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Edited Transcript of BBD.B.TO earnings conference call or presentation 1-Aug-19 12:00pm GMT

Q2 2019 Bombardier Inc Earnings Call

MONTREAL Aug 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Bombardier Inc earnings conference call or presentation Thursday, August 1, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alain M. Bellemare

Bombardier Inc. - President, CEO & Director

* John Di Bert

Bombardier Inc. - Senior VP & CFO

* 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

* Fadi Chamoun

BMO Capital Markets Equity Research - MD & Analyst

* Myles Alexander Walton

UBS Investment Bank, Research Division - Research Analyst

* Noah Poponak

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Rajeev Lalwani

Morgan Stanley, Research Division - Executive Director

* 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

* Walter Noel Spracklin

RBC Capital Markets, LLC, Research Division - Analyst

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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's Second Quarter 2019 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, 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 welcome to Bombardier's Second Quarter 2019 Earnings Call. I 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 financial performance of the corporation. There are risks that actual events or results may differ materially from these statements. For additional information on forward-looking statements and underlying assumptions, please refer to the MD&A. I'm making this cautionary statement on behalf of each speaker on this call.

With me today is our President and Chief Executive Officer, Alain Bellemare; and our Chief Financial Officer, John Di Bert, to review our financial results for the second quarter ended June 30, 2019.

I would now like to turn over the discussion to Alain.

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Alain M. Bellemare, Bombardier Inc. - President, CEO & Director [3]

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Well, thank you, Patrick. Good morning, everyone, and thank you for joining us today. As you saw in the press release this morning, we continued to make solid progress on our turnaround journey. We are pleased with our momentum in Aerospace, where our transformation is progressing ahead of plan. At Transportation, we continue to make good progress transforming the business as well. Over the next 12 to 18 months, we have more work to do to complete what we started. We are working through our challenging projects as well as the ramping up to make sure that we delivered on the backlog successfully. As a result, we are going to an intense phase where we need to make additional investments over the rest of the year, including adding engineering and manufacturing capacity. Although this will have an impact on our 2019 financial results, these are the right actions to complete the journey and to position BT to deliver sustainable financial performance. I will come back to BT in a few minutes. But first, an update on Aerospace.

As I mentioned, we are pleased with our progress in Aerospace. Our focus now is on creating value with our new Bombardier Aviation by leveraging our investments. With the closing of the $200 million transaction and the agreement to sell the CRJ program to MHI, our 3 underperforming commercial aircraft programs have been successfully addressed. This allows us to fully focus on business aviation, one of our 2 strong pillars. As a result of the actions that we've taken with our Aerospace portfolio, we have retired major risk with the certification and EIS of the C Series, now the Airbus A220 and of our new Global 7500.

We have created shareholder value by monetizing underperforming and noncore assets. We have improved our financial position by reducing the residual value guarantee exposure on the CRJ program by $2 billion since 2015, and we have strategically positioned the Airbus A220 for our commercial success.

One year into our partnership with Airbus, the A220 program has gained strong momentum. Cost reduction efforts are on track, and the order book has grown significantly with close to 300 new orders and commitments. This includes the latest exciting order from Air France for 60 aircraft. So again, good momentum with more to come as Airbus continues to leverage its global reach and scale.

Turning now to business aircraft, where our financial performance was right on plan for the second quarter and is tracking to our full year guidance. Our growth programs remain on track, as does our aftermarket strategy, which is benefiting from investments to expand our service network and capabilities. In the second quarter, we led the industry with 35 aircraft deliveries, including 2 Global 7500, and we expect to achieve our full-year delivery targets, including 15 to 20 Global 7500, which are mostly in our completion center now. The aircraft is performing very well in service. Its unmatched performance capabilities are being recognized across the industry. We are also seeing strong interest in our new Global 5500 and 6500, both of which remain on track for certification later this year.

Book-to-bill was 1.2% for the quarter and well above 1% for the first half of 2019. Our industry-leading backlog has grown by more than $1 billion this year to $15.3 billion, so a very good momentum at business aircraft. We expect this to continue as the business jet market outlook remains stable and as we continue to enhance our product portfolio. This includes the launch of the Learjet 75 Liberty, which improves our competitive position in the light jet segment as well as the latest performance enhancement package for our Challenger 350, which increases the value of this segment-leading aircraft.

The consolidation and streamlining of our aerospace assets into a single Bombardier Aviation segment is moving forward as planned, and John will walk you through the guidance for this new segment, which is largely consistent with our previous guidance.

Turning now to Transportation, where we are focused on completing our 5-year transformation. Since 2015, we have made significant progress on both of our key objectives. We're shaping the business to fully leverage our global scale and addressing our portfolio of large, complex projects. The reshaping of BT is tracking well. We now have regional customer organizations empowered to provide world-class service to our customers. We have standardized product platforms, driving reuse, innovation and economies of scale. And we have global operations focused on our core activities as we continue to optimize our footprint and our supply chain.

We've also made significant progress with our large complex legacy projects, all are nearly complete. In many cases, the trains are built and ready for entry into service upon completion of software development, final certification and customer acceptance. When complete, these new innovative platforms will significantly strengthen our portfolio. But first, we do have some challenges to resolve, mainly in the U.K., Germany and Switzerland.

Completing these projects will take a bit longer than expected and are consuming more resources. To protect the schedule and the backlog, we will invest an additional $250 million to $300 million over the course of this year. We are driving specific actions, including adding engineering resources to work on software development, increasing manufacturing and assembly capacity at several sites and working end-and-end with customers to rebase delivery schedules and to reach commercial settlements. John will walk you through the details of how these investments and costs will impact our 2019 guidance in just a few minutes.

Let me assure you that we fully understand what needs to be done, and we're taking the right actions. Danny and the team are aggressively driving their detailed action plans. When we complete our turnaround plan in 2020, we will have transformed BT into a global business, capable of delivering strong and sustainable financial performance.

With that, I will turn it over to John to review Q2 and our revised full-year guidance.

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John Di Bert, Bombardier Inc. - Senior VP & CFO [4]

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Thank you, Alain. Good morning, everyone. As we enter the second half of 2019 and look to complete the fourth year of our 5-year turnaround plan, Bombardier is well positioned to transition to a leaner, simpler and stronger industrial enterprise focused on business jets and trains. As part of this journey, we closed in the quarter the sale of the Q400, improving our earnings profile while generating $300 million in additional liquidity. We also recently announced the planned sale of our CRJ program to Mitsubishi, which includes $550 million in cash and completes the reshaping of our aerospace portfolio.

During the second quarter, we also continued to make progress on the completion of major train innovation projects. As we have shown in the past, we remained proactive and action-oriented in addressing the challenges we are facing as we transition the train backlog over the next 12 to 18 months to a more balanced project portfolio. Although 2019 will prove to be more financially challenging than anticipated, we are very confident that our actions will lead to a business that generates sustainable earnings and cash flows.

Finally, as we enter the last year of the turnaround, we have also done so by protecting our strong liquidity position throughout the journey. At the end of Q2, we carried $3 billion of cash on hand and approximately $700 million of available credit facilities.

Now before I discuss our updated full-year guidance, which includes the go-forward consolidation of our Aviation business into a single reporting segment and the impact of the increased costs in Transportation, let me first turn to the highlights of our Q2 financial performance. Our second quarter results feature healthy 9% organic growth across the portfolio as aircraft deliveries increased, as our aftermarket activities continue to be fueled by the footprint expansion and as we make progress across the rail portfolio. In absolute dollars, consolidated revenues were $4.3 billion, posting a nominal growth against the comparable period in 2018. The reported flat revenues masked the 9% growth as last year's results included the full contribution from the C Series and Q400 programs as well as from the aircraft training business. Those businesses have been sold or deconsolidated as we reshaped the portfolio.

On the earnings front, profitability is tracking well for business aircraft at 7% adjusted EBIT while commercial aircraft recorded a second consecutive quarter above breakeven. On a consolidated basis, adjusted EBITDA of $312 million and adjusted EBIT of $206 million were lower year-over-year as a result of Transportation's 5.1% margin for the quarter.

Turning to free cash flow. Usage for the quarter was $429 million, in line with our target of $1.5 billion or better for the first half of 2019. Free cash flow performance in Aviation units was solid, offsetting some weaker performance at BT.

Looking back at our cash usage during the last 6 months, working capital consumed $1.25 billion, including significant investments in aerospace inventory mainly to support the intense ramp-up of the Global 7500 and continued growth in train finished goods while the expected release of inventory is back-end loaded. While we continue to see cash usage in the third quarter, we do expect higher-than-normal cash conversion of working capital in the fourth quarter as we plan to deliver a significant number of Global 7500s and reach delivery milestones on key train projects.

Moving to business unit performance. Let me start with Business Aircraft. Revenues were up 6% to $1.4 billion in the quarter on 35 deliveries. Activity this quarter reflects a slightly higher proportion of global deliveries versus last year. This result also emphasizes a strong performance from our aftermarket business, which has grown double digits when normalizing for the sale of training activities earlier this year.

Looking at BBA's operating performance, adjusted EBITDA for the quarter was stable year-over-year at $146 million even as production ramps up on the Global 7500. On a year-to-date basis, adjusted EBITDA margin is up 50 basis points to 11.1% driven by aftermarket growth and cost reduction initiatives.

Adjusted EBIT was closer to $100 million or 7% for the quarter, including the dilutive effect of higher noncash amortization associated to the entry into service of the Global 7500. On a year-to-date basis, the margin was 7.3%, trending to our expectations.

Moving to Commercial Aircraft where activity was strong during the quarter, with CRJ and Q400 deliveries meaningfully higher than last year at 17 aircraft and reflecting a catch-up of lower output in Q1. Revenues totaled $516 million, and notwithstanding the higher deliveries, were $100 million lower year-over-year as the previous year included the C Series operations. Additionally, Q2 only reflects 2 months of Q400 revenues as we completed the sale of the program at the end of May.

So far this year, BCA recorded positive adjusted EBIT of approximately $42 million before accounting for the A220 equity pick up loss of $8 million. This strong performance results from solid aftermarket growth as well as from the positive RBG settlement gains, which are not expected to occur in the second half.

A word on CRG activities through the closing of the transaction and subsequent wind down at the end of 2020. In 2019, we are reducing our delivery outlook by 5 aircraft as we are mutually agreeing with a customer to cancel an order. These aircraft, which are already in production, will be redirected to 2020 deliveries. Further, all remaining aircraft in the backlog will be manufactured by Bombardier over the next 12 to 15 months. Some will be delivered prior to closing, the remainder will be sold by Mitsubishi and delivered by the end of 2020. Bombardier's CRJ revenues and earnings from post-closing manufacturing activities are expected to be marginal.

Now looking at Aerostructures. Revenues for the quarter totaled $565 million, a 24% increase over 2018 as production accelerates on the Global 7500 and its wings as well as on A220 components. On the profitability side, second quarter adjusted EBIT was 6.5%, consistent with the ramp-up of large programs. On a year-to-date basis, adjusted EBIT margin is 10%.

If we take a quick look at Bombardier Aviation as if all 3 aerospace units were combined for the first 6 months, revenues would have totaled $3.5 billion, net of eliminations for Aerostructure intercompany sales. Pro forma adjusted EBIT would be $295 million or 8.4%. This strong performance trended above expectations in the first 2 quarters principally as BCA recorded a profit. BA margins in the back half of the year will reflect the dilutive effect of lower CRJ profit and the significant increase in revenue from early Global 7500 deliveries. Altogether, BA adjusted EBIT margin is expected to be approximately 7% on a full-year basis.

Let me now turn to our rail business, which recorded revenues of $2.2 billion in the quarter, slightly higher than the first quarter and consistent with the production synchronization announced earlier in the year. This represented a 2% organic growth year-over-year, offset by an unfavorable currency impact. For the first 6 months, revenues were $4.3 billion, tracking to full year guidance of $8.75 billion. Adjusted EBIT at BT was $111 million for the quarter or 5.1%. These results include additional cost pressure on some of the 5 large, late-stage projects we are driving to completion. For the first half of 2019, BT's cost pressure totaled approximately $150 million or 350 basis points of margin dilution against our reported 4.5% year-to-date margin. We are now adjusting full year EBIT margin guidance from 8% to approximately 5% as we will take additional measures to deploy resources to stabilize projects mainly being impacted by the intensity of our efforts in the U.K., Germany and Switzerland.

We see 2019 as a pivotal year for Transportation. Although increased costs and lower cash generation are a short-term setback in financial performance, we are confident that the allocation of resources will produce longer-term benefits for the portfolio. In total, we see an earnings adjustment of $250 million to $300 million from our previous guidance, and it can be summarized as follows: $50 million to $75 million in incremental costs to complete our big 5 projects, particularly in Switzerland and the U.K. As they are taking more time to complete, these projects will consume more costs. We also expect delivery milestones in those regions to occur closer to year-end, creating a timing risk to this year's cash flows. The balance of the earnings adjustment is largely driven by the increase in manufacturing and engineering capacity and the various costs of disruption to the schedule. This includes some inefficiencies in the form of overhead underabsorption and customer settlement costs. A significant portion of these costs are expected to be incurred this year. And as a result, we will adjust Bombardier's free cash flow guidance downward for full year 2019. In summary, BT is actively managing its complex legacy projects. As we execute, the improving contract mix is creating a path to higher margins.

Let me now provide you the details of our 2019 guidance under the 2 new reporting segments, Bombardier Aviation and Bombardier Transportation. Starting in the third quarter, we will report our results under this structure as we've already integrated our internal operating model at BA. On revenues, the consolidated guidance is expected to be between $16.5 billion and $17 billion, largely in line with the previous guidance. At BA, the role for these 3 segments, net of eliminations, results in revenue guidance of approximately $8 billion. This amount is close to a low end of the original range as we adjusted for fewer CRJ deliveries. At BT, revenue guidance is unchanged at approximately $8.75 billion.

Consolidated adjusted EBIT is revised downward to a range of $700 million to $800 million, largely tied to the reduction at BT to approximately 5% margins. At BA, adjusted EBIT guidance for the year is approximately 7%. This includes a dilution coming from CRJ and Global 7500 in the second half of the year but excludes the A220 equity pick-up loss. It is important to note that going forward, the A220 partnership will be classified as a corporately held investment and, therefore, excluded from the Aviation segment and reported separately with corporate costs.

Finally, as earnings and cash flows at BT are revised downward, we are adjusting consolidated free cash flow usage to approximately $500 million. The revised outlook accounts for the $250 million to $300 million BT action plan and also reflects, to the best of our knowledge, the cash flow timing risk of some key projects, with delivery milestones near the end of the year. With cash on hand of $3 billion mid-year and cash generation in the second half, we have the right liquidity to absorb any working capital volatility.

Well, to sum it up, we've come a long way in aerospace, streamlining and simplifying the organization. We are now squarely focused on our growth programs with -- while expanding our margins. At Transportation, the goal is the same: to transition to a stronger portfolio of projects. And in 2019, despite the challenges, we are making clear progress transforming the business. The path to stronger financial performance includes decisive actions in the short-term that position us for the value-creating opportunities in the rail sector. And with our strong cash position, combined with the absence of significant debt maturity through the end of 2021, we can take the right long-term actions and complete the 2020 turnaround.

With that, operator, we're 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 Rajeev Lalwani with Morgan Stanley.

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Rajeev Lalwani, Morgan Stanley, Research Division - Executive Director [2]

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First question, maybe the obvious one, on the Transportation side. Can you just talk about what happened between the last update and this time? I mean you had an opportunity to raise your cost before. Why didn't you just do it then? And then relating to that, I mean how comfortable are you that these costs will be contained to this year and you'll see some margin improvement as we go into next year? I think some of us probably would assume that those 5%-or-so margins may hold going forward as you start to enter into new contracts and so on.

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John Di Bert, Bombardier Inc. - Senior VP & CFO [3]

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Yes. So let me take a stab at that, Rajeev. So I think a couple of things. Number one is that when you look back, I mean we were focused very squarely on accelerating and completing the 5 large projects we've been updating you on over the last few quarters and months. And the team with -- we've asked Danny to do as he's come on board and start to really get a clean, strong roadmap to completion on those projects. And by the way, we've made a tremendous amount of progress there. We've also asked them to look across the portfolio more deeply and really get us ahead of any other vulnerabilities that may have been created given the fact that the intense efforts we're putting in, particularly to the U.K. and parts of Europe, Germany, particularly Switzerland as well. What we're doing there is we're actually, I'd say, proactively putting some resources to play in engineering. Lots of software work that we're doing right now is concentrating a lot of effort on the big 5 projects, which means that we want to now double back and put more energy and resources on the rest of the portfolio. It's really a proactive effort that we're taking here, and we believe very strongly in the business long term. And what we're doing now is we're managing the intensity of the effort to complete these large projects, which hold a lot of inventory, as you very well know, and at the same time, protect the remainder of the backlog. So this is something that continues to progress. And frankly, I would say that over the last 4 to 6 weeks, this is where we've asked Danny to focus, and he and the team have come back with a plan. Alain and I want to support that plan, and we're providing him the flexibility to really stabilize the portfolio because the long-term prospects for the business are very good, and we want to make sure the franchise grows going forward.

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Rajeev Lalwani, Morgan Stanley, Research Division - Executive Director [4]

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And as a follow-up on the jet side, you had some pretty good book-to-bill figures. Can you talk about where the strength in the market was within your portfolio and whether or not maybe the pricing environment is holding overall?

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Alain M. Bellemare, Bombardier Inc. - President, CEO & Director [5]

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I would say -- good morning, Rajeev. I would say it was probably driven mostly by the upper end of our segment in the large cabin, so the Global 6000. And the competitive landscape is intense, I would say, right now, so we continue to do well. We have a very good product offering. And we are doing what needs to be done to win in the marketplace while we're driving cost here internally.

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Operator [6]

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Our next question is from Cameron Doerksen with National Bank Financial.

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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [7]

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Just want to follow-up on the free cash flow guidance for the year. And I would think that maybe the -- one of the biggest wildcards here is the SBB contract. Just wondering if you can update where things stand there. And does your updated guidance here assume that deliveries will be fairly meaningful on that contract in Q4? Does it assume that something has been slipped into 2020?

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John Di Bert, Bombardier Inc. - Senior VP & CFO [8]

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So maybe I'll take a quick view on the cash flow, and then we can update you on the actual project itself. But I would say that we've made a lot of progress. The trains now, I think there's 16 that are in service. We continue to bring new trains into service and improving performance. We are back-end loaded here. And so part of the adjustment to the earnings side and -- was the, I guess, lengthening of some of the big 5 projects to a completion. That's still within the year. But like I said during my commentary, I think that we do have some timing risk here that's kind of hard to call, to be honest with you, in terms of calendarization.

Notwithstanding, I mean whether it's going to be end of this year or if something slips into next year, the good news here is that we have trains completed in inventory, some in service, and we're working through with SBB to make sure that we can accelerate as much of that inventory into passenger service as possible, and then with that complete cash collection. So I would say, Cameron, it's going to be end-year loaded with some risk to slip to next year. We've tried to guide with the best of our ability here, and that's what we said, approximately $500 million. $250 million to $300 million of that is straight for really supporting the business, and the remainder of the variability is to account for what may be some timing challenge.

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Alain M. Bellemare, Bombardier Inc. - President, CEO & Director [9]

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When it comes to SBB, Cameron, we're making significant progress. We've got 16 trains right now in service. The production process is going very well. We are going through a number of teething issues, I would say. But fundamentally, the train is performing well. It's going to be an amazing platform once we're done with that. From a delivery standpoint, this is not the only one. It's important to know that there is -- we are expecting deliveries on multiple projects this year. So as John said, I mean there could be some timing issues associated with that, just to be very clear and very transparent. But today, we feel that we understand what needs to be done. The team has a good plan in place, and they are driving it. So really, we're guiding today with the best of our knowledge when it comes to unleashing inventory that we have built over the past, like 2 years .

Just as an update on some of our other key projects maybe that we have since we're on it. New York should be complete this year. Crossrail should also be very close to fully complete this year. LOTRAIN that we've been talking about, we have about 88, and a little bit more than 80% of the cars built right now, and we started to deliver trains. We have 6 in service today, and Dosto DB, we're still progressing as per plan. So we are making solid progress with these 5 projects. And as John said, that has put a bit of pressure in the system, and that is the reason why we are adding capacity, both in engineering and manufacturing. And on engineering, it is mostly on the software side and mostly in the U.K. as well as Germany.

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Operator [10]

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Our next question is from Myles Walton with UBS.

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Myles Alexander Walton, UBS Investment Bank, Research Division - Research Analyst [11]

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Alain, you've obviously gone through a few of these resets on the plan, particularly at Transportation, over the last 9 months. Is there some incremental confidence you're getting to the point where you've scrubbed everything because it sounds like this most recent charge, this $200 million, just associated with underabsorption, I guess, across the business and required investments across the business. And so is there any seedlings that it's not just 5 programs, it's actually broader than 5 programs, that are going to be trouble for the next few years?

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Alain M. Bellemare, Bombardier Inc. - President, CEO & Director [12]

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No. First, just for the -- to answer the first piece of your question, Myles, is that we feel confident today that we do understand the problems. We do understand what needs to be done to make sure that we deliver to our customer commitments. And obviously, the 5 big projects -- I mean these are, by and large, new platforms that are going to be shaping the future product portfolio that we will have at BT. These big projects have put pressure in the system. And as a result of that, I think that what we're going through right now is an accumulation of projects, which has like put pressure, as I said. It has created a bit of a bubble, and we're going through a bottleneck. So to address this bottleneck, that's the reason why we decided to really add resources and engineering. As I said, mainly -- it's mainly on the software development side. I mean that's where we have like the biggest challenge in term of achieving milestones so that we can start [unleashing] on the trains and delivering the trains to customers but as well as on the manufacturing sites. And it's not across the board. It's on very specific sites where we add -- where we have to add capacity, and the team is doing that.

And the last piece is in the supply chain with specific suppliers that we're working closely with so that they increase their capacity. So we are growing. The business is growing. And one of the thing that has happened here is like with these 5 projects, there was a lot of focus on that. We've kept on winning new projects, and all of this has accumulated to the point where we now have to address this bottleneck. But I would say, to conclude with the first piece of your question, yes, today we feel very confident that we have a clear view of what needs to be done to put -- to complete these 5 big projects which are tracking well, still tracking well today, but then also protect the rest of the backlog.

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Myles Alexander Walton, UBS Investment Bank, Research Division - Research Analyst [13]

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And just to clarify, maybe, Patrick, I don't know, the $200 million, you said this is overhead of underabsorption in customer settlements? Did I get that right that these are costs that are being leveled onto programs outside of the 5 that we've talked about over the last year though?

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John Di Bert, Bombardier Inc. - Senior VP & CFO [14]

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Yes. So let me -- it's John. I'll just give you some color on that. So basically, the adjustment covers the fact that there's $50 million to $75 million of that, that's associated with the big 5 projects, so specifically that part of the question. And those are largely negative margin contracts. And then the remainder is really an investment across the portfolio. That does include some absorption, and it does include some customer settlements as well as the fact that we are proactively adding the costs and investments, which will benefit all the portfolio, but it will also affect our margins. Correct.

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Operator [15]

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Our next question is from Robert Spingarn with Crédit Suisse.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [16]

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I wanted to just, I guess, stay on the topic, but maybe ask from a slightly higher level. Given that this -- if we use a baseball analogy, that this sort of 9-inning transformation, now it looks like it's an extra innings. I think, John, you referred to finishing up the transformation in 2020. But clearly, the numbers or the originally targeted numbers are extending to the right. So the question is this, either for you or for Alain, when is our first breakeven free cash flow year? And can you get to that original target of $750 million to $1 billion at some point even with the divestitures that you've had?

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John Di Bert, Bombardier Inc. - Senior VP & CFO [17]

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Yes. So let me take a stab at that, Rob. So I'd say a couple of things. First of all, let me put 2019 in some perspective. So during the year, we'll have deployed some restructuring spend across the portfolio, including the fact that we're now integrating the aviation units, and we started some reshaping as we announced last year. So I would say that, that's putting some nonrecurring sort of stress on cash flow this year. We also integrated the wing, and that's been probably $0.25 billion, so some $250 million of total ramp up to integrate that into our own supply chain here internally. And that's going well by the way. At the same time, we're building up to probably rate at 35, 40 aircraft in the system by the end of the year this year. So a lot of stress on that side of the house where you are basically deploying cost, I think, will level out in terms of cash and performance on trains. Obviously, when we take down the earnings number here and adjust also for the implication of adding some investments to cash, that puts some pressure. I don't expect that to be a recurring type of a cost as well. So I think it's -- it gives you some color on the fact that although this year, we do see pressure down to about approximately $500 million of cash usage, a lot of that does hide some of the performance.

In a nutshell, both BUs, whether it's BT or BA, will generate cash this year and meaningfully as well. So I think that -- I would say that -- I mean, and not to make light of anything or sugarcoat, but the reality is there's been a lot of transformation, a lot of turnaround accomplished here. And we feel good about both businesses. I'd say that the aerospace is accelerating very nicely through what we've intended to do here. We have a great franchise now. It's getting synergy on the BT side. We have accomplished a lot. I know that this project set back here is a little more difficult, but the reality is we've reshaped that franchise. We have standardized platforms. We have a global commercial organization. We've leveraged the scale of that business. And at the same time, we're putting a lot of energy into empowering the regions to work directly with customers. And so all of those things are very positive.

To your question about 2020, and not to be cute, but we're not going to get into 2020 guidance today here. I think it's time for us to just to work through the year. We've got a lot going on. But I will say that we still believe very strongly that the business has cash-generating capabilities that are significant, and that those 2 business units are well positioned to do exactly that. They have started to do so in '19. And as we manage through some of the ramp-up, it's a growth challenge here and a -- basically a synergy generating challenge. We can then leverage that to a very positive and strong performance for a while to come.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [18]

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Alain, let me comment this from a slightly different angle maybe since -- I know you don't want to get ahead of yourself on the guidance. But for us, we want to get some sense of your confidence level given that we have had a number of guidance resets here and a few disappointments. So Alain, can you characterize for us your level of visibility and confidence today in the next 2 to 3 years versus prior points when you've given us guidance? Is it really that much clearer than it's been?

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Alain M. Bellemare, Bombardier Inc. - President, CEO & Director [19]

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It is, Rob. Aerospace, I mean, is clear today, very clear. And we're largely done on the aerospace side. It's all about business aircraft, Bombardier Aviation, ramping up the Global 7500 and making sure that we'll continue making the right investments to keep growing this great franchise moving forward. The train has been a little bit of a setback. It took us a little bit of time to really understand fully what needed to be done on these big projects. Now we have it, and we get it. We have good action plans in place. We also, in a proactive way, I tasked Danny to dig deeper on all project. I told him to go wide and deep and really understand what is happening across the board. And today, we have that. So we've got a full assessment of what needs to be done at BT. It will take about like 12 to 18 more months. That's the reason why we keep saying that we will complete the turnaround journey as per plan at the end of 2020, and we will have BT in a much stronger position with a fully refreshed product portfolio. It is a good business. I mean the fundamentals are still solid. It's solid growth. It's countercyclical. Actually, it's not really cyclical. We have a very strong backlog. And the thing that we're doing here, Rob, is we're taking actions to make sure that we protect the backlog moving forward.

So yes, we have better visibility today. It's clearer. It comes with volatility, the strength business. You have like big projects. They come with very specific milestones. In our case here -- I mean the key, key milestones that we have to go through, the most critical one, are software development. That's the reason why we're adding a lot of capacity to this. We've redeployed a lot of people to these functions. And we then have to go through homologation of these trains and then customer acceptance of these trains. So we know what we need to do. And for that reason, John and I are fully supporting Danny, and we're investing in capacity because it is a great business. And in the long run, it is the right thing to do, and we want to make sure that we will put this business at the right place, and we would see this business performing in the long run.

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Operator [20]

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Our next question is from Fadi Chamoun with BMO.

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Fadi Chamoun, BMO Capital Markets Equity Research - MD & Analyst [21]

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John, a little bit more clarification on some of these numbers in BT. So you said the cost pressure from these handful of contracts, current amount, it took $250 million in the first half. And you're saying you're taking another $250 million to $300 million investment in the back half to kind of stabilize the portfolio in these contracts as well. But are these -- I'm just trying to understand, like, if we exclude these handful of contract, is the remaining business running at your targeted levels? And are these numbers, the cost you incurred in the first half and you expect to return in the second half, do they reoccur going forward? Or are these just onetime shots that we are seeing this year?

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John Di Bert, Bombardier Inc. - Senior VP & CFO [22]

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Yes. Thanks, Fadi. So I think part of the answer there is that what we do when we assess the investments and the overall added cost is we apply those through the -- obviously, the cost centers but then they flow into the project margins. So what you're going to see here is the mix of these difficult contracts that we had is bringing down significantly by the end of this year, probably about $1 billion or so left for 2020, and that's the kind of the big 5. So they do have a still a dilutive effect on margins in the overall scheme of things. And then the additional cost that we're putting in here does have some impact on the portfolio margins, obviously.

Now that being said, I think, as Alain said, it's the right thing to do here, and it does protect the overall portfolio. So the answer to your question is that, obviously, the big 5 and some of the adjustments that we've taken are nonrecurring. At the same time, as the mix flows through, it will take probably 12 to 18 months between now and the time we kind of work through the impact of the investments we're making. So that will have some implications through '20. That said, I would say that, and I say this today, and we'll obviously go through a whole planning process here, but I think that this would be the low point of where we see things now. It's a little better from here.

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Fadi Chamoun, BMO Capital Markets Equity Research - MD & Analyst [23]

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Okay. And just one follow-up question. Do you expect to incur any cost in the RJ program because like at the end of 2020 when you -- you would have completed the aircraft deliveries? Are there any costs associated with wrapping those deliveries down that are beyond what is disclosed in the transaction with MHI?

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John Di Bert, Bombardier Inc. - Senior VP & CFO [24]

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Yes. I think we took some restructuring money in the second quarter just to cater for what we believe are the cost, I would say, in the big scheme of things, manageable by us in the business, so not super material. The way that's going to work is that we'll manufacture and assemble the aircraft on behalf of Mitsubishi through the year next year. They'll pay us basically a manufacturing fee, and then after that, we'll wind down production. The real positive here is that Mitsubishi has obviously a great interest in a lot of the capability, the knowledge, the people, the talent that we have at CRJ, and we'll incorporate them into their business. So obviously, the implication of the restructuring is much lighter, and at the same time, we also have needs across our business. So I think balancing all those things makes for a very manageable restructuring cost at the end, and it's a fully learned out asset, right, so a lot of the cost of the business are behind us now. So nothing material, I would say.

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Operator [25]

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Our next question is from Seth Seifman with JPMorgan.

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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [26]

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I think, John, you mentioned during the prepared remarks, continued cash outflow through Q3 and then kind of outsized inflow in Q4. Did you size the cash outflow so that we should know kind of what it would be through the 9-month period versus the 1.5% year-to-date?

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John Di Bert, Bombardier Inc. - Senior VP & CFO [27]

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Yes. I mean let me start with Q4 and calendarizing and kind of putting a hard spot on this stuff, which is not an easy game right now, right? I mean a lot of this stuff is -- it's fairly chunky payments for huge delivery outputs, and we have some 700 train units, cars and finished inventory that are awaiting some very final steps here. So kind of hard to calibrate perfectly, which is why I do believe that between some completing investments on the 7500 as we -- in terms of working capital and just completing big delivery aircraft in the fourth quarter, and obviously, the lumpiness of BT and some of these additional investments, I do, at this point, believe that Q3 will be negative. It's hard to call. But I mean let's say, $200 million, $300 million is -- and this is not guidance for it. I want to be careful, but a couple of hundred million dollars or so of cash burn is probably likely. So we finished that 1.5% at the midpoint. I'd say anything up to 1.8%, 1.9% is probably a reasonable look, and then we'll need to come back in the Q4. I think Q4 presents $1 billion of just natural typical capability within the business. And then there's lots of trains out the door and lots of 7500s, and I'd say that we do see both happening. The quantum is going to vary a little bit, but I think that's where you get back to the minus 5%.

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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [28]

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Okay. Okay, great. And then, I guess just understanding a little bit better, sort of qualitatively, what's happening in the train business. I guess we know a lot of the work is done. The trains are there. They need to be delivered but kind of need more software and engineers at this point. So for the more aero-oriented among us, in terms of what those software engineers are going to be doing on these projects that are close to completion, like how do they come into the mix here?

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Alain M. Bellemare, Bombardier Inc. - President, CEO & Director [29]

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Well, it's not -- good morning, Seth. It's no different than what we're seeing on the aero, new design, new aircraft. It's the same typical industrial engineering challenge. The last piece of completing the engineering on a project is related, by and large, by software. In this case, you need to have full integration of the train with the infrastructure. So I mean there's a lot of work, collaboration with the customer that has to go through. But there are no -- it's not different than what we're seeing on the aerospace side on an aircraft. Actually, if there's anything, we took a lot of our aerospace software engineers, and we moved a lot of them to the train side, and they're making a big difference today.

I think it's important, to your question, maybe the broader question, to understand what has happened at BT. We've made huge progress in reshaping BT since 2015. When you think about that, we have an organizational structure that is clear now. I mean we have empowered our regions. We have leveraged our scale. We have centralized some of our supply chain activities. We have -- I mean it's not a small task. But we have standardized our product platforms. So we have Aventra, for example, in the U.K. It's one platform for multiple application. We have TALENT 3, which is another regional commuter that is now standardized in our platform that can be used on multiple projects. And that is the reason why we're saying that out of this, when we're done completing these projects, we're going to have a refreshed product portfolio that we will be able to use and leverage on other projects moving forward. So a lot of work has been done.

The good thing, and we don't talk much or enough about that, is our trains are performing extremely well. Once we get them in service, reliability is very good, and the feedback from customers is unanimous. Once they have their train and the service, they really like the performance of the trains. So we have -- from a design standpoint, we don't have major significant issues. We have like normal teething, EIS, entry into service issues, SBB, as a case in point, is a brand new train. And what we're facing now is the last phase of an engineering development cycle, which is largely related to software.

So that is, in a nutshell, what we're going through. And what has happened is all these big projects we're going through our pipeline, we have kept on winning. So there has been an accumulation of projects in the system, and I would say, which traded a significant need to add more capacity across the board. And that is what we are doing now. I mean we are putting more capacity to address this bottleneck and unlock the inventory that we've built into the system. And we have a lot of finished trains into the system that are waiting for key last milestones, software, customer acceptance or, in other cases, homologation of the train in specific countries.

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Operator [30]

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Our next question is from Ronald Epstein with Goldman -- with Bank of America Merrill Lynch.

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Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [31]

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One big picture question and a small question. So let's start with the smaller detailed question. John, in the free cash flow outlook for this year, I mean there's like so many moving parts. What do you have in there as asset sales? Like if you could just review, like what's that free cash flow outlook for this year?

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John Di Bert, Bombardier Inc. - Senior VP & CFO [32]

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No. There's no asset sales and free cash flow and nothing that is of any meaning anyway. So all the investments, all that stuff is separate, and the benefit is cash on hand. But free cash flow is really the operational activities and the impact of restructuring outflow costs, cash, as well as the integration of the wing, which was done early in the year and really accounts for us internalizing that supply chain, which was previously external to us. So now the guys are well at hand in building 2020 and beyond wings. So we're carrying that, and that impact us about $250 million for the year. So between the 2 of those, that's the real nonrecurring stuff that's, I would say, not standard.

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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [33]

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Got you. And then just sort of a bigger picture question. I mean this whole call, you guys have been peppered with questions around Transportation and trains. And I think really kind of the elephant in the room is why that anybody believe this is an 8% margin business sustainably, right? I mean a lot of us has followed the company for a very long time, and this is like an ongoing cycle, right? What changed just recently on contracts that went in place maybe 5 years ago? Put it this way, right, so there's a whole backlog of contracts. Who's to say in 3 years, there's not going to be 5 more contracts that are a problem, and 3 years after that, that there's not 5 more contracts that have a problem and that this is just sort of an ongoing cycle in this business. I mean it's the way it's been for a very long time, and it seems still to be that way. So it's -- how is any outsider supposed to believe ultimately that this is an 8% margin business?

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John Di Bert, Bombardier Inc. - Senior VP & CFO [34]

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Well. So I'll take a -- I mean I'll start with this, and then I'll pass it to Alain as well. But I think that there's a couple of things, Ron. I mean it's not so potentially evident from the outside here, but there's been a lot of progress, and Alain mentioned this a few minutes ago, in terms of reshaping this business. I mean we have made significant investments in new train technology. We have tremendous platforms that do very well in service, and we're winning with those platforms. If you look at the order book over the last 2 years or so and you flipped through the announcements, you'll see a very nice backlog buildup, which includes platforms that have been developed and now are being reused, so it de-risks. So to your question about longer-term, there's a de-risking component of that time to market improvements. There is the fact that we've also been improving the mix towards service and signaling, and we've done so with purpose and aggressively. And I think that those are also elements that provide stability to the project portfolio. They have better margins typically. The work we're doing here, albeit a little bit painful in 2019, I think also allows us to put the resources in the right places.

And we are continuing to work at cost reduction improvement, and we've made a lot of progress in them in the last 2 years, including the fact that when you do standardized platforms, you can go back to the supply chain, and you have more leverage because you have standard components, and so on and so forth. And then we continue to improve industrially. And I think those are -- we have great leadership that is very strong industrially, and they're continuing to make the right decisions. So in the longer term, I think better backlog, better industrial operational execution and cost reduction, and de-risking with respect to engineering and time to market. I think those are all attributes. And I think we have demonstrated. I know that 2019, the margin is off a little bit here. But the reality is we've demonstrated this business can perform, 6%, 7%, 8%. So I think that's still part of the plan.

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Alain M. Bellemare, Bombardier Inc. - President, CEO & Director [35]

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There is no reason, Ron, to believe that this business cannot deliver solid high single-digit performance. This is a good business. You've got a very large backlog, i.e., you've got volume. So you can do something with this. And I think there's significant opportunities at BT when you compare it to the way we're doing it on the aerospace side. So I mean there's opportunities for simplification across the board. There's opportunities to increase the level of proficiency in our engineering capability, especially on the software side, which relates to train control and signaling where there's also good margins to be made on that. As John said, great opportunities now that we have standardized the platforms, and we're completing the entrants -- the design and entry into service of these trains. We'll be able to reuse that somewhere else and then leverage the service contract. But there is like 2 major fundamental opportunities is on the project management side.

To answer your question as to how you prevent future similar situation is, the projects have to be managed out of the gate perfectly. So it means like you have to have a very strong project management, and that is exactly what we're doing right now. We've been very disciplined in our bidding process. We have added a lot of discipline in the way that we go to market. And then the next thing that we are doing is we are synchronizing demand bids with our production system, and that is also very critical. So it's from demand to engineering to production system to make sure that you have the right capacity across the board. That's how you protect margins on these projects. And it has to be managed very carefully every step of the way. So we believe that this is a good business. It's a stable business. And we -- it's a business that can deliver, as I said, in the range of 8% ROS moving forward.

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Operator [36]

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Our next question is from Noah Poponak from Goldman Sachs.

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Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [37]

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The free cash flow outlook reduction is larger than the EBITDA reduction. So can you square the variance there for me? And then when I read the release on the free cash reduction, it describes the incremental cost but then also timing risk on some of the projects and the milestones on the projects. But I feel like I hear you on this call stating that there's the potential for deliveries and milestones to move around relative to this range. So I'm just trying to figure if you're telling us there is also additional risk from the uncertainty around that even relative to the new range?

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John Di Bert, Bombardier Inc. - Senior VP & CFO [38]

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So, yes. So to be clear, as you said, $250 million to $300 million is kind of the additional cash outlay. And then I'm also adding to that some variability with respect to end of the year milestones. So I am adding approximately $250 million, if you want to call it that, to the bottom end and saying, essentially, that the new guidance is approx $500 million. Look, we have looked at this up, down, sideways. Alain mentioned it. I've mentioned it as well. There's a lot of train deliveries, and there are milestones, or I would call it triggers, to each of those deliveries that include software completion then certification and customer acceptance. It will make it difficult to perfectly predict the calendarization. So I would say that the best of our knowledge today is approximately $500 million of usage considering all that we know and see, and that we will continue to work towards the completion and the eventual cash generation of those milestones and deliveries. But there is risk because a lot of these triggers will occur in November, December, and as a result, that does put some pressure on calendarization. And I don't pretend to be perfect in terms of being able to see that. So it's a timing conversation. At the end of the day, what's, I think, very stabilizing and gives me and Alain confidence is that this is finished goods in inventory and that they are trains that are ready to go. And whether we get collection fully in November, December, or we spill some into earlier next year, the cash will come out. The $250 million to $300 million that we're applying to the portfolio, that's really the cash that we eat up. And the rest of it is timing, and they will come through when we complete. And my expectation is, to the best of our knowledge, $500 million this year, and we'll see it from here. We'll give you guys updates in Q3.

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Patrick Ghoche, Bombardier Inc. - VP of IR [39]

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And operator, we'll take our last question, please.

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Operator [40]

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Our last question is from Walter Spracklin with RBC Capital Markets.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [41]

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Let me focus in on the BBA or the business jet division, and specifically on the Global 7500. Alain, you mentioned that you're reiterating your guidance for 15 to 20. Having only delivered 2 so far, it certainly implies quite a ramp-up here either late third quarter or particularly in the fourth quarter. What confidence do you have around that ramp-up? And if successful, with everything you see so far, you're at 35 to 40 for next year. Is there any reason why that wouldn't still hold?

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Alain M. Bellemare, Bombardier Inc. - President, CEO & Director [42]

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Yes. Good morning, Walter. Like I said, we're still confident in delivering between 15 to 20 aircraft this year. We've delivered like 3 so far. There's another probably 3 to come in the third quarter, and the rest will be in the fourth quarter. We have 15 aircraft right now that are in our completion center right here in Montreal, and it's really progressing well. Actually, completion is progressing a little bit better than planned. So our level of confidence is good. Obviously, I mean it's a brand-new aircraft, so it might come with like a bit of a swing in this. But right now, I mean we're making very good, solid progress. We understand it's a bit back-end loaded, but we've always said that. And we saw it. I mean it was designed this way to make sure that -- like the aircraft that we bring into service are performing well and minimizing the risk for potential retrofit.

But the aircraft in service is performing extremely well. Actually, performance of the aircraft is way above expectation as you've seen. I mean we're establishing new records everywhere in terms of range, in terms of speed. So it's an aircraft that's got tremendous capabilities. And this year, we think that we will be in the range. So the team, David and the team feel confident that they will deliver 15 to 20 aircraft. And we are ramping up right now to 35 to 40 aircraft next year. And we have a lot of -- within the system in Toronto in order to -- we have over like 20-ish aircraft in the system in Toronto that are in different stage of completion for a green before we move them to Montreal for completion. So progressing well, but it's a new aircraft, and it's a beautiful aircraft. And with that come a bit of complexity. But so far, so good. We're going down the learning curve as per plan.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [43]

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On the margin that you had pegged for next year of 8% to 10%, given that 35 to 40, based on your early take on the ramp-up so far, are you directionally within that range? Or would you feel you're able to do better or worse than that initial range?

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John Di Bert, Bombardier Inc. - Senior VP & CFO [44]

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Yes. So thanks, Walter. I think that, again, with the caution that it's early to make any comments about 2020, and I'd love to be able to go through the next couple of months with David and the team and see how we push through 2020. But I would say that, generally speaking, that still holds to be the right kind of performance. We have a consolidated aviation unit, which is one of the reasons I want to take the time with the team. There's the divestitures as well to account for. And so as a result, my expectation here is that we'll still get good performance, which means some margin accretion and growth year-over-year.

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Patrick Ghoche, Bombardier Inc. - VP of IR [45]

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That concludes the call. Thank you, everyone.

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Operator [46]

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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.