April 28, 2016: “Our turnaround plan is gaining traction,” said Alain Bellemare, BBD CEO, to lead off the first quarter earnings report for Bombardier.
“This is a big win for Bombardier,” he said. “This is a strong endorsement for the C Series.” He said BBD is finalizing the agreement with Air Canada for 45 firm orders and 30 options for the CS300. “We significantly improved the quality of the backlog list.
“Looking ahead, we are seeing increased customer interest in C Series,” Bellemare said.
The Air Canada, Air Baltic and Delta orders will result in a 2Q2016 charge of $500m, or nearly $4m per aircraft, BBD announced in its press release. This means the aircraft were sold at a loss, but the gain of these blue chip customers were needed. This is about the learning curve and unit accounting (see below).
Delta deliveries begin in 2018.
Belleman said the C Series will be the largest driver of future growth for BBD.
The CRJ and Q400 saw soft orders in the first quarter. Bellemare sees a stronger second quarter. He vowed increased attention by management this year.
John Di Bert, CFO, said BBD is performing to the Transformation Plan, but more work lies ahead. Commercial deliveries in 1Q were 20 aircraft vs 23 a year earlier. year.
“EBIT is a work in progress in 2016,” Di Bert said. “Benefit from our actions will begin happening in the second half.” Di Bert said BBD is starting to see improvements in margins. There was a small margin on existing commercial programs, but C Series pushed EBIT to a $66m loss. This will widen this year as C Series production ramp up takes place, as previously forecast, Di Bert said.
Di Bert expects the Quebec government investment of $1bn to close by the end of the second quarter. The forward plan doesn’t not factor in a federal government investment, with which negotiations for another $1bn investment have been difficult.
Bellemare said the Transportation Plan was constructed without assuming the federal investment, but getting it will allow flexibility and future investment. Bellemare largely ducked a question from analyst Rob Spingarn of Credit Suisse whether the investment could use the money to develop a larger CS500. The focus today is on execution and business aircraft, Bellemare said.
Another analysts later returned to the topic. Bellemare repeated his answer, focus on today’s challenges. “I feel very good about where we are today. We have the only new aircraft in the 100-150 seat market, so for the time being” the focus is on this market.
Di Bert said the $500m charge is about the learning curve. “A lot of these aircraft are in the early stages of the learning curve.” Under the accounting rules BBD follows–ie, unit cost accounting rather than program account followed by Boeing–BBD takes the charge now. This will be a non-cash charge.
Di Bert said the per-aircraft loss of the charge will be a moving number and not necessarily a loss of $4m per aircraft. This is because of the learning curve improvements. If Delta exercises options, these will be outside the learning curve charges, he said.
Bellemare declined to speculate on the future of the orders with Russia’s Ilyushin Finance Corp, which is hampered by international sanctions on Russia, and bankrupt Republic Airways Holdings, which is expected to reject the C Series contract during the bankruptcy process.
BBD sees 15 deliveries this year, double this next year and gradual ramp up to 120 by 2020.
Initial analyst take:
Goldman Sachs (Neutral)
Bombardier (Neutral; C$1.26 12-month price target) reported weaker-than-expected 1Q16 operational results. Adjusted EBIT in the quarter was 19% below our estimate, with margin downside in Commercial Aircraft and Aerostructures and Engineering Services. Free cash flow was a larger use of cash than we expected. However, the company also announced that Delta Airlines has placed a firm order for 75 CS100 aircraft with options for additional 50 aircraft. This is a critical order for the CSeries program that was otherwise lacking major network customers and general demand momentum. 2016 guidance is unchanged. The closing of the Quebec investment is expected to occur in 2Q16.
JP Morgan (Neutral)
Though widely anticipated, we still expect a positive reaction to Bombardier’s order for 75 C Series aircraft from Delta with an additional 50 options. Moreover, Q1 was solid, with better than expected EBIT and cash flow, a 1.3x bizjets book to bill, and unchanged guidance.