Q4 2015 Bombardier Inc Earnings Call (English)
Feb 17, 2016 AM EST
BBD.B.TO - Bombardier Inc
Q4 2015 Bombardier Inc Earnings Call (English)
Feb 17, 2016 / 01:00PM GMT
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Corporate Participants
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* Patrick Ghoche
Bombardier Inc. - VP IR
* Alain Bellemare
Bombardier Inc. - President and CEO
* John Di Bert
Bombardier Inc. - SVP and CFO
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Conference Call Participants
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* Walter Spracklin
RBC - Analyst
* Cai von Rumohr
Cowen and Company - Analyst
* Turan Quettawala
Scotia Bank - Analyst
* Seth Seifman
JPMorgan - Analyst
* Konark Gupta
Macquarie Research - Analyst
* Benoit Poirier
Desjardins Securities - Analyst
* Ron Epstein
Bank of America Merrill Lynch - Analyst
* Cameron Doerksen
National Bank Financial - Analyst
* Robert Spingarn
Credit Suisse - Analyst
* Fadi Chamoun
BMO Capital Markets - Analyst
* Peter Arment
Sterne, Agee & Leach, Inc. - Analyst
* Tim James
TD Securities - Analyst
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Presentation
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Operator [1]
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(Spoken in French). Good morning, ladies and gentlemen, and welcome to the Bombardier fourth quarter and full year 2015 earnings conference call. Please be advised that this call is being recorded. (Spoken in French). I would now like to turn the meeting over to Mr. Patrick Ghoche, Investor Relations Vice President for Bombardier. (Spoken in French). Please go ahead.
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Patrick Ghoche, Bombardier Inc. - VP IR [2]
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Thank you, Maude. Good morning to those on the call and thank you for joining us. This management discussion has been arranged to review our performance for the fourth quarter, as well as the 2015 full-year results. As in the past, we'll invite institutional investors and financial analysts to ask your questions following management's remarks.
Today, Alain Bellemare, President and Chief Executive Officer, and John Di Bert, Senior Vice President and Chief Financial Officer, will provide performance highlights, which will address the business' continued strategic focus, segment operational performance, our Q4 and full year results for the year ended December 31, 2015, and provide some color on this morning's announcement. John will also provide the Company's guidance for 2016 at the conclusion of his prepared remarks.
This conference call is broadcast live on the Internet and also translated into French and English. For copies of our earnings release and supporting documents, or to retrieve the webcast archive on this call, which will be available later today, please visit our website at www.bombardier.com. Slides for this presentation, in English and French, are also available.
All dollar values expressed in this conference are in US dollars, unless stated otherwise. We also wish to remind you that during the course of this conference call, we may make projections or other forward-looking statements regarding events or the future financial performance of the Corporation. I bring your attention to chart 2 of the earnings chart deck.
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. I am making this cautionary statement on behalf of each speaker whose remarks today may contain forward-looking statements.
I will now turn over the discussion to our President and Chief Executive Officer, Alain Bellemare.
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Alain Bellemare, Bombardier Inc. - President and CEO [3]
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Thank you, Patrick, and good morning, everyone, and thank you for joining us today. We will review our 2015 financial results, and share with you the significant progress that we are making with our turnaround plan, and provide guidance for 2016.
As you saw this morning, we just landed a major commitment from Air Canada, a prestigious international airline, for 75 C-series 300 aircraft, including 30 options. This is a strong endorsement of this outstanding aircraft, which will create significant value for Air Canada and its passengers.
This is a fascinating win for Bombardier. At this price, the full order, firm and options, could reach a value of up to $6.4 billion, and with this significant milestone, and the certification of the CS100 last December, we are now building great momentum to successfully compete and create superior value for airlines with the C-series.
It is the best aircraft in the 100 to 150 seat class segment. Its innovative, all-new design makes it the lowest operating cost, the greatest cabin comfort, and the most environmentally friendly aircraft in the industry, by far.
Bombardier has now received orders and commitments for a total of 678 C-series aircraft. Air Canada and Bombardier have a long history of cooperation. We are excited to further grow our relationship with Air Canada, and are looking forward to working very closely with the Air Canada team on the C-series program.
We are turning Bombardier around. We have a plan to make this great company stronger and more competitive. In the past 12 months, we significantly de-risked and stabilized the business by taking proactive and decisive actions. We now have the liquidity needed to execute our strategic plan. We have a great team in place that is fully engaged and focused on disciplined execution.
With the certification of the CS100, the great performance of the aircraft, the significant win today, a clear line of sight to enter into service with SWISS, positive momentum is building on the C-series.
We are now shifting our attention to 2016. We are gaining traction with our transformation plan to rebuild earnings power and generate better free cash flow. 2016 will be a year of transition. I really see it will be a year of transition because the ramp-up of the C-series production will put pressure on earnings. This is part of the normal learning curve on new aircraft programs, and is consistent with our five-year plan that we shared with you at our last Investor Day in New York.
The reset of the Global 5000, 6000 production rate will bring revenues down. This realignment of our production was essential to protect our brand and the residual value of our products.
Now, despite these pressure points, it's important to highlight that our liquidity position will remain strong, and our cash usage will improve by at least $500 million this year, because of the disciplined cash management practices that we are putting place.
As part of our turnaround plan, we are announcing this morning a global workforce reduction of 7,000 employees worldwide, including 2,000 contractors over the next two years. We're taking this difficult decision to make Bombardier stronger.
With our remaining 64,000 employees worldwide, we will continue to create superior value for our customers, be more competitive, and deliver improved financial performance going forward.
This restructuring action is driven by three key factors. First, we are adjusting our business aircraft production volume to be in line with market demand. We are currently going through an industry-wide (inaudible), especially in markets such as Russia, Italy, and China.
Second our major development programs in Aerospace and some large projects in Transportation, are ramping down, and it is as expected. We are resizing our manpower in these areas to match future workloads.
And finally, our transformation plan is gaining traction. We are driving productivity and operational efficiency across all sectors of Bombardier. As we emerge from 2016, we will continue to grow and hire in specific regions, both in Aerospace and Transportation.
For example, as we ramp up to full production on the C-series, we will grow our workforce over 2,500 employees in our state-of-the-art Quebec facilities. Other examples will be the Global 7000 program, assembled in Toronto, and specific transportation projects across the world where our workforce will also grow.
In 2016, our focus will be on disciplined execution. Starting with commercial aircraft, the team is working very closely with SWISS to ensure a solid entry into service of the CS100 by mid-2016. We will see the first C-series aircraft flying passengers with SWISS this year, and at a really exciting milestone.
With the signing of Air Canada for the best-in-class CS300 aircraft, we add a major international airline customer to complement our order group in both Europe and Asia. With the addition of Air Canada, we have now achieved a strong global footprint for the C-series.
This, combined with the upcoming entry into service of the CS100, is creating positive momentum upon which we will build to further grow our order book.
We have an amazing business aircraft franchise. We have the highest backlog in the industry at $17.2 billion, which our sales organization is hard at work to strengthen through our streamlined and more direct sales channel.
We have best-in-class products in all categories with our Global, Challenger, and Learjet families. In fact, the Global 5000 and 6000 sales continue to be solid. The Challenger 350 leads the medium category with more than twice as many deliveries as the closest competitor. And with the newly certified Challenger 650 now, we will continue to lead this segment of the market, which has remained solid in the past year. We believe that our production rate has been properly adjusted, in line with the current market conditions.
On the development side, the Global 7000 program, a segment-defining aircraft, is progressing well, and we are on target for first flight this year.
Our Aerostructures and Engineering Services business, is a key source of competitive advantage, with our advanced technology, bid competency, and global footprint. Our focus in this business is to further improve our cost structure.
Finally, we are a global market leader in the very attractive rail transportation market, which is fueled by favorable megatrends such as population growth, urbanization, and environmental awareness. Our Transportation business has a strong backlog of $30.4 billion.
In 2016, we are focused on project execution, margin expansion, and growth. We expect margin improvement resulting from the benefit of our transformation plan. So, as you can see, 2016 will be a year of transition.
We are building momentum on the C-series, and our turnaround plan is gaining traction. We are on our way towards delivering on our 2018 and 2020 financial objectives.
Let me now turn it over to John to review the Q4 and 2015 financial results. He will also share guidance for 2016.
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John Di Bert, Bombardier Inc. - SVP and CFO [4]
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Thank you, Alain, and good morning, everyone.
Our turnaround is well underway, and today's commitment from Air Canada is another exciting milestone on the path to our 2020 financial objectives. We have covered a lot of ground in this past year. Many of our decisions had an impact on financial results, as we de-risk the business and position for future financial success. When I look at 2015 and 2016, I see significant operational improvements that are being turned into sustainable profitability and cash flow.
Let me begin on chart 4 by walking us through our 2015 results and how our actions will build earnings power. Overall fourth quarter financial performance reflects our continued efforts to de-risk the business.
Revenues of $5 billion compared to $6 billion in Q4 2014, driven by an adverse currency translation impact of $233 million, as well as 14 fewer business aircraft deliveries. Including BBA, we delivering 84 aircraft in the quarter and maintained our leading market share of deliveries in the business aircraft segment.
At BT, lower revenues relative to Q4 2014 resulted from the optimization of our supply chain, delaying recognition of certain revenues under contract accounting. While these improvements support working capital initiatives and reflect our focus cash flow generation, they did create a shortfall for 2015 sales guidance at BT.
Full-year consolidated revenues of $18.2 billion were 3.7% lower than 2014 on a constant-currency basis, including 275 aircraft deliveries versus both prior year performance and guidance of 290 units.
As was the case in Q4 last year, the production ramp-up of the C-series created pressure on earnings. Year over year, EBIT in Q4 was affected by profitability at BBA where both volume and margins were lower than 2014. Our proactive decision in May 2015 to balance and demand will gradually improve margins for business jets.
Additionally, our Q4 earnings performance includes a $45 million charge reflecting the impact of restructuring our pre-owned aircraft activities and commercial practice. During 2015 we depleted the value of our used aircraft inventories by over 30% before any valuation adjustments. These actions will sustainably protect and improve the future margin at BBA.
At 5.7% fourth quarter EBIT margins at BT improve sequentially and year over year, fueled by higher gross margins in rolling stock due to favorable revenue mix, and improved contribution from our JVs in China.
For full year 2015, EBIT at $554 million compared to $923 million in 2014. The shortfall results mainly from the proactive risk management and decisive action to stabilize the business, and to prepare for a transition to earnings and cash flow generation aligned with our Investor Day objectives.
The elements of the reduction in full-year earnings include approximately $140 million in valuation adjustments for pre-owned business aircraft and used parts inventories, lower aircraft deliveries, and the ramp-up of costs at C-series.
New financing expenses for the year increased by $174 million, consistent with the issuance of long-term debt earlier this year, and a non-cash fair value loss on aircraft loans and lease receivables, and this is as we reported in Q3.
It's important to note that we expect to see interest expense higher next year, driven by lower capitalized interest on the C-series program.
As we continue to review all aspects of our business, we recorded certain special charges in the fourth quarter. First, as we implement business model enhancements, and strengthen our direct relationship with customers to improve competitiveness and to solidify our long-term profitability, we recorded a charge of $327 million. The cash impact of this charge is largely behind us, with approximately $80 million left to be disbursed in the first half of 2016.
Second, following a detailed review of our programs that extended into the fourth quarter, we recorded a $296 million non-cash charge for a tooling balance related to the CRJ1000 and Learjet families. We remain committed to these programs and will continue to market the aircraft aggressively.
The CRJ1000 is limited by scope-clause restrictions in the US, while the CRJ900 market remains solid, as evidenced by recent orders in the fourth quarter.
We are confident that our program reviews are now aligned with current market conditions.
Cash flow performance in Q4 was strong. We delivered $527 million of free cash flow, beating our objective of $300 million for the period. At $1.1 billion cash flow from operations in Q4 reflects the benefit of our decision to adjust production rates at BBA, disciplined cash management, and a focus on working capital at BT. Finally, as I said in Q3, we monetized financial assets, generating $94 million of cash in the quarter.
Our capital investments are tracking per plan, and they are well aligned to program objectives. Our spending reduced by $100 million for the year to just under $1.9 billion, and this will continue to decline in 2016, following the certification of the CS300. For the full year, we used $1.8 billion in free cash flow, better than our guidance of $1.9 billion to $2.2 billion.
Bombardier's liquidity stands at $4 billion as we enter into 2016. On a pro forma basis, including the recently received $1.5 billion capital injection by the Caisse depot, and the anticipated $1 billion investment in the C-series from the government of Quebec, our pro forma liquidity level is strong at $6.5 billion. We have the right level of liquidity to execute our strategy and our long-term plan.
I would now like to turn your attention to annual guidance plans, by segment, for 2016 on chart 6.
At Investor Day, we mentioned that 2016 would be a transition year, with expected pressure on earnings and progress on free cash flow. While this remains true on a consolidated basis, the implementation of the transformation plan, business model enhancements, and productivity initiatives in 2015 and '16 are driving margin expansion in each of Transportation, BBA, and BAES.
Transportation is solid and stable with revenue growing to $8.5 billion on a constant-currency basis, as we execute on the strong order backlog of $30.4 billion. EBIT margin expands to over 6%, as we gain traction on our transformation plan.
At BBA, including the global production reset, leading to approximately 150 deliveries in 2016, EBIT is expected to remain stable year over year, with margins recovering to approximately 6%. This expansion is driven by our decisive actions in 2015.
Our proactive decision to balance supply and demand in May 2015, as well as our new direct go-to-market strategy, positions us well in this current market environment. Furthermore, as highlighted earlier, improvements in the pre-owned aircraft business model will protect future margins.
Revenues at BCA will grow to $3 billion, driven by the initial delivery of the first C-series aircraft this year. Total deliveries at BCA will be approximately 95 units. Typical of the learning curve for a new aircraft program, early production units of C-series will result in negative margins, impacting the segment's profitability, and leading to a loss of $550 million.
It's important to note that as we reduce CapEx and we build working capital, the total cash flow for the C-series will by similar to 2015.
At Aerostructures and Engineering Services, revenues are expected to be flat as C-series ramp-up is offset by BBA's reduced volume. The acceleration of the transformation initiatives are positively reducing costs at Aerostructures, generating improved EBIT margin of 7.5%.
Moving to chart 7, on a consolidated basis, we expect 2016 revenues between $16.5 billion and $17.5 billion, and EBIT before special items of between $200 million and $400 million. Net of the earnings impact from the ramp-up of the C-series, EBIT across the portfolio is expected to improve year over year.
Consistent with our announcement for global workforce adjustments, we also expect to record special charges of between $250 million and $300 million accruing through 2016.
While we do not provide quarterly guidance, the implementation of a number of these initiatives and the ramp-up to the delivery of the initial CS100 will materially impact Q1 cash flows and earnings before the net benefits materialize in the second half.
Overall, 2016 cash flow will improve significantly. Our guidance of free cash usage improves between $1 billion and $1.3 billion for the year, including the expected cash costs of restructuring I just described above.
Considering the anticipated $1 billion equity injection into the C-series in 2016 by the government of Quebec, Bombardier is firmly on track towards positive and sustainable cash flow generation across its businesses.
Our guidance reflects the necessary and appropriate actions that need to be taken. They are consistent with our long-term plan. We are rebuilding our earnings power to deliver value creation for our stakeholders.
In closing, and before we open it up for questions, we announced this morning our intention to seek shareholder approval for a share consolidation at our upcoming Annual Meeting. While this action will have no effect on the fundamentals of the business, it's an action that will benefit all shareholders and ensure that we maintain and attract a broad investor base.
With that, Maude, we are ready for our first question.
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Questions and Answers
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Operator [1]
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Thank you. Merci. (Operator Instructions). (Spoken in French). (Operator Instructions). Our first question is from Walter Spracklin from RBC. Please go ahead.
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Walter Spracklin, RBC - Analyst [2]
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Yes, thanks very much. Good morning, everyone.
So, I guess my first question is for John here. The guidance on your cash flow guidance for $500 million to $800 million reduction, this is clearly one of the key barometers or drivers that investors are focused on, affecting your liquidity, so it's important to really understand where that's going, and in the past, that's been a factor that has had some risk to it, and some -- quite some volatility versus where the original guidance and expectation have come in.
So, I'm just curious if there's components of this guidance this year that would increase your certainty or your comfort of being able to hit that guidance range, compared to prior years? And, perhaps, if you can put into buckets where those savings are coming in to give us some added comfort as to the achievability of that cash flow guidance?
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John Di Bert, Bombardier Inc. - SVP and CFO [3]
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Great. Thanks, Walter. Thanks for the question.
We're very focused on cash flow, and we're very focused on working capital, but let me just give you some color here.
I described in Q3 some of the dynamics for the current year cash usage relating to BBA and sort of the working capital adjustments in advances and inventory.
We have been very, very proactive, very decisive this year. The way we have established our 2016 plan relative to production and advances, our assessment of the market, I think, is very balanced, and as a result, I go into the year with confidence that we have put this dynamic behind us.
You look at Q4 and I think you start seeing some of the benefits of our decisions, where -- So, at BBA, I think that's -- we have it, I think, in the box relative to cash flow and management for 2016.
BT -- very focused on working capital, on managing their supply chain, on the various large projects they're running. Again, I think you see some of the benefit in Q4. That will continue with very proactive transformation plans there. So, starting to firm up a strong performance of cash to earnings at BT.
So, overall, I think the transformation plan, the decisions that we're making in terms of also adjusting our cost structure, and the way that we have sized our 2016 overall plan and -- and via the markets related to that plan, I think puts us in a strong place to deliver on cash flows for the year.
And I'll just end with the comment that from an overall CapEx point of view, again, both programs are getting very disciplined oversight, and I think we remain, as we have been in 2015, on track with spend. We did not vary in '15 and I don't expect us to vary in '16, either.
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Walter Spracklin, RBC - Analyst [4]
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Perfect. That's my one question. Thank you very much.
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Operator [5]
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Thank you. The following question is from Cai von Rumohr from Cowen and Company. Please go ahead.
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Cai von Rumohr, Cowen and Company - Analyst [6]
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Yes, thank you very much, and, Alain, congratulations. So, on your guidance for bizjet, 150 deliveries, could you give us a little bit of color in terms of by the key products what you're looking for, and perhaps a bit more color on relative demand by your markets? Thanks so much.
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Alain Bellemare, Bombardier Inc. - President and CEO [7]
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Hi, good morning, Cai, and thanks. Good talking with you.
When we looked at the volume forecast for business aircraft, we were pretty clear last year that we were resetting our production rate on the Global. We're in the range of 50-ish aircraft. So, that's pretty -- really what we have in the plan this year on the Global.
Clearly, our Challenger 350 in the medium-size segment is still doing extremely well. It is the best aircraft in that class. So, that will be, pretty much, in the range of 60, 60-ish aircraft. And the rest is going to be a blend on the Challenger 650 and the Learjets.
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Cai von Rumohr, Cowen and Company - Analyst [8]
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And is any of that 650 because of difficulty in getting planes out the door, or just the ramp? Or is that demand-related?
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Alain Bellemare, Bombardier Inc. - President and CEO [9]
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No, the 650 is actually pretty stable in terms of volume. So, that's -- as you know, we have done a major upgrade to the Challenger 650 last year. It came into production. Customers really like the new cabin. It's a pretty nice aircraft, and like I said, I think that we're pretty stable there in terms of the production rate.
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Cai von Rumohr, Cowen and Company - Analyst [10]
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Thank you very much.
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Alain Bellemare, Bombardier Inc. - President and CEO [11]
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Thanks, Cai.
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Operator [12]
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Thank you. The following question is from Turan Quettawala from Scotia Bank. Please go ahead.
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Turan Quettawala, Scotia Bank - Analyst [13]
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Yes, good morning. I guess I had a quick clarification. John, are you not going to provide, then, CapEx numbers for 2016? And maybe some sense on where the working capital move is expected in that free cash flow guidance?
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John Di Bert, Bombardier Inc. - SVP and CFO [14]
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So, we don't intend to provide guidance on CapEx this year, but what I can tell you is that, overall, the two major programs that are in development, both C-series and Global -- yes, the 7000, 8000, will, in both cases, have the same kind of cash profile. The difference you'll see is that you'll have the majority of cash flow will start to divert towards working capital at C-series, now that we're entering into production and will be certifying the 300 mid-year.
So, expectations, overall, for cash flow on those major programs stable, year over year, and that was the lion's share of what we spent last year in the $1.9 billion, so the rest of the business is kind of similar, year over year.
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Turan Quettawala, Scotia Bank - Analyst [15]
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Got it. Thank you very much. And if I may ask just one quick on, on the backlog on the Aerospace side, I know you've taken the Global production down. I'm just talking about the commercial side here, in particular, CRJs and Qs. There's been some weakness there, I guess, from an order flow perspective. Alain, are you looking at production rates on that side? And if you were to look at that, I guess, when should be thinking about orders coming in, if we have to assume stable production there?
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Alain Bellemare, Bombardier Inc. - President and CEO [16]
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So, so far we see pretty solid skyline for 2016. We are -- our teams are actively working the field right now. The Q400 looks pretty good. I mean, we've got a nice pipeline of opportunity. We're focused on the CRJ, and we'll monitor the situation on the CRJ as we move forward.
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Turan Quettawala, Scotia Bank - Analyst [17]
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Thank you.
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Operator [18]
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Thank you. The following question is from Seth Seifman from JPMorgan. Please go ahead.
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Seth Seifman, JPMorgan - Analyst [19]
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Thanks very much, and good morning.
I wanted to ask about C-series, the write-downs. If we look at what you're forecasting for this year, if -- as we get through 2016, is it fair to say that we'll be -- you think we'll be roughly halfway through the losses that you expect to book on the program at that point?
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Alain Bellemare, Bombardier Inc. - President and CEO [20]
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Good morning, Seth. I think that you're referring to cash, right?
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Seth Seifman, JPMorgan - Analyst [21]
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Yes.
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Alain Bellemare, Bombardier Inc. - President and CEO [22]
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Yes, as John said, I think that what we're seeing in terms of spending on the C-series this year is pretty much in line with our spending last year. Obviously, there's kind of a shift here, I mean, moving from program development to production ramp-up. So, I mean, I think that we're going to be using roughly $1 billion again this year, and then, thereafter, what you're going to see in '17, '18, '19 is a significant drop. And the drop is pretty drastic from '16 to '17, and thereafter kind of flattish for about, like, three years. And our -- what we've said is like we would -- we needed about another, like, $2 billion to break cash flow positive on the C-series.
So, to your question, is yes, I think that at the end of 2016, probably half of the cash needed will be behind us, and then there will be another $1 billion to go until we break even, cash flow positive.
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Seth Seifman, JPMorgan - Analyst [23]
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Great, thanks. Thanks very much.
And maybe just as a quick follow-up, I know the U.S. has been the strongest business jet market recently. Just with, maybe, corporate profits coming under a little pressure here this year, are you seeing any change in the demand environment in the US?
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Alain Bellemare, Bombardier Inc. - President and CEO [24]
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So far, the US is still very strong for us. Actually, we've been gaining traction. We have had a very good presence in emerging markets, like Russia, China, Middle East, which became softer in -- at the end of 2014, 2015. So, I mean, I think that we've achieved a pretty good balance, and, obviously, we will continue to monitor the economic situation in the US, but so far, we are -- we feel confident with the plan that we have.
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Seth Seifman, JPMorgan - Analyst [25]
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Great. Great. Thank you very much.
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Alain Bellemare, Bombardier Inc. - President and CEO [26]
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Thanks.
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Operator [27]
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Thank you. The following question is from Konark Gupta from Macquarie. Please go ahead.
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Konark Gupta, Macquarie Research - Analyst [28]
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Good morning. Thanks for taking my question.
So, my question is on EBIT margin and free cash flow guidance that you have provided for 2016. So, it looks like the CapEx will, ideally, decline from 2015 in 2016, and that will provide some lift to the free cash flow, but I would think there's probably more to that, as well, maybe in terms of cost savings coming from the workforce adjustments you have announced this morning, as well as you announced previously.
So, can you please parse out what are the moving parts in margin improvement coming from workforce adjustment, as well as any of the process improvement initiatives you have taken? Thanks.
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John Di Bert, Bombardier Inc. - SVP and CFO [29]
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Yes, thanks for the question. So, across the board, as I mentioned in my commentary, margins stand in all of the segments, while we do an investment ramp-up on the C-series. In terms of some of the basis of the expansion, really, we're gaining a lot of traction on the transformation side. That's coming from both supply chain initiatives that are undergoing, as well as the fact that we are driving productivity across the business. We're now sizing ourselves, as well, to the current markets, I think, very efficiently there.
When you look overall I'd say that those transformation benefits kind of show up as probably 100 basis points of improvement in the underlying business segment, and you see that clearly in our guidance relative to BT, and how we're recovering at BBA, and to the fact that we are driving a lot of cost improvements at Aerostructures and Engineering.
In addition, we've also taken some decisions in '15 to kind of de-risk the business, and so you see some recovery at BBA there, giving it a little bit more lift. You have to also appreciate that, given the adjusted rate at 150 deliveries next year, we've done a lot of work in terms of stabilizing the margin there. So, even with lower volumes, we're able to stabilize earnings and provide recovery to its margin.
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Konark Gupta, Macquarie Research - Analyst [30]
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So, John, these new 7,000 job announcements this morning, when do you expect the full sort of impact of these adjustments, and what could be the magnitude of that?
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John Di Bert, Bombardier Inc. - SVP and CFO [31]
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Okay. So, I'd say that the way you should think about the restructuring is that we're going to go through -- and there's going to be some timing. I'll touch that in a second, as well, but when fully deployed, our -- all of our actions should produce about a one-year payback on the total cost of the program.
So, we kind of gave guidance there for the whole year, $250 million to $300 million. I think that's what you should expect as we start -- as we have those programs fully deployed, implemented, and maturing on annual run rates, and I'd say that's going to be a 2017 kind of -- the magnitude of that savings probably will largely 2017.
That said, we will see benefits this year, as well. They will contribute to the 100 basis points margin that I described as kind of the just generic lift across our business segments.
Understand that we're going to be doing a lot of the work here in terms of implementing the transformation, restructuring, and other activities in the first half of the year, so, that'll show up in quarterlies, as well, and I think Q1 will be the most pressured quarter, so to speak, as we both invest in the value-add for the production rate at the C-series, and we begin deploying some other restructuring and other transformation activity. And second half will start to show benefits, and then into 2017 (inaudible).
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Konark Gupta, Macquarie Research - Analyst [32]
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Okay. Thanks a lot. Thanks for the great color. Thanks.
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Operator [33]
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Thank you. The following question is from Benoit Poirier, Desjardins. Please go ahead. (Spoken in French).
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Benoit Poirier, Desjardins Securities - Analyst [34]
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Yes. Thank you very much and good morning, gentlemen.
My question is related to the upcoming investment from the federal. You ended with $6.5 billion in short-term resources, so a relatively strong cash position. I'm just wondering how important is the investment from the federal, and whether, also, it could unlock some orders? And I will also like to have more color on what type of financing it could take, and whether you're considering to make any changes in the corporate governance?
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Alain Bellemare, Bombardier Inc. - President and CEO [35]
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I think that, as we've said the -- thank you for the question. As we've said, the participation of the federal government into the program is very important to us, and it's very important for two specific reasons.
The first one is, clearly providing a strong endorsement on the program itself, helping us regaining confidence and building momentum. We are getting significant traction now with the Quebec government investment in the C-series. We've seen the positive effect on that in our -- during our discussion with customers. This major announcement this morning from Air Canada is also adding to this.
So, I mean, we're looking forward to a decision from the federal government. So, that's one piece of it.
The second is, that would bring additional financial flexibility. You are right in saying that our liquidity position is strong at $6.5 billion, but, I mean, having additional flexibility into the C-series to support campaigns, production ramp-up, and entry into service is also very critical.
So, I think that the reason why we are looking forward to seeing the federal government coming into the program as a liquidity partner.
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Benoit Poirier, Desjardins Securities - Analyst [36]
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And would it take a different form, or, basically, you would reduce your participation in the C-series program, Alain?
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Alain Bellemare, Bombardier Inc. - President and CEO [37]
------------------------------
As we've said, I mean, we don't -- I mean, these are current, ongoing negotiations with the federal government. I mean, we want to be careful as to what we are communicating and saying publicly, but I think that we are hoping that the federal government would come very close to what Quebec did, because, I mean, Quebec came in with a very good structure where we have equity ownership, the equity ownership, and we've been benefiting significantly from that. So, we hope that the federal government would do something similar to that.
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Benoit Poirier, Desjardins Securities - Analyst [38]
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Okay. Thanks very much for the time.
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Alain Bellemare, Bombardier Inc. - President and CEO [39]
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Okay, thank you.
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Operator [40]
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Thank you. The following question is from Ron Epstein from Bank of America Merrill Lynch. Please go ahead.
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Ron Epstein, Bank of America Merrill Lynch - Analyst [41]
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Yes, hey, good morning, guys, and congratulations on the Air Canada deal.
Just a quick question on that, if you can say, what was -- was there -- how are the financial incentives in that deal, meaning, did you have to do RBGs or not? And if you did, how are you going to account for them on your balance sheet?
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Alain Bellemare, Bombardier Inc. - President and CEO [42]
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So, the -- obviously -- good morning, Ron. This is deal that we've been working on for months with Air Canada. We're very excited about that. I mean, it comes at a very critical point, but it's also injecting significant momentum into the program, because it's a meaningful, like, international prestigious carrier, but also the size of the order is very critical.
So, that's good. In terms of commercial, obviously, you'll understand that we're not talking publicly about that. I would just say it's a very good commercial deal, and we feel good about what we've done. I think it's a win/win for Air Canada and for us.
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Ron Epstein, Bank of America Merrill Lynch - Analyst [43]
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Great. And then, one follow-on, if I may. There's been, I guess, reasonably high profile press about some issues around the shutdown and startup on the Pratt & Whitney engine. Have you heard any pushback from your customers? Have you seen that performance issue with the C-series? Qatar was out pretty vocal about it. They still are.
Can you give us a little perspective, your point of view, on what's going on with the engine?
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Alain Bellemare, Bombardier Inc. - President and CEO [44]
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Yes, so far, Ron, I mean, the engine is performing well on the aircraft. We're very pleased with the support that we're getting from Pratt, and the -- we don't have the similar issue on our engine versus the engine that is on the neos today. I understand although it's the same architecture, these are like two different engines, different size, so, so far, so good. And we're working very closely with SWISS to get ready for entry into service, and the engine's performance has been pretty good.
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Ron Epstein, Bank of America Merrill Lynch - Analyst [45]
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Okay, great. Thank you so much.
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Operator [46]
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Thank you.
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Alain Bellemare, Bombardier Inc. - President and CEO [47]
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Okay, thanks, Ron.
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Operator [48]
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Thank you. The following question is from Cameron Doerksen from National Bank Financial. Please go ahead.
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Cameron Doerksen, National Bank Financial - Analyst [49]
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Yes, good morning.
I guess maybe just a things on Bombardier Transportation. There's been, I guess, a change in leadership there. I'm just wondering if there's any change to your long-term targets at BT?
And I guess the other thing on BT is, in the past you had some discussion about what the order outlook looks like for the year. I'm wondering if you can maybe just discuss what you're seeing on the order front for BT in 2016?
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Alain Bellemare, Bombardier Inc. - President and CEO [50]
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Good morning, and thanks, Cameron. I would say the change of leadership in BT is, in my view, something that is positive in the sense like Laurent is very focused on operation. If you look at where we are in our journey at BT, I think somebody that is going to right operational efficiency and productivity improvement in managing our large projects very quickly is something that's very positive.
The business is doing well on the sales side. I mean, obviously, we are bringing way more discipline in that we were going after new projects. Last year book to bill was 1.1. Order intake was $8.8 billion. We had a very strong Q4 at $3.4 billion.
So, we feel good about our ability to win new projects, and we feel good about the five-year plan, and what we're doing in the -- in '16 and what we're committing to the Street in terms of financial targets is in line with our five-year plan. So, nothing has changed.
Back to closing the loop here on your question, nothing has changed from a leadership standpoint. So, we're very consistent.
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Cameron Doerksen, National Bank Financial - Analyst [51]
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Okay, thank you.
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Alain Bellemare, Bombardier Inc. - President and CEO [52]
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Thanks.
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Operator [53]
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Thank you. The following question is from Robert Spingarn from Credit Suisse. Please go ahead.
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Robert Spingarn, Credit Suisse - Analyst [54]
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Good morning. John, I wanted to just ask you a quick -- a quick question, then Alain on the C-series. But, John, on the $1 billion use of cash this year for C-series, how much do we allocate to development versus production losses? How do we think about that?
And then, Alain, on the Air Canada order, this comes in toward the end of the five-year period you talked about in November. Is there any opportunity to -- can these aircraft change the cash flow profile that you gave us, the timing that you'll break even on a cash basis on C-series by the end of the five years? Can this move this target to the left a little bit? And can some of these aircraft deliver earlier than 2019, if need be?
Thank you.
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John Di Bert, Bombardier Inc. - SVP and CFO [55]
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Okay, thanks, Rob. So, with respect to C-series in terms of cash flow and where it's going to go, you have a pretty good sense by looking at the guidance at BCA, so think about that business sort of low-single-digit positive. It gives you a sense for the $1 billion, kind of roughly half and half, I'd say, for where it's going to be spent in CapEx and production ramp-up and cost.
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Robert Spingarn, Credit Suisse - Analyst [56]
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Okay.
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Alain Bellemare, Bombardier Inc. - President and CEO [57]
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When it comes to -- good morning, Rob. When it comes to the C-series, I think that like the cash flow profile for the next five years is not largely -- is not going to be affected by the C-series. If there's -- by the Air Canada deal, excuse me, on the C-series.
If there's something, I mean, it would be very little, and it would be in the 2020 timeframe, so --
Could we deliver the aircraft earlier should they need it? The answer is probably yes, although the timing for us is pretty good right now when you look at the skyline over the next, like, three to four years.
So, timing is good, and impact on cash very minimal, if any, during the next five years.
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Robert Spingarn, Credit Suisse - Analyst [58]
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And do you think you'll deliver the 10 aircraft to SWISS that are scheduled for this year? You'll get all 10 out there?
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Alain Bellemare, Bombardier Inc. - President and CEO [59]
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Well, right now, that's the target. We're working towards that, and we don't see any reason why we wouldn't do that.
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Robert Spingarn, Credit Suisse - Analyst [60]
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Okay, thank you.
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Operator [61]
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Thank you.
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Alain Bellemare, Bombardier Inc. - President and CEO [62]
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Thanks, Rob.
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Alain Bellemare, Bombardier Inc. - President and CEO [63]
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The following question is from Fadi Chamoun from BMO Capital Markets. Please go ahead.
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Fadi Chamoun, BMO Capital Markets - Analyst [64]
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Yes, good morning, and congrats on the Air Canada order, by the way.
But I wanted to ask you about the deal being contemplated with the Canadian government. I'm understanding that, ultimately, there is going to be an equity take involved, potentially, in that deal, which would shift the ownership of the C-series to the governments of both Quebec and Canada, ultimately, if that deal goes ahead.
So, how should we think about the sort of medium-longer term economics of the C-series for Bombardier? Is there optionality here for buying it back down the road? How should we think about that? What's being contemplated under those deals in terms of the long-term ownership of the aircraft?
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Alain Bellemare, Bombardier Inc. - President and CEO [65]
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Let me take a shot at this, Fadi. I think that the -- if you look at the Quebec investment deal in the C-series, I think that we've been pretty clear. It's coming at a time when you actually need the cash to make sure that you properly successfully complete your development cycle, and get the production up, I mean, to full rate.
So, I mean, Quebec has invested at the right time, but there's also a call option on that, and that has been predefined with Quebec, and if we were going to do a deal with Canada, I expect that we would get something that also would be similar. So, I mean, that the simple way to look at it, I mean, having Quebec and Canada coming in as equity partners to stimulate the program and at the right time, I mean, the people can decide to stay in, or we have a mechanism to have a different structure in moving forward, should we want to do it.
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Fadi Chamoun, BMO Capital Markets - Analyst [66]
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Okay. So, John, from a reporting point of view, I guess we would be seeing the C-series reported as a minority interest if the Canadian government deal goes through like the Quebec deal was to go through, and then, ultimately, down the road, if you pursue that call option, then that probably comes back to the books. Is that how you would sort of think about it?
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John Di Bert, Bombardier Inc. - SVP and CFO [67]
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Yes, I think, Fadi, it's too early to start making, I guess, conclusions about the accounting. Obviously, there's many options. You describe one, and I wouldn't start speculating on the final conditions and how we would interpret that for reporting purposes.
One option is that we could deconsolidate, but there are other considerations. I'll reserve that until we have kind of firm details from this deal.
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Fadi Chamoun, BMO Capital Markets - Analyst [68]
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Okay, thank you.
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Operator [69]
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Thank you. The following question is from Peter Arment from Sterne Agee. Please go ahead.
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Peter Arment, Sterne, Agee & Leach, Inc. - Analyst [70]
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Yes, good morning, Alain and John. Alain, I wanted to circle back a little bit to, maybe, Cai's question on the business aircraft, kind of more from a book-to-bill standpoint. I know that you made some changes on how you're pursuing pricing, kind of pursuing more breakeven deals. How should we think about just kind of the book-to-bill expectations as we think about 2016, just given the planned reductions that you've had in some of the -- your big shares that you've had in Russia and EM that are under pressure? Thanks.
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Alain Bellemare, Bombardier Inc. - President and CEO [71]
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Thanks, Peter, for the question. I think if you look at the book-to-bill, I mean, prior to cancellation in that 2015, we were around like 0.6, and, obviously, the net looks down quite a bit, minus 24, but if you look at the cancellations in 2015, half of it were related to the cancellation of the Lear 85, then, there's another significant portion of it that were related to restructuring actions that we took.
So, I mean, there's about -- over 130 of those cancellations that were induced by us, by management decisions to rebuild our franchise and preserve value of our great aircraft moving forward. So, that's kind of 2015.
In 2016, with the right -- with the production rate adjustment, the focus now is on rebuilding the backlog, and we are expecting a higher book-to-bill, net, this year, in 2016 versus what we saw in 2015.
But, again, remember, in 2015, we didn't start from a 0.1 book-to-bill. I mean, we started from 0.6 book-to-bill prior to all these one-time adjustments.
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Peter Arment, Sterne, Agee & Leach, Inc. - Analyst [72]
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Okay, great. Thank you.
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Patrick Ghoche, Bombardier Inc. - VP IR [73]
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We'll have time for the last question.
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Alain Bellemare, Bombardier Inc. - President and CEO [74]
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Thanks.
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Patrick Ghoche, Bombardier Inc. - VP IR [75]
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We'll take the last question, please.
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Operator [76]
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Thank you. The last question is from Tim James from TD Securities. Please go ahead.
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Tim James, TD Securities - Analyst [77]
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Thank you. Good morning.
The reduction in the workforce plans for the Aerostructures and Engineering Services segment is relatively significant, given the size of that business. Is this a change in the Company's strategy regarding outsourcing, or is it more just a reflection of the cost structure in that segment of the business?
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Alain Bellemare, Bombardier Inc. - President and CEO [78]
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Good morning, Tim. I think it's a little bit of both. I mean, what we're talking about here is overall a 10% reduction of our global workforce. It's kind of split between aerospace and train, kind of half and half. There's actually three drivers of that, as I mentioned earlier.
I mean, the first one relates to volume. I mean, we're really adjusting our costs, our internal costs, to the market conditions, market realities. I mean, there's volume adjustment. We took some production rates down, especially in -- on the business aircraft side.
The second one is, as we are phasing out of our major development programs, like the C-series with the certification of the CS100 and soon this year the certification of the CS300, our development cost is going to come down quite a bit, which will also have an impact on our manpower. So, that's kind of the second biggest driver of that.
And the last one is the need to increase productivity across all of our segments, all of our sectors, and that's no different than what other companies are doing, and we're doing that to, obviously, regain earnings power, to improve margins, and be in a position to start paying down debt, starting in 2018.
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Tim James, TD Securities - Analyst [79]
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Great. Thank you very much.
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Alain Bellemare, Bombardier Inc. - President and CEO [80]
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Thanks, Tim.
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Operator [81]
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Thank you.
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Alain Bellemare, Bombardier Inc. - President and CEO [82]
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So, I think at this point, I would like to thank you all for being on this call this morning. As you see, we are making significant changes at Bombardier. We have a plan. We have a good transformation plan. We are gaining traction. The C-series is building momentum. I'm very proud of the team. We have a very solid team in place, and I feel good about the actions that we're taking to make Bombardier stronger again.
So, I think, again, for taking your time, and I look forward to seeing you soon. Thank you.
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Operator [83]
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Thank you. Merci. (Spoken in French). The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
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