Bombardier Inc. (BBD-B.TO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Bombardier's Third Quarter 2025 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. Francis de La Fleche, Vice President FP&A and Investor Relations for Bombardier. Please go ahead, sir.

Good morning, everyone, and welcome to Bombardier's earnings call for the third quarter 2025. 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, Eric Martel; and our Executive Vice President and Chief Financial Officer, Bart Demosky, to review our operations and financial results for the third quarter ended September 30, 2025. I would now like to turn over the discussion to Eric.

[Foreign Language] Good morning, everyone, and thank you for joining us today. So I have to start by saying Bombardier is in an excellent position. Our third quarter results have put us in a confident path to meet our 2025 guidance as we focus on executing our plan for a very strong end of year. Before Bart and I dive into the numbers, I want to take a moment to reflect on a few strategic accomplishments from this past quarter that also represents a perfect view of our long-term strategy. Yesterday marked an important moment for Bombardier, the Global 8000, the world's fastest business jet received Transport Canada type certification. This aircraft leads the industry with a maximum speed of Mach 0.95 and the lowest cabin altitude of any business jet in production, the program's journey will next continue with entry into service of our first aircraft before the end of the year. The Global 8000 crowns a lot of recent successes at Bombardier. On the performance front, for the third year in a row, Bombardier ranked amongst the TSX 30 top-performing stocks, an achievement very few companies in this index's history have ever reached. When it comes to our services, our customers have spoken loud and clear. Being ranked first in both the AIN and ProPilot product survey results is not just a recognition of our aircraft reliability but it's also a recognition of our people. It reflects the strength of the team we've built, one that is united by a single mission, putting our customers at the very art of everything we do day in and day out. We also took a bold step forward launching our U.S. expansion in August. In October, we began concrete actions with the announcement of our new service center in Fort Wayne, Indiana. And let me be clear, this is just the beginning. This facility will significantly strengthen Bombardier's footprint in the Midwest, placing us closer to key cities and customers. Once fully operational in the second half of 2026, this center will offer world-class maintenance, repair and overall capabilities for all of our aircraft. Most importantly, it will create approximately 100 high-skill jobs further reinforcing our commitment to growth to our customers and to the communities we operate in. This last quarter also marked a key milestone in the evolution of our U.S. manufacturing footprint. In August, we officially inaugurated our new component manufacturing facility in Moorpark, California, replacing our previous Los Angeles area operation. The new 46,000 square foot site offers a modern and collaborative environment tailored to the expertise of our highly skilled team producing components for our Global 7500 and Global 8000 business jets. Our third quarter momentum has also carried into the fall. We deepened our presence in Asia through an agreement with Sojitz Corporation, one of Japan's leading business jet providers. They placed an order for both a Global 6500 and Global 8000 flagship aircraft. This order will serve as the foundation for Japan's first large business jet shared ownership program. Bombardier Defense also continued to gain significant traction. We delivered the 9 Bombardier Global aircraft to the U.S. Air Force for the BACN program. And we signed a 10-year service agreement with Sierra Nevada Corporation to support 2 global 6,500 aircraft equipped with RAPCON-X technology. Bombardier Defense will contribute to our future growth meaningfully, and we are already seeing a strong foundation. In fact, we anticipate a growing number of aircraft deliveries in Q4. What's important to highlight here is that some aircraft testing for defense mission are green or modified aircraft delivered directly from our facilities in Toronto and Wichita. This creates extra capacity or flexibility in our Montreal completion lines as they focus primarily on deliveries to civil customers. This separation allows us to scale our defense operation efficiently without having pressure to our core business jet production lines at critical times of the year. At the same time, demand remains strong across our entire portfolio, and our backlog remains at a 5-year high levels with a healthy balance between individual and fleet customer. As we prepare for the second half of the decade, we are in a position to begin reevaluating some longer-term production rates in areas where our facilities and the supply chain ecosystem could support increases to meet demand. That said, our top priority will remain to keep the operational discipline and customer focus that have defined our success until now. For Q4, we once again anticipate a more backloaded delivery profile similar to 2024. Our teams are working well to manage the tight schedule and meet all our customer commitment. Of the risk we monitor proactively, supply chain continues to be our top priority and what we can assure you is that our teams are working with agility and discipline to mitigate disruptions. With that in mind, let me return to the Q3 results themselves. We had a double-digit growth for several key metrics, starting with 13% more deliveries, 11% more revenues, including a 12% more revenues from services. 16% more adjusted EBITDA and 59% more adjusted net income. Our free cash flow was even more significant with a generation of $152 million, which is $279 million higher than last year. These are results the entire team is very proud of, as we continue to demonstrate our strong growth potential and high levels of performance. We've also taken some action in the third quarter that focus on strengthening our balance sheet. Bart will go -- will cover that in more detail as well as our commitments to continue retiring debt and meeting our on track net leverage objectives. We are entering the final stretch of 2025 with excellent momentum across the board and most importantly, have still meaningful cash generation ahead of what will be a very large fourth quarter for deliveries. Our growth across all key indicators reflect the entire team's relentless focus on executing our plan and supporting our customers. The Bombardier team is on track for a strong year-end. Bart, on that note, over to you to dive deeper into the numbers.

Okay. Thank you, Eric, and good morning, everyone. The entire Bombardier team is very pleased with the results we've shared with you today. Simply put, Q3 was a quarter of strong execution, continued year-on-year growth and significant progress across our key strategic objectives. And as we enter the final stretch of the year, we are in a great position to deliver on our full year commitments. As Eric mentioned, Q3 was a standout quarter. Our backlog climbed to a 5-year high of $16.6 billion, supported by a robust 1.3x unit book-to-bill ratio. We delivered more aircraft, more service revenues, more EBITDA and more free cash flow than a year ago. We also continue to bring down the cost of our debt after having refinanced another $250 million at a favorable interest rate. We were once again included in the TSX 30 list for the third consecutive year, recognizing the top 30 performing stocks on the exchange over the 3-year period ending June 30, 2025. At the same time, we've seen continued strengthening of our institutional shareholder base, underscoring confidence in our long-term potential. These achievements, combined with a very strong backdrop for Business Aviation, have put us right where we want to be to close out the year. Turning to the financials. We delivered strong year-over-year performance. Total revenue for the quarter reached $2.3 billion, an 11% increase year-over-year. We delivered 34 aircrafts, up 4 units versus Q3 of last year. In terms of mix, we had 13 medium and 21 large aircraft deliveries, , in line with the reversal towards a more global heavy mix of deliveries in the second half of this year, which I had mentioned during our last call. As a result, manufacturing and other revenue rose by $172 million compared to Q3 of '24, driven by the incremental deliveries, favorable mix and increased pricing. Our services business also continued to perform exceptionally well, generating $590 million in revenue this quarter, a 12% increase year-over-year and representing roughly 25% of total quarterly revenue. Year-to-date, services are up 11%, and we have set the stage for strong continued growth for years to come. Turning to profitability. Adjusted EBITDA came in at $356 million, up 16% year-over-year with a margin of 15.4%, a 60 basis point improvement over the same period last year. Margin growth was driven by improved aircraft mix and stronger pricing, but was partly offset by transitory supply chain-related costs. Adjusted for this item, our EBITDA margins would have well exceeded 16%. Our adjusted EBIT was $227 million, a 13% increase over Q3 of last year. Adjusted net income rose sharply to $129 million, up 59% year-over-year, driven by strong execution and reflecting the growing earnings power of our businesses. Q3 adjusted EPS increased 64% to $1.21 versus the same period last year. Moving to cash. We generated $152 million of free cash flow in the quarter, representing a $279 million improvement compared to Q3 of last year. The year-over-year improvement is the result of higher earnings and improved working capital, which was driven by increased customer advances and lower inventory investments. In Q3, we invested $128 million in inventories, which was largely funded by a $101 million increase in customer advances. CapEx and net interest were $38 million and $78 million, respectively, for the quarter. In July, we also made our final residual value guarantee payment of $22 million. As I mentioned earlier, we continued to strengthen our balance sheet with an additional $250 million debt refinancing at a favorable interest rate. And earlier this week, we announced an at par debt repayment of just under $100 million that will be effective on December 3 and will clear the remaining balance of our 2027 notes. Our debt retirement plan remains on track, and we expect to continue making debt repayments in the coming months. Liquidity for Q3 remained solid at a pro forma $1.38 billion, adjusted for the debt repayment we made in early Q3 and in line with our targeted range of $1 billion to $1.5 billion. Looking ahead to the balance of the year, we are on track to meet our full year guidance. We expect to deliver a fourth quarter with very strong margins resulting from a higher mix of large-cabin aircraft, including Defense 6500s, Global 7500s and our first Global 8000, which just yesterday received Transport Canada type certification. These dynamics, along with expected stronger earnings and inventory release are setting the stage in Q4. It's been a great year so far for Bombardier, and our team is fully focused on closing the year in a strong fashion before turning the page to next year's plan, which we will look forward to discussing during our next call in February. With that, I'll thank you very much. And I'll turn it over to Francis to begin the Q&A.

Thanks, Bart. I'd like to remind you that the Bombardier Investor Relations team is available following the call in the coming days to answer any questions you may have. For the question period, please limit yourself to 1 question and 1 follow-up. With that, we will open up for questions. Operator, please go ahead.

[Operator Instructions] First, we will hear from Tim James at TD Cowen.

I'm just wondering, first, if you could talk about how you see the potential for capital deployment for M&A going forward. The balance sheet just gets better quarter after quarter. You're in a very strong position here. Just wondering what you're thinking about in terms of external capital deployment at this point? What types of opportunities you would consider or capabilities that you'd like to build?

Yes. This is a great question. Actually, we're having a discussion as we speak internally about this. But I think the principle that will guide us is, first of all, we will remain extremely disciplined as a company. We know that we've done extremely well over the last 5 years. Our stock has grown everything. And we've paid quite a bit of debt, which we're going to continue to do between now and the end of the year. But this gives us optionality walking into the next portion of the -- next half of the decade. And those options will be -- we could still reimburse that, which is always an option. We will definitely continue to invest in our program. I think it's important -- and when I say our program, it means our existing program, we'll look at all our options, but also there's a very nice opportunity shaping up for the defense business also that we will consider investing. So clearly, you need to think about some product investment, mainly improvement on our existing product, which have still capability to do so. Defense -- but then at the same time, we left the door open on potential M&A. And let me characterize this a little bit. Don't think of some major purchase there. We're more thinking of incremental that could add value to our existing business of services and defense mainly. So this is where we see value right now. We know that we have amazing potential to grow organically in both of those businesses between now and 2030. But if opportunity occurred to do a bigger portion of the maintenance work, as an example, or in defense using our existing capability, we will definitely consider those. So I guess all options are on the table, but I think what I should say is you should keep in mind that we'll be extremely disciplined with our capital deployment. We will continue to support mainly the business we are already in, actually only the business we are already in, I should say. And we'll be opportunistic at the same time, if ever, opportunity occur for a small incremental on services and defense.

Very helpful, Eric. My follow-up question. This week's Canadian budget, the plan changes to the luxury tax in Canada. You press released talking about 600 potential new jobs for Canada. Could you talk about how you see that potential change in the luxury tax impacting your business?

Yes. First of all, we were extremely happy about the decision of the government. I think they realized themselves that there was no value added to have this tax for the taxpayer actually, neither for the government. But clearly, when we said that publicly this week, this will create jobs at Bombardier and its supplier base. So you have to think about this along this way. Usually, Canada was a very strong market for Bombardier. First of all, we have the majority of the market. You have to think about 10 airplanes a year. And in the last couple of years since the luxury tax got implemented, we were thinking of -- we were more delivering about 2 to 3 plane a year. So there was a major setback for us on the Canadian market that we dominate. So clearly, now what the opportunity is, is catching up. I have a lot of customers that I've been talking to that says, I'm not going to place an order and buy a plane until this tax is there. Now that the tax is out, we have catch-up to do. So you should expect a significant increase because, first of all, we have a bit of catch-up to do on the Canadian market. and this has always been an amazing market. When you compare to the size of the country, the economy compared to the rest of the world and the number of airplanes we're selling here, it's actually a very, very strong. So we're excited about this. I can tell you we're already having 4 calls coming in so that we can discuss the next purchase of a Canadian customer.

Next question will be from Myles Walton at Wolfe Research.

Bart, could you help us with the fourth quarter implied margins toward 19% and that 400 basis point increase? What would be the driver of that? And obviously, higher than what you've seen in the past? And maybe just these transitory supplier costs, are they really behind you at this point? Or could they still be there in the fourth quarter?

Yes. Thanks, Myles. Q4, as I think probably everyone on the call knows, has traditionally been a very strong quarter for us. It's a quarter where we have customers who traditionally are looking to receive aircraft for accelerated depreciation purposes in the United States. And it also tends to be a quarter where we have a very strong mix of large cabin aircraft relative to our midsized aircraft. Those large cabin aircraft are bringing higher pricing, generally greater margins. It's typical that the large cabin aircraft, particularly the 7500 commands a much higher margin, and we are delivering a very large number of those aircraft along with the first 8000 in Q4. So that will be part of it. We also anticipate or have plans to deliver about 40% of our total deliveries for the year in the fourth quarter. As you can imagine, on a quarterly basis, we're spreading fixed costs across much more aircraft. So that's driving margin accretion as well. Services demand in the fourth quarter tends to be equally as high as we get customers preparing for the following year and they place large parts orders. So we know that part of our business is going to be very busy. And then as well, I mentioned in my prepared comments that we're anticipating delivering a fairly significant number of defense aircraft, particularly 6500s in the quarter. We've talked about the margin profile for our defense business. That profile, which is very strong, spreads across both the green aircraft that we deliver and the modifications that we perform on those aircraft for delivery. So all of those things combined are going to drive considerable margin improvement in the quarter. When it comes to supply chain headwinds, this has been something that I think the whole industry has been dealing with, obviously, for a number of years now. You've probably heard on prior calls with the other OEMs that we continue to collectively see supply chain challenges, but relief is starting to happen. Eric mentioned this on the last call that we were -- we've been starting to see this. Our own supply chain team has been working very, very hard with our suppliers to drive improvement. And we're now at the point where for the first time in probably 4 years, where we're back to what we would characterize as normal number of late parts to line. So the supply chain has normalized, except for maybe the one kind of acute area that we've talked about, which continues to be engines. So that all means that the headwind we've been facing from out of work or out-of-order work, incremental cost is going to start to become clawed back. We're expecting some of that to happen next year throughout the year, and that will continue into '27 as well.

Let me, Myles, add just maybe 1 or 2 comments to what Bart says very clearly. But on the defense side, okay, just to help you characterize what we have ahead of us is the fact that we've delivered so far this year about 4 defense planes. The number of planes we're thinking in the fourth quarter, you have to think of a double-digit number around. So that's clearly a significant margin increase for us in the fourth quarter. The second thing, Bart's comment on the supply chain were right. I was myself -- engines, as you know, has been the biggest challenge. Our overall shortages have gone down like to a manageable level. Engine were the main constraint. I was myself a couple of days ago on the shop floor. And I was walking the factory, and I haven't seen engines waiting on the receiving dock for a long time, actually for years, and now it's starting to come up. So I've seen some of the program. I think I would say we have 2 programs that are in a good catch-up right now. One remains fragile. And the other thing I have to say that gives us strong confidence for the fourth quarter is the fact that probably for a couple of weeks now, we have all the engines we need to deliver year-end and pretty much all the parts, so -- which gives us very strong confidence for our delivery in the fourth quarter.

Great color. Eric, maybe just a quick one. You said reevaluate higher rates. Is that a reevaluation for higher rates in 2026 in a material way or more beyond 2026?

Yes. I think I would say today beyond 2026. We are in a great place, as you know, with our backlog, but having too much backlog also can become a problem because now you're selling airplane in '28, '29, if not more. So we have to reassess that. But as I said, we'll be extremely disciplined. I'm not going to -- and the team won't do it if we don't think the supply chain will follow us. So there is great detail of work right now on some program. And I'm sure you realize I won't mention which one. It is strategic and full for us. But we are thinking of diligently working at the capability of the supply chain. And I think if the capability of the supply chain conclusion is that we -- it's possible and we can do it, then we will clearly have strong consideration for some of the programs.

Next question will be from Benoit Poirier at Desjardins.

Yes, according to an article, obviously, you've talked about the potential to increase production rate on the Challenger, but also you're looking to maybe move a few parts in terms of manufacturing around the globe. So I was wondering if you could maybe talk a little bit more about the potential for cost savings and maybe the potential for margin improvement as you bring the Challenger production rate higher and as you move a few parts around the globe.

I think, Benoit, this is a great question. We always need to be mindful of continuously reducing our costs. but also derisking our supply chain all the time. So I guess some of the projects we're laying out right now will do both. They will help us to improve the margin of our product. They will help us to derisk maybe some of the supply chain and will bring quite a bit of benefit. And there could be the one also that will give us the opportunity to go faster on some of the program. So I guess when we are assessing all of this, we have a very clear road map. And in our plan, we are already banking on some margin improvement on our program. And some of it can come from pricing, but some of it also will come from reducing our costs. So we have a very detailed plan on how we are going to reduce costs in our company between now and 2030, and we are acting on this plan already. And the strategy you just alluded to is definitely a big part of that.

Next question will be from Gavin Parsons at UBS.