Bombardier Inc. (BBDB) Earnings Call Transcript & Summary

Okay. Thank you. So welcome, everyone. Next up is Bombardier. we appreciate the late addition. Alain Bellemare, Chairman and CEO; and John Di Bert, the CFO. So maybe I'll just turn it over to you to talk -- maybe walk through, obviously, a whole bunch of stuff going on here to try and get a straight on where the numbers shake out from a pro forma standpoint in terms of what the aviation business will look like going forward, if you want to take it from a capital structure, revenue profile and margin profile.

Thanks, David. Let me start and then I'll turn it over to John to provide, like, more colors on the number. But I think that we are at the end of the turnaround journey at Bombardier. It has been a 5-year turnaround plan. We have the assets at the right place where we have totally exited commercial aviation. The C Series is now with Airbus, the A220, a great place, going to be a great program moving forward. We just announced last week that we are selling -- we've reached an agreement with Alstom to sell our train business to them for a pretty fair value. So again, John will give you more detail. And moving forward now, we're all ends on business aviation. This is a business where we are extremely well placed. It's a USD 7-plus billion and growing, with significant runway for margin expansion. We're coming out of a massive investment cycle with our brand-new Global 7500, which is the best business aircraft in the world today, and with significant refresh on our Global 5500 and 6500. We have best sellers with our Challenger products. So we are -- we feel very good about where we are. We're very pleased that we have successfully completed this turnaround, which was a very demanding journey. And now we're landing at a very good place with a very strong business aircraft franchise. On this, I will turn it to John to give you a bit more detail as to what does it mean financially for us.

Yes. So I think what's important here, David, to your question is -- I'll take this in a couple of pieces. One, talking first about the transaction, where it leaves our balance sheet and what it means for our financial strength going forward. And then maybe I'll give a little bit of just a broad color on BA. We haven't gotten any of the specifics on that. So we'll probably leave that through 2020, but I'll give you a little bit of just a top-down oversight. So first things first is that we've shown this in some of the material we put out with the transaction. By and large, when you take the proceeds of the BT sale and you add that to what we expected for 2020, around about $4 billion of cash, adding $4.2 billion to $4.5 billion of proceeds for the BT transaction, and then you remove from there what will go with the business, about $1 billion we estimate roughly of cash that goes with the business within BT, you're left with something around $7 billion. We clean up any exit liabilities for commercial aircraft. So there's some separation and some RVGs, and et cetera. So $6.5 billion to $7 billion fully available to us. From there, what you should think about is the $4.2-plus billion of proceeds from BT goes to debt pay-down. So that will be a significant reduction of our debt stack. We'll optimize the number after that. So will leave us with a couple of billion dollars or more of cash. That's an optimization exercise. We'll try to make the business strong, flexible on the way out. So determine whether we take some revolver or other flexible available capital, which may allow us to deploy more of the on-hand proceeds that I mentioned there. I think what it really means is that you come out of this with a fantastic portfolio of aircraft, big investment cycle behind us. And really the story for BA, after moving off the debt and after accessing, I think, will be more cost-efficient cost of capital and debt, leaves a business that is very, very well poised for financial performance. And the reason I say that is you've got -- in 2019, speaking from actuals, you had about $5.4 billion coming from business aircraft activities. So forget all the divestitures and aviation, all of that, $5.4 billion. You add to that the growth on the 7500, pretty significant this year, we'll get to the kind of mature rate 35-plus aircraft, which means with a little bit of aftermarket, you're probably looking at a number that's $7 billion-or-so of revenue. Now we're not giving guidance out there, but just a simple math to take you in that direction. We had 7% margins in aviation last year. I expect those to be equal or better next year. So again, what you look at simple math is about something that approaches $500 million of EBIT. To that, we're going to have a pretty significant run of 7500s from hereon in, 35-plus aircraft, they'll come with depreciation and amortization. We expect that to be around $400 million, maybe more D&A. So it gives you an EBITDA number that starts to approach $900-plus million. That's the franchise that exists today. And that franchise really is in aftermarket acceleration. So top line from services business. When Alain and I joined, we're about $700 million, $750 million of revenue per year, probably closer to $1.25 billion now, as we speak, $1.2 billion, $1.25 billion. That business has runway in terms of accessing more of our fleet. We have 4,800 aircraft in the fleet, and we touch about 1/3 of that fleet. We were at 20%. I think there's runway there to grow. That's good margin business. And then very importantly, is you have a Global franchise, really, the 7500 clean sheet, amazing aircraft; the 5500 and 6500 entry into service this year. They're both great aircraft with a very strong market acceptance. Those aircraft have margin growth capability, significant learning curve and the fact that they're premium aircraft with solid margins, that will push margins up. So the big picture is you got $7 billion of revenue, more or less, growing. You have margin expansion that we believe is certainly capable of double digits over the next...

EBIT. EBIT margin.

EBIT, yes, over the next few years. And then the -- how you bring this all together is, you have a business that's got double-digit margin potential. CapEx, we've been very disciplined. You've seen even with the 5500 and 6500, a very surgical deployment of capital on time, on cost and in service. We believe that we're going to continue to be able to operate that way, which is $400 million to $500 million. We treat depreciation and amortization more or less equal to CapEx. So a pretty good portfolio of investments ahead of us there within that plan. So good conversion of EBIT to cash flow, a very favorable tax situation, significant amount of tax attributes coming from our past investments. So the runway on tax cash is pretty clean for the next several years, which means you have a business, growing margins, strong top line and the ability to convert the earnings to cash through disciplined capital and good tax situation.

That $900 million EBITDA, does that include corporate in that number?

It doesn't. That's the business unit. And then we expect growth from this number. And then, of course, we would need to work through the optimization of our corporate cost structure. We're in the neighborhood of about $150-or-so million right now, as we speak, full business. We've got really almost 3 going on, right? You still have some commercial activity, you've got trains and you've got the business jet. And of course, there'll be some simplification. We have great talent. I think there'll be a real good way to find the right-sized structure. And some of that talent may be useful as well on the train side as there's some specific activity we can carry on there.

So pro forma leverage, just looking at the net debt, like 2.5x levered for BA, including pension, maybe 4x levered, is the way we should think about it?

So you can do the simple math, right? You take this kind of $9.3 billion of bond debt. We're looking at $6.5 billion to $7 billion of actual available pro forma cash. We'll optimize how we deploy, but pro forma net debt, about $2.5 billion exiting all of this transition and divestiture, that against -- again, I don't want to create any new targets or expectations, but just by and large, $1 billion EBITDA franchise, including, I believe, over time, the corporate cost, and that gets you $2.5 billion. Now we're not setting any numbers today. This will be a communication and a kind of a dialogue over the next year as we kind of get closer to that stand-alone business. And I would just simply say that from there, BA already generates cash flow today. So going forward, lower debt structure, that cash flow applied to better cost of capital, managing the corporate cost would leave us with cash generation, so an EBITDA growth. So I mean, it starts to give more acceleration to that leverage ratio as well.

Okay. And the delivery profile for BA, so I think last year, business jets, you did 142 with 11 7500s. I think this year, you talked about 160, includes a couple of CRJs. So let's call it somewhere in that 155 to 160 range. So it sounds like your legacy product with the ramp in the 7500, the legacy product is lower. Is that -- and if so, where is that? Is that Challenger or Global? Where is the production lower? And how does that flow back through in terms of pricing and all of that?

I'd say, by and large, yes, I mean, a handful, we may -- we tweak the production. We always do that. I mean this is -- but I wouldn't say there's any real meaningful change in the market dynamic. I'd say that, by and large, we replace deliveries with sales on a one-to-one basis. I think that's where the market is. With respect to the 7500, we're looking at around 35 aircraft, maybe -- can be a bit more than that, we'll see. So I think, for us, going from 11, and we talked about 3x as being kind of the solid expected outcome, gets you about 33 units. We talked about 35 as being the production rate that we're driving today. So by and large, there may be a half a dozen aircraft that we're tweaking. No more specifics than that. I think that the market for whether you call it the Globals or the Challengers, solid 75-plus either way. And that's really -- we've been disciplined. I mean, in 2015, when we got here. I mean, Alain made some big decisions. I think they have been the right ones. We've protected brand. We've protected value. The new aircraft are at the right price points. They offer a tremendous amount of customer value and allows for the market to absorb that and get value with new aircraft at good pricing. So I would say, by and large, 75, 75 and kind of 10 to a dozen Lears, and that's your 160.

Outcome?

Yes. Did you want to...

No. No.

So I mean Challenger 350 has been running 60-or-so a year. You've got more competition from the standpoint of Longitude coming into the market. Do you think those kind of volumes are sustainable on the 350 going forward?

Yes. It's a great brand, and we've been doing extremely well, protecting our market share on this because customers just love the aircraft. And we are upgrading the aircraft, making sure that we keep it fresh. So obviously, I mean, we see the competition increasing in that segment of the market, but we feel good about where we are.

Okay. The BT transaction with Alstom. I mean, obviously, we have the precedent with Siemens and Alstom and that not going through. How is this different? And what gives you the confidence that this won't run into potentially some of the hurdles that that deal saw?

You never know, but we feel confident about the antitrust approval process because the reason is, like, pretty simple it was like there's -- it's a great fit. Bombardier transportation and Alstom, there is a real good match. And there's very limited overlaps. There has been a lot of work done, obviously, over the past few months to really understand where are these overlaps. And Alstom did a great work already coming up with potential remedies. So I'm not going to speak for them. But let's say that they've learned a lot through their experience in the failed merger between them and Siemens, and that was applied to what we just went through here. So I think that these are like very complementary business. There was significant overlaps on the high-speed train and signaling and the failed Siemens-Alstom merger. I mean, we don't have any of that here. So -- or very little of that, if any. So we feel good about the antitrust approval moving forward.

Okay. And the 5 problematic contracts. Can you talk about where you are with each one of those, I guess, from a cash burn standpoint or onerous contract balance? How much more is left to go through there? And how does that kind of influence ultimately the cash that you get from Alstom upon deal close?

Yes, I think that's the good news. The way that we've structured the deal transaction here with Alstom is, we've established a floor, and that is the floor that we, John and I, are using in our financial planning moving forward. There's upside potential based on operating performance in 2020 up to another like $300 million, $400 million. So I mean, the way that the deal is structured is like -- is pretty solid. I'm not sure, I mean, it matters much other than to say, back to your question about performance on specific projects, we've done a lot of work managing our way through these large, complex legacy projects in 2019, and it did cost us more than expected, and it took a little bit longer than expected. But we are really putting the business at a good place. As I mentioned many times, we probably have another like 12 months in front of us to complete that transformation journey at BT, which was also a pretty significant journey. And we've created value along the way, and that is the reason why we -- this deal is so attractive. That deal is attractive for 2 fundamental reasons. One is there's a need in that industry on the train side for consolidation, and that deal really addresses that. And the other one is like, it's really a win-win. I would say it's a win-win-win because it enables us to monetize like fair value, good value for the business. It enable Alstom to be the industry consolidator and create a very strong rail transportation business moving forward. And at the same time, there was the opportunity for us to monetize our stake, the CDPQ stake in Bombardier transportation, which was also a very high cost of capital for us. So specifically on projects, I think that we've done like tremendous progress in 2019. New York City is done, TTC in Toronto is done, Crossrail in the U.K. is done, LOTRAIN in the U.K. was faced by a software development challenge that we had. But like now, it's done, its passed. Trains have been homologated. And they're delivering and they're going to be delivering in the first half of 2020. And at SBB, which was like a monster of a project, very challenging 15 months ago, I mean, we were still working on certification, homologation of that train. Today, we have 31 trains in service out of an order of 62 trains. So we have 50% of the order completed and the performance of the trains are just -- is just exceptional. So so far so good. So we have some more work to do, but like that franchise is really moving towards a real good place. I will just stop, saying that we had also a very strong order intake in 2019, $10 billion, and the margins in those orders were very good. They were good because they came from signaling, from service, from repeat, so like options and I -- reuse content, so which means minimal reduced risk on these -- on project execution moving forward.

This came up a bit on the conference call, the fourth quarter call. The -- I guess, the pivot, at least hourly, to us, the pivot towards doing a transaction on the BT side rather than continuing to operate the business. Now that you've disclosed the transaction, can you give any sort of back -- I mean, how long have you been talking to Alstom? Like how long has this been in the works? What was the trigger to kind of pivot you in this direction rather than thinking you could go forward with both businesses and deleverage that way?