Q1 2017 Bombardier Inc Earnings Call
May 11, 2017 AM EDT
BBD.B.TO - Bombardier Inc
Q1 2017 Bombardier Inc Earnings Call
May 11, 2017 / 12:00PM GMT
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Corporate Participants
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* Alain M. Bellemare
Bombardier Inc. - CEO, President and Director
* John Di Bert
Bombardier Inc. - CFO and SVP
* Patrick Ghoche
Bombardier Inc. - VP of IR
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Conference Call Participants
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* Benoit Poirier
Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst
* Cai Von Rumohr
Cowen and Company, LLC, Research Division - MD and Senior Research Analyst
* Cameron Doerksen
National Bank Financial, Inc., Research Division - Analyst
* David Bruce Tyerman
Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research
* Konark Gupta
Macquarie Research - Analyst
* Noah Poponak
Goldman Sachs Group Inc., Research Division - Equity Analyst
* Robert Michael Spingarn
Crédit Suisse AG, Research Division - Aerospace and Defense Analyst
* Ronald Jay Epstein
BofA Merrill Lynch, Research Division - Industry Analyst
* Seth Michael Seifman
JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst
* Stephen Trent
Citigroup Inc, Research Division - Director
* Steven P. Hansen
Raymond James Ltd., Research Division - SVP
* Turan Quettawala
Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research
* Walter Noel Spracklin
RBC Capital Markets, LLC, Research Division - 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 First Quarter 2017 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 of IR [2]
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Thank you. Good morning, everyone, and thank you for joining us for this review of our first quarter's performance. This conference call is broadcast live on the Internet. For copies of our earnings release and supporting documents, in both English and French, or to retrieve the webcast archive of this call available later today, please visit our website at bombardier.com. All dollars values expressed during this call are in U.S. 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 financial 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'm 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 performance and key achievements for this quarter. John Di Bert, our CFO, will then review our financial results for the first quarter ended March 31, 2017.
I would now like to turn over the discussion to Alain.
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [3]
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Well, thank you, Patrick and good morning, everyone and thank you for joining us today. As you also saw in our press release this morning, we had a strong start to the year, highlighting our performance in the first quarter was margin expansion led by Transportation and Business Aircraft improved cash flow performance and continued progress ramping our growth programs. This solid performance in the quarter demonstrate the progress we've made executing our turnaround plan and transforming our company, this by challenging market conditions. As we approach the midpoint of the year, we are confident in our strategy, our turnaround plan and in our ability to achieve our full year guidance. We are focused on building earnings power by improving efficiency and reducing costs across our operations and in the supply chain, flawlessly executing our growth programs and capturing top line growth across our portfolio.
Before John goes through the first quarter financial results, let me provide a few highlights from the business units, starting with Bombardier Transportation, which had a strong quarter. In the first quarter, BT resumed revenue growth, improved margins and increased the size and quality of its backlog. A very good quarter with more to come. Again, these early results demonstrate the long-term potential of the actions we took in 2016 to transform our rail segment from a strong and stable business into a higher growth, higher margin rail solution provider.
To support this growth, we add, again, a strong book to bill of 1.1 in the first quarter, and we are actively pursuing a large number of opportunities. We expect revenue momentum to continue this year as we ramp up on a number of major projects and execute on our $31 billion backlog. This growth will convert to strong operating margins, coming from leveraging our past technology investments, continuing to secure a more favorable contract mix and accelerating our operational transformation, which include workforce optimization, product standardization and by better leveraging our low-cost footprint.
Turning now to Business Aircraft, which also delivered very strong margin improvement in the quarter on stable deliveries, in line with our expectations for the full year.
Going forward, our disciplined approach to aligning production rate with market demand and our focus on improving productivity will allow BBA to perform in any market environment.
Moreover, our leaner cost structure will allow us to deliver strong earnings power, strong earnings growth when the market recovers. Flight testing on the all-new game-changing Global 7000 is going extremely well. The aircraft continues to show a very high level of maturity. And we are quickly expanding the flight test envelope and confirming the aircraft's outstanding performance capabilities. So the program is on track for EIS in late 2018 in full support of our 2020 revenue growth targets.
Another growth driver is our increased focus on the aftermarket business leveraging our large installed base of 4,700 aircraft. This year, we have expanded our capabilities and footprint in both Europe and China, adding 5 maintenance stations in Europe, opening our new Tianjin service center in China and receiving full certification for our London Biggin Hill service center.
At Commercial Aircraft, the story for 2017 will be the acceleration of C Series deliveries. As planned, this acceleration will pick up in the second half of the year. We remain on track to deliver 30 to 35 aircraft for the full year or more than 4x our deliveries in 2016. We will do this at the same EBIT level, as we come down the learning curve. As we ramp up deliveries, we will also remain focused on delighting our large customers, including Korean Air, which will become the first Asian C Series carrier later this year. The performance and reliability of the 10 C Series in service today is outstanding, meeting or exceeding our expectations with almost 10,000 revenue flights completed to date.
The aircrafts unmatched capabilities were further highlighted this quarter with the steep approach certification for London City airport. The C Series is the largest aircraft to land at this downtown airport. It can connect London City to New York nonstop in just 7.5 hours and it opens up new options for flights connecting London City to other European cities.
On the sales front, customer interest remains high, fueled by the C Series outstanding performance. Despite a sub-short-term market, campaign activity remains solid, and we see multiple opportunities to strengthen our 350 aircraft backlog this year.
A few words on the petition that Boeing filed with the U.S. government. First, we believe this action could have a serious impact on airlines to driving public, innovation and competition in the aerospace industry. A long time ago, Boeing decided to exit the 100-seat class segment. Bombardier entered into this market precisely because it was underserved. We created a supported platform that is more comfortable for passengers, more fuel efficient for the environment and more economical for airlines. But Boeing would prefer the airlines by larger aircraft based on older technology. That approach may be better for Boeing, but it is worse for everyone else. And on top of it, the C Series benefits both the Canadian and U.S. economies. We have deep roots in Canada, Québec and in The United States. In the U.S., the C Series will generate billions of dollars of exports and thousands of jobs. In fact, much of the content on the C Series is sourced from companies and suppliers in the U.S., making Boeing's position a direct threat to the high-scale well-paying jobs in the U.S. and in Canada. At Bombardier, we believe that open and fair competition drives innovation, and we strive to compete on the basis of our superior aircraft. We have a strong team dedicated to building the legal case needed to prevail, and we look forward to demonstrating our commitment to innovation and competition.
Okay. I will stop here and conclude by saying, we feel very good about where we are. We had a very strong start to the year. Our turnaround plan is in full motion, and we are confident in our future.
With that, I will now turn it over to John to review our first quarter financial results.
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John Di Bert, Bombardier Inc. - CFO and SVP [4]
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Thank you, Alain. Good morning, everyone. We are exactly where we wanted to be after the first quarter, continuing to deliver sustainable and predictable results. We have produced revenues in line with our plan. We saw growth resuming at BT and disciplined management of business and commercial aircraft production.
Also, importantly, our margins continue to trend up, led by Transportation and Business Aircraft. With this improving operational performance, we, again, focused on improving free cash flow, ensure we ramp up our new programs according to plan while streamlining working capital and investments.
I'm encouraged by these early results, proving we can perform in any market as we continue to build earnings power.
Let's take a closer look at first quarter numbers. Consolidated revenues totaled $3.6 billion in Q1, and while this compares to $3.9 billion last year, we resumed growth at BT, with a 5% year-over-year revenue increase before currency translation.
Q1 revenues also reflect our continued discipline in managing BBA and BCA production levels and maintains our path towards our full year delivery guidance. As I noted on our February call, BCA will mostly contribute to revenue growth in the second half, as C Series deliveries accelerate to reach 30 to 35 units for the full year. With the first quarter behind us, and with the natural ramp up of business jet deliveries during the year as well as our Transportation project pipeline, we continue to see a clear path to revenue growth of 1% to 3% for full year '17 as previously guided.
This quarter was about great margins, hitting a robust 8% at BT and growing to approximately 7.5% at BBA and Aerostructures, all before special items. Overall, we delivered $128 million of EBIT before special items, up from $104 million in Q4 and in line with last year's first quarter. Year-over-year, return on sales increased by 30 basis points even with the planned lower revenues at BBA and BCA.
We continue to manage our top line with discipline while growing earnings power.
The margin lift demonstrates solid project execution at BT and the growing benefits of realigning our cost structure across each business. Also, of note, in the quarter is the realization of some of the favorable FX impact, we expect in our Canadian operations as the effective rate for Q1 '17 was favorable to prior year. We had planned for this FX tailwind in our full year guidance.
We are reiterating EBIT guidance for the year at $530 million to $630 million, before special items.
Q1 produced $160 million of free cash flow improvement versus last year, driven for the most part by better cash from operations. Consolidated free cash flow usage was $593 million this year, compared favorably to $750 million a year ago. Free cash flow usage was in support of our revenue growth plan, it includes approximately $275 million in development capital, mainly towards the Global 7000 and $340 million invested in working capital, mainly for the C Series production ramp up ahead of intensifying deliveries in the second half as well as to spool up BT production.
Solid Q1 free cash flow performance combined with increasing seasonal business jet activities, major train projects, execution and growing inflows from C Series gives me confidence in our ability to achieve our full year free cash flow objectives.
Let's turn to a review of the business unit performance. Starting with Transportation. After a year, where we realigned the focus of the trained units to margins and cash, we are now regaining revenue momentum as we execute on our $31 billion backlog. Revenues in the quarter reached $1.9 billion, growing organically by approximately $100 million year-over-year. 5% before diluted -- the dilutive impact of currency translation. This growth is driven by the production ramp up of certain key projects, which are expected to accelerate through 2017. A currency translation revenue impact of $55 million in the quarter was driven by a weaker euro relative to last year. Ex currency, we remain confident on our full year revenue guidance of approximately $8.5 billion.
As Alain mentioned, order intake continues to be strong and supports sustained long-term growth. We recorded another quarter with a book to bill above one, even as we enhanced the quality of our backlog. That means consistent with our strategy to leverage our technologies across more platforms, we are securing orders from existing product families such as FLEXITY, INNOVIA, TRAXX, TWINDEXX setting ourselves up for sustained margin improvements. For the quarter, EBIT, before special items, was $153 million, increasing 33% or approximately $40 million year-over-year.
With solid sales, strong orders, an 8% EBIT margin, this was one of the best quarters at BT in over 2 years. In addition to positive project mix during the quarter, we also continue to see strong performance in our Chinese JV from both earnings contribution and continued order intake at BST.
As we execute on certain recovery projects through the rest of the year, we do expect some margin dilution. However, our transformation initiatives will provide offsetting benefits, giving us confidence to confirm our full year margin target of approximately 7.5%.
Business Aircraft results were off to a good start. Q1 saw 29 deliveries compared to 31 a year ago. On that basis, we recorded revenue of $1 billion in the first quarter, $300 million lower than a year ago, driven by a lien preowned aircraft inventory reducing aircraft available for sale, and by a delivery mix skewed towards lighter aircraft. Based on upcoming visibility of our $15.2 billion backlog, we expect deliveries to improve as we enter more seasonally active quarters and seen enhanced delivery mix as 2017 progresses.
Backlog remains fairly stable during the first quarter, implying a revenue book to bill approaching one.
As we continue our disciplined approach to this market with a target of 135 deliveries for the year, our strategy to reduce costs and protect brand value is being validated by BBA's strong margin momentum. In Q1, we recorded EBIT before special items of $77 million, representing a 100 basis point margin improvement versus a year ago. As expected, transformation initiatives are playing a positive role in this margin trend, supporting our 7.5% margin guidance for the full year.
Continuing with Commercial Aircraft. In the first 3 months, we delivered 14 CRJs and Q400s, tracking to our full year target of 50 deliveries. Revenues totaled $540 million, lower than Q1 last year as a result of 6 fewer CRJ deliveries. Remember, we reset our expectations for regional aircraft in the latter part of 2016. Recent order activity in the segment remains low and confirms our prudent management of production rates. Revenue growth in BCA will start this summer with an acceleration of C Series deliveries. While production activity was strong in the quarter, we only recorded one sale from an accounting standpoint. Two additional aircraft delivered during the quarter will be recognized in Q2 revenue, now that the steep approach certification for London City has been received for the CS100.
We see a handful of deliveries for the next quarter as we prepare for a significant growth of the in-service fleet in the second half of the year. We are reconfirming our 30 to 35 deliveries for full year 2017.
The ramp-up costs at BCA are being carefully managed, while we continue to ramp up production rates in the quarter. BCA reported a $55 million EBIT loss, close to Q1 2016 levels. We achieved this by hitting the expected production learning curve, while also leveraging our legacy aircraft aftermarket and preowned aircraft activities. While the EBIT loss for the quarter is low relative to our full year expectations of $400 million, it's important to note that we book a net realizable value expense on C Series inventory within our internal supply chain as part of intercompany eliminations. This was the case in Q1 and explains, for the most part, the increase in eliminations for the quarter. Whether we accrued for NRVs in BCA, or through eliminations, it's purely a timing issue dependent on intercompany transactions between BAES and BCA.
The net consolidated result is the same, notwithstanding quarterly fluctuations between the 2.
Now looking at Aerostructures. Revenues for the quarter totaled close to $400 million. As usual, over 70% of those sales were driven by BBA and BCA, driving a $70 million decline in internal revenues, consistent with adjusted production rates in those units. As the year progresses and C Series components deliveries accelerate, we see total Aerostructure revenues gradually increasing. On the profitability side, first quarter EBIT was 7.5%, stable over the previous year. The negative effect of lower volumes was offset by transformation benefits and with the volumes increasing for the rest of the year, we continue to expect full year margins moving above 8.5%.
Before we discuss the outlook for the balance of the year, a quick note on EPS. We delivered a breakeven adjusted EPS for the quarter, supported by a low tax expense relative to last year. Turning our attention to the outlook for the balance of 2017. As I've highlighted before, we are reaffirming all of our 2017 guidance. To summarize, we have a clear path to this year's revenue growth. It is driven by C Series delivery acceleration in the third and fourth quarter, seasonal business jet deliveries and improving mix to the rest of the year and organic growth in Transportation segment as project execution continues to trend favorably.
Earnings are beginning a trend of sequential EBIT growth in Q1. We expect this trend to continue with gradual growth through the balance of 2017, supported by volume increases, mix improvements and further transformation benefits.
On the free cash flow front, in light of Q1 strength, we expect second quarter usage to be stable before we see a measured improvement in free cash flow usage in Q3. Second half free cash flow will be characterized by the acceleration of C Series deliveries and topped by traditionally strong fourth quarter output across the businesses.
Cash level at quarter end was healthy at $2.9 billion, or $3.9 billion of total liquidity. Of note, this quarter, the extension of our revolving facilities by 1 additional year to 2020. Underscoring our banking syndicates continued confidence in our business plan and turnaround progress.
Now in our second year of the turnaround, we feel confident in our ability to reach our goals for 2017. The strong start confirms our strategy and shows that the decisions we are making are producing improving results even in the current market environment. We're also confident that they are shaping future performance where revenue growth and margin expansion further fuels earnings acceleration and free cash flow conversion.
With that, operator, we're ready for our first question.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Our first question is from Walter Spracklin from RBC.
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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [2]
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So I guess, my first question here will be on -- or my only question here will be on Transportation on the BT side. Obviously, you mentioned that you've had some fantastic margin improvement here and that there would be some dilution in the back part. Can you talk about how the sustainable run rate is in terms of your overall objectives? Have you -- do you consider yourself well in advance or ahead of schedule in terms of your margin improvement in that segment? You've effectively achieved the 8% already, even if it is on a quarterly basis. And can you touch on where you are in systems and signaling and the opportunity to further expand that portion of your business as you progress to higher margins overall as a result of that exposure?
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John Di Bert, Bombardier Inc. - CFO and SVP [3]
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Walter, so thanks for the question. I think we're very pleased with how the Transportation unit is doing thereon. Like I said, last year, he's been doing a very good job of taking cost out, streamlining its operations and continuing to fundamentally restructure the business and he's doing that well. He still continues to win in the marketplace, which is critical. And so we also like what he's done with backlog this quarter in terms of orders. I think that to your question about the sustainability, I think, we're heading in the right direction here. I mentioned a bit of dilution as we go forward, as we kind of come through when we talked about burning off large projects that we did have some thinner margins on, but supported by continued benefit of operational improvements. I think it's too early to call any kind of new expectation or objective with respect to the 8% in the longer term. Recall, we also had a strategy here, where we want to continue to win in a marketplace and in a competitive landscape. So we will also be ready for competitive forces as they materialize and continue here. So I think that's part of the plan. The plan is that we do such a good job on margins, it allows us to grow ahead of the industry and ahead of our competitors and so the 2 come together for the plan we have by 2020 and approaching $10 billion business with margins at 8% or better. I just say that we're executing well.
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Operator [4]
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Our following question is from Ron Epstein from Bank of America Merrill Lynch.
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Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [5]
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Just wanted to follow-up on, is there anything else that you guys can talk about around the potential JV with Siemens. We haven't heard much about it. They announced -- the Siemens, they announced some big costs cutting today in their mobility division. So I was just wondering if there's anything, you could give us any more color on that?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [6]
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All right. Ron, its Alain. So obviously, we're not going to comment on or speculate on rumors. We've been saying, as I said 2 years ago, they were going to look at the entire industry and industry consolidation and take a proactive approach and that's what we'll keep doing moving forward.
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Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [7]
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Okay. Good. May I follow-up with a second one because that was really, really, really short.
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [8]
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Sure.
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Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [9]
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Okay, great. Cool. You mentioned about the C Series ramp up throughout the year. Can you give us maybe give us some more color around how you expect that to go? And more, specifically on the financial side, what impacts that going to have on cash flow throughout the year?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [10]
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I can start, Ron, and then let John, take the cash portion here. We've -- as per plan, I mean, it's designed to ramp up in the second half. So it was a slower start this year. It's really in line with the delivery of engines and so far Pratt is on schedule. So like a ramp up in the back half, and we expect probably around 10-ish aircraft in the first half and then another like 20 aircraft in the back half.
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John Di Bert, Bombardier Inc. - CFO and SVP [11]
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And just very quickly there in terms of cash flow, we planned the business this way for the year, right? I mean, we have Korean coming in kind of around third quarter so that also helps the growth in terms of introducing a new entrant to service customer. We're excited about that. But in terms of the cash flow, we plan to build inventory and production as we navigate through Q1. That will continue into Q2 somewhat and then we'll see inflows from deliveries that materialize Q3, Q4, which also supports the cash targets that we have for ourselves this year. So, so far, working exactly as we planned, and we expect to continue to do so.
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Operator [12]
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Our following question is from Cameron Doerksen from National Bank Financial.
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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [13]
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My question is on the Global 7000. I mean, it sounds like the flight test program is going well. I'm just wondering if you can update us on where things stand with the wing supplier. There's been some, I guess, some updates there on their behalf? And I'm just wondering if you perceive there to be any risk of them backing out the contract in anyway?
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John Di Bert, Bombardier Inc. - CFO and SVP [14]
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Cameron, a couple of points as you mentioned. One is that program is going very well. We have our third flight test vehicle in flight now already and actually had a great first flight yesterday. So we're very pleased. We have wings for FTV4 and 5. We also have early production wings for the first few units of production. So with respect to how we're working with both Triumph and the rest of our supply base, all continues to go well. Of course, Triumph made some announcements this week. I won't comment on their announcements, but I will say that we continue to have the right kind of communication and dialogue between us and that we have a commercial dispute, but with respect to how the program is pacing, we expect to continue to work closely and make sure, that we're successful and bank with them. So we're, at this point in time, feel very confident that we're going to find the right solution.
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Operator [15]
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Our following question is from Cai Von Rumohr from Cowen and Company.
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Cai Von Rumohr, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [16]
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So you had strong margins as you pointed out at both BT and in the bizjet area. And yet, you didn't raise your target for the year. Could you comment first on, could you be better at bizjet because as you point out the mix gets better as you go through the year and where could we be? And secondly, you pointed out that there will be some dilutive elements at BT as we go through the year. Could you give us some color on what those dilutive elements might be and approximately, when we should look for them?
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John Di Bert, Bombardier Inc. - CFO and SVP [17]
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Thank you. No, so we haven't made any adjustments to guidance. I think, we're executing on our operating cost takeout, with respect to -- I'll talk both BT and BBA just briefly. But with respect to BT, we had spoken about this a couple of times over the last couple of years with respect to our 5-year plans, and we do have some larger contracts in Toronto for example, where we had spooled up costs and made sure that we're tracking to customer renewed commitments. We had a couple of projects in Germany, which were similar. So we wanted to make sure that as Alain took the leadership here that we delight customers and we focus on doing so. And where we had to make investments, we have. So those are the impacts that you kind of will see work through here '17 and parts of '18. With respect to exactly one, where -- how and -- it's in the percentage of completion as we increase the number of actual delivery units, we'll be adding the hardware, which we'll then get bigger mix of those contracts over the next 3 to 5 quarters. So we're still confident that we have a very strong plan, those 7.5% margins that we're looking for at BT, I think are still fully on track and we've actually done better this quarter. We'll see where we go next quarter. With respect to BBA, strong quarter on like revenues with respect to margin. We do have also some benefits of Canadian dollar FX and there so that compares Q1 this year to Q1 last year are better for us and then after that kind of tighten up a little bit. So I'd say that it's not just -- its strong performance and a little of FX and then the rest of the year, kind of seem that $0.8 rate that we plan for maybe $0.01 or $0.02 better. So really, in a nutshell, not ready to make any changes on guidance. Business is performing well, and we'll continue to go from here and we're looking for revenue growth in the second half to really help overall earnings.
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Operator [18]
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Our following question is from Robert Spingarn from Crédit Suisse.
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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [19]
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On the cash flow, just going back to the strength in Q1, relative strength is probably better way to describe it, but you've achieved about half of your improvement, which I think, is a range of $50 million to $300 million in lower outflow this year versus last year. You did about $160 million of that here in Q1. Can you speak to the timing that, that might be driving that? And how we should think about Q2? I think you said it would be stable. But will we actually have a negative compare in Q2? Are you building most of the C Series that you're going to deliver in Q2, the 10 that Alain referred to in the second quarter? Or is that inventory already on hand?
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John Di Bert, Bombardier Inc. - CFO and SVP [20]
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Yes, so I mean, we are continuing to build, so we're going to have -- we have inventory on hand for sure. And I mean, just back to my comments, Rob, let me just put some context again on this. $593 million of cash usage in Q1. We had $275 million of CapEx, large amount of that goes to 7000 that will be a steady state through the year and we'll continue, I think, probably ramping up a little bit of the investment there, as we get into Q2 and then stabilize 3 and 4. So that's one element of it and, again, it's driving growth. The second piece of it is working capital investments. We had talked all last year about being very disciplined in terms of project management at BT. We're into the delivery phase now. We want to see units go out the door. So we are trying to build up the materials as we'd now worked through the engineering and final design phase on somebody's projects that I mentioned earlier. And now we'll see deliveries, so that will build up material inventory and so little bit of cash usage there and that will be part of the second quarter story. With respect to -- so that was $340 million of working capital. So when you take those 2 together, really that's where the negative cash rent. We really expect cash flows to turn for C Series more than any else in the second half of the year, right? So that's when you'll have unit deliveries and you'll have -- we'll have built up to the next level of production, which means that they kind of ramp between the first half and the second half, will be consumed before the end of Q2 and then, after that we'll see more inflows, which will support, especially Q4.
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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [21]
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So John, before I lose you here, does that all translate to a use of around $600 million in Q2? When you say stable, are you saying stable with Q1 or stable with last year's Q2?
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John Di Bert, Bombardier Inc. - CFO and SVP [22]
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Fair question. Okay. So that's clear and the intent of my commentary was that we'd have stable cash flow usage Q1, Q2. So your $600 million is ballpark, correct.
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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [23]
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Okay. And I assume Q3 is going to be somewhat flattish and then a small positive in Q4?
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John Di Bert, Bombardier Inc. - CFO and SVP [24]
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Well, I'm not going to give you all the math, but you could do some math, and I think, we may still have some usage in Q3. But we'll give you guys more color in the next quarter. I think Q4, obviously, is over the positive quarter and I expect that.
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Operator [25]
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Our following question is from Steve Hansen from Raymond James.
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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [26]
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Congrats on some steady improvements here in the plan. It's good to see. I was just hoping you can provide some additional commentary on the sales pipeline for the C Series. I think as you described in your commentary, it remains robust. Just trying to understand whether or not, any of these relating Boeing allegations would have any impact on your sales plan as you see it thus far? And just maybe what your expectations are for the plan for the year?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [27]
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Well, thanks for the comment. Thanks for the question. And the sales pipeline is pretty good right now. Actually, the level of customer interest is growing and it started driving better performance of the aircraft. The 2 airlines that are currently operating, the aircrafts are very pleased, and we're actually beating expectation from a performance and reliability standpoint. And since it's a small community, I mean, everybody understand that. So this is very good. So I'm very optimistic about what we will be able to do between now and the rest of the year in terms of adding orders to the backlog. We have a good solid backlog right now. On your question regarding Boeing, I don't think this will have an impact because in the end there's no other aircraft in the 100-seater class segment. It is the best aircraft and when airlines do need an aircraft in that class, the C Series is on top of the pile here. So we feel good about where we are and optimistic about where this thing is going.
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Operator [28]
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Our following question is from Seth Seifman from JPMorgan.
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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [29]
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In the filing that Triumph put out on Friday, they talked about potentially declaring the structured business insolvent within 90 days. So just wondering if you could talk about what contingency plans you have if that were to happen. And specifically, how you see your position relative to other customers or structures? Do you see yourself on an equal footing with all the other customers of structures as a -- with regard to what would happen in the event of a structured bankruptcy?
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John Di Bert, Bombardier Inc. - CFO and SVP [30]
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Seth, with respect to Triumph, we won't speculate on their filing or with respect to our own internal plans here. Obviously, we're focused on the program. So we'll make the right decisions both with Triumph and on our own to protect that program. But I will leave it there for this morning and prefer not to have too many conversations on a public forum with respect to that conversation with Triumph. With respect to other customers, I think, you know that we all have our best interest here to work together and look for solution and hope that they can find a successful path through what they're working on. And from that point of view, the aerospace supply chain, all has the same interest, and I think we'll be working collectively to make sure that's a possibility.
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Operator [31]
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Our following question is from Turan Quettawala from Scotiabank.
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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [32]
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I guess, I'll maybe try the free cash flow, again, here John. If I look at the $1.2 billion burn, I guess, in the first half, and then you have $340 million of inventory already, sort of I guess, that comes out maybe potentially in the second half. Is it fair to assume that you're tracking towards the low end of your guidance here for the full year?
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John Di Bert, Bombardier Inc. - CFO and SVP [33]
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I mean, Turan, it's too early to call that. I think, we made a plan. The plan is right now on track and we'll be in a better position in the second half of the year as we have, to give you guys color if we see something to the better side of this. But right now for me, we put out $750 million to $1 billion. We've got a couple of programs here. Let's not forget, this is not just steady state. We have C Series ramp up. We want to make sure, we're going to be well positioned for '18 as well and start to get the higher -- heart of that delivery schedule. Delta coming on as well. We'll also want to make sure that we pace the 7000 properly that we are continuing to maintain our schedule and make the right investments. Don't forget, we're already investing in production hardware for the first deliveries on the 7000 the back end of next year. So all of that, still suggests to me that we are tracking our plan properly. We've build the right liquidity. We have the confidence of our banks and now we're operating the business in a very disciplined way. So $750 million to $1 billion stands and more color as we get into the second half of the year.
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Operator [34]
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Our following question is from Stephen Trent from Citi.
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Stephen Trent, Citigroup Inc, Research Division - Director [35]
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Just a quick one for me. When I think about the Transportation segment, can you -- you mentioned that you're pursuing potentially a large number of projects and I appreciate that you can't mention specific campaigns, but kind of from a geographic perspective, can you at least sort of give us a heat map as to where we see -- where you see strong potential? In the past there have been projects mentioned in India and some other countries and just wanted to get your take on that?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [36]
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Our train business is pretty global as you know. So we have a strong footprint obviously in Europe. So there's many ongoing activities in Europe. We also have a very strong center of gravity in China, and we've been winning in China as well. I mean, we're really part of the fabric in the Chinese market. So this is good and the region is also good for us. So the Asia Pac region is another place where we're doing well. We are competing everywhere else around the world, and one of the things that we've decided to take is a partnership approach. So when it comes to countries like India, where there's very large projects, we often team up with strong players to have like more attractive proposal for customers. So I would say, overall, pretty much everywhere around the world. And I'm not mentioning North America, but I mean, North America is also a place, where we have like many ongoing projects whether they're in the U.S. or here in Canada. So I would say pretty much around the globe.
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Operator [37]
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Our following question is from Benoit Poirier from Desjardins Capital Markets.
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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [38]
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In terms of marketing campaign for CRJ and turboprop could you mention more color about the marketing campaigns? And whether there's a risk of lowering furthermore to production rate next year, assuming there's no sizable orders in the second half?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [39]
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Okay. Benoit, on the -- starting with the prop, the prop is interesting because right now, this is the one that we see softness in 2018, and we have already adjusted our production rate to the right level. It's even to a conservative level for 2018. At the same time, I mean, it's the one where we also have a very large number of ongoing activities like there's many potential, there's actually term campaigns and potential orders on the prop side. So we are monitoring this, and we're paying attention to that. On the CRJ, the team is actively working on this. And we are optimistic. We have a new interior design on the CRJ that is very attractive, and we are in discussion right now with key customers to see how we can get orders and keep growing this and keep maintaining this ongoing. So I feel good about the CRJ and optimistic that we'll be able to secure orders more in the short term here.
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Operator [40]
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Our following question is from David Tyerman from Cormark Securities.
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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [41]
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My question's on the business jet environment. I was wondering if you could give us your view on prospects for -- by the various major aircraft groups that you sell in that area.
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [42]
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David, I can take a shot and then, John can add if he wants to. I would say, overall, I think that what we're seeing right now is a pretty stable market. And the market has been soft now for a few years. As soft -- but I mean, at least we believe that we have the rates and our various product lines at the right place. So as we've said for the past like 2 years, we really wanted to preserve the value of our product portfolio and make sure that we're protecting the residual value of aircraft moving forward. So at the bottom end on the Lear, clearly was much softer than everywhere else. Having said that, I mean, we did some adjustment to their rates and right now, we're tracking, and we had a pretty good first quarter. And the middle of the range here, the Challenger 350, 650, and we're still doing extremely well on the 350. I mean, its best-in-class aircraft. I mean, we had solid deliveries and still solid orders on that product line. So this is going well. And same thing on the Global, maybe was a little bit softer in the first quarter, but still going extremely well and selling well in the marketplace, and we're pretty much in line with the forecast for the full year. So I would say, overall, we have made some significant adjustments over the past 2 years. We feel good about where we are. We think that we are at the right level in terms of what we are producing. And we are starting to be a little bit more optimistic about what the market is going to be going over the next like 2, 3 years.
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Operator [43]
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Our following question is from Konark Gupta from Macquarie.
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Konark Gupta, Macquarie Research - Analyst [44]
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My only question would be on the C Series, Alain. Why are we not seeing new C Series orders than customer interest is growing? And the aircraft is performing very well in the current fleet. Does it have something to do with Pratt engine issues on A320neo? Or is it high airline capacity or pricing or tough competitive environment? Like what's happening there in the C Series world that you're not seeing many orders right now?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [45]
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Yes. Konark, this is -- it's really timing that's -- there's nothing more to it. I mean, it's really related to customer readiness to move forward with the orders. You've seen a little bit of a soft market overall in the commercial aviation, commercial aircraft side. But having said that, I mean, it's not impacting the discussion we're having. The aircraft is good. I mean, it's -- it takes some time for the airlines to see how the best fit that new aircraft type within their fleet. This is a market, I mean, that's going -- I mean, this aircraft is going to be in the market for the next like 25, 30 years. So I know that people are looking for the next order. We have a strong backlog today, I've said that. I mean, we -- our backlog is solid and the pipeline is good. The aircraft is performing extremely well. So we'll announce when customers are ready to announce. But there's nothing major. I know you mentioned the engine situation and all that. But obviously, it comes up in the discussion, but so far, I mean, it has not been handicapped for potentially getting orders. And the other thing that is important to mention here is like the performance of the engine on the C Series has been very good. So it's an engine that has been designed for the C Series, so very well integrated, and we are not seeing the same type of issues that then you're seeing.
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Konark Gupta, Macquarie Research - Analyst [46]
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So can you confirm, Alain, that there has been no engine issue with C Series like what we saw in A320neo?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [47]
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No. I mean, we have -- the performance of the aircraft has been actually very good. I mean, there were some product upgrades that we will need to do in some part of the engine that are similar to what the Neos will have to do. But by and large, okay, we don't -- we have a very reliable engine on the C Series and so far the customers are relatively happy with that.
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Operator [48]
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Our following question is from Ron Epstein from Bank of America Merrill Lynch.
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Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [49]
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This is a follow-up from before. When we think about the airplane business, right, so C Series is going along pretty nice and we're getting in the flight test on the 7000. So 2 of the big projects are wrapping up. How do you think about what's next? Is it a bigger plane? Is it another bizjet? Is it different turboprop? I mean, where do you think to -- where from here?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [50]
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It's interesting question, Ron. And it feels good to get closer to that position of thinking about what we do next, but we're not done yet. So right now, it's a -- the focus first, was on getting the C Series certified in -service, performing well and ramping up. And that's what we're doing. And we have focused on the CS100 and 300. And we have shifted resources now on the flight testing and certification of the Global 7000, which is also a very large program for us. So it's working well. We have our engineering organization fully focused on that. And as you said, I mean, it will be phasing out towards now the end of 2018. So we are starting to think about what we do next because it's critical. We have a good engineering machine now, and we have learned a lot over the past few years, and we want to capture these learnings and build that into our next platform. So -- but it's -- I would say, it's early to tell, and I want to make sure that the organization stay focused now on the 7000. On the advanced engineering side, I mean, we're doing some work and when we're ready to make some announcement, we'll let you know.
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Patrick Ghoche, Bombardier Inc. - VP of IR [51]
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Operator, we'll take our last question please.
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Operator [52]
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Our last question is from Noah Poponak from Goldman Sachs.
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Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [53]
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John, is it possible to quantify in millions of dollars each of the sort of major components of free cash flow being better than flat year-over-year. I know you've given the components of why it's a use, but I'm trying to better understand where you -- specifically, where you outperformed and by how much?
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John Di Bert, Bombardier Inc. - CFO and SVP [54]
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Okay. So you're going to do a math test here, but still -- help me on, Noah. So you're looking for, specifically, what's the analysis you're looking at here?
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Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [55]
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So I'm saying in the year-ago quarter, you -- the use was $760 million and in the current quarter, it's the $598 million. And so what makes up that $160 million variance versus the expectation to be flat?
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John Di Bert, Bombardier Inc. - CFO and SVP [56]
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Well, I'd say that that's mostly operational. I think, in the end, we have a better use of working capital. I mean, that's -- we've done a much better job with inventories and that's starting to show.
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Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [57]
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Okay. So that's what I was going is whether or not that was sustainable operational improvements versus the timing of something.
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John Di Bert, Bombardier Inc. - CFO and SVP [58]
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Well, no. Clearly, I think, it has a lot to do with it's -- I think, it's clearly sustainable. I would say that we -- when we did our 5-year plan, we also showed how 2017 cash flows drive to breakeven for '18. And you'll see that, as we manage CapEx through this peak cycle that will be a contributor to taking down '17 cash flows are improving them, I should say towards '18. We continue to invest in restructuring in 2017. That will start to go away in '18. It will be more neutral. So less of an outflow in that benefit. And so between those 2 items and the fact that we continue to grow earnings, I think, is where you have the road map for next year. So it is fundamentally structural better working capital management and the second half of the year, we'll have the sales growth and deliveries. So it's operational performance. It's disciplined and it's just having the rightsize production for the markets we're in.
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Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [59]
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Perfect. And if I might just squeeze in one more. Could you tell us how many C Series deliveries you have second quarter to date, both on a physical handing the airplane over to the customer basis and on your accounting basis?
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John Di Bert, Bombardier Inc. - CFO and SVP [60]
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Okay. So just -- because you ask me a question now that implies that I may tell you Q2 in exact deliveries, but I guess, what we are seeing is that Q1 first and foremost is, we had 3 deliveries to customers. One of those was revenue recognized, 2 of them were deferred because of the need to have steep approach for London City certified. That was a significant attribute of the aircraft. So those now because of the certification, are going to be Q2 revenue recognition. I expect a handful of aircraft delivered in the second quarter. So no specific number there, but I mean, it will be certainly, I think better than 5 deliveries -- new deliveries. And then, as we get into the second half Alain talked about it. We're going to be sort of looking at 20 plus.
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Operator [61]
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Thank you. We have...
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Patrick Ghoche, Bombardier Inc. - VP of IR [62]
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Operator that will conclude our call. Thank you very much. Thank you, everyone.
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John Di Bert, Bombardier Inc. - CFO and SVP [63]
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Thanks guys.
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Operator [64]
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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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