Q3 2016 Bombardier Inc Earnings Call
Nov 10, 2016 AM EST
BBD.B.TO - Bombardier Inc
Q3 2016 Bombardier Inc Earnings Call
Nov 10, 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 & CEO
* John Di Bert
Bombardier Inc. - SVP & CFO
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Conference Call Participants
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* Cameron Doerksen
National Bank Financial - Analyst
* Kristine Liwag
BofA Merrill Lynch - Analyst
* Benoit Poirier
Desjardins Capital Markets - Analyst
* Seth Seifman
JPMorgan - Analyst
* Derek Spronck
RBC Capital Markets - Analyst
* Robert Spingarn
Credit Suisse - Analyst
* Cai von Rumohr
Cowen & Company - Analyst
* Turan Quettawala
Scotia Bank - Analyst
* David Tyerman
Cormark Securities - Analyst
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen. And welcome to the Bombardier Third Quarter 2016 Earnings conference call. Please be advised that this call is being recorded. At this time, I'd like to turn the discussion over to Mr. Patrick Ghoche, Vice President Investor Relations for Bombardier. Please go ahead, Mr. Ghoche.
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Patrick Ghoche, Bombardier Inc. - VP, IR [2]
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Thank you. Good morning, everyone, and thank you for joining us for this review of our third quarter performance. This conference call is broadcast live on the internet, for copies of our earnings release and supporting documents in both English and French. All dollar values expressed during this call are in the US dollars unless stated otherwise. I also wish to remind you that during the course of this call, we may make projections or other forward-looking statements regarding future events or the future performance of the corporation. I bring your attention to page 2 of our presentation.
Several assumptions were made 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. I am making this cautionary statement on behalf of each speaker whose remarks today will contain forward-looking statements.
In a few moments Alain Bellemare, our President and Chief Executive Officer, will address our operational performance and continued strategic focus. John Di Bert, our Chief Financial Officer, will then review our financial results for the third quarter ended September 30, 2016. I would now like to turn it over to Alain.
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Alain Bellemare, Bombardier Inc. - President & CEO [3]
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Thank you, Patrick. And good morning, everyone, and thank you for joining us today. As you all saw in our press release this morning, this was a strong quarter for Bombardier. We delivered our financial commitments. We continued to execute on our growth programs, with the certification of the CS300 and just last week the very successful first flight of our new Global 7000, which will be the benchmark in ultralong-range business aircraft. And we are successfully executing our turnaround plan, and steadily transforming our Company.
With this strong performance and the good momentum we have generated across all business units, we now expect to finish the year at the high end of EBIT guidance, with significantly improved year-over-year cash performance, and with better operating margins at each of our business units as per plan. As we close out 2016 and look forward to 2017, we are confident in our strategy, our turnaround plan, and in our ability to achieve our 2018 and 2020 goals, with a strong and highly committed leadership team.
We remain focused on improving operational efficiency, flawlessly executing new programs, and maintaining a disciplined and proactive approach that will allow us to perform in any market environment. Along with disciplined cash performance, a key part of our turnaround plan is transforming our operations to reduce costs, to leverage our scale of $16 billion plus, and to become more efficient across our supply chain and in our own operations.
In the first 9 months of 2016, we have made solid progress in these areas. We are more than 80% complete with the first major workforce reduction that we launched in the first quarter. And we are on track to exceed our 2016 cost saving targets for both our direct and indirect spend.
Last month we launched the next step in our operations transformation. The focus of this action is to better leverage our global footprint through site optimization, specialization, and streamlining our back-office and nonproduction workforce across both our Transportation and Aerospace businesses. These actions clearly demonstrate our commitment to drive profitable earnings growth and strong cash flow generation. Together, they will result in annual cost savings of $500 million to $600 million. We expect to reach the full run rate by the end of 2018.
Before asking John to go through our financial results in detail, let me share with you a few highlights from the business units, starting with Bombardier Transportation, which had a strong quarter. As you know, Laurent and his team are focused on transforming our rails segment from a strong and stable business into a higher growth, higher margin rail solution provider.
Solid progress can be seen in Transportation margin improvement, which we now expect to exceed 6.5% for 2016. This improvement puts us firmly on the path to achieve our 8% goal for 2020, as we continue to drive productivity and improve our cost structure through workforce optimization, product standardization, and by better leveraging our low-cost footprint.
Further supporting our growth objectives was BT's strong third quarter order activity, with a very solid book-to-bill of 1.6. This included the $1.2 billion East Anglia win in the UK. We expect strong order activity to continue as we close out the year, and a full year book-to-bill above 1.
We're also improving the quality of our backlog with contracts that include higher service content and contracts that are based on existing platforms, leveraging our past R&D investments to reduce execution risk and cost, and make us more competitive in the marketplace.
Looking ahead, BT will continue to focus on three things-- one, growing top line; two, securing a more favorable mix with more service and signaling revenues in future contracts; and three, operational transformation to drive margin expansion on our $31 billion backlog. Laurent will share more details at the upcoming Investor Day.
At Commercial Aircraft, the C Series continues to perform exceptionally well in service. A few numbers, we now have three CS100s in service with SWISS. They have collectively flown more than 1,100 revenue flights, and have accumulated more than 1,500 flight hours. Aircraft performance has been excellent, exceeding expectations, with industry-leading reliability for a new aircraft platform. And the feedback from our customer and passengers continues to be outstanding.
One other data point, the first C Series A Check was successfully completed last week, with no issue or findings. Further highlighting the C Series ease of maintenance and low operating cost, was the fact that the check was conducted in just under five hours, well below the current industry standard. We expect to deliver four more C Series this year, and the CS300 variant remains on schedule to enter into service next month with airBaltic. As Fred and the BCA team did with SWISS, they are working very closely with airBaltic to ensure another smooth entry into service for our customer.
Customer interest in the C Series campaign activity remains very strong across the industry, including with low-cost and mainline carriers. Earlier this month, the C Series flew to China for the Zhuhai Air Show. From the airline feedback we received at the show, it is clear that the C Series unmatched passenger experience, lowest operating cost, and its best-in-class noise and emission performance, is truly being recognized by airlines around the world.
On the engine delivery issue, we are working very closely with Pratt & Whitney. We have received their assurance that they are addressing the matter and taking the necessary steps to support our 2017 production schedule. Of course, we will provide more detail and complete BCA guidance at next month's Investor Day.
Turning now to Business Aircraft which had another strong quarter, with an industry-leading 36 aircraft deliveries, bringing our year-to-date total to 109; very good performance given the current market conditions. With this strong performance, we now expect to exceed our original guidance of 150 deliveries for the full year, with better revenue and EBIT performance, again good work by David and the team. We are clearly seeing the benefits of the proactive actions and the business model enhancement we took last year.
As mentioned earlier, we also achieved a key milestone last week with the very successful first flight of our Global 7000. And we remain on track for entry into service in the second half of 2018, as per plan. Our existing strong backlog and the increasing customer interest in the 7000 and 8000, clearly confirms that these class-defining ultralong-range business jets will position Bombardier for strong growth. These are truly game-changing aircraft.
The 7000 is the first and only clean-sheet business jet, with four living spaces and a separate crew rest area, providing unique value, unparalleled comfort, and unmatched interior design flexibility. In other words, the best cabin in the industry. This flexibility, combined with the aircraft's range and performance, will set a new standard, making the 7000 the best business jet in the industry.
As we manage Business Aircraft moving forward, we will continue to be disciplined in our approach and proactive in our actions, to protect our brand and our margin performance in any market environment.
Okay, let me stop here, and turn it over to John to review our Q3 financial results.
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John Di Bert, Bombardier Inc. - SVP & CFO [4]
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Thank you, Alain. Good morning, everyone. Our third quarter performance highlights the progress we are making in our transformation. And most importantly, it signals a step forward towards stronger and sustainable profitability. We are gaining traction through strong execution and focused efforts. And we continue to grow confidence in our ability to deliver on our 2016 commitments, as well as our 2018 and 2020 goals.
Given our performance after three quarters, we are raising 2016 EBIT targets at each of our four business units, and we are tightening our consolidated EBIT guidance to the top end of the range at $350 million to $400 million. Let me provide some highlights on our progress on margins and cash.
In Q3, EBIT before special items was 16% better than 2015, growing from $75 million to $87 million. Segment margins were 6.4% at BBA, 7.9% at BT, and 8.6% at Aerostructures; each improving over last year and outpacing our full-year margin guidance.
After the first 9 months, BBA EBIT margins before special items are 6.6%, better than guidance of 6% and ahead of 2015 at 5.7%. At BT, Q3 margins before special items at 7.9% are above our 6% guidance, and year-to-date margins grew over 100 basis points from the same period in 2015 to 6.7%.
At Commercial Aircraft, we expect to be approximately $100 million better than full-year EBIT guidance, even as we ensure a flawless entry into service for the C Series. Our improved earnings estimate is a result of solid execution. We certified the C Series 300 as planned, met our CS100 entry into service target in the summer, and the three aircraft in passenger service are performing very well.
Finally, we are starting to see sustained progress in free cash flow, where cash usage for the quarter improved by approximately $500 million versus last year; driven by improved cash from operations and the ramp down of C Series development spend. So with year-to-date cash usage of $1.6 billion, going into a positive free cash flow fourth quarter, we see a comfortable path towards our full-year cash flow usage guidance of $1.15 billion to $1.45 billion.
These margins and free cash flow gains are encouraging, particularly as we exit this transition year with lower CapEx spend and two restructuring actions underway. Let's now turn to our Q3 consolidated results, followed by a review of business units' financial performance, and updated guidance for 2016.
On chart 5, we recorded revenue of $3.7 billion, as we successfully navigated current markets with good deliveries, and continued our disciplined operating approach to working capital. Particularly influencing revenues at BT, total revenue for the first three quarters is $12 billion, with full-year expectations pointing to approximately $16.5 billion, influenced by C Series revised delivery schedule and supported by a seasonally strong fourth quarter.
As I mentioned at the outset, profitability for the quarter was on plan across the board. Consolidated EBIT before special items is $323 million after three quarters. This points to a strong 2016 relative to our original guidance of $200 million to $400 million. We now fully expect to be close to the high end of that range, and we are tightening EBIT guidance to $350 million to $400 million.
In Q3 free cash flow usage totaled $320 million, closely tracking third quarter ramp-up investments in the C Series of $360 million. This is a good sign, as we are beginning to establish a base for cash flow breakeven in 2018. Q3 free cash flow is $500 million better than last year, underpinned by two factors-- one, progress on cash from operations; and two, lower development spend.
Now let me expand on this. Cash flow from operations in Q3 would exceed $200 million when excluding the inventory buildup of the C Series, which exceptionally included carrying three C Series aircraft waiting for engines at quarter end. Recurring positive cash flow from operations is a significant improvement, driven by better profitability and working capital management.
Second, year-over-year CapEx is trending down significantly, now that the two C Series variants are fully certified. Development spend is now concentrated on the Global 7000, which entered the flight test program phase last week with its first flight.
Turning to chart 6, let me update you on liquidity. We ended the third quarter with $3.4 billion of cash on hand, increasing from $2.7 billion when we started 2016. Cash on hand will continue to grow as we head into the cash-generating fourth quarter. With liquidity of more than $4.4 billion by yearend, we will be entering 2017 with strength.
One final word on workforce optimization before we review each of the business units' performance, as Alain mentioned, we have now completed 80% of our previously announced initiative. In the third quarter, we recorded a $24 million restructuring charge, totaling $180 million year to date. We'll be largely complete on this initial phase by yearend. Now, with the combined effects of our October announcement, we continue to expect the aggregate restructuring charges for 2016 to fall within $250 million to $300 million.
Looking at our Q3 2016 financial results by business unit on chart 7, let's start with BT. The Transportation market continues to exhibit countercyclical trends, and our performance in the first 9 months supports our growth prospects. With a book-to-bill of 1.6 in the quarter, and 1.1 year to date, we expect to complete a seventh consecutive year with a book-to-bill at or above 1.
BT revenues were $1.8 billion for the quarter, against $2 billion last year. The year-over-year decrease is largely driven by proactive and disciplined project management, prioritizing cash, as we work to synchronize our supply chain and reduce lead times. Our reduced working capital contributes to deferring revenue recognition into subsequent quarters. Reflecting this into the full year, revenue expectations at BT are approximately $8 billion for 2016.
Our improving operations, combined with cost-cutting efforts, has translated into margin improvement, supported by strong project mix, BT EBIT before special items grew to 7.9% for Q3, a substantial improvement over third quarter 2015. For the full year, we expect margins to better than 6.5%, more than 50 basis points ahead of our original guidance.
At Business Aircraft, we delivered 36 business jets and continued to lead the industry in 2016 in that respect. Year to date, we have 109 aircraft deliveries, and we expect a strong finish to the year, adding 40 to 50 units in Q4, driving us towards full-year revenues of approximately $5.5 billion at BBA.
Revenues in the quarter totaled $1.3 billion, returning to the traditional mix of light, medium, and large aircraft. Although we are still contending with a tough pricing environment in the light jet market, we delivered seven Learjet aircraft in the quarter. Given solid deliveries and seasonally soft order pattern for Q3, we are pleased with our year-to-date book-to-bill of 0.8.
In the quarter, we in fact improved the quality of our $16.5 billion backlog through proactive cancellations that will support stronger future earnings. At 122 gross orders so far this year, we are seeing decent activity that we expect will carry through into the last quarter.
Business jet EBIT continues to impress during this year, where we realigned production to market. With EBIT margins well above 6%, BBA is demonstrating the benefits of our early actions, our focus on cost-cutting, and the enhancements to our preowned business. After 9 months, our accumulative EBIT before special items stands at $269 million, on track to improve on the $308 million in earnings reporting for full year 2015.
Now moving to Commercial Aircraft, focus continues on execution, ramping up production and supporting the C Series in service. At $538 million, revenues in the quarter increased versus last year, despite a muted contribution from C Series with only one delivery. On a full-year basis, we expect revenues at BCA to approximate $2.7 billion, including seven C Series deliveries.
Nonetheless, since the beginning of the year, we demonstrated tight cost controls at BCA leading to an EBIT loss before special items of $107 million for the quarter, and $276 million so far this year. As I mentioned in my introduction, our ability to closely manage the C Series entry into service while mitigating the impact of engine delays, allows us to improve our EBIT expectations for the year by $100 million to a loss of $450 million.
Turning to CRJ and Q400, deliveries were in line with 2015 as we entered the lighter half of the year on commercial aircraft. Year to date, we have delivered 61 regional aircraft, up from 56 one year ago. We are on track to our 2016 delivery target of 85 to 90 aircraft at BCA.
Finally, Q and CRJ orders were lumpy in the quarter. So far this year we are seeing good activity on the Q400 where book-to-bill stands at 0.8. This, before adding the LOI signed with Philippine Airlines for up to 12 aircraft in the past month. For the CRJ, as market-wide activity remains slow, we continue to actively engage with our 60-plus customers to be positioned for order pickup.
At Aerostructures and Engineering, production ramp up of the C Series components is driving significant activity in Belfast, as 2017 deliveries entered into the production cycle. Revenues for the quarter were $337 million, driven as usual by internal sales. Those sales were lower than originally forecasted, as we managed production to align with commercial and business aircraft. This change is expected to lead to a full-year revenue of approximately $1.6 billion, with minimal impact on consolidated revenues.
Cost control is key at Aerostructures, and its margins are showcased in the results of several transformation initiatives since the beginning of the year. EBIT before special items of $29 million came in line with last year, equivalent to a strong 8.6% margin. We are increasing our full-year EBIT margin guidance to approximately 8% from our original 7.5% expectation.
Our actions are driving results. Our 2016 profitability and free cash flow improvement are early indications of Bombardier's tremendous value creation runway. We have a very strong liquidity position, and are continuing to take decisive action. We are entering the next phase of our turnaround plan with confidence, as we focus on building earnings and cash flow growth.
I look forward to updating you on our turnaround plan and providing detailed 2017 guidance at our December 15th Investor Day. With that, we're ready to take our first questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Cameron Doerksen, National Bank Financial
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Cameron Doerksen, National Bank Financial - Analyst [2]
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Yes. Good morning. I just wanted to dig a little bit into the BT margin in the quarter, obviously a very strong performance at 7.9%. Was there anything I guess that maybe was unusual in the quarter that would have driven margin that high? And, yes, maybe if you can just maybe give some color around that.
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John Di Bert, Bombardier Inc. - SVP & CFO [3]
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Good morning, Cameron. This is John. So I'd say that what you're really seeing in BT fundamentally is just strong execution in what we're trying to do, improve the business. You've seen a lot of cost reduction initiatives we've announced over the year. Laurent and his team are working very well in terms of improving not only the earnings, but also working capital and cash flow at the business. And we had good project mix in Q3, yes, that's for sure. But the margin growth is a sign of current performance and also things to come. So with the recent announcement in terms of the restructuring, we expect to continue to be able to increase margins.
And you've seen that we've raised our guidance for the full year. So we now see margins ahead of 6.5%, so better than what we had guided earlier this year. And I think we're well-positioned towards our 8% goal here for our turnaround plan. The team has done a great job, so just the strong execution.
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Cameron Doerksen, National Bank Financial - Analyst [4]
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Okay. And maybe just quickly secondly, this may be a supply chain question. You know, in North America BT has a fairly significant supply chain in Mexico. And we also have-- BA has a large jet facility in Mexico. Obviously we've had some maybe some increased uncertainty about trade deals come up recently. I'm wondering if that uncertainty affects any of your plans around supply chain.
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Alain Bellemare, Bombardier Inc. - President & CEO [5]
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Good morning, Cameron. It's Alain. Not really, to be honest with you. I mean we're a global player. We work everywhere around the world. And Mexico is one of our operations. They're doing well. We have a very large presence in the US, thousands of people and multiple suppliers, many customers. And it's I guess you're referring to the US election here. I think that it would be too early to speculate about what that would imply from a trade perspective. But I feel that it shouldn't impact our operation at all.
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Cameron Doerksen, National Bank Financial - Analyst [6]
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Okay. Thank you.
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Operator [7]
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Ron Epstein, Bank of America Merrill Lynch
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Kristine Liwag, BofA Merrill Lynch - Analyst [8]
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Hi. Good morning, guys. It's actually Kristin Liwag calling in for Ron. Alain, in 2011 Bombardier signed a strategic agreement with COMAC to collaborate on the C919 in the C Series. Can you discuss how this agreement has worked in practice compared to what the Company may have expected? And the genesis of this question is to understand what your strategic agreement with China Railway in Transportation, which you announced in September, what this could mean for Bombardier going forward.
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Alain Bellemare, Bombardier Inc. - President & CEO [9]
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Okay. Good morning, Kristine. I would say on the COMAC side, very little. That was prior to my time, so I really don't know much about that, other than to say that there has not been much in terms of collaboration with COMAC. The MOU we just signed with CRC is a very critical one. We have a very large presence in China. We have over 5,000 people. We have six joint ventures. We are the only Western player on the train side that such a presence. So we benefit from our presence into the Chinese market as well.
So what we have agreed with the Chinese, with CRC, is to do more collaboration moving forward on a more global scale.
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Kristine Liwag, BofA Merrill Lynch - Analyst [10]
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Does that mean you're bidding on contracts together? And can you discuss what's the split? Are you doing more of the strategy and design and they're doing manufacturing? Can you just provide a little bit more color?
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Alain Bellemare, Bombardier Inc. - President & CEO [11]
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I would just say right now that I want to be careful. I mean that-- a lot of that is-- I mean it's confidential and it's also competitive intelligence. So I mean I would just say that we're looking at growing together on a global scale, meaning that we will look at partnership where it makes sense on a case-by-case business on specific projects.
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Kristine Liwag, BofA Merrill Lynch - Analyst [12]
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Great. Thank you very much.
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Operator [13]
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Benoit Poirier, Desjardins Securities
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Benoit Poirier, Desjardins Capital Markets - Analyst [14]
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Yes. Good morning, and congratulations for the results. I was wondering, Alain, if you could provide more color about what you foresee for the business jet, on the business jet side in terms of the booking activity and also what type of production rate movement we might see in 2017, given the current environment.
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Alain Bellemare, Bombardier Inc. - President & CEO [15]
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Good morning, Benoit. As you saw, we had a pretty strong quarter, given the current market dynamics. So we feel good. We feel very good about what David and the team are doing. And I also feel very good about what we've done in 2015. I think we were very proactive in making significant adjustment to our rates. I feel that we're at a good place right now. We are still looking at where is the market going. And I believe that we're in the right place, in the right zone for this year and also for next year as well. There might be a little bit more fine-tuning here and there. But by and large, we have a book-to-bill of about 0.8 so far, and we're driving to have a book-to-bill closer to one by the end of the year.
So I think a great job by the team. The exciting thing in Business Aircraft on top of it is the Global 7000 first flight, where a lot of people didn't believe that we would fly this year. We did, as per plan. And the Global 7000 is an amazing machine. It's going to be the best business aircraft in the industry. And we are very confident to have this aircraft coming into service, as per plan by the end of 2018.
So overall, I feel that we have taken the proactive actions that were needed in Business Aircraft. And the team is executing well.
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Benoit Poirier, Desjardins Capital Markets - Analyst [16]
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Okay. And quickly, any update on the strategic review for Learjet, Alain?
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Alain Bellemare, Bombardier Inc. - President & CEO [17]
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No. As we said last time, I mean we are looking at the Learjet franchise. It is a good franchise. We have thousands of aircraft flying today. The team has been looking at making some fine-tuning in the marketplace on pricing and things like that to see how we can reenergize sales. And we actually had a pretty good quarter. The third quarter was our best quarter this year.
Having said that, it's still one of the toughest segments of business aircraft, the low end of business aircraft, the light segment. So we will continue to keep an eye on this. And then we'll see what we do.
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Benoit Poirier, Desjardins Capital Markets - Analyst [18]
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Great. Thanks for the time.
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Operator [19]
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Seth Seifman, JPMorgan
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Seth Seifman, JPMorgan - Analyst [20]
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Thanks very much, and good morning. I wonder if you could talk maybe a little bit more about the global and sort of the flight test program and where we go from here. The hours and milestones, and then a little bit about the cash drain profile in terms of does development cost stay at this level through next year, and then what the inventory build might be.
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Alain Bellemare, Bombardier Inc. - President & CEO [21]
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Okay. Good morning, Seth. As you saw, we had the first flight last week. I mean we've already flown since then a second time. I mean the aircraft is actually performing very, very good. I mean we are capturing a lot of the learnings from the C Series, which have been built into the Global 7000. So when you look at the flight test maturity, we're always starting at a pretty good place versus where we started on the C Series, which gives us confidence now with almost a year and a half, 18 to 24 months program in flight test program, to full certification in front of us that we will hit our entry into service target in the second half of 2018.
In terms of the spending and cash flow alternatives, I will turn it to John.
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John Di Bert, Bombardier Inc. - SVP & CFO [22]
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Hi. Good morning, Seth. So the program is, as you know, now into the flight test program phase. So we're going to build up some flight test vehicle hardware next year. That will continue pace in the program. It will be the only major aerospace program in development. So that's going to be, I think, for us a strong focus. And we'll be able to manage as we have very well in terms of meeting program milestones.
When you look at how we're looking at kind of the cash flow related to the program, you can see this year BBA spending about $160 million or so, $170 million a quarter in investing in product. I think that you kind of keep that pace. You add some working capital probably into 2017. So we'll bump up a little bit in terms of cash usage. But I think generally overall, part of an improving cash flow story.
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Seth Seifman, JPMorgan - Analyst [23]
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Great. And then just to follow up with a sort of related question, the development spending on the C Series side. I think at the beginning of the year you guys had talked about the billion of cash consumption on C Series this year, about half of that being for CapEx or development. And it looks like you're going to underrun that pretty substantially, I mean maybe by about $200 million or so, based on the program tooling data. Is that fair?
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John Di Bert, Bombardier Inc. - SVP & CFO [24]
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No. I'd say that right now we're actually [bang] on within $50 million, plus or minus either way of that billion. So we'll see how we close out the fourth quarter here. But all in, we're looking at probably being in the neighborhood of about a billion dollars for 2016, and still very confident as we look out towards the program and into 2017 and 2018 and onward that we'll be within the $2 billion that we outlined. So we'll talk more about C Series at Investor Day. But I think fundamentally here, tracking well for this year, about a billion dollars, maybe a little lighter in terms of the tooling side of it. But just overall on the program, given also the impact of moving some of the aircraft for the engine delay, still within a billion plus or minus $50 million, and then from there kind of the other billion over the next three years or so.
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Seth Seifman, JPMorgan - Analyst [25]
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Great. Thank you.
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Operator [26]
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Walter Spracklin, RBC Capital Markets
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Derek Spronck, RBC Capital Markets - Analyst [27]
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Good morning. This is Derek Spronck on behalf of Walter. In the gear turbo fan engine, while it was being developed there was some concern about possible heat increases, especially on high-frequency routes. How has the engine performed now that it's in commercial service? And how has been the dispatch reliability of the C Series so far?
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Alain Bellemare, Bombardier Inc. - President & CEO [28]
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Well, good morning, Walter. It's Alain. Very good. The performance of the aircraft in service is excellent. Actually I've been working on multiple projects over the past 20 years. And I would say it's the best I've ever seen. And that's just not me talking. I mean that's the feedback we're getting from the customer.
As for the engine, the engine is also performing extremely well in service. So I think that what we're seeing now is more like a production ramp-up issue. Pratt is managing that. And we're working closely with them. But overall we're very pleased with the maturity of the aircraft in service. And soon we will have our CS300 in service with airBaltic. And we are good to go. We're ready to support them as they start their operation.
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Derek Spronck, RBC Capital Markets - Analyst [29]
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Great. And I see a production issue on the GTF. Is that a C Series GTF production issue, or is it a GTF production issue all around?
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Alain Bellemare, Bombardier Inc. - President & CEO [30]
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It's a GTF production issue.
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Derek Spronck, RBC Capital Markets - Analyst [31]
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Okay, great. And just finally, now that you have the C Series in commercial service, are you able to get the data from Swiss Air, the performance data that you're starting to compile and utilize that as you look for new sales globally for the C Series?
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Alain Bellemare, Bombardier Inc. - President & CEO [32]
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Yes, absolutely. The answer is yes. And that's the reason why I was saying that the aircraft performance is very, very good. This Swiss team is very pleased with the overall performance, whatever we're talking about, operating cost, maintainability of the aircraft in service; I mean all the metrics on noise footprint, emission and things like that. So overall, it's clear that a lot of people are waiting to see how the aircraft was going to perform in service. And we are just delighted to see the performance out there in the field.
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Derek Spronck, RBC Capital Markets - Analyst [33]
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Okay, great. Thanks very much.
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Operator [34]
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Robert Spingarn, Credit Suisse
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Robert Spingarn, Credit Suisse - Analyst [35]
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Good morning. I wanted to ask really two things. First Alain, on the biz jet side, with the book-to-bill net of 0.8 year to date, and your comment earlier that you think you can get closer to 1.0 for the year. That kind of implies about 50 orders or so in Q4. So first, is that realistic? And since I would think some of those are 7000s, and those don't deliver for a couple of years or more, can you still keep deliveries flat in 2017 against what will be a tough comp with the higher deliveries this year?
And then second question is for John, and it has to do with slide 7 on the commercial guidance adjustment. Is that all C Series? In other words, the $300 million drop in sales and the $100 million increase in profit, is that all the deferred-- the eight units on the C Series? And if so, does that mean a $12 million loss per C Series being deferred to the right?
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John Di Bert, Bombardier Inc. - SVP & CFO [36]
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Okay. So let me take that one first. This is John speaking. So when you talk about the $300 million of sales adjustment that's largely C Series. And you can whatever-- do a little bit of math one way or the other. But it's in that ballpark for the aircraft we're taking off the schedule.
When it comes to profitability that's different. That's really about execution. We launched this year, needing to certify and entry into service the 300-- and certify the 300 and entry into service on the 100, and support the fleet, then ramp up production. Essentially what this is saying is we have hit every milestone, as expected. We've been very disciplined in terms of how we've deployed not only cash, but also how we've managed expenses on the program. And we've got the results we needed from program execution in terms of performance and in-fleet or in-service reliability.
So what that $100 million really reflects is the fact that we're just executing very well, and not so much any relation or very little relation to the delivery schedule. Don't forget that the early units, we take the expenses as we bring in inventories. So yes, we've managed a little bit of inventory in terms of the schedule adjustment. But the large adjustment in terms of the guidance here is just good performance.
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Robert Spingarn, Credit Suisse - Analyst [37]
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So some of those aircraft are already built, and the costs are in prior periods?
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John Di Bert, Bombardier Inc. - SVP & CFO [38]
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[No]. We continue to obviously ramp up the line. We're mitigating some of the inventory. But as inventory comes in for production, we're still taking an NRV adjustment. So what I'm saying--
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Robert Spingarn, Credit Suisse - Analyst [39]
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I see.
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John Di Bert, Bombardier Inc. - SVP & CFO [40]
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It's not the biggest part of that $100 million improvement. The biggest part of that $100 million improvement is us just knowing that we are on track against our milestones, and any contingency required is no longer required at this point.
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Robert Spingarn, Credit Suisse - Analyst [41]
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I see, okay. And Alain, thank you, on the biz jet?
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Alain Bellemare, Bombardier Inc. - President & CEO [42]
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And on the business jet, Robert, we are-- let me clarify. We are striving to a 1.0. I don't want to minimize the challenge of that in a soft market environment. I think that the team has done extremely well so far this year. I'm not sure if we're going to get to 1.0 by the end of this year. But that's what the team is working on.
So, you are right in saying that the market is still difficult. We are seeing that. It's tough in pretty much all markets-- Russia, China, South America. And low end of the market, like I was saying earlier, the light jet segment of the market where the Lear is, is also very challenging.
Having said that, I think that we've put our production rate in a pretty good zone. That does not mean that we're not going to fine-tune it a little bit more for 2017. But it's not going to be anything that is as material as it was in 2015. So I think that we've took the tough actions in 2015. And if you look at what we're doing with our Challenger 350 or 650, or Global 5000, 6000; we are selling well. I mean these are products that bring tremendous value to customers in the marketplace.
Understanding what you're saying about the 7000 is absolutely right. I mean we are selling 7000, and it's true they're not going to come into service right now. These new sales are going to be probably post 2020. Because we're pretty booked until 2020 on the Global 7000. But our existing platforms are very good.
So we will continue to take a very disciplined approach to our production rates on business aircraft, so that we continue to drive margin expansion, protect the brand, protect the value of the aircraft; but by and large, I think that we are in a good place. It doesn't mean that we're not going to do some further fine-tuning to it.
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Robert Spingarn, Credit Suisse - Analyst [43]
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Okay. Thank you, both.
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Operator [44]
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Cai von Rumohr, Cowen & Company
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Cai von Rumohr, Cowen & Company - Analyst [45]
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Yes. Thank you very much. And good performance. So your preowned biz jet inventories were down over 50% in the quarter, a very good performance. Where do you expect them to be at the end of the year, and what sort of impact are you seeing from the fact that two of your competitors have indicated that they have excess white-tail inventories. And one of them, who has not previously done much in the way of price discounting, is indicating that they finally also are having to price discount to move product?
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Alain Bellemare, Bombardier Inc. - President & CEO [46]
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Well, good morning, Cai. And thanks for asking that question. Again, I will start by saying I'm very proud of what David and the team did in 2015. I think that we saw that coming. And we really adjusted our production rate very early, earlier than anybody else in the industry. And as a result, I think that we are in a much better place.
As part of our turnaround plan, we also put a lot of focus on what we call business model enhancement. And one big piece of it was to manage used aircraft. And if you look at where we were in 2015 and where we are today, you will see a significant drop from $400 million to now less than $100 million.
Now this was done by honestly taking a strong focus on it, moving it, moving aircraft, being disciplined and trading in aircraft. And the fact is the team has been doing just a super job. Now where is this thing going to go? It's likely to be moving a little bit up and down from this point. I think the same thing now, we're getting into a place which does make sense, where you have to do some trade-in to sell new aircraft. So we will be disciplined, but we will also at the same time continue to be aggressive at moving new aircraft around.
So by and large, I think that where we are is a good place. It could go up a little bit. But we're not going to go back up to where we were in 2015. So whether we move up, plus or minus $50-75 million, I mean I don't know, to be honest. It will depend on what we see and what type of trade we have to take in.
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Cai von Rumohr, Cowen & Company - Analyst [47]
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Thank you very much. And then turning to the C Series, you indicated that Pratt is there to support you in 2017. As you see it right now, does that mean support you to your original target of deliveries in 2017 plus the catchup of the seven or so that have slipped out of 2016? Or is it just to do the target that you had for 2017?
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John Di Bert, Bombardier Inc. - SVP & CFO [48]
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Good morning, Cai. This is John. So the way we're looking at it right now is that we're working with them. We see the 33-35 that we put out there, if you recall, last year when we were in New York on the 5-year production ramp; we still see that as being the goal, the target for next year. And as we work through and synchronize our sales with their schedule, we'll see if we have any possibility to recover some of the seven. I think that's a work in progress fundamentally, and we'll get more clarity as we go here. But the 30-35 I think is still the range that's the right one for us.
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Cai von Rumohr, Cowen & Company - Analyst [49]
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Okay. And then the last one is when you indicated the C Series deliveries, I think you took your cash outflow guidance up a bit. And I think you just said that you're still near a billion cash-out for the 2016. So what then if that hasn't changed, what was the reason for the cash flow-- cash outflow guide to increase?
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John Di Bert, Bombardier Inc. - SVP & CFO [50]
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So Cai, when you look at it, we've talked about the aircraft that don't get sold that obviously comes without the-- then you don't collect the cash on that. So fundamentally that's the stress on our cash line. I talked about the billion, and I said, plus or minus $50 million or so. So the point there is that there's still a little bit of stress on the billion, nothing that I'm concerned about. And fundamentally if you look at our range, $1.15 billion to $1.45 billion, we're still confident that we're going to come into that range.
So the bottom line is we want to be proactive, give you guys some visibility as to where we saw things. We needed to take some actions as an organization here, as a manufacturing kind of-- the operations team just to size out how we would do this. We're mitigating some of that stress. It's not fully gone. And we have a range $1.15 billion to $1.45 billion.
We're working very well. If you look at where we are in Q3 this year, year to date $1.56 billion of cash used. If you look into Q4, you can make an assumption on that. But it would tell you that we're sizing into the range that we expect to be. So as far as I'm concerned, it's just managing through some of the adversity and doing the right things from a business operating point of view.
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Cai von Rumohr, Cowen & Company - Analyst [51]
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Thank you very much.
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Operator [52]
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Turan Quettawala, Scotia Bank
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Turan Quettawala, Scotia Bank - Analyst [53]
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Yes. Good morning. I guess my question, I just wanted to chat a little bit on the margins that you guys are coming in at, obviously coming in ahead of your expectation here a little bit in the year. I guess if you marry that with the restructuring that you're doing right now, are you coming in sort of a little bit ahead of that that you were thinking, Alain? Or is it just that you're finding more opportunities to streamline operations?
And so as we think about the longer-term margin guide, is it fair to assume that maybe some of that is happening a little bit sooner than you expected?
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Alain Bellemare, Bombardier Inc. - President & CEO [54]
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Yes. Good morning, Turan. When we put our turnaround plan in place, obviously we took what we thought was a pragmatic approach to this. And we've been doing extremely well. We're actually tracking a little bit ahead of plan. So I mean that is one of the drivers.
But like the fundamental driver of this margin improvement is very good disciplined execution by each of the business units.
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Turan Quettawala, Scotia Bank - Analyst [55]
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Thank you. And I guess just last one more question from me here on the BT revenue. You took it down a little bit, and also on an ex-currency basis I think it's down. So just John, can you give us a sense of how much the contracts figure into deferred revenue because of what you're doing on the working capital side, is a factor there in terms of the revenue decline at BT?
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John Di Bert, Bombardier Inc. - SVP & CFO [56]
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Yes. You know, when it's all said and done, I'd say that you see it in the working capital discipline. You see it in the project management. A couple hundred million dollars of that $500 million is related to just strong discipline. We continue to manage projects, I think, in a very effective way. And so what's important, I think, as you look at book-to-bill, 1.6 times, you've got $2.9 billion of orders. We'll have 6 or 7 consecutive years now above 1.
So we feel pretty good about 2017 growth in terms of top line at BT. We also feel very good about how we're operating and managing the business in a much more lean and effective way. So a combination of good working capital, project management, better margins, and growth; I think we really are where we want to be in terms of the train business. And Laurent is doing a really, really good job. So I think it's just a good story there altogether.
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Turan Quettawala, Scotia Bank - Analyst [57]
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Perfect. So I guess net-net, or on an ex-currency basis, you expect growth in BT next year in revenue?
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John Di Bert, Bombardier Inc. - SVP & CFO [58]
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Yes. I think we've positioned ourselves well this year with another solid year of orders.
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Turan Quettawala, Scotia Bank - Analyst [59]
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Thank you.
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Patrick Ghoche, Bombardier Inc. - VP, IR [60]
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Operator, we have time for one more caller.
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Operator [61]
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David Tyerman, Cormark Securities
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David Tyerman, Cormark Securities - Analyst [62]
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Yes. Good morning. My first question, John, you mentioned that mix was one of the contributors to the BT high margin contribution in Q3. I'm just wondering if you could quantify that. And I'm just trying to get an idea of there's a chance that this is going to come down materially to a more normal level going forward.
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John Di Bert, Bombardier Inc. - SVP & CFO [63]
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I'd say that the color I'll give on BT margins is really number one, cost reduction initiatives from the beginning of the year, very well executed and continue to execute; and number two, we've launched additional initiatives here in October that will continue to contribute to margin expansion growth; three, project execution and just disciplined management of those projects, including accelerating and improving on the projects where we've had some challenges. I think that's the other fundamental.
And then what you can read out of all of that is that you've got margin momentum in the year. We're improving our full-year guidance to reflect that kind of performance at 6.5%, and that we are very well-positioned towards our 8% goals for BT as a business unit. I'd say that you'll see continued momentum, and yes, there's project mix in Q3, a 7.9% margin. We can afford a little bit of that project mix to normalize and still be tracking a very strong margin performance in 2017. And then 2017 will be discussed in a little bit more detail when we get together in December. But I think that will be another good story.
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David Tyerman, Cormark Securities - Analyst [64]
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Okay. Very good. And then just the other question; the CRJ order backlog is definitely drifting down here. You started the year at 79. You're down to 60 now. Any thoughts on where we go from here on this? Because you're getting dangerously low, it seems.
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John Di Bert, Bombardier Inc. - SVP & CFO [65]
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Yes. Maybe I'll take this one here is that on the CRJ, if you look at it, fundamentally what do we feel? We feel good about where we are. I mean we continue to proactively manage through the yearend 2016 very disciplined on how we're managing production and rates. And we're sized where we want to be in the second half of 2016. I think if you look over 2015 and 2016, you see something in kind of the-- probably when it's all said and done-- about 40 deliveries in those years. I think you'll be a little bit lighter next year. It's a great aircraft. We continue to work with customers. The campaign activity has been in a bit of a lull cycle. And when you look at order performance, we've had great quarters and then we've had soft quarters. It's a bit lumpy.
So right now, what we do is we look out to where we have good visibility, probably over the next 9 months-- let's say the next three quarters are pretty good visibility. For next year you should expect a little bit lighter volumes when it's all said and done. But our current rates and how we're managing the business right now is already tuned into that.
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David Tyerman, Cormark Securities - Analyst [66]
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Okay. Very good. That's helpful. Thank you.
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Operator [67]
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Thank you.
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Alain Bellemare, Bombardier Inc. - President & CEO [68]
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So let me close the call by saying that I'm very confident in our strategy, our leadership team, and also in our ability to achieve both our 2016 guidance and our 2020 goals. I mean we have now Bombardier on a path to profitable earnings growth and cash generation, and we will remain focused on improving productivity. Our turnaround plan is in full motion, as we speak right now. We have launched two major waves of reduction this year. And the first one is 80% completed. And the second one is getting very good traction.
We are executing on our new programs. The CS100 and CS300 are both now certified, and they will both be in service before the end of the year, with very good performance. And the 7000 is flying, and we remain confident to have the 7000 in service in the second half of 2018. And we will continue to apply a very disciplined and proactive approach to managing our product portfolio.
So I understand, I mean we all do here, that we still have a lot of work ahead of us. But Bombardier today is a much better and stronger company than it was a year ago. And we are committed, the entire team here is committed, to delivering superior value to our shareholders and customers.
So looking ahead to 2017, we feel that we're in a good position. We are launching key initiatives that are needed to achieve our margin growth and goals. So it's all about focusing on executing our 5-year turnaround plan. So we look forward to seeing you in New York on December 15. And I thank you so much for being on the call this morning. Thanks.
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Operator [69]
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Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.
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