Q3 2012 BOMBARDIER INC Earnings Conference Call (English)
Nov 07, 2012 AM EST
BBD.B.TO - Bombardier Inc
Q3 2012 BOMBARDIER INC Earnings Conference Call (English)
Nov 07, 2012 / 03:00PM GMT
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Corporate Participants
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* Shirley Chenier
Bombardier Inc. - Senior Director, Investor Relations
* Pierre Beaudoin
Bombardier Inc. - President, CEO
* Pierre Alary
Bombardier Inc. - SVP, CFO
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Conference Call Participants
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* Joe Nadol
JPMorgan - Analyst
* Benoit Poirier
Desjardins Capital - Analyst
* Hamzah Mazari
Credit Suisse - Analyst
* Noah Poponak
Goldman Sachs - Analyst
* Fadi Chamoun
BMO Capital Markets - Analyst
* Cameron Doerksen
National Bank Financial - Analyst
* Walter Spracklin
RBC Capital Markets - Analyst
* Turan Quettawala
Scotiabank - Analyst
* Ron Epstein
Bank of America-Merrill Lynch - Analyst
* David Newman
Cormark Securities - Analyst
* Anthony Scilipoti
Veritas Investment - Analyst
* Tim James
TD Securities - Analyst
* David Tyerman
Canaccord Genuity - Analyst
* Chris Murray
PI Financial - Analyst
* Stephen Trent
Citi Financial - Analyst
* Steve Hanson
Raymond James - Analyst
* Sean Silcoff
The Globe and Mail - Media
* Sylvain Larocque
Canadian Press - Media
* Scott Deveau
National Post - Media
* Marie Tison
The Press - Media
* Caroline Fine-Asphalt
Wall Street Journal - Media
* Vanessa Lu
Toronto Star - Media
* Francois Shalom
The Gazette - Media
* Ross Marowits
The Canadian Press - Media
* Daniel Bordeleau
Radio Canada - Media
* Francois Pottier
Journal Dans Les Faits - Media
* Susan Taylor
Reuters - Media
* Molly McMillin
Wichita Eagle - Media
* Matt Angelique
Journal Dans Les Faits - Media
* Zachary Pollock
Aviation International News - Media
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Presentation
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Operator [1]
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Good morning, 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 ahead, Ms. Chenier.
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Shirley Chenier, Bombardier Inc. - Senior Director, Investor Relations [2]
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Thank you, Operator. (spoken in French) 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 start 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 third quarter ended September 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 archive of the integral version of this call will be available within the next few 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'm making these cautionary statements 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, CEO [3]
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(interpreted) Hello and welcome to this conference call. Before commenting on the third quarter results, I would like to start by giving you an update on the development of the Cseries program as well as the restructuring initiative that we launched in transportation.
On the Cseries, since the beginning of the year we've made substantial headway and have met a significant number of key milestones. Over the last few months we used the momentum gained with our supplier to reach a fully harmonized schedule to which everyone is committed. Based on this schedule, first flight for the CS100 will now occur by the end of June 2013, a date that all parties have agreed is achievable. Entry into service will take place approximately one year after and as the CS300 use many common parts, the timeline remains unchanged with an entry into service by the end of 2014. We will continue to give you regular updates with a more detailed review during the first quarter of next year.
In transportation, we just announced a measure to further improve our competitiveness and cost structure. These measures include the closure of a plant in Germany and the reduction of direct and indirect personnel by approximately 1,200 employees worldwide. The charge for this restructuring activity will be determined and booked in the fourth quarter. However, we don't expect this charge to exceed $150 million.
Now as it relates to the results, revenue for the third quarter excluding foreign exchange were in line with last year at $4.3 billion, diluted EPS was $0.12 for this quarter compared to $0.11 last year. In aerospace revenue we're stable at $2.3 billion representing a positive mix as we delivered a total of 57 aircraft this quarter versus 68 last year. Order intake has proven to be solid with a total of 297 new orders year to date versus 206 last year, bringing the backlog to $26.1 billion compared to $22 billion at the beginning of the year.
In transportation, as expected, revenues at $2.1 billion have slightly decreased from last year if you exclude the negative impact of foreign exchange. Revenues from Asia-Pacific have now returned to a typically level as we are ramping up production on new contracts following the variation order agreement with the Chinese MOR. We expect full year revenue to be lower in the single digit range as per our guidance. And on the order front we continue to see a good level of activity at this time $2.3 billion of new orders in the quarter versus $1.6 million for the same period last year, a book to bill of 1.1 compare to 0.9 for the same period last year.
Now we'll let Pierre walk you through the financial results.
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Pierre Alary, Bombardier Inc. - SVP, CFO [4]
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(interpreted) Thank you, Pierre. Aerospace revenue for the quarter totaled $2.3 billion, the same level as last year. This reflects 44 deliveries of business aircraft with a better mix and a lower level of deliveries of commercial aircraft. EBIT totaled $123 million or 5.4% of revenue in line with our guidance and as compared to $129 million or 5.6% last year. The small reduction in margin percentage reflects a higher cost of sale due to escalation in foreign exchange which was mostly offset by higher selling price and a positive variance on our provision for contingencies.
For transportation, revenues total $2.1 billion as compared to $2.3 billion last year. This reduction is essentially due to foreign exchange. For the full year, excluding the impact of foreign exchange, we expect revenues to be lower than last year, in the range of a single digit. EBIT margin is at 6% compared to 7.4% last year mainly due to a lower margin in rolling stock which was partially offset by higher margin in systems and signaling.
On a consolidated basis, revenues total $4.3 billion while EBIT is at $248 million compared to $301 million last year. Net financing income amounts to $25 million compared to an expense of $58 million last year as a result of a gain on certain financial instruments and lower interest expense on our long-term debt. With an effective income tax rate of 22.3% net income reached $212 million or $0.12 per share compared to $192 million or $0.11 per share last year. Aerospace cash flow from operations totaled $475 million while our investment in our programs total $543 million. Transportation used $109 million of cash in the third quarter which is a significant improvement compared to last year's usage of $347 million.
The economic recovery is proving slower than originally anticipated. As a result, on a full year basis, the aerospace cash flow from operations will not be sufficient to fund its investment in programs of approximately $2 billion for the year. Therefore, the free cash flow usage for 2012 for aerospace is now expected to be approximately $800 million. On a consolidated basis, free cash flow usage is estimated to be approximately $500 million. At the end of the third quarter, our short-term capital resources totaled $3.5 billion which includes cash and cash equivalents of $2.1 billion.
To conclude, the Cseries program is making good progress with the first flight now scheduled by the end of June 2013. We're seeing a high level of activity in all of our businesses resulting in a backlog of $58.6 billion which provides us good visibility. The increase reflects improvement in the level of orders in both business, jet, and commercial aircraft and a continued good level of order intake in transportation. The future of Bombardier is bright and the next year will be exciting as we start seeing our product and development come to life. Thank you.
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Shirley Chenier, Bombardier Inc. - Senior Director, Investor Relations [5]
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Thank you, Pierre. We will not 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. If not, you can contact me after this conference call. I'll 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) Joe Nadol, JPMorgan.
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Joe Nadol, JPMorgan - Analyst [2]
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Thanks. Good morning. My question is on the cash flow. Pierre, could you walk through what specifically what line items changed in your guidance for operating cash flow this year? Was this about book to bill? Is it finished goods that are on the balance sheet now, et cetera? And then the second part of that is as we look into next year, what pieces of the aerospace cash flow are -- and I'm talking about aerospace specifically here with both parts of this. What pieces of that cash flow can you see today? For example, can you tell us if the investment spending is still going to be about $2 billion? What pieces of the operating cash flow can you see for aerospace next year? Thanks.
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Pierre Alary, Bombardier Inc. - SVP, CFO [3]
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When you look at the cash flow within aerospace, given the investment of $2 billion, to be we had mentioned originally in our guidance at the beginning of the year. The cash flow from operations should be significantly enough to finance most of that $2 billion. It may be a bit short of $2 billion but close to $2 billion is essentially the message. Now what we're seeing is we're seeing more like $1.2 billion of cash flow from operations versus an investment of $2 billion. Therefore, the $800 million revision to our guidance.
And when you look at the $1.2 billion, if you compare to the EBITDA that you can expect in aerospace, that means that a significant portion of the net asset is being reduced or realized, therefore bringing cash but not quite at the level we were originally anticipating. And the major variance comes from the fact that the level of advances is slower than what we had originally anticipated and the lower level of advances, although positive year over year, we're going to see an increased level of advances from customers year over year, not as high as we were originally expecting. It comes from the fact that the recovery is not at the speed we were expecting.
So, therefore, although we have a very good book to bill -- the book to bill is 1.5 to one. Although we have a good book to bill, it's not as high as we were expecting and it comes at a later point in time and therefore we don't have the time to build up the advances.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [4]
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And you asked about next year?
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Pierre Alary, Bombardier Inc. - SVP, CFO [5]
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Next year, obviously the more precise guidance will come when we do our year end results but what I can tell you is in terms of the spending, it should be an amount similar to this year so therefore around $2 billion.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [6]
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Just one thing I want to add is if you look at the amount of orders we're getting in business aircraft I believe Pierre mentioned that it's very good but right now we're gaining market share which is also very good but also signals that the market is not recovering as fast as we had anticipated.
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Joe Nadol, JPMorgan - Analyst [7]
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Is this mostly about the terms changing though? Or about fewer orders?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [8]
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No. It's not about the term. What Pierre meant by later is that if you get an order within let's say six months of delivery, the milestone payment that you normally get if you get an order two years in advance, of course these milestone payments you don't get. You get the initial signature and then you get the delivery if it's within the window of a short-term delivery. That's what happens when the market is not as strong as what we had anticipated.
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Joe Nadol, JPMorgan - Analyst [9]
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Some of this cash will be pushed into next year then?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [10]
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Depending on how fast the market recovers --
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Pierre Alary, Bombardier Inc. - SVP, CFO [11]
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For example, Joe, let's say a signature two years before, you get a sort of amount. Then you get an additional advance at 18 months prior to delivery, 12 months prior to delivery, six months prior to delivery. If you look at the Lear, as you know, the very small jet, we have a small backlog. Therefore we sign and a few months after we deliver. We don't have that built up advances over two years. It's not that the terms are different, simply that we don't build it up over a two year period.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [12]
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To get back to your point, depending on how the market recovers next year, this is when we build longer-term backlog, especially as it relates to smaller airplanes.
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Operator [13]
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Benoit Poirier, Desjardins Capital.
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Benoit Poirier, Desjardins Capital - Analyst [14]
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Good morning. My question is related to the Cseries. I was wondering if you could provide more color about the issues with some suppliers and also what could be the costs associated with the six month delay. Thank you very much.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [15]
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Like I've always said when we look at the Cseries program, we're aiming for a flight on the -- we were aiming for a flight on 31 December or in December but with a rest three to five months what we're saying today is once we have looked at our schedule individually with suppliers and of course certain parts need to come before others so when we come up with a harmonized schedule, we're really saying now that we feel confident to fly by the end of June.
I'm very excited about the program because if you walk through the factory you're seeing flight test vehicle one being assemble, you see the cast article starting to be in test. We're seeing components coming in for flight test vehicle two and assemblies will begin in December. So, there's a lot of great things going on but simply when you look at the major systems of the aircraft at the time they need to come in, we feel that a date by the end of June is realistic and achievable. That's us and all of our suppliers.
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Benoit Poirier, Desjardins Capital - Analyst [16]
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Is there any specific area that you want to give some color on?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [17]
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We've talked about major systems in the past. Major systems are the most complex ones. They will influence the schedule. There's nothing really new, just the reality of when parts were coming in at what sequence and the integration of all of this and some challenge of some suppliers made it the date to focus on is by the end of June.
You asked me about the additional cost and I forgot to answer that. When we planned the business plan of this Cseries -- I think you've heard me say that quite a few times. We looked at the first flight with a schedule that was December but could have three to five months additional. So, you can imagine that the business plan was not planned without considering some contingency in time. That being said we don't anticipate this delay to have an impact on the business plan.
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Operator [18]
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Hamzah Mazari, Credit Suisse.
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Hamzah Mazari, Credit Suisse - Analyst [19]
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Just a question on the transport side of your business. What benefit do you see coming from the restructuring? I know you highlighted the cost side. Is this a function of the economy or is this more of a function of you feel like your cost structure is just too large and you have too many facilities?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [20]
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It's a function, first of all the order level of transport has been good. This fusion of where these orders come from we cannot always have it perfectly where our plants are. This plant in Aachen has been a challenge for a few years so we transferred a few years ago the [Ausbaun stukar] into this plant and this product is going to come to an end shortly. After that or to the delivery to the end of delivery shortly, and after that we don't see additional business for this plant. This plant has been focused mainly in the Netherlands and the business is kind of slow in this area. On a macro level, transport is doing very well but I think there's always opportunity to adjust and also look at ways of making us more competitive.
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Hamzah Mazari, Credit Suisse - Analyst [21]
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Just a clarification. You're not changing the total program costs for the Cseries off of the six month delay. Is that right?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [22]
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That's right.
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Operator [23]
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Noah Poponak, Goldman Sachs.
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Noah Poponak, Goldman Sachs - Analyst [24]
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A question on aerospace margins. If I'm looking at the reported year to date it's a little over five. If I take out the other line which I guess is mostly non-operational, it's just over four. Which of those is the right baseline to work off of for 2013 and perhaps if you could talk maybe even just directionally about where you think margins go next year given the main inputs on the aerospace side? Thanks.
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Pierre Alary, Bombardier Inc. - SVP, CFO [25]
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First of all, I'll challenge you when you say you removed the other income, other expense. It is part of our operation. For example in this quarter we've revised our provision for contingencies and the provision for contingencies that we put in place is a provision when we sell aircraft and then we offered certain guarantees. So, we reduced the margin at the beginning when we make the sale and then we adjust it on a quarterly basis. When I look at it, to me it's clearly part of the operation. So, I don't exclude the item. You really have to look item by item which one could be a one time or not. In this quarter for example, it's clearly ongoing business and business as usual. So, we look at it --
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Noah Poponak, Goldman Sachs - Analyst [26]
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Our baseline should include something in other?
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Pierre Alary, Bombardier Inc. - SVP, CFO [27]
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It should include other income and other expense, yes.
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Noah Poponak, Goldman Sachs - Analyst [28]
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Is there any way to gauge roughly what a normalized contribution is from that line item?
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Pierre Alary, Bombardier Inc. - SVP, CFO [29]
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I'd say it's through our explanation. We do explain it when it's out of the norm and we identify specifically when we believe it is a one-time item. We've done that in the past. We explain the margin, the variation in the margin, and we say in addition there is this item that makes a variation.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [30]
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You could argue that this other should go back into airplane margin because it was an airplane margin that it came out of.
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Noah Poponak, Goldman Sachs - Analyst [31]
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That makes sense. What's the --
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Pierre Alary, Bombardier Inc. - SVP, CFO [32]
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For example if you look at page 15 of the MD&A we're saying that for the nine months ended September 30, 2012, the EBIT margin was positively impacted by 3% as a result of a $23 million gain recorded and other income following successful resolution of a litigation. So, we highlight this one specifically kind of outside the explanation on the margin to indicate that this is a one-time.
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Noah Poponak, Goldman Sachs - Analyst [33]
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Right. That makes sense and is helpful. So, then what's the right baseline, what you would consider to be the operational number for the aerospace segment margin coming out of 2012 and what should we look for in 2013?
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Pierre Alary, Bombardier Inc. - SVP, CFO [34]
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For 2012 our guidance is 5% and you could always say that the item I referred to, you can always exclude it which 0.3%. It doesn't make a big difference to the full year. In terms of that our guidance remains at 5% for the full year. When you look at next year we're going to provide guidance on next year with our Q4 results.
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Noah Poponak, Goldman Sachs - Analyst [35]
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Are you able to say at this point if you think margins will be up or down next year?
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Pierre Alary, Bombardier Inc. - SVP, CFO [36]
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My guidance will be with the Q4 results.
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Operator [37]
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Fadi Chamoun, BMO Capital Markets.
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Fadi Chamoun, BMO Capital Markets - Analyst [38]
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A question on the transportation margin. The EBIT margins have gotten worse in the third quarter. You're down 140 bps year on year and you're lower versus the first half. I would've thought that at this point we should start to see some stabilization or even some modest improvement versus the first half. Is there anything incremental in terms of the execution issues that you've seen on the European side? Is there more color you can provide on this?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [39]
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We had an issue with some contracts last year and we've explained over the first, second quarter that we've resolved the issues and we're now fully delivering on those contracts. So, the weight of those contracts in the third and the fourth quarter are more important than in the first and the second because we're delivering more, we're ramping up. So, those contracts as we are issuing, we had additional costs which were reflected but it also reflects in the lower margin on those same contracts. It's kind of that contract mix that is impacting this year and that's what we've seen in the first couple of quarters and this quarter again.
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Pierre Alary, Bombardier Inc. - SVP, CFO [40]
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It will be to a lesser degree next year.
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Fadi Chamoun, BMO Capital Markets - Analyst [41]
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Okay. That's helpful. In terms of the restructuring charge that you're expecting, how much of that is cash basically?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [42]
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This is a rough order of magnitude in terms of the cost because we knew that you guys would be interested in having an idea of the maximum cost that would be attached to that restructuring. We've announced that restructuring just recently and we're currently doing a detailed calculation and the vast majority will be cash, but it will obviously come over a period of over a year or 1.5 years.
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Pierre Alary, Bombardier Inc. - SVP, CFO [43]
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Because if you're doing personnel reduction, it will be planned through the year. Of course we're going to be forced to do it the sooner the better so we can benefit from the advantage of cost reduction.
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Operator [44]
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Cameron Doerksen, National Bank Financial.
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Cameron Doerksen, National Bank Financial - Analyst [45]
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I have a question on the Cseries here. I guess as early as just a few weeks ago the target for first flight was still end of December. I'm wondering what kind of comfort you can give us that the June target is achievable and I guess in association with that what are your customers saying to you now that you've informed them of this delay?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [46]
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Two parts of this question. First of all, with customers, we've been working with them with our view of a harmonized schedule for quite some time, looking at -- because their delivery positions have of course come further in time and when we did commit to delivery schedules, we were also careful in which position we give customers considering there could be some variation in the first flight. So, this is something we've been very transparent with customers and we've been working with them and I think they're all on board understanding where we're going with that. And of course all of this is always to minimize also any penalties that would be associated with late delivery.
I think you need to understand that it was important for us to maintain a target date so that we would get all the suppliers' firm commitment to get a harmonized schedule and that's why I've always said our target is December but you can understand that three to five months within this is essentially on schedule in such a big program like this and it made no sense at all to give a break to any one of our partners by giving them additional time.
The date was December and that's what all we worked on. In the end, there are some components that are complex. We've seen some challenge and we feel the harmonized schedule, the right target to have now with the airplane coming together is by the end of June. But now it's very different than the other day because it's really a commitment by individual suppliers when they're coming in. You can see a physical aircraft being assembled. You can see short Lear flights as vehicle number two and I feel confident that we have something solid by the end of June.
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Cameron Doerksen, National Bank Financial - Analyst [47]
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Do you get or recover any penalties from suppliers who are late to your schedule?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [48]
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There will be individual discussions. Some may have penalties to face. Others are late because we send them the drawings late. At this point, really what our partners is working together at making sure that we get the parts all at the schedule so that we can integrate because you can think that there's no sense of getting a wing before a fuselage and there are certain parts that come in sequence. And really all of the effort now with suppliers is more about schedule than commercial.
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Operator [49]
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Walter Spracklin, RBC Capital Markets.
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Walter Spracklin, RBC Capital Markets - Analyst [50]
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My question comes back to free cash flow on the balance sheet. I think that's one of the questions I get most often from investors is how much buffer you have in terms of your liquidity position. I just wanted to -- Pierre, perhaps you can correct my logic or point me into a direction I might be wrong here.
Based on your guidance now for consolidated $500 million for the end of the year that is to suggest that you'll do about $1.1 billion or just over $1 billion free cash flow for the fourth quarter which should bring your liquidity up to let's call that $4.5 billion. You've stated to us, Pierre, in the past that you're comfortable with $2 billion in liquidity at the beginning of every year.
Am I right in concluding here that by the end of this year you'll have $2.5 billion in buffer and if I look at this year as being kind of a bad year at $500 million down, are we looking at a buffer measured in years at four to five years or am I missing something in that calculation?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [51]
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I don't think you're missing anything in the calculation. You calculation is quite right. What I mentioned in the past year in reference to your $2 billion is that I need $1 billion in each business for working capital and so on. Being at $2 billion I wouldn't be comfortable starting the year with $2 billion in cash. So, your calculation at being above $3 billion the right one and if you look at the past four or five years we've always started the year in cash above $3 billion.
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Walter Spracklin, RBC Capital Markets - Analyst [52]
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So, $3 billion is pretty much where you'd rather be which would then signal maybe three years of buffer? Is that right?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [53]
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Yes. Because when I look at liquidity, given that we're in a significant investment period and the uncertainty in the market, you don't want to be too tight on liquidity. So, if there's one thing I want to hear to err, I'll be on the safe side. So, definitely liquidity, I'm always going to look to make sure that I have more than enough liquidity.
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Walter Spracklin, RBC Capital Markets - Analyst [54]
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Won't some of your government arrangements be kicking in more so in the next year or two than they were in the last year or two?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [55]
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It's pretty much gradual.
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Walter Spracklin, RBC Capital Markets - Analyst [56]
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If I could just get a clarification question on the transportation, you had mentioned, Pierre Beaudoin, that there were three factors negatively impacting BT's revenue and margins, being contract mix, project maturity, and perhaps as well the China slowdown or stop and then restart that had been mentioned prior. Of those three things, China seems to be done and started up again now, so that -- I'm just trying to get clarity as to how many of those will be a factor in the fourth quarter and going into 2013 and how many will be less of a drag in that period?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [57]
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That's actually the projects we'd identified before would be less of a drag as we look towards next year because some of them, the big deliveries have occurred this year but they will continue to be present through this year. So, fourth quarter.
As we look forward, of course China right now is restarted and I think this is a very exciting program for us. Not only are we doing the ZEFIRO 250 that we have been doing for quite some time but we have the opportunity through this variation order to design a new product, the ZEFIRO 250 next generation which is an aluminum frame. That for me is very positive because we didn't have an aluminum 250 kilometer train in our portfolio and through this variation order we are able to get one to market. That's very positive and then the 380 next year is starting also to become a factor in terms of revenue.
So, I think those are very positive. China is back, if you want, more to a level we've seen before and even there's some potential growth in that. And what we need to continue to be very close to is the start up of new projects. They're big projects, complex projects. And there's good things going on. There's some challenge. But overall I think transport is well positioned.
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Operator [58]
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Turan Quettawala, Scotiabank.
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Turan Quettawala Scotiabank - Analyst [59]
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My question is also on the Cseries. I was just wondering in terms of testing how much of the airframe static structure is already complete? Can you give us a sense of that and potentially when you expect that test to start?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [60]
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It's started. The test article has started testing. We are now installing the open add on it which we just received but the rest of the aircraft is completed and started. It's a very complex piece of equipment because there's lots and lots of wires in this aircraft to monitor the structure and that's essentially in place and started.
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Turan Quettawala Scotiabank - Analyst [61]
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Pierre, how long do you think that process will take?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [62]
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Several years. You mean the testing?
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Turan Quettawala Scotiabank - Analyst [63]
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No. I mean to certify the airframe static structure before you can do the first flight.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [64]
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Yes. We need to get a release from a structural perspective before first flight. It's sometime -- I don't know the exact date but it's sometime in the next six months obviously.
------------------------------
Operator [65]
------------------------------
Ron Epstein, Bank of America-Merrill Lynch.
------------------------------
Ron Epstein, Bank of America-Merrill Lynch - Analyst [66]
------------------------------
A couple questions. First one, we see 87 used aircraft on the balance sheet. Is that right? Are those all Bombardier aircraft or are you taking on trade other manufacturer's aircrafts?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [67]
------------------------------
The vast majority are Bombardier aircrafts. I don't have it in front of me but it would be above 85%. My view of it. We have a few trades from competitors. When we do that, the customer understands that we are also very careful in the value of the aircraft because we're more comfortable of course selling a used Bombardier aircraft but we have a few. Not many.
------------------------------
Ron Epstein, Bank of America-Merrill Lynch - Analyst [68]
------------------------------
Is that just a reflection of where the market is right now? I mean, to get deals done do you really have to take the synergy and -- how aggressive do you have to be on the trade? Are you comfortable talking about that? I'm just trying to get a better feel for it.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [69]
------------------------------
Let's be careful on this. I've always told you that on trades we have a policy, not more than 30% of our backlog. We're in fact at 25%. So, we're not doing anything that's outside of the guidelines that we established. We are taking trades but no more than usual.
------------------------------
Pierre Alary, Bombardier Inc. - SVP, CFO [70]
------------------------------
And the value of the inventory of used has gone down by $100 million in this quarter.
------------------------------
Ron Epstein, Bank of America-Merrill Lynch - Analyst [71]
------------------------------
Maybe just one last one if I can. Sorry about going back to Cseries. I know there's been a lot of questions on it. Can you be any more specific with what's going on with suppliers about the delay? And then can I ask a question that was asked before but I think is critical? What makes you feel so comfortable about that six months or five months, whatever it is? I think the fear -- and you probably know it -- among investors is you get four or five months out and then another one happens. It's a known unknowns that kind of get these programs. What makes you feel very comfortable about knowing the unknown unknowns, if that makes sense?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [72]
------------------------------
What you're pointing out is it's a very complex product. More than 100,000 parts come together in these airplanes. There's a lot that can happen but where we are today, we're more in execution phase where suppliers have tasks. We understand what needs to be done. We've seen the parts in production. We can monitor the schedule day by day at the supplier. So, we have more visibility than when it's just drawing or design stage. We can feel and touch parts. The assembly of the parts we've done so far have gone extremely well.
So, I feel good about the way we've laid out the schedule, the things that need to happen. We've talked about fly by wire before. We are testing some versions of the software but the idea is that when you go to fly it, you need to have the latest version that can be released from a safety of flight perspective. So, there will be different drops through time but it's not like we don't have a drop right now that we can work with. We have a lot more visibility and it's more visual and we have commitments from the supplier. Before I was asked when do we complete the cast article testing. That's scheduled for first flight. I've got a note from our CCRS team that's mid-April.
------------------------------
Pierre Alary, Bombardier Inc. - SVP, CFO [73]
------------------------------
If I may add there, Ron, the individual systems have been tested by themselves, already tested. And then with the aircraft zero or Siesta or Aaron Bird which is all saying the same thing, we've started and progressed well into other various systems, interfaced with one another. That's giving us a lot of confidence.
------------------------------
Operator [74]
------------------------------
David Newman, Cormark Securities.
------------------------------
David Newman, Cormark Securities - Analyst [75]
------------------------------
Just further to the last question, potential customers, the campaigns you have out there right now, do you think there will be any sort of delays until you achieve first flight given I guess the track record of Airbus and Boeing with some of the delays they face? Do you see this leading to some deferral of the campaign?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [76]
------------------------------
I don't think so because we're bringing the customers -- there's a lot of different people saying things about the Cseries including competitors of course that build stories on the Cseries. Our best selling point is for them to come to the factory and the development centers and see the product and the customers that have seen our level of advancement are very impressed. What they're most impressed with is the level of testing that we're doing upfront and the amount of integration we've already done to make sure this aircraft performs as promised and also delivers on the overall economics. So, the confidence in the suppliers, the customers, as they see our hardware is very good right now. I don't think it will delay any orders.
------------------------------
David Newman, Cormark Securities - Analyst [77]
------------------------------
Just a quick one, if I can squeeze it in. Just very holistically, if you look in the free cash flow, 2013 cash has been a big question on the call here today. What do you think are going to be the key drivers? I mean, BT obviously you're seeing a recovery there and then some of the old contracts you're delivering on, lower margin, that clears the deck I think at the end of the year. Maybe BT in line with profitability of Global, maybe a bit of a Cseries drag. Where do you see the drivers on free cash flow next year?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [78]
------------------------------
The free cash flow comes from in terms of the inflow if you look and the outflow it's well understood being the investment that we're doing. The inflow is the EBITDA and how do we manage our net assets? That means the level of inventory and so on. And in particular the level of advances from customers.
------------------------------
David Newman, Cormark Securities - Analyst [79]
------------------------------
Do you think BT would but a big swing factor in terms of the recovery back to in line with profitability next year?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [80]
------------------------------
BT should be in line with profitability. That's true.
------------------------------
Operator [81]
------------------------------
Anthony Scilipoti, Veritas Investment.
------------------------------
Anthony Scilipoti, Veritas Investment - Analyst [82]
------------------------------
Just a quick thing following up on Ron's question about the Cseries. When I read the comments on page 18 of the release it talks about the engine and it says the engine -- I don't quite understand. I read it and it suggests that the engine's not certified yet. Is that the big hold up that we're not understanding?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [83]
------------------------------
The engine is not certified yet but it plans to be certified shortly. I think I just want to read what you read. Engine anticipated complete engine certification by the end of 2012. Now, that's of course the engine is part of being able to go to first flight but that's not -- I think this program is progressing very well.
------------------------------
Anthony Scilipoti, Veritas Investment - Analyst [84]
------------------------------
That's not the thing that's been delayed?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [85]
------------------------------
There's no delay as far as I know on the engine. On the contrary, it will be certified by the end of the year and I understand the tests are going very well. No.
------------------------------
Anthony Scilipoti, Veritas Investment - Analyst [86]
------------------------------
That's fine. With the comments on the credit, the provisions for credit and residual value guarantees, I did notice the amount changed. And you did comment on that already, Pierre. But when I look at the exposure on your contingencies note, the total credit and residual value exposure has been relatively flat say over the last six, seven quarters, but now you've made the -- what's exactly changed in your assumptions that has allowed you to reduce that provision that you're recording against that exposure?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [87]
------------------------------
The exposure is going down in fact. We should look at the provision. It's pretty much in proportion of that exposure. Three years ago it was $2.9 billion. Now it's $2.6 billion. It's reduced by $300 million over two years. So, it has reduced and when we look at it, there's different components. We look at the number of components and one of them, for example, is residual value guarantee.
In many cases the window for exercising residual value comes at a point where the airline still used the aircraft and needs the aircraft and continues to use the aircraft so the aircraft continues to fly. Therefore the guarantee becomes over and we have to reverse the provision we had on that specific residual value for that specific aircraft. That would be an example. So, it's really done in detail, deal by deal and it's reviewed on a quarterly basis. It's a very detailed analysis.
------------------------------
Anthony Scilipoti, Veritas Investment - Analyst [88]
------------------------------
I'm sure. But you're right if you go back the number of years that you suggest. But I'm just talking the total exposure I see is $2.7 billion. I look at first quarter, I see $2.7 billion. I look at last quarter, I see $2.7 billion. Q4, $2.7 billion. And I see that the amount of the provision again, it, that's come down, that's been relatively stable at $580 million, $590 million and now it's down due to your adjustment, down $240 million or just $539 million. That's what I'm getting at.
------------------------------
Pierre Alary, Bombardier Inc. - SVP, CFO [89]
------------------------------
But that's what it is. Any specific transaction in the quarter that the residual guarantee for example, a certain number of items. That's basically what happened.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [90]
------------------------------
The RBGs have expired. It's very straight forward.
------------------------------
Anthony Scilipoti, Veritas Investment - Analyst [91]
------------------------------
It has a positive impact on earnings when you make an adjustment, that's all.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [92]
------------------------------
Of course. And we see a negative impact when we set it up.
------------------------------
Pierre Alary, Bombardier Inc. - SVP, CFO [93]
------------------------------
Right. This is airplane margin that we put as a reserve and when we release it because it's not needed anymore, it's a positive. And you have a negative when it came in.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [94]
------------------------------
And I would say the last five or six years where maybe six or seven of our customers went through bankruptcy proceedings, as we went through those bankruptcy proceedings, we always end up that our provision was well established because there was no impact in that given quarter. To me that speaks to how we establish our provision and the validity behind it.
------------------------------
Anthony Scilipoti, Veritas Investment - Analyst [95]
------------------------------
When you talked about the other income here there's another line item of $14 million just labeled other. It's positive.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, Investor Relations [96]
------------------------------
Anthony?
------------------------------
Anthony Scilipoti, Veritas Investment - Analyst [97]
------------------------------
Yes? Pardon? I just wonder what was that?
------------------------------
Pierre Alary, Bombardier Inc. - SVP, CFO [98]
------------------------------
That's an adjustment in terms of the capital tax.
------------------------------
Anthony Scilipoti, Veritas Investment - Analyst [99]
------------------------------
Capital tax?
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, Investor Relations [100]
------------------------------
Anthony, maybe we can take this offline? Give us a call after the conference call?
------------------------------
Anthony Scilipoti, Veritas Investment - Analyst [101]
------------------------------
No problem.
------------------------------
Operator [102]
------------------------------
Tim James, TD Securities.
------------------------------
Tim James, TD Securities - Analyst [103]
------------------------------
Thank you. I just want to return to the cash flow discussion for a minute. I believe you mentioned earlier, Pierre, that the reason for the change in cash flow guidance for the year was primarily related to the lower level of advances coming in. Now, you've dropped the cash flow guidance by I guess $300 million relative to the previous guidance does that account for the entire amount of the change then? Or are there other factors that play there?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [104]
------------------------------
You can imagine it as number of factors, plus $90 million on something, minus $50 million on something else. But that explains the bulk of it. It's looking forward.
------------------------------
Tim James, TD Securities - Analyst [105]
------------------------------
So, the level of advances that had been expected under previous guidance was $800 million higher than the advances expected, roughly, under the current guidance? Am I thinking about the correctly? I just want to make sure I've got that straight.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [106]
------------------------------
Roughly, yes.
------------------------------
Operator [107]
------------------------------
David Tyerman, Canaccord Genuity.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [108]
------------------------------
I just wanted to ask about the credit and RBGs and the net financing expense. Both of them are generating significant profit gains has been pointed out. What I'm wondering is whether we're going to continue to see them generate these kinds of improvements and profitability on a sustained basis. Are we going to continue to have credit and RBGs running $20 million, $30 million a quarter? Are we going to see the net financing expenses continue to run in the positive where they were fairly expensed in the past.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [109]
------------------------------
On the net financing expense the answer is that you should not expect or let me put it a different way, the financial instrument, the variation on the financial instrument can go up or down. It's almost impossible to predict. When I looked at it forward, I put zero in my mind. The variation this quarter is $58 million because last year was negative $18 million. This year it's positive $40 million. It's $58 million. This one, if you're looking forward, you exclude that one for sure. That's on the interest. Now, on the contingent liability it goes up and down also depending on what happens in the quarter but typically you can expect a portion to reverse leading up to the level we had this quarter.
------------------------------
Pierre Alary, Bombardier Inc. - SVP, CFO [110]
------------------------------
There's some great success stories like the CRG200 in Russia. This is a great success story that of course helps the residual value of this aircraft. We have about 100 CRG200s operating in Russia.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [111]
------------------------------
So, sometimes the lease comes to an end and the lesser calls us and obviously we know it comes to and end so we get our market. Russia is a good example as Pierre mentioned. Africa, Mexico. We do prepare the market. And remarket those. And as we remarket those the residual value guarantee goes away.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [112]
------------------------------
Just to my question, should we expect and model $20 million, $30 million reversals on an ongoing basis per quarter?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [113]
------------------------------
No. You shouldn't. It would be on the high side. In some quarters we add to it. In some quarters we have one of our customers -- because we look at credit rating. Some of the customers to which we've sold aircraft with a certain financing support, their credit rating goes down. In those cases, our prohibition goes up. But we highlight it in our explanation when the variation is significant. So, if you look at the previous quarter, that will give you a good feel of how it moves, up or down. But if we don't talk about it, that means it was not significant. You shouldn't model a significant amount on an ongoing basis.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [114]
------------------------------
Should not?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [115]
------------------------------
Should not.
------------------------------
Operator [116]
------------------------------
Chris Murray, PI Financial.
------------------------------
Chris Murray, PI Financial - Analyst [117]
------------------------------
Just returning to the transportation division, you've indicated a little bit that a number of the issues you've seen over the year should be cleaned up by Q3-Q4. Just looking into early 2013 it also sounds like you're going to be starting up a few contracts. I wondered if you could give us some color on your confidence in seeing margins starting to recover in 2013. You previously talked about an 8% target in BT. What kind of confidence do you have that you'll at least directionally be moving that way?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [118]
------------------------------
We're confident the margin's going to go up but we're only going to be more precise with the Q4 results. So, in terms of those contracts coming on, should we be thinking that we may see some timing issues in Q1, Q2 or will they be further out in the year. Any sort of idea about that at this point?
------------------------------
Chris Murray, PI Financial - Analyst [119]
------------------------------
We anticipate this revenue going up next year and more precision in the Q4 results.
------------------------------
Operator [120]
------------------------------
Stephen Trent, Citi Financial.
------------------------------
Stephen Trent, Citi Financial - Analyst [121]
------------------------------
Just another quick question on the transportation division. I noticed that you guys recently increased your activity in the Brazilian market with your transportation ops there. What sort of potential are you seeing beyond the contract I believe you already won for the Sao Palo airport monorail?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [122]
------------------------------
We're excited about this monorail because we think it's the right type of product for Brazil. It could be implemented without major time like you would do if you did a tunnel. For us, we think with this base we'll have a great showcase to participate in the market in Brazil. Also, we've already had success in signaling in Brazil and as new systems are coming in, I think they can be more. I think Brazil's definitely a growth market for us.
------------------------------
Operator [123]
------------------------------
Steve Hanson, Raymond James.
------------------------------
Steve Hanson, Raymond James - Analyst [124]
------------------------------
With respect to the Cseries you suggested that the potential customer base here will not be distracted by the timeline slippage which I suppose is somewhat comforting but let me ask it another way. How would you assess the probability of landing incremental new orders of significant between now and first flight?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [125]
------------------------------
I think it's a very good probability. There's a lot of exciting campaigns going on right now with customers. At the same time this is a decision that the customers state there's some good discussions going on, so I think the probabilities are high. Also, when the airplane flies it will bring a whole bunch of other customers that are waiting for that event.
------------------------------
Operator [126]
------------------------------
Benoit Poirier, Desjardins Capital.
------------------------------
Benoit Poirier, Desjardins Capital - Analyst [127]
------------------------------
Just to follow-up on transportation with respect to the closing of the facility in Germany and also with the 1,200 layoff. What is the expected impact on the margins going forward?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [128]
------------------------------
It's part of our I would say we're making adjustment to our business to get more competitive. We're looking at the various footprint we're having and what needs to be adjusted and it's basically adjustment to make sure we're competitive in terms of our cost base and we're adjusting -- and you've seen that in the past we've been adjusting every year but obviously not at that level and not closing plants. That's the --
------------------------------
Pierre Alary, Bombardier Inc. - SVP, CFO [129]
------------------------------
I think in the end we've always been trying to balance to get closer to maximum loads in all of our plants and when we look forward in Germany we felt we had one too many plants in Germany. With the potential business coming forward, because if you don't load a plant completely, you have under absorption, you have the costs, and you can't cover all the costs with the business you've got. So, when we look at the projected sales in this country, we said -- you know what? We can do what's ahead of us with one less factory.
------------------------------
Benoit Poirier, Desjardins Capital - Analyst [130]
------------------------------
Good color. Last one if I may, could you maybe provide an update on the upcoming marketing campaigns on the regional side, especially in the US?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [131]
------------------------------
On the one, the fact is now, and I think we have a good chance at Delta. Delta has operated our products for quite some time. They like the CRJ. And it's a product that has 16% better operating costs than our competitor. These are active discussions with Delta right now. I think we're well positioned and have a good chance to win this order.
------------------------------
Operator [132]
------------------------------
Noah Poponak, Goldman Sachs.
------------------------------
Noah Poponak, Goldman Sachs - Analyst [133]
------------------------------
Just a follow-up on that last question, actually. Where do you expect CRJ and Q400 deliveries to come in for the full year? And perhaps if you could also just talk about what campaigning is like outside of the large US ones that everyone's talking about? It seems like it's been fairly light in the rest of the world.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [134]
------------------------------
Your question was to the deliveries in terms of the commercial aircraft?
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Noah Poponak, Goldman Sachs - Analyst [135]
------------------------------
Yes. If you could break it out, CRJ, Q400, that would be helpful.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [136]
------------------------------
We don't break it out specifically but our guidance which we had for some time which is really unchanged is that we would deliver approximately 55 commercial aircraft.
------------------------------
Noah Poponak, Goldman Sachs - Analyst [137]
------------------------------
Any color on what you're seeing outside of the US on the regional jet side?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [138]
------------------------------
On the regional jet side, you're right, it has been slower. We have a lot of smaller campaigns going on but as far as big campaigns, they're really focused in the US right now and they're taking some time to get executed. I think for us, we're trying to find the right economics for us to go forward on these campaigns.
------------------------------
Operator [139]
------------------------------
Fadi Chamoun, BMO Capital Markets.
------------------------------
Fadi Chamoun, BMO Capital Markets - Analyst [140]
------------------------------
Just on the business jet, I wanted to take a stab at this. You've had a good year in terms of orders but a lot has come from fleet customers and fleets that are typically spread out. I think you mentioned it doesn't really start until 2014. I'm wondering if there's any initial thought at this point about how we should think about 2013 rates versus 2012 given the strong order that you've got but also given that the mix has been mostly towards fleet. How comfortable are you with rates remaining somewhat flattish going into next year or maybe improving a little bit?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [141]
------------------------------
I think, Fadi, you said you would take a stab at it. We're not going to give you guidance for next year. As you know, the larger aircraft are selling very well and the smaller remains difficult. But next year, as you know, we're going to start delivering the 7075 also. Guidance will come in Q4.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, Investor Relations [142]
------------------------------
Operator, do we have any further questions at this time?
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Operator [143]
------------------------------
We have no further questions at this time.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, Investor Relations [144]
------------------------------
This concludes the question period intended for investors and analysts. We will now begin the question period for media representatives. Operator?
------------------------------
Operator [145]
------------------------------
(Operator Instructions) Sean Silcoff, The Globe and Mail.
------------------------------
Sean Silcoff, The Globe and Mail - Media [146]
------------------------------
A couple of questions for you. When you talk about the $800 million shortfall in your free cash flow, you cited Learjet. How much of the shortfall would you attribute to that program and how much of it is spread out to the other plane types?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [147]
------------------------------
We didn't mentioned specifically Learjet.
------------------------------
Sean Silcoff, The Globe and Mail - Media [148]
------------------------------
I wasn't clear if you were talking hypothetically about Learjet or specifically.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [149]
------------------------------
No. I gave that as an example. Basically it's the level of new orders and more precisely the timing of those new orders and the impact it has on the advances from customers.
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Sean Silcoff, The Globe and Mail - Media [150]
------------------------------
Is that particularly skewed to any particular type like Challengers or Learjet versus Globals?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [151]
------------------------------
The reference I made to the Lear, for example, is that it has a very short backlog and very short backlog means when you sign the order you deliver very quickly after. Therefore, we don't have the build up of those advances. So, that's an example. On the commercial side, also, it does apply. But I probably said different models. But it's in relation to the backlog, it's in relation to the build up of the advances through time. But on one side it's below what we had originally expected but we're doing very well in terms of signing new orders. We signed a higher level of new orders than last year. Our book to bill is 1.5 to one. That means we're signing 50% more than we deliver. It's not that the business is not doing well. The business is well under the circumstance but we were expecting the recovery to have a steeper curve, if you like.
------------------------------
Sean Silcoff, The Globe and Mail - Media [152]
------------------------------
What is your backlog now in the three jet types versus your ideal backlog?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [153]
------------------------------
The backlog measure in terms of number of months of production, the Learjet is at seven months. The Challenger is -- the target is six to nine. The Challenger is at 19 versus a target of 15 to 18. The Global is at 34, the target is 24 to 30. And by the way that's on page 23 of the MD&A if you want to refer back. The Q400 is at 14 where it's a target of 18 to 21 and the CRJ is at 47.
------------------------------
Sean Silcoff, The Globe and Mail - Media [154]
------------------------------
47 months? What's your target?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [155]
------------------------------
Yes. 18 to 21.
------------------------------
Sean Silcoff, The Globe and Mail - Media [156]
------------------------------
If you're at or ahead of your targets on all of these, I don't understand why the dollars are just collapsing.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [157]
------------------------------
These are based on the previous rolling four quarter deliveries and the deliveries in the first three quarters of this year have been lower so therefore your denominator is lower. We give that as a proxy to help the investor to understand our backlog but it's obviously not an exact calculation. We have to take that into consideration. There's been a very low level of order on the CRJ which mathematically show a high level of backlog and number of months based on the delivery we have.
------------------------------
Sean Silcoff, The Globe and Mail - Media [158]
------------------------------
Is a lot of the free cash shortfall then coming from the CRJ business?
------------------------------
Pierre Alary, Bombardier Inc. - SVP, CFO [159]
------------------------------
We're not breaking it out by platform, Sean.
------------------------------
Sean Silcoff, The Globe and Mail - Media [160]
------------------------------
What are the implications of the lower cash flow? What is this going to do to you financially?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [161]
------------------------------
The implication of low free cash flow is you have less cash at the end. That's why we're looking at liquidity on a constant basis. But we have liquidity -- our level of liquidity is fairly high. It is at $3.5 billion after having used cash for three quarters and that includes cash and cash equivalents of $2.1 billion and the fourth quarter will generate cash substantially so that level of liquidity will go significantly higher than the current amount. So, we've got a good level of liquidity.
------------------------------
Sean Silcoff, The Globe and Mail - Media [162]
------------------------------
If I could ask one final question --
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, Investor Relations [163]
------------------------------
Sean, one more and that's it.
------------------------------
Sean Silcoff, The Globe and Mail - Media [164]
------------------------------
Absolutely. Just about the CCRE supplier issue. You mentioned Avionics. Is it one supplier in particular or is the issue for the delay -- I heard what you said, Pierre, about ordering everything and you're happy with the way things are unfolding, but again the issue boils down to one or just a handful of supplier in particular or is this more of an issue of you kind of shuffling the deck around so that things come in at exactly the right thing?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [165]
------------------------------
It's about harmonizing the schedule and getting things at the right time so we can maximize the use of all the components that are coming in to get to first flight. There is some supplier issue but it's really about making sure things happen as planned at this point.
------------------------------
Sean Silcoff, The Globe and Mail - Media [166]
------------------------------
What is the issue in particular though -- is it a raw material issue? Or are they unable to actually produce?
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, Investor Relations [167]
------------------------------
Sean, I suggest you give us a call after, okay? We have a lot of people waiting on the line.
------------------------------
Operator [168]
------------------------------
Sylvain Larocque, Press Canadian.
------------------------------
Sylvain Larocque, Canadian Press - Media [169]
------------------------------
(interpreted) I wanted to know for the 1,200 positions that will be cut, there's a number that are related to the plant in Germany but will there be any job cuts in other countries? In Canada? In Quebec?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [170]
------------------------------
(interpreted) The transportation team is putting the plan together and I can't tell you exactly the job cuts will be but it will be throughout the transportation organization including North America.
------------------------------
Sylvain Larocque, Canadian Press - Media [171]
------------------------------
(interpreted) Now in terms of the strike at La Pocatiere, any news? Do you think there will be an impact on the Montreal subway contract? On the other contracts you have in North America?
------------------------------
Pierre Alary, Bombardier Inc. - SVP, CFO [172]
------------------------------
(interpreted) Both parties are in discussions and no we don't think this will have an impact on delivering any products that are coming from the plant.
------------------------------
Operator [173]
------------------------------
Scott Deveau, National Post.
------------------------------
Scott Deveau, National Post - Media [174]
------------------------------
I feel like you've been asked this a few times but you haven't quite answered it. Is there a specific problem with any specific supplier on the Cseries that it's causing the delay?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [175]
------------------------------
Like you said, I have been asked this question a few times. There is some supplier challenge but there's nothing specific. It's more about have a harmonized schedule and integrating all these parts to get ready for first flight by the end of June.
------------------------------
Scott Deveau, National Post - Media [176]
------------------------------
You've said in the past that you're having some issues with the fly by wire and that was the top concern for you. Was there some kind of issue that arose from that that led to this delay?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [177]
------------------------------
Nothing new. Of course you're pointing out one of the most complex systems of the aircraft and that's what we have done in the past is talked about where we have very complex systems and those are the most challenging ones. There's nothing new to report of fly by wire.
------------------------------
Scott Deveau, National Post - Media [178]
------------------------------
Why did it take you so long to announce the delay? I mean it seemed like everybody on the street had a better sense that you were not going to be able to meet this deadline than you did.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [179]
------------------------------
I think our job is to manage the schedule in the best way we see fit for our shareholders, for our customers, for our employees, and we felt that was the best way to manage our schedule.
------------------------------
Scott Deveau, National Post - Media [180]
------------------------------
Do you expect any further delays in the program at this point?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [181]
------------------------------
At this point we feel we're going to first flight by the end of June.
------------------------------
Operator [182]
------------------------------
Marie Tison, The Press.
------------------------------
Marie Tison, The Press - Media [183]
------------------------------
(interpreted) Again about the Cseries and again about your suppliers. Can you tell me if your Chinese supplier is part of the challenges?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [184]
------------------------------
(interpreted) I think you're aware that a lot of the components for the first systems were built in our own plants in Belfast and Montreal and the rear fuselage that was built by our Chinese supplier. Everything is working very well. That was for the first test vehicle. The parts for the second test vehicle are being expected in Montreal very soon. Their part of the project is happening very well.
------------------------------
Operator [185]
------------------------------
[Caroline Fine-Asphalt], Wall Street Journal.
------------------------------
Caroline Fine-Asphalt, Wall Street Journal - Media [186]
------------------------------
Mr. Beaudoin, you talked about attached occurring in mid-April to complete static testing tests. Could you just elaborate on that?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [187]
------------------------------
I was asked before when the cast article which is the structural test article, when the test would be completed to a degree where we could take the airplane to first flight and I got feedback from the Cseries team that's listening to this call that it's mid-April.
------------------------------
Caroline Fine-Asphalt, Wall Street Journal - Media [188]
------------------------------
When do you expect a decision from Delta?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [189]
------------------------------
You'd have to ask Delta. I'd like a decision very shortly. I think it's a great opportunity for Bombardier. But our teams are having a discussion and it's really a question that the customer needs to answer.
------------------------------
Caroline Fine-Asphalt, Wall Street Journal - Media [190]
------------------------------
Thanks. I think everyone's asked already the questions on the Cseries. When you talk about just on the order side and on the delivery side -- how many campaigns do you have going on? Again, do you truly anticipate that you'll have another order before the bird takes off?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [191]
------------------------------
I feel confident that we will because we had some very advanced discussion, including LOIs that we have announced that we need to transform into purchase orders but, no, yes, I feel very confident that this will happen before first flight.
------------------------------
Operator [192]
------------------------------
Vanessa Lu^, Toronto Star.
------------------------------
Vanessa Lu, Toronto Star - Media [193]
------------------------------
Mr. Beaudoin, before you've always indicated that you had no plans to discount the price of the Cseries jet to boost sales or options. I'm wondering if you remain firm in that position even with this delay that you've announced today. As well, if you could walk through the number of firm orders and the number of conditional orders if there's been any change?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [194]
------------------------------
What I've said before is that we have a good level of orders and we feel confident that we have the level of orders that we need to get production going. In fact our backlog now stretches quite a bit in time as we look at our orders the options that we have plus the LOI that we're working on. If we talk specifically on the orders, they're under 35 firm and if we look at order commitments, so that would count options and LOIs, letter of intent, that would be about 300.
------------------------------
Vanessa Lu, Toronto Star - Media [195]
------------------------------
About 300?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [196]
------------------------------
Above 300.
------------------------------
Vanessa Lu, Toronto Star - Media [197]
------------------------------
Above? Okay. And you remain firm --
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [198]
------------------------------
The number is 352 to be exact.
------------------------------
Vanessa Lu, Toronto Star - Media [199]
------------------------------
352? Thank you. And you remain firm in terms of the price? No movement on that?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [200]
------------------------------
What I said before, and I remain firm, is that we don't need to go and give prices that we'll regret when we deliver the airplane. This is a good airplane with a huge competitive advantage and we can get value for it. I remain firm on that.
------------------------------
Operator [201]
------------------------------
Francois Shalom^, The Gazette.
------------------------------
Francois Shalom, The Gazette - Media [202]
------------------------------
Did I understand correctly that this six month delay will not incur additional costs?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [203]
------------------------------
What I spoke about -- and the answer is yes. What I said is they will not influence the business plan because when we do make a business plan we do consider some contingency in time.
------------------------------
Francois Shalom, The Gazette - Media [204]
------------------------------
But I'm trying to understand how you can have a six month delay without it incurring additional costs. That's going to cost you money.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [205]
------------------------------
What I'm saying to you, Francois, is the business plan will not be influenced by this delay.
------------------------------
Francois Shalom, The Gazette - Media [206]
------------------------------
So, there was a contingency plan for a delay built into the business plan?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [207]
------------------------------
Every business plan that we do at Bombardier but also I believe every business plan always considers some contingency in time and money and what I'm saying to you, we're able to meet our business plan with this first flight by the end of June.
------------------------------
Francois Shalom, The Gazette - Media [208]
------------------------------
Can you give any sort of details on what the contingency for any eventual delay would've been?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [209]
------------------------------
Business plans are something we keep confidential because they're highly sensitive from a competitive perspective. But I can tell you that the CCRE plan is a very good business plan.
------------------------------
Francois Shalom, The Gazette - Media [210]
------------------------------
In terms of penalties, with the penalties that you will receive from suppliers offset the penalties that you're on the hook for from aircraft sales orders?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [211]
------------------------------
The sales orders and where the positions are in the skyline, where they would take delivery, we were very prudent at promising sales deliveries that we were just prudent at promising. So, we don't anticipate much penalty from -- to our customers. And of course our suppliers will work with us.
------------------------------
Francois Shalom, The Gazette - Media [212]
------------------------------
But this is sort of a self-perpetuating problem though, isn't it? Because if you delay first flight another six months, that first flight milestone bonus I guess you could call it, additional charges you could charge a customer are not going to materialize, right?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [213]
------------------------------
I'm not following you.
------------------------------
Francois Shalom, The Gazette - Media [214]
------------------------------
You're not going to get the first flight additional bonuses until the end of June now instead of December 31?
------------------------------
Pierre Alary, Bombardier Inc. - SVP, CFO [215]
------------------------------
When you say bonus do you mean -- ?
------------------------------
Francois Shalom, The Gazette - Media [216]
------------------------------
Once the aircraft flies, which it was supposed to be December 31, you can charge customers that little bit more or that lot more for that milestone. Is that right?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [217]
------------------------------
I think, Francois, what you're referring to is that when we sell airplanes three or four years before the program, of course you get a discount because the customer's taking a risk on the fact that airplane is in the beginning. As you accomplish milestones, you're able to do away with those discounts. Of course, once you've accomplished first flight, the pricing and you're closer to production, the pricing gets better. So, yes, if you delay first flight you delay the orders we would get at the price after first flight.
------------------------------
Francois Shalom, The Gazette - Media [218]
------------------------------
Did the election yesterday put a crimp in your business aircraft projections with the charges that the administration is trying to impose on business aircraft?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [219]
------------------------------
We've done well in the US and I think we'll continue to do well. Of course the economic recovery is something we're monitoring but I can tell you that in the last few months we've seen a come back in the economy in the US and we're quite excited about that.
------------------------------
Operator [220]
------------------------------
Ross Marowits, The Canadian Press.
------------------------------
Ross Marowits, The Canadian Press - Media [221]
------------------------------
First, I'm wondering if you could clarify about this plant closure and layoff? You said that some of it will take place in North America but can you give an order of magnitude out of the 1,200?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [222]
------------------------------
First of all, what's related to the plant is about 350 employees. And then the rest is more of a reduction in overhead across Bombardier transport. Remember that we have 35,000 employees at transport so this is a reduction of 1,200 employees overall. It is significant because it's 1,200 employees, but on 35,000 it's not a huge adjustment.
------------------------------
Ross Marowits, The Canadian Press - Media [223]
------------------------------
So, in North America then would that be like 10%?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [224]
------------------------------
I can't quantify this right now. We'll give more precision on the actions we've taken in the fourth quarter provided that it's not competitively sensitive.
------------------------------
Ross Marowits, The Canadian Press - Media [225]
------------------------------
The timing of these layoffs would be when?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [226]
------------------------------
These actions are to be taken place next year.
------------------------------
Ross Marowits, The Canadian Press - Media [227]
------------------------------
Next year? By the end of the year?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [228]
------------------------------
As the plan is being developed right now, it's very hard for me to give you the exact timing but these will occur, my anticipation, through next year, but the sooner the better so we can take advantage of the cost reductions.
------------------------------
Ross Marowits, The Canadian Press - Media [229]
------------------------------
So, it will be several months before there are layoffs then?
------------------------------
Pierre Alary, Bombardier Inc. - SVP, CFO [230]
------------------------------
Yes. The other thing to consider is that we have employees that are not permanent employees. They're temporary employees. They'll be the first ones to be impacted. We look at the total, except for the specific plant in Germany, 800 out of 35,000, 36,000 employees. That's not significant. In any given site or any given country, it will not be important at all.
------------------------------
Ross Marowits, The Canadian Press - Media [231]
------------------------------
In terms of the Cseries, you've long talked about working towards the December timeframe. At what point did you realize you weren't going to be able to meet that?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [232]
------------------------------
Recently. But what we wanted to do before we talked about a new date was harmonize our schedule. But I've always said December was our target but three to five months I would consider that on schedule. So, what we thought in the last recent period was to make sure that we had a harmonized schedule before we talked about another date.
------------------------------
Ross Marowits, The Canadian Press - Media [233]
------------------------------
So, it's what? The last two months or so that you realized it wouldn't work?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [234]
------------------------------
It's shorter than that. We've always been pushing with all suppliers to meet the December date but recently it became obvious that some of the components would come later and would not come in the right sequence. So, we decided to come up with the announcement today.
------------------------------
Ross Marowits, The Canadian Press - Media [235]
------------------------------
You had an extra shift to try to gain some time in the schedule. Did things get worse as you went on or get better?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [236]
------------------------------
Things are going quite well. In fact on the Cseries, we do have an extra shift. Our team are working seven days a week. There's a lot of enthusiasm in the team of the Cseries and a lot of dedication. So, things are progressing quite well.
------------------------------
Ross Marowits, The Canadian Press - Media [237]
------------------------------
Did you have to change any suppliers?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [238]
------------------------------
No.
------------------------------
Ross Marowits, The Canadian Press - Media [239]
------------------------------
What guarantee can you provide that you'll actually meet this new schedule? Because it's longer than some people had expected.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [240]
------------------------------
I can understand that. There's no guarantee. But right now the schedule is harmonized and it looks good. We're seeing the components. I'm excited about what I'm seeing as an aircraft. Things are coming together at a good rate and the team is very, very focused. I'm getting it done. I feel very confident. But there is not guarantee.
------------------------------
Ross Marowits, The Canadian Press - Media [241]
------------------------------
I'm sorry, one last thing. Is there any delays to the Learjet 85?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [242]
------------------------------
On the Learjet 85 we're driving to first delivery by the end of '13.
------------------------------
Operator [243]
------------------------------
(interpreted) Daniel Bordeleau, Radio Canada.
------------------------------
Daniel Bordeleau, Radio Canada - Media [244]
------------------------------
(interpreted) Could you repeat again in French for my program what you just said about the Cseries? In other words, to what extent are you confident that you'll be able to meet this June date whereas you're missing the December date? Are you sure?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [245]
------------------------------
(interpreted) There's a lot that we've done, a lot of milestones we've passed with the Cseries. We're starting assembly. The airframe is essentially finished. We've started testing it. We have a harmonized schedule with our suppliers so that we get the components as we need them to assemble the aircraft. I'm very confident we will achieve flight before the end of June. This being said, it's a very complex program. There are still risks. But I believe that as far as I'm concerned, I'm confident we'll keep to that timeline.
------------------------------
Daniel Bordeleau, Radio Canada - Media [246]
------------------------------
(interpreted) Another aspect of the Cseries, recently there was talk about a high density 160 seat version. Is that project still live? Are you going to make a decision soon?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [247]
------------------------------
(interpreted) The CS300, that's just a customer option. If a customer wants a 160 seater, we have it available. It's more a question of seating density rather than a different aircraft. It's available.
------------------------------
Daniel Bordeleau, Radio Canada - Media [248]
------------------------------
(interpreted) Another question about the Q400 in Russia. Can you give us an update? Where are you at this time in terms of discussions?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [249]
------------------------------
(interpreted) Nothing specific about Russia. I think our marketing team always has to evaluate the best way of selling products in various countries. There are discussions in Russia but elsewhere, but the production of Q400 remains in Canada.
------------------------------
Daniel Bordeleau, Radio Canada - Media [250]
------------------------------
(interpreted) So, there's no plan to sell a license to the Russians? It's not a license you're selling them?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [251]
------------------------------
(interpreted) There is no plan to sell a license to the Russians.
------------------------------
Daniel Bordeleau, Radio Canada - Media [252]
------------------------------
(interpreted) Finally, in terms of a potential sale to Delta, when do you hope to see developments?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [253]
------------------------------
(interpreted) Like I said earlier, this is a decision for the customer to make. We're well positioned I think to get the order from Delta. This is a carrier that is operating the CRJ. They like the CRJ. They've had several hundred for years. For us we have a very good offer with good discussions with Delta and we hope that we'll get an order very soon, a decision very soon.
------------------------------
Daniel Bordeleau, Radio Canada - Media [254]
------------------------------
(interpreted) Maybe a final question on the Cseries. You've said a lot -- you've said often in the past that you didn't want to make a plan bigger than the CS300. Is that still true? Would you potentially -- could you potentially decide to have a 180 seater or something like that?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [255]
------------------------------
(interpreted) I think we'll focus on executing the two aircraft we have in development. The CS100 and CS300 and for the future we'll see later.
------------------------------
Daniel Bordeleau, Radio Canada - Media [256]
------------------------------
(interpreted) But you're not ruling anything out?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [257]
------------------------------
(interpreted) I think our focus right now has to be on completing the two aircraft in development.
------------------------------
Operator [258]
------------------------------
(interpreted) Francois Pottier, Journal Dans Les Faits.
------------------------------
Francois Pottier, Journal Dans Les Faits - Media [259]
------------------------------
(interpreted) You've spoken a great deal about something but I'm trying to understand the situation with cash flow and the investments in aerospace and so if I've understand everything correctly, what you've tried to apply this investments, I think that brings you to $2 billion. So, I think your cash flow should be about $1.2 billion in 2012.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [260]
------------------------------
(interpreted) That's right.
------------------------------
Francois Pottier, Journal Dans Les Faits - Media [261]
------------------------------
(interpreted) In 2013 do you think that you'll also be investing $2 billion in aerospace?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [262]
------------------------------
(interpreted) Yes. Roughly that's what we're looking at investing next year.
------------------------------
Francois Pottier, Journal Dans Les Faits - Media [263]
------------------------------
(interpreted) So, the cash flow would be of that order of magnitude?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [264]
------------------------------
(interpreted) We will give a more specific forecast but only when we reach the end of the fourth quarter.
------------------------------
Francois Pottier, Journal Dans Les Faits - Media [265]
------------------------------
(interpreted) If I understand well you have liquidities in the range of $3.5 billion. Is that in terms of lines of credit?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [266]
------------------------------
(interpreted) Yes. That includes lines of credit and $3.5 billion is at the end of the third quarter and the end of the fourth quarter we would like to have a very significant cash flow. Perhaps in excess of $1 billion and liquidities that are at $3.5 billion or $4.5 billion.
------------------------------
Francois Pottier, Journal Dans Les Faits - Media [267]
------------------------------
(interpreted) If we're talking about overall liquidities for both transportation and aerospace, could you use all of this in aerospace or are there ceilings?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [268]
------------------------------
(interpreted) The liquidities that we have help us to operate on a continual basis in the two groups. They provide us with the liquidity that we need to operate.
------------------------------
Francois Pottier, Journal Dans Les Faits - Media [269]
------------------------------
(interpreted) I'm trying to see whether you have $2 billion you could use within aerospace? I think businesses are generally required to respect levels of liquidity.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [270]
------------------------------
(interpreted) Yes. That's true. That's in our documentation with regard to transportation we have roughly $500 million US at the end of the term. So, altogether we're talking about $1.2 billion at the end of the quarter for the two groups but we could use that within the quarter.
------------------------------
Francois Pottier, Journal Dans Les Faits - Media [271]
------------------------------
(interpreted) With regard to Russia you were talking about a peaked interest in regional jets and there's been a lot of discussion around the Q400.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [272]
------------------------------
(interpreted) There is a very significant demand for regional jets and for turboprops in Russia for modern planes, planes that would allow different airlines to modernize their fleet. When we look at the successes that we've had to date, the CRJ 200, there are roughly 100 of these in operation. We also think there is a market for turboprops. There's also a market for the 700, 900, and 1000.
------------------------------
Francois Pottier, Journal Dans Les Faits - Media [273]
------------------------------
(interpreted) This is a little bit vague in terms of discussion. Is there a possibility that these planes may be assembled in Russia?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [274]
------------------------------
(interpreted) Our teams are looking at the best way to meet that demand but there's nothing specific we can mention at this point. We're having discussions throughout the world and we're trying to figure out how we can have the best of business success.
------------------------------
Operator [275]
------------------------------
Susan Taylor, Reuters.
------------------------------
Susan Taylor, Reuters - Media [276]
------------------------------
Can you give us an update on the total cost of Cseries development, what the figure is at right now, is it at $3.4 billion? Is it higher?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [277]
------------------------------
Sometimes I don't split nonrecurring and recurring costs because as we gave you this indication as we started the development program, because it gives you a proxy on how we're planning for the program but as we work through the program we make choices between the right price of the part and the investment up front. So, what I can tell you is that we are meeting the business case when we launched the Cseries and so far if you look at our MD&A we have $2 billion invested in tooling on the Cseries.
------------------------------
Susan Taylor, Reuters - Media [278]
------------------------------
Would it be accurate to put the total development costs at $3.4 billion or $3.5 billion?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [279]
------------------------------
This will vary through time. I don't want to give you the exact number of non-recurring because you would not have the complete tooling or nonrecurring what we call it inside. You would not have the complete information because there's been so many choices made in the last few years. But the business case, we are meeting it.
------------------------------
Susan Taylor, Reuters - Media [280]
------------------------------
Previously you had said that by the end of 2013 you had expected 300 firm orders. Is that figure, is that target still achievable at this point?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [281]
------------------------------
I think we're in good shape with the Cseries to continue to get a good order level and meet the targets we have set.
------------------------------
Susan Taylor, Reuters - Media [282]
------------------------------
So, you think you can meet that target of 300 firm then?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [283]
------------------------------
I think the target of 300 firm was a number derived from other programs but I do feel we're in a good position to have the orders we need to cover our skyline, our production schedule for several years.
------------------------------
Susan Taylor, Reuters - Media [284]
------------------------------
Currently the production schedule or skyline extends out how far? To 2016?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [285]
------------------------------
We're into '16 at this point. We're going to take our time to ramp up the production in order to make sure we meet our customer commitment.
------------------------------
Susan Taylor, Reuters - Media [286]
------------------------------
You mentioned earlier that shifts are now working I guess at Mirabelle at seven days a week. Are they still doing three shifts 24 hours a day?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [287]
------------------------------
It depends on the components. Where we need to, our employees are very dedicated, very enthusiastic about the program. Where we need to we have no issue to bring people around the clock and in other areas it serves no purpose to be there 24 hours a day. But you need to be there seven days a week. If you were to go to Mirabelle on the weekend, you'll see a lot of cars on the driveway.
------------------------------
Susan Taylor, Reuters - Media [288]
------------------------------
One last question about the harmonizing of the schedule. I guess I need your help on understanding why that wasn't something that was previously in place. It strikes me with all the components and parts coming in the schedule must've been harmonized before now. But you're telling us today that this is something new that's happened?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [289]
------------------------------
You're exactly right. We had a harmonized schedule. But what happens through time is you get a supplier that delays and then you get another one that delays and then in the end you're getting components in the wrong sequence. You get the pressure on them to meet the date, their latest date, but at one point it serves no purpose to get the parts in the wrong sequence. So, then we reharmonize the schedule based on the reality that we have.
------------------------------
Susan Taylor, Reuters - Media [290]
------------------------------
I know you've been asked about this but give us an idea of what kind of suppliers there were issues with that were effected by these delays. Was it software? Was it something else?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [291]
------------------------------
There's many suppliers on an aircraft. There's 55 tier one suppliers on this aircraft, so first level. And then after that there's over 300. It's not a specific system. The most complex systems are the one we've spoken about in the past and the most complex systems have a lot of software in them. So, in software, what you will see is we will get several drops and we need to get the one that we can release for flight to go to first flight. So, yes, software is a big part of the challenge that we have be there is software everywhere in a product like a modern aircraft of today.
------------------------------
Operator [292]
------------------------------
Molly McMillin, Wichita Eagle.
------------------------------
Molly McMillin, Wichita Eagle - Media [293]
------------------------------
I have just kind of a two part question. One, I'm wondering the effect of the strike here in Wichita on your customers and on your production and then also on the 70, 75, and 85 program.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [294]
------------------------------
So far, we've been managing it quite well although it's frightened quite a few employees at work. So, I don't think there's an effect so far. The good news is we have a mediator now that's been asked to come in and work with us at trying to find a resolution because what we want is to find a resolution and get all our employees back to work. But so far there is no impact on our customers or on the Lear 85 program.
------------------------------
Molly McMillin, Wichita Eagle - Media [295]
------------------------------
Also in the press release you had there were 45 net orders in the quarter for business aircraft and that includes 19 for the global family. How many of those were for Learjets?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [296]
------------------------------
We didn't specify. I don't think we've released this information. If we have, we will send it to you but I don't think that's part of the release.
------------------------------
Molly McMillin, Wichita Eagle - Media [297]
------------------------------
What has been the market for Learjets. You mentioned that stuff is certainly more difficult for the smaller jets there.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [298]
------------------------------
It's like every manufacturer at the smaller end of the business has been difficult although we have two new products, the 7075. Our customers are excited about them. To that end it's been much better.
------------------------------
Operator [299]
------------------------------
(interpreted) [Matt Angelique], Journal Dans Les Faits.
------------------------------
Matt Angelique, Journal Dans Les Faits - Media [300]
------------------------------
(interpreted) If the new deadline is June, there is the new deadline you're also talking about April?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [301]
------------------------------
(interpreted) We were talking about the cast test, the structural test. That is in a facility, these are static tests. We were looking at doing these structural tests and we believe that these tests will be completed by mid-April.
------------------------------
Matt Angelique, Journal Dans Les Faits - Media [302]
------------------------------
(interpreted) So, you're still thinking about an inaugural flight in June?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [303]
------------------------------
(interpreted) Yes. That's it.
------------------------------
Matt Angelique, Journal Dans Les Faits - Media [304]
------------------------------
(interpreted) Delivery of planes, would the delivery take place before the end of 2013?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [305]
------------------------------
(interpreted) We've said that it would take place approximately one year after the test flight.
------------------------------
Matt Angelique, Journal Dans Les Faits - Media [306]
------------------------------
(interpreted) So, does that mean the delivery is also pushed back by six months?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [307]
------------------------------
(interpreted) It's pushed back but that doesn't necessarily have an impact on the clients because delivery to the clients is of course a separate issue.
------------------------------
Matt Angelique, Journal Dans Les Faits - Media [308]
------------------------------
(interpreted) Will employees be called back to work six months later? What effect will this have on employees?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [309]
------------------------------
(interpreted) Yes. If production begins later, the call backs for employees for production would also be pushed back later.
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Matt Angelique, Journal Dans Les Faits - Media [310]
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(interpreted) How many employees are we talking about here?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [311]
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(interpreted) I haven't looked at the number of employees that we would need. I couldn't tell you.
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Matt Angelique, Journal Dans Les Faits - Media [312]
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(interpreted) Are we talking about several hundred?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [313]
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(interpreted) We have more than 10,000 employees in aerospace in Montreal. We're already a considerable employer in the field.
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Matt Angelique, Journal Dans Les Faits - Media [314]
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(interpreted) With the CCREs in particular?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [315]
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(interpreted) As I told you, I don't have that information with me. If you would like to call after the conference call we could try and find it if we have it for you and we could give you a little bit more information.
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Operator [316]
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Zachary [Pollock], Aviation International News.
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Zachary Pollock, Aviation International News - Media [317]
------------------------------
Just a quick question again about the Cseries. Do you know who the first operator is going to be yet?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [318]
------------------------------
Yes. We do. It's an undisclosed customer.
------------------------------
Zachary Pollock, Aviation International News - Media [319]
------------------------------
Any particular reason it's still undisclosed.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [320]
------------------------------
It's a commercial reason between us and the customer and we're working on that.
------------------------------
Zachary Pollock, Aviation International News - Media [321]
------------------------------
Will that customer be paid a penalty for the delay.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [322]
------------------------------
Each customer we're discussing on the influence of the delay of six months but as I said before we had considered when we committed to this position we had considered some contingencies. So, I don't expect the penalties to be big.
------------------------------
Operator [323]
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Caroline Fine-Asphalt, Wall Street Journal.
------------------------------
Caroline Fine-Asphalt, Wall Street Journal - Media [324]
------------------------------
I just wanted to follow-up to clarify that as of now Bombardier has $2 billion invested in the Cseries program. Is that correct? And the total cost of the entire program is estimated to be $3.4 billion or $3.5 billion?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [325]
------------------------------
The $2 billion, you'll find that in our MD&A where we give you the information on tooling. That's correct. We have $2 billion invested in the Cseries. And the $3.4 billion was the original number we gave at the beginning of the program as an indication of the size of this investment. This has varied as they always do in program because we make a choice between tooling and the price of the parts so that number will be different.
------------------------------
Caroline Fine-Asphalt, Wall Street Journal - Media [326]
------------------------------
Is that estimated $3.4 billion, $3.5 billion, is that the Bombardier share or the total cost of the program?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [327]
------------------------------
That was the total cost of the program.
------------------------------
Caroline Fine-Asphalt, Wall Street Journal - Media [328]
------------------------------
I just ask on the $2 billion because I have previously been told it was $2.5 billion.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [329]
------------------------------
If you look at our MD&A we're very transparent. It's $2 billion. You have that information.
------------------------------
Operator [330]
------------------------------
Marie Tison, The Press
------------------------------
Marie Tison, The Press - Media [331]
------------------------------
(interpreted) Just a question on Russia. I'd like to know what's happening with the CRJ9000 and its certification. Is there anything new to be said on that front?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [332]
------------------------------
(interpreted) We're expecting certification to come soon but I can't tell you about all the different stages in that process but I think they're going well.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, Investor Relations [333]
------------------------------
Operator, do we have any more questions?
------------------------------
Operator [334]
------------------------------
There are no further questions at this time.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, Investor Relations [335]
------------------------------
Thank you very much, everybody, for participating with us today. Have a good day.
------------------------------
Operator [336]
------------------------------
Thank you. The conference has now ended.
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Editor [337]
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Portions of this call 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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