Bombardier reports lower 2Q2015 income

July 30, 2015: Bombardier reported lower net income on slightly higher revenues for the second quarter.

The press release is here. The earnings call presentation is here. Bombardier-Q2-2015-Presentation-20150730-en

“Overall, the second quarter was in line with plan in terms of revenues, EBIT and deliveries, and our liquidity stands at $4.4 billion,” said Alain Bellemare, President and Chief Executive Officer. “After five months on the job, I have a better understanding of our challenges and opportunities. We are taking specific action, including the launch of our Bombardier transformation plan, a disciplined approach to cash management, and the strengthening of our leadership team to reshape the company and ensure our long-term success.”

Bombardier said it completed 2,000 of the 2,400 hours required for certification of the C Series, which will be delivered during the first half of 2016 to launch operator Swiss International.

During the earnings call, Bellemare outlined more details of the Transformation Plan designed to turn BBD around from its financial strains.

JP Morgan’s initial reaction to the press release:

  • Bombardier reported an in-line Q2 with EBIT guidance down modestly, but that is not what is at the top of investors’ agendas. What matters most for the stock, in our view, is Bombardier’s ability to sell CSeries aircraft, the rate at which the company burns cash, and management’s strategic plans for the company’s various product lines. The Q2 release only really addresses the second of these issues, the rate of cash burn, which could be worse than we expected in the near term based on working capital growth. The other issues are likely to come up on the call.
  • Q2 cash burn of ~$800 mn exceeded our forecast by ~$300 mn. YTD, cash burn of $1.55 bn was up from $1.34 bn last year. The weakness relative to our forecast was in cash from ops with investment spending lower than our forecast by ~$60 mn. The ~$370 mn operating cash outflow missed our forecast by ~$400 and was down ~$470 mn y/y despite an EBITDA decline of only ~$30 mn. There were several sources of working capital growth, including aero advances, aero inventories, Transportation inventories, and Transportation receivables.
  • Management forecast investment spending of ~$2 bn in 2015, on par with the initial guidance and our estimate.

Cash flow for the second half of the year will be affected by production rate of the Global 5000/6000, new orders, the Transformation Plan and other factors.

Certification of C Series is proceeding. Better than expected performance “is generating renewed interest,” said Bellemare. Sales is working to firm up the commitments, which currently outnumber firm orders.

Renewed efforts on the Q400 and CRJ have campaigns underway, he said.

“I’m glad that the focus has shifted to [C Series] orders now [from testing and certification],” Bellemare said. “The performance of the aircraft is…above expectations. Clearly the focus has shifted to increasing the backlog. We are basically filling up the pipeline, but it won’t happen overnight. The orders going forward have to be good for the airlines and good for us. We have about half a dozen customers who have shown interest over the last few weeks.

“The backlog that we have have sufficient orders to fill the production,” he said. “We should not forget this is a 7,000 aircraft market. We have the best aircraft for this class of aircraft for orders moving forward.”

Bellemare said the reaction from customers at the Paris Air Show was “super-positive.”

The investment of the C Series will comes down “significantly” as the program transitions from testing to production and delivery.

Bombardier faced a tough grilling from aerospace analysts, who questioned the dearth of orders for C Series and production rates and declining sales for business jets, returning to the topics again and again. BBD refused to provide guidance on a number of metrics or book:bill forecasts, citing transformation efforts that will take time, transition phase for business aircraft.

Global 7000 entry-into-service was reset to 2018, a delay of two years.

“We will do what we have to do to win a campaign,” Bellemare said of C Series. “In the end it has to make good business sense for us and good business sense for the airline…that makes good commercial sense going forward.”

Bellemare said BBD is “engaged” with customers who have commitments to convert “some of the options” into firm orders. “It’s a process that takes some time.”



25 Comments on “Bombardier reports lower 2Q2015 income

  1. Alain Bellemare: “After five months on the job, I have a better understanding of our challenges and opportunities. We are taking specific action, including the launch of our Bombardier transformation plan, a disciplined approach to cash management, and the strengthening of our leadership team to reshape the company and ensure our long-term success.”

    Translation: We are running out of cash.

  2. ‘We are basically filling up the pipeline, but it won’t happen overnight. The orders going forward have to be good for the airlines and good for us’

    So reading between the lines they are having a real problem achieving the sort of price point they want/need. Not really a surprise. The cash burn looks to be the number one issue and selling just over the marginal costs would do a number of positive things:
    1/ establish a market, be seen and generate in service experience
    2/ generate rather than burn cash
    3/ move down the learning curve reducing cost
    4/ be taken seriously as a competitor and not just as a way of reducing the price of your next 100 A320/B737
    5/ develop manufacturing capability in the ramp up as any large operator will want 100+ now and not spread over 5-10 years

  3. @ Sowerbob

    “1/ establish a market, be seen and generate in service experience”

    That will have to wait for EIS with SWISS in the first half of 2016. But this may potentially have an even bigger impact than PAS had this year.

    “2/ generate rather than burn cash”

    I am afraid that will not be possible for at least a few more years. The C Series is at the bottom of the learning curve and the new Globals are two years behind schedule (like the C Series). And they are still mopping up in the wake of the Learjet 85 programme cancellation.

    “3/ move down the learning curve reducing cost”

    Reducing cost will only keep them afloat until the C Series starts to generate profits. Same thing for the Global, but it won’t bring profits until long after the C Series itself, which is nowhere near that.

    “4/ be taken seriously as a competitor and not just as a way of reducing
    the price of your next 100 A320/B737”

    They are already taken seriously by potential customers. The problem is that Boeing, and especially Airbus, take them even more seriously…

    “5/ develop manufacturing capability in the ramp up as any large operator will want 100+ now and not spread over 5-10 years”

    Bombardier is well prepared for ramping up if need be. They have a well established plan for that, along with legions of qualified manpower. It’s the least of their worries right now.

    • Normand

      I must say I have always been a tad confused by the BBD line up and product ranges. I will defer to your in-depth knowledge. At the same time I see a double or quits position on the Cseries, they need an order book running way into the future to satisfy their bankers as things get progressively tighter over the next 3/4 years. Further a lot of their cost base will be fixed and so almost all arguments lead towards pushing forward at full speed and going for broke. If they can get 200 frames in the air and proving their worth to customersbefore ‘technical insolvency’ they will have arrived and will have established a foundation or bridgehead in the NB market which will be difficult to contain. It is more like high stakes poker than an industrial programme. I hope they turn up some aces, I truly do

      • They have sold 603 C Series so far, including 243 firm. Their current effort seems to concentrate on firming up some of the options. In my opinion this is plenty enough until the aircraft demonstrates its in-service capabilities with airlines like SWISS and other operators around the world. That will not only give them visibility but credibility as well. The way I see things is that as interest for the aircraft mounts and new customers sign-in they will have had the time to ‘oil the machine’ and will be ready for a potential avalanche of new orders. Ramping-up is a process that can be accelerated but it can’t be rushed, for we have to take into consideration the capacity of the various suppliers. Douglas had a massive problem in the Sixties when they sold more DC-9s than they could produce. This could have happened to BBD if Airbus and Boeing had ignored them. Running too fast can derail the operation, while running too slow can be extremely expensive. But even if it will cost more money to Bombardier to manufacture the initial batch it will still bring in some badly needed cash. That is why EIS is so important. But all this takes time and hopefully BBD will be able to hang in there for the duration of this difficult transition period. But I remain confident that one way or another they will find the means to finance this extraordinary endeavour.

  4. “they are having a real problem achieving the sort of price point they want/need. ”

    Their problem is that Boeing and Airbus are just about giving away their planes in order to keep Bombardier from getting a foothold. That can work for only so long. The 100 plane orders will come but they said all along that they want a bunch of little orders in the beginning to have a broad customer base that Lessors want to see.

    I had being hoping for more details on the CSeries certification process. They must be getting close as the target was 2400 less credits for ground testing. At 200 hr/month they could be done in August. You would think that would be something to mention in the conference call.

    • They may indeed have completed the hours they need for certification in a couple of months from now, but certification won’t come for another few months after that. In a recent interview given by Robert Deluce, Porter’s CEO, the C Series is likely to be certified next November or December.

  5. Bombardier will not be rich in the short term. All entry money will be reinvested in a development tool of the CS500, the CRJNeo in the updated Global 5000 and 6000 (Next Generation?) to compete with new Gulfstream 500 and 600. This is the main reason to justify the review… Otherwise, Bombardier should take the opportunity to cross the 7000 and 8000 to launch a Global 9000 (17-19 passengers with 9700 nautical miles) if they want to dominate Gulfstream for a long time !!! 🙂

    The sales pitch has a limited impact on actual purchases by customers. They want to see the products, find the features, performance measurement with actual figures. Bombardier absolutely must be patient and wait for the experience with Swiss. Bombardier must resist selling off the CSeries. It takes a big American or European player with the purchase of multiple copies to create the buzz and excitement among the public, and thus start a movement !

    The merger with Siemens and Bombardier Transportation (before the IPO ?) will generate probably one or two billions to fund future developments.

    • “The merger with Siemens and Bombardier Transportation (before the IPO ?) will generate probably one or two billions to fund future developments.”

      I know this is an aerospace blog, but since the Transportation division is what keeps Bombardier in business I would like to offer the following comments. I am no expert of the transportation business but a merge with Siemens makes sense to me for the following reasons:

      1. Bombardier Transportation is headquartered in Berlin, Germany.
      2. The head of the division is a German (Luz Bertling).
      3. Siemens is a German company with a large contingent in France (Matra Technologies).
      4. Bombardier became number one after the acquisition of its German competitor Adtranz in 2001.

      So culturally there should be no problems. But apparently they are fierce enemies of each other.

      • Doesnt make sense to sell the steady earner where they are a major player to concentrate on a cyclical business where they could be 3rd or 4th place.

        Better to let go say the business jet side to someone like GKN who are expanding in the aerospace sector?

        • I agree with you on this. But Bombardier need cash; and a participation, perhaps up to 40%, would make BBD and Siemens much stronger players who would be better equipped if they join forces to compete with the Chinese.

          • Chinese not even in that league and rely on semi licensed production.

            Its like the airplane business they should have major capability by now but dont and are in fact further behind.
            You can see where Soviet Union went from end of WW2 to mid 70s, in the same 30 year period from say 1980, what have they done in China. They struggle even when trying to update a old design.
            It must be a choice of national priorities and aviation is down the list, I think medical research is one of their big things now.

          • Bombardier is no longer the number one train manufacturer. The two main Chinese train manufacturers (CNR & CSR) have recently merged into a sigle company that is larger than BBD. And the latter just lost a big contract to build metro cars for Boston: they could not match the Chinese on price. It was the first time a Chinese train company had won a contract in the US. And I am quite sure it will not be the last.

          • I my country they have just bought moderate sized chinese diesel electric locos ( with German engines!). Cheap price but many problems. They were certified as asbestos free- they werent.
            Boston can be the canary in the mine but will regret it.

  6. It missing an important element in the meeting with analysts : a discussion on the future of the CRJ. One source of this guy

    was reported that the CRJ 700, 900, 1000 Neo would share the same wing … Added to the fact that E2 of Embraer (175), currently estimated too heavy to meet the US Scope Clause, suggest a bright future for Bombardier, in terms of cash flow generator … !

    • Yes, but to develop a new wing for the CRJ700/900/1000 will require money, and that is something Bombardier doesn’t have right now.

      • Yes, but, Norman, Bombardier has spent almost a billion dollars in Northern Ireland with highly qualified and experienced people already on the thing !

        • Correction, they have spent the UK and NI governments money in Northern Ireland from a range of agencies.
          As well Laurent Baudoin got a CMG in the new years honours list. Its a mid level honour usually known in a ironic tone as ‘Call Me God’

          • Look what Bombardier did with Shorts after they acquired it from the Queen. I wouldn’t call Laurent Beaudoin God, but if I were Irish I would certainly see him as a God send. PLEASE spare me the usual “taxpayer’s money” diatribe.

          • Its not a diatribe, its correcting an assumption Bombardier spent its own money.
            Same goes for government of Quebec, Ontario and Federal government of Canada. Then theres Mexico as well. Now they are going to dip into retirement funds of Quebec pensioners as provincial Quebec and Ontario are so heavily in debt as it is.
            The reason why UK government sold off Shorts in Northern Ireland, was so they didnt have to pay for it any more. Fat chance now that its sold they still are paying !

  7. @ CapitaineScarlet

    As far as I am concerned it’s a fantastic project. Like you say the high-tech factory is already built and they have the required expertise. But they have way too much on their plate ring now:

    1. They still have to digest the Learjet 85 fiasco.
    2. The C Series is two years late and the development costs are going through the roof.
    3. The new Globals are more than two years late while the existing Globals aren’t selling as well as they used to.
    4. The Global 5000/6000 need to be revamped.
    5. The CRJ family needs a new wing and new engines.
    6. The Q400 has been massacred by the competition and something needs to be done quickly to stop the hemorrhage.
    7. The CS500 is badly needed to counteract the considerable efforts deployed by Airbus and Boeing to kill the C Series in its cradle.
    8. The Transportation division is facing a major transformation.
    9. The staff is new and still learning the ropes.
    10. The stock is declining with the revenues.

    What is happening to Bombardier right now is very similar to what I expect will happen at Boeing in five to ten years from now. I like to call this “Negative Convergence”.

    • I agree with you! It should already anticipate this new team manager and the new organization that will be Bombardier. And indeed, this is a fantastic chess game unfolding before our eyes. Knowing sell and know how to count, the very art of management which must focus the new management team of Bombardier. It would take a new low cost carrier in Europe or North America, which would build on the CSeries for, this time, producing a domino effect ! Meanwhile, in my case , I buy big packages of shares of Bombardier 🙂

      • Capitaine thats isnt going to help, as its cash in the hand they need. They cant borrow more as their credit rating is in the ditch. The governments where they operate have had their wallets raided previously for capital costs.
        Large amounts have been written off because of other programs that have been abandoned or delayed.
        Technically its a wonderful plane but seems the business is run badly. I my part of the world the major domestic carrier has a fleet of Q300 as its 50 seater , but for its 70 seater flies a different make ATR72. How could that make sense you ask when there is a Q400 that could do the job. Would they not want two planes closely related differing in seat numbers.

        Not when the Q400 is souped up to have near jet speeds. And the higher costs that go with it. The market seems to think a 4 across near jet is best flown by a E170 and actual jet. Or Bombardiers own offerings.

        What were they thinking ?, fantastic prop planes who were doomed by bad business decisions

        • To date, Bombardier has a debt of $ 9 billion. What organization is able to invest as much in research and development without obtaining guarantees to reduce its business risk? Government assistance is a tool to measure the risk. And because of the military past of aviation, there is a kind of myth, glory, or pride that prompts a government to help entrepreneurs to make machines. Precisely, flying machines and energize and create economic movements across society. But for leaders such as Bombardier, Airbus and Boeing, their duties require to produce, not an ideal plane, but first a return on investment from a bet on the future consists of market research and engineering fantasies. And with Q300 and Q400, Bombardier has inherited these machines by buying De Havilland. What to do with when Bombardier’s experience is limited to a few years? We learn his craft, it limits investment and a little patience to give a global view of its market. For turbo, global vision (and not international) date a few years. They still need time to get in tune with an engine builder that will, also take the risk of investing large sums of money through tax aid … The study of Airbus and Boeing shows that it takes the include in blocks of 3 to 5 years to assess the management qualities, qualities that do not necessarily provide positive choices (340, 380, 747-8, etc.) …

          • Bombardier bought the De Havilland Canada business in 1992 ( from Boeing !)
            the DHC-8-400 was launched in 1995 so was a Bombardier project ( it had been on drawing board previously)
            This was the same time as the CRJ700.!
            You can see business decisions werent thought out properly even then. The technical leadership isnt matched by business leadership.

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