Q3 2017 Bombardier Inc Earnings Call
Nov 02, 2017 AM CET
BBD.B.TO - Bombardier Inc
Q3 2017 Bombardier Inc Earnings Call
Nov 02, 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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* Cameron Doerksen
National Bank Financial, Inc., Research Division - Analyst
* David Bruce Tyerman
Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research
* Fadi Chamoun
BMO Capital Markets Equity Research - MD and Analyst
* Kevin Chiang
CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst
* Konark Gupta
Macquarie Research - 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
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen. And welcome to the Bombardier Third Quarter 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 of 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 third quarters 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 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 Chief Financial Officer, will then review our financial results for the third quarter ended September 30, 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 thanks, again for joining the call this morning. This was a very exciting quarter for Bombardier as we announced our game-changing C Series partnership with Airbus. This is a defining moment for Bombardier. Airbus joining the C Series program is a strong endorsement of the aircraft, the market potential and the opportunity for long-term value creation. The overwhelmingly customer interest and positive feedback we have received in the past few weeks gives us great confidence that we have the right partner and that we are on the right path to unlocking the full potential of the C Series. This is truly a win-win-win situation. Combining Airbus global reach and scale with our state-of-the-art aircraft will generate new value for our customers, our suppliers and shareholders.
As is in the press release, we announced an LOI to sell up to 61 C Series aircraft to a European customer. This includes 31 firm aircraft. We expect to finalize the agreement by the end of the year. This new order confirms the increasing confidence that airlines and leasing companies have in the C Series, and we expect to see accelerating sales momentum in the months ahead.
Beyond the C Series partnership announcement, this quarter marks 2 years since we launched our 5-year transformation plan and I'm very pleased with the progress made so far. The team is doing a remarkable job, and we are on track to achieve the goal we set out in November 2015. We have a clear line of sight to our 2018 cash flow breakeven objective. We have demonstrated our ability to reduce cost, improve productivity and grow margins. We have executed on our growth programs, and we are taking the big strategic steps necessary to unleash the full value of our portfolio.
As we close out 2017, we are very well-positioned to achieve our full year guidance. In fact, we now expect EBIT to be at the top end of our guidance range at $630 million or above. This is a 50% improvement over last year. On revenue and free cash flow, we anticipate ending the year within our guidance range even as we manage through the Pratt engine delivery challenges. As noted in our press release, we are taking down our C Series delivery forecast to 20 to 22 aircraft for 2017. This is the result of the ramp-up issues at Pratt and their need to divert production engines to support customer operations. This is a short-term issue that Pratt is actively addressing. Pratt is also providing us with cash advances to support our production ramp-up, and John will go through the details in just a few minutes.
A few words on the trade case pending in The United States. As you know, we believe that Boeing's petition is an unjustified attack on the airlines, the flying public and innovation in the aerospace industry, and we will continue to vigorously defend ourselves against this attack. In the meantime, our partnership with Airbus provides a solution for serving existing and future U.S. customers. And like Bombardier, Airbus has a long history of investing and creating jobs in The United States, establishing a C Series assembly line in Mobile, Alabama, further extends that commitment. To be clear, this will be a full and complete assembly line. And import duties simply do not apply to products manufactured in The United States. We expect to obtain all regulatory approvals for our Airbus partnership next year. In the meantime, we are working closely with Delta on a short-term solution to preserve our 2018 production ramp-up. We will provide more details when we give our 2018 guidance later this year.
Turning now to Business Aircraft, which again delivered solid performance. With several quarters of strong profitability, we are confident in full year margins of roughly 8% at Business Aircraft. We also remain on track to deliver 135 aircraft this year. By improving productivity and operational efficiency, we have demonstrated that Business Aircraft can perform in any market environment. And BBA is well positioned to deliver stronger earnings growth as the market recovers.
Overall, the business jet market is performing as expected. We see continuing signs of stabilization, including higher aircraft utilization and lower levels of preowned inventory. Flight testing on the Global 7000 continues to go extremely well. We now have 4 aircraft in flight testing, and they are demonstrating high levels of maturity and reliability. Entering to service remains on track for the second half of next year. The aircraft is sold out through 2021, and customer interest continues to grow as we approach CIS. Last month, we displayed flight test vehicle #4, with a fully-fitted interior cabin at NDAA. Feedback was just outstanding. Customers are clearly beginning to realize how game-changing the Global 7000 will be. This is simply the best aircraft out there, and there is no other aircraft like it. The Global 7000 combines unmatched range, speed and operating cost with an exceptional cabin, its size, comfort and performance make it a truly remarkable aircraft.
Another important growth driver at BBA is capturing additional aftermarket work from our large installed base of 4,700 aircraft out there in the field. Through the year, we have continued to expand both our service offerings and footprint. We recently added more interior capabilities at our Tucson facility and launched a new smart service program. This program allows us to better serve customers that are not currently enrolled in the Power-by-the-Hour programs. We will talk more about it when -- in the coming months and especially when we talk about our 2018 guidance.
Turning now to our train business, which is firing on all cylinders. BT continues to grow revenue, improve margins and increase the size and quality of its backlog. For the quarter, revenues were up 20% as we continue to execute on key projects. Orders year-to-date are $6.7 billion. This is 8% higher than the same period last year. BT's backlog now stands at $33 billion. This solid order book combined with a strong market outlook gives us clear visibility to achieving our $10 billion target by 2020.
We are confident that we have the scale, the technology and people to compete and win in the marketplace. And as the competitive landscape evolves, we will continue to assess opportunities to make our rail business even stronger. For now, Laurent and his team are focused on completing the transformation. This includes executing under a site specialization and product standardization strategies to reduce cost, improve productivity and to derisk program execution.
A few comments on our Aerostructures segment. This business has unmatched manufacturing capabilities that are underappreciated. In the third quarter, Aerostructures grew margins to 9.3% while supporting the ramp-up of our 2 key growth programs: the C Series and the Global 7000. As a supplier to these programs, Aerostructures is very well-positioned to benefit from their growth, and their team is laser-focused on ramping up production and reducing costs.
Okay. I will stop here and conclude by saying that, we feel very good about where we are and of the actions that we've taken so far. We are squarely on track to deliver on our commitments that we made 2 years ago, and we are taking the necessary steps to unleash the full value of the Bombardier portfolio.
With that, I will turn it over to John to review the Q3 financial results.
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John Di Bert, Bombardier Inc. - CFO and SVP [4]
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Thank you, Alain, and good morning, everyone. With another solid quarter executing our strategy, we continued to make great progress on our plan to build earnings power. We are entering the fourth quarter with confidence. We're delivering on top line guidance at Transportation, Business Aircraft and Aerostructures. And with 8.5%-plus margins realized in the third quarter, we are firmly positioned to meet our guidance of approximately 8% across those businesses for the full year. This strength puts us on track to exceed even the higher end of our consolidated profit guidance, looking to achieve EBIT before special items of $630 million or better. As Alain pointed out, that's close to a 50% improvement from 2016 on a stable top line.
Let me summarize the third quarter numbers. Consolidated revenues totaled $3.8 billion or 3% better year-over-year. Notably, BT revenues were up 20%, reflecting the significant project ramp-ups we had anticipated. On the Aerospace side, volumes continued to show stability in business jets and a back-ended ramp-up on the C Series.
On the C Series front, the engine delays coming from Pratt & Whitney are reducing our delivery expectations this year. We are now targeting 20 to 22 deliveries in 2017. The reduction from 30 to 35 units represents a $300 million to $500 million revenue impact relative to our original plan. As such, we are revising our full year consolidated revenue estimates from 1% to 3% growth to flat year-over-year. So we see full year revenues of approximately $16.3 billion, driven by continued strength at BT and good delivery momentum in BBA heading into the fourth quarter.
On the earnings front, EBIT before special items reached $165 million in the quarter, almost double the same period last year. Profitability reflects our continued progress on our turnaround plan, growing higher-margin activities and controlling costs. These efforts led to 8.5% margins at BT, 8.8% at BBA, and 9.3% at Aerostructures. Having already realized $457 million of EBIT before special items in the first 9 months, our expectations for the full year of $630 million or above implies fourth quarter EBIT to continue growing sequentially.
Our free cash flow usage for the quarter was $495 million, consistent with expectations and in support of delivery growth in both planes and trains in Q4 and through '18.
Specifically, during the quarter, we grew inventory by $450 million, mainly to support accelerating deliveries and key transportation projects over the coming months. This higher working capital was also driven by the early ramp-up of the Global 7000 assembly line and additional C Series aircraft inventory.
Taking into account the C Series delivery plan, we now see full year free cash flow usage equal or better than last year at approximately $1 billion, the lower end of the guidance range. This implies a strong positive cash flow quarter to finish the year, consistent with typical Q4 patterns.
Finally, adjusted EPS was $0.01 negative in the quarter, affected by a higher tax expense resulting from unfavorable country mix. With year-to-date adjusted EPS slightly above breakeven, we now expect full year EPS to improve significantly over 2016.
Let's turn to a review of the units' individual performances, starting with our rail business. Transportation is reaching a turning point on its path to sales growth. The business is gearing up for an acceleration of delivery activities starting in the fourth quarter, spanning a number of large projects. Already in Q3, revenues increased by 20% year-over-year, up to $2.1 billion. On a constant currency basis, this growth remained impressive at 17%. We expect a similar growth profile for the business in the fourth quarter, on its way to $8.5 billion full year revenues supported by favorable FX.
And as deliveries accelerate, inventory is expected to reduce, contributing to positive cash flows in the last few months of the year and throughout 2018.
For the quarter, EBIT before special items was $181 million, increasing 30% year-over-year for the third consecutive quarter, representing a margin of 8.5%.
In addition to more higher-margin systems revenues, we continue to see strong contribution from our Chinese JVs, offsetting the lower margins of certain recovery projects. The 8.2% margin year-to-date supports full year guidance of approximately 8%.
In addition, the restructuring momentum driving BT's operations in 2017 should translate into additional earnings power in the years to come. In summary, BT continues to perform, ramping up key projects and securing new ones for the future. Its book-to-bill continues to trend at or above 1 with significant orders from Asia and Europe.
Business Aircraft also continued to perform with a focus on execution of its Global 7000 development program and aftermarket growth. BBA delivered 31 aircraft in the quarter, Global and Challenger deliveries were generally in line with the same period a year ago, at 9 and 18 units, respectively, while Learjet saw 4 deliveries. Year-to-date, total deliveries reached 96 aircraft or 70% of the 135 aircraft target for the full year.
Revenues at Business Aircraft reached $1.1 billion during the period, lower by $200 million over Q3 2016, mainly as a result of leaner preowned aircraft inventories, leading to fewer aircraft available for sale.
Also of note during the quarter, we recorded incremental revenues from our aftermarket business, stemming from recent investments in our service network. This incremental volume from our service business helped to offset some of the planned reduction on the OEM side.
For the full year, revenues continue to trend towards our $5 billion guidance.
On the earnings front, EBIT before special items was $96 million or 8.8%, representing a 240 basis point margin improvement versus 1 year ago. The progress this quarter comes predominantly from better mix and growing aftermarket business and is fueled by lower tooling amortization. With strong year-to-date EBIT margins of 8.5% in Business Aircraft and considering the aircraft mix expected in the fourth quarter, we reiterate our full year margin guidance of approximately 8%.
Finally, backlog at quarter-end continued to lead the industry at $14.5 billion. With continued market stabilization, we advance towards 2018 with production aligned to markets.
Moving to Commercial Aircraft. C Series deliveries in the quarter totaled 5 aircraft, cumulating to 12 so far this year. With recent delays in engine deliveries, we revised our delivery targets for the full year to some 20 to 22 aircraft, down from our previous expectation of 30.
We are working closely with Pratt & Whitney and our airline customers to reschedule deliveries in the near future as more engines become available. On this point, Pratt & Whitney has agreed to support excess inventory generated by engine delays through a supplier advance. Starting in Q4, they will deploy this advance against aircraft built but not delivered. This funding will not be included in our free cash flow metric but will benefit overall liquidity and cash on hand.
On our established platforms, 4 CRJs and 7 Q400s were delivered in the quarter, reaching a combined 39 deliveries year-to-date, tracking well against our full year target of approximately 50 deliveries.
From a revenue standpoint, additional C Series deliveries contributed to offset lower CRJ and Q400 production. With year-to-date revenues of $1.7 billion and fewer C Series deliveries anticipated in Q4, we revised BCA's revenue guidance to $2.5 billion from $2.9 billion. From the learning curve and cost perspective, C Series is performing according to plan, contributing to BCA's EBIT loss of $235 million year-to-date, and tracking well to our $400 million guidance.
I want to pause for a minute and address some of the highlights of the partnership with Airbus and answer some important questions that we've been getting. First, the actions of both Boeing and Airbus now show a clear endorsement of the game-changing C Series capabilities as well as the attractive market it was designed to serve. We are very proud to welcome Airbus to the program. We are excited about the benefits of our deal, which unlocks the full potential upside of the C Series while it removes several risks from the point of execution.
Industry experts at the Teal Group and Air Insight have each had increased their delivery forecast for the C Series by as much as 50% over the next 20 years. This fully supports the value creation of the deal and our belief, shared by most, that the C Series market opportunity is significant.
From a free cash flow perspective, I would say 3 things. First, cash invested through closing continues to increase our ownership in the program beyond the current 63%, driving upside to our participation in the program post-closing. Second, with Airbus by our side, we preserve and enhance our goal to breakeven in 2020 on the C Series. This means the first year post-closing would be the last year of funding requirements, including the capital required for final assembly line in Alabama. These investments, which are already part of our 5-year cash flow plan go against the $700 million maximum commitment with Airbus. And in exchange, Bombardier will receive Class B shares in the C Series LP.
Finally, with the additional volume and synergies expected by partnering with Airbus, this transaction is accretive to free cash flow post-2020.
Now going back to the quarter and looking at Aerostructures. Revenues totaled $343 million, stable over last year. EBIT before special items grew to 9.3%, its highest level so far in this year, improving sequentially in year-over-year, as we benefited from increasing aftermarket sales and positive currency effects. In that context, we continue to see full year margins at approximately 8%.
So to conclude, I want to shed some light on 2017 performance and what this means for our 5-year turnaround plan. If we look past the short-term revenues and cash deferral resulting from lower C Series deliveries, we would be trending to the top end of guidance on all fronts, revenue, EBIT and free cash flow. We are doing what we said we will do and all that while making significant progress on the flight test program of the Global 7000 and tracking to our 2018 entry into service, restructuring key train projects to set them up for renewed growth and enhance profitability, driving our transformation through structural changes on how we do business, making our margin expansion sustainable, and strategically positioning the C Series for long-term commercial success and value creation for Bombardier's shareholders. This demonstrates we're on the right track to meet and in certain cases, exceed our financial objectives. Specifically, for our 2018 targets, this progress means improving margins as we hold production rates steady in our Aerospace segment to stay aligned with markets. And with better economics from the business units and continued discipline, we remain on track to meet our cash breakeven objective for the year.
With that operator, we are 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 Cameron Doerksen from National Bank Financial.
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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [2]
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Just a question on Business Aircraft. I'm wondering if you can maybe just talk a bit about what you're seeing out there as far as order activity, any changes in the last quarter from what you saw earlier this year. And it sounds like you're pretty comfortable with the production, the rates that you have going into 2018, but maybe if you can just discuss where -- what specific product lines you might see some risk on the production rates heading into next year?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [3]
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Good morning. We believe that we are at the right place right now, I mean, at around 135 aircraft. We are still taking a pretty pragmatic view here on the market. We are seeing some good signs, especially in the U.S. market at pretty much across the full product range that we have from the Challenger 350 up to the Global 6000. The rest of the world is pretty much unchanged right now. So we believe that there's like upside potential in the coming years. So whether you look at China, Middle East or Russia, which has been pretty good markets, especially for the upper end of our product portfolio. So we think that 135 aircraft a year is the low point and the market is pretty much supporting that.
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Operator [4]
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The following question is from Stephen Trent from Citi.
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Stephen Trent, Citigroup Inc, Research Division - Director [5]
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I am just curious when we think about your tie-up with Airbus. What do you see for the industry regarding longer-term pricing on Commercial Aircraft? And any read-through on your end on what this means for your competitors perhaps looking to undertake similar types of alliances.
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [6]
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As you know, it's tough to discuss pricing, so that's not something that we're going to start talking publicly and openly. But I would say the punchline here is this deal is good for the industry and it's good for our customers. It will trade value. It's really clear that we -- I mean, in that segment of the market, 100 to 150 seat class, I mean, there's really 2 competitors today, Embraer and us, if you look at the low end of the narrow-body product lines, the older Airbus and Boeing, it was like really no sales, or very, very little sales. So really, there was like 2 competitors before, there will still be 2 competitors moving forward. Now in terms of potential further consolidation, I'm sure you understand that I would be speculating. So I would rather talk about what we've done in a proactive way, and I am very proud of what we've done with Airbus, and I really believe that this will fully unleash the value of our major investment in the C Series. And as customers are saying, they love the product, they love the performance of the aircraft and so far, I mean, the positive -- the reaction from customers on this deal has been super positive. So -- I mean, we look at this partnership with Airbus in a very optimistic way.
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Operator [7]
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The 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 [8]
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I guess, I was wondering if you can talk a little bit about your competitive positioning in the transportation business considering the combination that was announced by Alstom Siemens. And I guess maybe if you can talk through, to the extent that you can throw some light, maybe on potentially -- if you guys would be considering something with some of the other players in the industry?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [9]
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Good morning, Turan. For sure, we will continue to look at the competitive landscape and assess some potential moves as long as they would trade no value for shareholders. And we will look at all options. So I mean, as I said before, everything is possible but it needs to make some good strategic sense. In the meantime, we have an amazing franchise, and Laurent and his team are doing a great job in transforming our train business like as never done before. So I mean, we're growing margins and we're improving our execution performance. And the team is focused on delivering on our commitments. So I mean, it's all ends on increasing performance of the business units so that we strengthen this and whatever we do here will help us to be stronger in the long run from a strategic viewpoint. So that's kind of it. I mean, we are, I mean focused on execution and continuing to assess strategic options.
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Operator [10]
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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 [11]
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Just a quick one. Is it possible to attribute this latest C Series order to the Airbus deal? Is it too difficult to do that just yet or -- you described earlier, I mean, asking in another way, you described earlier that your sales momentum is accelerating. I was just trying to get a sense for how many sort of late-stage campaigns you might have had in place prior to the deal and how those have changed since the announcement. Just to give us a flavor for what kind of accelerating momentum we might expect on the sales front.
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [12]
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Good morning. Clearly, I mean we have a good aircraft, we have a great aircraft. And the customer feedback on the performance of the aircraft has been just like outstanding. So we had and we still have a number of very active campaigns ongoing, and this one here is part of what the team has been doing for a while. And as I've been saying before, it takes time to close a deal, I mean, the customers -- the customer need to be ready to place orders. So at the same time, it is clear that Airbus coming into the program is adding confidence about the long-term success of the programs. So I wouldn't say they're today totally linked, but it will -- it is clearly helping us to accelerate the sales momentum.
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Operator [13]
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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 [14]
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Alain, I have 2 questions, actually, I guess one is for John, one is for you. Hopefully, you can hear me. At a very -- so Alain, at a very high level, you've talked about the strategy with Airbus, we understand it. What is the purpose behind the call option down the road? Is it Bombardier's intention to exit this business at some point? And I ask that question in the context of you built a great airplane, so I can't imagine you don't want to be in that business long term. And then John, for you, to what extent is the higher EBIT a result of fewer C Series deliveries this year? And will the -- will the Pratt & Whitney impact extend into '18 and how far into '18?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [15]
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So let me take the first piece of it, Robert. I think that like -- as you've see in many M&As, you have like a call and a put option, and that's exactly what we have. We're talking 7 to 8 years down the road here. So I mean, it's tough to predict exactly what is going to happen so far out. I would say we're going into this partnership with Airbus in a very positive, constructive and with a long-term view on staying in the program. Should at that time, either party not willing to continue or seeing opportunities to do something else, that's where the call option and the put option is there for. So I don't think there's more to read into this. We like the business, clearly, we love the product, we like the business. And right now, our thinking is to stay involved in the commercial aerospace segment.
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John Di Bert, Bombardier Inc. - CFO and SVP [16]
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Hey, Rob, so maybe just taking on the second part of your question. So to be clear, we are continuing to build aircraft in Mirabel, so we continue to move the line and that means that all of the kind of expense that was related to those early aircraft are -- is largely going to continue to take place. So the impact of the lower deliveries is not very significant on full year, I would say, expectations, guidance. And as a result, we have the arrangements with Pratt & Whitney, where they're going to back up some of those inventory investments, so marginal impact. The plan for '18, again, recall we have customers behind all of those deliveries. I think we had an original plan when we first set this out, of the ramp-up of some 45 to 55 aircraft. We're going to be disciplined, prudent, we're working with Pratt to make sure we have clarity as to schedule and timing for next year's deliveries of engines, and make sure that we collate ourselves very well. So at this point in time, too early to call a number for next year, but probably on the lower end of that range, and then we will pick the right spot with both customers and Pratt, and what's right for the business.
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Operator [17]
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Our following question is from Ronald Epstein from Bank of America Merrill Lynch.
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Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [18]
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So Alain, quick question for you. When you think about your supply base on the C Series, post the Rockwell Collins UTC deal, on their last earnings call, Greg mentioned that they will be about 35% of the content on the plane. I mean, how do you think about that? Are you comfortable with that? Is that a good thing? Is that a bad thing? And just kind of what your broad thoughts on it because we're seeing some changing dynamics in the supply chain and this is one of them.
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [19]
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Yes. Good morning, Ron. Clearly, supply chain is about scale today. I mean, the more scale you have, the better it is. The better it is when you negotiate, but also the better it is when you want to reduce costs. So it goes both ways. So I mean the UTC Rockwell merger clearly increased the content that UTC will add on some of our aircraft, not just commercial side, but on the business aircraft side as well. So clearly, we're watching it closely. But we think that -- coming back to the C Series, that having the power of the Airbus, the procurement organization and supply chain expertise is going to be good news in term of helping us to achieve the cost target and fully unleashing the value of the investment that we've made. So me, scale, I like. I think that it's good for supplier, if it's well done, and it's clearly good for us in this case with Airbus.
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Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [20]
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Okay. And then if I may, if I can just follow on with maybe a really big strategic question. Assuming all this goes through with Airbus and kind of everything gets approved, how do you expect your competitors to react, right. I mean, sort of 1 movement from 1 competitor will naturally drive something from somebody else. I mean, have you guys thought about that? And what do you think a potential reaction could be?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [21]
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Yes. Like I said, Ron, I think that I would rather be careful and not speculate about what our competitors are going to do. But I would say that we do have the best aircraft in the 100 to 150 seat class, bar none. It is the aircraft that brings the most value to customers from an operating cost standpoint, from a cabin comfort standpoint, and there is nothing that comes close to matching it on range and performance. So you add this to the Airbus product portfolio in the narrowbody segment with the 320 and the 321, and there you have a full product portfolio covering the narrowbody range. So I feel that this is really adding value to Airbus and it's helping the C Series to fully unleash the full value of the program. And I would say that we will be very well-positioned to compete successfully and gain our fair share of the market.
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Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [22]
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And then -- and just one follow-on to that, if I may. Has there been any talk of unifying the cockpits between the 2 airplanes, be it that they're both fly-by-wire, be it that they're both side stick, has there been talk about maybe making the pilot transition from one to the other, more simple?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [23]
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I guess that we would get ahead of ourselves here. We will first complete the deal, and make sure that we successfully close it. And then we'll talk about integration, and then optimization of the aircraft. But as you know, Ron, and as you just said there, the beauty here, of this partnership between Airbus and Bombardier on the C Series is the aircraft architecture of the 320 family and the C Series is very common. So I think that in terms of potential optimization opportunities, clearly, there is some good moves that could be made over the next few years.
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Operator [24]
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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 [25]
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Alain, you mentioned that the aerospace business was -- I'm sorry the Aerostructures business was underappreciated. What are some of the things you think about doing to make sure that it does become appreciated, including by investors?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [26]
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Well, clearly, this is a good, solid business, with good top line revenues and good margins. About 75% of the volume relates to what we do at Bombardier, and about 25% comes from external customers. So what we're talking about here is a business that is in the range of $1.7 billion, with amazing capabilities. And we have capacity that we can do something else with. So that's what we're thinking about. Now that we have stabilized the C Series, we have the Global 7000 coming on stream, it will add like good solid volume to that business unit. The question that is on our mind is, how do we further grow volume at Aerostructures. And it can be done in multiple ways and growing more aggressively with external suppliers. We're looking at potential partnership and things like that. The name of the game here is we want to create more value because we have great capabilities and we can bring value to customers in multiple forms.
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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [27]
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Great. And then, if I could just follow up very quickly. I appreciate your comment earlier that aircraft that are made in the U.S. are not subject to tariffs and that makes a lot of sense, of course. But if someone wanted to make the argument that significant portions of the aircraft are coming in from other places, are you concerned at all that there is still residual risk of a tariff on portions of the aircraft? And if not, what gives you the legal confidence to think that you can get past that?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [28]
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Well, let's say that we are very confident. And the reality here, is like, just to start with, there's over 50% of the content on the C Series that is coming from the U.S., over 50%. That creates 22,000 jobs in the U.S. today. That is before us putting an assembly line. That's more content, U.S. content on the C Series than Boeing has on the 787. So it is already a large -- largely a U.S. product. Now we are going to have a full and complete assembly line in Mobile that will further increase the U.S. content. So when you think about value creation in the U.S. from a job standpoint, this is an amazing product, so we will make it a domestic product, based in the U.S. assembled in the U.S. with high -- very high-level of U.S. content, which will be creating thousands of jobs and billions of dollars in the U.S.
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Operator [29]
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Our following question is from Fadi Chamoun from BMO Capital Markets.
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Fadi Chamoun, BMO Capital Markets Equity Research - MD and Analyst [30]
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This question maybe for John. So rough math will get us to about like $2.5 billion of cash at the end of this year, like cash balances. And considering the typical seasonal cash burn that you get in the first half of a year, the outlook looks a little bit uncomfortably close to $1.5 billion, so I think what sort of you need that at a minimum for the transport and aerospace, if I'm not mistaken. You mentioned the Pratt & Whitney support, I'm wondering if you can put some number around that, and if you have other levers that you have to get you through this short-term kind of liquidity position.
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John Di Bert, Bombardier Inc. - CFO and SVP [31]
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Yes. So let me take that in a couple of ways Fadi. First of all, by design, when we laid out this plan some 2, 3 years ago, this was going to be the turning point, and we knew that. So we are designing the business around that and we have been very proactive in terms of the cash and liquidity, and we're going to continue to do so. Let me just give you a few highlights of how I see where we are today and then I'll just touch back on your comments on '18. So right now, we right-sized the business, strong profitability across every unit. The 7000 is going through the final year of development, we're ready for entry into service at the back end of '18. Trains, accelerating. We've got growth coming, we've built up quite a bit of inventory, but that's also by design as we want to kind of relaunch some projects when you go back 18 months. So the fact of the matter is, that we are here because that's where we designed the plant to be. We're going into the fourth quarter. Fourth quarter is going to be a solid cash generating quarter, that will leave us, as you said, kind of in that range of north of $2 billion, close to $2.5 billion of cash. So Alain and I have always been very disciplined in terms of how we've managed the cash flow. We're in the planning cycle as we speak for not only '18, but also the longer term -- continue to see a nice clean path to breakeven. And we will keep ourselves proactive, and look at all options and make sure that we provide the right basis for '18 to be successful. And the reason that we do so with so much confidence is because when we look at our 2020 objectives, the ones we set out with you, profitability and cash flow of this business, still very strong, very positive. So we know what we need to do here to get the job done through '18 in terms of execution, keep our options open, be disciplined, complete the planning cycle and make sure that we have the right level of liquidity throughout the year.
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Fadi Chamoun, BMO Capital Markets Equity Research - MD and Analyst [32]
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Okay. Great. Just one another question. So when we look at the delivery C Series, is the plan to get you back on track in 2018, or is sort of the -- delivery run rate sort of kind of goes down a little bit through 2018?
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John Di Bert, Bombardier Inc. - CFO and SVP [33]
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So when we set out the plan, and again, that was November of '15, we talked about 2018 being 45 to 55 aircraft that was the target ramp. And this year, we said 20, 22. I'd say that we need a little bit more work with Pratt, to kind of figure out the sequence and the scheduling of engines into the next year. At this point in time, what's obviously very positive is we're working with customers very closely. The aircraft in 2018 are all backed by customer orders that are affirmed. And ultimately, a little bit early to call a number, but I would say, you'd be looking at a lower end of the range, and we'll pick the right number somewhere around that space, 40-plus when we put out our guidance for next year, and that's a few weeks or a couple of months away here. So I think stay tuned, but the reality is, that customers on the other end of this, working flexibly with us. Pratt & Whitney working very hard to recover the schedule on this interruption, and we are still moving our line, so we haven't stopped any of the momentum with respect to assembly. My expectation is, we'll give you guys a number that will be something around 40, 45 when we're all said and done, but stay tuned.
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Operator [34]
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Our following question is from Kevin Chiang from CIBC.
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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [35]
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Maybe just 2 quick ones, just clarification points. I think earlier, you had mentioned you're seeing some positive outlook for business jets and mentioned the Challenger and Global looking good. I'm just wondering what you're seeing on the Learjet front and just how this fits within your investment portfolio or product portfolio overall here?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [36]
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So as we've said on the Lear, we want to keep on driving sales. There was a bit of pressure on pricing and that nothing has changed here. We want -- I mean, it's a great franchise. We've got a very large installed base. We're maximizing aftermarket activities on that front, and we will continue to strike on this, as much value as we can with our Lear franchise. So right now, focus -- focus on maximizing performance of the product and making sure that we increase sales.
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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [37]
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And just a clarification point around, I guess the shortfall cash payments. To the extent these are triggered within the Airbus joint venture, does this increase your proportional interest in the C Series? Does that get counted towards like capital investment? Or was that outside of I guess -- any potential increase in your interest in this C Series investment?
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John Di Bert, Bombardier Inc. - CFO and SVP [38]
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Thanks for the question. So the -- any cash that's injected against that $700 million commitment over 3 years will be rewarded with equity, and that's kind of a Class B share, and it will have a stipulated return and those will become redeemable at some point in time through the same put or call option should we choose. So they are investments and we will come back with capital or an equity stake. But we will not the dilute the Class A shares, so just to be clear, it does not dilute the common interest.
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Operator [39]
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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 [40]
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Just 2 questions. The first one on BBA side. I have noticed the backlog keeps going down, it's down 6% since the end of December, and it was down 10% in 2016. I was wondering how to square that with your commentary that the market is stabilizing.
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [41]
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Yes. I think that the -- we have been using a bit of the backlog clearly over the past 2 years, but at the same time, we also took the rate down from over 200 aircraft. I mean, in 2015, we were at 220 aircraft, down to 135. So I think the common is more than 135 aircraft a year. We believe that this is in line with the market demand. So at that end with that level of production activity, we believe that we'll be able to start rebuilding the backlog as the market start recovering. So as I said, I think that in the U.S., we're seeing some good signs, still kind of flattish in rest of the world. And we think that we have been -- we've reached the bottom. We've never seen a good recovery in Business Aircraft as you know since 2008, so we are proud of what we've done in terms of adjusting rates. And when you look at it moving forward, we believe that we will continue to keep our market share and most importantly now, we have the Global 7000 coming into service towards the end of next year and that will create huge value for our Business Aircraft franchise.
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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [42]
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So do you think you can stabilize that backlog soon?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [43]
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Well, it's a -- obviously there's a bit of speculation in here, but like our thinking right now based on what we are seeing is yes. So I think that we are -- we are seeing better level of activities and we think that the world economy is still good, and therefore, I mean, as you know, Business Aircraft is largely linked to corporate profits and we think that in the short- to medium-term, this will continue to improve.
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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [44]
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Okay. And my other question was on the Aerostructures. So I'm wondering if there are any margin implications for that unit from the Airbus C Series deal. And related to that, can you let us know what the sales at BAES has to the C Series?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [45]
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I can take the first part of this, and in terms of sales for C Series, maybe the guys can look at it quickly. But clearly, the thing that Airbus does, the Airbus deal does for this, it secures volume, an increased volume. And therefore, will help us reduce cost, and that is fundamental. And that was a bit of my comment earlier, when I talked about the Aerostructures business. This is a good business, $1.7 billion overall. And now with Airbus coming in and as you've seen, I mean, the forecast, the sales forecast is going up with Airbus, meaning, there will be more production units into the system, which will help with the order absorption, which will also help on the material side as we use and leverage the Airbus procurement system to help us take costs down. So we're seeing this, the Airbus partnership as a plus for our Aerostructures business.
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John Di Bert, Bombardier Inc. - CFO and SVP [46]
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Maybe, I will...
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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [47]
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With a changed pricing?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [48]
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Excuse me?
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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [49]
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With a changed pricing?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [50]
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You mean, would it change pricing?
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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [51]
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Yes, you're using transfer pricing right now it’s going to be --
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [52]
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Yes. Obviously, we're going to need to make it cost-competitive for the aircraft itself. And so we're an internal supplier to Airbus in that case. So I mean, we need to work the cost down, as we would do with any customer. So clearly, we'll continue to be aggressive on that front. So again, I think the key here is Airbus deal brings additional volume, secure volume for the long run, will help us take costs down on multiple fronts, and there will be clearly some ripple benefit on the pricing side going back into the C Series program.
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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [53]
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I am sorry, Patrick.
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John Di Bert, Bombardier Inc. - CFO and SVP [54]
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No, no, it's fine. It's John. I think Alain had picked up on the back end of that answer. But no, I would say that exactly that we are already in the competitive cost structure environment, and we do so to support the C Series. Don't forget we did a JV going back a year ago already, which means that we've established contractual pricing between BAES and the C Series JV when we brought in our first partner, Québec. That continues. And the name of the game really is about using the strength of the program now and acceleration of overtime of volume and stability of production to take cost out. So I think Alain has got the rest of this. At the end, we have always been focused on cost and that's we're going to continue to stay focused, and BAES that's what they do very well, and they'll be able to support the program with the Airbus, of course.
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Patrick Ghoche, Bombardier Inc. - VP of IR [55]
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On that operator, we will take our last question please.
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Operator [56]
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Our last question is from Konark Gupta from Macquarie Capital.
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Konark Gupta, Macquarie Research - Analyst [57]
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I just have a couple of questions, one on free cash and business jet, if I may, quickly. So John, you recently mentioned that Airbus deal would not impact free cash flow outlook to 2020. Now the engine delays and design changes on Pratt & Whitney are continuing and we are not sure if Delta could delay deliveries next year. But you are also winning new orders at the same time. So can you please remind us what are the key puts and takes in breakeven free cash flow next year?
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John Di Bert, Bombardier Inc. - CFO and SVP [58]
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Well, I guess, in terms of free cash flow, I think you're going to see a cycle where you will have strong top line growth that will mean conversion of inventory that we've been building up, the train business is a good example of that. We're coming off the development cycle with respect to the Global 7000. So front-end of the year, we'll consume more as we go into the final stages of development FTV 5, and then build up working capital inventories. You have then a cycle that begins in the kind of latter half of the year with advances on the Global 7000 as they start to get ready for '19 deliveries, so you get the advance ahead of delivery in the back end of the year. So those are kind of nice contributors to funding some of the programs final stage. At BCA, we continue to take cost out. Obviously, we continue to come down the learning curve with respect to the program. As I said, we'll get the final kind of look at what we produce next year but it will be materially more than this year obviously, and cost again, we will deleverage as well as cash on hand. You'll have more deliveries contributing to cash flow in the back-end of the year there as well. So I would say that's how the year starts to come together. Don't forget the train business, strong quarter this quarter. That's something we expect to continue, and we've been building that up in the sense that inventories are part of the -- they're just predelivery where you'll see a big cash flow. So those are some of the telltale signs for next year. As far as the comments around the geared turbofan and GTF, these are typically -- mostly manufacturing issues and performance of the aircraft, the engine, the fuel efficiency, the noise have all been outstanding. So I mean, we'll look past all of this. We're working positively with Pratts and they've stood up between their product. They've come to the table. They made sure that they've mitigated the impacts to us in the short-term here with the inventory we'll be holding, and will work through that next year, as we unwind it based on deliveries that come off of their new delivery schedules. So for 2018, we're kind of putting the final touches on the plan. We still see a good path to the breakeven objective, and we'll give you guys more color as we get to an Investor Day.
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Konark Gupta, Macquarie Research - Analyst [59]
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Okay. And Alain, just on the business jet, so -- when I do some math on the book-to-bill ratio on dollar basis, it looks pretty reasonable in Q3. So can you please help us understand the product mix versus demand in that book-to-bill ratio number? And are you seeing anything different than what your competitors have been telling us in terms of demand and pricing in the market?
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Alain M. Bellemare, Bombardier Inc. - CEO, President and Director [60]
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I think that clearly we've been -- the Challenger keeps doing extremely well. I mean, the Challenger 350 product line. Our Global also is pretty strong and Learjet is like a little bit softer. And that was as per plan and as expected. So that's kind of what we are seeing. I would say this is consistent with what happened in the previous few years, in the past few years and it's also what we are seeing moving forward. So great product lines on Challenger and Global, a bit more challenging on the Lear going forward. In terms of competitors, I think that everybody in the industry has seen the market challenge, and we were -- I would say, I'm very proud because we were very proactive in adjusting our production rate in line with market demand. We were the first one to doing this. And looking forward, I still think that we have the best product lines out there and when we add the Global 7000, we will have the best business aircraft franchise in the world. So I think that we're positioning ourselves extremely well around.
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Operator [61]
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So back to you Mr. Ghoche.
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Patrick Ghoche, Bombardier Inc. - VP of IR [62]
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That's good. So thank you everyone for being on the call. Have a good day.
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Operator [63]
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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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