Bombardier's (BDRBF) CEO Alain Bellemare on Q2 2016 Results - Earnings Call Transcript

| About: Bombardier Inc.B (BDRBF)

Bombardier Inc. (OTCQX:BDRBF) Q2 2016 Results Earnings Conference Call August 5, 2016 8:00 AM ET

Executives

Patrick Ghoche - VP, IR

Alain Bellemare - President and CEO

John Di Bert - CFO

Analysts

Robert Springarn - Credit Suisse

Cameron Doerksen - National Bank Financial

Turan Quettawala - Scotiabank

Ron Epstein - Merrill Lynch

Benoit Poirier - Desjardins Capital Markets

Seth Seifman - J.P. Morgan

Walter Spracklin - RBC

Cai von Rumohr - Cowen & Company

Gavin Parsons - Goldman Sachs

Tim James - TD Securities

Stephen Trent - Citi

Operator

Good morning, ladies and gentlemen, and welcome to the Bombardier Second Quarter 2016 Earnings Conference Call. Please be advised that this call is being recorded.

At this time, I’d like to turn the discussion over to Mr. Patrick Ghoche, Vice President, Investor Relations for Bombardier.

Please go ahead, Mr. Ghoche.

Patrick Ghoche

Thank you. Good morning, everyone. And thank you for joining us for this review of our second quarter’s performance.

This conference call is broadcast live on the Internet. For copies of our earnings release and supporting documents in both English and French or to retrieve the webcast archive of this call, available later today, please visit our website at www.bombardier.com.

All dollar values expressed during this call are in U.S. dollars unless stated otherwise. I also wish to remind you that during the course of this call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the corporation.

I bring your attention to page two of our presentation. Several assumptions were made 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. I am making this cautionary statement on behalf of each speaker whose remarks today will contain forward-looking statements.

In a few moments, Alain Bellemare, our President and Chief Executive Officer will address our operational performance and continued strategic focus. John Di Bert, our Chief Financial Officer will then review our financial results for the second quarter ended June 30, 2016.

I would now like to turn over the discussion to Alain.

Alain Bellemare

Thank you, Patrick and good morning everyone. Thank you for joining us today. As you all saw in the press release, this was a strong quarter for Bombardier. First, we delivered on all of our financial commitments. Second, we completed development work on the C Series and have transitioned into production ramp-up and revenue generation phase of the program. Third, we closed the $1 billion equity investment from Québec in the C Series, strengthening the program. And finally, we made solid progress executing our turnaround plan. So, good momentum across the entire portfolio.

As we start the second half of the year, we are confident in our strategy, our turnaround plan, and our ability to meet both, our full year guidance and 2020 goals. Our focus is on improving operational efficiency, flawlessly executing the ramp-up of our new programs, and maintaining a disciplined and proactive approach allowing us to perform in any market environment.

Highlighting our progress in the second quarter was the C Series entry-into-service with SWISS. With three weeks of service, the first production aircraft is performing as expected, and feedback from our customer and passengers has been outstanding. The delivery of the second SWISS C Series aircraft is on schedule and our production ramp-up continues to go well.

As I mentioned earlier, certification of the CS300 last month also marked a significant milestone for the C Series program, the completion of the development phase and the full transition into the production ramp-up and revenue generation for both C Series models. Québec equity investment in the C Series program was also a significant milestone, as it gives us the financial flexibility needed to unlock the full potential of the aircraft.

Earlier in the quarter, we also finalized our agreement with Air Canada for 45 CS300 aircraft and options for 30 more. With this agreement, we have a firm backlog of over 300 aircrafts; including options and commitments, this number more than doubles. So good momentum with the C Series as we begin the second half of the year.

Turning to our overall performance, as you know, 2016 is a transition year for Bombardier as we shift our focus from derisking the business to rebuilding a clear path to profitable earnings growth and cash generation. And in the first half of the year, we made significant progress. In addition to successfully relaunching and bringing the C Series into service, we met all of our cost reduction and financial performance commitments including revenue, EBIT, margin improvement and cash flow.

One important note on our performance in the second quarter. As planned, almost all of our cash went to the C Series and Global 7000 development and ramp-up; in other words, to fund our future growth. This cash discipline gives me confidence that we will be able to achieve our cash flow neutral goal by 2018 when both programs are in service.

Along with disciplined cash performance, a key part of our turnaround plan is transforming our operations to reduce cash, leverage our scale, and to become more efficient across our supply chain and in our own operations. In the first half of 2016, we have made good progress in these areas. A few examples, we are more than 60% complete with our previously announced workforce reduction. And we are on track to achieve our 2016 cost savings target for both our direct and indirect spend.

You will recall, we are targeting 250 to 300 basis points earnings improvement from reducing these costs by 2020. So, a lot of opportunity here over the next few years. John will go through the financial results in detail in a few minutes but first, a few highlights from the business units.

Starting with Business Aircraft, which had a strong quarter in a challenging market. As you will recall, we proactively aligned our production rates last year in anticipation of where we saw the market heading. Our competitors are just now starting to make their own adjustments, but today there is an oversupply in the market, especially for light business jets. In response, we are looking at how we best position The Learjet 75 in this environment. With respect to our Global and Challenger franchises, we are a year ahead of the industry with the action we took, and our results speak for themselves.

In the first half of the year, the Business Aircraft team delivered 73 aircraft, and we are on target to achieve our full year guidance of 150 deliveries. We also had an industry-leading year-to-date book-to-bill ratio of 1. And in the pre-owned market, Bombardier’s Global and Challenger lead the industry with respect to value retention available inventory and days on the market, all of which translate into value for our customers. So, I am very happy with how David and the Business Aircraft team are performing in this market, delivering better and sustainable margins on lower volumes.

Looking ahead, we see some near-term softness in the business jet market, but we are confident in the medium and long-term growth outlook, which means we will continue to be disciplined in our approach and proactive in our actions to protect our brand and deliver value to customers and shareholders. That being said, we don’t anticipate any significant adjustments. And again, we are on target to meet 150 deliveries for the year.

Looking further ahead, development of the Global 7000 and 8000 is progressing well with first flight on schedule for later this year. These aircrafts will be class-defining ultra long-range business jets that will position Bombardier for strong growth as the market recovers.

In our Commercial Aircraft business, the largest driver of future growth is the C Series. And as I mentioned earlier, Fred and the BCA leadership team have created tremendous momentum with 127 firm orders and 80 options in the first half of 2016 as well as a smooth entry-into-service. As many of you know, we conducted demo flights with the C Series at the recent Farnborough Airshow. The feedback was simply outstanding. More and more people are recognizing the C Series unmatched passenger experience, lowest operating cost, and its best-in-class noise and emission performance. Customer interest and campaign activity also remains very strong across the industry including low cost and legacy carriers. This reflects the C Series best-in-class performance and its ability to create value allowing airlines to open new routes, expand existing networks, and upgrade regional routes.

Turning now to the CRJ and Q400 programs. Despite some softness in the aerocycle, we saw solid orders and deliveries in the quarter. As we grow to the production planning process for 2017, we will look to ensure that our production rates align with market demand, and continue to focus on cost reduction to improve our competitive position.

Turning to our rail business, where we delivered another solid quarter. Laura and his team are focused on transforming Bombardier Transportation from a strong and stable business into a high growth, high margin rail solution provider. Transformation efforts [ph] are focused on three things, growing the top line; securing a more favorable product mix in future contracts; and executing our operational transformation plan to deliver better margins on our $30 billion backlog. Specific actions include improving our go to market strategy, focusing on higher margin solutions, and driving revenues related to service, signaling and systems versus the traditional rolling stock. We are also focused on improving productivity and cost structure through workforce optimization, product standardization and by better leveraging our supply chain and low cost footprint. Finally, we are working on developing differentiated products and services to fully leveraging partnership opportunities to provide maximum value to customers and shareholders. So, a lot of great work being done at BT.

Let me stop here and turn it over to John to review the Q2 financial results.

John Di Bert

Thank you, Alain; and good morning, everyone. Our second quarter performance was solid. We continued to execute our turnaround plan, making significant progress on C Series, transformation, cash flow performance and liquidity while we manage through this challenging environment.

Looking at chart four, we delivered on our commitments and street expectations. With the C Series, we secured major orders, reaching a firm backlog that exceeded our entry-into-service goal; and most importantly, exceeded planned deliveries in the first five years of production, derisking our ramp-up.

We closed the Québec investment in C Series and are fully focused on optimizing production, on-time delivery and revenue generation. Second quarter deliveries, revenues and EBIT were as planned, and in line with full year target.

For the second straight quarter, our margins for Business Aircraft, BT and Aerostructures were all above 6%, highlighting the early benefits of our transformation. And importantly, free cash flow improved by $250 million quarter-over-quarter and $300 million year-over-year.

As we begin to exit the peak investment cycle at C Series, operating cash flow across Bombardier is approaching breakeven. We finished the second quarter with strong pro forma liquidity of $4.9 billion including $3.3 billion of cash on hand, as we go into the seasonally stronger second half of the year. And while we are focused on the work ahead of us, our consistent financial performance for the first half allows us to reaffirm our guidance for the year.

Let me take you through our consolidated results, followed by a review of the business units and finally, an update on cash flow and liquidity.

On chart five, looking at consolidated results. Revenues were $4.3 billion in Q2 versus $4.6 billion a year prior, explained by a $340 million planned reduction in Business Aircraft revenues. EBIT before special items stood at $106 million for the quarter and reached $236 million on a year-to-date basis. We therefore entered the second half well-positioned to manage our production acceleration on C Series and the first flight of the Global 7000. These results set us on track to full year revenues within our guidance of $16.5 billion to $17.5 billion, and we see a path to the upper end of our $200 million to $400 million EBIT range. On free cash flow usage, we reaffirm the target between $1 billion and $1.3 billion for the year.

One note before we review results by unit. While we’re going to provide EPS guidance, it’s important to remember for your models and for consensus that our reported number is impacted by income tax expenses without the benefit accounting tax recovery in countries where we have operating losses.

Now, looking at our Q2 2016 financial results by business units, starting with BT on chart six. Revenues were $2 billion for the quarter, $103 million lower than 2015 on a constant currency basis due to contract phasing in our systems and signaling businesses. Activity levels were good with Q2 new order intake yielding a book-to-bill of 1.1, cumulating at 0.9 on a year-to-date basis. With mid-year revenues at $3.8 billion and continued focus on working capital discipline, we may see some pressure on our full year revenue guidance of $8.5 billion. Nevertheless, we expect operating earnings performance to be strong.

In the quarter, earnings before interest, taxes and special items were $124 million, and this is equal to 6.3% of revenues, a slight sequential improvement over Q1. On a year-to-date basis, margins are 60 basis points better than 2015. And as I mentioned, Transportation is on plan to achieve its 2016 EBIT margin target of over 6%, continuing the positive trend over last year, as transformation is already contributing to sustainable margin gains, notably from workforce optimization.

At Business Aircraft, we delivered 42 business jets in the quarter, the most amongst our direct competitors, reaching 73 deliveries year-to-date. As Alain mentioned, this marks the halfway point to our full year delivery target of 150 aircraft. Again this quarter, Global and Challenger deliveries were on plan with 14 and 23 deliveries respectively, maintaining industry-leading market share in highly competitive segments.

We did see some activity on Learjet sales in Q2 at five delivers, but this level is still below our expectation. As Alain mentioned, the light category is remarkably competitive, and we’re addressing our position. Overall, book-to-bill at Business Aircraft was solid, standing at 1.21 [ph] after six months, one of the highest in the industry so far this year. Putting this into perspective, we have 70 net orders year-to-date versus 27 for the same period last year, this is more than double. Our results confirm that our proactive decisions last year were effective and that we have aligned supply to current markets.

For this quarter, Business Aircraft revenues totaled $1.5 billion with an EBIT before special items of $98 million or 6.7% of sales; this strong performance relative to last year’s 6.6% margin despite reduced volumes. Our margin performance so far this year is driven by good product mix, higher service revenues, and progress on transformation. Given the solid first half results, we’re comfortably tracking to revenue guidance above $5 billion and 6% EBIT margin for 2016. We expect year-over-year EBIT growth versus full year 2015.

Turning to Commercial Aircraft where we achieved major milestones in the last two months. Certifying CS300 completed a development, and we delivered the first C Series aircraft, paving the way for revenue growth in the quarters and the years to come. Deliveries for the CRJ and Q400 series were also good, reaching 26 units up from 20 in Q1 and 19 one year ago. The 47 aircraft delivery in the first six months puts us on track to our delivery target for BCA. Q2 revenues grew to $764 million above the $598 million recorded last year on the back of stronger deliveries. With an acceleration of revenues in the second half as the C Series gains momentum, revenue guidance remains in the range of $3 billion, above last year’s $2.4 billion. EBIT loss before special items of $103 million in the quarter was on plan as C Series production ramped up.

As the production rate intensifies, and as we establish the aircraft programs to support infrastructure, we expect our second half loss to increase relative to the first six months performance. We remain conservative and continue to expect full year negative earnings approaching $550 million. Finally, book-to-bill in Commercial Aircraft was notable at 5.9. Our backlog of over 300 C Series aircraft is reinforced by the quality of the orders from Delta and Air Canada. The quarter also saw orders for 17 CRJs and 15 Q400s as work to rebuild this backlog.

At Aerostructures and Engineering, revenues were $425 million versus $472 million one year ago. This reduction reflects the timing of Aerostructures and general revenues as they focus on incremental work related to C Series. The unit continues to focus on cost reduction and on productivity. EBIT before special items was $30 million, representing a 7.1% margin in the quarter. As production accelerates and transformation gains traction, Aerostructures remain on track to increase margins from almost 6% in 2015 towards its 7.5% goal this year.

Now, moving to chart seven. Strategic initiatives are key enablers that accelerate our turnaround plan and will drive earnings growth. The decisions we are taking will build a stronger company. In the second quarter, some of these actions led to special charges. First, as announced during our Q1 earnings call, we’ve relaunched the C Series of marquee orders that reenergize the program, filling delivery slots in the steep part of the production learning curve. As such, a $490 million special provision was booked against future deliveries. In essence, this accelerated the recognition of planned high-production cost. These orders created significant value for Bombardier by filling [ph] at a critical time; and they generated the sales momentum that we are now experiencing. They were fully factored into our five-year plan, and we continue to target breakeven cash flows for the program by 2020.

In the last three months, we continued to execute our previously announced initiatives in line with our plan as well we maintained a proactive approach to risk management. We pursued our workforce optimization efforts and are tracking ahead of plan at over 60% completion. In Q2, we recorded a $44 million restructuring charge. We expect productivity gains as we complete this initiative, through the end of this year and into 2017.

We had positive developments in our efforts to manage certain risks and liabilities. First, we made significant progress winding down the Lear 85 program, allowing us to release $54 million of previously booked provisions. We recorded a $139 million pension liability gain as we moved to align our future plan indexation practices with that of the market. This decision fits with our desire to prudently manage pension liabilities and earnings volatility. And finally, these gains were partly offset by a $40 million provision increase against an ongoing tax litigation.

These are generally positive developments to our business and will support our transition to rebuilding earnings power and free cash flow generation.

In fact, on chart eight, taking a look at our Q2 cash flows. This is our third straight quarter of strong performance relative to plan with cash usage largely related to funding growth. Our overall free cash flow profile is improving with usage of $490 million relative to $750 million in Q1 and $808 million the same quarter last year. This significant progress comes in large part from the restoration of Business Aircraft’s cash flow generating abilities now that the business is right-size to the market.

Spending decline of the C Series development program will also contribute to sustainable cash flow improvement; and as transformation benefits to grow and cash discipline continues, cash flow generation has begun to establish a positive trend. In the near term, going into the second half of 2016 with $1.2 billion of cash spend behind us, our liquidity stands at $4.4 billion or $4.9 billion on a pro forma basis including the anticipated Q3 equity installment Québec. This puts us in a strong position as we were more or less breakeven on free cash flow for the remainder of the year.

I expect good liquidity at the start of 2017 and momentum towards our 2018 cash flow neutral goal. Directionally, free cash flow usage in Q3 for C Series will be material, while Q4, our seasonally strongest quarter is expected to rebuild our robust liquidity position.

In closing, our performance for the first six months of 2016 was controlled and predictable, helping to build confidence in our reaffirmed guidance for the year. And, as we start looking beyond the year, we will ensure we remain pragmatic about markets continuing to take the same kind of proactive decisions that led to the launch of our turnaround plan. In doing so, we will remain focused on exceeding customer expectations and sustainable value-creation for our shareholders.

With that, operator, we’re ready for our first question.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Robert Springarn from Credit Suisse. Please go ahead.

Robert Springarn

John, on the cash flow, you just mentioned on C Series for the remainder of the year. You’ve now gone from an R&D phase into a production phase; could you give us a little more detail on how many aircraft are in production, what the flow looks like? And that way we can track how the cash usage differs from R&D to production.

John Di Bert

I guess we’ve talked about our ramp rate, if you recall, we’re going to kind of square ourselves in year around 12-15 [ph] aircraft in the year. We’ll see where that lands. We’re tracking actually very well with respect to the ramping of the C Series. And as you know, the aircraft’s performing very well. So, we expect to double that rate or so next year. And in terms of the -- I’m trying to size up how you want to kind of calibrate the question here, but...

Robert Springarn

Well, so, what I am thinking about is how many aircraft are in production now? What are you thinking in terms of Q3 delivers versus Q4? And essentially the cash flow associated with those aircraft, again, Q3 versus Q4. In other words, are there major changes in how you burn cash on C Series, now that you’re only producing aircraft?

John Di Bert

Yes, okay. So, fair enough. So, I’ll give you some data and then maybe you can work a little bit of this out. But, we are about $0.5 billion through on the first six months of the year. And we’ve largely now put behind us all the certification work. As you know, we’ve done that with the 300. So, development behind us; we’ve got about $0.5 billion to go that’s consistent with the $1 billion that we’ve given you guys in terms full year. Usage, no changes with respect to the $1 billion; we’re tracking well. And that will get us, like I said probably a dozen or so aircraft this year. And then, it will size us up for call it 30 to 40 aircraft next year, we’ll land that number as we get closer to the back-end but 30 to 40 aircraft next year.

The rates by the time you get into Q4 of ‘16 will look a lot like the rates that you’re going to get for the four quarters of 2017. And so that’s more or less a story that we go really from a stop kind of Q2, got one aircraft out, will kind of be a midpoint between 1 and 8 or so or 10 in Q4; so, [indiscernible] whatever that might be, 2, 3, 4 aircraft in Q3 will come out.

Operator

Thank you. A following question is from Cameron Doerksen from National Bank Financial. Please go ahead.

Cameron Doerksen

Thank you. Good morning. A question on the business jet markets, one of the comments you made in the prepared remarks was just with regards to Learjet and you’re “addressing” your position there. Can you describe what you mean by that? Is that a signal that you may exit that market altogether?

Alain Bellemare

Well, good morning Cameron; it’s Alain here. So, what we’re seeing is like significant softness and the smaller size Business Aircraft; and the Lear 75 sales were pretty soft in Q1, much better in Q2. It’s a very competitive segment of the market. So, there is significant pricing pressure. And what we meant by that is we’re going to continue monitoring this and making sure that we keep on pushing sales, and then we’ll see where it goes.

Cameron Doerksen

Okay. So, if you see a risk to a lower production rate for business jets in totality, it’s probably more on the Learjet side, less so on Global and Challenger?

Alain Bellemare

Absolutely; that is very clear.

Operator

Thank you. A following question is from Turan Quettawala from Scotiabank. Please go ahead.

Turan Quettawala

Yes, good morning. I guess maybe you can talk a little bit about Global 8000 as well. You’ve spoken I guess about the potential cancellation or maybe some relooking at that program as well. Can you talk about when that decision has to be made, and I guess, does it change CapEx a lot and would there be any charges associated with that?

Alain Bellemare

Good morning, Turan; it’s Alain. We never talk about cancelling the 8000; unfortunately some journalist did. And right now, what we’ve been saying is we are focused on the Global 7000; that’s what the team is focused on. When I joined the organization, we put significant and clear priority on our new program development. We stopped and verified, we said all ends on deck on the C Series and we just did that. I mean we have the CS100 certified; we have CS300 now certified. And now it’s all ends on deck on the Global 7000. And once we are far advanced with that, we will see what we do.

Turan Quettawala

So, I guess the decision, if there is one to be made, I guess comes may be in 2017 then?

Alain Bellemare

We will see when we get there, when we are ready for this. Right now, the only thing that we are focused on is to make the Global 7000 a huge success by optimizing performance of the aircraft, which is going to be an amazing aircraft in the marketplace, the best ultra long-range business jet available. And once we’re far advanced and we understand the performance of this aircraft, then we will decide what we do with the Global 8000.

Operator

Thank you. The following question is from Ron Epstein from Merrill Lynch. Please go ahead.

Ron Epstein

Hey, good morning guys. Just a quick question for you on the Globals. The Globals you have in production right now, how many of those are in backlog? That’s to say, are you guys building any white tails? And then, two, what is your visibility on demand on the Globals when you look out over the say the next 12 to 18 months?

Alain Bellemare

Good morning, Ron. As you know, we have resized our production range significantly last year when the range was about 50ish Global a year. We feel pretty good about that. So far so good, we’re tracking well in the first half. And even if you look at our book-to-bill ratio in the first half between the medium size and the large Business Aircraft, we’re at one; so, kind of a good place to be. So moving forward, I think that this is -- right now, it looks like this is kind of the right level of production volume, given the foreign market demand. So, we might have to do a bit of fine tuning up or down, but we believe we’re in the right zone. So, that’s pretty much kind of it on the Global.

Ron Epstein

So, just as a follow on quickly, that would be -- you did 28 airplanes in the first half. So, if we were to annualize that that puts you at 56, which is higher than 50, right? I mean, it’s in the 50s; is that the right way to think about it or not?

Alain Bellemare

Yes, it is absolutely.

Ron Epstein

Okay. And then, just changing gears quickly, in the post-Brexit world that we’re in now, what impact have you seen, if any, may be not at all, on the transpiration business in Europe? Has there been anything -- have you seen any slowdown in orders, more conservatism; I think to say that very well more conservatism from governments in Europe or not? What impact has that had?

Alain Bellemare

We haven’t seen anything, Ron, to be honest with you. And may be because it’s too early or may be because people not know. But the fact is, there is ongoing projects there and nothing has changed or so far, it’s pretty much like business as usual.

John Di Bert

Yes, and generally speaking, we think that second half in terms of order campaigns is going to be probably a little bit more active than the first half. And nothing has led us to believe different at this point, and we continue to watch that, but still seems like a good environment.

Operator

Thank you. Our following question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.

Benoit Poirier

Good morning, gentlemen; and congratulations for the progress made so far. Just looking at the C Series and related to the announcement with Ilyushin just wondering whether there is any potential charges associated with that and any other customers at risk of reaching a similar agreement, especially talking about Republic here.

John Di Bert

Yeah, no charges associated with IFC, and we just continue to work with our customers. I mean, they had some their own requirements, and we’ve worked something out that also benefits our Q400 program. So, I think from that point of view, good settlement going forward. With respect to the remainder of the order book, I mean, I think we’ve improved the quality part a bit here with Air Canada with Delta, and we’re doing -- we continue to have good momentum with sales campaigns. With respect to -- I mean there are some of the obvious questions that lie out that were Republic, and we continue to work with them. So, I don’t -- I won’t speculate now down my plan but and no charges that I anticipate relative to those kind of adjustments.

Benoit Poirier

Okay. And quickly, any progress on your strategy of reducing your cost on the Q400 and maybe if you could highlight the bidding opportunities for the prop, going forward?

Alain Bellemare

Yes, the team has been working pretty hard and taking the costs down. So, we’re making progress, there is more to do, and it’s a very competitive segment of the market as well. But, we have the best aircraft out there. So, the pipeline is pretty rich when it comes to campaigns on the turboprops, and it’s pretty much global as well. So, we’re confident on the sales side. But for this to be successful and for us to be able to land additional orders, we need to keep on working there. So, the strategy is clear and we’re just executing on it.

Operator

Thank you. A following question is from Seth Seifman from J.P. Morgan. Please go ahead.

Seth Seifman

Thanks very much, and good morning. I wonder if you could talk going forward about the CapEx or investment profile for Global 7000. I mean it’s been very steady over the past year or so in terms of what you’ve been spending every quarter. Is that -- does that change significantly as we move into flight testing next year?

John Di Bert

Good morning, Seth. As you said, we’re kind of -- we’re steady as she goes probably the last two years here. And we gave you guys a little bit of color about what we thought it would be for the full year, so more or less what we did last year. I think as you look at 2017, and we’ll probably have more time to talk about this when we give you guys some color and guidance later this year. But we do expect next year to be a higher spend year with respect to 7000 CapEx; at the same time, we do expect to see the C Series much lower. So, bottom line is that we think it will have a trend on investments in product and development that’s continuing to deplete. So, from the peak in 2015, down this year and probably down a little bit more next year, 7000 kind of up a little bit and the C Series down.

Seth Seifman

Okay, great, thanks. And as a follow-up, can you just remind us, there was -- there is special item for the pension in the quarter on the P&L. But from a cash perspective in terms of contributions this year and what the profile is going forward for the pension plan?

John Di Bert

So, we -- some small improvements in terms of cash usage on the pension plan. The ones that we mentioned is obviously non-cash. We’ve done a really good job with asset returns. And generally speaking, I think we have a positive trend over the last couple of years, about probably $30 million positive this year and probably the same next year, about $30 million of improved cash flow.

Operator

Thank you. Our following question is from Walter Spracklin from RBC. Please go ahead.

Walter Spracklin

Thanks very much, operator; good morning, everyone. So, coming back on the business jet, when I look at your guidance for revenue and margin for the full year and then backing out what you’ve done in the first half, I guess this comes back to Cameron’s question. I mean, you’re trending above -- or it seems like if you take in the seasonality of the fourth quarter from prior years, it looks like you’re expecting in fact none of that seasonality to come in. And the margins, given your margin run rate now would have to drop down to 5.5% or somewhere thereabout in order to meet that full year guidance, which implies that you are -- there is something happening in the back half that suggests that we’re not going to get to those numbers that something will be quite negative. So, I am just curious, what level do you see is sustainable for the Learjet that you have in production to keep this program in place; is there some kind of run rate that you have as a benchmark that you want to look forward to unless that there you look to see what you do with that program?

John Di Bert

Thanks Walter. So, I guess trying to just make sure I get the question right here. You’re specific to BBA in terms of first half to second half?

Walter Spracklin

That’s right.

John Di Bert

Okay. So, from a first half performance, about a $185 million right of EBIT, we guided to roughly 6% margins on more than -- equal or more than $5 billion of sale. If you do some quick math there, you come in somewhere around $300 million; so that’s just about $115 million in the second half. I think we had a strong first half in terms of mix, and that helps. We also had some good service revenues in the total revenue mix that’s helpful. So when you look at second half in terms of Lear, that will be a bigger number than the first half. And when you kind of throw that in, it does reduce a little bit of the operating margin. That being said, I think we’ll still be 6% plus for the year. The team is doing well in terms of taking out cost and just being sized for this market. So, expectations -- that’s why -- if you listen to my comments at the start, I kind of said hey, we are still calling the range two to four, we’re starting to feel better about the upper end of the range. And that’s part of the performance. The guys are doing good job of selling air craft, being sized to the market, taking out costs and so giving us some path to the upper end of that range. And that’s what that reflects.

Walter Spracklin

I guess my question was, you’re delivering about 30 plus of these a year, of the Lear 70, 75s and now you’re kind of half that rate. And I am just wondering what level is it where you see as a sustainable rate before you have to make some decisions about that line?

John Di Bert

Yes, I mean, tough to make that call right now. I think we’re focused on selling planes in the second half. It’s a competitive environment; we’re going to go out there and make sure we balance market share with pricing and then we make the right decisions with respect to production rates. So, we’re -- I think that for now, focus is on selling planes. We’ll see where we are, but 20 to 25 aircraft is kind of a decent size program which we kept at that level as well. We’ll look at 2017 in the fall.

Walter Spracklin

Okay. And then, still on the Lear. I mean you had a big charge on the Lear 85 and you’re starting to reverse some of that charges through your adjustments now. Do you just look at this every quarter and then ratchet down? Do we have -- in order words, what is the propensity we might have some more reversals on the charge you took on the Lear 85 in the future?

John Di Bert

Yes, just to be clear on that, I mean, what we’re talking about here is we have some unwinding costs, right? So, it’s a matter of not so much we estimating as it is about actualizing our wind down. And we’re just very focused on making sure we’re disciplined and how we wind down the program and that reflects all kinds of arrangements we have including supply chain. And so, we’re just disciplined in how we’re doing that and the benefit of the team’s work in the last three months or so.

Walter Spracklin

Okay. A just quick housekeeping, are you still at 550, negative 550 for BCA for the year on EBIT?

John Di Bert

Yes, and you saw the comment there, I guess we’re ramping up and think about that Q4 looking a lot like what 2017 is going to look like in terms of the rate. So that’s all about bringing in inventory and supply chain. There is a little bit of variability with that where we remain conservative, we’re driving that ramp. So, we want to see the production rate intensify. At this point in time, the 550 stands, and we’ll give you more color in Q3 and when we’re little bit closer.

Operator

Thank you. A following question is from Cai von Rumohr from Cowen & Company. Please go ahead.

Cai von Rumohr

Yes, thank you very much; and good performance, guys. So, your working capital was good performance with the exception of white tails, which were up some 44 million to 315 million, they had been trending down. Could you comment what programs were going up on the white tails?

John Di Bert

Cai, first of all, thanks for the comment. With respect to stress of working capital and white tails, I mean really you’ve seen the first half with respect to Lear. So, we have a little bit of pressure there. I see that if there is anything, it’s there; the rest of it is honestly, there is not a lot of pressure of white tails in the backlog.

Cai von Rumohr

Great. And then, your wing supplier on the Global 7000 has had some issues. Could you comment? You said you still expect to have first flight by the end of this year. But, it looks like it’s a little bit tight to get to deliveries in the second half of 2018. How comfortable are you that you can make that schedule?

Alain Bellemare

Good morning, Cai. We’re still very confident in our ability to have EIS in the second half of 2018 for the 7000. There has been some challenges with drive out. [Ph] We’re working this together; we’re making progress; there is similar work to do. Now, the focus is on first flight and we’re still targeting first flight in the back half of 2016. So right now, there is absolutely no reason to believe that we’re not going to stick on schedule for 2018.

Cai von Rumohr

Okay. And on the plus side, I mean, you have a very large backlog on the Global 7000, presumably also well-priced. What’s your strategy going to be for kind of ramping production as we think about 2019 and 2020?

Alain Bellemare

Well, as you said, I mean the backlog on the 7000 is pretty strong. So, the thing is we’re working on the production ramp up as we speak actually. This is something we’re paying a lot of attention to. There is some more that the team is going to see how we get the production up as quickly as possible. But we’re going to try to get up to 50 aircraft a year as quickly as we can. But, obviously as with any new program, there will be a ramp and that’s what we’re trying to assess as how quickly can this ramp be.

Cai von Rumohr

Would it be fair to assume could you get to 50 by 2020?

Alain Bellemare

We still have a little bit more work to do, Cai, before I answer the question. So, I wouldn’t want to mislead you on this, anybody on this. But I would just say that obviously we’re trying to see how we go to rate as quickly as we can, because I said the backlog is solid.

Cai von Rumohr

And the last question is, could you update us on the status of your talk with the Canadian federal government?

Alain Bellemare

Discussions are still ongoing. As I said before, it’s a complex negotiation with the federal. And we’ll see where it goes. So, we’re still engaged on both sides, and we’re trying to find a win-win solution that would work. So, that’s kind of where we are right now.

Operator

Thank you. Our following question is from Noah Poponak from Goldman Sachs. Please go ahead.

Gavin Parsons

Hey, everyone. This is Gavin Parsons on for Noah. Good morning.

Alain Bellemare

Good morning.

Gavin Parsons

There have been a lot of airlines announcing kind of deferrals or cutting their growth plans lately kind of on the concerns about market oversupply. I was hoping that kind of on the C Series, may be to the extent that you have this insight, if you give us an idea of how much of your backlog or your current sales campaigns revolve more around fleet replacement rather than fleet growth.

Alain Bellemare

I think that it’s a mix. Being 100 to 150-seater class aircraft, it clearly addresses a segment of the market that has not been well served for many years. So, I mean, clearly, there is growth opportunities. At the same there is older aircraft that are really ageing, and that class for which the C Series is a very good replacement. So, I would say what we’re seeing is a mix of both. We’re -- we feel pretty good about the backlog that we have. As John said earlier, we have like marquee airlines in the backlog. And our backlog is smaller also relative to other people. So, we’re not seeing the same pressure. What we’ve got into backlog, we feel good about that. And if you look at the options, commitments and letter of intent, we feel that we’ve got like plenty of juicer to work with; so, so far so good. We feel that we’ve really relaunched the C Series. And second quarter was really a turning point having completed the certification of the CS300, we can really now focus our energies on ramping up production and selling aircrafts. And the sales team is very active, and the sales and marketing pipeline is pretty good right now.

Gavin Parsons

Okay, great. And then, on the business jet market, it seems like over the past couple of years, used -- elevated used inventory has been one of the biggest problems. Could you comment a bit about on whether or not you’ve seen residual values kind of continue to improve based on your rate adjustments? And then, on your comment on near-term market weakness, it looks like secondary market transactions are slowing. So, whether or not you’ve actually seen kind of a weakening in demand kind of beyond what has like been a elevated inventory problem for the past couple of years?

Alain Bellemare

We have -- I mean, our used aircraft inventory has come down a lot. I mean, we took that head-on last year and we did move a lot of aircraft, and the team has done a very, very good job. So, we are at a very good level, meaning being a low level, we’re below 160 million in total right now. So, that portion I feel good about.

If you look at the work we did last year in resizing our production rate was exactly what you’re saying. We wanted to protect the residual value of the aircraft. And if you look at the performance of the Bombardier aircraft in the marketplace versus competitors, you will see that we have the Global have retained or valued better than any other brand out there. So, clearly, it is working. And that was the feedback we are getting from customers, they were like concerned about value retention. And what we have done is like protecting the value. And also, if you look at how fast we’re moving the aircraft that are out there, and we’re moving them twice as fast as our competitors.

So, we’ve got momentum in the system; we’re preserving the value of the aircraft better than anybody else. We believe that our production rate is sized at the right place. Like I said earlier, we might have to fine tune it a little bit, but this is exactly that won’t be more than this.

In terms of what we’re seeing, clearly on a global scale, there is like softness. I mean there is softness in Russia, in Middle East and China. The U.S. and Europe are okay. But there is not one market that is striving right now. So, we have to keep monitoring the overall market demand. I think that we are in a low part of the cycle and this will comeback. But for the time being, we feel that we’ve taken the right decision over the past 12 months to manage this low part of the cycle. And moving forward, we are working on the 7000, 8000, which is going to drive future growth.

Operator

Thank you. A following question is from Tim James from TD Securities. Please go ahead.

Tim James

Thank you, good morning. Just wondering if you could comment on any changes you may be seeing in terms of the drivers of reaching your 2020 objective of an 8% EBIT margin in transportation. And I am thinking in particular whether the drag or benefit -- well, I actually believe it’s a drag as identified in the Investor Day presentation from the competitive environment maybe greater of weaker than expected, or any other influences that are notable, such as revenue conversion in terms of getting to that 8% objective?

John Di Bert

Good morning, Tim. So, this is John. So, in terms of BT and the 2020 objective, I think we see a clear line of sight there. I mean, obviously, it’s few years out, but we’re making good progress with respective cost reduction. That’s the focus of the team. I think there is lots of synergy and productivity to be generated out of BT, and Laurent is fully focused there; he has been for the first six months.

With respect to performance so far this, you see that we’re tracking to the expectations we set out there, significant improvement year-over-year when you look at we’re at midpoint. And I would say we expect that to continue with respect to margin expansion. Yes, in terms of competitive environment, absolutely it’s all of our segments are in competitive markets. Our focus here is on, we deliver great products, we have great technology, and ultimately we also are driving cost structure, so we can make sure that we’re very competitive in the market. And I think that when you look at our backlog, some $30 billion worth of backlog, that’s a lot of revenue to work off of. So, we still see including cash discipline and good working capital management, we still see financial performance tracking towards midpoint at 2018 and then on our way to 2020. But Laurent and the team are certainly focused on being a cost leader as well, so, driving both technology and cost.

Tim James

Okay, thanks. If I could just add to that then just to kind of summarize then is, is the behavior you’re seeing from key competitors in transportation kind of lining up with what’s factored into that 2020 roadmap?

Alain Bellemare

In the 2020 roadmap, we did put some assumption. There would be no pricing pressure in the marketplace. So, we did factor that in. But as John just said, at the same time, this is a business that has tremendous opportunity to take us out, and that’s what Laurent and the team are doing. So, clearly, we did 2020 plan that was or is still as balanced as we could, and like we’re still comfortable, we’re still feeling comfortable with that plan.

Patrick Ghoche

Operator, we have time for one more question please.

Operator

Thank you. Our last question is from Stephen Trent from Citi. Please go ahead.

Stephen Trent

Thank you, gentlemen and good morning. And thank you for the time. Just one quick question; most of my questions answered at this point. But I am curious on C Series order campaigns, what you’re seeing especially on the larger variant in terms of competitive response just thinking back to what transpired with United Airlines earlier this year? Thank you.

Alain Bellemare

I think that what we’re seeing is like tremendous interest from airlines right now. And it’s clear that the tone has changed that the airlines are seeing the benefits; it’s miserable, it’s tangible and the aircraft is flying, feedback from passengers is outstanding. So, the tone of the discussion has changed tremendously. And airlines are recognizing the value of CS100 and CS300 as being the best aircraft in the 100 to 150-seat class from an operating cost standpoint, from the passenger comfort and experience standpoint; we have the best environmental performance. So, when you put all of this together, we are having very good discussion with potential airline customers. So, I mean, obviously, you win some, you lose some. I mean, I think that it’s important to look at what we’ve done at Delta, what we’ve done at Air Canada, and the EIS with SWISS is very -- is going on very, very well. So, I feel very, very good about what we’ve done, where we are and the potential for the C Series moving forward.

Stephen Trent

Okay, very helpful. Well, I know you guys have a short time table here. So, I appreciate that question.

Alain Bellemare

Thanks to you.

So, in closing, I just want to thank you all for being on the call this morning. Again, I am very confident in our strategies. We have a great leadership team. And I believe in our ability to achieve both, our 2016 guidance and our 2020 goals. If you look at where we are today, our liquidity position is solid going into the second half of 2016. We are still on track to achieve breakeven cash flow positive by 2018. And the team is executing the turnaround plan. And we’re delivering on our financial commitments. We have taken some tough actions over the past 12 months to resize some of our production rate and we feel good about that. And, if you look at the C Series which was -- where there was a ton of questions about over the past like two to three years, I think that we have clearly turned the corner. We have two aircrafts that are now certified. And we are moving from a development phase to a revenue generation phase.

So, I think that overall, Bombardier is in a much better position today than we were a year ago. And we will continue to build this Company and make it strong for years to come. So, on this, I want to thank you all. And I think this is the end of the call. Thank you.

Operator

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

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