Q2 2015 Bombardier Inc Earnings Call-English
Jul 30, 2015 AM EDT
BBD.B.TO - Bombardier Inc
Q2 2015 Bombardier Inc Earnings Call-English
Jul 30, 2015 / 12:00PM GMT
==============================
Corporate Participants
==============================
* Shirley Chenier
Bombardier Inc. - Senior Director, IR
* Alain Bellemare
Bombardier Inc. - President & CEO
* Pierre Alary
Bombardier Inc. - SVP & CFO
==============================
Conference Call Participants
==============================
* Cameron Doerksen
National Bank Financial - Analyst
* Fadi Chamoun
BMO Capital Markets - Analyst
* Walter Spracklin
RBC Capital Markets - Analyst
* Ron Epstein
Bank of America Merrill Lynch. - Analyst
* Kevin Chiang
CIBC World Markets - Analysts
* Turan Quettawala
Scotia Capital - Analyst
* Konark Gupta
Macquarie Group - Analyst
* David Tyerman
Canaccord Genuity - Analyst
* Deepak Kaushal
GMP Securities - Analyst
* Seth Seifman
JPMorgan - Analyst
* Robert Spingarn
Credit Suisse - Analyst
* Benoit Poirier
Desjardins Capital Markets - Analyst
* Manish Somaiya
Citigroup Inc. - Analyst
* Tim James
TD Securities - Analyst
* Matt Vittorioso
Barclays Plc - Analyst
* Yilma Abebe
JPMorgan - Analyst
==============================
Presentation
------------------------------
Operator [1]
------------------------------
(spoken in foreign language). Good morning, ladies and gentlemen and welcome to the Bombardier Conference Call. Please be advised that this call is being recorded. (spoken in foreign language) I would now like to turn the meeting over to Ms. Shirley Chenier, Senior Director, Investor Relations. (spoken in foreign language). Please go ahead, Ms. Chenier.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [2]
------------------------------
Thank you, operator. (spoken in foreign language). Hello everyone (technical difficulty) conference call intended for investors and financial analysts. (spoken in foreign language). I would also like to welcome the media representatives in attendance today, you'll be able to ask questions a little later in the conference call during the Q&A portion set aside for you.
(technical difficulty) President and Chief Executive Officer and Mr. Pierre Alary, Senior Vice President and Chief Financial Officer will discuss about the financial results for the second quarter ended June 30, 2015. (spoken in foreign language). This conference call is broadcast live on the Internet and is also translated into French and English. (technical difficulty) www.bombardier.com and a webcast archive of the integral version of this call will be available later today. Slides for this presentation in English and French are equally available on our website.
All dollar values expressed during this conference call are in US dollars unless stated otherwise. I also wish to remind you that during the course of this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the corporation. Several assumptions were made by Bombardier in preparing these statements and we wish to emphasize that there are risks that actual events or results may differ materially from these statements. For additional information on such assumptions, please refer to the MD&A 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.
Alain Bellemare will now begin the presentation.
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [3]
------------------------------
Thank you, Shirley and good morning, everyone and thanks for joining the call today.
After five months on the job, I have a better understanding of our challenges and opportunities. I will share with you the specific actions that we are taking to reshape the Company and ensure long-term success. We will cover our financial results, and even though our reviews are still ongoing, I have decided to provide you an updated guidance for 2015 based on what we know today. I'll also give you an update on our two major development programs, the CSeries and the Global 7000, 8000. I will share with you our new Bombardier transformation plan, which is designed to improve cash, reduce cost and implement a strong culture of performance across all of our businesses.
Before I turn to our financial performance, let me say that we have accomplished a lot and as you will see, we are moving fast. We've continued to strengthen our senior leadership team by adding industry experts with the right mix of skills to improve every aspect of the business. In addition to the appointment earlier this year of Fred Cromer as President and Colin Bole as Senior Vice President of Commercial Aircraft, we appointed David Coleal as President of Business Aircraft. We then recruited Jim Vounassis to lead our Bombardier transformation plan. And in June, we hired Louis Veronneau as Vice President, Mergers and Acquisitions. Finally, we just announced that John Di Bert, an accomplished executive recognized for his financial discipline, will be our new CFO. Add to that our new CSeries renewed momentum in Paris, our proactive management of the Global 5000, 6000 production rate, the preparation for a BT IPO, as well as the launch of our transformation initiative, you can see that we are taking the right steps and making the necessary changes to improve the overall performance of the business.
And now for our financial results, overall, our second quarter is in line with plan in terms of revenues, EBIT and deliveries. At the end of Q2, our liquidity position stand at a good level at $4.4 billion. We are focused on disciplined cash flow management and we will continue to take the right actions to successfully bring our development programs to fruition. For the full year, we are revising guidance for our Business Aircraft and Aerostructures that I'll cover this in more detail.
Before turning it over to Pierre, I would like to take this opportunity to thank him for his many years of service at Bombardier, as this is his last call with us. Pierre, we wish you a well deserved retirement and quality time with your family and friends.
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [4]
------------------------------
Thank you, Alain. Good morning, all.
Overall, our results were in line with plan. Revenues for the quarter at $4.6 billion are up 2% when excluding an unfavorable currency impact. EBIT totaled $226 million or 4.9%. Our order backlog remains strong at $64.8 billion. The adjusted EPS was $0.06 for the quarter. As for free cash flow, the higher usage compared to Q2 last year was mainly due to a lower level of advances from customers in Business Aircraft and higher net income tax and net interest rates. Our liquidity position stands at $4.4 billion.
Now, given what we see for the second half of the year, we have updated our EBIT guidance. For the first half of the year, BT has reached 5.6%. EBIT margin is on plan to slightly improves, while BT is -- is on plan to slightly improve its EBIT margin for the year as per original guidance. Aerostructures has actually done better with 8.8%, well ahead of our guidance of 4%. We now expect 6% for the full year. Business Aircraft EBIT margin before special items year-to-date is at 6.7%. However, considering the softness in demand, we are revising our guidance to a range of 5% to 6% for the full year. We anticipate Commercial Aircraft EBIT to be basically in line with guidance. But there is some risk depending on the assumptions used at year-end around the level of non-cash provisioning in relation to the dilutive impact of the CSeries initial delivery. Again, know that these provisions are non-cash.
On the liquidity front, our liquidity as of June 30 totaled $4.4 billion, consisting of $3.1 billion in cash and cash equivalents, plus another $1.3 billion of available revolving credit facility. This is net of the repayment in the second quarter of $750 million of senior notes originally due in 2016. As a result, we have no debt maturities before 2018. In addition, all our bank facilities have been extended by one year to 2017 and 2018, demonstrating the banks' support in our plans.
And let me give you some color on cash flows for the second half of the year. Our cash flow from operations and financing activities will be influenced by several factors such as the impact of the production rate reduction of the Global 5000/6000 on our level of inventory, the level of new orders and related advances and opportunities stemming from our various initiatives, including our planned IPO, tighter cash management and our transformation plan. On the investment side, the amount invested for 2015 should be at a level similar to last year.
Now, I will turn it back over to Alain.
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [5]
------------------------------
Thank you, Pierre. Now, I'd like to give you a more detailed update by business segments.
At Commercial Aircraft, the CSeries flight test program is progressing rapidly with more than 2,000 hours logged to-date. Certification is progressing well and we are now working closely with SWISS to ensure a smooth entry-into-service in the first half of 2016. The aircraft is performing extremely well with fuel burn, payload, range and take-off performance, all exceeding expectations. This is generating renewed interest amongst our customers.
Today, we have a solid CSeries backlog of 243 firm orders plus 360 other signed commitments. With a high conversion potential, our team is working to firm-up these commitments, while pursuing major sales campaigns. [CSeries] backlog is an excellent base upon which to ram-up production. Even the extensive aerospace experience and networks of Fred and Colin, we are now building renewed momentum in our sales campaigns to further strengthen our backlog. With a market of 7,000 aircraft over the next 20 years in the 100 to 150 seat segment, we are confident that the CSeries will capture a significant portion of this market. We are aggressively pursuing these campaigns in the full knowledge that they will materialize over time as airlines assess their fleet requirements and make their purchasing decision. For Q400 and CRJ, we are working on several more campaigns in many regions of the world for both replacement and growth opportunity.
Moving to Business Aircraft, this is a great franchise. We have strong brands and best-in-class products like the Challenger 350 and the Global 5000/6000 resulting in a backlog of $22 billion, the largest in the industry. For the quarter, we had lower orders than normal due to market softness mostly in China, Latin America and Russia. Nevertheless, our sales team is totally engaged with several dozen customers and prospects and so far Q3 sales activity has been good. Given the current market conditions, I feel that we've made the right call a few months ago when we proactively announced an adjustment of our production rate for Global 5000 and 6000. We are balancing supply and demand and protecting the value of the brand.
Turning now to our new Global 7000/8000 development program. These will be game changing aircraft that will define a all-new category of business jets. The Global 7000 is the only purpose built four-zone aircraft in the world and it will deliver unmatched performance, flexibility and comfort. The state-of-the-art aircraft will feature a wing that optimizes both short field and long range performance coupled with a highly efficient engine, the largest cabin and the most advanced cockpit. Creating an aircraft of this unique caliber with no compromise in term of performance and comfort is challenging. These challenges have impacted the program schedule and the aircraft will now enter into service in the second half of 2018. With our review almost complete, I am confident in the performance of the aircraft, and in our ability to deliver to the revised schedule. In fact, the first flight test vehicle is being assembled in our Toronto facility. We will continue to work closely with our customers and suppliers to make this program a success.
In Transportation, we are a global market leader in an industry that benefits from favorable mega trends such as population growth, urbanization and environmental awareness. I recently spent some time in Berlin with our team and I see great opportunities for top line growth within this segment, which bodes a strong $30 billion order backlog. I also see a strong potential for margin expansion from our present EBIT level of 5.6%. Besides this margin expansion, we are proceeding with the implementation of OneBT, a program that is largely focused on leveraging our scale, standardizing platforms and implementing leaner processes. OneBT is part of our Bombardier transformation plan to improve earnings and cash.
In parallel, we are continuing our preparation for an initial public offering of a minority stake in Bombardier Transportation. We intend to file the required documentation with applicable securities regulators during the fourth quarter subject to market conditions. In addition, we continue to explore strategic options for our rail business given the ongoing industry consolidation.
As I mentioned, we've launched a new Bombardier transformation plan focused on three priorities that are essential to unleash the full potential; drive performance, improve cash generation and reduce cost. We started with a systematic process with identified and quantified opportunities within each business segment. We are now transitioning to the execution phase. We are working with suppliers to reduce product cost and implementing tighter controls of our working capital. This transformation plan will give us the momentum to raise our level of execution and operational performance. I will update you on a regular basis.
In conclusion, when I first joined the organization, I told you I would focus on program execution, better cash flow management, strategic options and strengthening the team. After five months, we have largely completed the review of our two major aerospace development programs and we feel confident about both the performance of the aircraft and our revised schedules. We know what we have to do and we're managing these programs tighter than ever. We are focused on disciplined cash management. We are moving forward with our Bombardier transformation plan and our partial IPO at BT. As you can see, we're making solid progress and we're taking action to reshape the Company for long-term success. With our employees' passion and our newly appointed team, we're building a strong (technical difficulty) culture in which our people are [accountable], engaged and empowered to continuously focus on results.
I want to thank you for your time, and we'll now go to questions.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [6]
------------------------------
Thank you, Alain. Operator, we'll now start the question period for analysts and investors.
And in order to keep the duration of this call at a reasonable length, as usual, I would like you to limit yourself to one question, only one sub-question to give everyone a chance to participate. If you have any remaining questions at the end and if time permits, you can get back in the queue, and if not, you can contact me or Jan after this conference call and we will answer all your questions.
And now start with the first question, operator.
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
(spoken in foreign language). (Operator Instructions). Cameron Doerksen, National Bank Financial.
------------------------------
Cameron Doerksen, National Bank Financial - Analyst [2]
------------------------------
My question is on the business jet market. We've heard your view of what you're seeing out there, but it is a bit of a disconnect between what your view is and what we saw from Gulfstream yesterday with they have pretty strong order activity in their second quarter. So, I'm just wondering if you can comment on that and what you think might this specifically be impacting your order activity and are we seeing any weakness sort of spread be two other models, other than the Global models?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [3]
------------------------------
The second quarter as you see was a little bit soft on order, but when you look at our two Global installed base and our large customer base, we still feel very strong. In fact, we delivered more aircraft in the mid-size and large business aircraft than anybody else in the industry. We have a strong backlog today of $22 billion. There were softness in China and especially in Russia, we have a large market in these regions of the world that are softer today. Our pipeline right now in Q3 is pretty good. We feel good about the second half of the year. So we believe it was just a little bit soft in Q2, but there is no reason right now to believe that the second half is not going to be strong.
And to answer your second piece of the question, we saw the impact obviously on our larger cabins, but we saw a bit of that on the mid-size, but there was a -- it was not specifically just on one unique model, it was pretty much across the board on -- during the second quarter, but activities right now in Q3 are good pretty much across the board.
------------------------------
Operator [4]
------------------------------
Seth Seifman, JPMorgan.
------------------------------
Seth Seifman, JPMorgan - Analyst [5]
------------------------------
Maybe, following up on the business jets, is there any way to talk at this stage about the level at which you think Global production needs to come down to and also just kind of maybe qualitatively what impact that might have on profitability in the Business Aircraft segment next year?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [6]
------------------------------
Like we've announced last quarter, we were going to take the rate down on the Global 5000/6000, we are actively doing that. I mentioned last time that like if you look in the past, our production rate was largely in the range of 50 to 60 aircraft a year. We've peaked to 80 aircraft. We felt that it was time to readjust the rate more in line with demand. So moving forward, what you'll see is production rate that will be in that range of 50 to 60 aircraft moving forward, which is pretty much in line with what we saw over the past few years and also what we see moving forward. So that's kind of the ballpark, 50 to 60 aircraft moving forward.
Obviously, as you readjust the rate and reduce it, it will have an impact. So it is having an impact on cash this year and it will have an impact on EBIT next year. At this stage, we are still quantifying it and we will know more as we move forward.
------------------------------
Operator [7]
------------------------------
Fadi Chamoun, BMO Capital Markets.
------------------------------
Fadi Chamoun, BMO Capital Markets - Analyst [8]
------------------------------
And I want to say thank you to Pierre and all the best as well in retirement.
Quick question on the liquidity side. So given the level of order that you're seeing going into this back half of the year, what should we expect in terms of cash flow burn this year. Obviously, the first half has been much, much higher than what was anticipated, I think the highest cash burn rate in any H1 we've seen in recent history. So how much of that we can see recovering in the second half from a seasonal point of view.
And as a related item, now that sort of you have reviewed the Global 7000/8000 CapEx this year is about $1 billion in business aviation I believe, what does this look like in 2016 as well?
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [9]
------------------------------
If you look at the (inaudible) in terms of cash usage, that's basically aligned with our plan. So from our perspective, there was necessarily surprise on that front, although it's been influenced by the low level of orders in the Business Aircraft, so that's an influence. And we'll see on the second half and I refer to what -- that we have a good pipeline currently. We feel good about the new orders. So obviously, the level of advances will depend on the new order levels. So it's a bit difficult to predict at this point, especially when we look at the different components that we're putting in place like changing the production rate on the Global 5000 that will reduce the inventory level, therefore be beneficial to the cash. But there is some timing as to when exactly it's going to be realized. And we have a number of opportunities that we're working on in relation to transformation plan that Alain as alluded to, and we're bringing in place tighter cash management to manage the cash.
Now, on the spend level, on the investment side, the level of investment is anticipated to be at the same level as last year. So within $2 billion, so quite comparable. So that's the -- much color I can give on the -- because there is many, many parts that are moving and bringing the number in terms of the cash flow this year is particularly difficult.
------------------------------
Fadi Chamoun, BMO Capital Markets - Analyst [10]
------------------------------
But if we go to the Global 7000/8000, where are we in terms of the cash spend in this program, are we halfway through, are we through sort of the way, I mean -- I guess there is a couple more years left to -- for entry-into-service. Should we sort of expect this level of spending probably stay at these kind of $1 billion range into 2016 or?
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [11]
------------------------------
I would say that the -- we don't provide specifically the spend by program, it's more by family. So you have it for Business Aircraft. As you can imagine, the bulk of the work is in relation to the Global. So the run rate we're currently having is the run rate you can anticipate on a quarterly basis.
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [12]
------------------------------
I think it's fair to assume that it will be kind of in the same ballpark for 2016 for Global 7000/8000. Obviously, I mean we are still finalizing the review and we'll know more about what is in front of us from an investment standpoint, but I would say the program is moving well, aircraft is being assembled in Toronto, site configuration is relatively stable. So, it's difficult right now to have like a definite number on this, but I think that if you assume same level as what we've been spending this year, you will be in the right zone.
------------------------------
Fadi Chamoun, BMO Capital Markets - Analyst [13]
------------------------------
Okay. What's the scope of the cash flow improvement opportunity in the transformation plan you mentioned?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [14]
------------------------------
Yes, we're scoping it. We have numbers right now, but I mean, I want to make sure that we're going to get traction. So the plan is pretty well defined and there are still some more work to be done. I mean we started that just about two months ago, a very strong collaboration from the business units. So I mean it was top-down, then bottom-up initiative, then we've converged on what we believe is achievable moving forward and at the next -- the right time, I will share the numbers specifically with you, but I am not ready to do that yet, but I would say it's significant, it's very much in line with what I've done before, I know what we have to do, I mean we're factoring different buckets of costs, non-product cost and product cost, and overall expenses, strategic options are also part of this.
So it's very comprehensive and Jimmy Vounassis is leading the initiatives for me across all of Bombardier, both rail and aircraft, has been doing a very similar job before. So I feel good about what we've done in just two months, but I just need a little bit more time before actually being able to quantify exactly what we're going to get out of it, but I would say it will be significant.
------------------------------
Operator [15]
------------------------------
Robert Spingarn, Credit Suisse.
------------------------------
Robert Spingarn, Credit Suisse - Analyst [16]
------------------------------
Good morning, Alain and good luck, Pierre.
Alain, two quick things. First on the CSeries, you just said that you're pleased with the performance of the aircraft which is understood based on what we heard in Paris and you are happy with the revised schedule, but what do you have to do to solve the demand issue, especially here what I would call the twilight of the current order cycle when most -- everybody else's order book is full for most of the next decade?
And then separately, a question on biz jet, what's the status on white tails, did you produce any in the quarter and what do you have on hand?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [17]
------------------------------
So starting with the CSeries, I'm glad that the focus has shifted to orders now. (inaudible) about aircraft development and certification and entry-into-service. So I think that then as you can see, we've made significant progress in netting down some of the questions that we had in the past and we feel good about the schedule in supporting SWISS kind of mid-year next year. The performance of the aircraft, as you just said, I mean is very good, actually above expectation and at the Paris Air Show, we had like tremendous interest from customers and people were actually pleasantly surprised with the additional performance that we are going to bring to the market.
So clearly, the focus now has shifted to how we start increasing the backlog. We have Fred, we have Colin, I mean we have like a very strong team working this day-in and day-out. We are coming up with a very strategic approach of targeting specific airline, understanding what's their mission requirement, how would this aircraft best fit the profile of their need and I mean we are basically filling up the pipeline. So it takes a bit of time, it's not going to happen overnight and we want to make sure that the orders that we secured moving forward are going to be win-win, meaning good for the airlines and also good for us.
So we are aggressively driving that, although we do recognize that it will take a little bit of time. So it's that we need to get in sync with the customer requirements on that. But we are proactively engaging with them and we have about half a dozen customers that have basically shown interest over the past few weeks that we are engaging with.
------------------------------
Robert Spingarn, Credit Suisse - Analyst [18]
------------------------------
Alain, can I interrupt and ask those particular customers this half dozen when would they require delivery?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [19]
------------------------------
I mean, now we are starting to get very specific. I would say they will require delivery at a time that we have -- we will be able to deliver to them, okay? And let me just finish on the CSeries. The backlog that we have and I know some people are challenging on the backlog that we have, but the fact is we have sufficient aircraft in there to ramp up production while still working with Airline to add aircraft to the backlog.
So, I understand that there's another question about our ability to get orders. I feel very confident that we will choose the team, I'm very glad to have Fred, to have Colin working with us. I'm seeing a very significant step change in our going to market and we should not forget this is a 7,000 aircraft market, and it's a long-cycle business. So it's a market where there has not been any new aircraft designed for this specific market in many, many years. So, I feel good that we have the best aircraft, best class of aircraft, and we will get orders moving forward. So that's on the CSeries.
Your question on the white tail, there was very little. I think that we had only one white tail. We understand what we have to do for the second half. Right now, we feel good about selling all the aircraft that we have in our production pipeline, and the team -- we've got ourselves team fully engaged and like I said, I mean right now, we're seeing a pretty good level of activity and we'll see how we do in Q3, and then we will readjust we have to for Q4, but for the time being, we believe that we will be able to deliver everything that we've got.
------------------------------
Operator [20]
------------------------------
Walter Spracklin, RBC.
------------------------------
Walter Spracklin, RBC Capital Markets - Analyst [21]
------------------------------
So just on the free cash flow, coming back on that. I hear you on the spend level will equate to last year, and so that gives us good color into what your CapEx will be, but the key variable here that is really surprised at least on our end was the net working capital draw during the first half of the year, I mean, it was $1.2 billion for the first half. That typically reverses itself in the fourth quarter, are we going -- are you expecting to see that $1.2 billion to also repeat in the second half, because obviously that would be a very, very somewhat alarming? How can you give us some color, could you give us some color on how that net working capital trend will evolve in the back half of the year?
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [22]
------------------------------
As you pointed out, our normal trend is that second half is stronger than the first half, in particular the fourth quarter is positive, and that's the trend we've been experiencing, quite specific to our industry on both sides, on both transportation and the aerospace side. On the aerospace side, there is a number of variable (technical difficulty) which influence the level of cash that will be used through or will be used or generated through the working capital. So the reduction in the inventory I referred to on the 5000/6000, we typically deliver more aircraft and that's what we anticipate to do, and it's part of our guidance and our forecast to deliver more aircraft in the second half than the first half. But as you can imagine, the production rate is particularly pretty steady. Therefore we're building up inventory in the first half and reducing it in the second half. But one of the big variables is the [advance] level that comes from the level of new orders. So we anticipate, we have a good sales activity. The second quarter was soft, so that can make a big variance.
------------------------------
Walter Spracklin, RBC Capital Markets - Analyst [23]
------------------------------
So just so I understand, even if you do go positive net working capital in the fourth quarter, I mean you could be shaping up for a year of $1.7 billion, $1.8 billion in free cash flow usage. Is that a level that we should be plugging into our models for 2016 and 2017 and then how long can you go at that kind of level without requiring more liquidity?
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [24]
------------------------------
I don't think I can be more precise than what just said, Walter. In terms of liquidity, what we've said is that when we start a year, we'd like to be around close to $3 billion of cash and cash equivalents at the beginning of the year to foresee the working capital needs, the variation and that is in time of significant level of investments $2 billion level of investment and you need $3 billion. At the end of the second quarter after having used $1.5 billion of cash, we're at $3.1 billion. We have a good cash position at the end of the second quarter, where we're typically higher than we usually do.
And looking at next year, I refer to this year in terms of the spend on the investments. Next year, you can anticipate that the investment on the CSeries will come down significantly as we have the certification this year and entry-into-service first half of next.
------------------------------
Walter Spracklin, RBC Capital Markets - Analyst [25]
------------------------------
Okay, thank you for that clarification. And for my second question, back on the CSeries, I think the merits that the aircraft offers are quite well understood. So I'm curious to know that you've been able to talk to some customers, you've been looking at the program, you've been looking at the aircraft itself and what it can do, what it can deliver, what's your take on why there has been such little uptake to-date, and what is different or going to be different that will allow for more rapid uptake over the next, hopefully, short-term?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [26]
------------------------------
I think that when we see like short time, I mean Paris Air Show was in June and now we're at the end of July. I mean these things are long cycle, they don't happen overnight and I'm sure that people understand that we all would like to see like large order just pumping up very quickly. We have a new team in place in order to just put a past few weeks. We've just confirmed the performance of the aircraft at Paris. For the first time we had like our two aircraft, the (inaudible), CS100 and 300 at Paris.
The level of activities we saw at the show was very surprising in a positive way. I mean we had many customers like reengaging with us after seeing the aircraft. So I mean that has been just a few weeks ago. So it does take time. So what gives me confidence to answer back to your question is -- I see first and foremost is the performance of the aircraft, is the quality of the aircraft, is that qualitative comfort, I mean that this aircraft is bringing for those who have seen the interior, the cabin is amazing, the cockpit is best-in-class, the range is good. I mean that's really a very good performing aircraft from an operating cost point.
------------------------------
Walter Spracklin, RBC Capital Markets - Analyst [27]
------------------------------
But I'll just interrupt you there, I mean, none of that is different, right? I mean that was always the case, about the CSeries. I hear you the difference so far as the new sales teams, so that's one difference, but the selling merits of the aircraft, which are very strong haven't -- they changed, they've improved and you can point to an actual aircraft in the year producing as supposed to theoretical. I guess that's a second change but outside of what I'm looking for is what really is different from when you joined that you can see that will change the order intake from this point going forward from when you joined previous to that for the -- since the project was launched back in a way?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [28]
------------------------------
I would say it's confidence. If you want to summarize it in one word, it's confidence. I mean it's confidence that the aircraft will do what it should be doing or what we were saying that the aircraft would do and the difference -- it was having the aircraft in Paris and being able to talk about the actual performance of the aircraft that's made a big difference. And honestly, airlines they want to see the aircraft flying, they want to see that the aircraft performance is there, they want to see that the reliability of the aircraft is there, which by the way in our flight-test program, the reliability is right on target, we are at this stage of the flight test program and it's a new theme. It's like having people who understand the industry, who can have a network, you can talk to airlines about their needs, and they can match the solution that we bring to them to their need, so we should not underestimate that having a real aircraft flying with real data, and a theme that has market knowledge, it makes a industry knowledge, it makes a huge difference. These are like the two biggest, biggest changes.
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [29]
------------------------------
I would say that in some instances a few months that I don't get question on the product, before we were getting those questions. We don't get that question anymore, because everybody knows now that with the -- it's a game changer for us, so that goes with the confidence that I referred to.
------------------------------
Walter Spracklin, RBC Capital Markets - Analyst [30]
------------------------------
That's great, thank you for the color, much appreciate it.
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [31]
------------------------------
Thank you and thanks for the question, because I mean I think it is the right question, and I think that there is a lot of people wondering why is that we're not getting more traction. I mean I think that we should just put that in perspective, again the reaction from customer at the Air Show was super positive, not just a little bit, but it was very positive, people were impressed with the aircraft. So, but it does take time, I mean, it does take time to reengage airlines and then make sure that we fit those schedules. So again I feel confident, I think that we have all the right ingredients right now to turn to improve the sales pipeline. That's what your question.
------------------------------
Walter Spracklin, RBC Capital Markets - Analyst [32]
------------------------------
That makes sense. Thank you very much.
------------------------------
Operator [33]
------------------------------
Ron Epstein, Bank of America Merrill Lynch.
------------------------------
Ron Epstein, Bank of America Merrill Lynch. - Analyst [34]
------------------------------
Just have two maybe follow-up airplane questions. So, basically, I think you are trying to come out with a different direction, what I think Cameron and Seth were trying to get at. When you think about what's going on in the biz jet market during the quarter, when your competitors backlog was up high-single digits in biz jets and your backlog was down. How do you square that, and then how do you square that with your commentary around that you could be cutting production on the 5000 and 6000, but it looks like orders are going to get better in the second half of 2015. I mean, does that just mean you can take rates backup again or I mean I'm trying to sort fall that out.
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [35]
------------------------------
Let me start with the second piece of your question, Ron first. The volume went up significantly on the 5000/6000 because we received some very large orders, largely transactional and we went up in rate to a level that had never been done before. So we went to a rate of about 8-ish aircraft a year. But if you look at a steady production rate with traditional customers, if that's been more into 50 to 60-ish range, so that's what we're doing. We're really readjusting the rate in line with a level that we believe is sustainable over time. So we went very high up and we believe that the rate of anywhere between 60 and 60 does make sense and obviously we need to fine tune that in line with what we're going to see in the marketplace.
On the first part of your question, we have a very global customer base and we work with everybody. We work with individuals, we work with -- we have a large presence with corporate fleet. We have a very good footprint and essentially we have US presence, but we also have an international presence. And if you look at the large cabin, we have a large exposure to regions like Russia and China and Middle East. And Russia was really soft in the second quarter, and so is China. So we had a little bit more exposure in these markets.
Having said that, I mean the team now is looking at other opportunities in our network around the globe and that's why we are confident that we will sell the aircraft and regain -- strengthen the order in the third quarter. So our presence in these emerging market has been very good for us in the past as they were buying a lot of aircraft, eventually it will come back. We feel that this is going to be good for us. I mean there was a little bit of a blip in Q2 and the team is confident in Q3 and we'll see what we get in the third quarter and then I mean we'll take the right step moving forward according to what we will be able to get in the third quarter.
------------------------------
Ron Epstein, Bank of America Merrill Lynch. - Analyst [36]
------------------------------
Okay. And then maybe just one more on the CSeries. You mentioned in your remarks before you're looking to do orders that were good for you guys and good for an airline. How do you do that with a new product, meaning are you guys willing to compromise more on price to get some share, so that's -- and maybe I'm wrong, what my understanding is that that's been one of the things holding back sales in the airplane. At least historically, the Company hasn't been willing to be aggressive enough on price?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [37]
------------------------------
We will do what we have to do, Ron, to win a campaign. And there is way more than price when you compete. Obviously performance of the aircraft, reduction in operating cost, including fuel burn and maintenance cost. I mean there is multiple of variables, I mean how the aircraft best fit the mission of the airline, leasing factors, you know that. I mean there is like so many variables. So pricing is not the only one.
But what I meant by that is in the end it has to make good business sense for us and it has to make good business sense for the airlines as well and we understand there is always a compromise somewhere during the negotiation process. But at the same time, I mean I think that we need to act as a responsible business people and make sure that the decision we make are the right decision. So whatever we need to do, I mean to stimulate sales, we will do. But I want to make sure that in the end, we will build a business that is going to make good commercial sense moving forward.
------------------------------
Operator [38]
------------------------------
Kevin Chiang, CIBC.
------------------------------
Kevin Chiang, CIBC World Markets - Analysts [39]
------------------------------
Maybe just on the CSeries you talked about the technical progress and the better-than-expected data coming out of the flight test program. I'm just wondering outside of new orders, what some of your customers that have commitments are waiting for before they firm up those orders, just given the technical progress to-date.
And then maybe just secondly, just given what's happened to Republic Airlines earlier this week, just wondering what your thoughts are there, maybe how you bring sense, the risk around that order just given what's happened recently with that airline?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [40]
------------------------------
Starting with the second piece of your question, I mean we are not going to talk about specific customers on this call because I mean this is just between them and us. I think that we are engaged with our customers that have options right now and that we're doing exactly that. We're looking at what would they need, when do they need it, and given the performance of the aircraft, the level of confidence that we are rebuilding, and the aircraft as we have significantly reduced the risk moving forward. And these discussions are ongoing, they are progressing well and I'm confident that we'll be able to convert some of the options into firm order moving forward.
But like I said earlier, it is a process that does take time. I mean I am also very impatient, I'd like to do that as soon as possible, but I just realized in a pragmatic way that there is just a certain speed at which you can work with airline and get them to take the aircraft, but we have the team -- the only thing that I can tell you is we have the team that is super aggressive and we have re-engaged in a very positive constructive way with airlines and I feel that we will turn the corner.
------------------------------
Kevin Chiang, CIBC World Markets - Analysts [41]
------------------------------
Thank you for that. Maybe just a quick clarification, just on the biz jet margins, I know there is a lot of moving parts and you're still going through your strategy there. But with the production rates coming down for the global and some of the comments you made around the restructuring to reduce the overall cost structure. Our biz jet margins when you look out past 2015 is the 5% to 6% good floor. We actually push through that. Just given the timing with some of these moving parts here?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [42]
------------------------------
Just to forecast right now to be honest with you, I think that I would -- I mean we need a little bit more time to understand how we will land at the end of the year in Business Aircraft, and we need to look that like obviously the adjustment of the rate down. We need to look at the transition plan, rates being tailwind, we have FX that is also going to help, Canadian dollars is coming down quite significantly. So I mean that is good news for us. So I mean at this early stage, it's difficult, we're still in the planning mode. I mean the first five months for me was really to put our arms around like new development programs, the 7000 and 8000 and the CSeries. I mean that was the primary focus. And now moving forward, we'll look at developing the 2016 plan and most importantly at three to five year plan. So I would say it's a little bit early to talk about what will 2016 look like for Business Aircraft.
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [43]
------------------------------
Especially at all of those initiatives, the timing of it is, it could vary but in addition then it flows through the inventory, flows through the overhead then through the inventory. So until you do detail bottom up budget, it is very hard to come up with specific numbers. So that's why typically we provide guidance for the upcoming year together with our year-end results.
------------------------------
Operator [44]
------------------------------
Turan Quettawala, Scotia Capital.
------------------------------
Turan Quettawala, Scotia Capital - Analyst [45]
------------------------------
I guess my first question, I want to just go back to the CSeries. I think you talked about the order flow quite a bit that's good. I'm just thinking about the ramp up a little bit. I think on the last call, you had mentioned that you're considering reducing maybe the ramp-up rate a little bit. I was wondering if you can give us some more update on that, how far ahead you on that decision and impacting anyway the dilution numbers that maybe you've provided in the past?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [46]
------------------------------
We are still finalizing the volume ramp up, we'd say that right now. We feel that we are -- we have pretty good numbers, I mean that's something we're going to be talking about it on this call, but it's a nice ramp up, it's a gradual ramp up, making sure that we take advantage of the front-end to accelerate our learning curve on cost, and also in shrink good aircraft performance in the field and minimizing potential retrofits, should there be any, so I mean that's, and it's also in line with our customer order book right now.
So it's clearly as you said, I mean it's diluted in the front-end and we're trying to manage it as best as we can, and the focus right now that we have with the team is one is look at volume, making sure that we support our customer order book and two, how do we speed up the learning curve moving forward so that we can reduce the negative pressure that we'll see from the early deliveries.
------------------------------
Turan Quettawala, Scotia Capital - Analyst [47]
------------------------------
So I guess $200 million to $250 million dilution next year would be reasonable at this point?
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [48]
------------------------------
We are not specific in terms of the dilution, but the dilution level we've been talking about, overall doesn't really change, it is more a timing as to when we record it, because as you know on the IFRS, we have the first unit are a flat. So when we built or start working on the first unit, we need to take a provision, NRV, net reusable value provision on the inventory, and we've already started to take some at the end of 2013, some in 2014, and obviously we're taking some more in the second half. So depending on how much we report, and then the timing of next year it will be less as we report, in addition to the portion where we recorded this year.
But, overall in terms of cash in terms of the economic, that doesn't mean the timing as to when we report it the amount in the book.
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [49]
------------------------------
We'll be able to provide more color on that when we get closer to year-end, like when we start talking about 2016 plan. We need to put everything in balance like I said, it's like -- at this stage of the story. I mean our development cost is going to be coming down, and the negative margins are going to be a headwind. I mean we have some headwind, we have some tailwind, we need to look at what does it do to the overall CSeries business moving forward. At this stage, we're still into work on this.
------------------------------
Turan Quettawala, Scotia Capital - Analyst [50]
------------------------------
Okay. And if I may ask one more, Alain, if I look at the long term sort of profile here on your aerospace margins through the cycle, you've sort of been at pretty much at the bottom of your margins for the last two years here and it seems obviously the cycle is kind of probably to the right of peak here. I guess my question is obviously there are some moving changes here with the Canadian dollar, but also with the dilution in the CSeries. As you look through the next three to five years, do you think there is an opportunity here for you to materially move your margins based on what you want to do on the cost side or do you think that maybe it's too late for this cycle?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [51]
------------------------------
I like the time frame that you're using three to five years because I think this is what I'm working on right now. I mean this is like long-cycle business, I mean it's complex, it does take time, and I think that's -- we need to look at it over a longer time horizon. If I look at the -- what we have in front of us clearly the transformation process is going to help us, allow us to bring our cost down and improve our cash position. It's clear to meet that there is significant upside potential in Business Aircraft.
I mean if you look at the margin there, I mean we're like in mid-single digit, 5-ish to 6. I mean it's slow and I'm starting to understand why it is low today. If you look at our competitors, I mean it's like 2x to 3x that, I mean that's -- I mean we bettered and what we've been doing and there is no reason for it, because honestly we have the best business aircraft in the industry. I mean our Global 5000/6000 and our Challenger 350 are best in class.
So to your point, I think that there is clearly room for margin expansion and earnings growth in Business Aircraft, now there is like a reset that we need to do and that's what we're doing and I understand it's a little bit painful right now, but it's also a transition year and I believe that we're doing the right thing in terms of bringing the supply more in line with what like the long-term demand is going to be.
If you look at it from a margin standpoint, there is room to improve. On the CSeries, I think that the challenge there is what I've seen before and what is very typical of any new program is the learning curve. I mean it's like bringing your cost down as quickly as you can by working internally on productivity improvement initiatives, but most importantly working with your suppliers to help you bring the cost down in line with where it should be.
But again, if you take a three year to five year view, which is a very typical of learning curve materialize over time in term of achieving your cost target, I think that this will -- this is going to be okay moving forward. So, I think that overall, we should improve in Business Aircraft and we should track well with the learning curve over the next three to five years in Commercial Aircraft.
------------------------------
Operator [52]
------------------------------
Benoit Poirier, Desjardins Capital Markets.
------------------------------
Benoit Poirier, Desjardins Capital Markets - Analyst [53]
------------------------------
Could you help me to reconcile when we look in terms of business jet the fact that you maintain your delivery guidance, while lowering your EBIT margin guidance. I was wondering if it's more a matter of mix or pricing issue?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [54]
------------------------------
It's both. It's a matter of mix and pricing this year.
------------------------------
Benoit Poirier, Desjardins Capital Markets - Analyst [55]
------------------------------
Okay. And my follow-up question is related to the Global 7000/8000. So given you announced to the market a 18-months delay or mid-2018. I'm just wondering whether the customers are aware and if it will translate into some cancellation -- reimbursement and also how [relative] will be the 7000/8000 over time in comparison to the CSeries.
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [56]
------------------------------
We have been talking with, I think, right now to all customers. Our team has been on the phone with them, last night and early this morning. So the feedback is just pretty unanimous and they understand, they are disappointed because they wanted the aircraft now, I mean it's a very good aircraft. But they all said the same thing, we like the aircraft very much and it's very unique, we want this aircraft, and we will be working with you to stay on the program. So our sales team is very much engaged and I would say it's a very positive reaction. It's a very good question that you're asking. And for us, it was also a little bit of a concern. But so far, I mean the early reaction is very encouraging.
So I mean we will keep working with our customers very closely to make sure that they stay in the program and as I said, I mean they recognize the very unique value of the 7000. So I mean it's a good start right now, but I mean we will keep working with them over the next few weeks.
------------------------------
Benoit Poirier, Desjardins Capital Markets - Analyst [57]
------------------------------
Okay. And just a little clarification for Pierre. Did you mention at the beginning of the call that you would expect the cash position at the end of 2016 to be close to 2015 which would assume close to $2.5 billion, Pierre?
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [58]
------------------------------
I did not refer to the future cash position. I more referred to what we have been where I tried to help giving some color as to where we are heading (multiple speakers) fact that we had $3.1 billion at June 30, which is a high amount compared to what we usually have at the end of the second quarter.
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [59]
------------------------------
I just want to add to your question and what Pierre just mentioned, and Pierre said it before. There is multiple factors that are going to impact cash flow moving forward. I mean there is the risk that we've been talking about on the Business Aircraft side, but there is also the opportunity that we are not talking much about which is the IPO of the train business, which is a transformation process that we're still in the process of quantifying, and we have other strategic initiatives that are ongoing.
So that's on top of obviously, people managing inventory in Business Aircraft, bringing the inventory down as we are readjusting the production rates. So we've got like multiple variables right now and that is the reason why today, I mean, we've decided to give you as much color as possible understanding that it's typical to be precise. And we will keep doing that, we decided that we would give you as much input as possible. We will basically share with you what we see -- that's what we're seeing today.
------------------------------
Operator [60]
------------------------------
Manish Somaiya, Citigroup.
------------------------------
Manish Somaiya, Citigroup Inc. - Analyst [61]
------------------------------
Pierre, are you comfortable giving guidance on cash balance for the end of the year?
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [62]
------------------------------
Yes, I'm comfortable. When I look at the amount of cash we have as of June 30, as I referred to which is a good level of cash and the various components. There are different things that are moving, and I just referred to it. I referred to it earlier. And officially when we take into consideration the transformation plan, the initiatives in terms of tighter cash management, the various strategic initiatives including the IPO and so on. So we've always been very careful on the liquidity level and I'll always ensure that we will have the appropriate liquidity level, especially at times where we invest significantly.
------------------------------
Manish Somaiya, Citigroup Inc. - Analyst [63]
------------------------------
But I guess if you exclude the IPO of BT in this case where do you think -- what are you targeting for cash balance?
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [64]
------------------------------
In cash balance, when we start the year, and I'm talking here cash balance, we typically would like to be at a level of about $3 billion when we are investing in the tune of $2 billion. Currently, this year we are investing $2 billion. Next year, and that includes the CSeries and it's quite a sizable amount -- the proportion of that amount is the CSeries and the CSeries would come down. So it could be $3 billion, could be even a bit lower than $3 billion and that would be a good cash position to start 2016.
------------------------------
Manish Somaiya, Citigroup Inc. - Analyst [65]
------------------------------
Okay. So you don't think it's going to be --.
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [66]
------------------------------
Pretty variable, obviously.
------------------------------
Manish Somaiya, Citigroup Inc. - Analyst [67]
------------------------------
Right, right. But at this point, what's your sort of implying is that cash balance should be at best flat with what you had at June 30.
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [68]
------------------------------
That's what I'm saying. I'm saying that what kind of cash balance would like to be, and I'm referring to kind of a minimum. We're targeting that, that level.
------------------------------
Manish Somaiya, Citigroup Inc. - Analyst [69]
------------------------------
Alain, just switching over to you, on the CSeries and thanks for the updates on the aircraft and the several campaigns you have going on. I was hoping that perhaps you could clarify for us what kind of airline customers are looking the half dozen that you mentioned at the CSeries and I guess, do you still feel comfortable getting to a 300 order backlog before entry-into-service?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [70]
------------------------------
Yes, I think that we have a spectrum of customers right now. We have like large carriers, smaller carrier. We have like an international distribution, some in North America, some in Europe and some in Asia, some in Middle East. So I think it's pretty much spread when I look at it quickly. So just the typical customer base that you're targeting for these type of application.
------------------------------
Operator [71]
------------------------------
Tim James, TD Securities.
------------------------------
Tim James, TD Securities - Analyst [72]
------------------------------
Just a question here on the Global 7000/8000 and the updated timing for entry-into-service on that aircraft, I'm just wondering if the push out in the program or entry-into-service. Should that have a positive or negative influence on your cash flow in 2016/2017, I don't expect sort of a number attached to it, just directionally if you could help us out here and what I'm wondering is does it sort of stretch out the CapEx requirements and therefore has a positive impact on cash flow or does the reason for the push-out mean higher CapEx spending and therefore have a negative bias to cash flow over the 2016/2017 period?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [73]
------------------------------
Let me start by saying, I don't think it's going to go up, that's the first, that's a good question and the phasing of spending on the program is the right question and that's exactly what we're looking at right now. So like I said earlier and during the call, right now, I would assume kind of the same level for 2016 and we're looking how do we optimize the development program now knowing the schedule that is in front of us. So I mean there is as you understand there is many factors that play here. I think that's the best we can do right now is just tell you that, for 2016, you should assume that we'll be pretty much in the same range, but it's going to be higher if there is anything, I mean, it might be a little-bit lower, that's what we're trying to see. At the same time, now that we have the revised schedule, I want to make sure that we delivered on that schedule. So, it's a balancing act, but I think that we get a feel here for what it will be for 2016.
------------------------------
Tim James, TD Securities - Analyst [74]
------------------------------
And so before you decided to revise the schedule on 7000/8000, would CapEx have still been in the same range in 2016 relative to 2015, I guess I'm just trying to gauge not so much the change from 2015 to 2016, you've provided good color on that. I'm trying to just understand whether the change biases 2016 and 2017 higher or lower from what your previous kind of thoughts would have been.
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [75]
------------------------------
I would say on the Global 7000/8000, it was pretty much similar. Overall with the CSeries coming down, you should anticipate a reduction 2016 versus 2015.
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [76]
------------------------------
Just to add to your question on 7000/8000, I think that's again it's pretty much in the front end of the schedule doesn't change much, to be honest with you. So I mean it's more as you move forward that we need to see the impact. The front end was like there is not much change. We know where we are and we know what has to be done in the second half of 2015 and in 2016. So I would say versus (inaudible) the plan and what we're planning, I will say that again, I think that you should be pretty much in the same range.
------------------------------
Operator [77]
------------------------------
Konark Gupta, Macquarie.
------------------------------
Konark Gupta, Macquarie Group - Analyst [78]
------------------------------
I just want to clarify one thing before asking my question. On the CapEx, when you were saying flat CapEx or roughly same CapEx in 2015 and 2016, were you alluding to the consolidated number of $2 billion?
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [79]
------------------------------
No. In my comments at the beginning I said the level of CapEx for 2015 should be similar to 2014. And the answer I just gave two minutes ago, when I said pretty much at the same level that was specific to the Global 7000/8000. And on the consolidated basis, again anticipate that 2016 although (technical difficulty) but given the CSeries, there is certification targeted for this year, entry-into-service next year, we could expect that 2016 CapEx for the CSeries to be much lower, significantly lower than 2015.
------------------------------
Konark Gupta, Macquarie Group - Analyst [80]
------------------------------
My question is for Alain. Alain, you said that Global 5000/6000 production rate could be similar to 50 to 60, what you were delivering before. Now given where your orders have been so far and the book-to-bill is I think looking like below 1 times on Global 5000/6000 for at least last two to three years. What kind of order book or orders or book-to-bill ratio you think you could get in the second half, so that you can get that 50 to 60 rate, what's the kind of risk to that 50 to 60 number?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [81]
------------------------------
We feel that the 50 to 60 number is a good level. That's the reason why we are re-adjusting production rate at that level. You know what we've been doing in the past. I mean we have a very large customer base and we understand that there's been softness in some segments of the market. But overall, the 5000/6000 have a very broad application in multiple different customer types as well. So we feel that again 50 to 60 aircraft a year level is the right level.
In terms of book-to-bill, I mean there is -- I mean it can be lumpy and we don't comment anyway on the book-to-bill number moving forward. So I would say if you look backward and you look at what we've done in that past and we look at where we are today understanding that some market might not be as good as we want, but others are better. So, all in all, I think that when we readjust the rate at the 50 to 60 level, I mean we'll be at a very good place. It's a good aircraft. I mean if you talk to customers and I'm sure you do, and the Global 5000 and 6000 are best aircraft in their class. So there is no reason for these aircraft to come down in demand. Actually the demand for the aircraft is very good and we feel that this is going to be a great aircraft for many years to come.
------------------------------
Konark Gupta, Macquarie Group - Analyst [82]
------------------------------
So in the current state of environment, do you expect 50 to 60 is probably the right number?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [83]
------------------------------
Yes, absolutely.
------------------------------
Operator [84]
------------------------------
Matt Vittorioso, Barclays.
------------------------------
Matt Vittorioso, Barclays Plc - Analyst [85]
------------------------------
Just on the potential IPO of the transportation unit, is that an action that you're taking out of necessity, is that for additional liquidity that you feel like you need going forward given the uncertainty around cash flow? How should we think about that? I mean the valuation in the context of your current leverage, I mean does it really help you delever your balance sheet or do you just do it because you feel like you need additional liquidity, some clarity on that would be helpful.
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [86]
------------------------------
I think that this is -- we've been pretty clear on the IPO and the story hasn't changed. We're doing the IPO for a few reasons. First it was part of our financing plan to raise more money for Bombardier. So I mean it's one factor and it's one reason why we're doing that. The second reason is there has been a little bit of activities in term of consolidation in the rail business, where our train -- we are market leader in rail. And when you look at the value -- overall value of that business, it's a very good business. So we said that we wanted to extract the value and monetize a piece of that. So I think that's the second reason is like crystallize the value of BT, extract some value and make sure that we position ourselves for potential consolidation in the industry. So, these are like the two main reasons, part of our financing plan and two, crystallizing the value of BT and getting ready for a strategic play.
------------------------------
Matt Vittorioso, Barclays Plc - Analyst [87]
------------------------------
Okay. And then just a quick follow-up. I know there are some commentary earlier on the commercial aerospace unit and I certainly understand that you're not providing 2016 guidance, but I was wondering if you could just very simply trying to understand as we struggle to model 2016 in commercial aerospace with CSeries deliveries, beginning in 2016, very simply, are we to assume that EBIT in commercial aerospace is better or worse in 2016?
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [88]
------------------------------
There is going to be an imaginative dilution effect in 2016, and we already feel in 2015 that dilution effect is taking a provision for net visible value on the inventory that we're building in relation to the first delivery. The guidance for 2015 for commercial aircraft as a whole is the EBIT loss of approximately $200 million, so which is mostly due to the dilutive impact of CSeries and you can expect that to be (inaudible) higher amount next year, although there is no guidance for 2016.
------------------------------
Matt Vittorioso, Barclays Plc - Analyst [89]
------------------------------
Understanding no guidance, but just so we can think directionally as the CSeries deliveries begin, you're saying that that dilutive impact kind of picks up and just very broadly it will be greater in 2016 than 2015, yes?
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [90]
------------------------------
Yes.
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [91]
------------------------------
(inaudible) at the same time, [the NV] is going to come down, FX is going to be a positive factor. So that's the reason why we're guarded. I mean we don't mind answering your question, as you said directionally, you are right, but it is difficult at this stage to quantify, so we need more time, and I'm sure you understand why we need a little bit more time here, because we've got some more work to do, but I think -- what you're saying is right.
------------------------------
Operator [92]
------------------------------
David Tyerman, Canaccord Genuity.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [93]
------------------------------
My first question is on the business jet margins in the second half. So they're going down a lot and looks like, by my math they will be down around 4.5% from 6.7% in the first half, and there is a lot more deliveries in the second half schedule than in the first half. I heard your comment to Benoit's question about mix and price, but this is pretty big. I was wondering if you could share some insights into what exactly is going on here.
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [94]
------------------------------
I think that we're in a transition phase right now. I mean that's the best way to look at it, I mean we're trying to move aircraft and we're trying to make sure that we readjust the rate at the right level. So when you do that obviously that has an impact on your business and there is other things that we're trying to address in parallel. So I see that as a transition time for business aircraft. It's difficult when your production rate was higher than the market demand and that's really what we're readjusting. So, we've said this before, transition time. I've said that we are balancing supply and demand that we are doing this to preserve the value of the brand and we're going through a period where we need to make these adjustments. So and they have an impact on earnings and they have an impact on cash. But once we're done with this, and we'll be in a much better position. So again the name of the game here is like to regain some of the -- regain and preserve the value of our business jet franchise which is an amazing franchise in the marketplace.
------------------------------
David Tyerman, Canaccord Genuity - Analyst [95]
------------------------------
Okay, that's helpful. Thank you. And then the second question, just sort of following on and to something you mentioned earlier, you said you are starting to understand why margins are low in the business. I was wondering if you could give us some insights into what you think is the issue and what the solutions are?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [96]
------------------------------
I think there is like, there is many factors that I still need a bit more time and some that I will probably never talk about, but there is like -- there is a -- I would say some of the punch line on this is like you know the volume need to be in line with the market demand that's I would say the biggest driver of why we are, where we are today. And so that will be the biggest number one driver.
The second driver is one of cost and we need to make sure that we address cost on our existing platforms and that's what we're doing. And then I think that we're going to start seeing our margins improving. So, there's quite a bit of an adjustment and don't think that it's new news. There has been a lot of speculation in the past about some of our -- the approach that we took in selling aircraft and things like that, but right now it's all about bringing it through the execution, good approach with our sales force, our campaigns and making sure that we stay focused on doing the right things for the business.
Again, I would say that we are in a transition phase for Business Aircraft. We have an amazing franchise, we have great aircraft and they bring tremendous value for our customers, we are adjusting it to the right level.
------------------------------
Operator [97]
------------------------------
Deepak Kaushal, [JMP Securities].
------------------------------
Deepak Kaushal, GMP Securities - Analyst [98]
------------------------------
I've got two follow-up questions. First is on CSeries. Alain, you mentioned you still see a 7,000 aircraft market. In the past, per management said, and they targeted about 50% of this. Now that you've done your review of the program, are there any updates into the total program numbers you might expect from this program. Does this change your unit costs, and how this impact your sales campaigns in terms of ability to achieve pricing targets.
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [99]
------------------------------
I think that from a market standpoint, I mean what we see hasn't changed much. I mean what are your talking 6,000 or 7,000, still a big market and CSeries is going to be the only new aircraft in that segment. So we feel good about the ability for us to capture a significant share of the market moving forward. Obviously the more volume you have, the better it is. At this stage, it's all about the front-end of the pipeline. So it's about focusing on the learning curve to bring the early unit costs down as quickly as we can and hopefully in time as we start getting more traction in the marketplace and the order backlog goes up, I think that's going to also help with cost. I mean the more volume you have, obviously I mean -- the better is going to be your absorption.
But at this stage, I would say it's not necessarily a big factor in what we're doing. What we're really doing is focus on the front-end, focus on the learning curve and making sure that we gain momentum, renew momentum in the marketplace with customers on the sales side.
------------------------------
Deepak Kaushal, GMP Securities - Analyst [100]
------------------------------
Okay, thanks. That makes a lot of sense. And then just shifting to the Global 7000/8000 program. You mentioned four major systems here, the engine, the cockpit, the wing and the cabin. What's the biggest change that cause a change in timing for entry-into-services program and how should we think of technical risk for this new program going forward?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [101]
------------------------------
I think that the changes were made in the early phase of the design. It's a very unique aircraft, that's got short field and long range capability. So from a narrow standpoint, it has been some redesign. We have right now the most advanced wing in the industry. I would say that was the primary reason of the delay. For the rest, I would say it's pretty much in line, there was like maybe, I would say typical normal development issues with systems, but I think that, at this stage, we feel good about the design -- the wing design like I said. Configuration, of not only the wing, but of the aircraft and systems is getting pretty stable as we assemble the aircraft. I would say that the risk has been coming down quite a bit, in terms of aircraft configuration, we are at a good point and it's a new development program.
So as you enter into your flight test program, you might find new things that you will have to address, but a lot of the design work has been done and we feel good about where we are today. So we have state-of-the-art cockpit, we have state-of-the-art engine, we have like the best cabin in the industry and we have a state-of-the-art wing. So all of this combined together is going to make a great aircraft. But I would say, by and large, I mean this is the reason why we are where we are. But we feel good about the performance of the aircraft moving forward at this stage.
------------------------------
Operator [102]
------------------------------
Yilma Abebe, JPMorgan.
------------------------------
Yilma Abebe, JPMorgan - Analyst [103]
------------------------------
My first question is looking at your internal financial models, from a liquidity perspective, what's changed between now and the capital raise in February?
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [104]
------------------------------
What changed between now and -- sorry, a little misunderstanding.
------------------------------
Yilma Abebe, JPMorgan - Analyst [105]
------------------------------
And the capital raise that you did in February. In terms of your interim models on the liquidity picture, any difference between now and then the February capital raise?
------------------------------
Pierre Alary, Bombardier Inc. - SVP & CFO [106]
------------------------------
There is no difference between -- nothing has changed. To fund, we did the capital raise, has to do the equity piece and the debt piece when we referred, cutting the dividend, has all been done almost concurrently in February-March time frame, and then looking at various strategic alternatives including preparing for an IPO for BT.
Maybe what, the element that I could say may have changed or may look different today is what we've experienced in the second quarter, the softness in the business jet market, which today we're seeing a good level of activity and the third and the fourth quarter, we'll see where we stand. But as of today, we see good level of activities, which we haven't seen in the second quarter. I would say that's probably the one element that's outstanding, but otherwise, nothing else has changed. We've continued to do in-depth review and we are adjusting according to the in-depth review. That's more precision into where we're heading with our two program, the CSeries and the Global and as we progress on those review, we're giving you updates, we just gave on both the CSeries and the Global. And on the CSeries front, bringing the two aircraft for the Paris Air Show was a positive, which as we were anticipating doing it, but it was not announced (technical difficulty).
------------------------------
Yilma Abebe, JPMorgan - Analyst [107]
------------------------------
I guess, a quick follow-up, perhaps this is for you, Alain. Looking at the Bombardier transformation plan that you have laid out here and thanks for the good details, how does debt reduction might play in this picture over the longer term. The Company has a lot of capital commitments, it's carrying a lot of debt, how do you vision debt reduction over time, what are the paths the Company can take to do [sits-up with that] over the longer term?
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [108]
------------------------------
I think it's very much linked to the development programs to be honest with you is to bring them first to fruition, complete them, bring the E&D cost down moving forward, I mean we are at a very high level, I mean it's like I said, previously and having like two major development programs like that in parallel and we had like (inaudible) long ago, it was very difficult for the organization.
So I mean, back to your point, I'd say the first step is to bring the development program down, reduce your cash outflow on these programs, and then start ramping up production so that you can benefit from advances and you can benefit from earnings, generating margins. I think that's the priority number one and once we get that done, then we'll start worrying about not paying the debt down and it will come in time. I mean as we have like some debt maturing, I mean then we'll pay the debt down. That's what we did earlier this year, I mean that's what has changed back to your previous part of the question is, we paid down 2016 debt in 2015 of [$750 million]. I mean that's when they will come to maturity, I mean the plan is to pay that down.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [109]
------------------------------
Operator, do we have any more questions?
------------------------------
Operator [110]
------------------------------
We have no further questions at this time.
------------------------------
Alain Bellemare, Bombardier Inc. - President & CEO [111]
------------------------------
So, just in conclusion, I want to -- first, I want to thank you for taking the time to make it to the call, very much appreciate it. Thank you for your questions, I think are very helpful. They help us bring clarity to where we are, we're trying to be as -- to share as much information as possible. Obviously, we still have some reviews that are ongoing, but what we've shared with you is everything that we know today based on what we are seeing and moving forward, we will continue to engage with you and speaking with you in the weeks and months to come. At investor conference, you'll see more of us, in various meetings and conference calls.
So we understand that we have multiple moving parts and we understand the challenges, we're taking actions, we're addressing them and we will continue to let you know and keep you informed of where we are at every stage of the game. So thank you for your time.
------------------------------
Shirley Chenier, Bombardier Inc. - Senior Director, IR [112]
------------------------------
Thank you, Alain.
------------------------------
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.
------------------------------