Bombardier Inc Pauses its Learjet 85 Program and Revises its 2014 Guidance Call
Jan 15, 2015 AM EST
BBD.B.TO - Bombardier Inc
Bombardier Inc Pauses its Learjet 85 Program and Revises its 2014 Guidance Call
Jan 15, 2015 / 03:00PM GMT
==============================
Corporate Participants
==============================
* Shirley Chenier
Bombardier Inc - Senior Director, IR
* Pierre Beaudoin
Bombardier Inc - President & CEO
* Pierre Alary
Bombardier Inc - SVP & CFO
==============================
Conference Call Participants
==============================
* Benoit Poirier
Desjardins Capital Markets - Analyst
* Walter Spracklin
RBC Capital Markets - Analyst
* Robert Spingarn
Credit Suisse - Analyst
* Fadi Chamoun
BMO Capital Markets - Analyst
* Joe Nadol
JPMorgan - Analyst
* Konark Gupta
Macquarie Capital Markets - Analyst
* Turan Quettawala
Scotiabank - Analyst
* Cameron Doerksen
National Bank Financial - Analyst
* David Newman
Cormark Securities - Analyst
* Anthony Scilipoti
Veritas Investment Research - Analyst
* Kevin Chiang
CIBC World Markets - Analyst
* Steve Trent
Citigroup - Analyst
* Steve Hansen
Raymond James & Associates, Inc. - Analyst
* Noah Poponak
Goldman Sachs - Analyst
* David Tyerman
Canaccord Genuity - Analyst
==============================
Presentation
------------------------------
Operator [1]
------------------------------
(spoken in French) Good morning, ladies and gentlemen, and welcome to the Bombardier conference call. Please be advised that this call is being recorded. (spoken in French)
I would now like to turn the meeting over to Ms. Shirley Chenier, Senior Director, Investor Relations. (spoken in French) Please go ahead, Ms. Chenier.
------------------------------
Shirley Chenier, Bombardier Inc - Senior Director, IR [2]
------------------------------
Thank you, operator. (spoken in French) Good morning and thank you, everyone, for joining us at such short notice. This conference call is intended for investors and financial analysts regarding the Learjet 85 program pause and the revision of our financial guidance for 2015. (spoken in French)
------------------------------
Unidentified Participant [3]
------------------------------
I also wish to welcome the representatives of media to this call. You will have an opportunity to ask your questions later on when Q&A starts for the media.
------------------------------
Shirley Chenier, Bombardier Inc - Senior Director, IR [4]
------------------------------
-- representatives of the media to this call. You will have the opportunity to ask your questions later on when the question-and-answer period starts for the media. Shortly, Mr. Pierre Beaudoin, President and Chief Executive Officer, and Mr. Pierre Alary, Senior Vice President and Chief Financial Officer, will answer your questions about this morning's press release. (spoken in French)
------------------------------
Unidentified Participant [5]
------------------------------
This conference call is broadcast directly over the Internet and translated in both English and French.
------------------------------
Shirley Chenier, Bombardier Inc - Senior Director, IR [6]
------------------------------
-- website at www.bombardier.com and a webcast archive of the integral version of this call will be available later today. 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 will be making predictions or other forward-looking statements regarding future events or the future financial performance of the Corporation. A number of 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 from these statements. For additional information on such assumptions, please refer to the MD&A for the year ended December 31, 2013.
Please also note that I am making this cautionary statement on behalf of each speaker whose remarks today will contain forward-looking statements. In order to keep the duration of this call reasonable, I would also ask you to limit yourself to one question to give everyone a chance to participate. If you have any remaining questions, you can contact me after this conference call.
Operator, we can now start with the first question.
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
(spoken in French) (Operator Instructions) Benoit Poirier, Desjardins Securities.
------------------------------
Benoit Poirier, Desjardins Capital Markets - Analyst [2]
------------------------------
Could you provide more color on what you are seeing for 2015 in terms of guidance? And if not, how are you thinking about your financial position going into 2015? Thank you.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [3]
------------------------------
Well, first of all, Benoit, thank you for your question. We will provide, as usual, our guidance with the annual results on February 12, so that's when we will provide the guidance.
As far as the liquidity, we are in a position where we have $3.8 billion of liquidity. We feel that we have the -- combine this with the cash flow from operation, we have a sufficient fund (technical difficulty)
------------------------------
Benoit Poirier, Desjardins Capital Markets - Analyst [4]
------------------------------
Okay, that's my one. Thank you.
------------------------------
Operator [5]
------------------------------
Walter Spracklin, RBC Capital Markets.
------------------------------
Walter Spracklin, RBC Capital Markets - Analyst [6]
------------------------------
Just following up on the liquidity and free cash flow position. If you could confirm -- based on your cash flow -- sorry, your cash balance you indicated, at $2.4 billion, it indicates that your free cash flow burn for the year is going to come in at somewhere around $1 billion, $1.2 billion or more for the year.
Pierre -- this is for Pierre Alary -- you indicated that you want at the beginning of each year a $2 billion cash position to start the year. You are at $2.4 billion and given that your 2014 burn rate was up at that elevated level, can you talk to us about what minimum volume -- or sorry, minimum cash requirements you have? And whether you would be at risk of breaking through that threshold in 2015, given the current burn rate.
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [7]
------------------------------
I guess your estimate of the cash burn is -- it stays on the guidance -- revised guidance we provided and it's a fair estimate. The -- we effectively have $2.4 billion of cash and cash equivalents. We have access to $1.4 billion -- access to liquidity -- current liquidity through the revolver -- the two revolver we have.
And we believe that's sufficient liquidity, as Peter referred to, given the cash flow from operation that we anticipate going forward to -- for our [rightus] development program.
------------------------------
Walter Spracklin, RBC Capital Markets - Analyst [8]
------------------------------
So just so I understand, if you continue --
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [9]
------------------------------
That's the minimum --
------------------------------
Walter Spracklin, RBC Capital Markets - Analyst [10]
------------------------------
Yes, if you continue with this burn rate, aren't you at risk of falling below any -- if you can tell us what the thresholds would be through the year? Aren't you at risk now of potentially falling through what those minimum cash requirements are? And if you could, like I said, detail what the minimum cash requirements might be?
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [11]
------------------------------
The minimum cash requirement that you referred to, that's at the beginning of the year. Because our trend is -- we usually spend in the first quarter, as you know, some more in the second, quite close to breakeven in the third, and then we recover it in the fourth.
So when I say that there's somewhere between $2 billion and $3 billion at the beginning of the year, that takes into account that cash burn and it takes into account the level of investment in there we might have. When it's the normal level of investment, it's $2 billion. When it's a high level of investment, like we had in 2013 of close to $2.3 billion, then it's more towards the -- closer to the $3 billion than the $2 billion.
------------------------------
Walter Spracklin, RBC Capital Markets - Analyst [12]
------------------------------
In cash or in total liquidity?
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [13]
------------------------------
In cash to start the year.
------------------------------
Walter Spracklin, RBC Capital Markets - Analyst [14]
------------------------------
Okay. Okay, thank you very much.
------------------------------
Operator [15]
------------------------------
Robert Spingarn, Credit Suisse.
------------------------------
Robert Spingarn, Credit Suisse - Analyst [16]
------------------------------
Could you talk a little bit more about what's going on with the residual value guarantees and how -- and what else is in this $1.4 billion charge? It seems that's not entirely Lear 85, so again, the various problems that you are experiencing across aerospace.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [17]
------------------------------
Well, the $1.4 billion that we referred to is strictly in reference to the Lear 85. And it's mostly [inferment], so therefore non-cash.
------------------------------
Robert Spingarn, Credit Suisse - Analyst [18]
------------------------------
Okay. And then on the cash side, you had the RVG problem.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [19]
------------------------------
On the question of the RVG, that explains why we are not at 5%. We had guided the EBIT of aerospace to be at 5%. Now we are saying it's more like 4%. That's because one of the main elements that explains that variance is the adjustment to the provision for credit and residual value guarantee.
And we do revise that provision on a quarterly basis. But revising the -- in detail with third-party, the valuation, the base valuation, that's what we do in the fourth quarter. And that's where we had an adjustment and it's mostly in relation to the CRJ-200.
------------------------------
Robert Spingarn, Credit Suisse - Analyst [20]
------------------------------
Okay. And you said the one for is all Lear 85, because I thought it said mainly in the release. There's nothing else there?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [21]
------------------------------
It's in relation -- it's strictly in relation to the Lear 85, mainly as it is through the adjustment of the tooling or the product development front, which is not --
------------------------------
Robert Spingarn, Credit Suisse - Analyst [22]
------------------------------
Okay, okay. Thank you.
------------------------------
Operator [23]
------------------------------
Fadi Chamoun, BMO Capital Markets.
------------------------------
Fadi Chamoun, BMO Capital Markets - Analyst [24]
------------------------------
Just want to go back to the liquidity numbers a little bit. So you have $2.4 billion as of the end of the year, and if I just look at historically, you've needed about an $800 million, typically, on average in the last number of years in the first half in working capital. And I'm presuming the CapEx will continue to be somewhere, I guess, in the $600 million range for the first half.
So now you're going to be falling down to close to $1 billion in cash in the first half of the year. So how does this set you up relative to some of these covenants that you have? And does the covenant allow -- is it relative to cash or is it relative to total liquidity?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [25]
------------------------------
We have different covenant for our -- I guess you are referring to the covenant for our (inaudible). And so we have different covenants that have different definitions that are based on -- we see kind of a standalone, if you like, in the IBA without DC. So the -- and we are all aligned with those covenants.
And there is minimum cash that you referred to. One is -- and I guess that's what you referred to in the liquidity. One is $500 million on the IBA side and then there's $600 million on the transportation side as a minimum liquidity.
But then when you get into the definition of liquidity, there's elements that are -- that is being added to that definition in addition to the cash and cash equivalent that we add to the financial statement. So that's why it cannot be directly calculated out of the financial.
------------------------------
Fadi Chamoun, BMO Capital Markets - Analyst [26]
------------------------------
Okay. So basically, you feel that -- I'm assuming that my numbers on CapEx and working capital are more or less a reasonable assumption. I'm assuming that -- it sounds like you feel that you have the headroom to get through this issue in the first half, specifically. From a liquidity point of view.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [27]
------------------------------
Starting the year at $2.4 billion, and again, the guidance of somewhere between $2.2 billion and $2.3 billion, depending on the level of investment, that's at the beginning of the year.
------------------------------
Fadi Chamoun, BMO Capital Markets - Analyst [28]
------------------------------
Okay.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [29]
------------------------------
So we feel we have the sufficient liquidity to -- again, considering the cash flow profile and cash flow generated from operations to cover our program -- development of our program.
------------------------------
Fadi Chamoun, BMO Capital Markets - Analyst [30]
------------------------------
Okay. I'm not sure if you want to touch base on that. I mean, it's a 2015 question, but do you start ramping up working capital for the C-Series production early in 2015 or is this more like later in the year kind of ramp?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [31]
------------------------------
It's gradual. We've started to ramp up the working capital. Typically in a new program, you ramp up the working capital. You have, at the same time, advances from customers that are pretty much aligned, typically.
------------------------------
Fadi Chamoun, BMO Capital Markets - Analyst [32]
------------------------------
Okay. Appreciate the comment.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [33]
------------------------------
There's progress payment that are embedded into our contracts, so we've got [if I deposit that signature], but there's some more -- 18 months, 12 months, 6 months prior to delivery. So as we ramp up for deliveries, there's some more advantage that come up, typically a contract.
------------------------------
Fadi Chamoun, BMO Capital Markets - Analyst [34]
------------------------------
Okay, thank you. Thank you.
------------------------------
Operator [35]
------------------------------
Joe Nadol, JPMorgan.
------------------------------
Joe Nadol, JPMorgan - Analyst [36]
------------------------------
Again on the liquidity -- and heard everything you said so far, of course -- but I was just wondering if you guys could share a little bit more about your game plan from here.
Do you plan to go to the debt markets in the near term? How much debt do you plan to raise, in addition to your cash flow requirements for operations? Of course, you have this maturity going into early next year, up $750 million more, and one of your revolvers matures early next year as well. So what do you plan to do from here?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [37]
------------------------------
Well, we always monitor the level of liquidity and we are obviously -- and that's what we've been doing in the past. Our opportunistic is on markets, so that's something that we continue to do. We continue to monitor the level of liquidity and we are being opportunistic as we're going through the year.
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [38]
------------------------------
I just want to remind everybody we want to discuss the Lear 85 -- the announcement we made today. As far as the plan for 2015, as usual, we will do it on February 12 and at that time, we'll issue guidance.
------------------------------
Joe Nadol, JPMorgan - Analyst [39]
------------------------------
Okay. Pierre, just one more. Could you comment a little bit -- and you gave us a number of reasons for the cash flow delta from your guidance for each of the two businesses last year. But could you give us a little more color on what were really the big changes from your guidance? What really surprised you in Q4, cash flow wise?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [40]
------------------------------
Cash flow wise, the -- when you look at the explanation, typically, we put the explanation and element in order of importance. So that means, for example, on the aerospace side, when we say level of customer advances, lower level of customer advances, that the largest [explanation] than, obviously, lower EBIT, the 1% EBIT that translated into cash, increase of used aircraft inventory.
So that would be the main element. The level of customer advances is in relation to backlog, is in relation to particularly the backlog new orders and the timing of new orders, also.
For example, on the small end, like on the Lear family, the backlog is low. We sell almost as we produce. So therefore, you don't buildup advances. As I referred to earlier, we typically -- cash upon signatures. So more cash 18 months, 12 months, 6 months prior to delivery. If you sign in a given month and you deliver four months after, well, you don't buildup advances as much.
------------------------------
Joe Nadol, JPMorgan - Analyst [41]
------------------------------
Right. What I'm really looking for here is whether some of these items that slipped out of Q4 might help you in the first half the year and if some of the -- if you could characterize some of the shortfall here as temporary or just moving parts. I don't know if you want to share any thoughts on that.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [42]
------------------------------
The customer advances could have been one, but no, not really.
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [43]
------------------------------
I think what we are working on -- we ended up the year at 282 orders for aerospace, just compared to last year. It's a good level, because last year, we had large fleet orders. But it's not that the orders are not there; they are just coming in not long enough in advance of production. That's where (inaudible) the advance.
------------------------------
Joe Nadol, JPMorgan - Analyst [44]
------------------------------
Okay, thank you.
------------------------------
Operator [45]
------------------------------
Konark Gupta, Macquarie Capital.
------------------------------
Konark Gupta, Macquarie Capital Markets - Analyst [46]
------------------------------
My question is on the Learjet 85. There must have been some customer advances or signature deposits on the orders that you received so far. So with the pause in the program, like, what really does it mean for those advances?
And then perhaps you can also talk about what was the really surprising element on the margin side in the fourth quarter that had you took down your guidance?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [47]
------------------------------
Yes, well, on the customer advances -- so effectively, we have orders on the Lear 85. And one of the significant orders that we have on the Lear 85 is the Flexjet, which have multiple aircraft orders.
Obviously, we will be in discussion with Flexjet, but when you look at fleet orders, typically in proportion, it's the lower level of advances we have compared to a traditional order, where delivery will be over the next year or year and a half. On a multiple order, it's over several years. So therefore, the level of advances, proportionately, is much smaller.
------------------------------
Konark Gupta, Macquarie Capital Markets - Analyst [48]
------------------------------
So what happens to those advances for any paused program? Would you have to refund it back to the customers?
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [49]
------------------------------
First of all, it is not a significant amount. The second is that there will be negotiation with each customers. Maybe they will switch to another aircraft from RJ family or if they choose not to go forward in the time being, yes, we would reimburse. So it depends on every situation.
Some may choose to go to another aircraft -- the Lear 70/75, the Challenger 350. We have a broad portfolio of products and these negotiations are going to go on right now.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [50]
------------------------------
In many cases, as the program was taking a bit longer, many customers have switched to another model. It is already done, in many cases.
------------------------------
Konark Gupta, Macquarie Capital Markets - Analyst [51]
------------------------------
Okay, thanks. And on -- just on the Q4 margin, on my question, was there anything surprising that may not continue for the next few quarters? Like the credit and residual value guarantee provision?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [52]
------------------------------
Well, the created value guarantee, that's a one-time event or such an extent in the sense that we do review on a quarterly basis the provisioning. But what the valuation or the future value -- the estimate of the future value, we only do that once a year.
------------------------------
Konark Gupta, Macquarie Capital Markets - Analyst [53]
------------------------------
Okay, great. Thanks.
------------------------------
Operator [54]
------------------------------
Turan Quettawala, Scotiabank.
------------------------------
Turan Quettawala, Scotiabank - Analyst [55]
------------------------------
I guess maybe I will focus a little bit on BT here. So the miss on BT margins for the year of 100 basis points, maybe you can explain why that is happening. I guess you are writing down some contracts there. And also, as you think about the backlog here over the next couple of years, how should we think about BT margins?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [56]
------------------------------
Well, on the BT margin, the -- like the adjustment we have in the fourth quarter is mostly in relation to our escalation clause, where, given the -- in Europe, where the inflation, if you'd like, is anticipated to be fairly flat, our contract provides for escalation clause and we do take into consideration, though, the escalation clause in evaluating our contracts.
We review downwards the future revenue on those. And as you know, under contract accounting, we need to do catch-up adjustments. So that mainly explains the variance in the fourth quarter.
------------------------------
Turan Quettawala, Scotiabank - Analyst [57]
------------------------------
Okay. And so I guess, is that part of the audit process that came on the year or -- I'm just trying to understand -- BT margins were actually doing quite okay for the first two quarters.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [58]
------------------------------
It's part of our regular review -- our annual review and then it's an estimate. We make the estimate and as times evolve, we do revise those estimates. And in the fourth quarter, it's budget time, so we do it in bottoms up more detail. So we had a few contracts where we had to adjust in relation to the specific countries in which we have those contracts.
------------------------------
Turan Quettawala, Scotiabank - Analyst [59]
------------------------------
Okay. And then -- so just sort of on that front then, it seems like you sort of have, in the last couple of years here, have had a few contracts that have been creating problems for the margin side on BT. Just trying to understand going forward here if you can give us any color on how you see those margins moving, just based on what you have on the backlog today?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [60]
------------------------------
Well, the margin on those contract have been revised downward. So therefore, that means the anticipated profit generated from those contracts is lower than what we used to have on those specific contracts.
So those contracts is putting pressure on the margin until we complete the delivery on those contracts and it's been replaced by a contract at the more normal margin. So then we will come back to higher margin that we've been experiencing in the past.
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [61]
------------------------------
Just to comment on escalation, our contracts do have escalation clause, which we have to estimate every year. We also have agreements with suppliers on each contract. What I want to say is that we will evaluate forward the escalation on price. That's why we will make adjustment.
As far as cost of the product, if there's no escalation or less escalation on price, we will go back to suppliers and discuss the situation, but that we don't anticipate [and I don't].
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [62]
------------------------------
And I refer that we look at specific countries. You've seen the news on the -- from Switzerland today, that they are looking at -- they have reduced their LIBOR rate and so on. So that's an indication of how they see the economy going forward.
So that's the lower level of inflation, so that's what they have to take into consideration when we do reevaluate, and that's what we did in the fourth quarter.
------------------------------
Turan Quettawala, Scotiabank - Analyst [63]
------------------------------
Okay, fair enough. Maybe just lastly, Pierre, can you give us any sense of how long these contracts are going to last for?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [64]
------------------------------
It varies from contract to contract. Some will end in 2015, some will end early 2016. But right now, what we're talking about is escalation, which we looked at contracts broadly -- not specific, but a contract where we are having some (inaudible).
------------------------------
Turan Quettawala, Scotiabank - Analyst [65]
------------------------------
Okay. No, understood. Thank you very much.
------------------------------
Operator [66]
------------------------------
Cameron Doerksen, National Bank Financial.
------------------------------
Cameron Doerksen, National Bank Financial - Analyst [67]
------------------------------
I just wanted to come back to the Learjet 85. I guess I wanted to get a little bit more explanation on what pause means. Given the write-downs and then layoffs, it sort of sounds like this is a more permanent adjustment to the Learjet 85 or maybe even a cancellation.
And I guess the other thing is I'm wondering if you can maybe let us know how much you actually spent on a cash basis for the Learjet 85 in 2014? I'm wondering what the reduction in spend will be on that program in 2015.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [68]
------------------------------
First, when we say pause, we mean pause. We have a good aircraft. We've done more than 75 flights on the FTV1 that is in test. We are advancing the FTV2, a second flight test vehicle, that would be ready to go to flight shortly when we decide to go forward with the program again.
The issue that we have is that we've been following this market obviously constantly since its slowdown in 2008, and right now, we don't see it pickup at the rate we had anticipated. So we say it's a good time to take a pause, let's see how the market behaves, and then we can build this great aircraft and take it to market.
------------------------------
Cameron Doerksen, National Bank Financial - Analyst [69]
------------------------------
And on the spend? How much lower will your overall aircraft development spend be in 2015 relative to 2014 if you are not spending on the Learjet 85?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [70]
------------------------------
Well, we don't provide the guidance specifically by program, but we provide guidance overall. And the guidance for 2015 will be provided in [separates well] with our year-end results.
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [71]
------------------------------
And then for a few quarters, I've been saying that we monitor the Lear 85 market and we manage our flight tests according to priorities, according to market potential, of course, and how the market dynamics are working. We have two fantastic platforms that we're working on, the C-Series and the Global 7000 and 8000. These programs are making great progress and they have great markets in front of them.
------------------------------
Cameron Doerksen, National Bank Financial - Analyst [72]
------------------------------
Okay, thank you.
------------------------------
Operator [73]
------------------------------
David Newman, Cormark Securities.
------------------------------
David Newman, Cormark Securities - Analyst [74]
------------------------------
Not to beat a dead horse, but just on the cash side, on the provisions, I do believe that you are running in sort of the peak of your maturities on your RVGs. And I'm just wondering, obviously provision isn't accounting, it's non-cash.
Is there any risk at all that this could be another -- a call on cash over the next couple years? How do you feel about the cash potential of the RVGs?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [75]
------------------------------
Well, in terms of the cash, there's one thing on the RVG. There is some more coming up in our annual report that we do provide the scheduled maximum risk. First of all, we don't always favor the maximum risk. That's one thing. And in fact, the provisioning is a good sense of what we estimate as being payable.
The other element also is that in many cases, our customers decide to continue to use the aircraft because it suits them well. It serves them well, so therefore we passed the window for the RVG and then they lose the guarantee, if you like, because they continue to use the aircraft.
------------------------------
David Newman, Cormark Securities - Analyst [76]
------------------------------
Okay.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [77]
------------------------------
In fact, when we look at the fuel price today, that's good news for the CRJ-200s. That's the -- they are being more profitable and make more sense to continue to operate.
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [78]
------------------------------
And the airlines, in many cases, are able to put them back in operation at the fuel prices today. I think when you ask about the amount, like Pierre said, we provide a lot of information on our reserve and what we feel is -- will be payable in the RVGs, FLVGs, and so on, [the credit there].
------------------------------
David Newman, Cormark Securities - Analyst [79]
------------------------------
I think -- that's on the annual, though. I don't think that's provided on a quarterly basis, though, in terms of the growth.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [80]
------------------------------
That's true. We provide it on the annual, but those guarantee were given a long time ago so that they don't change much in terms of the maximum.
------------------------------
David Newman, Cormark Securities - Analyst [81]
------------------------------
Right, right, right. Okay.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [82]
------------------------------
There's one thing it's producing.
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [83]
------------------------------
And you know, this is a dynamic discussion with customers in how they use the product. And like we just said, the window that we are going through now with the fuel price is going to change the dynamic on the 50 passenger regional jet, which is something that we have yet to see the full impact.
------------------------------
David Newman, Cormark Securities - Analyst [84]
------------------------------
Okay. And just a couple on the positive side. Obviously, you have another 1,000 people out of the system. I believe the cost savings that you guys highlighted on a Q3 call was around $268 million combined between BA and BT. How much might this true your annual cost save up, just on headcount reduction? Is it around $300 million or something?
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [85]
------------------------------
Well, most of the people that are going to be let go in this change for the Lear 85 were actually capitalized as tooling because this was development cost.
------------------------------
David Newman, Cormark Securities - Analyst [86]
------------------------------
Right, right.
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [87]
------------------------------
From an operating cost perspective, you won't really see much.
------------------------------
David Newman, Cormark Securities - Analyst [88]
------------------------------
Okay, okay. And then finally, just on the FX, I think the last update we got in terms of your hedges -- I know you approaching -- you are past year end now in terms of your currently hedge, your hedge position was December 31 last year.
So what does the hedge position look like at this juncture and what is the -- over the term, which I think is 12 to 18 months is typically what you hedge different with different tranches. So what does that look like right now, because obviously, that would be a bit of a benefit for you guys at this Canadian dollar.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [89]
------------------------------
Yes, well, we will provide more detail with our year-end numbers. And that's information that comes -- as we prefer to find, year-end financial statement. But we typically -- as you refer to, hedge -- we have a policy to hedge.
We hedge gradually on a [consistent] basis, so we do it more than on a monthly basis, on a continuous basis. So the proportion of what is being hedged, that's the same level typically -- the next 18 months has maybe -- or the next 12 months, that's probably something like 75% of it is hedged.
------------------------------
David Newman, Cormark Securities - Analyst [90]
------------------------------
Okay. So it is very, very gradually. You do it on a quarterly basis and you just true up your hedges. So we can probably look at the effective rate in 2013 versus the effective rate in 2014 and have a pretty good sense on what the net benefit might be. And I think it's $29 million for every $0.01 versus -- US versus the Canadian dollar, if I'm not mistaken.
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [91]
------------------------------
Yes, for the not hedged portion, yes.
------------------------------
David Newman, Cormark Securities - Analyst [92]
------------------------------
Very good. Thank you.
------------------------------
Operator [93]
------------------------------
Anthony Scilipoti, Veritas.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [94]
------------------------------
One question, with a couple parts related. If you look at -- on the aerospace side, I understand the reasons you've given. When I look at the order flow of announced orders thus far, for the Q400s, I get around 10, and CRJs, around 25. There were some Learjets that were announced.
It's not bad if I compare that to last year's order flow. So the missing component -- that's for the regional jet side. The missing component would be on the business jet. So what's happened on the business jets in terms of orders for the quarter?
And what is the -- what happened in the deposits? Is it that you are just offering aircraft at lower deposit? And what does that mean about the market?
And then tied to all this is, as everyone keeps going about the covenants, I think given the reaction in the marketplace and given the concern that investors have here, I know you haven't disclosed your debt covenants, but I think the time is right for us to know exactly what the limits are so that we can prepare accordingly. Thanks.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [95]
------------------------------
Okay, let me give you the numbers on the order. We'll end the year at business aircraft, approximately, because there is still some discussion with our auditor. Of course, this is preliminary, but the 129 for business aircrafts will carry through in the fourth quarter and 148 for the commercial aircraft, where we were at 116 at the third quarter.
So it's not that there is less deposit for aircraft, it's that the orders, when they come late closer to delivery, you don't keep the advance very long. You keep it sometimes a few weeks before the delivery of the aircraft, and that's where it affects us. So what we have to do is really build the length of the backlog as we've been working on for several years.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [96]
------------------------------
Okay. And what about the debt covenant?
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [97]
------------------------------
The debt covenant, if you refer, first of all, on the long-term debt, it's investment grade covenant packages and there's no specific financial covenant. So that covers a long-term debt.
Then if you look at the LC facilities, that's a non-funded facility. So that's -- there is no cash in relation to those facilities. These are guarantee of performance, guarantee mainly, that is -- that the bank issued for the benefit of our customers.
And then there's a revolver. And we have specific covenants, but again, those covenants are specific to the facility -- the two facilities in BT are specific to the facility in [BIVA]. They are calculated based on certain -- the operation in BT are based on BT.
And even if I was to provide the covenant, we wouldn't be able to calculate it, because we don't disaggregate the balance sheet and the various component and so on. So obviously, you can imagine that we do track and follow those covenants and we do meet those covenants every quarter. But we will not disclose those covenants, because it's not information that would be useful for the investors.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [98]
------------------------------
But I think it would assuage the market. You see the concern -- obviously, the panic in the stock price is telling you that investors are concerned. The number of questions that are coming on the liquidity indicate the level of concern. And so we need to be able to look forward and say okay, where should we start getting really concerned?
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [99]
------------------------------
I understand the liquidity concern. And as well, we are explaining that we have $2.4 billion of liquidity, $1.4 billion of access to liquidity through revolvers. But the calculation of the covenant is not the issue.
The question is do we have sufficient liquidity? And we do believe that given the access of liquidity, the liquidity we have, the cash flow from operation, and as we've done in the past, we will be opportunistic as to the various windows on the market to address liquidity.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [100]
------------------------------
What about looking -- is the level of equity part of the covenant? Because we're going to be having an equity balance by what I estimate of less than $1 billion.
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [101]
------------------------------
The answer is no.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [102]
------------------------------
Okay. This pricing pressure that's affected the margin in Bombardier Aerospace, you guys have long lead times with orders, so you know the price is going to be long before the aircraft gets delivered. So I don't understand why all of a sudden that's impacting this quarter's margin.
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [103]
------------------------------
On certain aircraft, we have long lead time. On some others, we do sign orders and deliver within the same quarter or soon thereafter. But I refer to you with the Lear family, for example.
So it's not binary and it's not all necessarily -- all 100% predictable. And there's also an escalation clause when we sign up or depending on the various metrics that the -- what's behind the calculation of the escalation, that varies. And it varies based on the -- when we deliver.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [104]
------------------------------
And we did a lot of delivery in Q4 and some of these aircraft were sold in.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [105]
------------------------------
I can see that and that should help the cash flow and the operating cash flow Q4, for sure.
------------------------------
Shirley Chenier, Bombardier Inc - Senior Director, IR [106]
------------------------------
Anthony, I suggest you (technical difficulty) call after.
------------------------------
Anthony Scilipoti, Veritas Investment Research - Analyst [107]
------------------------------
Thanks.
------------------------------
Operator [108]
------------------------------
Kevin Chiang, CIBC.
------------------------------
Kevin Chiang, CIBC World Markets - Analyst [109]
------------------------------
Maybe just following up on the cash flow from operations out of BA. You sold more planes, the order intake was relatively good versus 2013, and if I recall, back in your investor day, you tried to highlight that cash flow from operations, the $1.2 billion lower point of your range, was a pretty good floor price based on some assumptions you have made and you're obviously below that.
Highlighting the lower level of customer advances, what's changed over the past, call it, eight to nine months from your investor day? Is it -- it doesn't sound like it's lower advances per se, so is it lower orders overall than you had anticipated? Was it mix? I'm just trying to get a sense of how you could have been off by, call it, roughly $400 million from what you would have been guiding to just eight to nine months ago.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [110]
------------------------------
I would say it's the -- well, the main component -- the lower EBIT, obviously, has an impact [in that it] can calculate specifically. Then the level of advances coming from a mix of the less advances than we have anticipated on the business aircraft.
We're talking about 30 some orders in the fourth quarter. Typically, the fourth quarter is much higher than that for new orders in the business aircraft. And the timing of those new orders, as I referred to earlier. So in some cases, we got a new order in the fourth quarter and delivered in the fourth quarter.
------------------------------
Kevin Chiang, CIBC World Markets - Analyst [111]
------------------------------
Okay, thank you.
------------------------------
Operator [112]
------------------------------
Darryl Genovesi, UBS Securities.
------------------------------
Shirley Chenier, Bombardier Inc - Senior Director, IR [113]
------------------------------
Okay, Darryl, I will give you a call after.
------------------------------
Operator [114]
------------------------------
Steve Trent, Citi.
------------------------------
Steve Trent, Citigroup - Analyst [115]
------------------------------
I will stick to the one question here. I'm just curious, and forgive me if I missed the explanation. When you think about the working capital cycle as it relates to order flow and predelivery payments, can you tell us whether you've had to or you've made adjustments, per se, in percentage deposit requirements on new orders? And to what degree the PDP stream has been softened on year end from a policy standpoint?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [116]
------------------------------
No, there's been no change, and it's not been softened, if I use your term. It really -- like I said before, it has to do with the length -- the difference between the time of the order and the time of delivery is shorter, so therefore, we don't have an advance for very long. Because then you get the deliveries. So what we need to work on is lengthen the backlog.
------------------------------
Steve Trent, Citigroup - Analyst [117]
------------------------------
Okay, got it. Thanks very much.
------------------------------
Operator [118]
------------------------------
Steve Hansen, Raymond James.
------------------------------
Steve Hansen, Raymond James & Associates, Inc. - Analyst [119]
------------------------------
Just given all the liquidity concerns that are starting to surface here, should we expect any other actions or modifications to your other development programs? Or if I had to ask it another way, what degree of urgency do you feel to examine the timeline of prepared schedules for the other key programs?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [120]
------------------------------
What degree? I'm sorry, because your voice was coming in and out.
------------------------------
Shirley Chenier, Bombardier Inc - Senior Director, IR [121]
------------------------------
Could you repeat the question, Steve? The sound was not very good.
------------------------------
Steve Hansen, Raymond James & Associates, Inc. - Analyst [122]
------------------------------
Yes, I apologize. I'm on a cell phone here. Just given all the liquidity concerns that are surfacing, should we expect any other actions or modifications to your current development programs?
And if I had to ask it another way, what degree of urgency do you see or do you feel today to examine the timelines and schedule of those other programs, where key capital commitments are still in place?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [123]
------------------------------
No, you should not see any modification to the schedule of the programs. Of course, we are very busy at working at certifying the C-Series by the second half of 2015. And on this, we are making significant progress. We have now passed 800 hours of flying on the C-Series and the tests are going well.
There's still a lot of work to do, but I feel that we are making the progress to get certified in the second half of 2016. And we've started the assembly of the first FTV, the first flight test vehicle, of the Global 7000 and 8000. I think what -- the big win for Bombardier is to get these airplanes to market as soon as possible.
------------------------------
Steve Hansen, Raymond James & Associates, Inc. - Analyst [124]
------------------------------
And just a follow-up, then, maybe on the cost side. You've made a number of existing -- a number of cost cuts over the past 18 months or so. Should we expect an acceleration of that cost-cutting effort or should we expect it just to continue as under the previous plan?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [125]
------------------------------
We've made the adjustment to the [over ets] to create a leaner, more agile organization. I feel that we have this in place. Now what we need to work on with the management is to work on the margin. But no, we have the organization in place to be successful.
------------------------------
Steve Hansen, Raymond James & Associates, Inc. - Analyst [126]
------------------------------
Okay, that's it for me. Thanks, guys.
------------------------------
Operator [127]
------------------------------
Noah Poponak, Goldman Sachs.
------------------------------
Noah Poponak, Goldman Sachs - Analyst [128]
------------------------------
Pierre, if you can't give more detail on the covenants, can you just very simply say if you do or do not see any existing debt covenants needing to be relaxed?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [129]
------------------------------
Again, you are referring to debt covenants. The debt we have -- the long-term debt we have, there's no financial covenant attached to it. It's all investment grade package at the time we issued. And even when we were not investment grade, we issued debt on the market. The bonds that we have, we have no financial covenant attached to it.
Then if you refer to the bank facility that we have, the bank facility that we have is non-funded bank facilities, so it does not impact the liquidity, per se. Those that are in relation to letter of credit issuance and those letter of credit issuance is to guarantee the performance, mostly in BT.
And then we've got the revolver. So we've got specific covenant package that are for each of the facilities that are in relation -- BT, one is in relation to BT. The other one is in relation to the aerospace activity, and then there's specific covenant in relation to each facility.
------------------------------
Noah Poponak, Goldman Sachs - Analyst [130]
------------------------------
Right. So do you foresee any of those covenants needing to change?
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [131]
------------------------------
With the covenant we have, we do meet our covenant and we do revise on a regular basis with our banks our plan. And then we adjust whatever we need to adjust when it's the case.
------------------------------
Noah Poponak, Goldman Sachs - Analyst [132]
------------------------------
Okay. And is the small cabin business jet market incrementally worse versus three or four months ago when it felt -- it seemed some market observers were saying it was getting a little better? Or has it just kind of been walking along the bottom all along and you are making that call now?
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [133]
------------------------------
Well, I think your second part of your statement is what we worry about. We are doing okay with the Lear 70/75. We are meeting our targets that we've set. But it's not the level that it was pre-2008.
And as far as looking at the development of a category like the Lear 85, we monitor also what our competitors are selling in this category. And we feel that at this time, the market was not justified for us to continue the investment for this time.
Because when I look at the installed base and the people that will trade into this category, there's a great market, which says that as far as we are concerned, we prefer to take a pause, observe the market, and when the market shows real sign of picking up, I think we have a fantastic airplane to take to market.
------------------------------
Noah Poponak, Goldman Sachs - Analyst [134]
------------------------------
Okay, thank you.
------------------------------
Operator [135]
------------------------------
David Tyerman, Canaccord Genuity.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [136]
------------------------------
My question is on margins. Is it fair to use the 2014 margins as a base to consider going forward and then layer on top whatever currency benefit you get and benefits from the layoffs or are there other factors we should be considering?
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [137]
------------------------------
David, as we mentioned earlier on the call, the 2015 guidance will be provided as we disclose our year-end number, which was February 12.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [138]
------------------------------
Okay. Maybe since I didn't get any answer, I can ask one other question? (laughter)
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [139]
------------------------------
Good try. You should've expected that answer, but I will take your second question.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [140]
------------------------------
Okay. On the liquidity, is there a minimum level you can give, either total liquidity or cash through the year? You say $3 billion total liquidity, I think, at this point in your development cycle at the start of the year. Is there a minimum level for the low point in the year that we should be penciling in as a threshold?
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [141]
------------------------------
In a minimum level, we've been too close to $2 billion in terms of (inaudible) quarter. And starting the year at just below $3 billion, so there's no specific per quarter.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [142]
------------------------------
It really depends on the plan of the year and we will share on the talk in February our plan for 2015.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [143]
------------------------------
But presumably, there's some level of liquidity you need to run the Company. And that $3 billion would've had some relationship to that? Is that not the case?
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [144]
------------------------------
It is the case. It is the case. But on the other side, we've got those revolver that we can use.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [145]
------------------------------
But it also is in the context --
------------------------------
David Tyerman, Canaccord Genuity - Analyst [146]
------------------------------
Right, but that's in the total liquidity.
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [147]
------------------------------
Total liquidity at $3.8 billion, yes.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [148]
------------------------------
And that's also in the context of we are developing new aircraft.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [149]
------------------------------
No, I understand that, Pierre. But I guess what I'm driving at is if you say $3 billion is the okay number at the start of the year, don't go below that, what is the lowest number during the year, given that you are developing aircraft right now?
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [150]
------------------------------
I guess you can, as a proxy, take like $1 billion.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [151]
------------------------------
$1 billion less or $1 billion?
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [152]
------------------------------
$1 billion.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [153]
------------------------------
Okay. So you are saying that right now, you would have $2.8 billion excess liquidity?
------------------------------
Shirley Chenier, Bombardier Inc - Senior Director, IR [154]
------------------------------
Yes.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [155]
------------------------------
Okay, thank you.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [156]
------------------------------
[$3.8 billion, yes.]
------------------------------
David Tyerman, Canaccord Genuity - Analyst [157]
------------------------------
Okay, that's helpful. Thank you.
------------------------------
Shirley Chenier, Bombardier Inc - Senior Director, IR [158]
------------------------------
You said $3.8 billion, David?
------------------------------
David Tyerman, Canaccord Genuity - Analyst [159]
------------------------------
Yes. So I'm saying right this moment, you have $2.8 billion of excess liquidity. That's the $3.8 billion liquidity less the $1 billion minimum.
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [160]
------------------------------
In excess? Okay.
------------------------------
Pierre Beaudoin, Bombardier Inc - President & CEO [161]
------------------------------
I understand your logic.
------------------------------
Pierre Alary, Bombardier Inc - SVP & CFO [162]
------------------------------
I understand what you're saying. Yes, thank you.
------------------------------
Shirley Chenier, Bombardier Inc - Senior Director, IR [163]
------------------------------
Got it.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [164]
------------------------------
Thank you.
------------------------------
Shirley Chenier, Bombardier Inc - Senior Director, IR [165]
------------------------------
Okay. So for anybody else on the call who would like to -- who would have liked to ask a second question, please give me a call after we finish this conference call and I'll call you all back. Okay? Thank you.
Operator, this concludes the question period that is intended for investors and analysts, so we will now begin the question period for the media representatives.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------