Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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Bombardier 3Q2016 earnings: revenue down, performance up
Nov. 10, 2016, (c) Leeham Co.: Bombardier reported 3Q2016 and nine months results reflecting lower revenues as downsizing businesses and cost-cutting took effect.
Revenues for the current quarter were $3.7bn vs $4.1bn. For the nine months, revenues were $12bn vs $13.1bn. Earnings Before Interest and Taxes (EBIT), and before special items, were $87m vs $75m for the quarter. Losses are special items were $94m and $4.9bn.
For the nine months, EBIT was $323m this year vs $538m last year. Losses after special items were $722m and $4.66bn.
BBD burned through $320m in cash in the quarter vs $816m a year earlier. For the nine months, the cash burn was $1.56bn vs $2.37bn.
Alain Bellemare, CEO of Bombardier.
Gaining momentum
“We continue to gain momentum as we execute our turnaround plan and transform our company,” Alain Bellemare, President and Chief Executive Officer, Bombardier, said in a press release. “In the third quarter, we again delivered on our financial commitments, we achieved our program milestones and we continued to take the hard actions necessary to improve productivity, reduce costs and optimize our operations.”
The Commercial Aircraft division saw revenues increase to $538m from $480m in the quarter. Deliveries were up by two aircraft, to 16, year-over-year. However, net orders were a negative nine vs two YOY. This reflects cancellation of 12 orders by Russia’s leasing company Ilyushin Finance Corp. The book:bill ratio was negative.
EBIT was a loss of $317m vs $3.6bn.
Earnings Call
Quotes are paraphrased.
Bellemare:
- Earnings guidance is increased to the high end of previously stated numbers.
- The transformation plan is allowing BBD to perform in “any market.” Targets should be reached in 2018 through 2020.
- BBD is more than 80% complete with workforce reduction. On track to achieving cost reductions in 2016.
- There will be annual cost savings of $500m to $600m, with full run rate by 2018.
- CSeries continues to perform “exceptionally well” in service. More than 1,500 flight hours accumulated. Reliability is exceeding expectations. The first A check was conducted in under five hours, better than industry standards, with no problems identified.
- CS300 enters service with airBaltic shortly.
- We are working very closely with Pratt & Whitney on engine delivery issues. PW is working closely with us to support 2017 delivery schedule. An update will be provided at the investors’ day next month.
John Di Bert, CFO
- Financial performance for the year is ahead of original guidance.
- Still planning on cash flow break even in 2018.
- Recurring cash flow from continuing operations is a significant improvement.
- Ended 3Q with more than $3bn cash on hand from more than $2bn. Entering cash-generating 4Q.
- There has been $180m in restructuring charges YTD. Total for the year should be between $250m-$300m.
- Book:bill for all aircraft programs should end year at or above 1:1.
- Commercial aircraft: focus continues to be on execution. $2.7bn in full year revenues expected, including delivery of seven CSeries. EBIT expectations should improve by $100m to a loss of $450m.
- Market activity for CRJ remains slow.
Q&A
- AB: We don’t expect any issues with the global supply chain as a result of the US election. It’s too early to speculate as to trade, but it should affect global supply issue.
- AB: The strategic agreement with COMAC has so far produced very little. It was prior to my time, but there hasn’t been much collaboration with COMAC.
- AB: The performance of the CSeries in service has been excellent. In 20 years I’ve been working on projects, it’s the best I’ve ever seen. The engine is performing very well. What we’re seeing is a production ramp up issue with PW. It’s a GTF production issue.
- JDB: We still see CSeries deliveries of 30-35 next year. As we get more clarity with PW we’ll see if we can catch up the shortfall from this year.
- JDB: We feel good about where we are on production for CRJ. (Backlog down to 69.) It’s a great aircraft. Campaign activity has been a bit of a low cycle. You should expect a little bit lighter volumes next year.
JDB: “We still see CSeries deliveries of 30-35 next year. As we get more clarity with PW we’ll see if we can catch up the shortfall from this year.”
If I read this well it means they expect to recover full production by the end of next year, and then some. The “then some” being the 7 or 8 aircraft that will not have been delivered in 2016 as they had originally planned. All this means that Bombardier expects to be able to produce around forty aircraft next year.
I must say that I am a bit surprised. For the problem with the fan blades appears to be very serious. But from what I can see it looks like P&W have done everything they could possibly do to mitigate the problem. I know for instance that they are constructing two new fan blade factories in order to supplement the existing ones. So that from early next year they should have a total of four plants producing fan blades for the C Series and A320neo. My understanding is that while they will be doubling capacity they will also ameliorate quality in order to have fewer rejects.
Since these optimistic figures for C Series production are coming directly from Bombardier I assume they are more realistic. I say this because when P&W mentioned that by the end of next year they will have almost completely recovered I did not believe them and I thought there projections were a little optimistic. At this time next year we should have the answer. Or at least we will have “more clarity”.
In a sense, with 40 aircraft delivered, Bombardier will reach more than $ 1 billion in 2017 for the CSeries. This money can be expected to be invested in new programs. In the Global 7000, certainly, in the Global 8000, perhaps, in a new CRJ update, no doubt. But still ? In what else?
Be careful about what ‘cash in hand’ means, as its shorthand for actual cash in bank account and other products waiting for sale.
For aircraft manufacturers this means planes built but not yet signed over to customer ( testing, waiting for seats or engine parts etc).
The auto manufacturers apply the same ‘shorthand’ as they have a very long delivery tail and sometimes months supply of cars that havent yet got to dealers yards.
BBD has no money to put into new programs for a while.
The $3.4B cash figure does not include inventories ($6.8B).
But I don’t think they have cash for any major investments quite yet. Maybe some early work on a CS500, but they’ll be in cash conservation mode for a while yet.
By comparison the number for the whole of Boeing company are ( 2015)
$11.3 bill – cash and cash equivalents
$42.7 bill -inventories
As you would expect they have big production lines and lots of planes going through the final stages before customer acceptance. ( Roughly 70% of Boeing revenue comes from commercial aircraft, Im not sure of the ratio for Bombardier)
“Maybe some early work on a CS500.”
My understanding is that BBD “applied for a loan” about a year ago with the federal government to do just that. I am convinced that BBD is pressured by various customers, Delta among others, to launch the CS500 as soon as possible. In my mind this programme should be given priority over any other equally urgent ones, like for instance the CRJneo or Q400neo. It is obvious that both the Q400 and CRJ require new engines, among several other upgrades. But if Bombardier needs to invest say 1 billion on each of these programmes (C Series, CRJ, Q400) the CS500 is the one that will allow them to maximize the return, while being the quickest to breakeven.
I agree with you Normand but we can already imagine that it will be a direct jump in the territory of Boeing and Airbus. How to think of a CS500 whose characteristics will give a fairly considerable advantage and at a level such that the next single-aisle of the two giants are only a replica or imitation of the CS500. In other words, how to ensure that the CS500 will still be in demand around 2025-2035? In short, what do you think are the technical characteristics to be fully embedded in the design of the CS500, right now?
The CS500 will be a simple stretch of the CS300, which is the base model. It will likely be closer to the A320 than the 737 in terms of capacity, but could also be in between the two. But it will necessarily have an inferior range.
In my judgement it will be important for the CS500 to retain a potent range though, and I believe it will be possible to achieve this with several improvements to the engines via a succession of PIPs, along with further refinements to the airframe. This should make the CS500 an even more direct competitor to the A320 and 737, especially if it is able to offer a continental range. Here potential customers will have a lot to say and will dictate to BBD what they want: higher capacity/shorter range, or lower capacity/longer range. In any configuration the CS500 will offer unbeatable economics, but it’s more limited range may become an impediment if it cannot carry a full load of passengers coast to coast, in any direction, and at any time of the year. For I believe the USA will be an important market for the C Series, where this capability will be an asset.
The value of the aircraft will not only reside in its superior economics, but will also be based on the completion of a family of aircraft that will cover the entire 100-150 segment. This will make the C Series a unique aircraft. The CS100 variant will remain a niche aircraft though, because it won’t be able to compete with the Embraer E-Jet E2’s superior economics. Still, it will offer exceptional take-off/landing performances, with a relatively long range. This will make it a highly attractive aircraft for some operators that require these characteristics. And we have to keep in mind that the CS100 will be part of a family of aircraft. For each C Series variant will reinforce one another, and together will cover a critical segment that has long been neglected.
If the CS500 is successful, and I have no reason to believe it won’t, it might force Airbus to respond with an A320.5 that would have a similar capacity to the 737-8. This would itself force Boeing to respond with the NSA. The problem for the latter though is that with the existing technologies it cannot be made much better than the C Series, and will necessarily be more expensive. So this may force Boeing to make the 737 replacement bigger, away from the C Series territory. In my opinion Boeing should focus on the upper segment of the single-aisle market, where it will better compete with the A321. If the NSA is aimed at this category it could offer superior economics, but again will necessarily be more expensive than the A321.
This may explain why Boeing is focusing on the MoM at the moment and might have decided to put aside any 737 replacement until more revolutionary technologies become available. If the CS500 is a no-brainer for Bombardier, the 737 replacement is a conundrum for Boeing. The latter has been testing the market lately and it looks like the response did not clarify the situation very much, and may actually have raised the bar even higher.
I hope that they dont push into a CS500 model as they will be over stretched. Normally you would need serious interest from airlines before going down that path, neither of you have mentioned anybody other than Delta.
Look how Boeing moved its Max 7 to sit just above the CS300, where it can apply the most competitive pressure. The same will apply from Airbus if they moved into A320 territory.
Financial and marketing are not Bombardier strengths, over extending will wreck the whole program after they have achieved so much with getting their design into production, getting significant new orders in can be an expensive business with financial guarantees and taking trade ins and such.