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Executives

Shirley Chénier – Senior Director-Investor Relations

Pierre Beaudoin – President and Chief Executive Officer

Pierre Alary – Chief Financial Officer & Senior Vice President

Analysts

Walter Spracklin – RBC Capital Markets

Steve Hansen – Raymond James

Joseph Nadol – JPMorgan

Fadi Chamoun – BMO Capital Markets

Turan Quettawala – Scotiabank

Cameron Doerksen – National Bank Financial

Benoit Poirier – Desjardins Capital Markets

Robert M. Spingarn – Credit Suisse

David Newman – Cormark Securities, Inc.

Peter Arment – Sterne, Agee & Leach, Inc.

Ron Epstein – Bank of America/Merrill Lynch

David Tyerman – Canaccord Genuity Corp.

Stephen Trent – Citigroup Global Markets Inc.

Anthony Scilipoti – Veritas Investment Research

Deepak Kaushal – GMP Securities LP

Chris Murray – PI Financial Corp.

Danielle Ward – JPMorgan

David Tyerman – Canaccord Genuity

Scott Deveau – National Post

Molly McMillin – The Wichita Eagle

Francois Shalom – The Gazette

Bombardier, Inc. (OTCQX:BDRBF) Q2 2013 Earnings Conference Call August 1, 2013 10:00 AM ET

Operator

Good morning, ladies and gentleman, and welcome to the Bombardier Conference Call. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Ms. Shirley Chenier, Senior Director, Investor Relations. Please go ahead, Ms. Chénier.

Shirley Chénier

Thank you, operator. Good morning and welcome to Bombardier’s conference call intended for investors and financial analysts.

I also welcome the media representatives who are with us today. You will have an opportunity to ask questions later during this call when we open the media question period.

Shortly, Mr. Pierre Beaudoin, President and Chief Executive Officer; and Mr. Pierre Alary, Senior Vice President and Chief Financial Officer will discuss Bombardier’s financial results for the second quarter ended June 30, 2013.

Operator

This conference call is broadcast live on the Internet, and is also interpreted in French, and in English.

Shirley Chénier

You can access the broadcast on our website at bombardier.com. And the webcast archive of the integral version of this call will be available within the next 24 hours. Slides for this presentation in English and French are equally available on our website. All dollar values expressed during this conference call are in U.S. dollars unless stated otherwise.

I also wish to remind you that during the course of this conference call, we may make projections or other forward-looking statement regarding future events or the future financial performance of the corporation. Several assumptions were made by Bombardier in preparing these statements, and we wish to emphasize that there are risks that actual events or results may differ materially from these statements.

For additional information on such assumptions, please refer to the MD&A released today. Please also note that I’m making these cautionary statement on behalf of each speaker whose remarks today will contain forward-looking statements.

Pierre Beaudoin will now begin the presentation.

Pierre Beaudoin

Welcome to everyone. To start, I’d like to say that we had a good second quarter with overall increase in revenue added and backlog. In aerospace, revenue was stable and the EBIT margin was in line with our guidance. In business aircraft, we continue to capture strong market share in a stable market.

As for the CSeries, the integration of the aircraft CPU and engines on the first flight test vehicle is running smoothly, and the latest software upgrade continues to be successfully implemented. However, these highly technical tests are taking more time than initially anticipated. We are comfortable at taking the time to ensure mature systems integration before first flight to take place in comings weeks.

Transportation had a very strong quarter on the order front with a book-to-bill of 1.5. It also increased its revenue, EBIT and free cash flow. I would like to welcome Lutz Bertling, our new President of Bombardier Transport, a strong addition to our leadership team.

And now, I’ll let Pierre Alary go through the results.

Pierre Alary

Good morning. Aerospace revenue for the quarter totaled $2.3 billion, the same level as last year. EBIT before special items totaled $107 million, or 4.7% of revenue, inline with our guidance, and which compared to $99 million or 4.4% last year.

Our transportation revenues totaled $2.2 billion compared to $1.8 billion last year. This increase is due to the ramp up in production of contracts received in Europe, North America and Asia Pacific.

Overall, there has been no significant currency impact. EBIT margin is at $150 million or 6.9% compared to $115 million or 6.3% last year. The increase is mainly due to higher gross margin in system, signaling and services, and higher absorption of SG&A partly offset by a lower margin rolling stock and lower share of income from associates.

On a consolidated basis, revenues totaled $4.4 billion, an increase of 8% compare to last year. EBIT before special item was at $257 million compared to $214 million last year. Net financing expense amounts to $36 million compared $29 million last year, and with an effective income tax rate of 28.6%, the adjusted net income totaled $158 million or $0.09 per share compares to $167 million or $0.09 per share last year.

As expected, we use cash flow in the second quarter; aerospace used $459 million of cash, which is better than last year’s usage of $504 million, and the use of cash is essentially due to our significant investment in program, which amounted to $534 million in this quarter.

Transportation used $21 million of cash in the second quarter compared to last year’s usage of $44 million. And for the full year, we expect free cash flow to be inline with our guidance. As at the end of Q2, our short-term capital resources totaled $4.5 billion, including cash and cash equivalent of $3.1 billion. It is also worth noting that the pension deficit reduced by $640 million in the last six months mainly due to increases in discount rates and good return on our planned asset.

So to conclude, our results for the second quarter were good and in line with our guidance. We have a record backlog of $65.5 billion, which represents about four years of manufacturing revenues, and we continue to invest in new products, which would put us in a very solid position for the years to come. Thank you.

Shirley Chénier

Thank you, Pierre. We will now start the question period for analysts and investors. In order to keep the duration of this call reasonable, I would ask you to limit yourself to one question to give everyone a chance to participate. If you have any remaining questions at the end, and if time permits, you can get back in queue, if not you can contact me after this conference call.

We can now start with the first question, operator?

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Walter Spracklin from RBC Capital Markets. Please go ahead.

Walter Spracklin – RBC Capital Markets

Thanks very much. Good morning, everyone. So my first question is on the CSeries, and I’m just interested in the timing on the EIS side, I know that obviously they’ve been a couple of days here on first flight, and you kind of left it open now as when in your official view on EIS is.

I guess my question revolves around cost, if we do see entry in the service, let’s say hypothetically moves into a late 2014, potentially early 2015 just hypothetically, does that mean that your 200 basis point drag that you’d been guiding for aerospace for next year would no longer apply, and also on the cost side what does that do to your total program cost, I think the latest is $3.5 billion, how would that change if we do see any IS officially pushed out to a later 2014 timeframe?

Pierre Beaudoin

Let me start by saying that, there is nothing that has changed about the entry into service. Of course, we expect the first flight in the next few weeks, and from there we’ve always said that we’ve planned a flight test for 12 months, but it is a flight test program, so we’re learning during the flight test, and we’ll ask to keep you informed on what kind of progress and different milestone during the flight test, but it is a flight test and it’s scheduled for 12 months.

Walter Spracklin – RBC Capital Markets

Under the hypothetical, though that it didn’t make that 12 months, and got pushed into next year 2015, would the 200 basis point that you highlighted that drag – would that no longer apply if it were pushed out?

Pierre Alary

It’s very hard to answer a question like this when you say hypothetical. It depends on the assumptions specifically et cetera. And when we give guidance, and we gave guidance earlier this year as to 2014, and that’s based on the certain steps of assumption that we have. We obviously don’t revise those on a daily basis, and we’ll revise it with our annual guidance at our year end.

Walter Spracklin – RBC Capital Markets

Okay. And then on the program cost question, does these delays affect your program cost from the $3.5 billion that you had flagged for the total program cost initially?

Pierre Beaudoin

Not in a material way.

Walter Spracklin – RBC Capital Markets

No? Okay, all right. That’s my question. Thank you very much.

Shirley Chénier

You’re welcome.

Operator

Thank you. The next question is from Steve Hansen from Raymond James. Please go ahead.

Steve Hansen – Raymond James

Oh yes, good morning. And thanks for the time. Just looking at the net order count for the quarter, and it strikes me that the cancellations were relatively high in the quarter, just wondering if you give us a breakdown of why that might be?

Pierre Beaudoin

I mean the breakdown, it’s a question of some customers that’s realigning in the skyline, so we’ve adjusted some customer order to be later on or been replaced by a new customer within the current quarter.

Steve Hansen – Raymond James

There is no specific pattern …

Pierre Beaudoin

Nothing specific. Some swaps, customers move from one aircraft to the other, but nothing specific. Nothing unique, I would say.

Steve Hansen – Raymond James

Okay, very good. Thank you. That’s my one.

Shirley Chénier

Thank you, Steve.

Operator

Thank you. The next question is from Joe Nadol from JPMorgan. Please go ahead.

Joseph Nadol – JPMorgan

Thanks. Good morning. Pierre, Alary, I think I heard you say that you’re maintaining your guidance for aerospace cash flow for the year. Just wondering if you could give a little more detail on the cash from operations part, you’re at about $100 million through six months. I think your guidance is $1.4 billion. I noted that advances were down a little bit during the quarter. Just what’s your line of sight to getting that $1.4 million, it seems like you need a lot of advances coming in to get there?

Pierre Alary

Yes, we do. I mean while we are experiencing the first two quarters are inline with what we were expecting within our guidance, and in fact I had been specific on the guidance with respect to the free cash flow, but there is no change in our guidance overall.

But having said that, the first two quarters follow the pattern we were expecting, and then if you look at the cash flow from operating activity, we are doing better on a cumulative basis than last year, up to the tune of $340 million better, so the pattern is that, we expect to have an increase in advances from customers, from this point, the answer is yes. So that stays on the original guidance.

Pierre Beaudoin

And that also follows the pattern that what we have.

Pierre Alary

Exactly.

Pierre Beaudoin

Regularly.

Joseph Nadol – JPMorgan

Yeah I know, I understand just looking for is this commercial orders you’re expecting, CSeries orders, is it business jets, is it contractual advantage based on orders you’ve already received or is it new orders, any kind of color?

Pierre Beaudoin

The answer is that, it’s all of the above, there’s progress payment that we’re expecting that are based on orders that have already been signed and have been signed last year and previous year. So that’s schedule that’s coming from new orders and from new orders uneffectively every platform.

Pierre Alary

But business aircraft generally has better advancement than commercial aircraft?

Joseph Nadol – JPMorgan

Okay, thank you.

Operator

Thank you. The next question is from Fadi Chamoun from BMO Capital Markets. Please go ahead.

Fadi Chamoun – BMO Capital Markets

Good morning. So looking at your aerospace EBIT margin guidance for next year, which is 8%, at this stage how much of the revenues that you need to get to 8% are in the backlog, I mean I would suppose with the aircraft side of the business aviation, everything else, you’re probably pretty to be close to where you need to be or from a visibility point of view, just wondering how do you see that outlook now?

Pierre Beaudoin

Well, let me answer this in part, you look at the backlog of business aircraft, it’s quite healthy depending also on the product line you’re looking at, like the pattern that we’ve been talking about has not changed, it’s stronger on the larger aircraft than it is on smaller. So overall, I think that market so far, permits us to continue with our guidance.

Fadi Chamoun – BMO Capital Markets

Okay. So you don’t essentially see any big holes in this skyline that you would need to sell to get for that 8%?

Pierre Beaudoin

Well, there is aircraft still there to sell, and that’s normal pattern like I said, this market continues to be the same that we spoke about in Q1 of last year. The bigger aircraft we’re selling stronger than the smaller aircrafts, so in other words there is more Learjets to sell than there is the Globals.

Fadi Chamoun – BMO Capital Markets

Okay. Thank you.

Shirley Chénier

Thank you, Fadi.

Operator

Thank you. The next question is from Turan Quettawala from Scotiabank. Please go ahead?

Turan Quettawala – Scotiabank

Yes, hi. I guess for the first one, I just wanted to ask on, to the last question as a follow-up maybe, Pierre can you give us some sense on – does the commercial side of the business at all impact this, you know with CRJ orders and the Q400’s backlog also looking a little bit weaker here?

Pierre Beaudoin

For next year?

Turan Quettawala – Scotiabank

For excess margins, that’s right, sorry.

Pierre Beaudoin

Again in commercial aircraft, we see the skylines forward. We don’t see anything that has changed that would have us review our view of next year.

Turan Quettawala – Scotiabank

Great, thank you. And just also a quick question on, I know the EIS timing, for the CSeries you haven’t obviously changed that, but just trying to understand here, can you give us a sense of how long of a potential delay would start causing problems with regard to penalties, may be with airlines?

Pierre Beaudoin

I can start speculate the potential delay that’s for me is hypothesis. What we do with airlines, we keep them in form of how we’re making progress in the test, like they’re all informing where do we stand with the first flight, and what are the tests we still have to do, and then we look at the delivery, then we look at the test schedule, when the test schedule is 12 months, we’ll keep inform of the truth. So I am not going to speculate which airline would have – with very based on the potential delay that’s an hypothesis.

Turan Quettawala – Scotiabank

Okay. I guess based on where you are right now, I guess there is no risk for that happening, is that fair to say?

Pierre Beaudoin

No, I mean the airlines are all very supportive of the program that we have, and where we are in our schedule.

Turan Quettawala – Scotiabank

Great. Thank you.

Shirley Chénier

Thank you, Turan.

Operator

Thank you. The next question is from Cameron Doerksen from National Bank Financial. Please go ahead.

Cameron Doerksen – National Bank Financial

Yeah, good morning. I guess my question is on transportation; you had some pretty good growth year-over-year in DT, and it was especially strong on the system and signaling side. Is there something unusual going on in quarter or is that some more close to a sustainable level that we’ll see in system and signaling side specifically?

Pierre Beaudoin

This quarter was particularly strong, in system and (inaudible) is question of the – the condition of certain element within the system, because it’s more spiky, but it is growing, although this quarter’s growth, and this quarter will be on the high side.

Pierre Alary

I would say that we see a quite a few projects that in the system side. So when you’re dealing in emerging markets or markets where they have not had transit systems before they’re very often asked for the manufactures to be responsible by putting the whole system in place, including working with civil. So I see as a trend forward, as we’re developing our business in the new markets, I see more system for us.

Cameron Doerksen – National Bank Financial

Okay, thank you.

Shirley Chénier

Thank you, Cameron.

Operator

Thank you. The next question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.

Benoit Poirier – Desjardins Capital Markets

Yes, good morning. I was wondering if you could provide an update on the marketing campaign for the regional side, especially with AMR and Garuda, and also whether you’re ramping down the Q4 engine production or any risk on that side?

Pierre Beaudoin

Well, the first part is that, once you name Americans in active campaign which we are very active at answering questions that they ask and your AMR will make a decision. We expect the AMR to make a decision shortly. I can’t tell you more than that on this, because it’s a competitive campaign. As far as Garuda, I think you’re referring to them exercising options?

Benoit Poirier – Desjardins Capital Markets

Yeah.

Pierre Beaudoin

Okay, this is something the airline has said publicly that they would do. At this point, they have not yet exercised the option, but of course we are in discussion with them regularly. They’re taking deliveries of their aircraft, they like the aircraft. So I’m hoping that we’ll exercise the options shortly.

As far as the Q400, we’ve given guidance for this year. We have not given guidance for next year. So there is some active campaigns on the Q400. The product is appreciated. It just entered into service with WestJet as you know. So I think we’re making good progress on the campaigns that are active.

Benoit Poirier – Desjardins Capital Markets

Okay, thanks for the time.

Pierre Beaudoin

Thank you, Benoit.

Operator

Thank you. Next question is from Robert Spingarn from Credit Suisse. Please go ahead.

Robert M. Spingarn – Credit Suisse

Good morning.

Pierre Beaudoin

Good morning.

Shirley Chénier

Good morning, Rob.

Robert M. Spingarn – Credit Suisse

Hi, there. A couple of questions on commercial, first of all Pierre, what are you seeing here at the late stages of ground testing that you had not anticipated two months ago? Could you give us a little bit more specificity on that?

Pierre Beaudoin

Yes, it’s not tested, we have not anticipated as when we make a test, the earn value that we plan in the day of the tests is not quite at the level we had anticipated. So for example, we’re doing a test and then we discovered that wires were not – are plugged upside down. Okay, it’s not a big deal, but we have to go back and understand why it happened, and then it takes us two days rather than half a day. So it’s a whole bunch of…

Robert M. Spingarn – Credit Suisse

You have to find the wire.

Pierre Beaudoin

And if it’s a wire, we have to find it. So nothing significant showed up, but a lot of small stuffs that means that what we have planned in a day sometimes take three, four, five days, and of course delays first flight.

And like we have said to our team, it’s not a question of rushing; this has to be done very well. We have to learn what we need to learn to get a good flight test program because it’s not only about the first flight. So if it takes more time, it takes more time.

Robert M. Spingarn – Credit Suisse

So that being the case, how do we think about the cushion in the 12 month flight test program? Are you tight there? Do you have adequate cushion, because like you said something similar happening?

Pierre Beaudoin

Well first of all, the tests that we do for the first flight test vehicle is a lot more intensive than what we would do to get the other aircrafts to fly, because this is the first time we’re learning all these tests, integrated tests sales that we add suppliers and at Bombardier we’re learning how they behave on the aircrafts, so we’re taking a lot more time. It does not necessarily affect the flight test. So don’t link one to the other, so that would be my answer.

Pierre Alary

And it’s a different flight tests, vehicles do different tests.

Robert M. Spingarn – Credit Suisse

Right.

Pierre Alary

So on one sort of – on one series of tests we could be delayed if it has no impact on the other series as we can do it concurrently and Pierre referred to where sometime it takes longer and in some cases it takes less time than what we have planned, for this pluses and minuses.

Pierre Beaudoin

But what you learn on the first aircraft the first thing that happens with the team is we go back and look at the other flights as we go, see if we need to make a modification, if we’ve made the same mistake on the other one. So, we are learning to get the other airplanes ready, so I think one is not related to the other.

Robert M. Spingarn – Credit Suisse

Yeah but would you characterize the 12 month flight test as a tight schedule or do you have a fair amount of cushion, not necessarily relating it to the test for first flight, but in and out itself is it the tight program?

Pierre Beaudoin

Well, it always depends on the amount of aircraft you put into the flight test program as you know in the CSeries we are going to have five plus five CS100 and two CS300 and there is some additional tests that would be done on the first production airplane. So for me when we look at the schedule, yeah, it’s a busy test schedule for one year, but we’ve planned it and it’s doable. But like I said this is flight test, so as we learn and we achieve milestone, we’ll keep our customers inform how we make progress and of course we’ll adjust if we need to adjust, but I’ve got no reason this morning to say that the 12 month is not realistic.

Robert M. Spingarn – Credit Suisse

Okay. And then just I wanted to ask you Embraer launched its new aircraft during the Parris Air Show. And I wanted to get your thoughts on how this alters the competitive landscape when do you see this aircraft is competing with CSeries?

Pierre Beaudoin

Well, first of all their program covers regional and goes up in size into the category of where the CSeries is. It’s an aircraft that doesn’t come before 2018 and 2020 the regional version. So there is lots of time, so the CSeries will be on the market.

As we have said before, we have a big time advantage on our competitor. And it’s a derivative, so they did their best with what they had at making an aircraft just a derivative. So, without – I don’t want to get into it on the call, but we – I’m sure our marketing people can give you all the advantage of CSeries has because it’s now a new airplane. So Embraer did their best with modifying an air plane.

Robert M. Spingarn – Credit Suisse

Thank you.

Shirley Chénier

Thank you, Rob.

Operator

Thank you. The next question is from David Newman from Cormark Securities. Please go ahead.

David Newman – Cormark Securities, Inc.

Hi, good morning folks.

Shirley Chénier

Good morning, David.

David Newman – Cormark Securities, Inc.

Just a question maybe for Pierre Alary. Just on you had a net positive variance on RVG and credit guarantee provision. What’s our work there and how much really was it to the DA margins? And I do believe that the maturities begin to kick-in the next few years. Is this something that we can expect as you’re obviously maybe perhaps managing the RVG well and you might see reversals on that front, any comments?

Pierre Alary

Yeah. Well, first of all that it was not the reversal itself was not important and this called in the north 2014 in provision and the reversal is $7 million. So and itself it’s not in that field.

David Newman – Cormark Securities, Inc.

Right.

Pierre Alary

And effectively we’re working on reducing the risk overall with our VGF LVG and we’re reducing the risk. And as a result, variable in some cases to turn to process or reverse in a sense that some of the provision that is require.

David Newman – Cormark Securities, Inc.

Okay. And do you anticipate this could as you kind of get into the part of the program and assuming that you are doing a good job of sort of managing it. That could actually become more of a contributor to margin?

Pierre Alary

Certainly that the team that is that we’ve – we have passed to de-risk or look at those aspects and looking at the assets and what not. That really – that’s definitely their objective as to be able to fulfill those obligations at a lower cost and what we are provided for.

David Newman – Cormark Securities, Inc.

Very good. And last one for me. The Lear 85 when do you anticipate for a slight – perhaps Pierre Beaudoin for the FTV1 is still obviously being built in, and obviously I guess in your guidance overall for the year you are calling on lot of the smaller business jets. So, the 70, 75 is that still intact, I guess for the end of the year?

Pierre Beaudoin

Let me start by the second part of your question, the answer is yes. The 70, 75 is still scheduled to deliver through the end of the year. I think we said Q4 and it’s scheduled to deliver this year.

And for the 85, we are making good progress with this program. As we said before, there is some challenge in the composite structure, but that’s largely behind us. Now we are getting ready for first flight and it is scheduled to happen this year.

David Newman – Cormark Securities, Inc.

Very good. Good results. Thank you.

Pierre Beaudoin

Thank you.

Shirley Chénier

Thank you, David

Operator

Thank you. The next question is from Peter Arment from Sterne Agee. Please go ahead.

Peter Arment – Sterne, Agee & Leach, Inc.

Yes. Good morning, everyone.

Shirley Chénier

Good morning, Peter.

Peter Arment – Sterne, Agee & Leach, Inc.

This question is really more upon backup on the CRJ demand appear some of the higher profile campaign. I’m thinking Delta last year and American this year. We can kind of somewhat track. But how do we think about CRJ demand kind of more globally in some of the international markets that you compete in. Could you just give us some more color of what you are seeing and when we would expect to see some additional orders?

Pierre Alary

Well of course there is a lot of focus on the big American campaign and what happened now is the major airlines are ordered airplanes, and of course the AMR campaign is one that's still outstanding. And as you know, it’s a competitive campaign and we’re there with our product and we feel that we have a significant advantage, so we’ll see what the airline decides and when.

And then after that you should see also the regional airlines and that support the main airlines if they decide to – if they get additional routes from the airlines, of course they look at ordering airplanes. So the main volume remains the U.S. where the campaigns that you know, but we are developing international markets. You’ve seen our success with Garuda and our success in China.

And I would say and of course in Russia our product now is certified. We are working very hard on these campaigns getting the regional jet known and appreciated for the types of routes that they have, and I expect to see continued success internationally with the CRJ. There is nothing was announced lately, but I think there is good campaigns in the works right now.

Peter Arment – Sterne, Agee & Leach, Inc.

Thank you very much.

Shirley Chénier

Thank you.

Operator

Thank you. The next question is from Ron Epstein from Bank of America Merrill Lynch. Please go ahead.

Ron Epstein – Bank of America/Merrill Lynch

Yeah. Good morning.

Shirley Chénier

Good morning, Ron.

Pierre Alary

Good morning.

Ron Epstein – Bank of America/Merrill Lynch

So, just maybe back on the commercial side again, when we think about demand in the market it seems like there is just a huge amount of orders for the 737A size airplane, the A320 and when you look down at may be A319 size 737-7 it seems like there is a little bit less demand. What’s holding you back from going forward and just doing a, not to put a name on it, but CS500 that puts you right in that segment where demand seems to be surging. I got one more question and a follow-on, if I may.

Pierre Beaudoin

First of all, I think we have two very good products that we are working on with a unique market where will be offering a unique airplane in a market where the only manufacturer. We feel there is 7,000 units in this market over 20 years, and our competitors have looked at that market also say there is 7,000 units. So it’s not a forecast that Bombardier does alone. Actually we say 6800, 6900 to be precise, so there is a market there, what the airlines that are saying is that they have a need for a smaller aircraft.

But at a seat cost that competes with the bigger aircraft, and that’s what the 319 does not do or the 737, 700 does not do. It’s too expensive for them to be competitive from a seat cost perspective. So the CS300 does that very well. And we’re able to address route that today is very difficult for them to address competitively. So that’s the market we’ll focus on because I think we have a unique product.

Ron Epstein – Bank of America/Merrill Lynch

Okay. And then just as a follow-on just to, for clarity I think one of the earlier questions was someone asked about if there is a potential delay in entry-into-service. I think you mentioned that that won’t have an impact on cost or not very much. Help me to understand that how can a delay an entry-into-service possibly not impact the cost of the program?

Pierre Beaudoin

The questions was the delay in first flight, does it have a material costs and the material effect on the cost of the program, we said not material. Of course, it’s the flight test program, will be longer than planned, well we will spend more money on the program, but I don’t want to speculate on this at this point, we've scheduled the flight test for 12 months.

Ron Epstein – Bank of America/Merrill Lynch

Okay, thank you very much.

Shirley Chénier

Thank you, Ron.

Operator

Thank you. The next question is from David Tyerman from Canaccord Genuity. Please go ahead.

David Tyerman – Canaccord Genuity Corp.

Yes, good morning. I was wondering, if you could give an update on the market demand for business jets, I would absorb that as excluding the big orders, your sort of normal order type of business seems to have slowed down in the last, at least the last couple of quarters maybe three quarters, and so I’m wondering, are we in a much slower situation across the business area or should this pick-up at some point.

Pierre Beaudoin

So the way we monitored the market is to win of course the orders, and then the what’s in the backlog of discussions it’s a pipeline. We see orders, pipeline is very healthy what has taken more time this year is closing view. So, we have a strong pipeline, so that’s the positive about this market. And there is a lot of very active discussion. The concern we have is deals are taking long time to close. So, I would say generally we’re in a stable market if you look compared to last year with some growth in the larger aircraft. But we want to follow closely that the these active discussion in the pipeline get to a contract.

David Tyerman – Canaccord Genuity Corp.

Okay, thank you very much.

Shirley Chénier

Thank you, David.

Operator

Thank you. The next question is from Steve Trent from Citi. Please go ahead

Stephen Trent – Citigroup Global Markets Inc.

Hi, good morning everybody. Just a question for me on the transportation side. Certainly, in the Latin America side of the fence both Brazil and Mexico are talking up potential real projects, separate projects and high speed rail projects. I believe you guys have production in Queretaro in Mexico as well as in São Paulo and Brazil. And could you just give us some color on what you’re seeing there and where you see the potential for Bombardier Transportation effect?

Pierre Beaudoin

Yeah, I see a great potential for Bombardier Transportation like you said in Mexico we’re very active with the factory in transport in Serangoon, and an aerospace factory in Queretaro.

We know the market very well, we follow this market very well and I think with the projects they are talking about, like a high speed line to get that all, we are very much following this and looking with the customer what’s the ideal products there is another one they are talking about the line of Taluka to the airport which would be household type of product that I think Bombardier has to be, we would be very competitive. So Mexico has great potential, just to name two projects and the current President also said there was a priority for Mexico to implement, some mass transits in the country and he specified some projects like the two I just named. So, I think this will represent a great opportunity for Brazil.

Our focus is on the Monorail that we are starting to implement in São Paulo this is a unique product because it’s got the capacity of a metro, but it’s a Monorail, so it’s easier to put in place than a metro from an infrastructure perspective. So with the success of this first project, that’s starting now and we’re going to start to deliver trains and the infrastructure is making good progress. We then have a showcase to show in Brazil a system that can deliver what they are looking for is its capacity to move a lot of people without disturbing the city for the long-term by digging tunnels. So I think we have a great product and a great potential in that country.

Stephen Trent – Citigroup Global Markets Inc.

Okay, super. Thanks for the color. I’ll let someone else ask the question.

Shirley Chénier

Thank you, Steve.

Operator

Thank you. The next question is from Anthony Scilipoti from Veritas Investment. Please go ahead.

Anthony Scilipoti – Veritas Investment Research

Thank you. Good morning. I’m just looking at the presentation you have for the adjusted net income, Pierre. And maybe you could just walk us through to understand how your rationale for what’s included and what’s excluded to these numbers, I guess. I am on Page 9, of the MD&A.

Pierre Alary

Yeah. Well in this quarter the first adjustment we are making is in relation to the net financing expense in relation to the retirement benefit obligation. So, we are excluding this one because on the U.S. GAAP is calculated differently a lot of our competition is U.S.GAAP so, therefore we identified that distinctly that element to be more comparable.

And now the next one is the net change in provision arising from change in interest rate, so we have a number of provision, within the balance sheet that need to be net present value and as the interest rates are fluctuating on the quarter-to-quarter basis we kind of exclude that fluctuation because it’s not part of the really the business and the provision is there to cover what is needed and it’s going up or down, our expense has been going both ways and it's not the reflection of the core business. And obviously when we have some special item like the interest portion of the special item which is the litigation that is successful, resolution of the litigation so we are going to get back the capital pack that we’ve paid in the past.

So that’s part of EBIT as it was part of the EBIT originally and there is an interest component, so we believe that interest component is not reflection of the current quarter business. So that’s basically how we go about it, so it’s to help you to – it’s us identifying what we believe is non-core and non reflective of the current operation and it’s basically to help reader of the financial to get to the core business result.

Anthony Scilipoti – Veritas Investment Research

Okay. I think that's good that you provide it and the special item adjustment. It's just the pension one, because I and you're right. There's a slight difference to U.S. GAAP but historically that's always been included in the earnings that you've presented.

Pierre Alary

It’s been included in the past few years under IFRS and under IFRS the calculation was made differently and it was done on the – using discount rate on the liability and using the expected return on the asset, which was basically bringing a neutral impact on the entrance. But it identifying it you have the information, we believe that brings to core business and that’s why we do.

Shirley Chénier

Okay.

Anthony Scilipoti – Veritas Investment Research

Okay, thanks.

Operator

Thank you. The next question is from Deepak Kaushal from GMP Securities. Please go ahead.

Deepak Kaushal – GMP Securities LP

Hi good morning. Thank you for taking my question. I have a broader industry question. There have been a number of tragic incidences for operators in both the rail and aviation business this year. I was just wondering if could comment if you're seeing any signs of increased scrutiny from regulatory and safety authorities and if there are any changes and how this might impact the industry and the business?

Pierre Alary

First I think you’re referring to the series of event in the train business and the rail business this summer. And Europe of course in very tragic and we are concern when these events happened they seem to be all of course – all of the causes are different of these from operator's mistakes to – all of these events are under investigation right now. But that they seem to have all different cause that we see additional scrutiny. At this point we’ll have to follow this, but we feel that at least in the Spanish situation that equipment was not in cause at all.

Deepak Kaushal – GMP Securities LP

Okay. And Just a quick follow-up also on the transportation business, you did announce a big order for locomotive. I'm just wondering if those are standard design locomotive, if there's any custom work there and if this changes your margin mix when you gave your 8% target for EBIT given the higher margins that come with locomotives? Thank you.

Pierre Alary

Okay. You are referring to the framework agreement with Deutsche Bank?

Deepak Kaushal – GMP Securities LP

Correct.

Pierre Beaudoin

So this relates to a new design, which we’re doing in the context of this framework, of courses based on the locomotive that we asked today, but there is quite a few modification and that’s why they give it to us in the framework and we only got the first tranch of the – from an order perspective, but if you look at the framework it’s above 400 locomotives.

Pierre Alary

So it justifies the large modification to the current locomotive.

Deepak Kaushal – GMP Securities LP

Again, does that change the mix of margin that you anticipated when you gave your target for 8% EBIT margins for transportation?

Pierre Alary

No.

Deepak Kaushal – GMP Securities LP

Okay, great.

Pierre Alary

I think this is very good news because it gives us the basis to quote these type of locomotives to other customers.

Deepak Kaushal – GMP Securities LP

Okay, fanatic. Thank you so much.

Shirley Chénier

Thank you, Deepak.

Operator

Thank you. The next question is from Chris Murray from PI Financial. Please go ahead.

Chris Murray – PI Financial Corp.

Thank you. Good morning.

Pierre Alary

Good morning.

Chris Murray – PI Financial Corp.

Thank you good morning. Just another follow-up I think a little bit on the business jet market. A couple parts to this. This morning you guys came out and announced 96% year over year growth for the first six months in fractional and jet cart sales. I guess what I'm trying to figure out is there any read throughs that we should start to thinking about into at least the lower end of the market? And then the second part of this question, it's just a little bit of a follow-up on your comments that deals are taking a little bit more time to close. Can you give us an idea of what's maybe causing that? Is it something related to pricing or the availability of financing with customers?

Pierre Alary

Well. To answer your first part, I always said that Flexjet is a leading indicators of the industry what we are seeing since November last year is that customers are flying at a very high rate, above their contract agreement with us. So they are consuming their contract faster than the hours that they have. So that’s a very good news because it indicates to us, that there is lot of interests in flying private usually it’s a sign that there is a leading indicator towards a more traditional sales of aircraft or – sales of complete aircraft.

So I think that’s – that’s what you should read and communicate that’s flag jet fractional business flag jet particularly is growing again. As far as closing the orders there is nothing specific that I want to point to, is just the customers are there, and they’re shopping for aircraft. So, as compared to when it was very slow that’s not the case any more, we have a great pipeline, but they are being careful in their evaluation as the markets is, I would say just starting to pick up.

Chris Murray – PI Financial Corp.

Okay. Thank you very much.

Shirley Chénier

Thank you, Chris.

Operator

Thank you. The next question is from Danielle Ward from JPMorgan. Please go ahead.

Danielle Ward – JPMorgan

HI, my question is on the 2016 Euro bonds that you have outstanding. These are obviously callable at this point in time and I was wondering if you have any plans for these notes, whether you're thinking about refinancing or paying any of the issue down with cash on balance sheet in the near-term?

Pierre Beaudoin

Well it’s 2016 so that’s a few years down the road. We are currently in a significant investment period, which kind of reduced. We are investing $2 billion it’s going to reduce by $500 million over the next two years. So, I would say that our options are open. And we’re revaluating the capital structure from time-to-time, but there is no specific orientation on that 2016 bond.

Danielle Ward – JPMorgan

Thanks a lot.

Shirley Chénier

Thank you

Shirley Chénier

Thank you. The next question is from Joe Nadol from JPMorgan. Please go ahead.

Joseph Nadol – JPMorgan

Just had a couple of follow-ups. First on the Lear 70 and 75, Pierre, Cessna delayed as I'm sure you saw, the entry into service of three of their aircraft here because of the Garmin flight deck. And they said on their call they said that they were first in line to get their aircraft out the door. So, I was just wondering about your confidence level. I heard you say you reaffirmed Q4 deliveries, but just wondering how to bridge that gap.

Pierre Beaudoin

I guess they are first in line at Cessna. I don’t know to prove that. We are making good progress, testing is going well. We’ve accomplished, I don’t think we have 100 hours of testing left to do so. We are making good progress and we plan to deliver in Q4.

Joseph Nadol – JPMorgan

Okay and then just one more on the transportation side, which has been there I guess a few months now and my understanding what he was doing kind of a top to bottom review and getting comfortable. Is that still going on in other words, if he is signing off on – I guess for what that means or what we can take this as, is he signing off on all of the contractual estimates that completion each quarter now or is he still in that review mode?

Pierre Beaudoin

Right now he is touring the organization as you know that Bombardier Transports has clients in many countries. And there is many sites to see, it’s quite a large team to see, getting familiar with all the contracts also. And as you know, we constantly look at our other contracts and make sure that we’re inline with the results would declare our line with our expectations. So, of course you’re getting familiar with this including the whole organization at this point.

Joseph Nadol – JPMorgan

Okay, thanks.

Shirley Chénier

Thanks Phil.

Operator

Thank you. The next question is from Robert Spingarn from Credit Suisse. Please go ahead.

Robert M. Spingarn – Credit Suisse

Thank you. I wanted to ask about the fractional improvement as well. The first question's been answered, but perhaps is there any detail you can offer as to where across the fractional portfolio the strength is. You mentioned wealthy individuals coming back into the market, but are you also seeing it at the higher end supplemental lift for corporations?

Pierre Beaudoin

It’s spread all over. What we do see though is Corporation at that thing cards. Cards as a general rule because it gives them good easy access to supplemental lift rather than buying a fractional which is, I guess a longer-term commitment. So that comments specifically for supplemental lift, but we also see a lot of corporation looking at fractional as a good alterative to owning. So, I think overall the business of fractional – today we offer more products than we did in the past, meaning you know anything from a 25 hour card to a leased aircraft to a complete own and fractional aircraft and we will even do – we will even manage aircraft for customers that will want us – that own 100% of the aircraft and include these aircrafts in our fleets.

So the product portfolio is very broad and I think this is what is giving us a good growth right now because when we sit in front of a customer, we don’t offer only one type, but really good portfolio of products.

Robert M. Spingarn – Credit Suisse

The reason I ask the question is to try to isolate the different demand drivers and stratify the fractional because ultimately what we're interested in seeing is if this will translate to stronger light jet demand for whole aircraft, would you say that you can see, you have a line of sight to that happening at the Learjet level?

Pierre Beaudoin

The growth in fractional is not happening only in Light jets. For example, our strongest product in fractional is the challenger 300. So, I would not related light jet to the growth in fractional, I would more relate to the growth in fractional as a good sign that the industry is bearing to grow again.

Robert M. Spingarn – Credit Suisse

Overall, thank you.

Shirley Chénier

Thank you, Rob.

Operator

Thank you. The next question is from David Tyerman from Canaccord Genuity. Please go ahead.

David Tyerman – Canaccord Genuity

I have a question on RVGs. I was looking at Republic Airways this quarter transcript and something jumped out at me when I was reading it. The CEO was quoted as saying he's expecting roughly 600 small RJs to come out of the market in the next three plus years. That sounds like a large number that might be hard to place and may have negative impacts on residuals. Is that trend trigger RVG losses? I was wondering if you could comment on that?

Pierre Beaudoin

Well, I don’t think it’s any news to say a lot of 50 passenger jets are going to come out of the U.S. market, and that’s why we have a very active team at marketing these products in new markets such as Africa, such as Russia, we’re also looking at traders for the CRJ200, looking at different business application like shuttles, like complete converts to business aircraft. We’ve been very, very active there and just if you take Russia.

We have about 100 airplanes in Russia, flying with different airlines, which build the business for CRJ, larger CRJ in time and also is create some market for the CRJ200. So we need to continue to work on that, but I don’t think in what he said is and in use I can’t comments whether it’s 600 or 300. We’re looking at that on the individual airlines, but there is quite a few airplanes coming out in the U.S market.

Pierre Alary

Maybe (inaudible) that perspective if you remember maybe four years ago or so, the same kind of statement were made that 400 units were to be coming back on the market over 12 months to 18 months period and affectively a whole lot has been coming back, but have been marketed some where else and there’s been no impact really.

David Tyerman – Canaccord Genuity

So, you actually think you could put 600 planes into all those secondary markets in over like a three or four year timeframe? It just seems like an absolutely enormous number and way larger than anything in the past.

Pierre Beaudoin

Well first of all I’m going to speak about the CRJ. There maybe some smaller ERJ’s that are going to be hard to fly like 35 passenger ERJs that’s probably part of the volume, these are large operators of Embraer airplanes also, but the CRJ I have got already about a 100 in Russia and it’s a very well appreciated airplane. So, I think there is definitely a market for these type of airplanes at the lease rates that they’re going at in these new markets.

So the specific volume for me would be hard to comment, but we looked at it, account by account where the airplanes are going to come out and we make a plan and we’ve been public for example that we’re working on a very detailed plan with delta. So, I see that there is a market and we’re going to address the airplanes that are coming out, the U.S. markets will find homes through them.

David Tyerman – Canaccord Genuity

Okay, thank you for your answer.

Shirley Chénier

Thank you, David. Operator, do we have any more questions?

Operator

No, no further questions at this time.

Shirley Chénier

Okay. So this concludes the question period intended for investors and analysts. We will now begin a question period for Media Representatives. Operator?

Operator

(Operator Instructions) The first question is from Scott Deveau from National Post. Please go ahead.

Scott Deveau – National Post

Hi, just wanted to ask you about the last two delays into the first flight. I was curious why you were still certain that the plane was ready to fly up until the week before both delays were announced. And how we might look at future delays, would they come that quick or that seem before it is meant to occur?

Pierre Beaudoin

Like I said, we’re making really good progress. I’m getting to the first slide. What we have to do is very complex. And as we see issues come up, we correct them. Sometimes it takes more time than anticipated. There is nothing significant to report. We announce the delays when we judge that there was not possible anymore to make that specific date.

And now what we’re saying is that we are weeks away from first flight, not being able yet to pin a date.

Scott Deveau – National Post

So you can’t pinpoint a date, like you couldn’t say that it would go fly by the end of August or the end of September at this point?

Pierre Beaudoin

We are weeks away and they were making very good progress.

Scott Deveau – National Post

I was also kind of curious about the entry in to service day. I know that you said that it’s a 12 month flight program, but why are you so hesitant to say that with every success of delay, the entry in service wouldn’t be delayed if they move in tandem.

Pierre Beaudoin

You are trying to relate to the first flight to the test program, is that…

Scott Deveau – National Post

Yeah, so if the first flight’s delayed by eight months say, why wouldn’t entry in the service be delayed by eight months.

Pierre Beaudoin

First of all, we’ve always said it 12 months after first flight, so that has not changed. So if we have a delay of two months from first flight. The entry into service will be two month delayed. So that is your question.

Scott Deveau – National Post

So that you move in tandem then.

Pierre Beaudoin

But they only move in tandem as far as the schedule starts with First Flight. So, schedule of 12 months with first flight, so that moves in tandem. What I said there was not related, it is not because we have of delay first flight means that the 12 month schedule is going to suffer delay. The two are not related. In fact, what we learn at applying for their first flight test vehicle is learning’s that we are applying to the other airplanes we are building.

Scott Deveau – National Post

Okay, thank you.

Operator

Thank you. The next question is from (inaudible)

Unidentified Analyst

Hi, I like to know in terms of hiring to build the C series air craft. When is most hiring going to happen and now with the delays, when are people going to be hired to build the CSeries aircraft?

Pierre Beaudoin

There is a large team working on the CSeries, in terms of production we will make that decision during the flight test program, because we want to make sure that we don’t start manufacturing parts before we get a very good handle on the aircraft. So, we’ll have those discussions later in the year.

Unidentified Analyst

And how many people will you be hiring?

Pierre Beaudoin

I don’t think we’ve given exact figures. I can look at what we’ve disclosed already, but I don’t think we’ve given the exact figures.

Shirley Chénier

Yes please.

Operator

Next question from (inaudible).

Unidentified Analyst

Hi, you’ve started building the plant at Maribel, could you tell me how much money will be invested in building that plant and when production will start in the plant?

Pierre Beaudoin

Well production will start obviously when we start building the CSeries, which is, once the 12 months flight test program is over, which will start after the first flight. So flight testing is risks related to the flight testing, but we’ve scheduled 12 months. So, we will be starting production. In the existing facilities, existing hangers and then gradually we’ll moving into the new facilities. I can’t give you the exact dates when we will be starting production in those facilities and we haven’t made, we haven’t disclosed the amounts.

Operator

Thank you. The next question is from Molly McMillin from The Wichita Eagle. Please go ahead.

Molly McMillin – The Wichita Eagle

Hi good morning. My question has to do with, can you kind of characterize demand for the Learjet products and then a little bit on with the progress of the 85.

Pierre Beaudoin

With the demand in the smaller aircraft remains soft, now with the Learjet we have quite a few innovation on the 70, 75. So the demand is good, but in a soft market for the 70, 75 and as far as the Lear 85 progress, we are getting ready for first flight and we have to schedule that for this year.

Molly McMillin – The Wichita Eagle

For this year. Okay. I'm told there's some staff reductions that at the Learjet plant can you tell me a little bit about that.

Pierre Beaudoin

Yeah. We are adjusting the amount of people inline with the progress on with – the assembly schedule and the fact that we had to delay the deliveries of the 70 to 75 to the fourth quarter and of course on the progress of the Lear 85 that was slightly delayed from the fact that we had some challenge with the composite material, but today that’s behind us and we are getting ready for the first flight.

Molly McMillin – The Wichita Eagle

Do you know how many people you may have to or how many positions are going to cut, or how many people you might have to lay off?

Pierre Beaudoin

The exact amounts we could get back to you, but I don’t think we’ve announced this in this plan.

Molly McMillin – The Wichita Eagle

Okay. Alright, thank you.

Operator

Thank you. The next question from Francois Shalom from The Gazette.

Francois Shalom – The Gazette

One on the EIS, as you said recently some of these technologies are more complex and you said expected or some of the integration was more complex and you had expected. I’m just wondering wouldn’t it be better for Bombardier’s creditability to give yourselves another cushion for EIS rather than announced successive delays like you did with the first flight?

Unidentified Company Representative

Well first of all Francois, we didn’t say that this is challenging from a technology perspective. It just taking more time than anticipated and of course it’s a very complex product. We’ve always said that we have a flight test schedule for 12 months and that’s the schedule that we have. It is flight test. So as we progress we’ll keep our stakeholders informed, I think that’s the best way to approach them.

Francois Shalom – The Gazette

Why not, I mean if you’ve already experienced this on several locations, these delays with first flight wouldn’t it be rationale for you to expect the same thing with EIS?

Pierre Beaudoin

Like I said before, the two are not necessarily related though. What we’re doing on the first flight test vehicle is lot more complex than the type of test that we will do to get the other flight test vehicles in the air. We are learning from this first aircraft and we are applying to other aircrafts. So, I don’t think you can relate it to. It is flight test, so there is risk involved, but I’m speaking to you about our schedule, the schedule says 12 months.

Francois Shalom – The Gazette

The other thing for Bombardier Transportation, I’m wondering if you can comment on the investigation for bid rigging in Brazil, there was some documents seized that believe in your office in Brazil, can you comment on that at all?

Pierre Beaudoin

Well all I can say is that, we have very strict business practice and very high ethical standards. Brazil is conducting an industry wide investigation into allegation of quartile and related activities in public tender situation. We are collaborating fully with the authorities, and we will make sure that they get all the information necessary. I just want to repeat again, Bombardier has very high ethical standards, and we will support the authority at making sure they do a through investigation.

Francois Shalom – The Gazette

What do you expect to come out of this investigation?

Pierre Beaudoin

I’m not going to speculate to what I expect to come out of this investigation, we will support the authority in this investigation.

Francois Shalom – The Gazette

Thank you.

Operator

Thank you. The next question from (inaudible).

Unidentified Analyst

Hi, could you give a little more and detail about regional, regional aircraft, the impact – what’s the impact right now on the EBIT of aerospace?

Pierre Beaudoin

We don’t disclose profitability by product line.

Unidentified Analyst

Do you have some kind of bench mark that could help us a little bit?

Pierre Beaudoin

Well you can deliveries of regional jets that will give you an idea of the commercial revenue, so you can take the commercial revenue that will give you an idea of the impact of commercial aircraft on the business of aerospace.

Unidentified Analyst

Okay. Embraer is launching a new line of aircraft, some analysts feel that those aircraft will be or might be – more will be at least more competitive in state ultimately could that leave Bombardier to question or to decide that to invest more in CRJ or to abandon that family of aircraft?

Pierre Beaudoin

Our aircraft are very competitive right now. We have a strong advantage of Bombardier in terms of performance. In fact, Embraer has already tried to do fight back by making, by tweeting the aircraft they gave right now, but we feel that our aircraft continues to have major advantages over Embraer. They’ve announced major modifications to a plane that they are calling E2 for 2020 for the regional version is 2020.

The advantage for us is we will observing that very closely and we will make sure we remain competitive.

Unidentified Analyst

Questions should that mean new investments in the CRJ family when the CSeries is in place?

Pierre Beaudoin

What that means is we will make sure we remain competitive.

Unidentified Analyst

Question, okay, one final thing. It seems that there was a number of CRJ models that were going to be marketed or that we’re coming back on the market, you’re helping to resell?

Pierre Beaudoin

Like all manufactures of commercial aircraft, our job is make sure that those products continue to fly around the world after their first life cycle is completed with the first customer. So CRJ 200, some of them are coming out of the American continent and we’re working with customers to find new markets, new uses, for example, converting CRJ 200 into freight aircraft. So that’s the kind of thing that an aging aircraft can do very well, because somebody who is carrying cargo often can’t pay for a new aircraft because it’s only used to once or twice a day. So that’s a normal cycle, we’ve seen it with a number of aircraft throughout the world.

Unidentified Analyst

Is that what you are referring to and you are talking about Russia earlier.

Pierre Beaudoin

Russia is a market where they are using CRJ200 for carrying passengers with the Russian airlines. So this is not a cargo application, but a passenger application.

Shirley Chénier

Operator do we have any more question?

Operator

There are no further questions at this time.

Shirley Chénier

Thank you all for being with us today. Have a good day every body.

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