Q4 2013 BOMBARDIER INC Earnings Conference Call - English
Feb 13, 2014 AM EST
BBD.B.TO - Bombardier Inc
Q4 2013 BOMBARDIER INC Earnings Conference Call - English
Feb 13, 2014 / 01:00PM 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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* Walter Spracklin
RBC Capital Markets - Analyst
* Fadi Chamoun
BMO Capital Markets - Analyst
* Joe Nadol
JPMorgan Chase & Co. - Analyst
* Cameron Doerksen
National Bank Financial - Analyst
* Ron Epstein
BofA Merrill Lynch - Analyst
* Benoit Poirier
Desjardins Securities - Analyst
* David Tyerman
Canaccord Genuity - Analyst
* Turan Quettawala
Scotiabank - Analyst
* Deepak Kaushal
GMP Securities - Analyst
* Darryl Genovesi
UBS Securities LLC - Analyst
* Stephen Trent
Citigroup - Analyst
* Peter Arment
Sterne, Agee & Leach, Inc. - Analyst
* Steve Hansen
Raymond James & Associates - Analyst
* Anthony Scilipoti
Veritas Investment Research - Analyst
* Tim James
TDNewcrest/Waterhouse Securities - Analyst
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen. 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.
This is a pretty early call so I hope you all had time for coffee before we start. (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 fiscal year ended December 31st, 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 www.bombardier.com and the webcast archive of the integral version of this call will be available later today. Slides for this presentation in English and French are equally available on our website. All dollar values expressed during this conference call are in US dollars unless stated otherwise.
I also wish to remind you that during the course of this conference call we may make projections or other forward-looking statements regarding future events or the future financial performance of the corporation. Several assumptions were made by Bombardier in preparing these statements and we wish to emphasize that there are risks that actual events or results may differ materially from these statements.
For additional information on such assumptions, please refer to the MD&A that we 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.
As usual, Pierre will walk you through the 2013 results and details, but before he does, I must say that we've accomplished quite a lot over the past year and major milestones were reached in our development program.
The CSeries flew for the first time in September. The Lear 70 and 75 entered into service at the end of the year, and our very high-speed trains, the ZEFIRO 380 and 300 are progressing well towards their homologation; and all of this while garnering an important share of new orders which brought our backlog to a record level of close to $70 billion.
2014 is off to a great start with approximately $5 billion of orders, already one since the beginning of the year for both groups. A few examples- Al Qahtani from the Kingdom of Saudi Arabia, ordering 16 CS300s valued at approximately $1.2 billion; an undisclosed customer placing an order for a mix of Global 6000, 7000 and 8000 for a value of $537 million; the State of Queensland awarding us a $2.7 billion order for 75 EMUs, a maintenance center and 30 years of maintenance; and BART, the San Francisco Bay area rapid transit district, exercising an option for 365 additional railcars for a total of $639 million. And that doesn't include Crossrail in London or the Chicago Metro, which both notified us that we had achieved preferred bidder status.
2014 will be another growth year for Bombardier. We expect to deliver 280 aircraft in 2014, compared to 238 last year, and transportation will see its revenue increase in the mid-single-digit range over the same period.
We expect therefore an increase in revenue of approximately $2 billion, which will take our annual revenue to over $20 billion. This growth will translate into improved profitability compared to 2013.
Our investments in new products will also decrease significantly over the next two years, as the CSeries and the Lear 85 enter into service.
And now I will let Pierre Alary go over our results in more detail.
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Pierre Alary, Bombardier Inc. - CFO [4]
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Thank you, Pierre. Good morning. So both groups are reporting increased revenues for the quarter and the full year. Revenues for the fourth quarter totaled $5.3 billion, compared to $4.6 billion last year. This represents an increase of 11% for aerospace and 16% for transportation.
For the full year, revenues total $18.2 billion, an increase of $1.7 billion over last year. Aerospace revenues were at $9.4 billion, 9% higher than last year; while transportation revenues were at $8.8 billion, an increase of 11%.
The combined EBIT before special items total $186 million for the quarter and $893 million for the full year. That compared to $164 million and $806 million, respectively last year.
Both groups had an EBIT margin percentage at a similar level as last year.
For the full year, aerospace EBIT margin is at 4.1%, in line with guidance; while transportation is at 5.8%.
Net financing expenses for the quarter amounted to $45 million, compared to $49 million last year; and with an effective income tax rate of 30.7%.
The adjusted net income for the quarter totaled $129 million or $0.07 per share.
For the full year, adjusted net income totaled $608 million or $0.33 per share, compared to $671 million or $0.36 per share last year.
Consolidated free cash flow for Q4 amounted to $771 million, compared to $854 million last year. As a result, we ended the year with a strong cash balance of $3.4 billion.
For the full year, aerospace generated $1 billion of cash flow from operating activities and invested $2.2 billion in product development.
For the full year, transportation free cash flow generation was very good and exceeded profitability. Free cash flow totaled $668 million.
Our cash flow generated from operations, together with our good level of liquidity amounting to $4.8 billion, will ensure our financial flexibility to support our major investment programs in aerospace.
Now let me review our net retirement benefit liability. As we continue to implement our de-risking strategy in relation to our retirement plan, we have made significant progress during the year. Our net retirement benefit liability decreased from $3 billion to $2 billion, mainly due to strong return on plan assets and an increase in discount rates.
The net retirement benefit liability is comprised of the funded and unfunded pension plan and also retirement benefits. The last two components are always by structure in a deficit position, as they are unfunded.
So during the year, the funded pension plan deficit was reduced from $1.8 billion to $900 million. Our total retirement benefit cash contributions are expected to reduce by $50 million to reach $518 million for 2014.
Now let's look at our guidance and outlook for 2014.
For aerospace, we expect EBIT margin to be approximately 5%. We expect cash flow from operation activities to be between $1.2 billion and $1.6 billion; while our investment in programs are expected to be between $1.6 billion and $1.9 billion.
It is worth noting that we expect the investments for 2015 to be between $1.2 billion and $1.5 billion and to be below $1 billion in 2016.
In terms of deliveries, we expect approximately 200 business aircraft and 80 commercial aircraft for 2014.
Now in transportation, while 8% remains our target, we expect an EBIT margin of approximately 6% for 2014, free cash flow to be generally in line with EBIT, and we expect our revenue growth in the mid-single-digit range over 2013; that is, excluding foreign-exchange impact. And we expect a book-to-bill to be above 1.
Now I'll let Pierre conclude.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [5]
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Over the last five years, we've made large investments in game-changing mobility solutions and their entry into service is just around the corner. We're entering an era of even stronger revenue generation and this combined with our commitments to sustained growth and profits and revenues, will transform our Company.
Our potential is enormous and we're excited about our future. Our investments are about to pay off. Thank you.
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Shirley Chenier, Bombardier Inc. - Director, IR [6]
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Thank you, Pierre. We will now start the 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 or [Ian] 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) Walter Spracklin, RBC Capital Markets
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Walter Spracklin, RBC Capital Markets - Analyst [2]
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Thank you very much. Good morning, everyone. So I want to start my question I guess on to Pierre Alary; it looks like your CapEx now, you're guiding about $100 million to $400 million more for this year and then higher for the next year versus your prior guidance.
You'd always indicated into us that your cash requirements or total liquidity requirements at the beginning of each year, you wanted them to be about $3 billion. My question I guess is- is that $3 billion, given where you are in your investment cycle, is $3 billion still the right number to use? And if you are to go toward the higher end or the worse end of your cash flow expectations, are you comfortable that you'll be able to maintain that $3 billion or whatever the new number is at the beginning of each year over the next couple years?
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Pierre Alary, Bombardier Inc. - CFO [3]
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Well the answer is that the $3 billion, yes, is the right figures and if you look at the past two years, we were above $3 billion; for the past few years we were above $2 billion to start the year. And we've been going through a significant investment period.
So yes, being at $3.4 billion, being at access to credit facility of $1.4 billion; that's providing us with $4.8 billion of liquidity, so which we feel are adequate, given the investment program we have.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [4]
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At the same time, Pierre, I would add that we're reducing our investment in new programs in a significant way; all the way down to $1 billion. So when we have reduced step by step, year by year, of course our cash requirements will be less- the requirement to (inaudible).
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Pierre Alary, Bombardier Inc. - CFO [5]
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And you might remember that we used to talk about $2 billion and that was in the situation when we were in a normal investment period, which would be (inaudible).
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Walter Spracklin, RBC Capital Markets - Analyst [6]
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Okay. Thank you very much.
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Operator [7]
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Fadi Chamoun, BMO Capital Markets
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Fadi Chamoun, BMO Capital Markets - Analyst [8]
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Good morning. I wonder if you can help us understand a little bit what the CSeries cash flow requirements are going to be this year in terms of working capital; the dilution effect on the margin that you're expecting from the CSeries in 2014 as well. Thanks.
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Pierre Alary, Bombardier Inc. - CFO [9]
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I guess one, we've added one guideline, if you'd like, in the detail of the MD&A so I can guide to which page it is—on page 55 where we're specifying that the—until entry into service of the CS300, we anticipate to add to the program tooling, and we expect to increase the CSeries aircraft tooling by $750 million in relation to development spending and that is to enter into service of the CS300 and to that we will add about approximately $300 million in relation to capitalized (inaudible) costs.
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Fadi Chamoun, BMO Capital Markets - Analyst [10]
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Okay. So—
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Pierre Alary, Bombardier Inc. - CFO [11]
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(Inaudible) 2014 the dilution, and it's mostly in relation to the net reasonable value provision that we will have to take as we start building the inventory. It is expected to be about 1%.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [12]
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And of course that doesn't include SG&A as it relates to the CSeries.
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Pierre Alary, Bombardier Inc. - CFO [13]
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Exactly, yes. It's really in relation to the NRV, mostly in relation to the NRV.
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Fadi Chamoun, BMO Capital Markets - Analyst [14]
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Okay, so that's 1% on EBIT margin in aero 2014 from CSeries; but then if take that into consideration, it doesn't seem like your profitability in aerospace is improving concurrent with the strong revenue growth you've had in the last three years. Can you elaborate on why these incremental margins are somewhat low- at this stage (inaudible)?
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Pierre Alary, Bombardier Inc. - CFO [15]
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I guess considering a 1% dilution; that means that when I say that the EBIT is expected to be at around 5%, I mean excluding that dilution it would be 6% and that compared to 4.1% this year. So that's a significant increase. That's a 50% increase.
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Fadi Chamoun, BMO Capital Markets - Analyst [16]
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Right. But a year ago you were more in the line of thought that it will be going up to close to 8% and before dilution of this CSeries. So it is still tracking materially below that.
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Pierre Alary, Bombardier Inc. - CFO [17]
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Well, you know we haven't seen a significant recovery in the business aircraft. So the business aircraft market has remained pretty much the same for the past couple of years and as part of those guidance, we were expecting a recovery in the business aircraft; higher recovery than what we've seen.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [18]
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And we were delivering CSeries in 2014.
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Fadi Chamoun, BMO Capital Markets - Analyst [19]
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Okay. Okay, thank you.
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Operator [20]
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Joe Nadol, JPMorgan
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Joe Nadol, JPMorgan Chase & Co. - Analyst [21]
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Thanks, good morning. Pierre, on the CSeries, I'm just wondering if you could take a step back here and just give us a little detail on how it's going. What are really some of the specific drivers behind the delay; it hasn't been flying much, I don't think. And so- but what's behind that? And maybe just big picture- your confidence level in the adjusted schedule.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [22]
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When we gave you the adjusted schedule we took into consideration their flying since the first flight. And of course each airplane have their specific mission. FTV3 should fly in the coming weeks. So the way I monitor it is we have a curve that we call the earned value curve for airplanes. And we're on track to the new schedule with this earned value curve.
There's a lot of technical activities happening behind the scenes, but yes, the flying hours will need to come up. But they're progressing quite well as we speak right now.
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Joe Nadol, JPMorgan Chase & Co. - Analyst [23]
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Is there a show-stopper from a systems standpoint or is it software, or just what exactly—I mean the reason you guys have given for the delays have been a little bit vague. And I was just wondering if you could give a little bit more.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [24]
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Yes, we give a lot of details on the website of CSeries and Rob Dewar goes up and makes a video once in a while to give you updates. Really, it's more about when we expect different software drops in the airplane and not only related to fly-by-wire; there's a lot of different software in an airplane; and when we expect the maturity of different systems to come in the various airplanes.
You know we have a schedule with milestones to meet and things are progressing as per plan. And we'll keep you informed. Like I say right now, we are on our earned value curve that we plan for the delivery in the second half of 2015.
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Joe Nadol, JPMorgan Chase & Co. - Analyst [25]
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Okay. Thank you.
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Operator [26]
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Cameron Doerksen, National Bank Financial
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Cameron Doerksen, National Bank Financial - Analyst [27]
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Yes, good morning. My question is on the transportation margin. It was pretty weak in the fourth quarter. I'm just wondering if you can give a little more detail as to what was really impacting the margin there. Was this another sort of reevaluation of various contracts that impacted the margin? And I'm also wondering if you can give us some kind of timeline on when you think you can hit the 8% that target? Is it a 2015 goal or is it something beyond that?
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Pierre Alary, Bombardier Inc. - CFO [28]
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In terms of margin, effectively in the fourth quarter there was an adjustment on a few contracts which did impact the fourth quarter margin more specifically.
In terms of the 8%, as we mentioned, it remains our target. But we're focusing on those specific contracts and resolving the issues and that will be in the near future, I guess.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [29]
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Well, what I want to say about the 8%; we feel very confident that we can achieve 8% in the near future, but we've put back that target twice and I'd rather that we show you our constant progress before we give a specific date. At the same time, we are reorganizing in transport under [litch] leadership and we call it 1BT. But we're focused very much on putting more emphasis on project management, on global procurement and on our engineering process to have more standardization.
And I want to feel confident that this reorganization is in place before I give you a specific date. What I would tell you today is let's—we'll show you progress through next year, and then we'll be able to give more visibility.
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Cameron Doerksen, National Bank Financial - Analyst [30]
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Okay. Will the restructuring and reorganization activities be largely complete by the end of 2014?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [31]
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Yes, I would say so. Yes, we're doing this as fast as possible, given the [context] where we are reorganizing, but definitely 2014 it will be essentially done.
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Cameron Doerksen, National Bank Financial - Analyst [32]
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Okay. Thank you.
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Operator [33]
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Ron Epstein, Bank of America Merrill Lynch
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Ron Epstein, BofA Merrill Lynch - Analyst [34]
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Yes, good morning. Thank you for taking my call. Just turning back to Bombardier aerospace question- so you're guiding I guess- what- about a 20% increase in aircraft deliveries in 2014--
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Shirley Chenier, Bombardier Inc. - Director, IR [35]
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Ron? We can't hear you. Are you on a speakerphone or-?
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Ron Epstein, BofA Merrill Lynch - Analyst [36]
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Hello? Can you hear me now?
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Shirley Chenier, Bombardier Inc. - Director, IR [37]
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Yes. Thank you.
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Ron Epstein, BofA Merrill Lynch - Analyst [38]
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Yes, sorry about that. It's a telephone malfunction. So again, thank you for taking my call. So maybe just going back to Bombardier aerospace quickly; so for 2014 you're guiding something like a 20% increase in aircraft deliveries. But your margin guidance is only 5% and I get you're factoring in some CSeries dilution. But when I look at some of your competitors, particularly in the large business jet marketplace, right? Demand that looks like for Gulfstream 550s is doing really well. [Dafo] seems to be doing pretty well.
If you look at the margins the third guys are reporting and the mix of airplanes that you guys have- right, I mean the Global is a wonderful product and there's a lot of demand for it. You would think that your margin should be higher, right? I mean why aren't you getting more accretion from the Global family in your results in aerospace?
And then one follow on. I'm going to keep it to one question, sort of; out of respect. Can you tell us actually how many hours the CSeries has flown to date?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [39]
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Let me start with the CSeries question. We get regular updates on the sites. I would refer you to there. I look more at earned value, but I would tell you that the overall slice is about 100 hours. But specifics, you'll see on the CSeries site.
As far as the aerospace margin, we have a much broader portfolio than the manufacturer that you referred to. And some of the sectors are more difficult right now, like the smaller business jet. And I'll say when we talk about dilution of the CSeries 1%; this is only one part. We also have some effect of having more SG&A. We have a bigger salesforce, for example, to make sure that the CSeries is sold worldwide and supported.
So because we're investing for growth, it adds further effect on our margin. But if you look—if I just take the dilution of the CSeries for adjustment in contract, this 1%; so that takes you to 6% from where we are today. That's a big growth. It's almost 50%.
So we're making progress, but in the context- we have a broader portfolio.
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Ron Epstein, BofA Merrill Lynch - Analyst [40]
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But Pierre- may I just—
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Pierre Alary, Bombardier Inc. - CFO [41]
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As you mentioned, investing in the future.
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Ron Epstein, BofA Merrill Lynch - Analyst [42]
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(Inaudible). But when I think about programs like your Globals and the demand for them and that size aircraft and how that market's been doing; one would think that your margins on those programs should be mid-to-high teens, right? And it is a lot of revenue and I understand that Lear is in a hard space in the market right and that's just kind of how it is and you've got you're turbo props and you've got a much broader portfolio.
But- and maybe I'm just thinking about it too simply. But you would think that the profitability on those big planes could really help out that segment more than we're seeing.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [43]
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I think Ron, I already answered this question. We're investing into our future which will create a lot of growth for our Company. And of course, temporarily it has some effect on our margin, the dilution of the CSeries, a little bit more expense to make sure that we have the right team in place to be ready for all of that growth and it's a little bit the same thing at business aircraft with the development of the Lear 85 and the Global 7000 and 8000. Most of the costs are capitalized, but there are other costs that are expensed and business aircraft to be ready for that growth.
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Ron Epstein, BofA Merrill Lynch - Analyst [44]
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Okay. Thank you.
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Operator [45]
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Benoit Poirier, Desjardins Capital Markets
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Benoit Poirier, Desjardins Securities - Analyst [46]
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Thank you very much and good morning. My question, just to come back on the aerospace margin; how should the aerospace margin and CSeries 1% dilution should evolve in 2015 and beyond, as you get closer and start to deliver the plane?
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Pierre Alary, Bombardier Inc. - CFO [47]
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We expect the first two years of the entry into service of the CSeries to be dilutive and at this point in time, that's as much as we'll get into the detail. To the 2015-2016; 2015 will be in the second half of 2015; so we're getting far away to give precise guidance.
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Benoit Poirier, Desjardins Securities - Analyst [48]
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Okay. That's my one.
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Operator [49]
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David Tyerman, Canaccord Genuity
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David Tyerman, Canaccord Genuity - Analyst [50]
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Yes, good morning. My question is on the CSeries working capital requirements. I was wondering if you could give us some idea over the next couple of years how we should be thinking about this. You've obviously got inventory build. You're going to be getting deposits and so on. I'm just wondering how all this nets out.
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Pierre Alary, Bombardier Inc. - CFO [51]
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We're going to gradually increase the inventory as we've already started in fact. And as you pointed out, there's advances from customers that is growing. And there's also contribution from suppliers and so on. So that kind of balances it out and we will look at our liquidity overall and I'm referring to that $3 billion of cash as a minimum to start the year.
We're very comfortable with the level of cash we have to cover the working capital variation.
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David Tyerman, Canaccord Genuity - Analyst [52]
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Okay, but Pierre, there's a lot of anxiety in the investor base about this issue and your answer doesn't give us any way to really put a specificity to the working capital changes here. Like, is it zero? Is it something? Or is there some way we can think about this because investors are sitting here trying to figure out- what impact is this? You're just saying- trust us.
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Pierre Alary, Bombardier Inc. - CFO [53]
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Well, you're asking me guidance for 2015-2016. Typically and you would have seen it over the past few years, the working capital- the variations of working capital for the full year are not significant. That is, in fact, the cash flow from operations has been above the EBITDA. And that's a good indication of how we're able to manage and balance the inflows and outflows. And we don't expect that to change in a significant way. So that is that the working capital, the effect of the working capital is close to neutral.
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David Tyerman, Canaccord Genuity - Analyst [54]
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Okay. Thank you.
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Operator [55]
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Turan Quettawala, Scotiabank
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Turan Quettawala, Scotiabank - Analyst [56]
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Yes, good morning. I guess my question is on the BT margin. Lutz has talked about a significant increase in R&D expenses here just as he sort of changes the business a little bit. I'm wondering if you can comment a little bit on how soon you'd think you can sort of get that back, just in the context of the 8% margin. Presumably that obviously will have a negative impact on the margin here in the near term. And I guess you need to probably get that back from SG&A. So maybe you can talk a little bit about how soon you can do that. Thank you.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [57]
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Well, we all want to increase investment up front in R&D, but we have to earn that with reduction in SG&A on the other side. So this will not always be perfectly timed because sometimes we start a project before we've implemented the overhead reduction.
But it's very clear with Lutz and his team that he wants to—when he makes significant savings in efficiency, part of it will go back to R&D; always focusing on delivering the 8%.
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Turan Quettawala, Scotiabank - Analyst [58]
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So I guess the 6% margin guidance then for 2014, is that mainly due to execution issues on some of the contracts that you're facing?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [59]
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It's mainly due to contracts that are not delivering the margin that was anticipated, and that's why we're very focused on fixing the processes that I spoke about before.
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Pierre Alary, Bombardier Inc. - CFO [60]
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(Inaudible) when we adjust margin on contract; it has an impact in the quarter that we adjust the margin, but it also has an impact on the margin on that contract going forward, the margin is lower. So until we complete the initial phase of that contract, it continues to put pressure on the margin.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [61]
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But we're entering a different phase with BT. If you look at the orders we got recently, there's options in there or there's- Metro for example in Chicago, that's very similar to the one we built before. So the level of risk in front of us is less than what we faced in the last few years because we, I said that many times we have developed platforms that now are linked to very long option potential.
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Turan Quettawala, Scotiabank - Analyst [62]
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Okay, and if I may just really quickly on the BT free cash flow, Pierre; the last time you had problems on the execution and it impacted free cash flow as well. It seems from your guidance that you're not expecting to see that much of an issue this time around- is that a reasonable assumption?
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Pierre Alary, Bombardier Inc. - CFO [63]
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Yes, it is a reasonable assumption. In fact the assumption is that the free cash flow generation to be in line with profitability.
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Turan Quettawala, Scotiabank - Analyst [64]
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Thank you.
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Operator [65]
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Deepak Kaushal, GMP Securities
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Deepak Kaushal, GMP Securities - Analyst [66]
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Hi. Just a quick couple accounting questions. On the extra program costs for CSeries, the $750 million for program and the $300 million capitalized interest costs; are both of those amortized over the number aircraft? And then just to follow on that, on the inventory write-downs for CSeries in the quarter, are you able to quantify that impact and quantify how that would impact on a per-aircraft basis over the next year?
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Pierre Alary, Bombardier Inc. - CFO [67]
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Well in relation to the tooling; the $750 million increase in relation to the development outstanding for the CSeries until the entry into service of the CS300 and the capitalization of interest; effectively that will be amortized on a per-aircraft basis, because it's part of the tooling and that is amortized on a per-aircraft basis. So as we start delivery, we'll start to amortize.
And your second question was just—on the inventory write-down; well, the indication we've given is that for 2014 the dilution from the CSeries is in relation mostly to the NRV and therefore the inventory write-down and we've talked about 1%.
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Deepak Kaushal, GMP Securities - Analyst [68]
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Okay. And in the past when you talked about the 2% dilution for CSeries when you're in production; is that incremental to the NRV write-downs or is that built into that dilution impact?
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Pierre Alary, Bombardier Inc. - CFO [69]
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It's built in.
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Deepak Kaushal, GMP Securities - Analyst [70]
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Okay. Okay, thank you. I'll pass the line and jump back in the queue. Thanks.
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Operator [71]
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Darryl Genovesi, UBS Securities
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Darryl Genovesi, UBS Securities LLC - Analyst [72]
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Hi, good morning. Just to get back to aerospace working capital for a minute, but I'll focus on 2014. It looks like the gap between your—essentially your implied EBIT guidance and your cash flow from operations guidance at aerospace looks to include a big working capital benefit, after already you having gotten a big working capital benefit in 2013. Can you just explain what's built into that; what kind of order activity you need to actually hit that and to the extent that it's based more on an expectation for higher deliveries in 2015, rather than coming orders? Thank you.
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Pierre Alary, Bombardier Inc. - CFO [73]
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Well first of all, it takes into account the level of advances from customers that we expect and if you look at the past two years, we had a significant book-to-bill, well above 1.72 in the past two years so that is 2012, 2013. And with those signatures, there's the advances upon signature but after that there's advances, like 18 months prior to deliveries, 12 months prior to deliveries; so there's a number of advances that are contractually due in 2014. And we also expect a good level of new orders and there's also contribution from suppliers in our various development programs and normal advances from customers as we've signed up.
So that's why you've seen in the past couple years and we'll continue to see in 2014, that the working capital and net cash generation from the working capital variation.
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Darryl Genovesi, UBS Securities LLC - Analyst [74]
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Okay. So I guess it looks like there's about $700 million or $800 million implied working capital benefits. I guess can you just bucket the percentage of that I guess that you think is sort of locked in as opposed to what's dependent on new orders?
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Pierre Alary, Bombardier Inc. - CFO [75]
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$700 million; that's your calculation. I depends on what you've—what you're expecting in terms of cash flow from operating activities. It depends what you factored in.
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Darryl Genovesi, UBS Securities LLC - Analyst [76]
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I mean I was just using the midpoint of your guidance, where you had the $1.4 billion to $1.6 billion.
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Pierre Alary, Bombardier Inc. - CFO [77]
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Just look at the current year result where we have 4.1% of EBIT, so compare the EBIT to the cash flow generated from operations; that gives you a good idea.
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Darryl Genovesi, UBS Securities LLC - Analyst [78]
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All right; okay. Thank you.
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Pierre Alary, Bombardier Inc. - CFO [79]
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(inaudible) as the kind of contribution we can get from working capital improvement.
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Darryl Genovesi, UBS Securities LLC - Analyst [80]
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Okay. Thank you.
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Operator [81]
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Stephen Trent, Citi
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Stephen Trent, Citigroup - Analyst [82]
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Good morning and thanks for taking my question. And just from me, I was wondering if you could give us some broad color on where you are with marketing campaigns, specifically for the CSeries and on the transportation contracts in key countries and kind of how are you looking in terms of advance discussions versus preliminary discussions; if you could offer any insight there?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [83]
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Like we spoke before on many of the calls, there's some customers in the CSeries that have been following us for several years and now we're into flight tests and getting more and more data and they're coming to decision time. So we have a lot of active customers that are in advanced discussion with us. I cannot tell you when they will make a decision because that's their call.
But really right now, since we've announced the new schedule, it's about finding positions for them because as you understand, we have 200 firm; we have about 450 with the options and I guess overall commitment. So right now it's more a battle of finding the right positions for the customers as they make decisions this year.
But I think we have quite a few exciting opportunities in front of us.
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Stephen Trent, Citigroup - Analyst [84]
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Okay, great. Well I will stick to that one question rule and that's it for me. Thank you.
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Operator [85]
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Peter Arment, Sterne Agee
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Peter Arment, Sterne, Agee & Leach, Inc. - Analyst [86]
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Yes, good morning, everyone. Pierre, just a quick question on I guess it's related to CSeries, but there's reports earlier in January about kind of because of the delay reducing kind of some of the employee levels; is that also tied to some of the operations in the [business] jet also, or is it all just encapsulated with the CSeries delay? Thank you.
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Pierre Alary, Bombardier Inc. - CFO [87]
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Yes, it's not related to the CSeries delay. It's overall aerospace. We grew our employee base by about 4,000 since 2008 and Guy and his team felt it was time to make an adjustment to make sure that we were competitive and to deal with the fact that business aircraft did not grow as fast—the market did not come back as fast as anticipated.
And it was—in a Company of 35,000 employees, for aerospace this is an adjustment of 1700. So it's really going after areas and making sure different areas in the Company, making sure we have the right overhead to be competitive. So it's an overall adjustment, not focused on the CSeries.
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Peter Arment, Sterne, Agee & Leach, Inc. - Analyst [88]
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Thank you very much.
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Operator [89]
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Steve Hansen, Raymond James
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Steve Hansen, Raymond James & Associates - Analyst [90]
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Oh yes, good morning, everyone. Just to circle back on the revised CSeries timeline here; I was just hoping you could give us some added granularity on some of the key milestones to expect over the next six months beyond just the FTV3 commentary. And perhaps it's a broader subjective question to some degree; I was hoping you could help us understand or help us characterize the revised timeline as whether you think it's a realistic timeline or a conservative timeline. I'm just trying to get a sense for what kind of buffer you might have built into this new timeline and how realistic it is. Thanks.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [91]
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Well first of all, it's about really putting into flight; we're going to have seven aircraft in the flight tests with the CSeries. Five of them are CS100s. Two will be CS300s. So it's phasing in these aircraft with the various systems that are coming in. In some cases, we have preliminary systems in the airplane today and we'll get different level of maturity through the year.
We look at that schedule very, very carefully, as you can imagine. We feel very confident about this schedule. We also are not precise on a specific date. We've said second half of 2015. And we feel good that we're making progress towards the entry into service on the schedule that we announced.
It a question also of balancing when we bring in inventory to build the new aircraft. If we're too aggressive in the flight test with the work that needs to be done and we start building in inventory and we don't delivery aircraft; that's not the right recipe from a business perspective.
So once we balance all of this, we feel very good about second half 2015.
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Steve Hansen, Raymond James & Associates - Analyst [92]
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Okay. Is there a timeline or a proximate window where we should expect all of the flight test vehicles for the 100 to be in the air?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [93]
------------------------------
That I will let Rob Dewar and his regular update on the CSeries website to give more color, as he's ready to do it. Right now we're focused on talking about the FTV3. But we also give you on the site, good visibility on the state of advancement of FTV4, FTV5 and we're starting to talk about the CS300s. But because this website constantly gets updated and it's really Rob's responsibility to do that, I would let you go there and refer (inaudible).
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Steve Hansen, Raymond James & Associates - Analyst [94]
------------------------------
Okay. Thank you for the color; appreciate it.
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Operator [95]
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Anthony Scilipoti, Veritas Investments
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Anthony Scilipoti, Veritas Investment Research - Analyst [96]
------------------------------
Thank you and good morning. I just wanted to go quickly back to that question that was asked about the inventory write-down. I noticed that there was a pretty significant one this quarter; I guess about $44 million in Q4. And I noticed—I was happy to see the used planes going down, etc. Maybe you can explain how that write-down comes about what we can expect going forward in that regard. Thanks.
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Pierre Alary, Bombardier Inc. - CFO [97]
------------------------------
So your question is on the write-down in relation to the—or the provision we're taking for the net reasonable value on the CSeries?
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Anthony Scilipoti, Veritas Investment Research - Analyst [98]
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Perhaps the write-down that was shown in the note on inventory.
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Pierre Alary, Bombardier Inc. - CFO [99]
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Yes. What we're showing there; there's an increase of about—we had $147 million of write-down in 2013 versus $104 million last year. So the variance is mostly attributable to the CSeries. And what we do is that the used aircraft that we have on hand, we do revise them on a quarterly basis and adjust for the net reasonable value.
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Anthony Scilipoti, Veritas Investment Research - Analyst [100]
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So you take the inventory of CSeries that are—I mean because they're not really going to be sold yet, so—
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Pierre Alary, Bombardier Inc. - CFO [101]
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There's- okay so on the CSeries more specifically, the first aircraft that we deliver; they're typically at a lower price, at a launch price as you know. And then the first unit that we build are much more expensive to build. So quite typically, and that's what you see in the whole industry, the first units are negative in terms of contribution.
So as you start building the inventory, you have to question yourself as to the net reasonable value and it's in relation to the units that are negative in terms of contribution. Then the first dollar that you spend, you have to presume that it's for the excess inventory. So therefore you have to take a net reasonable value. So that's IFRS. And that's how we have to account for it.
So as we start spending on the first unit, we need to provide 100% on the first few dollars that we spend and then at some point we get to the net reasonable value and then that's over for those units.
Okay, that's why we need to record net reasonable value provision, even if we haven't started delivering on the program.
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Anthony Scilipoti, Veritas Investment Research - Analyst [102]
------------------------------
I understand. Okay, thanks.
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Operator [103]
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Tim James, TD Securities
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Tim James, TDNewcrest/Waterhouse Securities - Analyst [104]
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Thank you. I'm wondering if you could provide what the approximate dilution impact was from the CSeries in 2013. And I'm thinking of the comparable value to the 1% dilution that you provide for 2014 in your guidance.
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Pierre Alary, Bombardier Inc. - CFO [105]
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I guess just referring to the previous answer when I was giving the variance in terms of the write-down for the full year. I was referring to a variance of between $40 million to $50 million.
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Tim James, TDNewcrest/Waterhouse Securities - Analyst [106]
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Is related to the CSeries?
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Pierre Alary, Bombardier Inc. - CFO [107]
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Right.
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Shirley Chenier, Bombardier Inc. - Director, IR [108]
------------------------------
Okay, Tim?
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Tim James, TDNewcrest/Waterhouse Securities - Analyst [109]
------------------------------
Yes. Thank you very much. That's helpful.
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Operator [110]
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David Newman, Cormark Securities
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Unidentified Participant [111]
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Hi. It's [Hilda] on behalf of David. My question is on the CapEx. It would appear that the increase in the CapEx for the delays around $600 million or so. But you comment in your release that you may receive funding from the governments and suppliers. Have you engaged in any discussions to share the pain (inaudible)?
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Pierre Alary, Bombardier Inc. - CFO [112]
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If I understood you well, you wanted to know if the governments will participate in the additional cost? The answer to this is no.
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Unidentified Participant [113]
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Okay. Thank you.
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Pierre Alary, Bombardier Inc. - CFO [114]
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That was your question?
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Unidentified Participant [115]
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Yes.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [116]
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The contribution we're getting in terms of refundable advances are as per the original contract that we signed back in 2007 or so.
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Pierre Alary, Bombardier Inc. - CFO [117]
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Sometimes people track the exact amount, but given that they're in the currency where the governments are, and we report everything in US dollar; the exact amount may have varied from what we knew in US dollar, but it's the same as the original agreed amount.
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Shirley Chenier, Bombardier Inc. - Director, IR [118]
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So that's for the government contribution, the supplier is (inaudible). Hilda? Do we have any more questions, Operator?
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Operator [119]
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David Tyerman, Canaccord Genuity
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David Tyerman, Canaccord Genuity - Analyst [120]
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Yes, just a follow up on the Bombardier aerospace margins. I think you're getting a sense here that a lot of people are trying to figure out why they're so low and I'm one of them, too. You're talking about investing in products being part of this. You mentioned 1% for the CSeries. Is there a very large additional percent in investing and if there is if you can give us some idea of that? And then just beyond that; I mean you're still only at 6% even if you take the 1%. That's an improvement and a big one, but it's still very, very low versus history.
So I'm wondering- like, why is it so low? Is it very low absorption? It seems unusual that it would be—several of your really important lines are actually running quite well and quite at high levels. Or is pricing really low? Or what is really driving the low margin?
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Pierre Alary, Bombardier Inc. - CFO [121]
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There's a number of things that drive the margin overall. When you look at business aircraft, the high end do very well, medium end do okay and the small end are struggling. And that has been the case for a number of years now. So that has—the lower end has an impact on the margin on the business aircraft side.
On the commercial aircraft side, it's very competitive and on the existing; and we've been—we were at a very low level, although we're going to increase on the RJ side in 2014 in terms of volume. Now when we say the investment; there's a number of things in the investment. There's the SG&A, as we have teams that are getting prepared for the increased volume in relation to, for example the CSeries, and all the marketing and so on.
If you look at the backlog we've been increasing significantly the backlog and there's cost attached to that in terms of SG&A, for which we don't have the benefits yet. And the benefit is coming up. It's in front of us. So that's a number of things that explain why the margin is not—it is growing significantly as you pointed out, but not maybe as high as you would have expected if we were to deliver only the large end of the business aircraft.
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David Tyerman, Canaccord Genuity - Analyst [122]
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So would the biggest part of whatever margin decrease you're getting from these things be coming from the Learjets and the commercial aircraft?
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Pierre Alary, Bombardier Inc. - CFO [123]
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Yes, well then there's the dilution on the CSeries; that's really the NRVs that we're going to take again into account the whole team that we have there, managing the evolution of the CSeries, the marketing team around and so on.
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David Tyerman, Canaccord Genuity - Analyst [124]
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Okay. Could you quantify any of this?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [125]
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It's very hard when you start to do this because now you're starting to split expense like the expense of a salesman- how much does he work for CRJ, Q400, and to start to do this publically I think would be a mistake.
We look at it internally. We are building a $5 billion to $8 billion business with the CSeries and we need to be ready for not only from a customer-relation and salesforce perspective, but also after sales the entry into service is crucial in this program. So we have quite a bit of overhead related to this $5 billion to $8 million business that's just in front of us.
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Pierre Alary, Bombardier Inc. - CFO [126]
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But we will then get them to cost allocation between models or programs—
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Pierre Beaudoin, Bombardier Inc. - President, CEO [127]
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We don't want to start to—we look at it internally but I don't think that's a good thing to start allocating people in this way in our MD&A.
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David Tyerman, Canaccord Genuity - Analyst [128]
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You might want to think about it for your Investor Day because it's obviously a big question out in the investor base. Thank you.
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Operator [129]
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Deepak Kaushal, GMP Securities
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Deepak Kaushal, GMP Securities - Analyst [130]
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Hi, thanks. I was wondering if you could touch maybe a little bit on the Learjet 85 program and the Global 7000-8000 program. And on the Learjet 85 you've had some delays in first flight. Are you seeing an impact to these programs because of the CSeries delays? Have you slowed down investment in these programs to manage cash? If you can just give some color on the CSeries impact and how it relates to the aerospace programs that are coming, thank you.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [131]
------------------------------
They're not being impacted by the CSeries. So let me start with the Lear 85. The first flight is very close. It's been difficult, obviously. It's not on the schedule that we had anticipated. But now we're going to get into the flight program very shortly and then once we're into the flight program we'll do like the CSeries; once we've had a few weeks of flying, we'll see if we need to take a couple months. But then we'll issue a schedule for the flight tests and the entry into service.
I think it's going to be an exceptional aircraft. It was a little bit challenging to get all the components done and producible, but that's behind us now. We feel very confident about our capacity to manufacture this aircraft as anticipated. But now it's really about getting it into flight and moving forward and that's coming very shortly.
As far as the Global 7000-8000; really good commercial success, we have significant orders for this program and the technical aspects and the performance of the aircraft are progressing well. We do share some of the technology with the CSeries, so the teams are working very closely together.
As an example on fly-by-wire, but one is not holding the other. On the contrary, we benefit from the learning of the other. So I feel very good about the progress we're making on the two Globals, the 7000 and 8000.
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Operator [132]
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Steve Hansen, Raymond James
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Steve Hansen, Raymond James & Associates - Analyst [133]
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Yes, just one last one if I may; I just wanted to follow up on some of the changes we've seen in your salesforce lately on the aerospace side. There have been a number of notable changes at the relatively senior levels here over the past year and a half. I'm just wondering if you think you've got the right team in place now to push ahead with your current plan. Thanks.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [134]
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And you're referring to commercial aircraft?
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Steve Hansen, Raymond James & Associates - Analyst [135]
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Yes, that's correct. Thank you.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [136]
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I suppose, yes; because we have of course a sales team on the private side also (inaudible) business aircraft. Commercial aircraft I feel that, yes, we've made some changes lately. It's a question of making sure that we have the most competitive salesforce as possible.
I'm impressed with the job that has been done so far, but it's only been a few months. We're seeing good traction, good motivation from our team and the customer comments are very good. So we'll judge with results.
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Steve Hansen, Raymond James & Associates - Analyst [137]
------------------------------
Okay. Thank you.
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Shirley Chenier, Bombardier Inc. - Director, IR [138]
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Operator, do we have any more questions?
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Operator [139]
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There are no further questions registered at this time.
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Shirley Chenier, Bombardier Inc. - Director, IR [140]
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Thank you. So this concludes the question period intended for investors and analysts.
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Editor [141]
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This concludes the analyst portion of this call.
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Editor [142]
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Statements in English on 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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