Q1 2014 BOMBARDIER INC Earnings Conference Call - English
May 01, 2014 AM EDT
BBD.B.TO - Bombardier Inc
Q1 2014 BOMBARDIER INC Earnings Conference Call - English
May 01, 2014 / 11:30AM 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
* Seth Seifman
JP Morgan - Analyst
* Cameron Doerksen
National Bank Financial - Analyst
* Turan Quettawala
Scotiabank - Analyst
* Robert Spingarn
Credit Suisse - Analyst
* David Newman
Cormark Securities - Analyst
* Konark Gupta
Macquarie Research - Analyst
* Peter Arment
Sterne, Agee & Leach, Inc. - Analyst
* Benoit Poirier
Desjardins Securities - Analyst
* Kristine Liwag
BofA Merrill Lynch - Analyst
* Steve Trent
Citi - Analyst
* David Tyerman
Canaccord Genuity - Analyst
* Chris Murray
AltaCorp Capital Inc.. - Analyst
* Anthony Scilipoti
Veritas Investment Research - Analyst
* Neal Dihora
Morningstar - Analyst
* Paula Sen
Morgan Stanley - Analyst
* Deepak Kaushal
GMP Securities - Analyst
* Gerd Braune
Handelsblatt - Media
* Scott Deveau
National Post - Media
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen, and welcome to the Bombardier Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Ms. Shirley Chenier, Senior Director, IR. Please go ahead, Ms. Chenier.
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Shirley Chenier, Bombardier Inc. - Director, IR [2]
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Thank you, Operator. Good morning, and welcome to Bombardier's conference call intended for investors and financial analysts. We realize this is a very early morning call, and we'll be back to our normal 8:00 a.m. call next quarter, we promise. (Interpreted) I would also like to welcome the representatives of the media here today, and you will have the opportunity to ask your questions a little bit later during a question and answer period reserved for the media.
Shortly, Mr. Pierre Beaudoin, President and CEO, and Mr. Pierre Alary, SVP and CFO, will discuss Bombardier's financial results for the first quarter ended March 31, 2014. (Interpreted) This teleconference is being webcast live on the Internet, and is also simultaneously translated into French and 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, and all dollar values expressed during this conference call are in US dollars unless stated otherwise.
I also wish to remind you that, during the course of this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Corporation. Several assumptions were made by Bombardier in preparing these statements, and we wish to emphasize that there are risks that actual events or results may differ materially from these statements. For additional information on such assumptions, please refer to the MD&A released today. Please also note that I am making this cautionary statement on behalf of each speaker whose remarks today will contain forward-looking statements.
Pierre Beaudoin will now begin.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [3]
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Bonjour, (interpreted) Good morning, welcome to the teleconference. Welcome to everyone, and thank you for joining us at such an early hour. This is exceptional for this quarter due to our annual General Meeting.
We're satisfied with our first quarter results, and we're on track to meet our guidance for the full year. Both groups are strong level of orders, while some project timing resulted in transportation [garnering] an exceptional high level of orders in the first quarter. We see transportation book-to-bill to be above one for the full year. This strong activity is a testament to our decision to invest heavily in new products in both group, and we are starting to see the benefit of these investments.
In aerospace, EBIT margin is in line with our guidance for 2014, and we also achieve important milestones, such as the successful maiden flight of the Learjet 85 in April. In transportation, revenues increased by 7%, excluding foreign exchange, and the EBIT margin improved sequentially in the quarter. Our continued investment in a leading portfolio of product is paying off, as demonstrated by our record backlog of $76.9 billion, which sets the stage for strong revenue growth over a five-year horizon.
And now, I would like to let Pierre Alary go over the results in more detail.
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Pierre Alary, Bombardier Inc. - CFO [4]
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Good morning. Our aerospace revenues for the first quarter have totaled $2.1 billion compared to $2.3 billion last year. The decrease is mainly due to the divestiture of our Flexjet unit and to the lower level of sales of pre-owned business aircraft. Q1 EBIT margin, before special item, was at 5%, in line with our guidance, and it compares to an EBIT of 4.5% last year.
Bombardier transportation revenues for the first quarter totaled $2.3 billion compared to $2.1 billion last year, representing a 7% increase, excluding foreign exchange. EBIT margin was at 5% compared to 6.7% last year. The decrease is explained by lower gross margin in rolling stock due to the contracts with execution issues and a lower share of income from associates, which were partially offset by higher absorption of lower SG&A expenses. However, we are seeing an increase in margin on a sequential basis.
On a consolidated basis, Q1 revenues totaled $4.4 billion while EBIT before special item reached $219 million. The net financing expense is $34 million compared to $35 million last year. Our effective income tax rate was 33.5%, which is higher than what we have experienced in previous quarters essentially due to the change in mix of countries where profitability has been earned. Overall, our adjusted net income totaled $151 million, or $0.08 per share, the same level as last year.
Now, looking at free cash flow, as is typically the case in the first quarter, free cash flow usage amounted to $915 million. This compared to $590 million the previous year. Looking at our liquidity position, subsequent to quarter-end, we took the opportunity of favorable capital market conditions to issue $1.8 billion of senior note, of which approximately $1.3 billion will be used to refinance existing debt. As a result, our available short-term capital resources totaled, on a pro forma basis, $4.5 billion as of March 31, 2014, which includes cash and cash equivalent of $3 billion. This solid liquidity position is ensuring us the financial flexibility to support our development program.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [5]
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To conclude, we're making good progress in our flight test program, with major milestones steadily being achieved. Our record backlog of $77 billion sets the stage for strong revenue growth over the next five-year horizon. 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. So, in order to keep the duration of this call at a reasonable level, I would ask you to limit yourself 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, you can contact me 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 from RBC.
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Walter Spracklin, RBC Capital Markets - Analyst [2]
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Thank you very much. Good morning, everyone. So, I guess my first -- my only question here is on free cash flow and your capital structure, I guess. You'd guided us at about $1.6 billion to $1.9 billion in capital, or CapEx, for the full year, and it seems that you're running somewhat higher than that with your CapEx spend in the first quarter. [Guess] my question is do you expect now to -- is this just a lumpy kind of first quarter item, and should that come down for the rest of the year? And if not, given that you've tapped the market for debt this quarter, do you have any inroads into potential government sources that if -- going back to your government partners on some of these -- some of the support they've given on your programs right now? Is there any room for additional government support there?
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Pierre Alary, Bombardier Inc. - CFO [3]
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Yes. Well, first of all, Walter, we've reaffirm all of our guidance, all the $1.6 billion to $1.9 billion of spend for aerospace. This is our guidance, and we've reaffirmed it. In terms of the investment, on a sequential basis, you can expect a reduction. And in fact, if you look at the fourth quarter of last year, it was higher than the first quarter. So, effectively, you could anticipate a reduction of the investment throughout the year to complete the year at between $1.6 billion and $1.9 billion. So, we don't anticipate to have to go back to any sources to increase our liquidity. We have ample liquidity to meet our plan.
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Walter Spracklin, RBC Capital Markets - Analyst [4]
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Have you spoken to government at all? Have you ever considered going back to government, though, for any additional financial support?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [5]
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No, not at all. And they're -- as you know, they're loans, and we don't think we need to borrow government money on this program. That's already been done.
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Walter Spracklin, RBC Capital Markets - Analyst [6]
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Okay, thank you very much. I'll queue up again.
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Operator [7]
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Joe Nadol from JPMorgan.
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Seth Seifman, JP Morgan - Analyst [8]
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Thanks very much, and good morning. It's actually Seth Seifman on for Joe this morning. I was going to ask about pricing in business jets. Didn't call it out either way in the discussion of the margin, and I was wondering what it was like in the quarter relative to last year and how you see that shaking out for the rest of the year, and how it might affect the gross margin progression in aerospace for the remainder of the year.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [9]
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Well, it's still a market that is coming back, but not as rapidly as the industry, if you want, and ourself had anticipated. So, we're seeing a marginal price increase in some models. And -- but overall, it's going to be a slow -- we feel, from a pricing perspective, we don't expect much during the year.
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Seth Seifman, JP Morgan - Analyst [10]
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Thank you.
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Operator [11]
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Cameron Doerksen from National Bank Financial.
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Cameron Doerksen, National Bank Financial - Analyst [12]
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Yes, good morning. My question's on inventory. So, [seeing the] pre-owned aircraft that are for sale in your inventory ticking down the last number of quarters, but the 16 White Tails that you had in the quarter, I think that's the highest we've seen for quite a while. I'm just wondering if there's an explanation for that.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [13]
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Well, what I would say is that you saw that we -- if we talked about business aircraft, [so] the White Tails and business aircraft, this quarter we're going to deliver 200 aircraft this year. We expect to deliver these aircraft this year. I think it's more a question of timing, because it's not always great -- easy to align production with sales, but I'm not concerned with the level that we have today as when I compare it to the demand that we're seeing right now.
And for used aircraft, it varies quarter to quarter. Of course, now you don't have Flexjet anymore in our used aircraft. That will be a variation. But, at the same time, it's hard to take one quarter to compare to the other, because it depends really on the agreement of [trades] quarter to quarter.
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Cameron Doerksen, National Bank Financial - Analyst [14]
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Okay, thank you.
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Operator [15]
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Turan Quettawala from Scotiabank.
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Turan Quettawala, Scotiabank - Analyst [16]
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Yes, good morning. I guess my question's also on free cash flow. So, if I look at the quarter, given a negative $900 million, I guess that's about $325 million worse than last year. Q1 obviously was pretty strong on advances and orders here, and Pierre, you mentioned the one-to-one book-to-bill on BT. So, I guess, as you look forward here, advances probably -- I'm just wondering, are the advances going to be equally strong, going forward, or is it just going to be mainly inventory that's going to drive that free cash flow overall back to your guidance that you have for the year here? Thank you.
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Pierre Alary, Bombardier Inc. - CFO [17]
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I guess what we're seeing in the first quarter, it's our typical -- as you know, we spent on the first quarter, spent some more in the second. [Our] third quarter is typically close to break-even, and then there's a very good cash generation in the fourth quarter. So, it is not any different. It is a higher amount in the first quarter, and the variance comes mostly within transportation, and it's really a question of timing.
Effectively, there's been a high level of orders, in fact exceptional high level of orders, but when you look at the detail of those orders, a portion of it is in relation to service, where we don't get advances, and that's very normal. There is a PPP where, typically, the level of cash is much more in line with the spending. And then, there was one order that we signed that -- like the last few days of the quarter, so the cash comes in with the NTP, which is a Notice To Proceed, which very often happens a month or two after. So, it's really a question of timing, and we do anticipate to have the free cash flow aligned with profitability, generally in line with profitability, as we usually have in any year.
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Turan Quettawala, Scotiabank - Analyst [18]
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And Pierre, you expect that to be sort of, again, a big Q4, or do you think it'll be better in Q2 and Q3?
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Pierre Alary, Bombardier Inc. - CFO [19]
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It varies. It's a question of the contract, but typically it's Q4, yes, where we have a strong quarter.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [20]
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You're talking about--.
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Pierre Alary, Bombardier Inc. - CFO [21]
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--Free cash flow, yes, the inflow, yes. They are much more significant typically in the fourth quarter.
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Turan Quettawala, Scotiabank - Analyst [22]
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Thank you.
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Operator [23]
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Robert Spingarn from Credit Suisse.
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Robert Spingarn, Credit Suisse - Analyst [24]
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Good morning. I wanted to ask you about CSeries progress. The latest on [campaign's] demand for the aircraft as you continue to deliver results in flight tests, your latest thoughts on entry into service. And then, if you could comment, Pierre Alary, on the $31 million in write-downs that you took in aerospace, what's in that number -- in the inventory?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [25]
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Well, first of all, the CSeries flight test program is progressing well. We're at 280 hours of tests. It's -- and we're still forecasting the entry into service in the second half of 2015. We're making very good progress on that. And as far as the sales are concerned, I feel very confident about our 300 units before entry into service. I repeat on that, that has been our strategy since the beginning. That's about the level of launch order that we want to have with the options and the rights -- the commitments from customers besides the firm order. I think that's the right level of, if you want, discounted launch orders that we want to have.
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Robert Spingarn, Credit Suisse - Analyst [26]
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Okay. And on the $31 million?
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Pierre Alary, Bombardier Inc. - CFO [27]
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Yes. On the $31 million, that's -- first of all, it's in relation to a total inventory of $8.7 billion, and it is really mostly the normal component of inventory write-down, where we do take a provision for obsolescence on [stairs] that are not turning, and that's very normal. And a portion of it is in relation to the NRV on the CSeries that we've explained for a couple of quarters now. So, a portion of it is in relation to that, and a good portion is in relation to the normal provision for obsolescence that we take every quarter.
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Robert Spingarn, Credit Suisse - Analyst [28]
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Okay. And then, Pierre, on that $484 million in investment the CapEx in aerospace, I assume that has a lot to do with test articles and the early -- the beginning stage this year of the completion of development. So, how will that trend down within your CapEx guidance for the remainder of the year? Will it be at the time of the seventh aircraft completion? How do we think about that?
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Pierre Alary, Bombardier Inc. - CFO [29]
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Well, it would be a very gradual. There's a lot of manpower into that and to the testing, for example on the CSeries. So, it's going to be gradual towards -- from this quarter to next, and towards the end of the year.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [30]
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For example, the 10 aircraft that we need that are in production now, whether it's the five test vehicles or two CS 300 and beginning of production, these components are essentially made right now, and they're in advanced stage of production. That's an example that we're not going to do that again before production.
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Robert Spingarn, Credit Suisse - Analyst [31]
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Thank you.
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Operator [32]
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David Newman from Cormark Securities.
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David Newman, Cormark Securities - Analyst [33]
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Good morning. Just on the BT margins and cash flow again, just looking at the higher inventory that you have and how that might be pushed out in -- such that free cash flows could recover throughout the year, how should we think about that, the free cash flow throughout the year, and also the progression of margins, especially as related to some of the things -- I think you spoke about at the Investor Day like the SG&A reductions, the implementation of the IT, et cetera. So, I'm just trying to think how it might look sequentially, because we did see an improvement Q1 versus Q4, so I'm trying to gauge where we should think about that.
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Pierre Alary, Bombardier Inc. - CFO [34]
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Well, in terms of free cash flow, the trend that we have where, again, we spend the first two quarters, more so break-even in the third, and then good cash inflow in the fourth quarter, so that's basically what you should expect also in transportation this year, give or take a few -- $100 million or so per quarter.
And then, in terms of the profitability, we reaffirm our guidance of 6% profitability for the whole year, being at 5%, which -- and effectively we see a sequential increase vis a vis the fourth quarter of last year. So, you should expect improvement, and more so towards the end of the year.
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David Newman, Cormark Securities - Analyst [35]
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And these contracts that are kind of lingering with the execution issues, it sounds like it's a gradual progress on the margin side. And as you gradually put in the SG&A reductions and the implement of the IT, is that kind of how we should look at it towards your long-term targets, that it's just going to be a gradual progression over the next couple years towards those EBIT margin targets?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [36]
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It's a gradual progression, but also this can be variation quarter to quarter depending on the amount of delivery we do on a certain contract. So, for example, if we're delivering more, or advancing more, we do, of course, contract accounting on a contract that got a lower margin, you may get a variation quarter to quarter. But, it is our target to gradually get to the 6% and then the 8%.
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David Newman, Cormark Securities - Analyst [37]
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Very good. Thank you.
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Operator [38]
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Konark Gupta from Macquarie.
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Konark Gupta, Macquarie Research - Analyst [39]
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Thank you for taking my question. I would like to know if, given the situation Ahlstrom is in right now with respect to its rail business and strategic alliances with GE or perhaps Siemens, what are your thoughts about consolidation in the rail market, or perhaps in the signaling market? Of course, you announced an Australian acquisition this morning, which you didn't disclose the amount for. Can you disclose the amount, and also maybe share some thoughts about the consolidation in the rail market? Thank you.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [40]
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Well, like you pointed out, we made a very -- a small acquisition, it's a small company in Australia, because we're always looking for opportunities to add to our rail, but particularly our signaling portfolio. We're following, of course, with a lot of interest the Ahlstrom story this week. We see that GE seems to be taking over potentially the energy side, so it leaves us with a question of -- that you would have, how will Ahlstrom look as a pure-play transportation. But really, at this point, we're observing, and we think we'll face the same competitor.
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Konark Gupta, Macquarie Research - Analyst [41]
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Any kind of bids on the RSS? (Inaudible) acquired any acquisition amount or revenue and margins, or anything you can share on that, please?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [42]
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On the Australian acquisition, is that what you're asking?
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Konark Gupta, Macquarie Research - Analyst [43]
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Yes, yes, RSS.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [44]
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It's very small in terms of revenue.
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Pierre Alary, Bombardier Inc. - CFO [45]
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I mean, it's -- the size of the acquisition is such that, in any given quarter, you wouldn't see really the difference. It's more of a weight -- it's like services, so we're adding to services, or we're adding to signaling, very gradually. So, these are kind of small bolt-on.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [46]
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Yes. We saw a good team with some bolt-on products. And it's not significant right now in terms of revenue, but it adds to us some know-how.
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Konark Gupta, Macquarie Research - Analyst [47]
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So, it will certainly help you with the 8% margin goal that you have, basically, right?
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Pierre Alary, Bombardier Inc. - CFO [48]
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Well, [our] CS is a good contributor to this line.
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Konark Gupta, Macquarie Research - Analyst [49]
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Okay, thank you.
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Operator [50]
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Peter Arment from Sterne, Agee.
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Peter Arment, Sterne, Agee & Leach, Inc. - Analyst [51]
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Yes, good morning, everyone, just a quick clarification. On the employment workforce reduction, can you give us an update on where you are on implementing that, and then kind of what we should expect for ongoing expenses, going forward? Thank you.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [52]
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Of the 1,700 we had announced at aerospace, we have downsized now by 1,431. So, there's a little bit to go, and they will happen in the next couple quarters. But essentially, we're very advanced in this reorganization, or downsizing, at aerospace.
At transportation, we're making adjustments linked to One BT to reduce our overall SG&A, and this will happen gradually as the reorganization is taking place across Bombardier Transport.
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Peter Arment, Sterne, Agee & Leach, Inc. - Analyst [53]
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Thank you.
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Operator [54]
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Benoit Poirier with Desjardins Capital Markets.
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Benoit Poirier, Desjardins Securities - Analyst [55]
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Yes. Just in terms of turboprop, you signed some nice LOI and conditional orders with China and Russia. So, what's your level of confidence to see those orders being firm up this year? Could you give us an update?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [56]
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Well, they're two, I think, different situation. In Russia, we have also -- in parallel are negotiating, as you know, an assembly with -- final assembly plant with Rostec. Our teams are very active in negotiation, and the negotiations are progressing. Of course, in parallel, we're following the situation in Ukraine. And as of today, we're continuing to move forward to sign this assembly agreement, which of course will help in the overall of orders in Russia. It will be supportive to the overall orders in Russia. And we will adjust if there is further sanctions that appears, given the situation.
And in China, we are in discussions to look at doing something similar, but it's more at the beginning. And I think we will see some activities in the short-term in China with the turboprop, but we plan to be going further in China, to be the turboprop for China.
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Benoit Poirier, Desjardins Securities - Analyst [57]
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Thank you.
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Operator [58]
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Ron Epstein from Bank of America/Merrill Lynch.
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Kristine Liwag, BofA Merrill Lynch - Analyst [59]
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Hi, good morning, this is actually Kristine Liwag calling in for Ron this morning. Hello. You mentioned that you expect to have 300 aircraft orders for the CSeries, and you've said this many times before, before entering to service. How did you get to your target of 300 aircraft, and what makes you confident that you're going to get there? And I guess how many active campaigns are you pursuing at this time?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [60]
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Well, we're already at 203. We have the entry into service in the second half of 2015, so -- and we have quite a few very active campaigns, people that have been following the program since the beginning and now are gaining more and more confidence with the airplane as the flight test is progressing. So, when I see the level of activity and I see where we are compared to the 300 target with 203, I feel very confident that we're going to get there.
How did we get there? It's both an evaluation of the potential of the aircraft, long-term, and how many launch order we wanted, so we set the target five years ago. We need a certain amount of orders to cover the first few years of production. But again, these are launch orders, so I want to also make sure that we're able to sell the aircraft based on its value and its performance rather than just launch orders.
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Kristine Liwag, BofA Merrill Lynch - Analyst [61]
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Great. And on a separate topic, with business jets, can you talk about the customer interest for the G7000 and 8000?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [62]
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It's very strong. If you look how these two products are positioned compared to our main competitor, we really offer something that is quite superior to our competitor, Gulfstream. If you want the same performance as their aircraft and a few hundred nautical miles more, you go for a Global 7000 that's 10 feet longer, so much bigger cabin. And if you want an aircraft that's similar in size to their offering, you get 1,000 nautical miles more. So, we have a very strong offering, and the demand is very good.
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Kristine Liwag, BofA Merrill Lynch - Analyst [63]
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Okay, great. Thank you.
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Operator [64]
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Steve Trent from Citi.
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Steve Trent, Citi - Analyst [65]
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Hi, good morning, all, and thanks for taking my question. I will stick to your one-question rule, and I was curious with respect to how you're seeing the competitive landscape on the commercial jet side, generally speaking. And we happened to notice one of your rivals looks like they're complaining to the World Trade Organization about Mitsubishi Heavy Industries and just kind of wondering what you're seeing, wondering how often you're even seeing Mitsubishi show up in campaigns.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [66]
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So, I guess you're focusing on regional jets. It's a competitive market. Most of the time we compete with Embraer that we know very well, but we also have to be conscious that there will be three other players, Mitsubishi being one of them, and we do see them in campaigns periodically. Now, they've also announced quite a few times delays on their programs, so they're, I guess, less present in the campaign than they were a couple years ago. But, I think they will be a good competitor. And of course, we also have Sukhoi and the Chinese airplane in campaign, so the regional market is a very competitive market.
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Steve Trent, Citi - Analyst [67]
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Okay, appreciate the color. Thanks a lot.
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Operator [68]
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David Tyerman from Canaccord Genuity.
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David Tyerman, Canaccord Genuity - Analyst [69]
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Yes, good morning. I'd like to ask about the aircraft order outlook by major product line, and by that I mean the business jets, the CRJs and the Q400s, perhaps referencing what you expect for book-to-bill by area in 2014.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [70]
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Yes, I think we've given you guidance in terms of delivery, but no guidance in terms of book-to-build. I can tell you there's a very active market in all the categories, good demand on the CSeries category, RJs and -- RJ is good potential in the US still, but there's still a lot of need to fill sales capacity in the US as some 50-passengers are getting replaced. And turboprops is a global market, and as you saw from last quarter, they have a lot of opportunities in turboprop. And business aircraft overall coming back stronger in the higher end than in the small size, and that's been the case for quite a few years, and that's what we're continuing to see. Overall, we said a book-to-bill above one, but that's the overall portfolio.
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David Tyerman, Canaccord Genuity - Analyst [71]
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Okay, thank you.
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Operator [72]
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Chris Murray from AltaCorp.
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Chris Murray, AltaCorp Capital Inc.. - Analyst [73]
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Thank you. Good morning. Just looking at the Challenger 350, I guess entry into service you've indicated should be this summer. Just looking near-term, whenever there's been sort of product changeovers, just there's been some, call it, short-term quarter-to-quarter variation. Do you expect that we'll probably see something like that again in this changeover, or if you can just give us any indication what the project plan looks like?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [74]
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It's going to be minimal. This program is going very well, and there's very good order backlog, and that's been planned for quite some time so the transition would be -- will be quite smooth. Maybe an effect of a few units, but nothing significant.
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Chris Murray, AltaCorp Capital Inc.. - Analyst [75]
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Okay, thank you very much.
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Operator [76]
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Anthony Scilipoti from Veritas Investment Council.
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Anthony Scilipoti, Veritas Investment Research - Analyst [77]
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Thanks very much. I just -- my question's actually clarification on, or follow-up to some previous questions. With regard to the free cash flow, if we look specifically at the transportation, I noticed the booking of $8 billion of new orders. And then, if I try to parse through what the deposits or the advances look like for the quarter, if I look at the note on the working capital, I see only about $70 million. And I wondered why so little in deposits, or how should we look at that.
------------------------------
Pierre Alary, Bombardier Inc. - CFO [78]
------------------------------
Well, effectively, it's a sizable level of new orders in the first quarter. There's a couple of element to look into it. A portion of it is service for which we don't get advances. It's a regular payment as we proceed with the service, so there's no lump-sum payment in any way. There's -- one of those orders is a PPP, where typically we don't get a high level of advances. It's more spread over the contract. And then, there's one order that has been signed a couple of days before the end of the quarter, so the cash came in in the following quarter. In very sizable order, the initial deposit is typically lower. So, it's going to be more spread over the duration of the contract.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [79]
------------------------------
You don't provide any detail of sort of the length of time that the contract will spread over in the case of some of those ones, do you?
------------------------------
Pierre Alary, Bombardier Inc. - CFO [80]
------------------------------
I mean, it's contract by contract. It varies from contract to contract in all of our contracts. We've got more than 500 contract ongoing at any point in time, so a specific contract, when you look at it, you have to look at it globally. And that's why, because of that mix of contract that typically over a full year, or over a number of quarters, the cash flow is in line with profitability because of the mix of the contract. So, a specific contract doesn't help in terms of -- in any given period, so it's really the overall picture that is important. And the overall picture is that, generally, the free cash flow is in line with profitability over a number of quarters.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [81]
------------------------------
Okay. And just going back to the question about the White Tails in the inventory on aerospace, if you look at the disclosure in the MD&A that shows the backlog in months of production relative to target, it looks like you're comfortably in the range for each of the business jet segments. So, why would you have so many aircraft that aren't associated with orders sitting in inventory?
------------------------------
Pierre Alary, Bombardier Inc. - CFO [82]
------------------------------
Well, Pierre referred to timing. A good example is that we had 43 deliveries of business aircraft, and our guidance is 200. So, production is typically even from quarter to quarter, so if you put it just based on guidance, 200, that means we produced 50 aircraft. We've delivered 43, so we've got already there seven aircraft additional in inventory. So, it's really a question that the deliveries is typically skewed towards the end of the year, but production is even during the year.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [83]
------------------------------
And when you look at the amount of months of backlog compared to our targets, you've got to be careful. We have also some fleet orders, which I think is very good for our overall long-term stability, but some of these orders are spread over several years. So, they cannot necessarily all be delivered immediately. So, it's a question of timing, like we said, and I feel confident that we will sell [through] these White Tails.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [84]
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But, if it's -- I understand if it's -- but if it's a question of timing, Pierre, then you build a jet in Q1, you could deliver it in Q2, then it would be associated with an order in your disclosure, no?
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Pierre Beaudoin, Bombardier Inc. - President, CEO [85]
------------------------------
If it's a White Tail, it's not associated with an order, and we will get a customer on this aircraft in the next couple quarters.
------------------------------
Pierre Alary, Bombardier Inc. - CFO [86]
------------------------------
And for example, on the smaller family, we're basically selling as we build, so it is a question of timing there. And that has been the case since the end of 2008.
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Anthony Scilipoti, Veritas Investment Research - Analyst [87]
------------------------------
Are there any concerns with the Learjet 40 and 45 from the previous quarter?
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Pierre Alary, Bombardier Inc. - CFO [88]
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It's (inaudible) 40, 45, --We're at 70-75.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [89]
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You mean the Learjet 70, 75?
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Anthony Scilipoti, Veritas Investment Research - Analyst [90]
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Yes.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [91]
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It's an airplane that we have to demonstrate to see all the improvements we've made from the 40, 45, and that's what we're doing very actively right now, and the customer response has been great.
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Anthony Scilipoti, Veritas Investment Research - Analyst [92]
------------------------------
Okay. Thank you.
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Operator [93]
------------------------------
Neal Dihora from Morningstar.
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Neal Dihora, Morningstar - Analyst [94]
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Yes, hey, good morning, thanks. Just a follow-up on the BT gross margin. Is that all due to the contractual issues that you've had on those handful of contracts over the years? Are you just specifically on that? Thanks.
------------------------------
Pierre Alary, Bombardier Inc. - CFO [95]
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Well, when we compare year-over-year, there is effectively the execution issue on certain contracts as compared to last year, where we were at 6.7% and 5%, so that's one element. The other element is also in relation to our share of the income and joint venture, which is lower quarter over quarter.
------------------------------
Neal Dihora, Morningstar - Analyst [96]
------------------------------
Okay, thanks.
------------------------------
Operator [97]
------------------------------
Joe Nadol from JPMorgan.
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Seth Seifman, JP Morgan - Analyst [98]
------------------------------
Thanks, thanks very much, just two quick follow-ups here. Pierre Alary, just to follow up on the comment that you just made, the JVs in China, if we look at what the contribution was last year and where that's gone, what -- is that going to make a positive contribution as you [gain] from 5% in Q1 to a full-year margin of 6%?
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Pierre Alary, Bombardier Inc. - CFO [99]
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Well, you should look at the JV as -- the income on the JV is like the profitability we will do on two or three contracts. So, to me, I look at the overall profitability, that's one of the components, and it varies according to the execution or the timing on those contracts. And there's -- and for each of the JVs we have maybe three or four contracts, and again, the overall BT, we have more than 500. So, just a question of how it is presented and the financial that we see specifically those two -- the effect of those two or three contracts.
So, it's going to vary. It could vary a lot, because when we get towards the end of contracts, then the revenue comes down, but the revenue is not shown because we only show the profit, our share the profits, and then the profit comes down. And then, when we ramp up, it's the contrary. So, it's quite typical that the profitability on one specific contract could vary a lot from quarter to quarter in terms of absolute value, not necessarily in percentage but absolute value. So, as we report specifically, it shows variation, but it should be looked at in the overall context.
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Seth Seifman, JP Morgan - Analyst [100]
------------------------------
Right, but, I mean, I assume that one of the ways that you're going to get from a 5% margin in Q1 to something above 6% for the remaining nine months of the year is from a larger contribution from JVs is going to play a role in that. Is that correct?
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Pierre Alary, Bombardier Inc. - CFO [101]
------------------------------
It's going to play a role, but like any other contract play a role in the overall profitability of BT.
------------------------------
Seth Seifman, JP Morgan - Analyst [102]
------------------------------
Okay. And then, a last one just on -- moving back to the aero investment, you noted the nice step-down in Q1, mostly driven by CSeries and the increase in the business jet program to really remain around the same pace it's been running recently. What's the trajectory of business jet investment? Is that at a peak level? If so, how long does it stay at that peak before starting to come down?
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Pierre Alary, Bombardier Inc. - CFO [103]
------------------------------
Well, at some point we should expect the (inaudible) to come down, the investment on the (inaudible) to come down. But, on the other side, we should see a ramp-up in the global. So, overall, we should anticipate that the trajectory in the overall business aircraft, which combines those two, should be trending higher.
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Seth Seifman, JP Morgan - Analyst [104]
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At a fairly -- at roughly the same rate it's been trending higher for the past few quarters?
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Pierre Alary, Bombardier Inc. - CFO [105]
------------------------------
Well, I guess there's movement in each of the various program that we're having, and it's going to -- the overall is going to trend as we've guided, to be $1.6 billion to $1.9 billion, and then lower the following year, and then below $1 billion in 2016.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [106]
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And as we ramp up the Global 7000 and 8000, yes, you see the investment, but this is a program also that's got a different cash profile than a typical commercial program or a small business jet as advanced level, or better in the upper end of the business aircraft.
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Seth Seifman, JP Morgan - Analyst [107]
------------------------------
Okay, great. Thanks very much.
------------------------------
Operator [108]
------------------------------
Ron Epstein from Bank of America/Merrill Lynch - Analyst
------------------------------
Kristine Liwag, BofA Merrill Lynch - Analyst [109]
------------------------------
Hi, sorry, this is Kristine Liwag again with a follow-up question. So, when we look at Bombardier aerospace, the business jet book-to-bill in the quarter, it was over one, which kind of suggests that there's -- the market is maybe improving for business jets. So, can you talk about the pricing environment for the different product portfolios for -- the pricing environment for Learjet versus Challenger versus the global platforms compared to a year ago? And then, if the market continues to improve, how should we think about incremental operating margins for these programs?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [110]
------------------------------
While we see a modest improvement in pricing, but particularly in larger business aircraft, it is still a challenging market in smaller aircraft. At the same time, we're changing in the Challenger 300 to the Challenger 350, which has additional features, so there's a product where pricing is getting better because of product improvement and market. So, overall, I think what you have to consider is a modest price improvement as the market comes back.
------------------------------
Kristine Liwag, BofA Merrill Lynch - Analyst [111]
------------------------------
And the incremental operating margins?
------------------------------
Pierre Alary, Bombardier Inc. - CFO [112]
------------------------------
Well, if pricing improves, our costs are quite stable, so that would be a direct improvement in profitability.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [113]
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In line with achieving our target of 5% EBIT for this year at aerospace.
------------------------------
Kristine Liwag, BofA Merrill Lynch - Analyst [114]
------------------------------
Great. Thank you.
------------------------------
Operator [115]
------------------------------
David Tyerman from Canaccord Genuity.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [116]
------------------------------
Yes, just two quick follow-ups. First, Pierre Alary, could you comment on the tax rate for the remainder of the year?
------------------------------
Pierre Alary, Bombardier Inc. - CFO [117]
------------------------------
The tax rate, we should expect the tax rate to be 25% to 30%, closer to the 30% than the 25% for the full year.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [118]
------------------------------
Okay, that's very helpful, thank you. And then, just on the CRJ 1000, the production rate's been pretty low for quite a long time, including Q1, but the backlog is fairly high. I was wondering if you'd just give some insight into what's going on and whether that would change, the production rate would change at some point.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [119]
------------------------------
Well, it's a mix of the three products for us, between the 700, 900, and 1,000, and we're quite flexible in how to approach this, a very similar product. As far as the backlog, there is -- a good amount of this backlog is to [Air Ahlstrom], and they have been transitioning from their 50-passenger jet to a larger jet, the 1000. And I see that as a good potential for us. And as this aircraft gets better known, I think we can see, unfortunately, we still have airlines like Garuda that operate this airplane and have options. So, I think there's a good potential, but we need to work on selling this platform based on its reputation, which is great at this point with the airline.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [120]
------------------------------
Okay, thank you.
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Operator [121]
------------------------------
Paula Sen from Morgan Stanley.
------------------------------
Paula Sen, Morgan Stanley - Analyst [122]
------------------------------
Hi, thank you for taking the question. I just had a question about Farnborough. With the Farnborough Air Show coming up, do you plan to bring any models of the CSeries to the air show?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [123]
------------------------------
Our plan of Farnborough is not finalized, but the priority for the CSeries is a flight test [over].
------------------------------
Paula Sen, Morgan Stanley - Analyst [124]
------------------------------
Got it, thank you.
------------------------------
Operator [125]
------------------------------
Turan Quettawala from Scotiabank.
------------------------------
Turan Quettawala, Scotiabank - Analyst [126]
------------------------------
Yes, thank you very much. I guess my -- I had two quick ones here. First of all, on the debt deal, the recent one, Pierre, is that the additional debt that you took on? I assume you're going to capitalize the interest. Can you tell us if that's going to go to the CSeries mainly?
------------------------------
Pierre Alary, Bombardier Inc. - CFO [127]
------------------------------
The capitalization of the interest is -- or the calculation is being done on the investment, not necessarily on the debt side. So, the fact that we've book $500 million additional liquidity, and therefore debt on the other side, has no impact on the calculation, per se.
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Turan Quettawala, Scotiabank - Analyst [128]
------------------------------
Okay, so does that flow to the income statement, or not?
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Pierre Alary, Bombardier Inc. - CFO [129]
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It will flow through the income statement, yes.
------------------------------
Turan Quettawala, Scotiabank - Analyst [130]
------------------------------
Okay. And then, I guess the next one, just quickly on the White Tails, could you give us -- I wonder if you're able to tell us if those are -- which type of plane those are.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [131]
------------------------------
No, we don't release that, as you know.
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Pierre Alary, Bombardier Inc. - CFO [132]
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It's mostly business aircraft.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [133]
------------------------------
It's mostly business aircraft, but--.
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Turan Quettawala, Scotiabank - Analyst [134]
------------------------------
--Yes, but if I look at the numbers, it seems like they're, like, higher in business aircraft, correct, like on a quarter -- from Q4 to Q1, you're up $285 million of inventory on, I guess, five or six aircraft, correct?
------------------------------
Pierre Alary, Bombardier Inc. - CFO [135]
------------------------------
There's change in mix from quarter to quarter, because typically it's not the same White Tail, if you like, so it's rolling, so we can roll a model that is -- that has a higher selling price than another one, so it does have an impact on the -- you cannot just look at the incremental dollars and incremental number of units.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [136]
------------------------------
Certainly the mix has changed from quarter to quarter.
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Turan Quettawala, Scotiabank - Analyst [137]
------------------------------
Okay, thank you very much.
------------------------------
Operator [138]
------------------------------
Deepak Kaushal from GMP Securities.
------------------------------
Deepak Kaushal, GMP Securities - Analyst [139]
------------------------------
Hi, thank you. Thank you for taking my question. I did have a follow-up on CSeries flight test. You mentioned in your press release that you've reached maximum flight level and maximum speed on the envelope. I was wondering if you could tell us what the significance of this is in terms of the flight test program and what other milestones are important that investors can watch for outside of your quarterly reporting. So, for example, the follow-up on the Farnborough question, how important is that an indicator really on the progress of the flight test whether or not the aircraft appears at the air show? And then, I have a follow-up on CSeries, if I may.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [140]
------------------------------
Well, if you look at the CSeries, I think the best way to see the progress is with the reports that we give and the amount of hours that we've flown. We look at it from an earned value perspective, so are we earning value when we fly, and we are on target for delivery second half of 2015. Getting to the full flight envelope is important because it permits us to make a lot of progress in terms of the capacity of all the flights [they propose] to do, every test that's on the list. Before, we were limited there, given that we didn't have the full flight envelope.
Farnborough is an air show. Our priority is flight tests, so one is not related to the other.
------------------------------
Deepak Kaushal, GMP Securities - Analyst [141]
------------------------------
Okay, thank you. And then, a follow-up. I noticed the investment in working capital spiked in the quarter. I don't know if this question was asked earlier. I'm wondering if this has to do with progress on production for the first CSeries production aircraft. Maybe you can give us an update on that and working capital expectations related to first production CSeries aircraft. Thank you.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [142]
------------------------------
I didn't get your question. I'm sorry.
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Deepak Kaushal, GMP Securities - Analyst [143]
------------------------------
So, it looks to me that the investment in working capital was quite high in the quarter, and it's -- typically it happens in Q1, but it seemed quite high. I'm wondering if it's related to the beginning of production for first CSeries aircraft that will go to customers, and if you can give us an update on the progress for the production for CSeries, the production line.
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Pierre Alary, Bombardier Inc. - CFO [144]
------------------------------
Well, the change in working capital was in the first quarter, specifically to aerospace, was $220 million compared to $124 million last year. So, it's $100 million variance, and the $100 million at any given point is not significant.
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [145]
------------------------------
But, for a CSeries--.
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Pierre Alary, Bombardier Inc. - CFO [146]
------------------------------
--CSeries is going to be very gradual, and we're starting the production, but it's going to be very, very gradual and towards the first year of delivery, maybe up to 30 units for the first full year of delivery, and we're more than a year from that. So, it's really a very gradual ramp-up.
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Pierre Beaudoin, Bombardier Inc. - President, CEO [147]
------------------------------
So, for CSeries, we have 10 aircraft in production, or we've built 10 aircraft. Those are the flight test vehicles plus a couple for production. Before we ramp up anything else for production, per se, this will be more towards the end of the year or beginning of next year to be ready for the second half of 2015.
------------------------------
Deepak Kaushal, GMP Securities - Analyst [148]
------------------------------
Okay, thank you. That's very helpful. I'll pass the line.
------------------------------
Shirley Chenier, Bombardier Inc. - Director, IR [149]
------------------------------
Okay, Operator, we will now begin the question period for media representatives, so thank you. All the analysts who are still on the line, please give us a call and we'll give you a call back. Thank you.
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Operator [150]
------------------------------
(Operator instructions.) Gerd Braune from Handelsblatt.
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Gerd Braune, Handelsblatt - Media [151]
------------------------------
Hello, good morning, it's Gerd Braune in Ottawa. I'm corresponding for The Handelsblatt in Germany. I wanted to follow up with the Ahlstrom issue that was briefly discussed. How close are you following these events or discussions in Europe? And could you think about bidding for Ahlstrom if they only keep the transportation unit and sell the rest to GE?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [152]
------------------------------
Well, we're following what's happening to Ahlstrom with a lot of interest, because it is one of our main competitors. So, we're making sure that we're kept aware through the media what's going on, but that's about it. And we look at this transaction with interest as a competitor.
------------------------------
Gerd Braune, Handelsblatt - Media [153]
------------------------------
So, may I add one? So, no more comment on whether you might think about joining this bidding discussion in Europe?
------------------------------
Pierre Beaudoin, Bombardier Inc. - President, CEO [154]
------------------------------
I have no comment on this.
------------------------------
Gerd Braune, Handelsblatt - Media [155]
------------------------------
Thank you.
------------------------------
Operator [156]
------------------------------
Scott Deveau from National Post.
------------------------------
Scott Deveau, National Post - Media [157]
------------------------------
Hi, I was just wondering if it would be possible to detail why the investment was so high during the quarter in terms of the cash usage. And could you explain why it tends to abate throughout the course of the year?
------------------------------
Pierre Alary, Bombardier Inc. - CFO [158]
------------------------------
Well, the investment is quite at a normal level. It's higher from -- versus last year, but it's quite typical in the first two quarters that we -- the cash flow profile is such that the cash flow is negative the first two quarters, basically neutral in the third quarter, and it's good cash inflow in the fourth quarter. So, it's in relation to the way the deliveries are spread, the way the payment profile with the various customers are set up according to the various contract that we have. And that's a trend that is -- that we experience every year.
------------------------------
Scott Deveau, National Post - Media [159]
------------------------------
Okay, thank you.
------------------------------
Operator [160]
------------------------------
Thank you. (Interpreted) At this time, we have no further questions. I would like to give the floor to Ms. Chenier. I would now like to turn the meeting back over to Ms. Chenier.
------------------------------
Shirley Chenier, Bombardier Inc. - Director, IR [161]
------------------------------
Thank you, Operator. Thank you very much for your presence today. Have a great day.
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Operator [162]
------------------------------
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
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Editor [163]
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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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