- Earnings(1) up 48% year over year to $271M on $3.6B revenues
- Free cash flow usage(2) improved by $125M, 25% year over year
- ~$900M net proceeds expected mainly from the sale of non-core assets: Q Series program and Business Aircraft’s flight and technical training activities(3)
- Global 7500(4) certified by Transport Canada and the FAA; on track for entry into service before year end
- Enterprise-wide productivity initiatives launched, expected to generate $250M in annual recurring savings by 2021(3)
- 2018 guidance(3) updated: Revenues ~$16.5B; EBIT(1) ~$1B; and free cash flow(2) breakeven ±$150M, including net proceeds from Downsview sale
- 2019 guidance(3) provided: Revenues targeted to grow by ~10%; EBIT(1) targeted to increase by ~20% with improved cash generation
Bombardier (TSX: BBD.B) today reported its third quarter 2018 results marked by strong earnings growth. The Company also announced a number of strategic actions, including the launch of an enterprise-wide productivity program. This program is expected to generate annual savings of $250 million at full run rate, which we expect by 2021. Bombardier reached definitive agreements for the sale of non-core assets and the monetization of royalties, which is expected to generate approximately $900 million in net proceeds, increasing financial flexibility as the Company approaches the final – deleveraging – phase of its turnaround plan. Other highlights in the quarter include the certification of the Global 7500 business jet, paving the way for the aircraft’s entry into service in December 2018, and marking the end of the Company’s heavy investment cycle.
“With our heavy investment cycle now completed, we continue to make solid progress executing our turnaround plan,” said Alain Bellemare, President and Chief Executive Officer, Bombardier Inc. “With today’s announcements we have set in motion the next round of actions necessary to unleash the full potential of the Bombardier portfolio. During the earnings and cash flow building phase of our turnaround, we will continue to be proactive in focusing and streamlining the organization, and disciplined in the allocation of capital. I am very proud of what we have accomplished, and very excited about our future.”
For the quarter, Bombardier’s revenues reached $3.6 billion, representing 3% organic growth year over year, from Transportation, Business Aircraft and Aerostructures, as the Company deconsolidated revenues from the C Series program following the closing of the Airbus partnership. For the full year, Bombardier expects revenues of approximately $16.5 billion, at the low end of its guidance range.
The Company delivered strong profitability in the third quarter, achieving its best quarterly performance in years. EBIT before special items(2) grew 48% year over year to $271 million, and the Company remains on track to reach the top end of its guidance for the full year of approximately $1.0 billion. Over the same period, EBIT margin before special items(2) increased by 260 basis points to 7.4%, as margins(5) continued to trend above 8% at Transportation, Business Aircraft and Aerostructures. At Commercial Aircraft, EBIT before special items was near the breakeven point due to the deconsolidation of C Series losses net of the associated equity pick-up.
Free cash flow usage for the quarter was $370 million, an improvement of 25% year over year. Cash usage in the third quarter was driven by working capital build-up at Transportation, as the Company continues to work through the intense delivery phase. This will carry through the fourth quarter, and is targeted to largely recover in 2019. As a result, Bombardier is adjusting its free cash flow guidance for 2018 to include the Downsview proceeds. With this, the Company still expects reported free cash flow for the full year to be breakeven plus or minus $150 million.
Focusing the Portfolio, Divesting Non-Core Assets
Bombardier also announced today the sale of a number of non-core assets, in line with its strategy of focusing on growth opportunities in its Transportation, Business Aircraft and Aerostructures segments. The Company entered into definitive agreements for (i) the sale of the Q Series aircraft program and de Havilland trademark to a wholly owned subsidiary of Longview Aviation Capital Corp. for approximately $300 million; and (ii) the sale of Business Aircraft’s flight and technical training activities to CAE and the monetization of royalties for approximately $800 million.
Both transactions are expected to close by the second half of 2019, following the usual regulatory approvals. Net proceeds from the transactions are expected to be approximately $900 million after the assumption of certain liabilities, fees, and closing adjustments.
Streamlining the Organization
Bombardier also launched a new enterprise-wide productivity program to further streamline, lean out and simplify the Company. The initiative includes two actions. First, with the heavy aerospace investment phase successfully completed, Bombardier will right-size and redeploy its central aerospace engineering team. Key engineering team members will be redeployed to the business segments, with the largest group moving to Business Aircraft, to ensure they have all the necessary capabilities for future business jet development programs.
Bombardier will also establish a new Advanced Technologies Office (ATO), which will be led by François Caza, who has been appointed Bombardier’s Chief Technology Officer. The ATO will focus on systems design and engineering, including applying experience from Bombardier’s aerospace programs to its rail transportation business.
In addition to right-sizing and redeploying central engineering, Bombardier has launched a company-wide restructuring initiative focused on optimizing production and management processes, flattening management structures and further reducing indirect costs.
Collectively, these actions will result in a reduction of approximately 5,000 positions across the organization over the next 12 to 18 months, leading to annualized savings of approximately $250 million at full run rate, which we expect by 2021. Bombardier anticipates recording a restructuring charge in 2019 of approximately the same amount as special items.(3)
In parallel, the Company continued to strengthen its leadership team, with the appointment of Sam Abdelmalek as Chief Transformation and Supply Chain Officer in October. Bombardier also announced today that Danny Di Perna has been appointed President, Aerostructures and Engineering Services (BAES), effective immediately. Michael Ryan will assume the role of Chief Operating Officer for BAES. Together, they will focus on accelerating productivity, achieving world-class financial and operational performance, and delivering on the Company’s growth potential.
Introducing 2019 Guidance
With the numerous portfolio announcements made today, Bombardier introduced its guidance for the 2019 fiscal year. Revenues are targeted to grow by approximately 10% to $18 billion or more, as deliveries of the Global 7500 business jet accelerate. Profitability is anticipated to grow at a faster pace, with EBIT before special items targeted to grow by approximately 20% to a range of $1.15 billion to $1.25 billion, and EBITDA before special items(2) anticipated to increase by approximately 30% to a range of $1.65 billion to $1.8 billion.
Bombardier is targeting to achieve free cash flow generation in the range of $250 million to $500 million, which is anticipated to be offset by the $250 million restructuring charge mentioned above, as well as a $250 million contingency to reflect the working capital volatility as the Company progresses through its intense growth phase at Business Aircraft and Transportation. Accordingly, free cash flow guidance for 2019 is targeting breakeven plus or minus $250 million.
Bombardier is also reaffirming its 2020 financial targets, even after the divestiture of the Q Series program and Business Aircraft’s flight and technical training activities. Further details on the Company’s financial performance and growth opportunities will be provided at Bombardier’s Investor Day on Thursday, December 6, 2018.
SEGMENTED RESULTS AND HIGHLIGHTS
Business Aircraft’s third quarter performance shows solid execution on deliveries and sales, continued growth in the aftermarket, as well as the certification of the Global 7500 aircraft, the largest and longest range business jet in the industry.
Transport Canada Type Certification of the Global 7500 aircraft was awarded on September 27, 2018, followed by FAA type certification, paving the way for entry into service in December 2018.
Third quarter net order intake was strong, growing the backlog to $14.3 billion. Interest continues to grow in the Global family, including the new Global 5500 and Global 6500 aircraft offering.(4)
During the quarter, revenues totalled $1.1 billion on 31 deliveries including a strong mix of medium sized aircraft. With 96 deliveries year-to-date, this represents more than 70% of planned deliveries for the year, tracking to full year guidance on deliveries and revenue.
EBIT margin before special items during the quarter continued to trend above 8% driven by seasonal changes in aircraft mix, with year-to-date EBIT margin before special items of 8.5%.
Subsequent to the quarter, on October 15, 2018, the Global 5500 and Global 6500 aircraft program completed 70% of total flight test hours required for certification, tracking to entry into service at the end of 2019.
On October 3, 2018, we announced a further expansion of our service network with a new centre in Miami. Planned for inauguration in 2020, the new 300,000 sq. ft. centre will benefit our U.S. and Latin American customers and continue to fuel our growth.
On November 7, 2018, the Corporation entered into a definitive agreement to sell its activities consisting of flight and technical training for Bombardier Business Aircraft carried out principally in training centers located in Montréal, Québec, and Dallas, Texas to CAE, a long-time Bombardier training partner. This transaction provides Bombardier’s Business Aircraft customers the benefit of CAE’s training expertise, while Bombardier focuses on aircraft development and services. Concurrently with the sale, Bombardier and CAE have entered into an agreement to extend their Authorized Training Provider (ATP) relationship whereby CAE will prepay all royalties under the agreement. Combined, the total value of both transactions is $800 million, including $645 million for the sale of the training activities. Net of fees, liabilities and normal closing adjustments, we expect net proceeds of approximately $650 million. Closing of the sale transaction is expected by the second half of 2019, subject to customary closing conditions and regulatory approvals.
Starting July 1, 2018, following the closing of the C Series Partnership formed by Airbus (50.01%), Bombardier (33.55%) and Investissement Québec (16.44%), Commercial Aircraft deconsolidated CSALP from its results and replaced it by its share of CSALP’s net loss. As such, during the quarter, revenues decreased by $259 million mainly as the result of the deconsolidation.
EBIT for the quarter was near breakeven, a significant improvement as we deconsolidated CSALP results and recognized our share of CSALP’s net loss resulting in an equity pickup of $13 million. Further Bombardier invested $85 million in CSALP during the quarter in exchange for non-voting units of the partnership against its commitment of up to $225 million by year end.
CRJ Series and Q400 deliveries for the quarter totalled 5 aircraft, while net orders totalled 11 aircraft.
On November 7, 2018, the Corporation entered into a definitive agreement for the sale of the Q Series aircraft program assets, including aftermarket operations, to a wholly owned subsidiary of Longview Aviation Capital Corp., for gross proceeds of approximately $300 million. The agreement covers all assets and intellectual property and Type Certificates associated with the Dash 8 Series 100, 200 and 300 as well as the Q400 program operations at the Downsview manufacturing facility in Ontario, Canada. The transaction is expected to close by the second half of 2019, subject to customary closing conditions and regulatory approvals. Net proceeds for this transaction are expected at approximately $250 million net of fees, liabilities and normal closing adjustments.
Following the closing of the Airbus partnership on the C Series aircraft program earlier this year, and the agreement to sell the Q400 program announced on November 7, 2018, our full attention is turning to the CRJ program. As we continue to actively participate in the regional aircraft market with our established, scope compliant aircraft, our focus is on reducing cost and increasing volumes while optimizing the aftermarket for the approximately 1,500 CRJ’s in service around the world today. As we look to return the CRJ to profitability, we will also explore strategic options for the program.
Aerostructures and Engineering Services
Revenues increased by 23% year over year, driven by Aerostructures’ position as a key supplier to the A220 and Global 7500 aircraft growth programs.
EBIT before special items increased by 33% year over year supported by the revenue growth. The 8.4% EBIT margin before special items for the quarter reflects the continued ramp-up of the A220 and Global 7500 component production as well as the new contractual relationship with Airbus on the A220.
Intersegment revenue for the quarter represented 62% of the total revenues compared to 80% for the first half of the year. This decrease reflects Revenues from CSALP becoming external sales starting on July 1, 2018.
On November 8, 2018, Danny Di Perna has been appointed President Aerostructures & Engineering Services. Danny brings more than 30 years of aerospace and industrial experience with a proven track record in improving operational efficiency. Michael Ryan will assume the role of Chief Operating Officer.
Revenues in the third quarter totalled $2.1 billion, delivering 2% organic growth offset by an unfavourable currency impact. With the continued ramp-up of major projects initiated in 2017, we are seeing sustained growth across all segments, on track to full year guidance of approximately $9.0 billion.
EBIT before special items in the quarter was in line with the prior year at $187 million. For the quarter the margin was 8.7%, or 8.6% on a year-to-date basis, which continued to trend towards the greater than 8.5% margin guidance for the year.
As we work through an accelerated train delivery cycle following significant working capital investments made since mid-2017, we carried at the end of the third quarter greater than anticipated working capital.
The $33.9 billion backlog at the end of the quarter is driven by the 1.0 book-to-bill ratio(12) on a year-to-date basis, net of unfavourable currency impact.