Bombardier 3Q2015 earnings call

Oct. 29, 2015: “I feel confident in our liquidity going forward,” following the investment by the Quebec government of $1bn in the CSeries program, says Alain

Alain Bellemare

Bellemare, president and CEO.

With that, Bombardier launched its third quarter earnings call.

Cancellation of the Learjet 85 program was due to a lack of sales due to a prolonged downturn in the business jet market, Bellemare said. The $3.2bn charge against the CSeries program was driven by delays. Bellemare said that production aircraft are moving down the production lines. “We’re getting traction with potential customers” with the new sales team. The partnership with the Quebec government “is excellent news.”

Key initiatives have been identified for cash savings over the next five years. More information will be forthcoming on November 24 at a New York investment conference.

John Di Bert

John Di Bert, SVP and CFO, said one of his key goals will be increased transparency of financial going forward. The Quebec investment, which is scheduled to close Jan. 1, brings liquidity to a pro forma $5bn.

Di Bert said the company will work to monetize non-core assets.

BBD is writing down residual value guarantees (related to the CRJ program) to clear the books of this accounting overhang.

“There’s been a lot of discussion regarding our cash performance,” Di Bert said. In the third quarter, cash usage was more than $800m. Resetting production rate for the Global business jet reduces cash flow. Free cash flow will remain negative through 2016/17 but will be better than this year.

Coupled with the planned minority investment in Transportation and the Quebec investment, Di Bert says there will be enough liquidity to work through the negative cash flow periods.

Q&A

Quotations are paraphrased.

  • JDB: The CSeries is a great product. We’re really focused on future cash flows. The $3.2bn write off reflects the right valuation and the return on the investments going forward.
  • AB: We told our customers we were working to strengthen our liquidity and that Bombardier isn’t going anywhere. We will share more detail with our customers now that this has been announced.
  • JDB: Cash use for Global and CSeries will be consistent year over year.
  • AB: Next year BBD will build 15-20 CSeries, after that will ramp up to full production rate (which Bellemare did not detail).
  • Ron Epstein of Bank of America Merrill Lynch was blunt: the loss is twice the market cap, the governance hasn’t changed, it’s the same board: how can investors be assured this won’t happen again. Bellemare responded that without the write offs, the financial results would have been consistent with the year prior. The development of multiple aircraft programs pressured, “overwhelmed,” by the number of programs. Cancelling the Lear 85, the near-certification of the CSeries, other changes has significantly de-risked the company. On governance, “I’ve been getting all the support needed without any push back.”
  • JDB: CSeries ramp up will be over the next 3-4 years. We see cash flow positive and generation around 2020-21.
  • AB: There is tremendous interest in an aircraft that is actually performing in the 100-160 seat class. CSeries is the only new aircraft in the segment. We had issues before. Aircraft wasn’t certified. Management and sales team was challenged. CSeries is better than expected. We’ve strengthened the management team. We are regaining confidence with existing and future potential customers. We’re stepped up our game and there is more to come.
  • AB: The injection of $1bn will propel the success of the CSeries. It gives confidence CSeries and BBD will be there. Write off was non-cash. Moving forward the team is focused on performance, reducing costs in production and procurement.
  • JDB: CSeries will be profitable on a per-unit basis before 2020-21, probably three years from production.
  • AB: We’re looking for positive, break-even from cash flow on the program in about five years, which is normal for a new program. This has been built in our five year program.
  • JDB: The Quebec partnership investment is just to bring the CSeries to production. Any future cash requirements comes from BBD. Quebec will participate in the P&L.
  • AB: Declined to comment on reports of talks with Airbus, other than saying the leadership had to “look at all opportunities.”
  • JDB: We are not putting any cash into JV today. We will require $2bn to take program to cash positive, the bulk in 2016, using working capital and some at negative margin. Declines to say how many aircraft will be involved due to commercially competitive information. Guidance will be forthcoming next year. CSeries cash burn will be $1bn this year and next year. After investment in Transportation, will have about $6bn in liquidity (in other words, about $1bn expected for the Transportation sale).

 

8 Comments on “Bombardier 3Q2015 earnings call

  1. In this ad, the most important is the creation of a new company that will be led by a former premier of Quebec. A new subsidiary, without debt, likely to grow into a wider range of CSeries. There was talk of a significant part of the Quebec pension fund. In an ideal world, we would like to see it play a role, not as a private investor in Bombardier Transportation (at a probable one billion dollars …) but in the creation of an aircraft financing company (as GEGAS) with P & W….

  2. Upside : BBD gets the cash to ensure C Series production.

    Downside : BBD apparently forfeits 49.5% of C Series profits, but… (see below)

    The write-down was certainly requested by the Government, as it has to make sure BBD’s participation in the join venture is at fair value.

    Although the Government will own a 49.5% share in the JV, it is not a given that it will get 49.5% of the profits on the C Series. After all, Bombardier’s share will still be about 3 G$, vs 1 G$ for the gvt. And the GVT has had no role in the development program until now. There will certainly be a complex profit-sharing agreement.

    BBD is certainly getting a better deal that it would have gotten with Airbus.

    As for all the other write-downs, this is SOP when a new management team takes over a business in difficult times. The new team doesn’t want its future results to be weighted down by the legacy of the previous leaders.

  3. The Lear 85 was technically uncertifiable, not related to sales. You should go deeper about that, LOL guaranteed.

    • Indeed…. some of the structure was about as strong as honeycomb ice-cream….

  4. What on EARTH were they thinking investing that kind of money in Lear 85? O M G. Insanity? How on earth could that EVER be profitable? Total about 2.6B on a mid sized corp jet? For that money they should have delivered a supersonic business jet.

  5. On so small airliners composites doesnt play a role in weight reduction due not having the required mass reduce they just increase production costs. So i dont know why they went with composites.

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