Q3 2013 BOMBARDIER INC Earnings Conference Call - English
Oct 31, 2013 AM EDT
BBD.B.TO - Bombardier Inc
Q3 2013 BOMBARDIER INC Earnings Conference Call - English
Oct 31, 2013 / 02:00PM GMT
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Corporate Participants
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* Shirley Chenier
Bombardier Inc. - Director, IR
* Pierre Beaudoin
Bombardier Inc. - President, CEO
* Pierre Alary
Bombardier Inc. - CFO
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Conference Call Participants
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* Cameron Doerksen
National Bank Financial - Analyst
* Walter Spracklin
RBC Capital Markets - Analyst
* Robert Spingarn
Credit Suisse - Analyst
* Joe Nadol
JPMorgan Chase & Co. - Analyst
* Steve Hansen
Raymond James & Associates - Analyst
* Benoit Poirier
Desjardins Securities - Analyst
* Darryl Genovesi
UBS Securities LLC - Analyst
* David Newman
Cormark Securities - Analyst
* Peter Arment
Sterne, Agee & Leach, Inc. - Analyst
* David Tyerman
Canaccord Genuity - Analyst
* Stephen Trent
Citigroup - Analyst
* Kristin Liwag
BofA Merrill Lynch - Analyst
* Deepak Kaushal
GMP Securities - Analyst
* Turan Quettawala
Scotiabank - Analyst
* Tim James
TD Newcrest Securities - Analyst
* Doug Karson
BofA Merrill Lynch - Analyst
* Neal Dihora
Morningstar - Analyst
* John Wong
Greshon Capital - Analyst
* Ron Epstein
BofA Merrill Lynch - Analyst
* ary
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen, and welcome to the Bombardier conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Ms. Shirley Chenier, Senior Director, Investor Relations. Please go ahead, Ms. Chenier.
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Shirley Chenier, Bombardier Inc. - Director, IR [2]
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Thank you, Operator. Bonjour. 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 third quarter ended September 30, 2013.
(interpreted) This conference call is broadcast live on the internet and is also interpreted in French and in English.
You can access the broadcast on our website at Bombardier.com and the webcast archive of the integral version of this call will be available within the next 24 hours. Slides for this presentation in English and French are equally available on our website. All dollar values expressed during this conference call are in U.S. dollars unless stated otherwise.
I also wish to remind you that during the course of this conference call we may make projections or other forward-looking statements regarding future events or the future financial performance of the corporation. Several assumptions were made by Bombardier in preparing these statements and we wish to emphasize that there are risks that actual events or results may differ materially from these statements. For additional information on such assumptions, please refer to the MD&A released today. Please also note that I am making this cautionary statement on behalf of each speaker whose remarks today will contain forward-looking statements.
Pierre Beaudoin will now begin the presentation.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [3]
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Bonjour. (interpreted) Good morning and welcome to this conference call.
Aerospace financial results for the third quarter were in line with our guidance, but the level of order and the overall market conditions were a disappointment. We had a few landmark events in the quarter.
In August we signed an LOI with Rostec for the assembly of Q400 aircraft in Russia and an initial LOI for the sale of 100 Q400 aircraft in the Russian market.
In September we signed an agreement for the sale of our Flexjet fractional ownership activity and linked to this is a sizeable business aircraft order for both our Learjet and Challenger family of aircraft.
And last but not least, the CSeries flew for the first time, thus starting its extensive flight test program.
In transportation, revenues increased and free cash flow also improved slightly. However, the EBIT margin was affected by some execution issues which we are actively addressing. The market for transportation solution remains resilient with the most significant growth experienced in Europe and Asia-Pacific where we are well-positioned.
And now I'd like to ask Pierre Alary to go through our financial results in more detail.
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Pierre Alary, Bombardier Inc. - CFO [4]
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Good morning to all. Aerospace revenues for the quarter totaled $2 billion, compared to $2.3 billion last year as a result of a lower level of deliveries due to timing of deliveries to customers and to the transition to the Lear 70 and 75.
EBIT totaled $86 million or 4.3% of revenues, compared to $118 million or 5.2% last year. The reduction in margin percentage reflects lower selling prices for business aircraft, lower absorption of SG&A expenses and negative variance on our provision for contingency and a write down of CSeries inventory to a net reasonable value.
For transportation, revenues totaled $2.1 billion, compared to $2 billion last year and excluding a positive currency impact of $28 million, revenue increased by 4%.
EBIT margin is at 6%, compared to 6.3% last year; mainly due to lower margin rolling stock, partially offset by higher margin in services and higher absorption of lower SG&A and R&D expenses.
On a consolidated basis, revenues totaled $4.1 billion, while EBIT was at $221 million, compared to $240 million last year.
Net financing expenses were $36 million, compared to $15 million last year as a result of a gain on certain financial instruments realized last year.
And with an effective income tax rate of 15.5%, the adjusted net income totaled $165 million or $0.09 per share, compared to $173 million or $0.09 per share last year.
With respect to free cash flow, aerospace cash flow from operations totaled $179 million, while our investment in our programs totaled $585 million. Transportation used $5 million of cash in the third quarter, compared to last year's usage of $58 million; and at the end of the third quarter our short-term capital resources totaled $4 billion, including cash and cash equivalent of $2.6 billion.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [5]
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So to conclude, our results for the third quarter were in line with our guidance for the full year. The CSeries flight test program has begun and the results are in line with our expectations. We have a strong backlog at $65.5 billion which represents about four years of manufacturing revenue. And our continued investment in new products will position us well for the years to come.
Our strong growth story is taking shape. All of the elements are in place. Thank you.
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Shirley Chenier, Bombardier Inc. - Director, IR [6]
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Thank you, Pierre. So we will now start the question period for analysts and investors and in order to keep the duration of this call reasonable, I would ask you to limit yourselves to one question to give everyone a chance to participate. If you do have any remaining questions at the end and if time permits, you can get back in queue. And if not, contact me and I will call you back right after this conference call. We can now start with the first question. Operator?
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Questions and Answers
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Operator [1]
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(Operator Instructions). Cameron Doerksen.
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Cameron Doerksen, National Bank Financial - Analyst [2]
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Good morning. Question on the transportation margin; I mean it took a pretty big step back in Q3 to 6% from what you were running in the first half of the year. You've mentioned some problems with execution on some contracts. I'm just wondering if you can provide a little bit more information on that. Are these new contracts or are these some lingering effects of what we've seen on the previous execution issues on other contracts and were there any unusual provisions in the quarter that caused that margin to be at 6%?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [3]
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Well first of all, we're making progress like we said from our results from last year, overall for the year. Second, to your question, the contracts we had identified already, these, some of those are in high-revenue delivery, so of course they would affect the margin. But we have some execution issues on other contracts, of course it's in the context that we have also contracts going very well, so it's a balance of the two, but overall we are making progress on the margin in transport.
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Cameron Doerksen, National Bank Financial - Analyst [4]
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Thank you.
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Operator [5]
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Walter Spracklin, RBC Capital Markets
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Walter Spracklin, RBC Capital Markets - Analyst [6]
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Thanks very much; good morning, everyone. Just on your initial comments on execution issues; I was wondering if any of those did apply to aerospace as well or if that was just related to transportation. And in particular, I was wondering if you could comment on-- I think you mentioned there was an inventory write-down which in the footnote indicated that it was due to lower realized pricing on the CSeries due to the early CSeries sales. Is that-- typically I think you would expect the initial CSeries sales to be lower than the longer-term ones. Are they coming in even lower than that and is that what prompted the inventory write-down? So really the question is around the margin, and if you could address that in particular.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [7]
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As far as first, the beginning of your question on execution issue at aerospace, the pressure comes mainly on pricing at business aircraft. Now as it relates to your question on the CSeries, it is normal in an airplane program that the initial components are more expensive than the value or the price we can get from the market, so we have to write down the inventory. So this is something that was planned and we're just executing. Maybe you have not seen it in the past as this is an IFRS regulation or matter.
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Pierre Alary, Bombardier Inc. - CFO [8]
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Maybe if I explain a little bit of the mechanics around the write-down is that as you know, we had mentioned that the first year of deliveries would-- or the first deliveries anyhow would be negative in terms of contribution and that's because the costs are higher initially and the pricing is launch pricing and all of that, so that's why we're seeing that initially it would be a dilution to the margin.
Now more specifically, as we start to produce on those first deliveries, where there is a loss anticipated on those deliveries, we have to record from the first dollar we spend, we have to take a net reasonable value, if you like, on it. And the first dollars are the ones that we need to write off or take a provision on it.
So despite the fact that revenue will come later, we do have to take into consideration today or as we go on an ongoing basis, the excess costs.
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Walter Spracklin, RBC Capital Markets - Analyst [9]
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So this will be an ongoing kind of inventory adjustment that we could see in future quarters. It's not one that's just limited to this quarter and that's it?
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Pierre Alary, Bombardier Inc. - CFO [10]
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Exactly, yes.
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Walter Spracklin, RBC Capital Markets - Analyst [11]
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Okay, thank you very much.
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Pierre Alary, Bombardier Inc. - CFO [12]
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And to a get a feel of the variance if you'd like or the amount, as you know in note 11 to our financial statement on the inventory, we do specify the amount of write-down we take on the inventory. There's one that is that is on a continuous basis that we take a certain percentage on spare parts for obsolescence, and then we can see that there's variance from this year versus last year and a good portion of the variance is due to what we take on the CSeries.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [13]
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And maybe I should add that there's also a variance according to pre-owned aircraft and this is something that we see the market stabilizing and of course as we look at new transactions, the way we take pre-owned, we expect that number to stabilize, meaning to get back to a no write down; but this is more dictated by the market.
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Walter Spracklin, RBC Capital Markets - Analyst [14]
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Okay. Thank you very much.
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Operator [15]
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Robert Spingarn, Credit Suisse
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Robert Spingarn, Credit Suisse - Analyst [16]
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Good morning. I wanted to ask for a little bit more color on CSeries in general. So there are just a couple of CSeries questions together here. You mentioned that you're focused on the schedule and I got the sense you're reviewing the schedule. So I wanted to ask what that implies and that if there's an entry into service delay, beyond the one-year from the first flight, what your quarterly aerospace cash burn would look like, maybe relative to an assumption of about $250 million burn per quarter which is what we were thinking. And then I'd also like to ask you how the aircraft is performing in flight tests and when you will be feathering in those additional test articles, thank you.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [17]
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Okay, so there are many questions in your one question.
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Robert Spingarn, Credit Suisse - Analyst [18]
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A multitude of CSeries questions.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [19]
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I'll start by your last point with the flight tests. That started-- we started to fly again yesterday and we will give you constant updates on the CSeries website. So I think that's the right place to get updates. So the flight test is going well so far. Of course it's been limited because we had planned quite an extensive update period and we're within weeks of starting to fly the second airplane and then the others will follow.
So what we're doing right now from a schedule perspective is that there is, as you know, there is five aircraft of the CS100 on the flight test. We want to make sure that we understand very well the progression on these aircraft, the exact date when they start to fly, the commitment of all the suppliers during the flight test, and also their commitment towards delivering production parts.
As you know, we've already started to assemble the production aircraft. So there's many things to analyze before we get back with a definite schedule, so we're working on that and you'll get that in the next few months.
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Robert Spingarn, Credit Suisse - Analyst [20]
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Does that mean-?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [21]
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As far as the burn rate--
Pierre Al
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ary [22]
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As far as the burn rate, I guess your $250 million is coming from the fact that we've been spending roughly $500 million per quarter on all of our programs and that includes both the development costs and the investment into building and equipment and so on. And we had mentioned in the past that some 50% of that spend is in relation to CSeries. So I guess that's how you came up with $250 million and that's how much specific we're going to be. But what you can say to your $250 million; there's two components in it, or three components in it. There is the machinery, building and so on; and that is not really impacted by any delays if there is any delay. Then there is the develop cost and as part of the development cost you have the labor cost and then you've got also some spending on material, so I guess you have to kind of define what could be the labor cost.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [23]
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Just the one thing I want to add on burn rate; as we look at a schedule, we have several choices. We can fly many aircraft at once or we can say that we'll fly less aircraft and take more time so the burn rate goes down. So right now we're evaluating what is the best decision from an investment perspective for us and for all of the stakeholders, understanding everybody's schedule.
So you push through with many aircraft if everybody is committed. You have less aircraft flying if you think that you have some delays with some partners. And that's really the discussions that we're having today.
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Robert Spingarn, Credit Suisse - Analyst [24]
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And will this affect your start of production of customer aircraft; would you delay that if the test schedule delays?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [25]
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Well I'm not saying that we're going to have a delay; that's another element we're having with the customers is we're discussing with them the mix of aircraft that they're taking. Some of them have options to go from the 100 to the 300, and we're also looking at a schedule which we can commit to for the customers because they also have to implement the aircraft or change aircraft into their network.
So all of this is being discussed, as you can see, with many stakeholders; and we're trying to achieve the best financial picture for everybody involved.
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Robert Spingarn, Credit Suisse - Analyst [26]
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Okay, thank you very much.
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Operator [27]
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Joe Nadol, JPMorgan
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Joe Nadol, JPMorgan Chase & Co. - Analyst [28]
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Thanks; good morning. I wanted to dig down into business jet pricing a little bit, which seemed to be where the margin pressure came from. A few months ago at your analyst meeting it was cited that business jet pricing was going to be one of the major supports of margin going into next year and that you were targeted 300 basis points of aerospace margin improvement, excluding CSeries, in a large part on the back of pricing.
So my question is- what's changed over the last six months? Because your backlog for most of your business jets really extends much longer than six months. Why is this negatively impacting you in Q3 and as you look forward into next year, do you think this is going to be a headwind or a tailwind to your margins in aerospace?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [29]
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Well, I think as you-- as I said in my start, we are disappointed with the market. So there continues to be price pressure on business aircraft, particularly in the small aircraft so in the Learjet category. But-- and it gets better as the aircraft gets bigger and really what will also influence next year is the mix. So right now we're looking at this market situation and we're looking at the mix that would-- that will be billed for next year.
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Joe Nadol, JPMorgan Chase & Co. - Analyst [30]
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So Pierre, is this very much different than you thought six months ago? I mean Learjets are a relatively smaller part of your sales compared to Challengers and Globals obviously, within business jet; so is the picture now very different than it was six months ago?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [31]
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You mean for 2014 or 2015?
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Joe Nadol, JPMorgan Chase & Co. - Analyst [32]
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Yes; for 2014 and 2015.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [33]
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When we do budgets, we always look at the mix and whether we ramp up or slow down the line, so we're doing [tests] like every year and we give you our guidance in Q4.
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Joe Nadol, JPMorgan Chase & Co. - Analyst [34]
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Okay. All right; thank you.
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Pierre Alary, Bombardier Inc. - CFO [35]
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Maybe one thing I can say is that in terms of how the market is; on large aircraft the market is very good. On medium ones it's okay, and on small ones it's tough. And that was the same answer a year ago. But maybe a year ago we were expecting to be able to give a different answer today.
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Joe Nadol, JPMorgan Chase & Co. - Analyst [36]
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I see so it's not--
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Pierre Alary, Bombardier Inc. - CFO [37]
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(multiple speakers) that we haven't seen changes in the market. We haven't seen improvement that we were expecting a year ago.
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Joe Nadol, JPMorgan Chase & Co. - Analyst [38]
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I understand. Thank you.
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Operator [39]
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Steve Hansen, Raymond James
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Steve Hansen, Raymond James & Associates - Analyst [40]
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Oh yes, good morning, everyone. Just a quick question on the transportation side again, to circle back on a previous question; could you just perhaps provide a bit more clarity on the execution issues that you're facing and the expected duration of these issues in terms of the margin impact? I'm not too sure I quite understand how long or the magnitude of the issues that we should expect.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [41]
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Well, we are putting an emphasis on-- first of all we understand our execution issue very well. We're putting emphasis on and I'm working very closely with [Lutz] on that; more emphasis on how we address products from an engineering perspective, program management and of course a customer relationship and managing the contracts. So all three elements are being addressed and I feel that we can make progress on the foreseeable future from a margin perspective.
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Steve Hansen, Raymond James & Associates - Analyst [42]
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So less of a drag in the future quarters, if I'm to understand that correctly?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [43]
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You've got to be careful, though. We have long-term projects, so sometimes you don't fix that from quarter to the other, but directionally focusing on the three elements I told you will permit us to make progress.
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Pierre Alary, Bombardier Inc. - CFO [44]
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And the way it is accounted for; it's contract accounting. So that means that we estimate the total margin on the contract and as we review the contract, if we change the margin on the given contract, there's a catch-up adjustment in the current quarter. But then going forward, the margin is going to be lower on that contract as we go. So it will have an impact in terms of having less profitability on the following quarter for that specific contract. But the answer-- it's the same answer when it's a positive adjustment to the margin, we do a catch-up adjustment which is positive in one quarter and then going forward we record a higher margin, so it's a balance.
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Steve Hansen, Raymond James & Associates - Analyst [45]
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Thank you.
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Operator [46]
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Benoit Poirier, Desjardins Capital
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Benoit Poirier, Desjardins Securities - Analyst [47]
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Good morning. Just my question is about the guidance. Given the results you announced today, how can confident are you about your guidance for 2013 and 2014 in terms of free cash delivery and margins? And also assuming the CSeries only enters into service in Q1 2015, how should we think about the EBIT guidance for 2014? Should we expect to be closer to the 8% range? Thank you.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [48]
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Benoit, you're making a lot of assumptions there. We are in the planning period, in the budgeting period with both groups and as usual, we will give you guidance at Q4.
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Benoit Poirier, Desjardins Securities - Analyst [49]
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Okay, thanks.
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Operator [50]
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Darryl Genovesi, UBS
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Darryl Genovesi, UBS Securities LLC - Analyst [51]
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Thank you. Good morning. So I guess just kind of going back to what I guess Rob was asking you; on the guidance that you had out there for the 200 basis points of margin dilution from CSeries, can you just give us a sense of what went into that estimate; how many airplanes, what it's costing you to build a flight test aircraft now, how quickly you think you can get down the learning curve and then how much of your intangibles balance you're going to amortize with each delivery? I mean just any of the background behind that 200 basis points of margin dilution number would be helpful.
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Pierre Alary, Bombardier Inc. - CFO [52]
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You're asking much too much detail. We're providing guidance to give you an idea of where we're heading, where the Company is going; obviously, we won't give detail on the cost element, the price element and that's what you're asking for. So I think by providing the guidance as we provide, we're giving a good indication of what the ongoing can do and what the introduction of a new program can do and that's as far as we can go.
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Darryl Genovesi, UBS Securities LLC - Analyst [53]
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Okay. Maybe I'll try another one then. Just on your residual value guaranty provisions, you show a $375 million remaining. I know you've been reversing some of these, but how do you get comfortable that you've provisioned enough ahead of all these 50-seat regional jet retirements that everyone is kind of calling for? And then also how does the cash flow sort of phase beyond the initial $80 million that you highlight as current?
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Pierre Alary, Bombardier Inc. - CFO [54]
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Well in terms of our provisioning, we do review our provision on a quarterly basis. We have a very detailed model as to how to estimate our provision. We take into consideration the deal by deal, who's the customers, what are the probability of default based on the rating agency table, and we look at the original value of the aircraft, the estimated original value in the aircraft and time. We do a lot of various modeling to determine and we come up with our provision which we revise again on a quarterly basis, so it's refreshed on a regular basis.
And what I can tell you is that if we look at the past years, and you can go back seven, eight, nine years where we've been through with a number of customers that went through bankruptcy proceedings and so on where we had residual value guaranty and we had (inaudible) efficient guaranty and at the end, our provisioning was always sufficient to cover whatever we had to cover based on those guaranties that we'd been offering.
So to me, that demonstrates that our way of provisioning is the right one and gives us the right answer.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [55]
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The other thing I would like to add is how we're developing our markets for the 50-passenger after their initial customers, if you want. We have a freighter in development with partners. We're developing a secondary market. And in the US also there is many airlines that had anticipated to reduce their 50-passenger but they need the flying in the regional and they're keeping these aircraft longer and we're working with them.
So there are many facets of keeping the values up of the CRJs and I think the team is doing a great job.
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Darryl Genovesi, UBS Securities LLC - Analyst [56]
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Okay, and on the cash- how does the $375 million liquidate over time?
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Pierre Alary, Bombardier Inc. - CFO [57]
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Well, the provision is on both first of all the efficiency guaranty and the residual value guaranty; and the model is estimating what could it be. So the reality is going to be the reality, but what it could be seen as scheduled is the original value guaranty and we do provide as part of our annual report, when those guaranties come to expiration in the upcoming year, five years down the road and so on. And on that note, it's the maximum exposure, so it's not necessarily what we estimate we're going to have to pay, but proportionally you can have a view that way.
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Darryl Genovesi, UBS Securities LLC - Analyst [58]
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Thank you.
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Operator [59]
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David Newman, Cormark Securities
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David Newman, Cormark Securities - Analyst [60]
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Good morning. Just on the write-down on the inventories, the net realizable value for the CSeries; is there any assessment as to how that might vary from quarter to quarter and as you produce more aircraft should that rise as you approach entry-into-service and have a margin impact? The 8% I think you initially forecast, maybe it could fall just because of the provisions you have to do under IFRS?
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Pierre Alary, Bombardier Inc. - CFO [61]
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It's going to rise as we spend; as we spend I mean we ramp up production, up to the point where we will have covered the excess costs, if you'd like. So it's not necessarily in relation to the entry-into-service or whatnot; it's more as we spend, we're going to have to reserve the excess costs over the revenue.
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David Newman, Cormark Securities - Analyst [62]
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And Pierre, does that ultimately change your 2% dilution factor that you ultimate will-- or do you anticipate this as part of that?
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Pierre Alary, Bombardier Inc. - CFO [63]
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It was anticipated.
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David Newman, Cormark Securities - Analyst [64]
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Okay, and just a quick one, if I can squeeze one in; on the backlog, it's been fairly stable and you've got four years of manufacturing revenues as you highlight and you deliver-- I think you're starting to deliver on the Delta CRJ in Q4 if I'm not mistaken and then you've got the 70-75, then the 85 next year and of course just a pretty big backlog.
Could we expect that, I know you're not providing guidance at this point, but could we expect that you're already beginning to true up your lines and suppliers such that you'll have a higher production level beyond the Globals next year; just on the back of that. I assume Delta is getting ready to go.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [65]
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It's hard to answer this question without providing you guidance for next year. What we're doing is we're really planning that. We've been planning that for quite some time, but we're completing the budgets now and we'll give you the guidance to the delivery in Q4.
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David Newman, Cormark Securities - Analyst [66]
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Okay, very good. Thank you.
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Operator [67]
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Peter Arment, Sterne, Agee
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Peter Arment, Sterne, Agee & Leach, Inc. - Analyst [68]
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Yes, good morning, everyone. Pierre, I wonder if I can just circle back one more on the CSeries. You've-- congratulations on the first flight and you've had in the initial comments have been that you've had very clean flights in terms of achieving all your test points that you wanted to achieve and doing tests on the noise of the aircraft. Can you just give us a little more color other than I know you're not going to give us specifics on the data that you're seeing, but is there any high-level color that you can give us other than kind of the commentary on the test flights, how they went in terms of what you're seeing?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [69]
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Well, where we spend a lot of time is trying to predict what will happen and so far it's--before a flight-- and so far it's happening exactly as predicted, so that sounds pretty tame but this is the best news we can have in a flight test program is that we learn the minimum. Yesterday we had a flight of 1.5 hours and we're going to continue the flight test program.
So that's the color I can give you. There's nothing that sticks out, that says we need to redo this or retake that; so far, it's going as predicted.
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Peter Arment, Sterne, Agee & Leach, Inc. - Analyst [70]
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Is it still, like if I could just follow up on that related to this; on the plan was originally to-- it would take a couple months to perform all of the analysis on the data and be able to start sharing that with your customers; is that still the ongoing plan or do you need more flights before you can do that?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [71]
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I believe that we start sharing data after we fly FTD 2, but this is something that we're in detailed discussions with customers, when exactly we fly we share data. I think it comes later on in the flight test program, it's not right now.
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Peter Arment, Sterne, Agee & Leach, Inc. - Analyst [72]
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Okay, thank you.
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Operator [73]
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David Tyerman, Canaccord Genuity
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David Tyerman, Canaccord Genuity - Analyst [74]
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Yes, I just wanted to ask about the transport margins. So is there a new project that has now got execution issues or is this [Ile de France] and related I guess, on the margin catch-up; it sounds like there was an IFRS catch-up in Q3. Can you shed some light on the size of that?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [75]
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I'll just answer the question-- you said is there a new project. We are in the delivery of the three projects that-- well, two of the three projects, one of them has been delivered. TALENT 2 and Ile de France are delivering. But there is still execution issues on other projects, which that's why I'm saying let's focus on talking about what needs to be fixed and some work and engineering on program and sales contract management or sales relations with customers. So those are the three elements that we're putting emphasis, myself and Lutz and his team to make sure that we address those.
I'm saying that because we identify execution issues, but of course there is projects that are doing very well also delivering very good margins.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [76]
------------------------------
And the catch-up Pierre Alary?
------------------------------
Pierre Alary, Bombardier Inc. - CFO [77]
------------------------------
Yes, it's-- whenever there's a catch-up it is part of the quarter effectively.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [78]
------------------------------
Right, but was it large in the quarter? Like would it have-- like your margins fell quite a lot in the quarter, surprising to me anyway; and I'm wondering- is that the reason for it?
------------------------------
Pierre Alary, Bombardier Inc. - CFO [79]
------------------------------
Well, the margin was effectively impacted by catch-up adjustment.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [80]
------------------------------
Can you shed any light on the size?
------------------------------
Pierre Alary, Bombardier Inc. - CFO [81]
------------------------------
No, we're not specific, but if you compare to previous quarter-- last year we're at 6.3, previous quarter we're at 6.7; we're at 6. So it has an impact of somewhere up to maybe 0.7 if you like.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [82]
------------------------------
Okay, so it's the bulk of the big decline then, sequentially, it sounds like?
------------------------------
Pierre Alary, Bombardier Inc. - CFO [83]
------------------------------
It's part of it, yes.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [84]
------------------------------
Okay, okay thank you.
------------------------------
Operator [85]
------------------------------
Steve Trent, Citi
------------------------------
Stephen Trent, Citigroup - Analyst [86]
------------------------------
Hi, good morning, everybody. Just a question from me on the transport side; I'm curious if you could highlight what you're seeing in terms of opportunities and projects in Mexico with some real projects cooking; if you could give us any color there, I'd be grateful.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [87]
------------------------------
Yes, and I was just at the Mexico business forum. I'm glad you're highlighting this. I think there's great opportunity for us in Mexico. We're the only local manufacturer. We've been there for 20 years and we understand the market very well and I think the President has identified a few projects and we will participate or bid on all of them.
------------------------------
Stephen Trent, Citigroup - Analyst [88]
------------------------------
And any broad sense on timing or whether you're going to focus on Mexico City and sorry for violating your one-call question, but just as a follow up; you're one-question rule, rather.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [89]
------------------------------
Well, the timing, the President has said they're a priority and the timing will come from the customer. The sooner the better, as far as we're concerned. But the ones he's identified that I can speak of for example is Queretaro Mexico; a high-speed train which I think is a very interesting project. There's a Toluca line to take people from downtown Mexico City to Toluca. That's also a very good project. There's a project in Guadalajara where Bombardier is 100% of the system in Guadalajara today. So we're looking of course, we're looking for the expansion of this system and that has been identified.
There's another project in Monterrey that's in the bid today and I think we're quite well-positioned. So you can see it's a very active market and we understand it very well.
------------------------------
Stephen Trent, Citigroup - Analyst [90]
------------------------------
Okay, let me leave it there. Thanks very much for the color.
------------------------------
Operator [91]
------------------------------
Ron Epstein, Bank of America
------------------------------
Kristin Liwag, BofA Merrill Lynch - Analyst [92]
------------------------------
Hi. It's actually Kristine Liwag calling in for Ron. In your press release you said that you have about $4 billion of short-term capital resources and $2.6 billion of cash. But in the quarter we saw free cash flow usage from both commercial aerospace for transportation. So I was just wondering how we should think about cash in the next few years and also maybe when you think about raising more capital.
------------------------------
Pierre Alary, Bombardier Inc. - CFO [93]
------------------------------
Well, in terms of the cash, typically our fourth quarter is a high cash-generation quarter, so we use cash in the first three quarters and then the fourth quarter there's a generation of cash and that's a trend that we've been seeing for many, many years. So we expect the cash balance to be higher at the end of the fourth quarter.
And going forward, as we referred to in terms of guidance, we'll provide update guidance with our Q4 results. Now in terms of raising capital; there's no need to raise capital at this point.
------------------------------
Kristin Liwag, BofA Merrill Lynch - Analyst [94]
------------------------------
Sure. And if I can do a follow-up question; with the aircraft CSeries flight yesterday, is that with a fly-by wire system in place?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [95]
------------------------------
Well it's always been with the fly-by wire; what I think you're referring is the progress of the software through time; and we're going to have different drops as we get to production, so this was evolved and this will evolve from flight to flight or from different period to different period. What we did is we did an update during the downtime between the third flight and the fourth flight.
------------------------------
Kristin Liwag, BofA Merrill Lynch - Analyst [96]
------------------------------
Great. Thank you.
------------------------------
Operator [97]
------------------------------
Deepak Kaushal, GMP Securities
------------------------------
Deepak Kaushal, GMP Securities - Analyst [98]
------------------------------
Hi, good morning. Thanks for taking my questions, or question. I had a question; you talked about disappointment in the aerospace market. I wanted to focus on the commercial market. We can see the weakness continuing on the turboprop and the regional aircraft side on the CRJs; maybe if you could offer a view on the 100- to 150-seat market. Something that comes to mind is JetBlue's recent shift to larger A321s and a deferral of their Embraer aircraft. Are you seeing airlines move their fleet sizes to larger categories in this segment of the market due to weakness in the 100-seat market or is it because the aircraft are less optimal in that market, if you can offer some color on how that market is evolving?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [99]
------------------------------
With this one question you covered a lot of ground. From a turboprop and CRJ perspective, there's quite good opportunities. Of course as you look at the level of order in Q3 you see it's kind of low, but we're upbeat with the amount of opportunities in front of us. As you know, our American for example, has an RFP out. There've been some delays related to their exit of bankruptcy but this is a very good opportunity for RJs in the US.
There's quite a few turboprop opportunities. You saw that we announced an LOI for 100 Q400 in Russia, as an example. So we're quite upbeat with this category of aircraft.
As far as the 100- to 150-seats; yes, there is some airlines that are going bigger, but as a general rule, you look at the market; whether it's us or our competitors, we forecast 7,000 units over 20 years and we think this is growth segment of the industry, offering more frequency to customers at a competitive cost, competitive seat cost, I think is key and that's what the CSeries offers.
------------------------------
Deepak Kaushal, GMP Securities - Analyst [100]
------------------------------
Okay, I guess just to follow up; you mentioned frequency. I mean in this shift in JetBlue and I guess in North America; are you seeing that in a high fuel price environment, they're moving to fewer frequencies with larger aircraft and would this be a short-term phenomenon?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [101]
------------------------------
I think JetBlue is a very expensive seat cost airplane in this category that is not competitive, where the CSeries is going to be a very competitive aircraft with the A3-20s that they have. The problem is they have the wrong aircraft in that category.
------------------------------
Deepak Kaushal, GMP Securities - Analyst [102]
------------------------------
Okay. Thank you; appreciate the response.
------------------------------
Operator [103]
------------------------------
Turan Quettawala, Scotiabank
------------------------------
Turan Quettawala, Scotiabank - Analyst [104]
------------------------------
Good morning. I guess my question is on free cash flow. If I look on a year-to-date basis you're down about $1.7 billion as far as cash burn is concerned. I'm just wondering if you're still pretty comfortable with the guidance that you provided for 2013.
------------------------------
Pierre Alary, Bombardier Inc. - CFO [105]
------------------------------
What's the number you refer to? $1.7 billion down?
------------------------------
Turan Quettawala, Scotiabank - Analyst [106]
------------------------------
$1.7 billion for the first nine months, right?
------------------------------
Pierre Alary, Bombardier Inc. - CFO [107]
------------------------------
$1.7 billion is the usage versus $1.5 billion last year. (multiple speakers). I thought you had said $1.7 down, so it's-- the usage--
------------------------------
Turan Quettawala, Scotiabank - Analyst [108]
------------------------------
Cash burn $1.7 billion.
------------------------------
Pierre Alary, Bombardier Inc. - CFO [109]
------------------------------
Well again, there's no change to our guidance and so we're confident that the fourth quarter is going to be a good cash generation.
------------------------------
Turan Quettawala, Scotiabank - Analyst [110]
------------------------------
Can you provide some elements of that maybe, Pierre? I mean is that-- how much of that is dependent upon orders or advances maybe and with these sort of new issues, [NBT], does that negatively impact that at all?
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Pierre Alary, Bombardier Inc. - CFO [111]
------------------------------
No, NBT we expect as usual that the overall, the cash flow should be aligned with profitability; not exactly on it but generally in line. And that hasn't changed. And if I look at the aerospace side, there's a number of deliveries in the fourth quarter that it's going to be higher than what we've seen, so there's going to be reduction of the inventory level; the advent is coming from new orders that are expected; so that's all the various variable that we typically see in the fourth quarter.
------------------------------
Turan Quettawala, Scotiabank - Analyst [112]
------------------------------
Okay, great. Thank you.
------------------------------
Operator [113]
------------------------------
Tim James, TD Securities
------------------------------
Tim James, TD Newcrest Securities - Analyst [114]
------------------------------
Thank you. I just want to first of all confirm something, Pierre that was mentioned earlier in the call just in regards to the CSeries write-down. Is that number, that amount, included in the $37 million, the write-down in note 11, along with obviously other business aircraft, etc that normally occurs in that amount?
------------------------------
Pierre Alary, Bombardier Inc. - CFO [115]
------------------------------
Yes it is.
------------------------------
Tim James, TD Newcrest Securities - Analyst [116]
------------------------------
Okay.
------------------------------
Pierre Alary, Bombardier Inc. - CFO [117]
------------------------------
It is included in the $37 million, yes.
------------------------------
Tim James, TD Newcrest Securities - Analyst [118]
------------------------------
It's part of that number? Okay. My next question is just on the transportation segment. I'm just wondering if you can comment on the outlook into 2014 for the Asia-Pacific region. I know there's a couple contracts there that have ramped down a little bit, probably some others that are getting ready to ramp up. How do you look at 2014, just directionally, for revenue for transportation from that region?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [119]
------------------------------
Okay, so you went very broad. I think when you're talking about ramp down; you're talking mainly about our Chinese business, because there are other opportunities in the Asia-Pacific. There's, for example, a great contract that we've bid on in Australia called [Queens Rail]. So I just wanted to have more precision on your question.
------------------------------
Tim James, TD Newcrest Securities - Analyst [120]
------------------------------
Yeah, I believe I'm referring to the work in China, partly making it in reference to the commentary in the MD&A which doesn't specify which region within the Asia-Pacific. It just talks about some contracts ramping down in Asia-Pacific. But let's go with the fact that it's contracts in China.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [121]
------------------------------
Yes. So in China, we expect that we will start delivering ZEFIRO 380 towards the end of 2014 beginning 2015. So you see that there you will have a ramp up. And there's other opportunities that we're pursuing. Now we're in between contracts, so that's why we're referring to ramp down.
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Pierre Alary, Bombardier Inc. - CFO [122]
------------------------------
And it's down in this quarter, but if you look at it on a cumulative basis, it's higher. So-
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [123]
------------------------------
This year we're 30% higher than last year in this category.
------------------------------
Tim James, TD Newcrest Securities - Analyst [124]
------------------------------
So you were higher year over year in the first half of the year; and I'm just thinking China specifically now. You were up year over year in China in the first half but down in the third quarter, year over year. Is that correct?
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Pierre Alary, Bombardier Inc. - CFO [125]
------------------------------
Third quarter is down but that specific-- the mix of contract or the level of activities, some contracts coming down and some contracts ramping up; so it's just-- looking at one quarter doesn't give us really a trend.
------------------------------
Tim James, TD Newcrest Securities - Analyst [126]
------------------------------
Okay. Thank you very much.
------------------------------
Operator [127]
------------------------------
Doug Karson, Bank of America Merrill Lynch
------------------------------
Doug Karson, BofA Merrill Lynch - Analyst [128]
------------------------------
Great guys, thanks for taking my question. I guess I wanted to just talk about the extent that you can just give us some flavor on the order book for the CSeries. It looks like from your data here, there's 177 orders and I just wanted to get a sense of- is that where you feel you should be at this point, kind of on track with your internal targets? And as we look at that, is there any kind of cadence you can give us for what's some horizons we could look for in coming years?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [129]
------------------------------
What we've always said since the beginning of the program is that we wanted 300 firm by entry-into-service and that 177 today with what we have in discussions with the customers, we feel good about reaching that target.
------------------------------
Doug Karson, BofA Merrill Lynch - Analyst [130]
------------------------------
Great. Okay, I'll pass the mike to somebody else. Thank you.
------------------------------
Operator [131]
------------------------------
Neal Dihora, Morningstar
------------------------------
Neal Dihora, Morningstar - Analyst [132]
------------------------------
Yeah, good morning; thanks. I was wondering if you comment on aerospace employee base; I guess if you compare to say 2008, when you guys had deliveries of 345 units, I mean you had 32,500 and now you-- at least at year end 2012, you reported 35,500 and so maybe just if there's any sort of efficiencies to be gained in the labor front, thanks.
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Shirley Chenier, Bombardier Inc. - Director, IR [133]
------------------------------
That's a really pointed question. Can I get back to you on that?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [134]
------------------------------
What I would say to you is that we have more employees in R&D right now and development than we did in the period you just mentioned. As far as efficiency in the factory, we've made tremendous progress. So if we had more precision in your question, maybe we could get back to you with specific answers.
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Shirley Chenier, Bombardier Inc. - Director, IR [135]
------------------------------
Okay, Neal; we'll take if offline?
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Neal Dihora, Morningstar - Analyst [136]
------------------------------
Okay, thank.
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Shirley Chenier, Bombardier Inc. - Director, IR [137]
------------------------------
Thank you. We'll give you a call.
------------------------------
Operator [138]
------------------------------
[John Wong, Greshon Capital]
------------------------------
John Wong, Greshon Capital - Analyst [139]
------------------------------
Hi. Thanks for taking my question, guys. I just want to get a sense of how comfortable are you guys and this may have been answered in some form already; but how comfortable are you with your liquidity levels currently given the CSeries and Learjet investment commitments already that will be coming over the next year to 18 months?
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Pierre Alary, Bombardier Inc. - CFO [140]
------------------------------
Our liquidity level currently, I mean at the end of the third quarter are at $4 billion and we expect the fourth quarter to be a cash generation, solid cash generation, so therefore that liquidity to go up; and we've been working with that level, $3 billion to $4 billion of liquidity; given the size of the investment we're having for the past couple of years.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [141]
------------------------------
And the other thing I would add is our programs are-- two of our three programs are in the flight test, so that means we can see the revenue in front of us, not too far; it's not like we're starting a program. So our growth story I think is very exciting and it's right in front of us.
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John Wong, Greshon Capital - Analyst [142]
------------------------------
Okay. And I guess part of the reason I ask is- I think it was this time last year; obviously coming with the line of the delay announcement by six months on the CSeries first test flight at the time; you guys came with additional financing over the next I think subsequent few months. So you guys don't foresee kind of a repeat of that at this point, today?
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Pierre Alary, Bombardier Inc. - CFO [143]
------------------------------
Last year we were at a lower level of cash at the same period, and we always look at our capital structure; what makes sense and we revise it on a regular basis, and that's how we go about it.
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John Wong, Greshon Capital - Analyst [144]
------------------------------
Okay. I appreciate it. Thank you, that's helpful.
------------------------------
Operator [145]
------------------------------
Joe Nadol, JPMorgan
------------------------------
Joe Nadol, JPMorgan Chase & Co. - Analyst [146]
------------------------------
Thanks. I just had a couple of quick follow-ups and just confirmations. So Pierre Alary, just on the CSeries inventory if you vis-a-vis the note 11 which you point out, so the $37 million is it up that much from the last couple quarters? It's up a hair every quarter it seems like? Is most of that CSeries or is CSeries just starting to have a bit of an impact but it's going to get bigger so you wanted to flag it for the first time in the MD&A.
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Pierre Alary, Bombardier Inc. - CFO [147]
------------------------------
Yeah, we're flagging it for the first time because it's starting to get an impact. There's been some in the previous quarter and so it's starting to ramp up or to be higher, so that's why we are highlighting it.
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Joe Nadol, JPMorgan Chase & Co. - Analyst [148]
------------------------------
So we should be thinking about the--
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Pierre Alary, Bombardier Inc. - CFO [149]
------------------------------
But the bulk of the adjustment is in relation to the normal provision we are taking on [stairs], representing the obsolescence; we have a certain percentage we take every quarter and also the adjustment on the used aircraft inventory we have. When the market evolves, we adjust.
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Joe Nadol, JPMorgan Chase & Co. - Analyst [150]
------------------------------
Got it; so it's a relatively smaller part of the $37 million right now, but if we take your 2% guidance from before, for dilution next year, applied that to sales, it's roughly $175 million to $200 million for the year, so maybe $10 million or $15 million now is ramping up towards $40 million, $45 million per quarter? Is that roughly right?
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Pierre Alary, Bombardier Inc. - CFO [151]
------------------------------
I wouldn't speculate at this point. It depends on the ramp up of the working capital or the inventory level. It depends on the specific contracts. So there are a lot of variables around it.
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Joe Nadol, JPMorgan Chase & Co. - Analyst [152]
------------------------------
Okay. (multiple speakers)
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Pierre Alary, Bombardier Inc. - CFO [153]
------------------------------
(inaudible)
------------------------------
Joe Nadol, JPMorgan Chase & Co. - Analyst [154]
------------------------------
Okay. Then just one more which is on the transportation contracts; I just want to be clear. So the few large projects that are causing the margin pressure; is there anything else that you guys feels that should be flagged beyond TALENT 2 and Ile de France; is there another one or two large programs that are causing this or are those still the only ones you were referring to when you say a few large projects.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [155]
------------------------------
No, like I said before, these two projects that you referred TALENT 2 and Ile de France are in delivery, so they count in the dilution of the margin because their revenues were in the delivery phase and the revenues are going up. At the same time we have other big projects that have some execution issue, but we have other big projects that are doing well. That's why I'm saying, the best way to look at how to improve where we have execution issues is to focus on engineering, project management and relation with customers.
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Joe Nadol, JPMorgan Chase & Co. - Analyst [156]
------------------------------
Okay. But Pierre, the other two that are in deliveries, those have been going on for some time and one would think that you have your arms around those. This is the first time I think that you've referred to other large projects that have some issues. How confident are you that this is going to be a transitory issue or is there the risk that this becomes, that we start identifying these and this becomes a bigger issue next quarter or next year?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [157]
------------------------------
I'm confident that we are addressing the root cause, which I just mentioned and that we will make progress. But again, some of these projects are long term, but I'm confident we are addressing the root cause and we'll make progress.
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Joe Nadol, JPMorgan Chase & Co. - Analyst [158]
------------------------------
Okay. Thank you.
------------------------------
Operator [159]
------------------------------
David Tyerman, Canaccord Genuity
------------------------------
David Tyerman, Canaccord Genuity - Analyst [160]
------------------------------
Yes, I just wanted to follow up on your comments, Pierre Beaudoin, about the Q400 and the CRJ; you mentioned you were upbeat and you mentioned the American CRJ which we all know about and the Russian opportunity you have on the Q400s. Can you give us an idea if there's much more beyond that? Because the backlogs are obviously getting squeezed down, especially on the Q400, and so it's getting quite nerve-racking watching this and I'm wondering what could possibly happen here on the production front.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [161]
------------------------------
We have the advantage of seeing what we're working on with customers and there's quite a few opportunities, either with repeat customers, customers we already have that add to their fleet; or with new customers and new regions. I can't identify the customers until they have spoken themselves, but that's why I said I was upbeat because I think both products have good demand in front of them.
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David Tyerman, Canaccord Genuity - Analyst [162]
------------------------------
Okay, so it sounds like the potential is there for the order flow to pick up fairly soon, because it's going to need to I would think, given where your backlogs are getting to. Is that fair?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [163]
------------------------------
That's fair.
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David Tyerman, Canaccord Genuity - Analyst [164]
------------------------------
Okay, thank you.
------------------------------
Operator [165]
------------------------------
Deepak Kaushal, GMP Securities
------------------------------
Deepak Kaushal, GMP Securities - Analyst [166]
------------------------------
Hi. Thanks for taking my follow up. First of all, I do want to apologize; it's a short-term question. But I want to try to get into the right mindset for expectation for Q4. It looks like you have to get about 90 aircraft delivered in Q4 to hit your target for the year and there was almost a month of shutdown in the US government in terms of certifications. I'm wondering if you can make that up in the other two months and then just to follow on that, on the free cash flow, by math it looks like a lot of- more than $600 million probably working capital has to come out of transportation for you to hit your free cash flow number for the year. If you can offer some color on working capital in transportation and how that's going to play out over the next few months; thank you.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [167]
------------------------------
Well, I'll answer you on the airplane delivery. We feel confident that we can make up the two weeks delay that we suffered by the government shutdown. We feel confident with our guidance that we have given in terms of delivery. And you're right; it's a big quarter of delivery, Q4 for us.
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Pierre Alary, Bombardier Inc. - CFO [168]
------------------------------
Now when we look at the working capital in transportation; I invite you to look at the previous fourth quarter of previous years and you will see that the contribution in terms of cash is significant in the fourth quarter in transportation. So there's a seasonality effect and that's the best way to get an estimate of where it's going.
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Deepak Kaushal, GMP Securities - Analyst [169]
------------------------------
Okay, and beyond the seasonality, I know a couple of years ago you had a big inventory ramp for the start of some new projects. Are those specific projects rolling off or are they kind of still mid phase?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [170]
------------------------------
You know I don't look at project by profile; we do look at it project by project, but I cannot comment on this--
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Pierre Alary, Bombardier Inc. - CFO [171]
------------------------------
The problem is we've got 200 to 300 contracts going on at any point in time, so there's contracts ramping up and there's contracting going down so it typically balances one another.
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Deepak Kaushal, GMP Securities - Analyst [172]
------------------------------
Okay, so a normal working capital contribution for Q4?
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Pierre Alary, Bombardier Inc. - CFO [173]
------------------------------
Yes.
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Deepak Kaushal, GMP Securities - Analyst [174]
------------------------------
Okay, thank you. That's helpful.
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Operator [175]
------------------------------
Steve Hansen from Raymond James.
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Steve Hansen, Raymond James & Associates - Analyst [176]
------------------------------
Just two very quick follow-ups for me, please. The first one is simple. Just I noticed the tax rate was quite low in the quarter. Just on a go-forward basis, should we expect something about on a more normalized basis?
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Pierre Alary, Bombardier Inc. - CFO [177]
------------------------------
Yeah, on the more normalized basis; I mean it fluctuates a lot from quarter to quarter, but you could expect 20% to 25% is kind of our typical tax rate.
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Steve Hansen, Raymond James & Associates - Analyst [178]
------------------------------
Okay, that's helpful. And then just a last one if I may; on the CSeries program, (inaudible) comment that I think Pierre made earlier on something to do with the suppliers in discussion around perhaps altering the current flight testing program to more or less vehicles. Am I to understand-- I'm trying to understand the nature of any potential delays that could transpire in the program and trying to understand where they're sourcing from. Is it a function of the manufacturing on your side or it sounds like it's more a supplier bottleneck to some degree that could be a source of potential delay?
I'm just trying to understand what that could be or the magnitude.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [179]
------------------------------
Well, and that's-- I didn't want to refer to a potential delay; what I'm saying is right now, before we come out with schedule, it's very important that we have had discussions with all stakeholders, really understand the plus and the minus and make a decision. Because not only that we are doing flight tests right now, but we'll have to decide when to ramp up work in process to build the first aircraft.
So having a date that we can rely on and that we have spoken to all stakeholders is even more crucial now than it was during the development program. So that's why we need to take our time to do our job properly.
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Steve Hansen, Raymond James & Associates - Analyst [180]
------------------------------
Okay, that's helpful. Thank you.
------------------------------
Operator [181]
------------------------------
Kristine Liwag from Bank of America, Merrill Lynch
------------------------------
Ron Epstein, BofA Merrill Lynch - Analyst [182]
------------------------------
Hey Guys, it's actually Ron Epstein. I hope you're all doing well. Just some follow-on questions if that's okay; and good morning.
So just maybe if we can back up a little bit on CSeries; where did you think you would be in the flight test program now relative to where you are?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [183]
------------------------------
We are on plan with the flight test program at this point. It's early days; it's just starting. There's only one flight test vehicle in flight but we are where we thought we would be.
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Ron Epstein, BofA Merrill Lynch - Analyst [184]
------------------------------
Okay, so you are where you thought you would be; you're not delayed?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [185]
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No.
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Ron Epstein, BofA Merrill Lynch - Analyst [186]
------------------------------
Okay. And then maybe switching gears a little bit into business jets; the large aircraft market, seems like it's doing a little bit better than the mids and the lights, right? Can you characterize-- could you actually-- it seems like it's been going pretty well in the large aircraft market for Bombardier. How is it? How are things like pricing? We've heard some things like some of your competitors are in the market pretty aggressively trying to sell planes. How is the business environment right now for large business jets?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [187]
------------------------------
It's good, the Global has got a very good reputation as the airplane of choice and we have broad product portfolio from the 5000 all the way to the 8000s and I think our product positioning is very good when we look against the competition. So right now we're being able to have normal market price discussion with our customers.
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Ron Epstein, BofA Merrill Lynch - Analyst [188]
------------------------------
Normal price discussion; okay. And then maybe one -- (multiple speakers). Yes?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [189]
------------------------------
It's not a market that is affected by price pressure at this point.
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Ron Epstein, BofA Merrill Lynch - Analyst [190]
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Not affected by price pressure, okay. And then maybe one more question when we're talking about airplane pricing. I think you guys have said by the time the CSeries enters into service you want to have 300 aircraft in backlog. As it presumably goes into service, that's about when Boeing and Airbus get to the end of the road with the current generation 737 and then A320, right? How is that reflecting in the conversations and broadly speaking, because I know can only give so much detail; how is that reflecting in the conversations you're having with potential customers around pricing? Because I would imagine, but I could be wrong, that an environment where both Boeing and Airbus are kind of getting at the end of their production of their current aircraft, they'll be super aggressive on price. So is that putting pressure on you guys in terms of price with the CSeries or how does that change the dynamic?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [191]
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I don't think-- you'd have to ask them, but I look at the level of backlog for Boeing and Airbus, I don't think they have any of their classics still to sell. They're seeing NEOs or MAX so we're competing with them with product that has the same type of engines. Of course we have an all new airplane, so we have a competitive advantage in terms of what we can demonstrate in terms of performance, but really if I look at Airbus and Boeing, their focus is on the bigger airplanes, not the 319 or the 377, 700; because they can't compete with the CSeries and the CS300 in that category. The CSeries is far superior.
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Ron Epstein, BofA Merrill Lynch - Analyst [192]
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Okay. And then maybe one last one and you might have addressed this and I missed it so my apologies for that. When are you expecting the entry-into-service for the CSeries now? Still sometime next year; how should we think about that?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [193]
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What we said is we are evaluating the schedule now as the flight test program has started, and we will answer this question in the next few months.
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Ron Epstein, BofA Merrill Lynch - Analyst [194]
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Okay, great. Thank you.
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Operator [195]
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Robert Spingarn, Credit Suisse
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Robert Spingarn, Credit Suisse - Analyst [196]
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Thank you for taking the follow up. I wanted to ask you still on the CSeries, this is about the write-down Pierre. Is this one of the reasons you have good visibility into the 200 basis points of dilution? Is this write-down or the accounting behind this something of a regulator that allows you to clean out some excess cost of goods sold before you get to producing the aircraft?
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Pierre Alary, Bombardier Inc. - CFO [197]
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That's part of the accounting principles that we need to follow, so it's-- when you look at the specific contract you have and contract by contract where you spend on the contract and you won't recover all the costs, then you have to provide for it.
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Robert Spingarn, Credit Suisse - Analyst [198]
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But my point, in other words, does this give you greater clarity into your ability to limit the dilution in production to 200 basis points, assuming of course that something unforeseen doesn't come up on a particular aircraft as you're producing it?
In other words, if you get off of the learning curve?
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Pierre Alary, Bombardier Inc. - CFO [199]
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I don't more or less clarity. We have assumption as to what- when we give that guidance it was based on an assumption as to what would be the production rate, what would be done, what would be the deliveries, the ramp up and so on. Now it's the actual; so versus the assumption; it doesn't give me more or less visibility.
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Robert Spingarn, Credit Suisse - Analyst [200]
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Let me say it differently. If production costs per unit change in the future but you see that today, would we see that at the time the aircraft is built or would you take the write-down now?
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Pierre Alary, Bombardier Inc. - CFO [201]
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I take the write-down as I spend.
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Robert Spingarn, Credit Suisse - Analyst [202]
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Okay. All right, that answers the question. That money would be spent later so that would not be included now?
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Pierre Alary, Bombardier Inc. - CFO [203]
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Right.
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Robert Spingarn, Credit Suisse - Analyst [204]
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Okay, so the other question I had for you was on Q4 cash flow and this may have come up earlier but I just wanted to be certain. To what extent does your reiteration of cash flow guidance for the year contemplate timing on the advances associated with the big Flexjet order from Directional?
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Pierre Alary, Bombardier Inc. - CFO [205]
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Well, we take all aspects into account in our cash flow expectation (multiple speakers).
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Robert Spingarn, Credit Suisse - Analyst [206]
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Is that Q4 or Q1?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [207]
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Well, we expect to close Flexjet in Q4.
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Robert Spingarn, Credit Suisse - Analyst [208]
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Okay, so it's part of your guidance?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [209]
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Well when we gave guidance a year ago we had done the sale of Flexjet, so--
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Robert Spingarn, Credit Suisse - Analyst [210]
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Well, that's what I'm saying. So if you have advances coming in to operating cash flows, would you exceed your guidance or do you need these advances to make your guidance?
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Pierre Alary, Bombardier Inc. - CFO [211]
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The short answer is that we need advances to meet our guidance. That means we need to sign new orders and get advances that goes with it and we need the progress statement on the sale we made six months ago, a year ago, so that's progress payment; so all of those advances have to come in and they are a part of it.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [212]
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And we reevaluate the customer mix every quarter or more often than that, so that's part of it too.
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Robert Spingarn, Credit Suisse - Analyst [213]
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I understand. The reason I am asking you is just because it's a particularly big order at an interesting time, right when the year changes; that's why.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [214]
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Okay.
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Robert Spingarn, Credit Suisse - Analyst [215]
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Thank you.
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Operator [216]
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Thank you.
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Shirley Chenier, Bombardier Inc. - Director, IR [217]
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Operator, do we have any more questions?
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Operator [218]
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David Newman, Cormark Securities
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David Newman, Cormark Securities - Analyst [219]
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Yeah, guys; just a quick follow up on the examining of the EIS for the CSeries. With the delays already on the books and the potential for penalties and other extra costs; is that also going to factor into the equation versus lower rate initial production that you might have? And just trying to get a sense of how free cash flow might be impacted as months go by if there is a delay, let's say, into 2015. I'm not saying there's going to be, but could we assume that those penalties should compound or how should we be looking at the free cash flow?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [220]
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We don't want to do speculation on what if there is a delay; we're looking at the schedule now and we will get back in the next few months to show where the schedule will be on the CSeries. It's a question of balancing the interest of all the stakeholders- our customers, our suppliers, the ramp up of work in progress and the flight test. So we have some work to do.
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David Newman, Cormark Securities - Analyst [221]
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Let me just ask you in another way, Pierre. If you look at the penalties that you could potentially incur, what sort of flexibility have you built in beyond the delays that have already been on the books? I mean do you still have some decent flexibility on that or because your initial production is low; or how should we be thinking about it?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [222]
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Well, we're going to balance the best of meeting our customers' commitments to what makes the most sense during the flight test. So I cannot answer you specifically because you'd have to understand every contract of every customer. So I think overall counting them; we're trying to balance the interest of all stakeholders without taking too much risk.
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David Newman, Cormark Securities - Analyst [223]
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All right. Thanks, folks.
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Shirley Chenier, Bombardier Inc. - Director, IR [224]
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Operator, I think this concludes the question period intended for investors and analysts.
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Editor [225]
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This concludes the analyst portion of this call.
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Editor [226]
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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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