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Executives

Shirley Chenier - Senior Director, Investor Relations

Pierre Beaudoin - President and CEO

Pierre Alary - Senior Vice President and CFO

Analysts

Cameron Doerksen - National Bank Financial

Walter Spracklin - RBC Capital Markets

Robert Spingarn - Credit Suisse

Joe Nadol – JPMorgan

Steve Hansen – Raymond James

Benoit Poirier - Desjardins Securities

Darryl Genovesi – UBS

David Newman - Cormark Securities

Peter Arment - Sterne Agee

David Tyerman - Canaccord Genuity

Steve Trent – Citi

Kristine Liwag - Bank of America

Deepak Kaushal - GMP Securities

Turan Quettawala - Scotia Bank

Tim James - TD Newcrest Securities

Doug Karson - Bank of America Merrill Lynch

Neal Dihora – Morningstar

Joe Nadol – JPMorgan

Ron Epstein - Bank of America Merrill Lynch

Ross Marowits - The Canadian Press

Marie Tison - La Presse

Bombardier Inc. (OTCQX:BDRBF) Q3 2013 Earnings Conference Call October 31, 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. [Foreign Language]

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

Shirley Chénier

Thank you, operator. [Foreign Language]. 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.

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 third quarter ended September 30, 2013.

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

[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 statements regarding future events or the future financial performance of the corporation. Several assumptions will be 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 this cautionary statement on behalf of each speaker whose remarks today will contain forward-looking statements.

Pierre Beaudoin will now begin the presentation.

Pierre Beaudoin

[Foreign Language]

Good morning and welcome to this conference call. Aerospace financial results for the third quarter were in-line with our guidance, but the level of order and the overall market conditions were disappointment. We had a few landmark events in the quarter. In August we signed an LOI with Rostec for the assembly of Q4 under the aircrafts in Russia and an initial LOI for the sale of 100 Q400 aircrafts in the Russian market. In September we signed an agreement for the sale of our Flexjet fractional ownership activities and linked to that is a sizable business aircraft order for both our Learjet and Challenger family of aircrafts. And last but not least the CSeries flew for the first time thus starting its expensive flight test program.

In Transportation revenues increased and free cash flow also improved slightly. However the EBIT margin was affected by some execution issues which we are actively addressing. The market for transportation solution remained resilient with the most significant growth experienced in Europe and Asia Pacific where we are well positioned.

And now I would like to ask Pierre Alary to go through our financial results in more detail.

Pierre Alary

Good morning to all. Aerospace revenues for the quarter totaled $2 billion compared to $2.3 billion last year, as a result of the lower level of deliveries due to timing of deliveries to customers and to the transition to the Lear 70 and 75. EBIT totaled $86 million or 4.3% of revenues compared to $180 million or 5.2% last year.

The reduction in margin percentage reflects lower selling prices for business aircraft, lower absorption of SG&A expenses and negative appearance on our provision for contingency and a write-down of CSeries inventory to net residual value.

For Transportation revenues totaled $2.1 billion compared to $2 billion last year and excluding the positive currency impact [$28] million revenue increased by 4%. EBIT margin is at 6% compared to 6.3% last year mainly due to lower margin enrolling stock partially offset by higher margin in services and higher absorption of lower SG&A and R&D expenses.

On a consolidated basis, revenues totaled $4.1 billion while EBIT was at $210 million compared to $240 million last year. Net financing expenses were $36 million compared to $15 million last year, as a result of a gain on certain financial instruments realized last year. And with an effective income tax rate of 15.5%, the adjusted net income totaled $165 million or $0.09 per share compared to $173 million or $0.09 per share last year.

With respect to free cash flow, the Aerospace cash flow from operations totaled $179 million while or investment in our programs totaled $585 million. Transportation used $5 million of cash in the third quarter, compared to last year usage of $58. And at the end of the third quarter our short term capital resources totaled $4 billion, including cash and cash equivalent of $2.6 billion.

Pierre Beaudoin

So, to conclude, our results for the third quarter were in-line with our guidance for the full year. The CSeries flight test program has begun and the results are in-line with our expectations. We have a strong backlog at $65.5 billion which represents about four years of manufacturing revenue and our continued investment in new products will position us well for the years to come.

Our strong growth story is taking shape; all the elements are in place. Thank you.

Shirley Chénier

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

We can now start with the first question. Operator?

Question-and-Answer Session

Operator

[Foreign Language]

(Operator Instructions). Our first question is from Cameron Doerksen from National Bank Financial. Please go ahead.

Cameron Doerksen - National Bank Financial

Hi, good morning.

Pierre Beaudoin

Good morning.

Shirley Chénier

Good morning.

Cameron Doerksen - National Bank Financial

Question on the Transportation margins. I mean you took a pretty big step back in Q3 to 6% from where we were running in the first half of the year. You’ve mentioned some problems of execution on some contracts. I am just wondering if you can provide a little bit more information on that, are these new contracts or are these some lingering effects what we have seen on the previous execution issues on other contracts, were there any unusual provisions in the quarter that caused that margin to be 6%?

Pierre Beaudoin

Well, first of all we’re making progress like we said on our results from last year, overall for the year. Second, to your question the contracts we had identified already, some of those are in high revenue delivery, so of course they would affect the margin. But we have some execution issues on other contracts, of course it’s in the context that we have also contracts going very well. So it’s a balance of the two, but overall we are making progress on the margin at Transport.

Cameron Doerksen - National Bank Financial

Thank you.

Operator

Thank you. Our next question is from Walter Spracklin from RBC Capital Markets. Please go ahead.

Walter Spracklin - RBC Capital Markets

Thanks so much. Good morning everyone. Just on your initial comments on execution issues; I was wondering if any of those did apply to aerospace as well or if that was just related to transportation. And in particular, I was wondering if you could comment on I think you mentioned there was an inventory write-down which in the footnote indicated that it was due to lower realized pricing on the CSeries due to the early CSeries sales. Is that typically I think you would expect the initial CSeries sales to be lower than the longer term ones. Are they coming in even lower than that and is that what prompted the inventory write-down, so really the question is around the margin and if you could address that in particular?

Pierre Alary

Yeah. As far as, first beginning of your question on execution issue our aerospace, the pressure comes mainly on pricing at business aircraft. Now as it relates to your question on the CSeries, it is normal in an airplane program that the initial components are more expensive than the value or the price we can get from the markets. So we have to write-down the inventory. So this is something that was planned and we’re just executing may be you have not seen it in the past as this is an IFRS I guess regulation or it’s not.....

Pierre Beaudoin

Maybe if I can explain a little bit mechanics around the write-down is that as you know we had mentioned that the first year of deliveries would or the first deliveries any how would be negative in terms of contribution and that’s because the costs are higher initially and the pricing, launch pricing and all that. So that’s why we are seeing that initially it would be dilution to the margin.

Now more specifically as we start to produce on those first deliveries where there is a loss anticipated on those deliveries we have to record from the first dollar we spend we have to take a negligible value should like on it and the first dollar are the one that we need to write-off we take a provision on it. So despite the fact that revenue will come later, we do have to take into consideration today as we go on an ongoing basis the excess cost.

Walter Spracklin - RBC Capital Markets

So this will be an ongoing kind of inventory adjustment that we could see in future quarters. It's not one that's just limited to this quarter and that's it?

Pierre Alary

Exactly, yes.

Walter Spracklin - RBC Capital Markets

Okay. Thank you very much.

Pierre Alary

And to get a feel of the variance if you like or the amount as you know in note 11 to our financial statement on the inventory we do specify the amount of write-down we take on the inventory that is one that is on the continuous basis that we take a certain percentage to on spare parts for obsolescence and then we can see that there is variance from this year versus last year and a good portion of the variance is due to what we take on the accessories.

Pierre Beaudoin

Maybe I should add that there is also a variance according to pre-owned aircraft. And this something that we see the market stabilizing and of course as we looked at new transaction the way we take pre-owned we expect that number to stabilize meaning to get back to no write-down, but this is more dictated by the market.

Walter Spracklin - RBC Capital Markets

Okay. Thank you very much.

Operator

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

Robert Spingarn - Credit Suisse

Good morning. I wanted to ask for a little bit more color on CSeries in general. So there are just a couple of CSeries questions together here. You mentioned that you're focused on the schedule and I got the sense you're reviewing the schedule. So I wanted to ask what that implies and that if there is an entry into service delay, beyond the one year from the first flight, what your quarterly aerospace cash burn would look like maybe relative to an assumption of about $250 million burn per quarter which is what we were thinking. And then I'd also like to ask you how the aircraft is performing in flight tests and when you will be feathering in those additional test articles? Thank you.

Pierre Beaudoin

So there is many questions in your one question.

Robert Spingarn - Credit Suisse

A multitude of CSeries questions?

Pierre Beaudoin

I’ll start by your last point with the flight test is that we started to fly again and we will give you constant update on the CSeries [website] so I think that’s the right place to get update. So the flight test is going well. So far of course it’s been limited because we had planned quite an extensive update period. And we wouldn’t weeks of starting to fly the second airplane and then the others will follow.

So what we are doing right now from a schedule perspective is that there is, as you know there is five aircraft of the CS100 in the flight test. We want to make sure that we understand very well the progression on these aircrafts, the exact date when they start to fly, the commitment of all the suppliers during the flight test and also their commitment towards delivering production parts. As you know we've already started to assemble the production aircraft. So there is many things to analyze before we get back with a definite schedule. So we're working on that and you'll get that in a next few months.

Robert Spingarn - Credit Suisse

Does that mean, Pierre...

Pierre Beaudoin

As far as the burn rate...

Pierre Alary

As far as the burn rate I guess 250 is coming from the fact that we have been spending roughly $500 million per quarter on all of our programs and that includes both the development cost and investment into building and equipment and so on. And we had mentioned in the past that some 50% of that spent is --. So I guess that's how you came up to $250 million. And that's how much specific we’re going to be about what you can say to your $250 million there are two components in it or three components in it. There is the machinery, building and so on. And that is not really impacted by any delays, if there is any delay. Then there is the development cost and as far as the development cost, you have the labor cost and then you've got also some spending on material. So I guess you have to kind of define what could be the labor cost.

Pierre Beaudoin

And just one thing I want to add on burn rate, as we look at our schedule we have several choices. We can fly many aircrafts at once or we can say that we'll fly less aircraft and take more time, so that burn rate goes down. So right now we're evaluating what is the best decision from an investment perspective for us and for all of the stakeholders, understanding everybody’s schedule. So you push through with many aircraft as everybody is committed. You have less aircrafts line if you think that you have some delays with some partners. And that’s really the discussions that we're having today.

Robert Spingarn - Credit Suisse

And will this affect your start of production of customer aircraft; would you delay that if the test schedule delays?

Pierre Beaudoin

Well, I’m not saying that we're going to have the delay, that’s another elements we're having with the customers as we're discussing with them the mix of aircraft that they’re taking, some of them have options to go from the 100 to the 300. And we're also looking at the schedule which we can commit to for the customers because they also have to implement the aircraft or change aircraft into their network. So all of this has been discussed as you can see with many stakeholders and we're trying to achieve the best financial picture for everybody involve.

Robert Spingarn - Credit Suisse

Okay. Thank you very much.

Shirley Chénier

Thank you, Robert.

Operator

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

Joe Nadol - JPMorgan

Thanks. Good morning. I wanted to dig down into business jet pricing a little bit, which seemed to be where the margin pressure came from. A few months ago at your analyst meeting it was cited that business jet pricing was going to be one of the major supports of margin going into next year and that you were targeting 300 basis points of aerospace margin improvement, excluding CSeries in a large part on the back of pricing. So my question is, what's changed over the last six months because your backlog for most of your business that really extents much longer than six months why it is negatively impacting Q3? And as you look forward into next year, do you think this is going to be a headwind or tailwind to your margins in aerospace?

Pierre Beaudoin

Well, I think as you, as I said in my part, we are disappointed with the market, so there continues to be price pressure on business aircraft, particularly in the small aircraft. So in the Learjet category, but it given better as the aircraft gets bigger, and really what will also impact next year is the mix. So right now we’re looking at this market situation and we’re looking at the mix that will be built for next year.

Joe Nadol - JPMorgan

So, Pierre, is this very much different than you thought six months ago? I mean, Learjets are relatively smaller part of your sales, compared to challenges in global obviously, within business jet. So, is the picture now very different than it was six months ago?

Pierre Beaudoin

You mean for ‘14 or ‘15?

Joe Nadol - JPMorgan

Yes. for ‘14 and ‘15.

Pierre Beaudoin

When we do budget, we always look at the mix and whether we ramp up or slow down the line. So we’re doing that’s like every year and we give our guidance in Q4.

Joe Nadol - JPMorgan

Okay, all right. Thank you.

Pierre Alary

May be one thing I can say that in terms of how the market is, on large aircraft the market is very good, on medium one it’s okay, and on small one it’s stash. And that was the same answer a year ago, but maybe a year ago we were expecting to be able to give a different answer today.

Joe Nadol - JPMorgan

I see, so it’s not.

Pierre Alary

But we haven’t seen changes in the market, we haven’t seem improvement we were expecting a year ago.

Joe Nadol - JPMorgan

I understand. Thank you.

Operator

Our next question is from Steve Hansen from Raymond James. Please go ahead.

Steve Hansen – Raymond James

Just a quick question on the transition side again to circle back on the previous question, could you just perhaps provide a bit more clarity on the executions that you are facing, the expected duration of these issues in terms of the margin impact, I am not quite understand how long or the magnitude of the issues that we should expect?

Pierre Beaudoin

Well, we are putting an emphasis. First of all, we understand our execution issue very well. We are putting emphasis on and I am working very closely with lifts on that more emphasis on how we address products from an engineer perspective, program management, and of course customer relationship and managing the contract. So all three elements are being addressed and I feel that we can make progress on the foreseeable future from a margin perspective.

Steve Hansen – Raymond James

So less of a drag in the future quarters if I understand that correctly?

Pierre Beaudoin

You got to be careful. We have long-term projects. So sometimes you don’t take that from one quarter to the other, but directionally focusing on the three elements I told you [welcoming us] to make progress.

Pierre Alary

And the way it is accounted for on that contract accounting so that means that we estimate that total margin on the contract. And as we review the contract it would change the margin on the given contract. There is a catch up adjustment in the current quarter, but then going forward the margins going to be lower on that contract as we go. So we’ll have an impact in terms of having less profitability on the following quarter for that specific contract. But the same answer when it positive adjustments of the margins, we do a catch up adjustment which is positive in one quarter and then going forward we record a higher margins. So it’s a balance.

Steve Hansen – Raymond James

Thank you.

Operator

Our next question is from Benoit Poirier, Desjardins Securities.

Benoit Poirier - Desjardins Securities

Just my question is about the guidance. Given the results you announced yesterday -- today sorry; how concerned are you about your guidance for 2013 and 2014 in terms of free cash delivery and margins and also assuming the C series only enters into service in Q1 2015, how should we think about the EBIT guidance for 2014, should we expect to be closer to the 8% range?

Pierre Beaudoin

Benoit, you are making a lot of assumptions there. We are in the planning periods and the budgeting period for both groups. And as usual, we will give you guidance in Q4.

Benoit Poirier - Desjardins Securities

Okay, thanks.

Operator

Our next question is from Darryl Genovesi from UBS. Please go ahead.

Darryl Genovesi – UBS

So I guess just kind of going back toward, I guess Rob was asking on the guidance that you had out there for the 200 basis points for margin dilutions from C series. Can you just give us a sense of what into that estimate, how many airplanes and what is costing you to build the flight test aircraft now, how quickly you think you can get down the learning curve and then how much of your intangibles balance you're going to amortize on with each delivery? I mean just any of the background behind that 200 basis points of margin dilution number would be helpful.

Pierre Alary

So, you're asking much too much detail, we're providing guidance to give you an idea where we are heading, where the company is going. Obviously, we won't give detail on the cost element, the price element and that's what you are asking for. So I think by providing the guidance as we provide, we're giving a good indication of the -- what the ongoing business can do and what the introduction of a new program can do and thus far as we can go.

Darryl Genovesi – UBS

Okay. Maybe I'll try another one then. Just on your residual value guarantee provisions, you show a $375 million remaining. I know you've been reversing some of these, but how do you get comfortable that you've provisioned enough ahead of all these 50 seat regional jet retirements that everyone is kind of calling for? And then also how does the cash flow sort of phase beyond the initial $80 million that you highlight as current?

Pierre Alary

Well, in terms of our provisioning, we do review our provision on a quarterly basis, it's that we have a very detailed model as to, how estimate our provision. We take into consideration the deal by deal, who is the customers, what the probability of default based on rating agency table. When we look at the residual value of the aircraft, the estimated residual value in the craft and time, we do a lot of various modeling to determine and we come up with our provision which we revised against on a quarterly basis.

So it’s refresh on a regular basis. And what I can tell you that if we look at the past years and you can go back 7, 8, 9 years where we've been through with number of customer that went through bankruptcy proceeding and so on where we have residual value guarantee and when we had (inaudible) efficiency guarantee and at the end our provisioning was all the ways sufficient to cover whatever we have to cover and based on those guarantee that we've been offering. So that to me that demonstrate that we're provisioning is the right one and give us the right answer.

Pierre Beaudoin

The other thing I would like to add is how we're developing a market for the 50 passenger after their initial customers if you want. We have a freighter in development with partners. We're developing secondary market and in the U.S. also there is many airlines that had anticipated to reduce their 50 passenger but they need the flying in the regional and they’re keeping this aircraft longer and we're working with them. So there is many facets of keeping the values up of the CRJs and I think the team is doing great job.

Darryl Genovesi – UBS

Okay. And on the cash, how does the $375 million liquidate over time?

Pierre Alary

Well the provision is on both first of all, the efficiency guarantee and residual value guarantee and the model is estimating what could it be. So the reality going to be the reality, but what it could be seen as schedule, the residual value guaranty and we do provide as part of our annual report when those guaranty comes to expiration within their upcoming year, five years down the road and so on.

Darryl Genovesi – UBS

Thank you.

Pierre Alary

On that note is the maximum exposure, so it’s necessarily why we estimate, we’re going to have to pay, but proportionally you can have review that way.

Darryl Genovesi – UBS

Thank you.

Operator

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

David Newman - Cormark Securities

Hi good morning.

Pierre Beaudoin

Good morning.

Shirley Chénier

Hi, David.

David Newman - Cormark Securities

Just on the write-down on the inventories, the net realizable value for the CSeries; is there any assessment as to how that might vary from quarter-to-quarter and as you produce more aircraft should that rise as you approach entry-into-service? And have a margin impact, the 8% I think you initially forecast, maybe it could fall just because of the provisions you have to do under IFRS?

Pierre Alary

Well, it’s going to rise as we spend, as we spend, I mean we ramp up production up to the point where we will have covered the excess cost if you would like.

David Newman - Cormark Securities

Okay.

Pierre Alary

But it’s not still a lean relation to be entry-into-service or what not, it’s more how do we spend, we are going to have to reserve the excess cost over the revenue.

David Newman - Cormark Securities

Okay. And Pierre, does that ultimately change your 2% dilution factor that you ultimately will -- or do you anticipate this as part of that?

Pierre Alary

It was anticipated.

David Newman - Cormark Securities

Okay. Just a quick one if I can squeeze one in. On the backlog it’s been fairly stable and you have got four years of manufacturing revenues as you highlight in the delivery, I think you are starting to deliver on the Delta CRJ in Q4 if I am not mistaken and you got to 70, 75 and the 85 next year and of course it’s pretty big backlog. Could we expect that I know you are not providing guidance at this point but could we expect that you are already beginning to true up your lines and suppliers such that you will have a higher production level beyond the global next year, just on the back of that, I assume Delta is getting ready to go?

Pierre Beaudoin

It would hard to answer this question without providing you guidance for next year. What we are doing is we are really planning that, we have been planning that for quite sometime but we are completing the budgets now and we will give you d guidance to the delivery in Q4.

David Newman - Cormark Securities

Okay very good. Thank you.

Shirley Chénier

Thank you, David.

Operator

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

Peter Arment - Sterne Agee

Yes, good morning, everyone. Pierre, I wonder if I can just circle back one more on the CSeries. Congratulations on the first flight and you’ve had in the initial comments have been that you’ve had very clean flights in terms of achieving all your test points that you wanted to achieve and doing tests on the noise of the aircraft. Can you just give us a little more color other than I know you’re not going to give us specifics on the data that you’re seeing, but is there any high level color that you can give us other than kind of the commentary on the test flights, how they went in terms of what you’re seeing?

Pierre Beaudoin

Well where we spend a lot of time is try to predict what will happen before flight and so far happening exactly as predicted. So that sounds pretty same, but this is a best news we can add in the flight touch program, is that we learn the minimum. And yesterday we had a flight of 1.5 hours and we are going to continue the flight test programs. So that is the color I could give you, there is nothing to fix all, but say, we need to redo this or retake that so far going we predicted.

Peter Arment - Sterne Agee

Is it still -- if I could just follow up on that related to this. The plan was originally to it would take a couple months to perform all of the analysis on the data and be able to start sharing that with your customers, is that still the ongoing plan or do you need more flights before you can do that?

Pierre Beaudoin

I believe that we start to sharing data also with FTE2, but this is something that we are in detailed discussion with customers, when exactly we share data, I think it comes later on in the flight test program, it’s not right now.

Peter Arment - Sterne Agee

Okay, thank you.

Operator

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

David Tyerman - Canaccord Genuity

Yes. I just wanted to ask about the Transport margins. So is there a new project that has now got execution issues or is this still the Ile de France? And related I guess, on the margin catch-up, it sounds like there was an IFRS catch-up in Q3. Can you shed some light on the size of that?

Pierre Beaudoin

I will just answer the question of you said is there new project? We are in the delivery of the three projects, but we have two of the three projects, one of them has been delivered and two in the process delivery. But there is still execution issues on other projects, which that’s why I am saying let’s focused on talking about what needs to be fixed in some work on engineering program and sales contract management or sales relation with customers.

So those are the three elements that we are putting emphasis myself and Lutz and his team to make sure that we address those. And saying that because we identify execution issue, but of course there is project that are going very well also delivering very good margin.

David Tyerman - Canaccord Genuity

And the catch-up Pierre Alary?

Pierre Alary

Yes. Whenever there is catch up, it is part of the quarter effectively.

David Tyerman - Canaccord Genuity

Right, but was it large in the quarter? Like would it have -- like your margins fell quite a lot in the quarter, surprising to me anyway; and I'm wondering - is that the reason for it?

Pierre Alary

Well, the margin was effectively impacted by some catch-up adjustment.

David Tyerman - Canaccord Genuity

Can you shed any light on the size?

Pierre Alary

No, we're not specific, but if you compare to last year we were at 6.3% previous quarter we were at 6.7%, we are at 6% So it’s a more revenue impact of somewhere up to 0.7%.

David Tyerman - Canaccord Genuity

Okay. So it's the bulk of the big decline then, sequentially, it sounds like?

Pierre Beaudoin

It's part of that.

David Tyerman - Canaccord Genuity

Okay, okay. Thank you.

Operator

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

Steve Trent - Citi

Hi, good morning, everybody. Just a question from me on the Transport side. I'm curious if you could highlight what you're seeing in terms of opportunities and projects in Mexico with some real projects cooking? If you could give us any color there, I'd be grateful.

Pierre Beaudoin

Yes. And I was just as a Mexico business forum. I am glad you are highlighting this, I think this is great opportunity for us in Mexico. We're the only local manufacturer. We've been there for 20 years and we understand the market very well. And I think there is the President presented a higher few project and we will participate or bid on all of them.

Steve Trent - Citi

And any broad sense on timing or what are you going to focus on Mexico City area? I am sorry you are highlighting a one call question but just as a follow-up, your one question will later?

Pierre Beaudoin

Well, timing the President have set their priority and the timing will come from the customer, the sooner the better as far as we're concerned, but once these identified that I can speak up for example as Querétaro Mexico, a high-speed train which I think is very interesting projects. There is a Toluca line to take people from downtown Mexico City to Toluca, that’s also a very good project. There is a projects in Guadalajara, where Bombardier has 100% of the system in Guadalajara today. So we're looking of course -- we're looking for the expansion of this system and better identify. There is another project in Montreal that’s in the bid today and I think we're quite well positioned. So you can see it’s a very active market and we understand it very well.

Steve Trent - Citi

Okay. Let me leave it there. Thanks very much for the color.

Shirley Chénier

Thanks Steve.

Operator

Thank you. Our next question is from Ron Epstein from Bank of America. Please go ahead.

Kristine Liwag - Bank of America

Hi. It’s actually Kristine Liwag calling in for Ron. In your press release you said that you have about $4 billion of short-term capital resources and $2.6 billion of cash. But in the quarter we saw free cash flow usage from both commercial aerospace and transportation. So I was just wondering how we should think about cash in the next few years and also maybe when you think about raising more capital?

Pierre Alary

Well, in terms of the cash, typically our fourth quarter is high cash generation quarter, so we used cash in the first three quarters and then in the fourth quarter there is a generation of cash and that's the trend that we've been seeing for many, many years. Now we expect the cash balance to be higher at the end of the fourth quarter. And going forward, we’ll as we’ve referred to in terms of guidance, we’ll provide updated guidance with our Q4 results. Now in terms of raising capital, there is no need to raise capital at this point.

Kristine Liwag - Bank of America

Sure. And if I can do a follow-up question; with the aircraft CSeries flight yesterday, is that with a fly-by wire system in place?

Pierre Beaudoin

Well, it’s always been with the fly-by wire what I think you are referring is the progress of the software through time and we’re going to have different drops as we get to production. So this was evolved and this will evolve from flight-to-flight or from different period to different period. What we did is, we did an update during the downtime between the third flight and the fourth flight.

Kristine Liwag - Bank of America

Great. Thank you.

Shirley Chénier

Thank you, Kristin.

Operator

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

Deepak Kaushal - GMP Securities

Hi. Good morning. Thanks for taking my questions or question. I had a question; you talked about disappointment in the aerospace market. I wanted to focus on the commercial market. We can see the weakness continuing on the turboprop and the regional aircraft side on the CRJs? Maybe if you could also review on 100, 150 seat market something that comes to mind is Japanese recent shift to larger A321 and a deferral of their temporary aircraft. Are you seeing airlines move their fleet sizes to larger categories in this segment of the market to weakness in the 100 seat market or is it because the aircraft are less optimal in that market if you can offer some color on how that market is evolving?

Pierre Beaudoin

Well, with this one question you covered a lot of ground. From the turboprop and CRJ perspective there is quite good opportunities. Of course if you look at the level of order in Q3 it’s kind of low, but we are upbeat with the amount of opportunities in front of us. As you know our American for example had an RFP out, there have been some delays related to their exit of bankruptcy, but this is a very good opportunity for RJs in the U.S.

There is quite a few turboprop opportunities, you saw that we announced an LOI for 100 Q400 in Russian as an example. So we are quite upbeat with this category of aircraft. As far as 100 to 150 seats, yes, there are some airlines that are growing bigger, but as a general rule you look at the market whether it’s us or our competitors we forecast 7,000 units over 20 years. And we think this is a growth segment of the industry offering more frequency to customers in a competitive cost, competitive seat cost I think is key and that’s what the CSeries offer.

Deepak Kaushal - GMP Securities

Okay. And I guess just to follow-up; you mentioned frequency. I mean in this shift in JetBlue and I guess in North America; are you seeing that in a high fuel price environment, they're moving to fewer frequencies with larger aircraft and would this be a short-term phenomenon?

Pierre Beaudoin

I think JetBlue is a very expensive seat cost airplane in this category that is not competitive whereas the CSeries is going to be a very competitive aircraft with the A320s that they have. The problem is they have the wrong aircraft in that category.

Deepak Kaushal - GMP Securities

Okay. Thank you. I appreciate the responses.

Operator

Thank you. Our next question is from Turan Quettawala from Scotia Bank. Please go ahead.

Turan Quettawala - Scotia Bank

Yes. Good morning. I guess my question is on free cash flow. If I look on a year-to-date basis you're down about $1.7 billion as far as cash burn is concerned. I'm just wondering if you're still pretty comfortable with the guidance that you provided for 2013?

Pierre Alary

What’s the number you referred to?

Turan Quettawala - Scotia Bank

Yeah. $1.7 billion for the first nine months, right?

Pierre Alary

Yeah. $1.7 billion is the usage and this versus $1.5 billion last year. I thought you had said $1.7 billion down, so it’s...

Turan Quettawala - Scotia Bank

Cash burn $1.7 billion.

Pierre Alary

Well again, there is no change to our guidance. And so we’re confident that the fourth quarter is going to be a good cash generation.

Turan Quettawala - Scotia Bank

Can you provide some elements of that maybe, Pierre? I mean is that-- how much of that is dependent upon orders or advances maybe and with these sort of new issues, NBT, does that negatively impact that at all?

Pierre Alary

NBT we expect as usual that the overall, the cash flow should be aligned with profitability I mean not exactly on it, but generally inline and that doesn’t change. And if I look at the aerospace side, there is a number of deliveries in the fourth quarter that is going to be higher than what we have seen. So there is going to be a reduction of the inventory, a level the advent is coming from new orders that are expected. So that's all the various variables that we typically see in the fourth quarter.

Turan Quettawala – Scotia Bank

Okay, great. Thank you.

Shirley Chénier

Thank you, Turan.

Operator

Thank you. Our next question is from Tim James from TD Securities. Please go ahead.

Tim James - TD Newcrest Securities

Thank you. I just want to first of all confirm something, Pierre that was mentioned earlier in the call just in regards to the CSeries write-down. Is that number, that amount, included in the $37 million, the write-down in note 11 along with obviously other business aircraft, et cetera that normally occurs in that amount?

Pierre Alary

Yes, it is.

Tim James - TD Newcrest Securities

Okay.

Pierre Alary

It is included in the $37 million.

Tim James - TD Newcrest Securities

It's part of that number? Okay. My next question is just on the transportation segment. I'm just wondering if you can comment on the outlook into 2014 for the Asia-Pacific region. I know there's a couple contracts there that have ramped down a little bit probably some others that are getting ready to ramp up. How do you look at 2014 just directionally for revenue for transportation from that region?

Pierre Beaudoin

Okay. So you went very broad. I think when you’re talking about ramp down you’re talking mainly about our Chinese business because there is other opportunities in the Asia-Pacific there is for example a great contract that we have bid on in Australia called Queens Rail. So I just want to have precision in the question.

Tim James - TD Newcrest Securities

Yeah. I believe I'm referring to the work in China, partly making it in reference to the commentary in the MD&A which doesn't specify which region within the Asia-Pacific. It just talks about some contracts ramping down in Asia-Pacific. But let's go with the fact that it's contracts in China?

Pierre Beaudoin

So in China we expect that we will start delivering the 0380 towards the end of 2014 beginning ‘15 so you see that there you will have a ramp up and there are other opportunities that we're pursuing now we're in between contracts so that’s why we're referring to ramp down.

Pierre Alary

And it’s down in this quarter, but if you look at on a cumulative basis it’s higher so.

Pierre Beaudoin

This year we're 30% higher than last year in this category.

Tim James - TD Newcrest Securities

So you were higher year-over-year in the first half of the year; and I'm just thinking China specifically now. You were up year-over-year in China in the first half, but down in the third quarter year-over-year. Is that correct?

Pierre Alary

Yeah. Third quarter is down, but that’s specific to the mix of contract or the level of activities some contract coming down some contract ramping up, but it’s just looking at one quarter that will give us really ten.

Tim James - TD Newcrest Securities

Okay. Thank you very much.

Shirley Chénier

Thank you, Tim.

Operator

Our next question is from Doug Karson from Bank of America Merrill Lynch. Please go ahead.

Doug Karson - Bank of America Merrill Lynch

I guess I want to just talk about the (inaudible) give us some flavor on the order book for the CSeries, it looks like from date here this is a 177 orders and I just want to get a sense of, is that where you feel you should be at this point, I mean kind of your internal targets? And as we kind of look at that, is there any kind of cadence you can give us for what some horizons we could look for incoming years?

Pierre Alary

Well what we've always said since the beginning of the program is that we ordered 300 firms by entering the service and that's 177 to be with what we have in discussions with the customers we feel good about reaching that target.

Doug Karson - Bank of America Merrill Lynch

Great. Okay, I’ll pass the mic to somebody else thank you.

Operator

Our next question is from Neal Dihora from Morningstar. Please go ahead.

Neal Dihora - Morningstar

I was wondering if you could comment on aerospace employee base, if you could compare it to say 2008 when you guys had deliveries of 345 units, I think you had 32,500, now you have at least year-end 2012, you reported 35,500. So maybe just if there is any sort of visions to be gain in the labor front?

Pierre Beaudoin

What I would say to you is that we have more employees in R&D right now and development than we did in the periods you just mentioned. As far as efficiency in the factory, we’ve made tremendous progress. So if we had more precision in your question, maybe we could get back to you with specific answers.

Shirley Chénier

Okay, Neal, we will take it offline.

Neal Dihora - Morningstar

Okay, thanks.

Operator

Our next question is from [John Wang] from (inaudible).

Unidentified Analyst

I just want to get a sense of how comfortable are you guys and this may have been asked in some form already, but how comfortable are you with your liquidity levels currently given the CSeries and Learjet investment commitments already that will be coming over the next year to 18 months?

Pierre Beaudoin

Our liquidity levels currently I mean at the end of the third quarter are at 4 billion and we expect the fourth quarter to be cash generation, solid cash generation so therefore that liquidity level to go up and we have been working with that level 3 billion to 4 billion of liquidity given the size of the investment we are having for the past couple of years.

Pierre Alary

And the other thing I would add is our programs -- two of our three programs are in a flight test so that means we can see the revenue in front of us not too far, it’s not like we are starting program. So our growth story I think is very exciting, it is right in front of us.

Unidentified Analyst

Okay. And I guess part of the reason I ask is, I think it was this time last year obviously coming with was in line with the delay announcement by six months on the CSeries plus test flight at the time, you guys came with additional financing over the next I think subsequent few months. So you guys don’t foresee kind of repeated that at this point today?

Pierre Beaudoin

Last year we were at lower level of cash in the same period and we always look at our capital structure what make sense and we revise it on a regular basis and that’s how we go about it.

Unidentified Analyst

Okay, I appreciate it. Thank you.

Operator

Our next question is from Joe Nadol from JPMorgan. Please go ahead.

Joe Nadol – JPMorgan

Thanks. And just a couple of quick follow-ups and just confirmations, so just on the CSeries inventory, if you vis-a-vis the note 11, which you point out. So the $37 million is it up about much from the last couple of quarters, is up here every quarter it seems like? Is most of that CSeries or is CSeries just starting to have a bit of an impact but it is going to get bigger, so you wanted to flag it for the first time in MD&A?

Pierre Beaudoin

Yeah, we are flagging it for the first time because it’s starting to get an impact. There has been some in the previous quarter and so it’s starting to ramp up or to be higher, so that’s where we are liking.

Joe Nadol – JPMorgan

So we should be thinking about the…

Pierre Beaudoin

The bulk of the adjustment is in relation to a normal provision. We are taking on that on (inaudible) vis-a-vis the obsolescence. We have certain we take every quarter and also the adjustment on the used aircraft inventory we have, when the market evolve we adjust.

Joe Nadol – JPMorgan

Got it. So it's a relatively smaller part of the 37 right now, but if we take your 2% guidance from before for dilution next year, apply that to sales, it's roughly $175 million to $200 million for the year. So maybe $10 million or $15 million now is ramping up towards $40 million, $45 million per quarter? Is that roughly right?

Pierre Alary

I wouldn't speculate at this point it depends on the ramp up of the working capital or the inventory level, depends on the specific contracts. So there is a lot of variable around it.

Joe Nadol – JPMorgan

Okay.

Pierre Alary

(inaudible).

Joe Nadol – JPMorgan

Then just one more which is on the transportation contracts. I just want to be clear. So the few large projects that are causing the margin pressure, is there anything else that you guys feel that should be flagged beyond TALENT 2 and Ile-de-France. Is there another one or two large programs that are causing this or are those still the only ones you were referring to when you say a few large projects?

Pierre Beaudoin

No, like I said before, these two projects that you referred TALENT 2 and Ile de France are in deliveries, so they count in the dilution of the margin because their revenues are now, were in the delivery phase and the revenues are going up. At the same time, we have other big projects that have some execution issue, but we have other big projects that are doing well. That's why I'm saying the best way to look at how to improve where we have execution issues to focus on engineering, project management and relation with customers.

Joe Nadol – JPMorgan

Okay. But Pierre, the other two that are in deliveries, those have been going on for some time and one would think you’re always around those, this is the first time I think that you’ve referred to other large projects that have issues. How confident are you that this is going to be a transfer issue or is there the risk that this becomes that we sort of identifying these and this becomes a bigger issue next quarter or next year?

Pierre Beaudoin

I am confident that we're addressing the root cause which I just mentioned and that we will make progress, but again some of these projects are long-term, but I am confident we're addressing the root cause and we’ll make over.

Joe Nadol – JPMorgan

Okay. Thank you.

Operator

Our next question is from David Tyerman from Canaccord Genuity. Please go ahead.

David Tyerman - Canaccord Genuity

Yeah. I just want to follow up on your comments Pierre, but where about the Q4 enter in the CRJ, you mentioned you are upbeat and you mentioned the American CRJ which we all know about and the Russian operating you have on Q4100s. Can you give us an idea if there is much more beyond that because the backlog they’re obviously getting squeeze down and firstly on the Q4100 and so it’s getting quite nerve-wracking watching this and I am wondering what could possibly happen here on the production front?

Pierre Beaudoin

Yeah. We have the advantage of seeing what we're working on with customers and there is quite a few opportunity either with repeat customers, customers we already have that add to their fleet or with new customers in new region. I can’t identify the customer still they have spoken themselves, but that’s why I said I was upbeat because I think both products have good demand in front of them.

David Tyerman - Canaccord Genuity

Okay. So it sounds like the potential is there for the order flow to pick up fairly because this is going to need to I would think given more of your backlog for getting to, is that fair?

Pierre Beaudoin

That's fair,

David Tyerman - Canaccord Genuity

Okay. Thank you.

Operator

Our next question is from Deepak Kaushal from GMP Securities. Please go ahead.

Deepak Kaushal - GMP Securities

Thanks for taking my follow-up. First of all, I do want to apologize, it’s the short-term question, but I want to try and get in the mind set for expectations for Q4. It looks like you have to get a bit 90 aircraft delivered in Q4 to hit your target for the year and that was almost a month of shutdown in U.S. government in terms of certifications. I am wondering if you can make that up in the other two months. And then just a follow-on that on the free cash flow, by my math it looks like a lot of more than 600 million probably working capital has to come out of transportation free to hit your free cash flow number for the year. If you can offer some color on working capital in transportation and how that's going to play over the next few months?

Pierre Beaudoin

Well, I will answer you on the airplane delivery, we feel confident that we can make up the two weeks delay that we suffered by the government shutdown. We feel that we feel confident with our guidance that we have to give in terms of delivery and you are right, it’s a big quarter of delivery Q4.

Pierre Alary

Now when we look at the working capital and transportation, I invited to look at the previous fourth quarter of previous years, and you will see that the contribution in terms of cash is significant in the fourth quarter in transportation. So there is a seasonality effect. And that's the best way to get an estimate of where it’s going.

Deepak Kaushal - GMP Securities

Okay. And beyond the seasonality, I know couple of years ago you had a big inventory ramp for the start of the new projects, are those specific projects rolling off or they kind of still mid phase?

Pierre Beaudoin

I don’t look at it certainly project by profile, we do look at it project by project.

Pierre Alary

There is, we’ve got 200 to 300 contract going on at any point in time. So there is contract ramping up, there is contract going down so you don’t typically balance.

Deepak Kaushal - GMP Securities

Okay. So a normal working capital contribution for Q4.

Pierre Alary

Yes.

Deepak Kaushal - GMP Securities

Okay, thank you. That’s helpful.

Operator

Our next question is from Steve Hansen from Raymond James. Please go ahead.

Steve Hansen – Raymond James

Two very quick follow-ups for me please. The first one is simple, just I noticed the tax rate was quite low in the quarter. Just on a go forward basis should we expect coming back more normalized basis?

Pierre Alary

Yeah, and the more normalize basis, I mean it fluctuates a lot from quarter-to-quarter, but you could expect 20% to 25% is kind of our typical tax rate.

Steve Hansen – Raymond James

Okay that’s helpful. And then just the last one if I may on the CSeries program. Circling back to a comment I think Pierre made earlier on something to do with the suppliers and discussion around perhaps altering the current flight testing program to more or less vehicles. I am trying to understand the nature of any potential delays that could transpire the program and trying to understand where they are sourcing from. Is it a function of the manufacturing on your side or it sounds it’s more of a supplier bottleneck to some degree that could a source of potential delay? I was trying to understand what that could be or the magnitude.

Pierre Alary

I didn’t want to refer to potential delay, what I am saying is right now before we come out with a schedule, it’s very important that we have had discussions with all stakeholders literally understand the plus and the minus and make a decision because not only that we are doing flight test right now, but we will have to decide when to ramp up work in process to build the first aircraft. So having a day that we can rely on and now we have spoken to our stakeholders is even more crucial now than it was during the development program, so that’s why we need to take our time to do our job properly.

Steve Hansen – Raymond James

Okay. That’s helpful. Thank you.

Operator

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

Ron Epstein - Bank of America Merrill Lynch

Hey guys this is actually Ron Epstein, I hope you all doing well. Just some follow-on questions if that's okay and good morning. So just maybe if we can back up a little bit on CSeries; where did you think you would be in the flight test program now relative to where you are?

Pierre Beaudoin

We are on plan with the flight test program at this point. It’s early days, it’s just starting, there is only one flight test vehicle in flight, but we are where we thought we would be.

Ron Epstein - Bank of America Merrill Lynch

Okay. So you are where you thought you would be, you are not delayed?

Pierre Beaudoin

Yes.

Ron Epstein - Bank of America Merrill Lynch

Okay. And then maybe switching gears a little bit into business jets. The large aircraft market, right, seems like it's doing a little bit better than the mids and the lights, right? Can you characterize, because it actually seems like it's been going pretty well in the large aircraft market for Bombardier. How is it, how are things like pricing? We have heard some sayings like some of your competitors are in the market pretty aggressively trying to sale planes. How is the business environment right now for large business tests?

Pierre Beaudoin

It's good. The Global has got a very good reputation, it’s airplane of choice and we have broad product portfolio from the 5,000 although at to the 8,000. And I think our product positioning is very good, when we look against the competition. So right now we're being able to have normal condition price, normal market price discussion with our customers.

Ron Epstein - Bank of America Merrill Lynch

Normal price discussion. Okay. And then maybe one more thing…. Yeah?

Pierre Beaudoin

It’s not a market that is affected by price pressure at this point.

Ron Epstein - Bank of America Merrill Lynch

Not affected by price pressure, okay. And then maybe one more question when we're talking about airplane pricing. I think you guys have said by the time the CSeries enters into service you want to have 300 aircraft in backlog. As it presumably goes into service, that's about when Boeing and Airbus get to the end of the road with the current generation 737 and then A320, right? How is that reflecting in the conversations and broadly speaking, because I know can only give so much detail; how is that reflecting in the conversations you're having with potential customers around pricing? Because I would imagine, but I could be wrong, that an environment where both Boeing and Airbus are kind of getting at the end of their production of their current aircraft, they'll be super aggressive on price. So is that putting pressure on you guys in terms of price with the CSeries or how does that change the dynamic?

Pierre Beaudoin

I don't think you'd have asked that then, but look at the level of backlog for Boeing and Airbus. I don't think they have any their classics still to sell. They are selling NEOs or MAX. So, we're competing with them with product that has the same type of engines of course we have in all new airplane. So we have a competitive advantage in terms of what we can demonstrate in terms of performance. But really if I look at Airbus and Boeing their focus is on the bigger airplanes not the 319 or the 377, 700 because they can compete with the CSeries or CS300 in that category the CSeries is far superior.

Ron Epstein - Bank of America Merrill Lynch

Okay. And then maybe one last one and you might have addressed this and so my apologies for that. When are you expecting the entry in this service for the CSeries now, still sometime next year or how should we think about that?

Pierre Beaudoin

What we said is we're evaluating the schedule now as the flight test program has started and we will answer this question in the next few months.

Ron Epstein - Bank of America Merrill Lynch

Okay, great. Thank you.

Operator

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

Robert Spingarn - Credit Suisse

Thank you for taking the follow up. I wanted to ask you still on the CSeries, this is about the write-down Pierre. Is this one of the reasons you have good visibility into the 200 basis points of dilution? Is this write-down or the accounting behind this something of a regulator that allows you to clean out some excess cost of goods sold before you get to producing the aircraft?

Pierre Alary

That’s one of the accounting principles that we need to follow. So when you look at the specific contract you have and contract-by-contract where you spend on the contract and you want recover all the cost than you have to provide for.

Robert Spingarn - Credit Suisse

But my point, in other words, does this give you greater clarity into your ability to limit the dilution in production to 200 basis points, assuming of course that something unforeseen doesn't come up on a particular aircraft as you're producing it? In other words, if you get off of the learning curve?

Pierre Alary

I don’t have more or less clarity, we have assumption as to what the, when we give that guidance it was based on assumption as to what would be the production rate, what would be, what would be done, what would be the deliveries, the ramp up and so on. Knowledge the actual versus the assumption, it doesn’t give me more or less visibility.

Robert Spingarn - Credit Suisse

Let me say it differently. If production costs per unit change in the future but you see that today, would we see that at the time the aircraft is built or would you take the write-down now?

Pierre Alary

I think the write-down as I spend.

Robert Spingarn - Credit Suisse

Okay. All right answers the question, that money would be spent later, so that would not be included now.

Pierre Alary

Right.

Robert Spingarn - Credit Suisse

Okay. So the other question I had for you was on Q4 cash flow and this may have come up earlier but I just wanted to be certain. To what extent does your reiteration of cash flow guidance for the year contemplate timing on the advances associated with the big Flexjet order from Directional?

Pierre Alary

Well, we take all aspect into account in our cash flow expectation.

Robert Spingarn - Credit Suisse

Is that Q4 or Q1?

Pierre Beaudoin

Probably expect to close Flexjet in Q4.

Robert Spingarn - Credit Suisse

Okay. So it’s part of you guidance? Thank you

Pierre Beaudoin

When we give guidance a year ago that we had not done the sale of Flexjet.

Robert Spingarn - Credit Suisse

Well, that's what I'm saying. So if you have advances coming in to operating cash flows, would you exceed your guidance or do you need these advances to make your guidance?

Pierre Alary

The short answer is that we need advances to meet our guidance, means we need to sign new order and get advances that goes with it and we need the progress payments on the sale we’ve made six months ago, a year ago so that’s progress payment so all of those advances have to come in and they are part of it.

Pierre Beaudoin

And we revaluate the customer mix every quarter or more often than that so that’s part of it too.

Robert Spingarn - Credit Suisse

I understand. The reason I am asking you is just because it's a particularly big order at an interesting time, right when the year changes, that's why.

Pierre Alary

Okay.

Shirley Chénier

Thank you.

Operator

Thank you.

Shirley Chénier

Operator do we have any more questions.

Operator

We do have a question from David Newman from Cormark Securities. Please go ahead.

David Newman - Cormark Securities

Yeah, guys. Just a quick follow up on the examining of the EIS for the CSeries. With the delays already on the books and the potential for penalties and other extra costs, is that also going to factor into the equation versus lower rate initial production that you might have? And just trying to get a sense of how free cash flow might be impacted as months go by if there is a delay, let's say, into 2015. I'm not saying there's going to be, but could we assume that those penalties should compound or how should we be looking at the free cash flow?

Pierre Beaudoin

We don’t want to do speculation on what if there is a delay, we are looking at the schedule now and we will get back in the next few months to show where the schedule will be on the CSeries. It is a question of balancing interest of all the stakeholders, our customers, our suppliers, the ramp up the work in process and progress in the flight test where we have some work to do.

David Newman - Cormark Securities

Let me just ask you in another way, Pierre. If you look at the penalties that you could potentially incur, what sort of flexibility have you built in beyond the delays that have already been on the books? I mean do you still have some decent flexibility on that or because your initial production is low or how should we be thinking about it?

Pierre Beaudoin

Well, we are going to balance the best of meeting our customer’s commitments to what does makes the more sense during the flight test. So I cannot answer you specifically because you would have to understand every contract of every customer. So I think overall counts on that and we are trying to balance the interest of our stakeholders without taking too much risk.

David Newman - Cormark Securities

All right, thanks folks.

Operator

Thank you.

Shirley Chénier

Thank you. Now operator, I think this concludes the question period intended for investors and analysts. So we will now begin the question period for the media representatives.

Operator

[Foreign Language]

(Operator Instructions). Our next question is from Ross Marowits from The Canadian Press. Please go ahead.

Ross Marowits - The Canadian Press

Yes, thanks. I wanted to ask you first of all about your comments about interim service, you're working on I wanted to understand the schedule talking to suppliers now that is coming up with a schedule in next few months. But are we talking not really a question of whether it would be delivered within 12 months, but rather how far, how much of a delay it will be?

Pierre Beaudoin

No, we're not saying that. We still have the target to fly in 12 months. So we are looking at to do a flight test in 12 months. We're looking at all of the implication of stakeholders, whether it's the customer, suppliers, ourselves and kind of make the best choice for everybody involved.

Ross Marowits - The Canadian Press

So it could still be 12 months?

Pierre Beaudoin

That's our target.

Ross Marowits - The Canadian Press

And second, in terms of production rates for the commercial aircraft, obviously you don't have a lot of orders or deliveries at this point. Are you expecting to have to cut production rates on those aircraft types or I know you say you are optimistic about getting orders, what kind of timing do you have before you have to make that decision?

Pierre Alary

There is no change to our plan and if we have revised guidance towards our delivery that will come in our Q4 results.

Ross Marowits - The Canadian Press

In your Q4 results?

Pierre Alary

With our Q4 results.

Ross Marowits - The Canadian Press

Okay. And so one other thing, in terms of transportation, you say you have execution problems. Do you think that's going to hamper your ability to win large new contracts in Britain or elsewhere?

Pierre Beaudoin

No, I think we are company has got a reputation with customers around the world and we are very well positioned to win the large contracts.

Ross Marowits - The Canadian Press

Thank you.

Operator

Thank you. [Foreign Language]

Unidentified Speaker

The next question is from Marie Tison from La Presse.

Marie Tison - La Presse

Hi. Just to follow-up on the so called execution issues. What kind of problems are those and what contract are involved?

Pierre Beaudoin

As I told the analyst, the focus for us is to improve our execution issues on some contract is to focus on engineering program management and the relationship with customers. That’s what we're emphasizing. Specific contracts, I don’t think it would help identify them because we have the lot of contracts that are going really well. So it’s a mix and we're focusing on the mix of contractor transportation not contract-by-contract.

Marie Tison - La Presse

Yes. But you have big problems with major contracts before, why haven’t you managed to resolve that kind of problem with the new contract?

Pierre Beaudoin

If you look at the trend in our margin for transportation, we have resolved a number of them and then the progression will continue. Those are complicated issues, but I am confident that with the focus I've just given you that we will resolve them.

Unidentified Speaker

The next question is from (inaudible).

Unidentified Analyst

Just to be sure you've said that yesterday was the fourth test flight that took place. And also I wanted to know is it a fact that if the test vehicles stayed on the ground longer than anticipated, it was to be to carry out vibration test?

Pierre Beaudoin

They didn’t stay on the ground longer than anticipated. We had planned to an update period. And among those updates we had also planned certain vibration test that hasn’t been done prior to the first test flight.

Unidentified Analyst

So, and this was the fourth test flight yesterday?

Pierre Beaudoin

That's correct.

Unidentified Analyst

And do you intent to increase the rate of test flights over the coming weeks, so how many flights will be carrying out by the end of the year?

Pierre Beaudoin

In terms of update on the CSeries programs I would refer you to the CSeries website. We don’t necessarily make forecast, but we will certainly report on our progress.

Operator

Our next question is from (inaudible). Please go ahead.

Unidentified Analyst

Hi. I just wanted to find out, there were some I guess question or speculation wondering why there are so few flight test so far about a month and half into the program? And also wanted to find out when, whether you’ve discussed when the other test planes might begin flying?

Pierre Beaudoin

Well first of all, our test program is according to schedule. Every manufacturer schedules in a different way. We had decided to do the first flight and to do an update period and that's what we have done. And as far as the other flight test vehicles, they will come in the next few weeks, the second one will come and then the other ones will follow shortly after.

Unidentified Analyst

Okay. And you mentioned during the, with the analyst that you had done a update between the third and fourth flight on the fly-by wires, just can you elaborate or explain that a little bit more what kind of updates that entails?

Pierre Beaudoin

Well, what we have said is during the downtime part of the work that we’re doing is software update. We also did like somebody just identified some vibration test. But there is many things that are done during the update period. And that will happen all through the flight program. It’s really going to delay this version of software.

Unidentified Analyst

Okay. So fairly routine then?

Pierre Beaudoin

Well, as planned.

Unidentified Analyst

Okay. Alright, thank you.

Unidentified Speaker

Next question from is (Inaudible)

Unidentified Analyst

Two questions. Do you anticipate that it will be lay-offs related to Learjet production? That’s the first question.

Pierre Beaudoin

We are not planning any lay-offs connected to Learjet production.

Unidentified Analyst

But you have said there were fewer sales of the smaller aircraft, could you get to that point soon?

Pierre Beaudoin

We are not planning any lay-offs related to Learjet production.

Unidentified Analyst

Okay. So going back to development cost for the CSeries there was substantial confusion at the time of the first flight. We have been given to understand that it was $3.9 billion according to the new IFRS rules. And then later our journalist was told by you that it had, was backed down to $3.4 billion including the new IFRS standards. So is it $3.4 billion or $3.9 million?

Pierre Beaudoin

We identified the open cost of $3.4 billion at the beginning of the program and that’s the reference figure. But I can tell you that the business plan is progressing well, we are meeting a business plan. Of course non-recurring cost and recurring cost will vary during the program because sometime we have to make choices between investing in tooling and paying a better price or paying higher price for part and not invest in the tooling. So the reference cost for the program is $3.4 billion and we are keeping with our business plan. And those figures will fluctuate throughout the development process. And we will not be making more updates, because we’d have to indicate our recurring cost which we won’t do because it’s competitive information.

Unidentified Analyst

But when the development of the aircraft is stretching over a longer period than anticipated, aren’t you exceeding this early planned cost?

Pierre Beaudoin

As I told you it’s balanced between recurring and non-recurring cost. And we are constantly reviewing those two elements. And we are keeping with our business plans.

Unidentified Analyst

So no $500 million over run?

Pierre Beaudoin

Taking one figure and isolation from the other, it doesn’t anything. So I can’t answer your question.

Operator

Question is from (inaudible) from Bloomberg News. Please go ahead.

Unidentified Analyst

Mr. Beaudoin, a question about Bombardier transport. There were concerns raised in France about the [CapEx] site especially there are some contracts starting in 2016, what can you tell us about prospects for that site?

Pierre Beaudoin

I think the prospects are good because we have contracts that include options such as Ile de France, such as (Inaudible) which is our two level network in France. But we have to move to the option stages what we told our customer in order to secure employment. We haven't had options yet. The customer is positive about our trends right now Ile de France, getting very good performance from them. So we're talking, starting to talk about options and we're telling our customers that now is the time to get a handle on our backlog after 2005.

Unidentified Analyst

And a quick question on the CSeries. When will the second flight vehicle be taking off, will it be this year?

Pierre Beaudoin

Over the coming weeks.

Unidentified Analyst

You can be more specific?

Pierre Beaudoin

That's already pretty specific.

Unidentified Speaker

The next question is from Daniel (Inaudible).

Unidentified Analyst

Good morning. I just saw on the flight global website that you are about to offer a new version of Q400, higher density with more rows. Can you give us some information about that?

Pierre Beaudoin

When our customers ask us to look at how we can put more seats in the plane without changing the aircraft substantially, we're always looking at that. So it's sometimes happen that some customers ask us to maybe take off washroom or take off service area to put in more seats and it's our job to look at with the customers.

Unidentified Analyst

But there is no question of stretching the plane.

Pierre Beaudoin

If we're looking at more seats, it’s on a stretch version.

Unidentified Analyst

Okay. Are you still in negotiations with Qatar Airways? And do you hope to be concluding soon with them?

Pierre Beaudoin

We're not in habit of identifying customers individually, it’s up to customers to announce. We're in discussion with a number of clients throughout the world.

Unidentified Analyst

Well, it was a foreseeable answer. One last question maybe, do you intent to modernize the Challenger 605 as soon as only one in your business that have been modernized?

Pierre Beaudoin

It was modernized in 2005 we went from 604 to 605. It’s a very competitive plane that’s very much in demand especially with large companies throughout the world. It’s really the workhorse aircraft for companies around the world. And it’s very competitive. So we're not planning to change it soon.

Shirley Chénier

I believe we have no more questions.

Operator

[Foreign Language]

Unidentified Speaker

There are no further questions.

Shirley Chénier

[Foreign Language].

Thank you all for being with us today.

Operator

[Foreign Language]

The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

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