Q4 2012 BOMBARDIER INC Earnings Conference Call
Feb 21, 2013 AM EST
BBD.B.TO - Bombardier Inc
Q4 2012 BOMBARDIER INC Earnings Conference Call
Feb 21, 2013 / 03:00PM GMT
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Corporate Participants
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* Shirley Chenier
Bombardier Inc. - Senior Director, IR
* Pierre Beaudoin
Bombardier Inc. - President and CEO
* Pierre Alary
Bombardier Inc. - SVP and CFO
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Conference Call Participants
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* Walter Spracklin
RBC Capital Markets - Analyst
* Seth Seifman
JPMorgan - Analyst
* Fadi Chamoun
BMO Capital Markets - Analyst
* Cameron Doerksen
National Bank Financial - Analyst
* Benoit Poirier
Desjardins Securities - Analyst
* Noah Poponak
Goldman Sachs & Co. - Analyst
* Turan Quettawala
Scotiabank - Analyst
* David Newman
Cormark Securities Inc. - Analyst
* Peter Arment
Sterne, Agee & Leach - Analyst
* Hamzah Mazari
Credit Suisse - Analyst
* Steve Hansen
Raymond James Limited - Analyst
* David Tyerman
Canaccord Genuity - Analyst
* Stephen Trent
Citi - Analyst
* Chris Murray
PI Financial Corp. - Analyst
* Tom Astle
Byron Capital Markets - Analyst
* Neal Dihora
Morningstar Inc. - Analyst
* Anthony Scilipoti
Veritas Investment Research - Analyst
* Marie Tison
La Presse - Media
* Matt Angelique
- Media
* Molly McMillin
Wichita Eagle - Media
* Daniel Bordeleau
Radio-Canada - Media
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Presentation
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Operator [1]
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(Spoken in French). 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, IR [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 open the media question period.
Shortly Mr. Pierre Beaudoin, President and Chief Executive Officer, and Mr. Pierre Alary, Senior Vice President and Chief Financial Officer, will discuss Bombardier's financial results for the fourth quarter and year ended December 31st, 2012.
(Interpreted). This conference call is broadcast live on the Internet and is also interpreted in English and in French.
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 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 tat I am making this cautionary statement on behalf of each speaker whose remarks today will contain forward-looking statements.
Pierre Beaudoin will now begin the presentation.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [3]
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(Interpreted). Hello, and welcome to the conference call.
Before Pierre walks you through the financial results in more detail, I would like to cover a few points. Our results in 2012 are not reflective of our potential as we faced some execution issues. We were also affected by some events that were circumstantial in nature, such as a temporary drop in revenue generated from China, which has traditionally been a strong market for us. We're now back to normal and expect to see a significant increase in business from that region in 2013.
After proving our resilience through the economic crisis, today we are at a turning point. With our impressive total order book of close to $67 billion, we are forging ahead with breakthrough products and extending our reach in pivotal growth markets.
The backlog in Transportation has continued to increase, reaching a record amount of $33.7 billion at the end of the year, compared to $31.9 billion last year. This shows that our powerful lineup of products, combined with our commitment to customer support, is paying off.
And our project management capabilities remain a key component for flawless execution as we deliver on this record backlog.
In addition, Transportation has taken specific measures to restructure its activity. We are closing a plant in Germany, and reducing both direct and indirect personnel in order to improve our cost structure. These steps, among others, are aimed at securing our foundation for sustainable and profitable growth, while increasing our long-term competitiveness. We've adjusted the timeline and are confident we will reach our target of 8% EBIT margin by 2014.
In Aerospace, our development programs are making good progress. The C-series is entering its flight test program in 2013, with first flight scheduled to take place by the end of June. You will have the opportunity to see the first flight vehicle for yourself on March 7th in Mirabel.
In 2012, we saw a very strong level of new orders and are delivering -- and our deliveries were within guidance. We continued to invest in our service network by further expanding our geographical footprint and increasing our proximity to our customer base.
On the order front, Aerospace had a very strong year with a book-to-bill of 2.1, bringing our backlog to a record level of $33 billion compared to $23.9 billion last year, a 38% increase. This bodes well for future delivery, especially towards the end of 2013 and '14. This strong backlog gives us the visibility we needed to set a new target of 8% EBIT margin by 2014, before an anticipated 2% dilutive impact from the C-series entering into service.
As for investment in new programs, we expect net addition to property, plant, and equipment and intangible assets to decrease by $500 million in 2014, and by another $500 million in 2015. This will bring us to a more normal and sustainable level of investment in aircraft programs going forward.
And before I let Pierre review the financial results in more detail, I would be remiss not to mention the events we announced yesterday. First, our customer Ilyushin Finance Corporation signed a purchase agreement for up to 42 CS300 aircraft. This transaction follows a letter of intent signed in 2011 for up to 30 CS300 aircraft.
And Pratt & Whitney received Transport Canada type certification for the Geared Turbofan engine that will power the C-series.
Pierre?
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Pierre Alary, Bombardier Inc. - SVP and CFO [4]
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Thank you, Pierre. Good morning. Before I review the financial results, I would like to highlight the fact that we have introduced certain non-GAAP measures such as EBIT before special items, adjusted net income, and adjusted EPS. We believe that these measures enhance the understanding of our results and related trends and increase transparency and clarity into the core results of the business, therefore enabling a better comparability from one period to another and with our peers. These adjustments are described in detail on page 45 and 46 of the MD&A.
Now, let's review the financial results, starting with Aerospace. Q4 Aerospace revenues total $2.6 billion compared to $2 billion last year, mainly due to a higher volume as our fourth quarter of last year comprised only two months.
Q4 EBIT margin is at 3.4% compared to 6.3% last year. The decrease is mostly attributable to higher expenses, including a negative impact of foreign exchange, and lower net selling prices, mainly in the light category of business aircraft.
For the full year, revenues totaled $8.6 billion, the same level as last year. The EBIT margin is 4.7%, in line with our guidance.
Moving to Transportation, BT Q4 revenues totaled $2.2 billion, compared to $2.3 billion last year. This lower level of revenues is mainly due to the phasing out of major projects in some regions, partly offset by higher activity in services.
EBIT margin before special items is at 4%, compared to 7.2% last year, explained by a lower gross margin due to execution issues in a few projects, partly offset by higher margin in services, and lower SG&A expenses.
For the full year, BT revenues totaled $8.1 billion. Excluding the foreign exchange impact of $433 million, this represents a decrease of 12% over last year. EBIT margin before special items is at 5.6%.
On a consolidated basis, Q4 revenues totaled $4.8 billion, while EBIT before special items totaled $175 million.
Net financing expenses amounted to $33 million, and with an income tax recovery resulting from the recognition of previously unrecognized income tax benefit, adjusted net income for the quarter totaled $188 million, or $0.10 per share.
For the full year, adjusted net income totaled $692 million or $0.38 per share, compared to $865 million or $0.48 per share last year.
Consolidated free cash flow for Q4 amounted to $850 million compared to $590 million last year. As a result, we ended the year with a cash balance of $2.9 billion.
For the full year, Aerospace generated $1.1 billion of cash flow from operating activities, and invested $2 billion in our significant investment program.
For the full year, Transportation generated $386 million of free cash flow, pretty much in line with its profitability.
In a period of exceptionally high level of investment, we constantly monitor our level of liquidity and take advantage of capital market conditions to ensure financial flexibility. It is in that context that in January, subsequent to the year end, we issued $2 billion of unsecured senior notes to shore up our liquidity.
Our available short-term capital resources reached $4.3 billion at year end. And furthermore, on a pro forma basis, giving effect to this debt issuance, available short-term capital resources total $6.3 billion.
Our cash flow generated from operations, together with our solid liquidity, are ensuring our financial flexibility to support our major investment program in Aerospace, where we expect to invest approximately $2 billion again in 2013.
Now looking forward, if you look at our results for 2012, they are not reflective of our potential. Looking forward we expect significant improvement.
For Aerospace, we expect strong revenue growth from a record backlog and new products entering service in 2014. We expect an EBIT margin of 6% by 2014, after a 2% dilutive effect from the entry into service of the C-series aircraft. This is equivalent to an EBIT margin of 8% before this dilutive effect.
We expect cash flow from operating activity of $1.4 billion, while the investment in our program will be at approximately $2 billion for 2013.
You should know that this level of investment is expected to decrease by approximately $500 million in 2014, and in 2015, to bring us to a more normal and sustainable level of investment going forward.
For Transportation, we expect revenue for 2013, excluding currency impact, to increase by a percentage in the high single digits. We expect EBIT margin to gradually reach 8% by 2014, and we continue to anticipate to generate free cash flow generally in line with profitability.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [5]
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So, in conclusion, three main drivers will deliver long-term sustainable growth. First, a powerful product and service offering, as reflected by record backlog in both groups, and this soon to be fortified further as several innovative platforms roll out our facilities in 2014 and beyond, second, our expanding footprint in pivotal growth markets worldwide, and third, a strengthened customer satisfaction through flawless execution on every order.
These are exciting times at Bombardier and we are on the cusp of generating significant revenue growth. Thank you.
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Questions and Answers
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Shirley Chenier, Bombardier Inc. - Senior Director, IR [1]
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Thank you, Pierre. We will now start a question period for analysts and investors. So, in order to keep the duration of this call reasonable, I would ask you to limit yourself to one question to give everyone a chance to participate. If you have any remaining questions at the end, and if time permits, you can get back in queue, and, if not, you can contact me directly after this conference call.
We can now start with the first question. Operator?
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Operator [2]
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(Spoken in French). (Operator Instructions). Our first question is from Walter Spracklin from RBC Capital Markets. Please go ahead.
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Walter Spracklin, RBC Capital Markets - Analyst [3]
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Yes, thank you very much. Good morning, everyone.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [4]
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Good morning.
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Shirley Chenier, Bombardier Inc. - Senior Director, IR [5]
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Good morning.
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Walter Spracklin, RBC Capital Markets - Analyst [6]
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So, my first -- my question here, I guess, is on the BT margins. I know you gave some guidance there for pushing back your 8% expectation out to 2014. I'm just curious, I understanding the execution issues with China and how they've come back to normal here. That makes sense. Where I'm a little puzzled is the execution issues that seem to be ongoing in the other contracts and my question is whether these execution issues are still related to the same contracts that you were having problems with before, or are these new contracts, and, therefore, would they, therefore, continue to have a negative impact going into 2013?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [7]
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Well, first of all, Walter, good morning. You spoke of execution issues in China. I think you meant the revenue that came down because we were between two contracts. We never -- we don't have execution issue in China.
The second one is, they were related to the same contract we spoke before, and these contracts now are quite advanced, and we feel that, as you know, we are in contract accounting. We feel that we've recognized costs, the extra costs, related to these contracts.
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Walter Spracklin, RBC Capital Markets - Analyst [8]
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So, they'll be contained to 2012 and you won't see these, necessarily, in 2013?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [9]
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Exactly.
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Walter Spracklin, RBC Capital Markets - Analyst [10]
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Okay. Thank you very much.
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Operator [11]
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Thank you. Our next question is from Joe Nadol from JPMorgan. Please go ahead.
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Seth Seifman, JPMorgan - Analyst [12]
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Hi, good morning, everyone. Actually, it's Seth, on for Joe this morning.
I was wondering if you could give us some insight into what we should expect in terms of the net financial expenses, financial income and financial expenses, this year, given the increase in the interest expense from the new debt and the higher pension expense?
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Pierre Alary, Bombardier Inc. - SVP and CFO [13]
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Yes, I would say that the net financial expense, on an adjusted basis, that would be before the interest on the retirement benefit, you should expect something around $30 million to $35 million a quarter.
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Seth Seifman, JPMorgan - Analyst [14]
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But that's before pension expense?
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Pierre Alary, Bombardier Inc. - SVP and CFO [15]
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That's before pension expense, yes.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [16]
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Well, it's before the new IFRS --
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Pierre Alary, Bombardier Inc. - SVP and CFO [17]
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Exactly, yes. It's before the new -- before interest expense on retirement benefits, and there's a change in accounting principle with respect to the retirement benefit, and starting with the January 1st, 2013, the expense will be calculated using a discount rate on the net liability, as opposed to use the interest income on the expected return on the asset side and the discount rate on the gross liability.
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Seth Seifman, JPMorgan - Analyst [18]
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Okay, so it would be $30 million to $35 million per quarter, in the IFRS number, plus the pension expense?
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Pierre Alary, Bombardier Inc. - SVP and CFO [19]
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Exactly.
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Seth Seifman, JPMorgan - Analyst [20]
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Okay, great. Thank you very much.
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Operator [21]
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Thank you. Our next question is from Fadi Chamoun from BMO Capital Markets. Please go ahead.
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Fadi Chamoun, BMO Capital Markets - Analyst [22]
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Good morning. I want to explore the Aerospace EBIT margin a little bit more. Your margin in Q4 was 3.4%, which I think was the weakest Q4 in a number of years, despite higher delivery, and now you're saying it will look like flat in 2013 at 4.4%, and then go up to 8% in 2014, which is a pretty significant increase in 2014. Can you walk us through what's behind, first, the weakness in Q4, and why aren't we seeing improvement in 2013, despite higher deliveries? And how do you get to the 8% in 2014, please?
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Pierre Alary, Bombardier Inc. - SVP and CFO [23]
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Yes, well, in Q4 of 2012, the increased volume came a lot from the Lear family, so the lower end of our business aircraft, and that's where we have the most pricing pressure, if you'd like. And so, there was a lot of deliveries, and that has a dilutive effect, together with the fact that we delivered a lot of used aircraft, which also impacted the -- that quarter.
Now, going forward, with the very high level of new orders that we signed in 2012, these will really get starting to get reflected towards the -- the benefit of it towards the end of 2013, and, obviously, in '14. And that's where we're going to see the upside coming from that high level of orders. So, that's why we're having a result for 2013 pretty much at the same level as 2012, on a percentage basis.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [24]
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Yes, maybe I should add just some color to Pierre -- what Pierre said for Q4. You remember in the Lear 40/45, we're phasing out of these two models, and we're going to go to the 70/75. And we wanted to make sure that we sold these units as fast as possible, because this end of the market is weak, and also, in used aircraft to be aggressive in Q4 so we don't carry used forward.
I give you some numbers. We moved on white tails from 8 in Q3 to 3 white tails in business aircraft, and in pre-owned we sold 15 in Q4. These are significant numbers in the quarter. We knew it would compromise the margin, but we felt it was the right thing to do and look forward.
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Fadi Chamoun, BMO Capital Markets - Analyst [25]
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Okay. Are you assuming, then, in 20 -- like, are you assuming a recovery in commercial production in 2014? I'm just trying to understand if the 8% in 2014 you're looking at is primarily driven by the business aviation side, or are you assuming some recovery in commercial, as well?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [26]
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In commercial, we're going to start benefiting from orders that we got at the end of the year last year. We don't expect a big recovery, but some recovery.
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Fadi Chamoun, BMO Capital Markets - Analyst [27]
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So, a bit of increase in production rate, then, in 2014 on commercial? Is that the idea?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [28]
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Yes. Yes, but nothing significant, because I think we want to be prudent here. We'll see when the next RJ orders come through, with what's going on in the North American market. I think we may have a significant opportunity in front of us, but, as you know, it takes time to ramp up programs.
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Fadi Chamoun, BMO Capital Markets - Analyst [29]
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Okay. So, it does sound, then, in 2013 you're calling for flat margin versus 2012, but your production are higher in business jets. So, it does sound like you're probably leaning more on the conservative end with the margin in 2013?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [30]
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Well, what I would say to you, Fadi, and we've been through that before together. What you deliver in '13 are probably orders you took two years ago, and at the time two years ago, the market was very fragile, as you remember. So, you always have to think when we go through a very strong year of orders, we will benefit from it, but it takes a little bit of time.
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Fadi Chamoun, BMO Capital Markets - Analyst [31]
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Okay, thank you. That's helpful.
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Shirley Chenier, Bombardier Inc. - Senior Director, IR [32]
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Thank you, Fadi
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Operator [33]
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Thank you. Our next question is from Cameron Doerksen from National Bank Financial. Please go ahead.
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Cameron Doerksen, National Bank Financial - Analyst [34]
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Yes, good morning.
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Shirley Chenier, Bombardier Inc. - Senior Director, IR [35]
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Good morning, Cam.
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Cameron Doerksen, National Bank Financial - Analyst [36]
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A question on the Transportation margin target. Firstly, just a clarification. You've mentioned 8%. Is that 8% going to be reached in 2014 or is your expectation that you'll have 8% for the full year? And, I guess, in either case, how do you expect to get to that level? I mean, you've been running at a margin that's quite a bit lower than that in recent quarters.
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Pierre Alary, Bombardier Inc. - SVP and CFO [37]
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Yes, you're right that the margin was lower than that in the recent quarter, which was impacted by the execution issue that we referred to in a number of contracts. But if you go back the previous two years, we were at 7.2%. So, 8% is not out of reach, clearly, and we've got good visibility with the backlog. So, the 8% is for 2014 as a whole. So, it's 8% for the full year, and we anticipate to gradually get there. So, you can expect improvement in 2013 already.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [38]
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And we spoke about that 8% in Q3 and I believe Q2 also, and we also said we want to talk about it in more detail at the Q4 call, because this is after we've had a chance to go through a complete review of contracts that are in our plan or in our budget. So, we feel comfortable with the 8%, because we've gone through and analyzed. It's a contract-by-contract analysis.
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Cameron Doerksen, National Bank Financial - Analyst [39]
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Okay, thanks.
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Shirley Chenier, Bombardier Inc. - Senior Director, IR [40]
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Thank you.
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Operator [41]
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Thank you. Our next question is from Benoit Poirier from Desjardins. Please go ahead.
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Benoit Poirier, Desjardins Securities - Analyst [42]
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Good morning. You provide some very color about the C-series impact in 2014. I was wondering if you could provide some color about the -- your delivery expectation, and also what is going to be the production following -- in the next following two or three years?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [43]
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Well, we're not a point to provide exact numbers in production. I've been asked before what would be a plan, if you want, for production. We want to get to 120 airplanes per year, maybe three years, three and a half years, down the road. So, you think of the first year, the number would be somewhere between 20 and 30.
And it may vary from there. I'm just giving you some color, like you said.
And then, we'll gradually ramp up from there. We're going to be careful in our ramp-up, although it's quite fast over three years, because we have a new model coming in, at the end of '14, in production in '15, that would be the 300. So, just think of getting to 120 over three and a half years, starting with what I told you.
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Benoit Poirier, Desjardins Securities - Analyst [44]
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Okay, thanks. Thank you very much.
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Shirley Chenier, Bombardier Inc. - Senior Director, IR [45]
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You're welcome.
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Operator [46]
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Thank you. Our next question is from Noah Poponak from Goldman Sachs. Please go ahead.
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Noah Poponak, Goldman Sachs & Co. - Analyst [47]
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Hi, good morning, everybody.
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Shirley Chenier, Bombardier Inc. - Senior Director, IR [48]
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Good morning, Noah.
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Pierre Alary, Bombardier Inc. - SVP and CFO [49]
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Good morning.
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Noah Poponak, Goldman Sachs & Co. - Analyst [50]
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Just in an effort to understand a little better what you're seeing in the business jet market, you're -- I guess you're forecasting a little bit of growth on a total basis in 2013 versus '12. Maybe if you can give us a little color on how that breaks down by segment or by aircraft type, and then maybe if you can talk about what your expectation is for orders, compared to deliveries, if you're willing to do that, by segment type, as well, that would be very helpful.
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Pierre Alary, Bombardier Inc. - SVP and CFO [51]
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Well, in terms of the growth, we're referring to approximately 190 units business aircraft in 2013 delivery versus 2012. So, that's -- it's approximately, but if you look at versus 179, that's 11 units more. And we don't give, obviously, guidance specific which model or family, but over the past few years, clearly, the larger family, Global Express, have done very well. The Challenger family has done well, and, on the smaller ones, less so. So, you can imagine that the progression or the growth will be according to how each of those markets have been impacted, basically.
And in terms of book-to-bill, we don't give guidance on book-to-bill, but we expect some growth. So, therefore, above 1.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [52]
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Yes, we're seeing -- we expect a good market in 2013. Now we have to be careful to compare to 2012, because we had two very large fleet orders. It's not that we don't have other potentials there, but these are very binary. You either get them or not. So, I would be very careful in going on your number from 2012, but at the same time, I think our product line is strong where the market is strong. So, like Pierre said, I think as the markets grow we expect a good book-to-bill.
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Noah Poponak, Goldman Sachs & Co. - Analyst [53]
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Are you seeing any signs of life in small cabin, at all?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [54]
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For us, it would be hard to judge right now, because we're transferring from 40/40, which is in the upper end of the small cabin airplane, if I can say, and, given that we're transferring to a renewed line of products, 70/75, we have great orders there, and pricing is to expectation, but does it reflect the market, or does it reflect the customers just going to our new models, customers that we have in our product line today?
I think we have to be careful in interpreting the success of the 70/75. The market continues to be difficult, overall.
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Noah Poponak, Goldman Sachs & Co. - Analyst [55]
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Okay. Thanks very much.
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Shirley Chenier, Bombardier Inc. - Senior Director, IR [56]
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You're welcome.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [57]
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For small aircraft, just to be sure I'm precise.
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Operator [58]
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Thank you. Our next question is from Turan Quettawala from Scotiabank.
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Turan Quettawala, Scotiabank - Analyst [59]
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Yes, good morning. My question was on Aerospace free cashflow guidance. Over the last couple of years you've given guidance on free cashflow, at the beginning of the year, sort of being close to zero, with CapEx sort of being in that $2 billion range.
I know you changed that guidance in Q3 of last year, but I'm just wondering. This year you're sort of starting the year with lower free cashflow guidance and the CapEx hasn't changed. So, are you expecting slower order flow or slower conversion? Sort of any color there would be helpful. Thank you.
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Pierre Alary, Bombardier Inc. - SVP and CFO [60]
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Yes, well, I guess when we look at what is needed to -- if we were to be breakeven at $2 billion of investment, that means we need to do $2 billion of cashflow from operations. And cashflow from operations, when you look at profitability that we talked about, similar to last year, that means that it's a change in the working capital, a positive change in the working capital of about $1 billion. So, looking at all of our components, what we can do on the inventory side, on the advances from customers, and so on, we feel that $1.4 billion is a good achievement in 2013.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [61]
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I'd just add a little bit of color to this. We -- for quite a few years the industry expected business aircraft to bounce back from the 20080 slowdown, and we've seen some growth in business aircraft, particularly in the large, but I think as we plan forward today we're more conservative, as an industry, in looking how business aircraft will recover or will get back to what was pre-2008. So, our business plans reflect that now.
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Turan Quettawala, Scotiabank - Analyst [62]
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So, I guess you're being a little bit more conservative in terms of order flow, then, is that -- is that the right way to look at it?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [63]
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Well, it's a hard one to answer it like this, because it depends how the market will behave. It's still an unstable economy, in many parts of the world, although there's great sign in the US of a recovery. But I think we're more in line with what the industry -- we're in line with what the industry sees today, and in previous years we were in line with the industry, also, but the industry was more optimistic, if I can say it this way.
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Turan Quettawala, Scotiabank - Analyst [64]
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Fair enough. And if I could just sneak one more in there, quickly, in terms of BT, the cash impact of that charge that you booked in the quarter, is that going to be in 2013?
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Pierre Alary, Bombardier Inc. - SVP and CFO [65]
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The majority of it, yes.
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Turan Quettawala, Scotiabank - Analyst [66]
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Thank you. Okay, and, actually, Pierre, can you tell me first half, second half? Is that possible, or --?
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Pierre Alary, Bombardier Inc. - SVP and CFO [67]
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More so in the second half, I believe.
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Turan Quettawala, Scotiabank - Analyst [68]
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Okay, great. Thank you very much.
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Pierre Alary, Bombardier Inc. - SVP and CFO [69]
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It's going to be gradual, during the year.
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Turan Quettawala, Scotiabank - Analyst [70]
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Okay. So, you mean sort of more equally through four quarters, then?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [71]
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There's a lot of personnel in there, I would say, Q2, Q3.
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Pierre Alary, Bombardier Inc. - SVP and CFO [72]
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For example, with Aachen, we're negotiating and discussing with the union to get to a full agreement, and so that could be in the second quarter. It could be move to the --
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Pierre Beaudoin, Bombardier Inc. - President and CEO [73]
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But, at the same time, we've planned an indirect reduction of personnel of 1,200 people, and this is the one that's harder to plan, because Aachen is how many, Pierre, it's a hundred -- a few hundred in there. So, the majority is not in Aachen, and planning those 1,200 and depending when we make it happen, what are the contracts with our employees. So, that's why we're having a hard time to give you a perfect split of that.
But it's going to be through the year, I would say, concentrated probably Q3, Q4 -- Q2, Q3, I'm sorry.
------------------------------
Turan Quettawala, Scotiabank - Analyst [74]
------------------------------
That helps. That's very helpful. Thank you.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [75]
------------------------------
Thank you, Turan.
------------------------------
Operator [76]
------------------------------
Thank you. Our next question is from David Newman from Cormark Securities. Please go ahead.
------------------------------
David Newman, Cormark Securities Inc. - Analyst [77]
------------------------------
Good morning.
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [78]
------------------------------
Good morning.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [79]
------------------------------
Good morning, David.
------------------------------
David Newman, Cormark Securities Inc. - Analyst [80]
------------------------------
Just on the new programs with the Lear 85 delayed, and I guess we had the previous delays in the CRJ1000, is there any takeaways on the C-series at all, any learnings you can get from that? And I think, Pierre, I think you mentioned the last go 'round that there's like six or seven software drops. We see the aircraft being put together nicely, structurally, being tweeted out, but any sense on where you are, just related to the software?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [81]
------------------------------
Yes, I think it's hard to compare the two programs, the Lear 85 and the C-series.
------------------------------
David Newman, Cormark Securities Inc. - Analyst [82]
------------------------------
For sure.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [83]
------------------------------
They both have their complexity. If I can speak of the Lear 85, the complexity there is mainly in developing an all-composite airplane. The rest of the systems of this aircraft are pretty much systems that we understand and have done before, and the engine is already on other business aircraft.
So, I think we understand the -- what to do very well, and we have, because of the technology, we have some challenge, but I think looking forward now, it's pretty straightforward and it's working with systems that we understand very well. So, it's not a fly-by-wire aircraft, as an example.
So, I think the Lear 85, you think of an entry into service summer of '14, it's a good date to -- I feel confident we can achieve this date in summer 2014.
------------------------------
David Newman, Cormark Securities Inc. - Analyst [84]
------------------------------
Okay, and the C-series, the software drops where you might be on those sort of six or seven major software drops you talked about previously?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [85]
------------------------------
Well, we're on track to fly by the end of June. They will give you a full, detailed briefing on the 7th of March. So, on this, I'd rather leave it at there. I can tell you that, like any of these schedules, there is some challenge, but I still feel very confident that we'll fly in June.
------------------------------
David Newman, Cormark Securities Inc. - Analyst [86]
------------------------------
Okay. And last one, if I can squeeze it in, just on the Learjet 85, did you take any cancellations at all related to the delay? I see 17 cancellations in the quarter on the business jet side. Anything related to that program?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [87]
------------------------------
It's not related to the delay. There will be some movement in this skyline, I expect, because these orders that were taken quite some time ago, and it's typical as we get into milestone payments that you're going to change customers. Some customers that bought four or five years ago may not be able to fulfill their contract.
So, I'm not worried about that. The demand of the aircraft is good, and I expect that if we lose some, we'll replace them easily --
------------------------------
David Newman, Cormark Securities Inc. - Analyst [88]
------------------------------
Okay.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [89]
------------------------------
-- with better price, by the way.
------------------------------
David Newman, Cormark Securities Inc. - Analyst [90]
------------------------------
Thank you.
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [91]
------------------------------
When you look at the level of cancellation, that's the normal level, overall.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [92]
------------------------------
Yes, it's nothing --
------------------------------
David Newman, Cormark Securities Inc. - Analyst [93]
------------------------------
Okay. Okay
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [94]
------------------------------
For the all business aircraft.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [95]
------------------------------
And sometimes it's not a cancellation, per se, it's someone that says I don't want to wait any more, I'll take a Challenger 300. And that's fine with us.
------------------------------
David Newman, Cormark Securities Inc. - Analyst [96]
------------------------------
Okay, so you gross it up, then you net it off.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [97]
------------------------------
Right.
------------------------------
David Newman, Cormark Securities Inc. - Analyst [98]
------------------------------
You mentioned you had 60 Learjet 85 orders previously. I don't know if you've -- have an official number out there, but is that pretty much in the ballpark?
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [99]
------------------------------
Sorry?
------------------------------
David Newman, Cormark Securities Inc. - Analyst [100]
------------------------------
You had 60 -- I think you had Learjet 85 orders at one point. Is that still in the ballpark, or --?
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [101]
------------------------------
We don't --
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [102]
------------------------------
We didn't give specific. I think that was a long time ago we give the 60.
------------------------------
David Newman, Cormark Securities Inc. - Analyst [103]
------------------------------
Yes, it was a long time ago.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [104]
------------------------------
And given our competitors don't release that kind of backlog, we'd prefer not to. It's going to be a very competitive market. So, we're being careful with information.
------------------------------
David Newman, Cormark Securities Inc. - Analyst [105]
------------------------------
Very good. Thank you.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [106]
------------------------------
Thank you, David.
------------------------------
Operator [107]
------------------------------
Thank you. Our next question is from Peter Arment from Sterne, Agee. Please go ahead.
------------------------------
Peter Arment, Sterne, Agee & Leach - Analyst [108]
------------------------------
Yes, good morning. My question is back, really, following up on Noah's question regarding the business jet market, and it really relates, I guess, in the pre-owned category. Pierre, could you -- maybe it's just a clarification. You mentioned that you sold 15 aircraft in Q4. Did that exhaust what you had in inventory? And what is your expectations, kind of, for the pre-owned or your activity in pre-owned for 2013? Thank you.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [109]
------------------------------
No. We still have inventory. I'll give you the exact amount. At the end of Q4 we had 74 pre-owned aircraft in inventory. This would be a combination of commercial and business, compared to 87, and we say -- there's nothing significant going on pre-owned. It's typical that we take trade-ins, but it's no -- it's not over 25% of the sales that we make forward.
So, we control that very tight. We're careful on the pricing that we give on pre-owned, so it's part of the trade. So, expect us to continuously add pre-owned, but we've proven that we can sell them very well.
------------------------------
Peter Arment, Sterne, Agee & Leach - Analyst [110]
------------------------------
Okay. Have you stayed away from the Hawker business, just given the residuals that have happened there? Or what have you seen from that side?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [111]
------------------------------
Well, of course we saw it coming, like others. And we would price a Hawker at the price it can sell today. And there's some models that we would definitely stay away from, and there's others that will continue to have good value in their line. But, as a general rule, we're allergic to competitive products, unless it's a product that we find a home for rapidly, during the transaction, we try to avoid products that are not the best in the market, so we don't take anything but Bombardier.
------------------------------
Peter Arment, Sterne, Agee & Leach - Analyst [112]
------------------------------
Okay, thank you. Very well said. Thank you.
------------------------------
Operator [113]
------------------------------
Thank you. Our next question is from Hamzah Mazari from Credit Suisse. Please go ahead.
------------------------------
Hamzah Mazari, Credit Suisse - Analyst [114]
------------------------------
Good morning. Thank you. My question is just around your assumptions in getting to a more normalized CapEx level in 2015. If you could, just talk about what your assumptions there are, and where could you be wrong in those assumptions? Thanks.
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [115]
------------------------------
Well, our assumptions are basically based on the spend profile we have on the various programs we have. And the -- what we expect to work on over the next two years, basically, or up to 2015. We've been basically saying that $2 billion in 2013 will reduce by approximately $500 million in '14 and another $500 million in '15, so, basically, getting down to $1 billion.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [116]
------------------------------
So, your question, what would affect that? Of course, they're all linked with program schedules, program -- what we anticipate in our programs, and how we have planned our flight tests, and so on. But I think we understand -- we've done that a few times before, so we understand the risk in planning CapEx.
------------------------------
Hamzah Mazari, Credit Suisse - Analyst [117]
------------------------------
Yes, my question is just do you have any buffer built in, into that assumption of normalized CapEx in 2015? If the C-Series is delayed another few months, can you still hit that number? Is there adequate buffer in that number is my question, actually?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [118]
------------------------------
It reflects our business plan at this point, and it reflects what we anticipate. That's what I can say at this point.
------------------------------
Hamzah Mazari, Credit Suisse - Analyst [119]
------------------------------
Fair enough. Thank you.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [120]
------------------------------
Thank you, Hamzah.
------------------------------
Operator [121]
------------------------------
Thank you. Our next question is from Steve Hansen from Raymond James. Please go ahead.
------------------------------
Steve Hansen, Raymond James Limited - Analyst [122]
------------------------------
Yes, good morning, everyone.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [123]
------------------------------
Good morning.
------------------------------
Steve Hansen, Raymond James Limited - Analyst [124]
------------------------------
Concerning what the dilutive impact of the C-series, it seems reasonable to have a 2% dilutive impact as you enter into service and gradually ramp up your rates. I'm just wondering when you expect the platform to be accretive to margins, whether it's a '15 or a '16 story?
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [125]
------------------------------
Well, we expect that the dilutive effect will last approximately two years, and then the C-Series will contribute.
------------------------------
Steve Hansen, Raymond James Limited - Analyst [126]
------------------------------
Okay, very helpful. And then, just as a follow-up to that, with the recent order into Russia, there's been a lot of good success in Russia you've had in recent months, certification of the 400 and then this recent order. And there's been some commentary in the press, even, of late around a potential joint venture opportunity. I'm just trying to understand the strategic value you're placing on Russia as a -- sort of one of these new emerging growth markets, sort of Bombardier as a whole, but specific to Aerospace, in particular.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [127]
------------------------------
Well, let me start by Aerospace. I think there is definitely a lot of opportunity in Russia for our product line. If I start with turboprops, it needs a good -- an airplane, because there's large distance between cities that they want to connect, particularly in Siberia, where turboprops are really needed, an airplane that operates very well in winter conditions, and of course, the Q-400 is proven to do that. And they need capacity. So, I think we're very well positioned.
On the regional jets, we already have 85 of our CRJ -- approximately 85 of our CRJ200s in operation, and if I count the ones that are committed, we're close to 100. So, I think developing a base of CRJ200s is really good for the future of our CRJ line. We already see it in some customers that are saying now that we operate the 200s, we'd like to have the rest of the family, because, of course, they want to increase the capacity of the airplane.
And the C-series, it's great in the short runways, long distance, and I think you can see by the order that they believe in this product very much.
What we have to do in Russia is, also, to understand that they have local products. They're developing modern local products, and how do we become a player in this market, considering that they have a large aerospace industry, and what will we need to do to be a significant participant in this industry? And we're looking at that, at this point.
I would say on the rail side, it's the same thing. There's a lot of opportunities. We're already quite successful in signaling in Russia. Now we're looking how to penetrate the other markets, whether it's locomotives or light rail or metros. There's opportunities right now in Moscow for the Moscow metro. We were -- our partner in Moscow, UVZ, was chosen for trams, and they're going to use our technology.
So, there's an example that we can participate in the Russian market by working with a local partner, in this case, UVZ.
So, I think step by step we're examining opportunities in Russia. So, it's definitely for our two businesses.
------------------------------
Steve Hansen, Raymond James Limited - Analyst [128]
------------------------------
Very helpful. Thank you.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [129]
------------------------------
Thank you, Steve.
------------------------------
Operator [130]
------------------------------
Thank you. Our next question is from David Tyerman from Canaccord Genuity. Please go ahead.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [131]
------------------------------
Yes, good morning. My question is on Bombardier Transportation margin. I just wanted to get an understanding of how the major drivers of the margin improvement are going to flow through. I think there must be three of them -- execution issues going away, restructuring benefits, presumably, and also benefits from increased sales. When do these things hit? Like, does the execution issue stop at the end of Q4 '12, or does it lag into 2013 and go away? When do the restructuring benefits kick in and how material are they? And when do the sales increase such that you get better overhead absorption?
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [132]
------------------------------
I guess you effectively identified the main points driving the increase in profitability. What you can expect, it's going to be gradual towards, during 2013, getting to 2014.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [133]
------------------------------
So, do execution issues continue into the first part of the year?
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [134]
------------------------------
The execution issue, in itself, it was kind of recognized in 2012 in the sense that it's contract accounting, so we've adjusted the margins to the revised margin. But those revised margins are, obviously, going forward lower than what we had original anticipated. So, as those contracts are phasing out and being replaced by new contracts or increase in the activities on new contracts, that's where you're going to get the gradual effect from the execution.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [135]
------------------------------
Great. Okay, thank you.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [136]
------------------------------
Thank you, David.
------------------------------
Operator [137]
------------------------------
Thank you. Our next question is from Stephen Trent from Citigroup. Please go ahead.
------------------------------
Stephen Trent, Citi - Analyst [138]
------------------------------
Hi. Good morning, everybody, and thanks for taking my question. I apologize if you already mentioned, this, but I wasn't sure if I heard. As you look at the US airlines, some merger activity, and you guys did well on the Delta order, how are you seeing the landscape now in the sub-120 seat segment versus how you were seeing it, maybe, six months ago?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [139]
------------------------------
Well, generally, mergers in the US have been good for our industry. So, we're monitoring very closely the American-US Airways merger. As has been reported already, the networks are very complementary, so I think, in the end, it's going to be good for the RJ market, but this is -- as the customer is going through his merger, we have to be very close and understand the needs.
But I think American is definitely an opportunity for RJs this year. SkyWest is a provider to the airlines and United, so I expect good level of order in the RJ business this year.
------------------------------
Stephen Trent, Citi - Analyst [140]
------------------------------
Okay, great. Thanks very much.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [141]
------------------------------
Thank you.
------------------------------
Operator [142]
------------------------------
Thank you. Our next question is from Chris Murray from PI Financial. Please go ahead.
------------------------------
Chris Murray, PI Financial Corp. - Analyst [143]
------------------------------
Thank you. Good morning. Just looking and going back to some of the issues you faced with the Globals over 2012, can you give us an idea whether or not the Global production this year is sort of fully caught up, and whether or not that might form some of the increase in production now that the Vision flight deck issues may be somewhat more addressed?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [144]
------------------------------
Well, we don't give guidance per model of airplane. That's competitively sensitive, but the Global is the airplane we have the biggest backlog, and this is a platform that will gradually continue to increase.
------------------------------
Chris Murray, PI Financial Corp. - Analyst [145]
------------------------------
Okay. Thank you very much.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [146]
------------------------------
Thank you, Chris.
------------------------------
Operator [147]
------------------------------
Thank you. Our next question is from Tom Astle from Byron Capital. Please go ahead.
------------------------------
Tom Astle, Byron Capital Markets - Analyst [148]
------------------------------
Yes, good morning. I just had a question on the C-series impact, again, to EBIT margins in 2014. I assume that's based on EIS mid-2014, and it sounds like, Pierre Beaudoin, you said it was close to maybe 20 or 30 units in the year, and the impact 2%, would be a couple hundred million dollars impact. Is my math right on that side?
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [149]
------------------------------
Well, we're not providing specific numbers. So, mid-'14, yes, that's a good proxy, because we're seeing roughly enter into service is roughly a year after first flight, roughly. So, it can vary. And in terms of number of units, that also would vary, because it depends, the speed at which we're going to ramp up. So --
------------------------------
Tom Astle, Byron Capital Markets - Analyst [150]
------------------------------
And the impact to the margins, then, and to EBIT in general, is that due mainly to first-time learning curve or is it, some of it, the amortization of program tooling costs, or both?
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [151]
------------------------------
No, the amortization of program tooling costs will be even by unit. So, that's not an explanation. It's more that there's the initial cost, if you'd like, when you build the first aircraft are higher and on the other side, there's also launch customer price. So, the customer that you sell to typically has a pricing that is -- that would be, typically, lower.
------------------------------
Tom Astle, Byron Capital Markets - Analyst [152]
------------------------------
Right.
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [153]
------------------------------
So, it's on both sides, both the costs and the selling price.
------------------------------
Tom Astle, Byron Capital Markets - Analyst [154]
------------------------------
Okay. And that carries forward, you said, for about a year and a half or two years?
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [155]
------------------------------
Yes. Let's say two years, yes.
------------------------------
Tom Astle, Byron Capital Markets - Analyst [156]
------------------------------
Okay, thank you.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [157]
------------------------------
Thank you, Tom.
------------------------------
Operator [158]
------------------------------
Thank you. Our next question is from Neal Dihora from Morningstar. Please go ahead.
------------------------------
Neal Dihora, Morningstar Inc. - Analyst [159]
------------------------------
Hey, thanks for taking my questions. Just two questions, I guess, more specifically on the US regional jet opportunities. You guys announced the Delta order, and it sounded like that was an expansion of aircraft. Maybe in your MD&A, I think, you talked about the age of some of the fleet. Can you talk about whether people are going to replace some of the existing fleet that they have out there, maybe the CRJ200s, to get up to the scope limits?
And then, back on the C-series, does the two years of dilution sort of take into account the ramp-up time that you're taking or you were talking about previously to the full production rate? So, if that production rate is, let's say, over three years or four years, then would that dilution sort of last three or four years? Thanks.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [160]
------------------------------
Well, like we said, the dilution is 2% in the first year, and that will last -- gradually improve through the next two years after that and start to contribute after that. So, I'm not sure that I'm understanding fully your question on this.
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [161]
------------------------------
It's not necessarily in relation to the ramp-up. It's more as you improve your production, your production costs, and as you, basically, deliver on the first few units.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [162]
------------------------------
If you take another -- if you take Boeing, as an example, they would average everything over a program.
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [163]
------------------------------
10 years, roughly 10 years.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [164]
------------------------------
10 years, roughly. We don't do that. We take the real price and the real unit cost. So, of course, your first units would be -- would not contribute as much as your units once you're in full production.
------------------------------
Neal Dihora, Morningstar Inc. - Analyst [165]
------------------------------
I think -- yes, I think -- sorry to butt in. I think that's kind of what I mean, when you get to that, whatever your eventual production rate is, your cost per unit would be a lot lower. So, I guess the question is, in your assumption of a two-year sort of dilution from the C-series, let's say it takes longer to get to that eventual full production rate where you'd have the lowest cost per unit. Is that sort of -- you just said it's not really interrelated, but that was sort of my question.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [166]
------------------------------
Okay, and the RJ market, what was your question on the RJ market, again?
------------------------------
Neal Dihora, Morningstar Inc. - Analyst [167]
------------------------------
It was more on the replacement of older aircraft versus -- similar to what -- the Delta order seemed like it was an expansion of the fleet, not necessarily --
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [168]
------------------------------
Delta was seat for seat. So, we took 40 orders and they're taking out 60 CRJ200s. If you count the seats, it's going to be seat for seat.
So, there are some airlines that will expand, but you'll see a lot of this strategy where they're replacing smaller aircraft that are not as profitable for us -- for them, as with bigger aircraft that can give them a bigger margin. But, generally, it's seat for seat.
------------------------------
Neal Dihora, Morningstar Inc. - Analyst [169]
------------------------------
Okay, thanks.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [170]
------------------------------
Thank you.
------------------------------
Operator [171]
------------------------------
Thank you. Our next question is from Anthony Scilipoti from Veritas Investment Research. Please go ahead.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [172]
------------------------------
Thanks. And good morning. My question is related to the tax expense which I've seen continuing to go down. Maybe you could provide some additional color as to why, exactly, that's happening and how sustainable the lower rates are?
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [173]
------------------------------
Well, in terms of the rates, you can expect the rates -- and I always have kind of the same answer to that, and we're doing, usually better than my answer. You can expect 20% to 25% in terms of a tax rate, which is a lower tax rate than the statutory tax rate, and the reason is that we have a lot of tax attributes, that is elements we can deduct from our taxable income, that have been accumulated through the years.
And when you calculate the tax, it's fairly complex. First of all, you do it country by country. You have to look at the specific situation in every country, and then you look at the -- at your tax attributes that I referred to. You give it a value to those tax attributes, and then you look at on a relatively short period of time as to what you can use in those assets. And if you cannot use it within a relatively short period of time, then you have to take an allowance or a reduction.
As this is being revised on a quarterly basis, but more fully so at year end, it makes changes that is not necessarily directly related to the income that is earned in that period. And, for example, in the fourth quarter, we have a tax benefit, which is much higher or very positive compared to the revenue.
So, it's due to the fact that we have to reevaluate the various tax assets. And we have about $1 billion of tax assets. So, the -- there's a variation in those, which could impact a quarter or another.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [174]
------------------------------
And so, these would have been tax loss carryforwards, or whatever, that you did not take -- or you took valuation allowances against, right?
------------------------------
Pierre Alary, Bombardier Inc. - SVP and CFO [175]
------------------------------
Exactly. And this is detailed in our financials, in the notes to the financial statement. So, we've got the -- a detailed note that gives the value that we have, that's the note 11. So, we describe how much of the tax asset we have, how much of the unrecognized deferred tax assets, and the various amounts. It's all described, and whether it's coming from operating losses or temporary differences. And we have a lot of temporary differences, and you can expect, especially in Canada, that we have a lot, because we do a lot of the research and development in Canada for the development of all of our programs. So, there's -- which are capitalized on the -- in the financial statement, but for tax purposes, that's the tax benefit.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [176]
------------------------------
Okay, Anthony?
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [177]
------------------------------
Yes, that's great. Thank you.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [178]
------------------------------
Thank you.
------------------------------
Operator [179]
------------------------------
Thank you. Our next question is from David Tyerman from Canaccord Genuity. Please go ahead.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [180]
------------------------------
Yes, good morning. I just wanted to clarify. When you say Bombardier Aerospace margins similar in 2013 to 2012, what EBIT margin are you referring to, the number before special items or including?
------------------------------
David Tyerman, Canaccord Genuity - Analyst [181]
------------------------------
Well, I guess, the -- the variance is not that significant, 4.4% versus 4.7%, and when we say approximately at the same level, whether it's 4.4%, 4.7% or 4.9%, it's pretty much aligned. But guidance would be -- we would give guidance before any adjustments or before special items.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [182]
------------------------------
Okay. And just a question on the Challengers. The backlog on Challengers is quite low, excluding that one large order, which, obviously, you can't exclude completely. But it is quite low, and I'm wondering whether that implies that at some point you need to do something with the aircraft in terms of redesign?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [183]
------------------------------
Which Challenger are you talking about? Are you --
------------------------------
David Tyerman, Canaccord Genuity - Analyst [184]
------------------------------
Well, you only report the backlog stuff sort of as an aggregate. So, I'm not sure which one it is, but the overall backlog for the Challenger family, excluding that large order with NetJets, is pretty low.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [185]
------------------------------
Well, we think we have a very competitive product in both cases, and they're selling well, and we think we have enough opportunities to meet our production plan.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [186]
------------------------------
Okay, thank you.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [187]
------------------------------
Thank you, David.
------------------------------
Operator [188]
------------------------------
Thank you.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [189]
------------------------------
Operator, do we have any more questions?
------------------------------
Operator [190]
------------------------------
There are no further questions at this time.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [191]
------------------------------
Okay. So, this concludes the question period intended for investors and analysts. We will now begin the question period for media representatives. Operator?
------------------------------
Operator [192]
------------------------------
(Spoken in French). (Operator Instructions). (Spoken in French).
------------------------------
Unidentified Participant [193]
------------------------------
(Spoken in French).
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [194]
------------------------------
(Spoken in French).
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Unidentified Participant [195]
------------------------------
(Spoken in French).
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Pierre Beaudoin, Bombardier Inc. - President and CEO [196]
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(Interpreted). It's very difficult to forecast this. The market for the CRJs. We're moving from the 200s to the 700s. So, I think there's a lot of demand for that product. It's a very competitive product, and so we're very well placed. We're developing new markets, like Russia, where we already have a strong market for the CRJ200 that will give us other opportunities for the larger planes, over time.
(Interpreted). With regard to the turboprops, the Q400 is very well positioned for Russia, as well. There are many purchases in the United States and elsewhere in the world. So, those two planes -- there's a lot of demand for them.
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Unidentified Participant [197]
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(Interpreted). With regard to the margin, I understand the diluting effect. In 2014, the first C-series that are produced will have a dilutive margin, and then you're reaching the 8%. You'll increase your production rate.
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Pierre Beaudoin, Bombardier Inc. - President and CEO [198]
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(Interpreted). I didn't talk about margin in the future, but we said that that was a reduction of 2% in 2014. This is normal for a new plane program to start, to have this dilutive effect, because you have the startup costs that are typical of an airplane program, and we've had this in the past.
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Unidentified Participant [199]
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(Interpreted). I was trying to understand this in more detail. Is this a negative margin that you're likely to have with these planes?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [200]
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It's the same thing with all airplanes. The very first planes have this dilutive margin, because the -- we have the higher costs of startup and launching and the -- this is very typical for airplane programs, typical for Bombardier, typical for our competitors. It's the same thing.
Sometimes the accounting means that it's not as clear about the negative margin at the beginning, but we -- the sale price, with the unit price, and that's why you see the results now with a little bit more transparency.
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Unidentified Participant [201]
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(Interpreted). The Learjet 85, are you likely to have the same sales objectives with the Learjet? Is it a good contributor?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [202]
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Yes, of course it is. It's going to have a lot of success in its category.
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Unidentified Participant [203]
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(Interpreted). Thank you very much.
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Operator [204]
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Our next question comes from (inaudible) from the Canadian Press. Please go ahead.
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Unidentified Participant [205]
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Yes, hi. A few questions. First, you announced last year that there was a hiring and discretionary spending freeze. I'm wondering if you could outline how that's contributed financially to the Company, and has that been extended?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [206]
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We don't give specifics on that. I think it's just good management in this period where we invest a large amount of money in our new programs to be very close to our costs, and it's something that we'll continue through the years. I think it's just the right thing to do, during -- especially during a time we're spending or investing $2 billion a year.
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Unidentified Participant [207]
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But when you announced it, you said it was going to last at least until January. Has that been extended?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [208]
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Yes. Like I said, I expect it to continue, because we are in a time where we're investing $2 billion a year. I think the Aerospace team is doing what they need to do in terms of managing their business to be able to continue to invest the money they need to deliver their new program.
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Unidentified Participant [209]
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Secondly, I'm wondering about the Q400. Are there any plans or are you working on anything to extend the aircraft, especially to take on any changes that ATR might do?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [210]
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We have enough airplane programs in development right now, so we don't have additional ones to announce this morning.
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Unidentified Participant [211]
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And third, you started work in Morocco. I'm wondering if you're looking at other production opportunities in the world, such as Singapore?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [212]
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No, our investment right now is in Morocco. We're just starting with this plant and there's a lot of work to do to get it to the standards we expect. And I expect it to be a really good and competitive plant, but we're just starting.
In Singapore, what we're doing, we're building a new building in Singapore. It's a service center.
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Unidentified Participant [213]
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Thank you.
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Shirley Chenier, Bombardier Inc. - Senior Director, IR [214]
------------------------------
Thank you.
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Operator [215]
------------------------------
Thank you.
(Interpreted). The next question is from Marie Tison from La Presse.
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Marie Tison, La Presse - Media [216]
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(Interpreted). Hello. Given what you know now in terms of the production of the C-series, the orders that you might be getting for the regional jet, what do you foresee in terms of the production rate and employment in the Montreal region for the next two or three years?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [217]
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(Interpreted). We don't make any such projections. We'll adjust to demand, and we would be very happy if that gave us an opportunity to recall employees or to increase our -- the level of employment, but I can't make any forecasts in relation to that. It's really related to the demand, to the orders that we get, and we'll adjust as we have a chance to build more planes.
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Marie Tison, La Presse - Media [218]
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(Interpreted). In terms of the C-series, when will you be hiring to start building the planes?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [219]
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(Interpreted). There's already a number of staff that's been hired. I can't tell you how much. Maybe on March 7th you can ask that question. But there's already been some hiring of staff working on the C-series. We're assembling -- I think we're -- we assembled fourth -- we're assembling the fourth flight test vehicle. Or certainly we've assembled three. I think we've started on the fourth. So, that requires several hundred employees.
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Marie Tison, La Presse - Media [220]
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(Interpreted). In terms of the possible disappearance of Hawker, are you interested in picking up some of those lines? And what does that mean for you, Hawker disappearing?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [221]
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I didn't understand the first part of your question.
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Marie Tison, La Presse - Media [222]
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(Interpreted). Would you be interested in acquiring Hawker product lines?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [223]
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(Interpreted). Absolutely not. Our products are very competitive and we don't need Hawker's products. In fact, there's a reason why they closed down.
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Operator [224]
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The question is from [Matt Angelique] from [Le Journal] (inaudible). Please go ahead.
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Matt Angelique, - Media [225]
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(Interpreted). Hello. Could you tell us why you are having -- you're experiencing a delay?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [226]
------------------------------
(Interpreted). This is a program that has a lot of new technology. It's an all-composite aircraft, and that gave us a few challenges that have been resolved and we're in the execution phase.
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Matt Angelique, - Media [227]
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(Interpreted). Could you explain what would be the impact on employment by production site?
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Pierre Beaudoin, Bombardier Inc. - President and CEO [228]
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(Interpreted). The Lear 85, you're talking about? No, we won't give any employment impact per aircraft type. We don't give out that information.
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Operator [229]
------------------------------
Our next question is from Molly McMillin from Wichita Eagle. Please go ahead.
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Molly McMillin, Wichita Eagle - Media [230]
------------------------------
Hi, good morning. Pierre, I was wondering -- interested a little bit more in the Lear 85. I believe you said that the challenges are now behind you on that, and can you be a little bit more specific on what those were? I know they were technical, but can you give a little bit more color on what you have been facing?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [231]
------------------------------
I don't want to say the challenges are completely behind us. This is a development program of a new airplane, so, there's always challenges. We're going to get into flight tests and then deliver the aircraft in summer 2014. So, there will be additional challenges, but I think we understand very well the work that needs to be done.
And, like I said, this is a all-composite aircraft, and we had to understand very well the technology to make this aircraft. But I think -- I think now we understand very well what -- how to execute in the next few months to get to first delivery in summer 2014.
------------------------------
Molly McMillin, Wichita Eagle - Media [232]
------------------------------
And on -- talking about the Learjet plant in Wichita, I know you said you don't talk about program by program on impact to employment, but just overall for the site here, what are you seeing for employment, say, for this year or however? Is it steady? Will it decline? Or what do you see?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [233]
------------------------------
I'm not going to get into employment per plant. So, I can't give you that information. First, I don't have it with me, so I can't give it to you.
------------------------------
Molly McMillin, Wichita Eagle - Media [234]
------------------------------
Okay, thank you.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [235]
------------------------------
Thank you.
------------------------------
Operator [236]
------------------------------
Thank you.
(Interpreted). The next question is from Daniel Bordeleau from Radio-Canada.
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Daniel Bordeleau, Radio-Canada - Media [237]
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(Interpreted). Hello, you seem to be having a lot of problems with Transportation, especially in Europe. There have been problems with the Francilien. There have been problems elsewhere in Europe. Have you had to pay a lot of penalties for those various quality issues, like the Francilien? Mention has been made of EUR300 million. I don't know if that's an exaggeration.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [238]
------------------------------
(Interpreted). Okay, first of all, Transportation has had -- has performed extremely well for several years. Last year we had some challenges executing some programs, the Ile-de-France, for example. In terms of program costs, that's not information we release.
(Interpreted). So, what I can tell you is that the Francilien right now is in the delivery phase. We've got 84 trains already delivered. Performance is good. The customer is happy with the trains, has made good comments about the trains, especially since the passengers who are using the trains feel that it's a train that meets their expectations.
(Interpreted). So, for me, that's a program that will be very successful.
------------------------------
Daniel Bordeleau, Radio-Canada - Media [239]
------------------------------
(Interpreted). But if you look at the European market, overall, they're very affected by the economic crisis. Might you have to reduce production in your plants, even further than what you announced in the last quarter?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [240]
------------------------------
(Interpreted). Our main markets are France and Germany, and, as we've said several times, those markets are still healthy. We're also very strong in Northern Europe, and we have good opportunities in Sweden, for example. So, I think the order level will remain strong in Europe, as we've seen over the past few years.
(Interpreted). Obviously, Southern Europe is a tougher market, but Bombardier sells very little in those countries.
------------------------------
Daniel Bordeleau, Radio-Canada - Media [241]
------------------------------
(Interpreted). You've talked about Russia in the past minutes. Could you be investing in a new plant in Russia?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [242]
------------------------------
(Interpreted). Just like every opportunity, we evaluate the best way to sell into a country, the size of the market, what we need to do to make sure that we can be a leader on that market, and I think that right now everything is on the table, and we're looking at how best we can provide the long-term return for Bombardier shareholders.
------------------------------
Daniel Bordeleau, Radio-Canada - Media [243]
------------------------------
(Interpreted). In terms of the Q400, you said you have enough planes on your table, but the Wall Street Journal was reporting that you're in talks with a Korean company to develop a bigger turboprop. Can you tell us about that?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [244]
------------------------------
(Interpreted). As I said, we've got a number of development programs ongoing, and everybody is focusing on executing those programs, and, in future, we'll see whether there are other programs that could be of interest, but right now, those that are of interest are those that we've already announced.
------------------------------
Daniel Bordeleau, Radio-Canada - Media [245]
------------------------------
(Interpreted). And to conclude, I know there'll be a briefing on March 7th, but you still anticipate that the first flight of the C-series will be in June? That's not going to change?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President and CEO [246]
------------------------------
(Interpreted). We anticipate that the first flight will be around late June.
------------------------------
Operator [247]
------------------------------
There are no further questions at this time.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [248]
------------------------------
(Spoken in French). Thank you all for being with us today. (Spoken in French).
------------------------------
Editor [249]
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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.
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