenues, in line with our guidance, compared to $105 million or 5% last year. The reduction in margin percentage reflects a lower absorption of higher SG&A and R&D expenses, the negative impact of higher exchange rate, and a net negative variance on financial instruments.
For transportation, revenues totaled $1.9 billion compared to $2.7 billion last year. This lower level of revenues is due to the completion of major projects in Europe and Asia-Pacific ahead of ramping up of production of new contracts and a negative currency impact.
For the second half of the year, excluding the impact of foreign exchange, we expect revenues to be higher than the first half and also higher year over year.
EBIT margin is at 6.2% compared to 7.2% last year, mainly due to a lower absorption of SG&A and R&D expenses and to a lower margin in rolling stock.
On a consolidated basis, revenues totaled $4.2 billion, while EBIT is at $220 million compared to $296 million last year. Net financing income amounts to $11 million compared to an expense of $35 million last year as a result of gain on sale of security and on certain financial instruments and to lower amortization of letter of credit facility costs.
With an effective income tax rate of 21.2%, net income reached $182 million or $0.10 per share compared to $211 million or $0.12 per share last year.
As expected, we used cash again in the second quarter. Aerospace used $504 million of cash, which is a similar amount to last-year usage of $448 million. The use of cash is essentially due to our significant investment in program, which amounted to $481 million in this quarter.
Transportation used $78 million of cash in the second quarter, which is a significant improvement compared to last-year usage of $473 million.
Looking forward, we expect the Q3 free cash flow to be essentially neutral, while the Q4 should be very strong, bringing our total free cash flow for the year in line with our guidance.
As at the end of the second quarter, our short-term capital resources totaled $3.9 billion, including cash and cash equivalents of $2.5 billion.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [5]
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To conclude, in aerospace we saw an increased level of business jet orders, and we are gaining momentum in commercial aircraft. In transportation, the level of activity is robust, and the framework agreement and options represent a good potential for new orders. We are making good progress on our product development programs. So these, combined with our large existing backlog of $56.9 billion, positions us very well.
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Shirley Chenier, Bombardier Inc. - Senior Director, IR [6]
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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 would 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. And if we don't have time, you can just contact me right after this conference call. So 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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(Operator Instructions). Cameron Doerksen, National Bank Financial.
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Cameron Doerksen, National Bank Financial - Analyst [2]
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My question is on the, I guess, on the transportation margins. I'm assuming that if you expect better revenue performance in the second half of the year, that we should also expect some margin improvement in the second half relative to the first half. And I'm also wondering if you could comment on whether the 8% margin target for transportation is still in place for 2013.
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Pierre Alary, Bombardier Inc. - SVP and CFO [3]
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So as we have seen since the beginning of the year, our margin has been slightly lower than the previous year. And it's a question of, yes, volume, as you referred to, but also some contract and rolling stock, which we anticipate to have a continued impact for the second half of the year.
Now, in terms of the overall guidance, we had 8% long-term guidance. The 8%, what -- the way we look at our guidance is that we review our guidance as part of our budget process, which starts, or which ends, in fact, in the first part of the year. So that will end early next year, at about the same time as we disclose our Q4 results, and that's why we update our guidance in line at that point in time. So for the time being, our 8% guidance continues to be in effect.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [4]
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I just want to add on this that it's, as we look at our results the from year to year, it's very important that we take a careful look at the mix of products and our deliveries. So that's why we always look at our guidance for both groups in Q4.
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Cameron Doerksen, National Bank Financial - Analyst [5]
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Thank you.
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Operator [6]
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Joe Nadol, JPMorgan.
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Joe Nadol, JPMorgan - Analyst [7]
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Thanks, good morning. I'd like to dig into the aerospace cash flow a little bit. So the wording in your guidance for the year is that cash from operations will substantially fund the $2 billion of investment. And just given where we are year to date, I'm wondering where you really expect to generate the cash within aerospace -- just some context. Is it incremental orders you need to book? Is it shipments of aircraft that weren't completed in Q2? What really is the driver?
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Pierre Alary, Bombardier Inc. - SVP and CFO [8]
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Well, the driver is two components, essentially. It's the reduction of the level of inventory, as we anticipate more orders in the second half than the first half and the production is more steadily being done during the year. So some of the usage of cash in the first two quarters are working capital related, which we anticipate to reverse. So that's the inventory.
And the second part, as you alluded to, effectively, we anticipate to continue to sign a good level of orders and therefore increasing the level of advances from customers, from the orders, but also in relation to progress payment from previous new orders recorded.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [9]
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Maybe I should add on that, there will also be a good movement in used aircraft during the second half of the year. We've had good results so far at moving the used aircraft. But I think that you should count on this continuing. And maybe repeat again that the global production this year or delivery this year is not a typical year because of the transfer to the Vision cockpit. You saw that we made significant progress on the second quarter, with delivery of 15. But, obviously, to meet the 180 guidance that we gave for business aircraft, we will increase global deliveries in the second half of the year.
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Joe Nadol, JPMorgan - Analyst [10]
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Thanks.
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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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Hi, good morning, everybody. I just wanted to dive a little further into the aerospace operating margins. So, they were down on an adjusted basis when we strip out that one-time last quarter. They were down year over year and sequentially. And if I'm looking at my notes, the discussion there was around, as you just alluded to, the very low level of global deliveries in the quarter as you were transitioning. But then the global number is much higher this quarter, but the margin didn't change, adjusted quarter to quarter. So, what am I missing there? What was pushing down the margin? I think you talked about some of the components; maybe if you could put numbers around those items you talked about, that would be helpful. Thanks.
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Pierre Alary, Bombardier Inc. - SVP and CFO [13]
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Well, we don't get into the specific numbers onto the variation. But when we refer to a variation, typically it would be, you know, as a minimum probably $10 million, $15 million of impact as a minimum. And a number of things that we've identified is the lower absorption of SG&A, our SG&A; a negative impact of higher exchange rate; and a net negative variance on financial instruments. So there's a number of components that have impacted the margin in this quarter compared to the previous year.
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Noah Poponak, Goldman Sachs - Analyst [14]
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So we can't quantify those items?
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Pierre Alary, Bombardier Inc. - SVP and CFO [15]
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Well, you can expect that those items have an impact of a minimum of $15 million each.
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Noah Poponak, Goldman Sachs - Analyst [16]
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Okay.
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Pierre Alary, Bombardier Inc. - SVP and CFO [17]
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And when we look at the result, that 4.5%, and you refer to a normalized first quarter, and I guess you referred that it was slightly below 5% on the normalized basis. So when we look at it, our overall guidance for the year is to be at around 5%.
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Noah Poponak, Goldman Sachs - Analyst [18]
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Right.
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Pierre Alary, Bombardier Inc. - SVP and CFO [19]
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So being at, you know, just below 5% in the first quarter, 4.5% in the second quarter, and we have mentioned in our guidance that we would be at 5% and a better second half than the first half. So it's spread -- you know, it's in line with our guidance.
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Noah Poponak, Goldman Sachs - Analyst [20]
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Okay. Thank you.
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Operator [21]
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Fadi Chamoun, BMO Capital Markets.
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Fadi Chamoun, BMO Capital Markets - Analyst [22]
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Yes, good morning. Also a question on cash flow. Just looking at the balance sheet in Q2 versus where you were at the end of Q1, it does sound like inventories are largely unchanged. It does sound like advances are lower, and obviously CapEx, you spent some. But I'm trying to reconcile the decline in advances in aerospace and progress billing in a context where you had a pretty strong quarter in terms of book-to-bill.
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Pierre Alary, Bombardier Inc. - SVP and CFO [23]
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It's really a question, when you look at one specific quarter, you know, you cannot make a direct relation with the advance level and the signature of orders, because there is a question of timing, and there's a question of the overall portfolio and the overall backlog order, how it's evolving. So there's no direct relation in one given quarter.
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Fadi Chamoun, BMO Capital Markets - Analyst [24]
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Okay, and one clarification. In the presentation, you mentioned that transportation free cash flow for the year should be in line with profitability. Are we talking about this year?
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Pierre Alary, Bombardier Inc. - SVP and CFO [25]
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Yes, but it's generally in line. So, obviously, as you know, it's pretty lumpy. So we cannot be specific quarter to quarter. But overall, it should be in line, yes.
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Fadi Chamoun, BMO Capital Markets - Analyst [26]
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Thank you.
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Operator [27]
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Hamzah Mazari, Credit Suisse.
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Hamzah Mazari, Credit Suisse - Analyst [28]
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Good morning. A question on the transport business as well. If you could provide just a little more color as to some of the problem contracts that you have where inventory -- where you're still trying to flush out the inventory issue, and maybe any impact in terms of how big that was and how that impact progresses in the second half of the year?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [29]
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Well, let me make a comment on the programs themselves. We had identified three projects, two big ones being [Oresund], which we have restarted delivery in June. We've delivered nine trains to date. We're meeting the shared reliability target. We're continuing to work on reliability because these targets get more challenging through time. But we feel very good with where we are and how we're making progress and working very closely with the customer.
On the TALENT 2, we've delivered 90 trains to date. We have a target of 140 for the year. That looks very good. I think we're certified. All the obligations have been obtained. So that's not an issue. It's just a question of getting the trains delivered at this point.
And on the third one, Regina, we essentially have delivered the trains, and they are in operation.
So, I think those three that we have identified are well -- are making great progress. As far as giving you more color on inventory as it relates to delivery, it's very hard for us to give you specifics, because some of these contracts have advance that vary from contract to contract. I think what you should focus on is that we're delivering the inventory that were related to these contracts.
I don't know, Pierre, you can add --
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Pierre Alary, Bombardier Inc. - SVP and CFO [30]
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Maybe one element we can add is that for the first six months, transportation have used cash for $178 million. And we anticipate for the full year generation in cash pretty much in line with profitability. So there's going to be a significant reversal. And also, the delivery of those contracts is a good contribution to that reversal.
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Hamzah Mazari, Credit Suisse - Analyst [31]
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Great, thank you.
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Operator [32]
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Walter Spracklin, RBC Capital Markets.
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Walter Spracklin, RBC Capital Markets - Analyst [33]
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Thanks very much. Good morning, everyone. Just a question back on transportation here. You mentioned that the trend toward, I guess, or away from completed projects and into early-phase projects has had a negative impact on profitability. When I look, and I know Andre, when he's spoken about the backlog in the past, has indicated that he gets very good visibility on profitability. And that's why he was adamant about his 8% for next year. My question is, the rolloff of these projects seem to have been expected. I mean, you knew the timing of when projects were coming off, suggestive that this is purely a timing indication. And I'm just wondering if that's the fact, or has there been costs that have come in that were unexpected and would therefore jeopardize next year's guidance?
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Pierre Alary, Bombardier Inc. - SVP and CFO [34]
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Well, I guess the explanation in relation to the fact that some contracts are being completed ahead of some others that are ramping up. That's an explanation for the level of revenue, so it's not really an explanation for the level of the change in the margin. So it's really volume related.
And now, in terms of the margin, the volume --
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Walter Spracklin, RBC Capital Markets - Analyst [35]
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But aren't those two related? The volume kind of throughput and your margins are kind of related?
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Pierre Alary, Bombardier Inc. - SVP and CFO [36]
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Well, yes, for the -- not at the margin level, but more at the absorption level of period costs, like SG&A and R&D. And we refer to the fact that the EBIT margin has been impacted in this quarter in relation to some contract and rolling stock.
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Walter Spracklin, RBC Capital Markets - Analyst [37]
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So was there any unforeseen costs, though, that, when Andre was looking at his 8%, have cropped up that would jeopardize that 8% for next year now?
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Pierre Alary, Bombardier Inc. - SVP and CFO [38]
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The answer is yes. You can imagine that when we face some issues on contract in terms of deliveries and additional time to get certification and whatnot, there is effectively additional costs. And these were not anticipated.
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Walter Spracklin, RBC Capital Markets - Analyst [39]
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Okay, thank you very much.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [40]
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But as you refer to the 8% target of next year, before you --
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Pierre Alary, Bombardier Inc. - SVP and CFO [41]
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Right, yes. My answer was in relation to this quarter.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [42]
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Right. I think what you have to be careful is, yes, there's been change internally and there has been change on the market. For example, the market of locomotive is not picking up as fast as what we had anticipated. So that would be not a plus, obviously, but there's other things that are on the plus side.
What I'm saying is that we have such a wide portfolio of contracts in so many different regions in the world, is what's going on this year in the 8% target are not necessarily related. And what we have to do to -- like we do every year is, in Q4, reconfirm our target. But the way we see it today is the 8% is our guidance.
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Walter Spracklin, RBC Capital Markets - Analyst [43]
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Okay, thank you very much.
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Operator [44]
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Steve Hansen, Raymond James.
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Steve Hansen, Raymond James - Analyst [45]
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Yes, good morning. It's been only six or seven weeks since your pre-Farnborough tour of the CIASTA facility. But at the time, you seemed to assert that despite a relatively compressed timeline, you were still pretty confident in first flight this year for the CSeries, despite it only being six or seven weeks. Is your degree of confidence in that first flight still the same, or have you got any sense that there might be some slippage?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [46]
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It's still the same. It's an exciting time because we see components coming in from around the world. I just came back from our facility in Belfast last night, and we saw the great progress that is being made on the wing production. So there's a lot of exciting things going on. At the same time, I'll repeat what I've always said for the last three years. You know, we target the flight at the end of the year. This can play three to five months, and I would consider that on time. But the focus of our team is to fly at the end of the year.
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Steve Hansen, Raymond James - Analyst [47]
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Okay, that's helpful. Thank you.
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Shirley Chenier, Bombardier Inc. - Senior Director, IR [48]
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Thank you.
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Operator [49]
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Benoit Poirier, Desjardins Capital Markets.
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Benoit Poirier, Desjardins Capital Markets - Analyst [50]
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Thank you very much. You recently announced the production of the Learjet 60XR was altered. I'm just wondering what we should expect in terms of deliveries going forward. And could we see some maybe transition risk next year, given the stop in the delivery and also the transition from the Learjet 40/45 to the 70/75?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [51]
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Well, I think you have two questions in there, Benoit.
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Benoit Poirier, Desjardins Capital Markets - Analyst [52]
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Sorry.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [53]
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And I'll try to answer both.
There's always some risk in transition. But I feel very confident on the transition between the 40/45 because there's a lot of commonality between the two platforms.
Like I just said, I was in Belfast, and I saw that we're in production phase of the 70/75 already. And things are progressing in line with our guidance that we said that we would deliver in the first half of next year. And that's a question that has been asked. You saw the backlog in Learjet go up. We do include the 70/75 in there because production has started. So I feel good that this transition is well planned. The program is going well and the airplanes are flying. So, I think this should move smoothly.
For the Lear 60, what we need to make sure is be very close to the market and understand when to restart this production, given the level of inventory of the aircraft, given the plan that we have in production. And as you know, we monitor that very closely. And we thought it was wise at this point to take a pause. Like we said to our employees and to investors that follow us, it's a pause, and we'll follow the market very closely.
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Benoit Poirier, Desjardins Capital Markets - Analyst [54]
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Okay, thanks for the time.
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Operator [55]
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Turan Quettawala, Scotiabank.
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Turan Quettawala, Scotiabank - Analyst [56]
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Yes, good morning. My question is just on the commercial aerospace side, you've been doing some work in terms of realigning the sales team with emerging markets. And I think we've seen a little bit of success here with orders. I'm wondering what you're thinking in terms of order action, particularly from emerging markets on the commercial side. And as well, we saw a little bit of an uptick in terms of sales expenses in the quarter. Just wondering if you can give us any guidance on how that should -- how we should think about that for the balance of the year. Thank you.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [57]
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Well, we have good momentum in terms of sales in commercial. Like I said, we have 174 agreements already to date this year. 70 of those have been confirmed -- converted into firm. All of these sales have been outside of the US. Of course, there's also a big Canadian win in there. But you can see that we are progressing in markets outside of our traditional markets. And I think that's in large part due to the action that the team took a year ago by developing the sales force. And there's many campaigns outside of our traditional markets that are going out.
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Shirley Chenier, Bombardier Inc. - Senior Director, IR [58]
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Thank you, Turan.
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Operator [59]
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David Newman, Cormark Securities.
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David Newman, Cormark Securities - Analyst [60]
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Good morning. Just a question on cash flow. I guess more holistically, just looking at production line rates, and I know you don't provide specific guidance, but when you're thinking about your backlog and amounts of production, etc., what do you think about in terms of line rates? In other words, how high does the amount of production have to get? You guys have done a great job in building the backlog, especially on the commercial side. So, what do you think about when you're thinking about line rate production increases? And I guess how do you risk that with the types of customers that you might have in the backlog?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [61]
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That's a difficult question, because it's also something that will vary, depending on the robustness of the market and the length of our backlog. But typically, you want to see a year, a year and a half, of good, solid customers in your skyline before you would consider an increase. And you have to be careful when you see a backlog as a gross number, because you don't see the delivery dates of these aircraft. So sometimes although the number may be big, it doesn't mean that these deliveries are tomorrow morning.
So we, obviously, we have that information, and we make the call based on seeing firm orders to be delivered in the next, like I said, year or year and a half. And then depending on the level of the pipeline and how advanced discussions are, we could make a decision to increase. But I will tell you, it's very rare that we make a decision to increase without firm orders, because until it's concluded, it's not concluded.
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David Newman, Cormark Securities - Analyst [62]
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Okay. And you feel fairly confident as you head into next year and about, obviously, about the 180 for this year on the business jet side?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [63]
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We feel confidence with the guidance that we've given, yes.
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David Newman, Cormark Securities - Analyst [64]
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Very good, thank you.
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Operator [65]
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David Tyerman, Canaccord Genuity.
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David Tyerman, Canaccord Genuity - Analyst [66]
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Yes, I was just seeking some clarification on the Bombardier aerospace margin guidance for the year of 5% or so. Pierre Alary, I think you said that the first quarter, you would consider excluding the other income. So I'm wondering, when we're thinking about this number, should we exclude other income when we're thinking about the 5%, or is there some other guidance there?
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Pierre Alary, Bombardier Inc. - SVP and CFO [67]
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I guess whether we include it or exclude it, on a full-year basis, the impact would be very minimal. What do I mean by that? It would represent maybe -- and I would make the specific calculation -- but it may represent 20 basis points. So when we say we're going to be approximately 5%, if we are 4.8% or 5.2%, I would consider we are on the guidance.
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David Tyerman, Canaccord Genuity - Analyst [68]
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Okay, fair enough. Thank you.
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Operator [69]
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Chris Murray, PI Financial Corp.
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Chris Murray, PI Financial Corp. - Analyst [70]
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Yes, thanks, good morning. Just a quick question on transportation and your expectations for booking. So far, year to date, you're about 1.1 times, and you're expecting, I guess, revenue increases over the back half of the year. Can you kind of give us some guidance or some thoughts maybe around some of the major programs and where you think the opportunities are to add to the backlog at this particular point? And if you could also maybe touch on your expectations for recovery in China?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [71]
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Well, a couple questions in there. In terms of book-to-bill, we do expect -- we confirm our guidance to achieve a 1 book-to-bill, so 1 to 1, in line -- sales in line with revenue. Giving you other colors on that besides the projects that are already public would be -- would not be -- we don't do that because we wait for the customers to come out with the project. We could provide you with a list of the projects that are public that we have confirmed that we're bidding on. I don't want to do that now, because I'm not sure which one are public and which one -- and all the ones I know.
As far as China recovery, for us, our sales, we have a very large backlog. And so if you look in terms of recovery for revenue for Bombardier, it's got not much to do with what's going on in the market. It's got more to do with us executing on new contracts. Like I said in my opening comments, we started testing on the ZEFIRO 380, so that looks very good. Deliveries are going to start; the train is working well in the beginning of the test. And then we have more 250s to deliver.
We talked about these variation orders that we've been discussing, meaning that we have a large contract of the very-high-speed train. As I said before on this call, we would remix this contract between 250-kilometer trains and 380, and that's going on. So we're executing on our backlog. It's just that we could not time the sales to come on time for the reduction with the other contracts. So that's temporary.
As far as the market long term, think the market is very robust. Long term, there's a lot of good opportunities. But for us right now, it's really a question of executing on the contracts that we have.
------------------------------
Chris Murray, PI Financial Corp. - Analyst [72]
------------------------------
Great, thank you very much.
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Operator [73]
------------------------------
Stephen Trent, Citi.
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Stephen Trent, Citi - Analyst [74]
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Hi, good morning. I was just wondering if you could give us a little color on your campaigns on the commercial side, to what extent you're seeing the likes of Sukhoi and Mitsubishi showing up more frequently than you'd previously expected.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [75]
------------------------------
I would say we don't see the Sukhoi much in campaigns right now. Mitsubishi, they're working very hard on promoting their product worldwide. They're not a significant factor at this point. But obviously we're following that very closely, given the recent success, at least of getting an LOI. And it's an aircraft that is going to be delivered in a few years from now. So it's a development aircraft. But I think we need to follow that very closely. We see them periodically in campaigns.
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Stephen Trent, Citi - Analyst [76]
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Okay, great. Thanks very much.
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Operator [77]
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Tim James, TD Securities.
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Tim James, TD Securities - Analyst [78]
------------------------------
Thank you. I'm just wondering, returning to the transportation segment, can you provide some color on how much -- and I assume, by the MD&A here, it's a fairly limited amount -- how much of the 18% decline in revenue in transportation for the first half is related to sort of overall market conditions in Europe and China and India as opposed to the impact of contracts rolling off before others pick up. It sounds like it's a very limited amount related to the overall industry, but maybe if you could just discuss that, please?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [79]
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I think you answered your own question. It is very little because, it's really more transition of contracts for us. We have a large backlog. I think how you should monitor the market is based on the level of orders that we get. And as you've seen, it's been quite good for this half-year -- the half-year.
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Tim James, TD Securities - Analyst [80]
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Is this an unusual sort of event for Bombardier transportation, then, that you've got this period of so many contracts rolling off before new ones ramp up? I mean, is this unusual, or is there a reason, I guess, sort of going back a couple of years, on when order intake was that sort of is the reason behind this?
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Pierre Alary, Bombardier Inc. - SVP and CFO [81]
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I guess maybe what's unusual is the size of the variance, because we've seem those variants -- we see that regularly, the variance, you know, having contract that comes to an end in a given region before it ramps up. But if I look at the Asia-Pacific region, the size of it, it's very clear that -- or it's more obvious, if you like, but it's a question of size. And again, it's a very limited number of contracts. But it really shows in that region.
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Tim James, TD Securities - Analyst [82]
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Okay, thank you.
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Operator [83]
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Joe Nadol, JPMorgan.
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Joe Nadol, JPMorgan - Analyst [84]
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Yes, I want to come at that same issue, but really within Europe. It looks like, adjusting for currency, you were still down organically over 20% within Europe. And I was wondering if you'd be willing to speak a little bit more granularly about that market. Is this the UK, because it sounds like some of the problem programs are shipping, and you're booking revenue in France and Germany. So is this UK really down a lot year on year, or is it another of the core markets?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [85]
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Maybe I'll let Pierre cover this, but I just wanted to say -- you said the problem programs are slipping. I would confirm that's not the case.
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Tim James, TD Securities - Analyst [86]
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No, I said it sounds like they're going better.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [87]
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Oh, shipping, okay. I'm sorry.
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Tim James, TD Securities - Analyst [88]
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Yes, shipping.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [89]
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You're right, then.
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Pierre Alary, Bombardier Inc. - SVP and CFO [90]
------------------------------
Effectively -- well, in Europe, there's maybe two elements I can explain. There is in the UK market a variance, and it's effectively -- it's a little bit the same as I explained for Asia-Pacific. It's the number of contracts that have come to an end while we have others that are only starting. So UK, we see a variance there. But again, it's not overall market; it's really a timing of the specific contract, because there's a lot of activity in the UK.
And the other one is effectively in relation to the contract that we've discussed previously we are now shipping. But as we were -- we are now shipping because we solved the issue, but as we were solving the issue, we reduced the level of activities.
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Joe Nadol, JPMorgan - Analyst [91]
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Okay.
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Pierre Alary, Bombardier Inc. - SVP and CFO [92]
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Therefore, we produced less. So now we're delivering, so the production is going back up.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [93]
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Especially in France.
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Joe Nadol, JPMorgan - Analyst [94]
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Is it fair to say that there's no further problem programs in Europe that have popped up and this is all timing? Or is there a chance we hear next quarter about a new TALENT 2 or Ile-de-France?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [95]
------------------------------
You know, we manage a lot of contracts. We don't have any specifics to talk about. So there's always pluses and minus in various contracts, but nothing specific to talk about.
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Joe Nadol, JPMorgan - Analyst [96]
------------------------------
Okay, thanks.
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Operator [97]
------------------------------
David Tyerman, Canaccord Genuity.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [98]
------------------------------
Yes, I just wanted to ask about the BT margins. Pierre Alary, I think you said that you expect the impact that occurred in the second quarter to continue in the second half from the execution issues. I was wondering -- it sounds like a lot of these problems have been solved, so I was just wondering what specifically would be continuing to impact, whether the impact would lessen in the margins, like we'd see the margins improve, to some degree, in the second half, and also whether there's any chance that this continues on into 2013?
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [99]
------------------------------
Well, when you adjust -- as part of the contract accounting, we do adjust our margin when we face some issues or we refer to issues we had faced on a number of contracts. So the margin has been revised. And obviously, as you deliver on those contracts, you would record a lower margin going on.
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David Tyerman, Canaccord Genuity - Analyst [100]
------------------------------
Right.
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Pierre Alary, Bombardier Inc. - SVP and CFO [101]
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So we would -- we anticipate to deliver, you know, most of those contracts in the second half of the year. So that's why you would have an impact on -- continued impact on the second half of the year.
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David Tyerman, Canaccord Genuity - Analyst [102]
------------------------------
Okay, so this is just the IFRS effect, is it, then?
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Pierre Alary, Bombardier Inc. - SVP and CFO [103]
------------------------------
It's an IFRS. It's -- I mean, it was the same under Canadian GAAP, and it's very similar or almost exactly the same also under US GAAP. It's contract accounting. So when you face an issue in a specific contract, you have additional costs. Then you revise downward your margin. So you revise downward your margin. You do a catch-up adjustment for what you have delivered so far. And that impact is reflected in the quarter where you made the changes. But going forward, you have a lower margin on the same contract. So as you deliver on that contract, you record less gross margin.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [104]
------------------------------
Okay. So back to my question, does this effect lessen in the second half, and does it carry on into 2013?
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Pierre Alary, Bombardier Inc. - SVP and CFO [105]
------------------------------
It would affect mostly the second half.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [106]
------------------------------
Does it get any less than it was in -- like I said, is it a smaller effect than in Q2, or does it continue on at that kind of rate?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [107]
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Does it get -- I'm not --
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Pierre Alary, Bombardier Inc. - SVP and CFO [108]
------------------------------
I'm not sure -- could you repeat your question?
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David Tyerman, Canaccord Genuity - Analyst [109]
------------------------------
Does -- like, your margin was 6.2% in Q1 and Q2. I'm just wondering, this sounds like it was a big reason for that. Does it continue at that kind of rate because of this effect, or does it get -- is it not as severe in the second half?
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [110]
------------------------------
It would be similar.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [111]
------------------------------
Similar. Okay, thank you.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [112]
------------------------------
Thank you. Operator, do we have any more questions?
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Operator [113]
------------------------------
We have no further questions at this time.
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Shirley Chenier, Bombardier Inc. - Senior Director, IR [114]
------------------------------
Okay, thank you. So this concludes the question period intended for investors and analysts. We will now begin the question period for media representatives. Operator?
------------------------------
Operator [115]
------------------------------
(Operator Instructions). Scott Deveau, The National Post.
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Scott Deveau, The National Post - Media [116]
------------------------------
I just was hoping that maybe you could give me an update on -- you said that you had some concerns about the fly-by-wire system a few weeks ago. I was wondering if you could give an update on that.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [117]
------------------------------
Well, we're progressing very well with all systems on the CSeries. This was one of the systems that has been installed now or just completed on the Aircraft 0 at CIASTA. So things are progressing well. We're going to start testing on the CIASTA in August of all the systems, so that would include fly-by-wire. So there's nothing further to report. It is a critical system, obviously, on the CSeries, simply for the fact that it's the first time for Bombardier to do an aircraft that's all fly-by-wire. So we've identified it as something that is top of list to monitor and follow very closely.
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Scott Deveau, The National Post - Media [118]
------------------------------
And it remains at the top of the list, then, I guess?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [119]
------------------------------
It will remain at the top of the list all through the flight test until delivery, because it's the first time for us to do an all fly-by-wire aircraft.
------------------------------
Scott Deveau, The National Post - Media [120]
------------------------------
And I'm sorry, did you say there's a possibility that first flight might slip by three to four months?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [121]
------------------------------
No, that's not what I said.
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Scott Deveau, The National Post - Media [122]
------------------------------
Sorry.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [123]
------------------------------
I said for the last two or three years -- it's not new -- I've said that our target is to fly in December. But I always said that, you know, these type of programs, given that I've done a few, three to five months, waiting this would be considered on schedule for us. So nothing new there.
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Scott Deveau, The National Post - Media [124]
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Is there a risk of that happening there?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [125]
------------------------------
I can't give you a different answer than our target is December. And that's -- I feel good about our target, and our team is focused on that.
------------------------------
Scott Deveau, The National Post - Media [126]
------------------------------
Well, quite honestly, with all due respect, I mean, I've been covering this story for quite a long time, and I don't think I've ever heard you say that it might slip by three to five months.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [127]
------------------------------
I haven't said that it might slip by three to five months. I said -- and I've said it many times, so maybe I didn't have the opportunity to say it when you were in the room -- but I've always said that complex programs like an aircraft program, three to five months in fact would be world-class.
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Scott Deveau, The National Post - Media [128]
------------------------------
But as of right now, you still anticipate first flight at the end of the year?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [129]
------------------------------
Yes.
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Scott Deveau, The National Post - Media [130]
------------------------------
Okay, thanks.
------------------------------
Operator [131]
------------------------------
Sean Silcoff, The Globe and Mail.
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Sean Silcoff, The Globe and Mail - Media [132]
------------------------------
Good morning, Pierre. Just to specify, so you're going to be putting all of these systems really to the test in August. Is it fair to say, then, that -- you talk about three to five slippage -- three to five months being sort of normal for a program, although you're not saying that this is going to happen. Is it fair to say, though, that you probably won't really have a clear sense until after the testing starts in August? It certainly seems the market and a lot of analysts are already baking in the likelihood of three to six months. Is it fair to say that you won't really know until after the testing starts in August whether that's going to be a factor with the CSeries?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [133]
------------------------------
Well, first of all, I did not talk about a three- to five-month slippage. I said it can happen in a program of that complexity. I've said that for the last two years at least, so that's not new. And our target is to fly in December.
We said one of the challenges in a complex program like this is what you don't know. So, yes, testing exists so that we can learn. We feel very good. We've done a lot of testing into individual jigs and suppliers at Bombardier. Now we're starting integrated testing. It's going very well. And I always caution that it's a time we can get very much enthusiastic because it's exciting. We see a lot of components coming in. But at the same time, you know, we will learn through the testing, and we'll see. Our target remains to fly at the end of the year, and there's no need for us to speculate beyond that.
------------------------------
Sean Silcoff, The Globe and Mail - Media [134]
------------------------------
And just a follow-on question, if I may. Can you talk about the mood of prospective buyers of the CSeries? What's -- those who we haven't heard from yet, where there haven't been any orders, but where there's interest that you've seen, what sort of milestone are they looking for? Are they waiting to see the first flight? Are they waiting even farther than that before they're willing to commit to making orders with you, placing orders?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [135]
------------------------------
Well, like I said, it's a question of achieving the right balance. So it's also Bombardier looking to achieve some milestones so that we get beyond launch prices. So it's a discussion that we have with customers constantly. The enthusiasm for the CSeries is increasing. I felt it at Farnborough, as people can see that the aircraft is going to fly shortly. They see that the performance is confirmed, and they see also that we will have the only aircraft in that category that delivers anywhere close that delivers exceptional performance. There may be some derivatives in that category, but they are very far from our performance.
So, I think all of this is being confirmed on the market with facts. And that excites customers about the potential of the CSeries in their fleet. So right now, we're in advanced discussions with many customers, and we're trying to get the best deal for Bombardier in the long term.
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Operator [136]
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Ross Marowits, The Canadian Press.
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Ross Marowits, The Canadian Press - Media [137]
------------------------------
Yes, I'm wondering if you could elaborate a little bit more on this test period starting in August. How long does that last, and what are you going to do in that time?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [138]
------------------------------
Well, we're starting a period where we test the whole aircraft, all of the systems working together, so whether it will be on the ground or with flight test vehicles. So this is going to last until certification, which is about a year and a half after we've started complete tests, because we are also targeting for the first delivery in 2013. And that continues beyond, because after certification, we continue to test for reliability of components. So it's the beginning of a long period of several years.
------------------------------
Ross Marowits, The Canadian Press - Media [139]
------------------------------
And so you make adjustments as you go, then?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [140]
------------------------------
Of course.
------------------------------
Ross Marowits, The Canadian Press - Media [141]
------------------------------
And at that point, you will know whether there needs to be a delay in the first flight?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [142]
------------------------------
Well, you know, the testing has nothing to do with a delay in the first flight. The testing is the process we go through to get to first flight. And I'm very confident about us delivering the first flight on time, and I'm not going to start to speculate what goes on in the tests.
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Ross Marowits, The Canadian Press - Media [143]
------------------------------
Okay. And is all the testing done in Mirabel, or where is it done?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [144]
------------------------------
Testing is done worldwide at suppliers, which includes Mirabel for complete aircraft testing.
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Ross Marowits, The Canadian Press - Media [145]
------------------------------
Okay. And also, I'm wondering, there some discussion in Air Canada yesterday about potentially replacing the Embraer 175s, as well as others. Have you had any discussion with them about potential orders?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [146]
------------------------------
I think our aircraft is the right aircraft for Air Canada. You're talking about regional jets. I think they took an aircraft that was not economic, and we can offer them a better product for their service.
------------------------------
Ross Marowits, The Canadian Press - Media [147]
------------------------------
But not the CSeries, likely?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [148]
------------------------------
Well, this is a category of regional jets. And I think our regional jet has demonstrated it's got better economics. I think that can represent opportunity for us. The CSeries may also be an opportunity at Air Canada, but not to replace these smaller Embraer.
------------------------------
Ross Marowits, The Canadian Press - Media [149]
------------------------------
Okay, thank you.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [150]
------------------------------
Operator, do we have any more questions?
------------------------------
Operator [151]
------------------------------
At this time, we have no further questions. I would now like to return the meeting back over to Ms. Chenier.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [152]
------------------------------
Okay, thank you, operator. So as we have no more questions, I'd like to thank everyone for being with us today. (interpreted) Thank you, everybody, for being with us.
------------------------------
Operator [153]
------------------------------
The conference call has now ended. Please disconnect your lines at this time, and we thank you for your participation.
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