Q2 2017 Bombardier Inc Earnings Call
Jul 28, 2017 AM CDT
BBD.B.TO - Bombardier Inc
Q2 2017 Bombardier Inc Earnings Call
Jul 28, 2017 / 12:00PM GMT
==============================
Corporate Participants
==============================
* Alain M. Bellemare
Bombardier Inc. - CEO, President and Director
* John Di Bert
Bombardier Inc. - CFO and SVP
* Patrick Ghoche
Bombardier Inc. - VP of IR
==============================
Conference Call Participants
==============================
* Benoit Poirier
Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst
* Cameron Doerksen
National Bank Financial, Inc., Research Division - Analyst
* Fadi Chamoun
BMO Capital Markets Equity Research - MD and Analyst
* Kevin Chiang
CIBC World Markets Inc., Research Division - Analyst
* 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
* 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
==============================
Presentation
------------------------------
Operator [1]
------------------------------
Good morning, ladies and gentlemen, and welcome to the Bombardier Second 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.
------------------------------
Patrick Ghoche, Bombardier Inc. - VP of IR [2]
------------------------------
Thank you. Good morning, everyone, and thank you for joining us for this review of our second 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 dollar 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 the second page 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 Chief Financial Officer, will then review our financial results for the second quarter ended June 30, 2017.
I would now like to turn over the discussion to Alain.
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [3]
------------------------------
Well, thank you, Patrick, and good morning, everyone, and thank you for joining us today. As you saw in our press release, we delivered a strong second quarter in line with our turnaround plan. Highlighting our performance in the quarter was margin expansion at Transportation and Business Aircraft, strong orders in our Rail business, cash flow performance in line with our plan and solid execution on our growth programs and on transforming our operations.
So good progress across the portfolio as we continue to transform our company and build earnings power. As we begin the second half of the year, we are well-positioned to achieve our full year guidance, and we see a clear path to the upper half of our EBIT guidance. Before John goes through the Q2 financial results, let me provide a few highlights from the business units, starting with Bombardier Transportation, which had another strong quarter. Our Rail business continues to be both a top line and bottom line growth story. For the second consecutive quarter, BT delivered organic revenue growth and improved margins. We also delivered solid execution on key projects and grew the size and quality of our backlog. So a very good quarter demonstrating the early benefits of our transformation, with more to come. BT operational transformation is really gaining traction. We announced major restructuring agreements in Germany, Switzerland and Belgium. We remain focused on workforce optimization at our new centers of excellence, leveraging our global footprint and executing our product-centered position strategy.
In support of our revenue growth targets, BT delivered a strong book-to-bill of 1.4 in the quarter. And its backlog grew to over $32 billion. And we expect this growth to continue as we actively pursue a number of large opportunities in the second half of the year.
Turning now to Business Aircraft, which also delivered strong margin performance. This was driven by a favorable product mix and by our transformation plan. Given BBA's strong performance in the first half of the year, we now expect full year Business Aircraft margins to be above our original guidance of 7.5%. With an industry-leading 36 deliveries in the quarter, we are on track to achieve our full year guidance of 135 aircraft. Overall, the business jet market is performing as expected, with signs of stabilization. Business jet utilization is up both in the U.S. and also in Europe. Market sentiment for our business aircraft is also up. And preowned inventory continues to improve. So of course, as we said before, our focus on productivity will allow BBA to perform in any market environment and deliver strong earnings growth as the market recovers.
Flight testing on the Global 7000 is going extremely well. Our 3 flight test vehicles have logged more than 500 hours and the aircraft continues to show a very high level of maturity. It is performing well in hot and cold weather testing, as well as in icing conditions and during long-range Polar operations. We have significantly expanded the flight test envelope, reaching maximum altitude and speed, while demonstrating the aircraft's outstanding performance capabilities. The 2 remaining flight test vehicles are in advanced stages of preflight preparation. And production aircraft are starting to move through the assembly line. So the program is on track for EIS in the second half of 2018, in support of our growth targets.
At Commercial Aircraft, we recently celebrated 1 year of service for the C Series. During its first year in service, the C Series performance has been just outstanding. It has delivered better-than-expected results in all key areas: Fuel burn, range, operating costs and reliability. We expect to announce significant improvements to the performance specifications for both C Series models in the third quarter. This means better operating costs and value for airlines. Recent customer conversations, including at the Paris Air Show, confirm a growing interest in the aircraft. This comes from more and more people being exposed to the C Series' in-service performance, the very positive passenger feedback and the aircraft's unmatched capabilities, as demonstrated by the recent London City Airport certification. There are now 16 C Series flying throughout Europe, with one launch customers Swiss -- with our launch customers Swiss and Air Baltic. And over 1 million passengers have flown on over 12,000 flights.
Of course, the story for the rest of 2017 will be the acceleration of the C Series deliveries. As planned, the acceleration picks up in the second half of the year, and we remain on track to deliver around 30 aircraft as we work with our customers to finalize delivery schedules. So okay, I will stop here and conclude by saying we feel very good about where we are. We had a very strong first half of the year and our turnaround plan is in full motion and we are confident that we will be able to deliver on all of our commitments.
With that, I will turn it over to John to review the Q2 financial results.
------------------------------
John Di Bert, Bombardier Inc. - CFO and SVP [4]
------------------------------
Thank you, Alain. Good morning, everyone. As we reach the halfway point in the year, we continue to deliver on our plan to grow margins and manage free cash flow with discipline. In the second quarter, revenues across all business units increased over Q1, while we sustained early margin strength across BT and BBA.
We made progress on our site specialization strategy, reaching agreements with work councils in key European countries, giving us more confidence in achieving our 2020 Rail business goals. As always, free cash flow remains a priority. We delivered usage in line with Q1, as anticipated and as highlighted in our last earnings call. With another solid quarter, we are moving into the second half of the year confident in our execution, reiterating our overall guidance on revenues, EBIT and free cash flow. Let me summarize the second quarter numbers. Consolidated revenues totaled approximately $4.1 billion. This number includes close to $2 billion of BT revenues, growing 3.6% organically year-over-year. On the Aerospace side, volumes were consistent with market demand on all programs, while C Series started contributing modestly to top line with 6 deliveries. With year-to-date revenues of $7.7 billion, we continue to see full year revenues growing modestly over last year. On the earnings front, EBIT before special items reached $164 million or 4% of revenues. This is a 55% improvement over the same quarter in 2016. Profitability was driven to a large extent by BT's 8.2% margin and BBA's impressive 8.9% margin on planned lower volumes. Both units' margins benefited from favorable mix, but also showcased the effect of our improving cost structure.
Looking out to the full year. We see EBIT pointing towards the top half of the $530 million to $630 million guidance range on continued strength from BT and BBA. Consolidated free cash flow usage for the quarter came in at $570 million, consistent with expectations. Free cash flow usage was to a large degree in support of Global 7000 test program and its early working capital needs, as well as inventory investments in C Series production ramp-up. Improving cash flows for the balance of the year are expected to come from seasonally stronger patterns at BT and BBA and from accelerating C Series deliveries, mainly in Q4.
Free cash flow expectations for 2017 imply second half free cash flow generation ranging between $150 million and $400 million. On a quarterly basis, Q3 should improve modestly, while Q4 is expected to increase materially year-over-year, as C Series becomes a greater contributor to cash inflows.
Finally, adjusted EPS was $0.02 in the quarter, fueled by a onetime reversal of certain tax provisions. Excluding these tax benefits, EPS was breakeven for the quarter, improving over last year's $0.06 loss.
Let's now turn to a review of business units' individual performances. Starting with our Rail business. Transportation is in the early stages of delivering on its revenue growth targets, with top line revenues of $2 billion in the quarter and $3.9 billion year-to-date. The business is trending towards full year revenues of approximately $8.5 billion. As expected, growth in the second half of the year is driven by the ramp up of a handful of key projects, expecting to gradually contribute $0.5 billion in additional second half revenues. In addition, our full year revenue guidance is now supported by continued euro translation strength.
For the quarter, EBIT before special items was $161 million, increasing 30% year-over-year for the second consecutive quarter, representing a margin of 8.2%. In addition to more signaling revenues and positive project mix, we continue to see strong contributions from our Chinese JV.
With a strong first half producing 8.1% EBIT margin before special items, we are in a position to raise full year EBIT expectations for Transportation from 7.5% to 8%. This lift stems from improving project execution and transformation benefits, which are expected to offset the margin dilution from the handful of recovery projects ramping up through the year-end. As Alain mentioned, we remain focused on transformation at BT as we continue to reshape the business. In line with these actions, we recorded restructuring charges in the quarter of approximately $210 million comprised of severance payments of $180 million and $30 million of associated asset write-downs as we reorganized production facilities in line with our site specialization strategy.
This piece of our transformation represents the bulk of the $250 million to $300 million in restructuring expense expected company-wide for 2017.
In summary, BT continued to outperform, while executing on projects and securing future growth through a 1.4 book-to-bill.
Business Aircraft also continued its strong performance and execution, delivering 36 aircraft in the quarter. With 65 deliveries at the halfway point, we have shipped almost 50% of our full year target. Q2 deliveries included 3 Learjets, 18 Challengers and a peak of 15 Globals for 2017. Solid deliveries and favorable mix drove revenue up to $1.4 billion for the quarter, near the level recorded in Q2 last year, as Globals represented a greater share of our overall deliveries. With the year-to-date revenues of $2.4 billion, we continue to expect to deliver 135 aircraft for the full year and record approximately $5 billion in revenues. During the period, we recorded EBIT before special items of $123 million or 8.9%, representing a 220 basis point margin improvement versus a year ago. The positive delivery mix, combined with good performance from the preowned aircraft activities, compounded a benefit from ongoing transformation initiatives. Similar to BT, we now anticipate full year margins to reach 8%, as mix normalizes in the second half, up from the previous guidance at 7.5%.
Finally, backlog at quarter end continued to be industry leading at $14.7 billion, with the variation since March, mainly on the account of stronger Global deliveries. We are seeing the right order activity on the right products, with production aligned to the markets.
Moving to Commercial Aircraft. C Series production moved higher in Q2, with a total of 6 aircraft recorded in revenues, including 2 deliveries from Q1 recognized in Q2 revenues. As expected, the second half of the year, we'll see growing revenues with deliveries expected to double sequentially in each of Q3 and Q4.
With the pace of gradually accelerated -- with the pace gradually accelerating, we anticipate 2017 total deliveries to reach approximately 30 aircraft, within the original delivery range. On our established programs, 7 CRJs and 7 Q400s were delivered in the quarter, reaching a total of 28 deliveries year-to-date, tracking ahead of our full year target of 50 deliveries. Revenues for BCA totaled $640 million, driven lower versus last year as we managed CRJ and Q400 production to current markets. Most recently, order activity on the Q400 helped rebuild the backlog and provides further visibility into our planning process for 2018 and beyond.
For the full year, we are maintaining BCA revenue guidance at $2.9 billion. After 6 months, BCA EBIT loss is $141 million related to the production ramp up of the C Series. Combined with approximately $40 million of year-to-date losses from intercompany NRV on C Series reported in eliminations, we remain on track to full year loss of approximately $400 million for the unit. We expect this NRV loss to migrate to BCA as inventory is shipped from Aerostructures over the next 2 quarters.
So bottom line is that we're on track to achieve full year EBIT in line with 2016, but with substantially more volume, pointing to the gradual progress on the C Series production learning curve.
Now looking at Aerostructures. Revenues for the quarter totaled $426 million, stable over last year. In this quarter, we are seeing intercompany revenue increasing to 75%, as Global 7000 production ramp-up is added to the already growing C Series volumes. On the profitability side, second quarter EBIT before special items was 7.7%, improving year-over-year and growing 60 basis points over the previous quarter. With volumes increasing and as we experience step changes to production curve during the rest of the year, we expect full year margins around 8%. This change from 8.5% is marginal in dollar terms, representing less than $10 million of internal profits.
Now to summarize the outlook for the year. We have a clear path to this year's revenue, EBIT and free cash flow objectives. On revenues, we expect Transportation to drive top line improvement in Q3, while BBA resets in line with more normal aircraft mix. Then more intense growth is expected in the fourth quarter as all business segments contribute. This will be driven by: First, BT's gradual delivery ramp up of key projects; second, C Series deliveries, heavily skewed to Q4; and third, BBA following typical seasonal patterns. On the EBIT front, we now have 8% targets across BT, BBA and Aerostructures. As mix at BBA normalizes and BCA catches up to the $400 million loss for the year, we expect the quarterly pattern to be somewhat different. The second half should be roughly in line with the first 6 months at $300 million cumulative EBIT, with Q4 stronger than Q3. As I mentioned in my introduction, free cash flow will be heavily tilted towards the fourth quarter. We expect continued investments in growth programs, including higher CapEx to build Global 7000 production capabilities and still limited cash inflows from C Series deliveries to drive Q3 free cash flow usage higher relative to last year.
To conclude, we are delivering on our plan. We are seeing clear progress in our margins, driving our competitiveness and building earning power as we capture growth from new programs and from executing on our industry-leading backlogs. In the near term, we remain focused on creating long-term value by executing on those program milestones and driving transformation while ensuring we hit our free cash flow target.
With that, operator, we are ready for our first question.
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
(Operator Instructions) Our first question is from Fadi Chamoun from BMO Capital Markets.
------------------------------
Fadi Chamoun, BMO Capital Markets Equity Research - MD and Analyst [2]
------------------------------
So my first question is, sort of, how do you feel about Pratt's sort of pacing, with delivery expectations that you just lined up for the second half of the year, visibility into that sort of delivery pacing from Pratt on the engine side?
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [3]
------------------------------
Fadi, I think that so far, Pratt has been on the revised schedule that they have provided us last year. So we feel confident to be able to deliver roughly 30 aircraft as predicted. So we're tracking. Obviously, the back half is more loaded than the first half and that was by design, based largely on the Pratt engine delivery.
------------------------------
Fadi Chamoun, BMO Capital Markets Equity Research - MD and Analyst [4]
------------------------------
Okay. And just one more quick one. On the foreign exchange side, so we've seen sort of the Canadian dollar make a very quick move in the last few months. Can you, John, maybe sort of walk us through what kind of FX assumption you have in your long-term plan? And how does this sort of impact sort of your 12, 18 months, maybe, outlook?
------------------------------
John Di Bert, Bombardier Inc. - CFO and SVP [5]
------------------------------
Sure. Okay, Fadi. So we have a hedging program and the hedging program now covers us through the remainder of this year, largely next year highly covered as well. In terms of just assumptions, how we view our 5-year plan, we have an $0.80 assumption. And that's been the case now since we originally issued that plan in '15. So we maintain that $0.80 assumption for the Canadian dollar. We'll watch it as we go here. And we continue to obviously buy positions on a rolling basis going forward. So we'll have enough foresight as to FX on any implications to the plan. But for now, we don't consider it to be a big variant in the short term or medium term.
------------------------------
Operator [6]
------------------------------
A following question is from Ronald Epstein from Bank of America Merrill Lynch.
------------------------------
Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [7]
------------------------------
Strategically, when you think about Learjet, right, what, you delivered 2 airplanes in the quarter?
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [8]
------------------------------
We have -- yes, yes. No, go ahead. Sorry, Ron.
------------------------------
Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [9]
------------------------------
;
Yes, that's got to be costing you guys a fortune. I mean, how do you think about Lear going forward?
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [10]
------------------------------
Well, I think that we've been consistent on that one. I mean, we took the rate down because the market was soft. It is costing us a little bit of money on the OE front. But there is a very large installed base out there. So we've got hundreds of Lear flying, and we've increased focus on aftermarket and trading new value proposition to our customers who have the existing Lears. So we keep on driving sales. The team is doing a good job and actually, we've seen a little bit of a pickup in the past few months. So we'll see where it goes. We've always said that we like the brand. It's a great aircraft. It's got like way more value than its competitors. We just need to make sure that we can increase volume over time. That's where we are. And as you know, I mean, business aircraft market is a little bit soft, so it's -- we decided not to make a decision now on the...
------------------------------
Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [11]
------------------------------
Okay. Yes, yes. Fair enough. Another Aerospace question if I may. When we think about the relationship between Bombardier Aerospace and COMAC/AVIC. Now there was an agreement signed years ago, previous management team. How do we think about it today? I mean, what is the relationship between you guys and, call it, COMAC?
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [12]
------------------------------
Well, I mean, relationship with both is very good. I mean, obviously, especially AVIC, they are a very significant supplier on the C Series. I mean, they produce the bulk of the fuselage. So very tight on that side. And we've been having good discussion with COMAC for many years and some potential collaboration. So we like where we are in our partnership with especially AVIC.
------------------------------
Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [13]
------------------------------
Okay. And then maybe one Transportation question. When we look out over, let's call it the next, say 6 to 9 months, what you -- be it that we're always looking at aviation, are there any big competitions, anything we can kind of keep an eye on, as stuff coming down the road in terms of a pipeline of potential new wins? Or just if you could walk through that.
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [14]
------------------------------
This is the beauty of the Rail business, is like you don't have just one major project popping up once in a while, is you have like dozens of them always on the go. So we have hundreds of projects that we work on at any one point in time, and we have like dozens of projects that are like in the sales pipeline. So it's a very good, steady, growing business. I like to say that it's not recession-proof, but it's close to, okay, because it's infrastructure-driven. So even in tough times, governments, cities keep investing in urban transportation. So in that sense, I think that you need to look at the Rail business as a steady growth, driven obviously, by key projects and that's what we do. So we have a good pipeline of projects that we work on. We had a very good first half in terms of backlog, increasing the backlog, and we feel confident about the second half.
------------------------------
Operator [15]
------------------------------
Our following question is from Seth Seifman from JPMorgan.
------------------------------
Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [16]
------------------------------
John, I wonder if you can talk a little bit about, it looks like the investment level on the Globals really stepped up to kind of a new level here, close to $400 million, I think, of cash investment in the quarter. And maybe if you could talk about maybe what's happening in the program that's driving that right now and how we think about that evolving over the next couple of quarters here?
------------------------------
John Di Bert, Bombardier Inc. - CFO and SVP [17]
------------------------------
Yes, so I think the first, to the point answer, that we kind of gave indication we spend about $1 billion in the year, and I think you know that's more or less where we're going to be. So it stays right on track. We like the progress we're making. So the aircraft is doing really, really well. Alain made some comments before about we're into some significant testing. And we have 3 aircraft in service. We're building the fourth and fifth. So obviously, that's attracting tooling -- or investment. And we're also ramping up production units. So there is some usage there with respect to cash on building up production units for the back end of '18. I think we're into the fourth unit now, with inventory components coming in on the line. So I would just say that right now, we continue to track our plan. Very, very good progress with respect to performance. It's doing really, really well in testing. It's going to be the best aircraft in the industry, period. So for us right now, it's managing within our cash flows, and we feel good about the continued progress. Rest of the year, like I said, you look at and maybe a little tick down in Q3, Q4 with respect to spend, but we'll still have a high level this year.
------------------------------
Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [18]
------------------------------
Great. Great. And then maybe a quick follow-up on the same topic. You noted a settlement in the MD&A with the supplier, presumably on the Global. Is that issue pretty much done as far as you're concerned in terms of your getting the shipset content that you feel you need right now? And the way that things are going in their factory is pretty much consistent with what you need now going forward?
------------------------------
John Di Bert, Bombardier Inc. - CFO and SVP [19]
------------------------------
Yes, I think the really positive news here is that we've been working with them very closely over the last year, 1.5 years and came to just a reshaping of the agreement that I think works for everybody. We're working very well together. Honestly, they're very excited about the program. We are very excited about the program. We, at this point in time, it's all systems go towards entry -- certification, entry into service, and we have a very good relationship.
------------------------------
Operator [20]
------------------------------
Our following question is from Noah Poponak from Goldman Sachs.
------------------------------
Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [21]
------------------------------
Maybe staying on business jet, on the margins. You're basically operating to where your 2020 target is and that's in a relatively weak market, both volume and pricing, before the 7000, which I imagine should be a pretty high margin product. I'm assuming you still have cost and efficiency to achieve in the business, you're investing today. So any change in your thought about where that segment's margin can go over the long term?
------------------------------
John Di Bert, Bombardier Inc. - CFO and SVP [22]
------------------------------
Yes, first of all, you know what, you got it bang on. So I think the summary is right one. I think that we feel good about the performance. To be honest, you got to look also to the pretty good mix in Q2. So we had a raised content of Globals relative to overall deliveries and probably a peak for '17 in terms of number of Globals that are going to delivered in that next quarter. So that does help, obviously. But the other thing that -- we talked often at the beginning of this process, I mean, 18, 24 months ago, about reshaping the business. We've done a good job with respect to the overall sales and commission structure. We've done a good job with respect to preowned aircraft. And so those have been now staples of continuing to deliver margin. And when you looked at it, as you said, coming off almost $2 billion of sales in this tough market, we're fully aligned and we're producing better margins. So all of it is a strong positive. I would say that a grain of salt on Q2 with the really high margin because of a bit of a content mix. When you look longer term, 7000 will come on in the back end '18. I expect that '19 will then start some significant production; '20 may still have a little bit of, in terms of long-term margins on the 7000, won't be full rate yet. I think that will come more in '21 and '22. But we said 8% to 10%. We still are holding that for the 2020 plan. I think it's the right number. It gives us the right range. We're at the bottom end of that range on a consistent basis now. And then as you get past 2020, I think there's more runway. So we keep going, and we'll be looking for double digits and better as we get into those years, but it's worthy now to have that conversation.
------------------------------
Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [23]
------------------------------
Okay, that's really helpful, John. And just as a follow-up to that. So when the 7000 comes on end of '18 and as you're ramping '19, is that dilutive to the segment margin initially, just because it's really low volume and you're early in the learning curve? Or can it actually be kind of immediately accretive, just because presumably, the run rate margin of that airplane is much higher than where the segment is?
------------------------------
John Di Bert, Bombardier Inc. - CFO and SVP [24]
------------------------------
Yes, I still think that when you look overall '19, '20, you still have a little bit of dilution, I think, you get in the margin. That's the way we look at the plan. And if there's any opportunity to make that better, we will. But I think now realistically, you'd still get a bit of drag, which is why we said 8% to 10%, although we have ambitions probably in the longer term to do better and close gaps with competitors. But ultimately, you're probably going to need '21, '22 deliveries and kind of maturity and steady volumes to be able to drive the full potential of the margin.
------------------------------
Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]
------------------------------
Great. And then just one more for me on Transportation. Any color you can give us on how the sub-5% stuff in the business flowed through in the quarter and how it paces from here, because, similarly, there, the margins keep coming in better and now the guidance assumes it doesn't really change in the back half? So I'm just wondering, if you're achieving that while flowing those things through, the sort of tougher contracts through, or if we need to expect those to come on later in time?
------------------------------
John Di Bert, Bombardier Inc. - CFO and SVP [26]
------------------------------
Yes, so again, well said, because it's exactly what's happening, is we expect, if you look at the revenues, they'll have to kick up in the second half of the year. And we kind of estimate about $0.5 billion of acceleration. Don't forget, again, when we go back 18 months, we talked about making sure that we delivered and delighted our customers. So we've invested in projects to make sure that we final design. We had some large framework agreements that needed some attention. We made investments there. And now we're in the stage where we're building up hardware so that deliveries will start to accelerate in the second half on those big projects, which include some of the drag projects we discussed with respect to margin. So second half, if you think about accelerating revenues and about $0.5 billion of that coming from the sub-5%, that's going to be a bit of a pushback. So what we like is that the business is performing well enough that we can bring up guidance to 8%. But we can also manage the increase in volume from those large framework agreements. I think that will still be true through '18. So we'll -- when we talk guidance next year, we'll give you some color there. But what's positive is that we're at 8% now and the business is still improving. We did announce some restructuring in the quarter. That's again, bang on with the plan. We gave guidance for the full year, 250 to 300. Most of it was going to come from trains, and we've largely executed that in first half. So that will be good news for probably '19 and beyond.
------------------------------
Operator [27]
------------------------------
Our following question is from Robert Spingarn from Crédit Suisse.
------------------------------
Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [28]
------------------------------
I have 2 things and they're unrelated. So I'll just throw them both out there, maybe you can take them in order. Still on biz jet, your primary competitor at the global level saw a decent demand in the quarter. And interestingly for -- while they've got the 500, 600 coming, also apparently solid demand for the 550. So I was wondering if you could speak to the demand environment for the 6000 and how that's doing right now? That's question one. Question two is on BT and your long-stated interest in participating in whatever consolidation might happen in that market? And while I know you can't comment today on some of the deal speculation that's been out there in the news, but I was wondering if you could comment on how you might view consolidation that excludes Bombardier? In other words, if 2 other competitors were to get together, how would you view that development?
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [29]
------------------------------
Yes, let me start with the second one. I think that we've been super consistent, since I joined the organization, saying that we will be watching the industry consolidation, largely driven by China, by CRRC. And that we would take a proactive approach in -- with our strategic options. And that's what we've been doing, and we keep looking at this. Now whether we are part of it, like 1 player or 2 players, as you say, I don't know if it matters that much, because we have a plan, stand-alone plan, that is rock solid right now, and we're executing on this. At the same time, we are proactive and we're looking at options and opportunities, and we will do what is right for the business. So on your first question, the 5000, 6000 are actually doing much better than the 550, I mean, just to be clear. I mean, that's where we have had like very solid sales. And we had good, solid market leadership. If you look at the residual value of aircraft, you will see that the 6000 is the only one going up slightly right now, while the other one are coming down. So we feel very good about what we've done in terms of repositioning volume on the 5000, 6000 to preserve value for our customers. And when it comes to your comment on the 650, it's the only very ultra-large cabin aircraft out there today. But as John said, when our Global 7 comes into the market, it will be, by a long shot, the best business aircraft in the world. We have a solid backlog. The flight test program is going extremely well, and we are very confident about the future of the Global 7000 moving forward. So all in all, we have done -- we took some very tough actions, as John just mentioned, in Business Aircraft. We have reset the base. We have a much lower cost base. We have the right production volume, and we're focused on delivering value to customers by preserving the residual value of the aircraft moving forward. So all in all, we feel good about what we've done, where we are and what is in front of us.
------------------------------
Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [30]
------------------------------
Alain, I just want to clarify part of your answer to the first question if I may. But you mentioned Asia and China and I just want to make sure I interpret this right. Does that mean that it would not affect your strategy if the other 2 European players were to get together?
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [31]
------------------------------
No, I think that by and large, we have multiple options that we're pursuing. We are a very large player in China. We have close to 6,000 people on the ground in China. We're the largest Western rail manufacturer in China, so we're part of their fabric there. We've committed to doing projects with them. I mean, that was announced last year, outside of China. So we've got strong relationship. Having said that, my comment was that they have consolidated their rail business under one significant company, which is called CRRC. We are watching this. And as a result of this, we have been looking at what are the real strategic option to make our Rail business strong moving forward from a scale standpoint, from an efficiency standpoint, from a technology standpoint. So we feel that we have multiple options in front of us and we will continue to pursue them.
------------------------------
Operator [32]
------------------------------
Our following question is from Kevin Chiang from CIBC.
------------------------------
Kevin Chiang, CIBC World Markets Inc., Research Division - Analyst [33]
------------------------------
Just a follow-up on, I guess, the consolidation in Transportation. When you look back over the past year or so, have you seen the competitive environment change at all to increase the urgency around consolidation? Has CRCC or CRRC become more aggressive in the marketplace? Any comments there would be helpful.
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [34]
------------------------------
Yes, I think that there is clearly a change in the competitive landscape. I think that everybody know that. I mean, it's well known that CRRC has become a very strong player, not just in China, within China, but also outside of China. Having said that, we do have the best product offering in the industry today. We have the best technology, market access. We're growing the backlog as we continue to win. And we have like -- we believe that we have a very good, solid Transportation business. And that is the reason why I just said that we feel good about where we are. We have multiple options in front of us and we will do what is right to keep on growing the great franchise that we have.
------------------------------
Kevin Chiang, CIBC World Markets Inc., Research Division - Analyst [35]
------------------------------
That's helpful. And then just secondly, this is a second year where you've provided a positive earnings guidance update. And I'm just wondering when you look at the restructuring that you have, do you feel this is coming in faster than originally expected? Or maybe the potential -- the overall potential cost savings are maybe bigger than you originally expected? Is that playing a role here when you look at your medium-term earnings expectations?
------------------------------
John Di Bert, Bombardier Inc. - CFO and SVP [36]
------------------------------
Yes, you know what, Kevin, I would say first and foremost, we built a 5-year plan. It was a turnaround plan. It had 3 very intense years, and we described the phases of derisking and then rebuilding earnings and cash flow. And then eventually, we're taking advantage of the top line growth and leveraging the business. And that plan is largely intact, and we're pacing it very well. But I think at the same time, there was many moving parts, and we've been executing on all fronts. So I just think that it's a balanced view here, right? We knew the job we had to do, and we have been focused on executing it. And we've also been very responsive and agile in a changing market. So my -- the comment of are they coming in faster or is it better than, I think it's just straight on solid execution, that as we get confidence, we transfer that confidence to you through just our commentary and our adjusted -- or changes in guidance. But fundamentally, the original plan is the one that we're tracking.
------------------------------
Operator [37]
------------------------------
Our following question is from Stephen Trent from Citi.
------------------------------
Stephen Trent, Citigroup Inc, Research Division - Director [38]
------------------------------
Just a quick one for me. Certainly, as you look at your 5-year plan and you continue to execute well, as we move to 2020, how are you thinking about potential R&D in the Commercial Aircraft segment, looking at programs like the Q400? Any sort of long-term thoughts as to what you might be thinking about in that subsegment?
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [39]
------------------------------
Yes, thanks for the question. As we've said, we have in our 5-year plan a placeholder for future investment in Aerospace in the 2019, 2020 time frame, post completion of the Global 7000. We have not make any decision at this time. We are looking at what our competitors are doing; what are the customer asking for. And then we'll decide. The good news is we have a bit of time. I mean, we have contingencies in place and then we will do the proper capital allocation moving forward, based on the business need. So that's kind of where we are right now. We have very strong product development engineering organization. We have learned a ton over the past few years. If you look at the performance of the C Series in service, it's extremely good. So I mean, all these learnings are now moving onto the Global 7000, which is really helping us in a major way. So we want to also make sure that we protect this moving forward and that we retain our engineering talent and the learnings that we have built over the past few years. So right now, we have roughly about $1 billion over 2 years that is unallocated. And we are in no rush to make a decision. We will do, as I said, proper capital allocation moving forward.
------------------------------
Operator [40]
------------------------------
Our following question is from Benoit Poirier from Desjardins Capital Markets.
------------------------------
Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [41]
------------------------------
I was wondering if you could provide color about the -- an update on the current marketing campaigns for Commercial Aircraft? So not only for the C Series, but also if you could touch about the Qs and also the CRJs, especially in light of the Boeing petition?
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [42]
------------------------------
Okay, thank you, Benoit. I would say right now, the sales pipeline is pretty good. There's a good level of activity on the C Series. On the Q, as you saw at the Paris Air Show, we had some pretty good announcement there. So I mean, the backlog on the Q is actually growing nicely. We do have some ongoing activities, current discussion on the CRJ. So overall, I think that the team is working pretty hard, and we have a few opportunities that we're pursuing aggressively. So I think that's kind of it for the Commercial Aircraft as we speak. Your question, when it relates to the Boeing petition, we find this very disappointing, that Boeing would take an action like that. I mean, the facts are pretty simple. I mean, Boeing did not even compete at Delta. So there's really no harm and no harm to the aerospace industry. The C Series got a very strong U.S. content on top of this. So obviously, I mean, we are working the process with DOC and ITC and hopefully, I mean, we'll see the right outcome out of this process.
------------------------------
Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [43]
------------------------------
Okay. Maybe very quickly for John. Just in terms of CapEx for the year, how should we be thinking? And also, whether you feel -- where do you feel about the free cash flow range for the year? Whether you could move more toward the bottom, or the top end of the range?
------------------------------
John Di Bert, Bombardier Inc. - CFO and SVP [44]
------------------------------
Yes, so I'd say for CapEx, we had indicated, I think, about 1.4, I think that's the range. You may see a little bit more than that. We'll try to continue to push development at the 7000. So I'd say it's within that range, 1.4, 1.5, no big changes there. And then, with respect to cash flow, I think right now, we're just being very mindful. I mean, we're trying to manage the ramp-up of both the Global and the C Series effectively here. The train business is starting to deliver hardware big in the second half and then through next year in terms of trains and service. So that's where we're just driving execution and operations. My expectation, $750 million to $1 billion still stands. And I think at this point in time, we have the plan to get there. But we'll give you guys more color as we get into -- later into the second half year and we move product and inventory.
------------------------------
Operator [45]
------------------------------
Our following question is from Cameron Doerksen from National Bank Financial.
------------------------------
Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [46]
------------------------------
Just a quick question for me on Transportation. You talked about M&A a little bit earlier. And then I know you don't want to comment on specific rumors that are out there. But I'm just wondering if you can sort of confirm that your goal in any potential M&A, especially with regards to maybe creating joint ventures, would be to essentially maintain the cash flows that you're generating from the current business?
------------------------------
John Di Bert, Bombardier Inc. - CFO and SVP [47]
------------------------------
Well, I think, I mean, it goes without saying that the broader question than that is that we are very focused on cash flow and continuing to create opportunities for us to generate cash, and then as well, over time, to leverage the business. So I would say that just on a general basis, whether that be M&A related or otherwise, that, that is one of the key objectives we have. And so it will be part of all strategic decisions, but no more comment than that, I'd say.
------------------------------
Operator [48]
------------------------------
Our following question is from Turan Quettawala from Scotiabank.
------------------------------
Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [49]
------------------------------
I guess, maybe I'll try the M&A question once again as well. Do you think that from a European standpoint, there is -- within the governments, there is any -- would there be any major issues if there were sort of be a European consolidation on the Transportation side?
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [50]
------------------------------
Turan, again, I mean, we're not going to speculate on things like that. And I think the only thing that I would say is like is what I said. I will repeat what I said before. We understand that eventually, there will be industry consolidation. We have decided to take a proactive role into this. We have multiple options that we're looking at. And when the time come, I mean, we will enter the process that are required for approval. But I mean, at this stage, I mean, that would be pure speculation.
------------------------------
Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [51]
------------------------------
Okay, fair enough. And I guess, maybe I'll ask one more quickly on the turnaround as well. I know you talked to margin progression obviously, going in better than expected initially. I'm wondering if you can give us a bit of sense in terms of fundamentally what's happening on the ground. Like a lot of the turnaround was based on improvements in -- changes in the employee levels and in terms of process improvements and so on and so forth. Are you sort of progressing ahead of schedule there? Or are you progressing in line with schedule there, and some of this margin improvement is sort of more mix and other things that John alluded to earlier in the call?
------------------------------
John Di Bert, Bombardier Inc. - CFO and SVP [52]
------------------------------
Turan, no, I would say that when you look at it, we haven't, if you look -- and we made some very deliberate decisions in terms of sizing the top line. So that hasn't been the source of any margin improvement, right? We've kind of sized the business. But what we've done when we sized it is also forced the organization to make the right choices and look for operational efficiencies and productivity and that's come on very nicely. We also restructured some of the commercial practice we had. So when you look at BT and BBA, aftermarket revenues improving, how we handle our sales and commissions, also an improvement. So I think just overall, we had a very systematic set of steps that we wanted to go through at the very beginning. And I think the organization's responded very nicely and all of those transformation programs and initiatives that we had are delivering. And just there's something that is also happening in the background. You look at inventories at BBA. It's come down tremendously. And then, in a certain way, we've used that to reinvest and ramp up on the 7000 and the C Series and in the train business. That becomes a catalyst for sales growth, back end of this year, but then into '18 and '19. So it was a plan that had several dimensions and initiatives and that plan is executing. The restructuring of our organization or reshaping of our organization, I think, is on plan, on track and the margins reflect that.
------------------------------
Operator [53]
------------------------------
Our following question is from Konark Gupta from Macquarie Capital.
------------------------------
Konark Gupta, Macquarie Research - Analyst [54]
------------------------------
A couple of questions. First, on C Series. How have your discussions with U.S. customers changed, given the uncertainty around Boeing dispute and potential duties? I mean, I don't know if Boeing will win the case because they did not have a competing jet in the Delta campaign, but let's say they win. What would be your course of action: Defend or accept that restructured cost?
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [55]
------------------------------
Yes, I would say that the discussion are still ongoing. We have not been affected at all right now by this. People understand that these are long processes. And as to what will be the outcome, you understand that it's very difficult right now. We would be speculating. I will just say that we believe that the facts really support us. We have very strong support from the Canadian government and also from our customers, including Delta. And as responsible leaders, we always do contingency plan and this one is no exception. So if we ever need to take an alternative road, we will. For the time being, we stay focused on fighting this.
------------------------------
Konark Gupta, Macquarie Research - Analyst [56]
------------------------------
Okay. And then on business jet, Alain, how should we think about delivery mix in second half? And can you share the unit book-to-bill ratio for first half, because the dollar book-to-bill seems below one in first half.
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [57]
------------------------------
So the first, deliveries were good. The net orders was actually pretty good. We had a few cancellation of smaller aircraft. The second half is, we still have some work to do. But the team is hard at work and the level of activity is pretty good. So we feel good. It's a different market than it used to be. I think that it's important to -- I think that everybody understand, it's a market that has been soft for many, many years now. And it has not been a typical aerospace cycle for Business Aircraft. So what we're starting to see is stabilization, but what it means is you don't have the same strong backlog that push you or helps you in 12 to 18 months out. So that's something that we have to deal with. And I think that we've been dealing with it very successfully over the past like 18 to 24 months as we have adjusted production levels at the right place, in line with market demand. So I'm very careful when it comes to orders and order backlog. The fact is we have a fairly stable overall backlog of $14.7 billion. And if we look at the level of activities that we have, I feel good. So still a market that we keep an eye on, and we hope to see a little bit of a bounce back in 2018. So far, I would characterize it as the market is stabilizing.
------------------------------
John Di Bert, Bombardier Inc. - CFO and SVP [58]
------------------------------
Operator, we'll have time for one very quick last question, please.
------------------------------
Operator [59]
------------------------------
Our last question is from Walter Spracklin from RBC.
------------------------------
Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [60]
------------------------------
I know you've talked about the C Series and the order campaign and the successes and advances you've had there and talked very constructively, even though we didn't see any orders in the -- at the Air Show, that they are percolating. My question is whether the content of those discussions has shifted at all. I know at the beginning, you really sold the aircraft on the merits of its cost -- the cost savings, the fuel burn savings, the overall operating cost savings. And I'm hearing from airlines now, some of the appeal is in the applicability of the aircraft on routes that might be too thin for a 737, but outside of the range of a regional. And early indications from some of your initial customers are in fact putting those new aircraft not in replacement for the aircraft that they're subbing in for, but rather on longer, thinner routes. Can you talk a bit about whether that is changing the tone and if that's going to lead to orders among airlines where you might not have a replacement campaign in place, but rather one where strategically, they have to respond to some of the new markets that the customers that you have now are using on these, with these aircraft?
------------------------------
Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [61]
------------------------------
Walter, I wish I could. I have recorded your comments and I would just play them back again. Yes, you're bang on. This is exactly what is happening. I mean, it's the first time in 30 years that there's a clean sheet new aircraft in the 100- to 150-seat class. And that is also one of the reason why it's taking a little bit of time. And I mean, we're building this aircraft for the next 20 to 30 years. But now the airlines have to see how it fits in their fleet planning strategy. And this, what you said there is exactly what we are seeing. Now the people -- now that we have aircraft flying out there and now that the performance is not questioned any more for all the reasons that you've said, the cost is even better than expected. I mean, we're seeing even opportunities to do more in the second half of this year. I mean, the people are now looking at, okay, how does that fit in my network, how can I optimize my network by using this very unique aircraft in the 100- to 150-seat class, that got very good seat mile cost and very low trip cost? So this is exactly what is going on. And that is the reason why I'm saying the quality of discussions with airlines has really shifted. I mean, now we have very serious discussion. I mean, we're looking at fleet optimization, network optimization, like and how does the C Series fit within these airlines. And we have the highest level of activities that I've seen since I joined the company. So I think that your -- you've done a good summary and I think that you just nailed this.
------------------------------
Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [62]
------------------------------
Okay, that's very encouraging. And if I might just slip in a housekeeping for John. John, you did increase your guidance on a number of divisions in EBIT. No change on free cash flow. Can you talk about how that trickles down? Does it mean CapEx for the back half coming in a little bit higher than expected? Or is it just something that given the ranges that you did, you didn't feel the need to change your free cash flow guidance?
------------------------------
John Di Bert, Bombardier Inc. - CFO and SVP [63]
------------------------------
Yes, so I'd say one is we put the range out there because we need -- there's a little bit of play one way or the other. But the other one is I'd say that I go back to where we're in a certain sense, rebuilding ramp here. And that means that the timing of inventories and so on and so forth is the play in the second half, we've increased our investments in working capital for the train business, as we get ready to make big deliveries there. And we're investing in 7000s for early production. And then, we have a lot of C Series delivery in Q4. And so as a result, I think that range still applies because those are ramp-ups that were planned. They will take some working capital, but they will also lead to sales and revenue growth, back end of this year and into next year.
------------------------------
Operator [64]
------------------------------
Thank you. We have no further questions at this time. Back to you, Mr. Ghoche.
------------------------------
Patrick Ghoche, Bombardier Inc. - VP of IR [65]
------------------------------
Okay. Well, thank you very much. That concludes our call. Thank you.
------------------------------
Operator [66]
------------------------------
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------