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Executives

Shirley Chenier - Senior Director, IR

Pierre Beaudoin - President & CEO

Pierre Alary - SVP & CFO

Analysts

Joe Nadol - JPMorgan

Benoit Poirier - Desjardins Capital

Hamzah Mazari - Credit Suisse

Noah Poponak - Goldman Sachs

Fadi Chamoun - BMO Capital Markets

Cameron Doerksen - National Bank Financial

Walter Spracklin - RBC Capital Markets

Turan Quettawala - Scotia Bank

Ron Epstein - Bank of America-Merrill Lynch

David Newman - Cormark Securities

Anthony Scilipoti - Veritas Investment

Tim James - TD Securities

David Tyerman - Canaccord Genuity

Chris Murray - PI Financial

Stephen Trent - Citi Financial

Steve Hansen - Raymond James

Sean Silcoff - The Global Mail

Scott Deveau - National Post

Marie Tison - La Presse

Caroline Van Hasselt - Wall Street Journal

Vanessa Lu - Toronto Star

Ross Marowits - The Canadian Press

Susan Taylor - Reuters

Molly McMillan - Wichita Eagle

Bombardier Inc. Cl B (OTCQX:BDRBF) Q3 2012 Earnings Call November 7, 2012 10:00 AM ET

Operator

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

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

Shirley Chenier

Thank you, operator. Good morning and welcome to Bombardier's Conference Call intended for investors and financial analysts. I also welcome the media representatives who are with us today. You will have an opportunity to ask questions later during this call when we start the media question period.

Shortly Mr. Pierre Beaudoin, President and Chief Executive Officer; and Mr. Pierre Alary, Senior Vice President and Chief Financial Officer will discuss Bombardier’s financial results for the second quarter ended September 30, 2012.

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 ir.bombardier.com and the webcast archive of the integral version of this call will be available within the next few 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 were made by Bombardier in preparing this statement, and we wish to emphasize that there are risks that actual events or results may differ materially from the statements. For additional information on such assumptions please refer to the MD&A released today. Please also note that I'm making these cautionary statements on behalf of each speaker whose remarks today will contain forward-looking statements.

Pierre Beaudoin will now begin the presentation.

Pierre Beaudoin

Hello and welcome to the conference call. Before commenting on the third quarter results, I would like to start by giving you an update on the development of CSeries program as well as restructuring initiatives we have launched in transportation.

CSeries. Since the beginning of the year we've made substantial headway and have met a significant number of key milestones, and over the last few months we used the momentum gained with our suppliers to reach a fully organized schedule to which everyone is committed. Based on this schedule, first flight for the CS100 will now appear by the end of June 2013, a date that all parties have agreed is achievable. Entry into service will take place approximately one year after and as the CS300 use many common parts the timeline remains unchanged with an entry into service by the end of 2014. We will continue to give regular update with a more detailed review during the first quarter of next year.

In Transportation, we just announced measure to further improve our competitiveness and cost structure. These measures include the closure of a plant in Germany and the reduction of direct and indirect personnel by approximately 1200 employees worldwide. The charge for this restructuring activity will be determined and booked in the fourth quarter. However, we don’t expect this charge to exceed $150 million.

Now as it relates to the results, revenue for the third quarter excluding foreign exchange were in line with last year at $4.3 billion, diluted EPS was $0.12 for this quarter compared to $0.11 last year. In Aerospace, revenue were stable at $2.3 billion representing a positive mix as we delivered a total of 57 aircraft this quarter versus 68 last year. Order intake has proven to be solid with a total of 297 new orders year to date versus 206 last year bringing the backlog to $26.1 billion compared to $22 billion at the beginning of the year. In Transportation, as expected, revenues at $2.1 billion has slightly decreased from last year if you exclude the negative impact of foreign exchange.

Revenues from Asia Pacific has now returned to a typical level as we are ramping up production on new contracts following the variation order agreement with the Chinese MOR. We expect full year revenue to be lower in the single digit range as per our guidance. And on the order front we continue to see good level of activity at $2.3 billion of new orders in the quarter versus $1.6 million for the same period last year, a book to bill of 1.1 compared to .9 for the same period last year.

Now, I'll let Pierre walk you through the financial results.

Pierre Alary

Thank you, Pierre. Aerospace revenue for the quarter totaled $2.3 billion the same level as last year. This reflects 44 deliveries of business aircrafts with a better mix and a lower level of deliveries of commercial aircraft. EBIT totaled $123 million or 5.4% of revenue in line with our guidance and as compared to $129 million or 5.6% last year. The small reduction in margin percentage reflects a higher cost of sale due to escalation and foreign exchange which was mostly offset by higher selling price and a positive variance on our provision for contingency.

For Transportation, revenues totaled $2.1 billion compared to $2.3 billion last year. This reduction is essentially due to foreign exchange. For the full year, excluding the impact of foreign exchange, we expect revenues to be lower than last year in the range of a single digit. EBIT margin is at 6% compared to 7.4% last year mainly due to a lower marginal rolling stock which was partially offset by higher margin in the system (inaudible).

On a consolidated basis, revenues totaled $4.3 billion while EBIT is at $248 million compared to $301 million last year. Net financing income amounts to $25 million compared to an expense of $58 million last year as a result of a gain of certain financial instrument and lower interest expense on our long-term debt.

With an effective income tax rate of 22.3%, net income reached $212 million or $0.12 per share compared to $192 million or $0.11 per share last year.

Aerospace cash flow from operations totaled $475 million while our investing in our programs totaled $543 million. Transportation used $109 million of cash in the third quarter, which is a significant improvement compared to last year usage of $347 million.

The economic recovery is proving slower than originally anticipated. As a result, on a full year basis, the Aerospace cash flow from operation will not be sufficient to fund it’s investment in program of approximately $2 billion for the year. Therefore, the free cash flow usage for 2012 for aerospace is now expected to be approximately $800 million. On a consolidated basis, free cash flow usage is estimated to be approximately $500 million.

And at the end of the third quarter, our short-term capital resources totaled $3.5 billion, which includes cash and cash equivalent of $2.1 billion.

Pierre Beaudoin

So, to conclude, the CSeries program is making good progress with the first flight now scheduled by the end of June 2013. We are seeing high level of activity in all of our business resulting in a backlog of $58.6 billion, which provides us good visibility. The increase reflects improvement level of orders in both business jet and commercial aircraft and a continued good level of order intake and transportation.

The future Bombardier is bright and the next year will be exciting as we start seeing our product in development come to life. Thank you.

Shirley Chénier

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

Question-and-Answer Session

Operator

(Operator Instructions).

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

Joe Nadol - JPMorgan

My question is on the cash flow. Pierre, could you walk through specifically what line items changed in your guidance for operating cash flow this year, was this about book-to-bill, is it finished goods that are on the balance sheet now, etc? And then, the second part of that is as we look into next year, what pieces of the Aerospace cash flow are -- I am talking about Aerospace specifically here in both parts of this. What pieces of that cash flow can you see today? Like for example, could you tell us if the investment spending is still going to be about $2 billion, and what pieces of the operating cash flow can you see of Aerospace of next year? Thanks.

Pierre Alary

Well, when you look at the cash flow within Aerospace given the investment of $2 billion to be, we had mentioned originally in our guidance in the beginning of the year that the cash flow from operation should be significantly enough to finance more than that $2 billion, so it is way short of $2 billion but close to $2 billion was essentially the message. Now, what we are seeing is, we are seeing more like a $1.2 billion of cash flow from operation versus an investment of $2 billion, therefore, the $800 million revision to our guidance.

And when you look at that $1.2 billion and if you compare to the EBITDA that you can expect in Aerospace that mean that a significant portion of the net asset is being reduced or realized so, therefore, bringing cash but not quite at the level we were originally anticipating. And the major variance comes from the fact that the level of advances is lower than what we had originally anticipated. And the lower level of advances although, positive year-over-year we are going to see an increased level of advances from customer year-over-year, not as we were originally expecting. And it comes from the fact that the recovery is not at the speed we were expecting. So, therefore, although we have a very good book to bill, the book to bill is 1.521, so although we have a good book to bill it comes -- it’s not as high as we were expecting and it comes at a later point in time. So, therefore, we don’t have the time to built up the advances.

Pierre Beaudoin

And I asked about the next year.

Pierre Alary

About next year obviously the more precise guidance when we do our year end results but what I can tell you is in terms of the spending it should be an amount similar to this year so therefore around $2 billion.

Pierre Beaudoin

Just one thing I want to add is if you look at the amount of orders we are getting in business aircraft believe Pierre mentioned that its very good but right now we are gaining market share, which is also very good, but also signal that the market is not recovering as fast as what we had anticipated.

Joe Nadol - JPMorgan

It is mostly about the terms changing though or about few orders?

Pierre Beaudoin

No, its not about the term what Pierre meant by later is that if you get an order within let's say six months of delivery well the milestone payment that we normally get is we get a two year an order two years in advance, of course these milestone payments we don’t get. So, you get the initial signature and then you get the delivery if its within the window of the short term delivery. And that’s what happens when the market is not as strong as what we had anticipated.

Joe Nadol - JPMorgan

Some of this cash will be pushed into next year then?

Pierre Beaudoin

Well depending how fast the market recovers.

Pierre Alary

For example, Joe, let’s say signature two years before you get a certain amount. Then you get an additional advances 18months prior to delivery, 12 months prior to delivery, 6 months prior to delivery. If you look at the Lear, as you know, the very, the small jet we have a small backlog. So, therefore, we sign in a few months after we deliver. So, we don’t have that built up of advances over two year. So, it’s not that the terms are different but simply that we don’t built it up over a three year period.

Pierre Beaudoin

So if you get back to your point depending on how fast the market recovers next year this is when we build longer term backlog especially as it relates to smaller aircraft.

Operator

Thank you. Our next question is from Benoit Poirier of Desjardins Capital. Please go ahead

Benoit Poirier - Desjardins Capital

My question is related to the CSeries. I was wondering if you could provide more color about the issues with some suppliers and also what would be the cost associated with the six month delay? Thank you very much.

Pierre Beaudoin

Like I have always said when we look at the CSeries program we are aiming for a flight on the -- we were aiming for a flight of 31st December or in December with a rest three to five months. What we are seeing today is that once we have look at our schedule individually with suppliers and of course a certain part needs to come before others. So, when we come up with an harmonized schedule we are really seeing now that we feel confident of slide by the end of June.

I’m very excited about the program because if you watch through the factory, you are seeing Flight Test Vehicle 1 being assembled, you see the Test Vehicle starting to be impact. We are seeing components coming in for Flight Test Vehicle 2 in assemblies will begin in December. So, there is a lot of great things going on, but simply when you look at the major systems of the aircraft and at the time they need to come in, we feel that the date by the end of the June is realistic and achievable, and that’s often all of our supplier.

Benoit Poirier - Desjardins Capital

Okay. And is there any specific areas you want to give some color on?

Pierre Beaudoin

Well, we've talked about major systems in the past, major systems are the most complex ones, they will influence the schedule. So, now there is nothing really new, just the reality of when parts were coming in at what sequence and the integration of all of this and some challenge and some suppliers made it that the date we’re focused on is by the end of June.

You asked me about the additional cost I forgot to answer that. When we planned the business plan of the CSeries, and I think you heard me say that quite a few times, is that we look at the First Flight with the schedule that with December, but could have three to five months additional. So, you can imagine that the business plan was not a plan on without considering some contingency in time. And that being said that we don’t anticipated the delay to have an impact on the business plan.

Operator

Thank you. Our next question is from Hamzah Mazari from Credit Suisse. Please go ahead.

Hamzah Mazari - Credit Suisse

Just a question on the transport side of your business. How much -- what benefit do you see coming from the restructuring? I know you highlighted the cost side, and is this a function of the economy or is this more of a function of you feel like your cost structure is just too large and you have too many facilities?

Pierre Beaudoin

Well, it’s a function -- first of all, the order level of transport has been good. This fusion of where these orders come from we can not always have that it perfect where are plants are and this plant in Aachen has been a challenge for few years so, which we had been Stuttgart into this plant. And this product is going to come to an end shortly to the end of delivery shortly and after that we really do not see additional business for this plant. This plant has been focused mainly in the Netherlands and the business is kind of slow in this area. On a macro level, transport is doing very well. But I think there is always opportunity to adjust and also we will look at ways that are making us more competitive.

Hamzah Mazari - Credit Suisse

Okay. And just a clarification, you are not changing the total program cost for the CSeries off of the six month delay, is that right?

Pierre Beaudoin

That is right.

Operator

Our next question is from Noah Poponak from Goldman Sachs. Please go ahead.

Noah Poponak - Goldman Sachs

Question on Aerospace margins, so if I am looking at the reported year-to-date it is little over five. If I take out the other line which I guess, is mostly non-operational, it is just over four. Which of those is the right baseline to work off of for 2013 and perhaps, if you could talk maybe even just directionally about where you think margins go next year given the main inputs on the Aerospace side? Thanks.

Pierre Alary

Well, first of all, I will challenge you on the, when you say you remove the other income other expense. It is part of our operation. For example, in this quarter we have revised our provision for contingencies and the provision for contingencies that we put in place is a provision when we sell aircraft and then we offer certain guarantee. So, we reduce the margin at the beginning when we make the sale and then we adjust it on a quarterly basis. So, when I look at it, to me its clearly part of the operation, so I do not exclude the item. You really have to look item by item, which one could be a one-time or not. But in this quarter, for example, its clearly ongoing business and business as usual. So, we look at it --

Noah Poponak - Goldman Sachs

And baseline should include something and other?

Pierre Alary

It should include other income and other expense, yes.

Noah Poponak - Goldman Sachs

Is there any way to gauge roughly what a normalized contribution is from that line item?

Pierre Alary

I would say its to our explanation and we do explain it when it is out of the norm and we identify specifically when we believe it is a one-time item.

Noah Poponak - Goldman Sachs

Okay. And then, --

Pierre Alary

And then, in the past, we explained the margin, the variation in the margin. And we say in addition, there is this item that makes a variation.

Pierre Beaudoin

I know you could argue that this other should go back into airplane margin because there was an airplane margin that it came out of, so its.

Noah Poponak - Goldman Sachs

Okay. Now that makes sense. So what’s the --

Pierre Alary

And for example if you look at page 15 of MD&A we are seeing that for the nine months September 30th, 2012, EBIT margin was positively impacted by 3% as a result of a $23 million in gain recorded in other income following successful resolution of a litigation. So, I like this one specifically kind of outside the explanation on the margin to indicate that this is a one time.

Noah Poponak - Goldman Sachs

That makes sense and is helpful. So then what’s the right baseline, you know, what you would consider to be the operation or number for the Aerospace segment margin coming out in 2012 and what should we look for in 2013?

Pierre Alary

Well, for 2012 our guidance is 5% and you could always say that can I refer to, you can always exclude it which is 0.3%, it doesn’t make a big difference into the full year. And in terms of it -- so our guidance remains 5% for the full year. And when you look at next year, we’re going to provide the guidance for next year with our Q4 results.

Noah Poponak - Goldman Sachs

Are you able to say at this point if you think margins will be up or down next year?

Pierre Alary

Our guidance will be with the Q4 result.

Operator

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

Fadi Chamoun - BMO Capital Markets

A question on transportation margin. The EBIT margin has gotten worse in the third quarter and you're down 140 bps year-on-year. And that your lower versus the first half. I would have thought at this point should start to see some stabilization or even some modest improvement versus the first half. Is there anything incremental in terms of the acquisition issues that you seeing in, on European side? Is there more color you can provide on this?

Pierre Alary

Well, the contract is we have had an issue with some contract last year and we have explained over the first, second quarter that we have resolved the issues and that we are now fully delivering on those contracts. So, the way that those contract in the third and the fourth quarter is more important than in the first and second because we’re delivering more, we’re ramping up. So and those contract as we had issue we had additional cost which were reflected but it also reflect in a lower margin on those same contracts. So, it kind of got contract mix that is impacting this year and that’s what we’ve seen in the first couple of quarter and this quarter again?

Pierre Beaudoin

And it will be to a less of a degree next year.

Fadi Chamoun - BMO Capital Markets

In terms of the restructuring charge that you're expecting how much of that is cash or basically?

Pierre Alary

Well, this is a rough order of magnitude in terms of the cost as we knew that you guys would be interested in having an idea of the maximum cost that would be attached to that restructuring. We've announced that restructuring just recently and we're currently doing a detailed calculation, and so that the vast majority will be cash --

Pierre Beaudoin

That come through the year.

Pierre Alary

Cash but it will obviously come over a period of over a year or a year and half.

Pierre Beaudoin

Because if you're doing personnel reduction it will planned through the year. Of course, we're going to force to do it the sooner the better so we can benefit from the advantage of cost reduction.

Operator

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

Cameron Doerksen - National Bank Financial

A question on the CSeries here. I guess as early as just a few weeks the target for first flight was still end of December. So I'm wondering if what kind of comfort you can give us that the June target is achievable? And I guess in association with that, what are your customers sort of saying to you now that you've informed them of this delay?

Pierre Beaudoin

Well, I guess, two parts of this question. First of all, with customers we’ve been working with them with our view of a harmonized schedule for quite sometime looking at -- because their delivery positions have come of course come further in time. And when we did commit the delivery schedules, we did -- we were also careful in which position we give customers considering there could be some variation in the first flight. So, this is something we've been very transparent with customers and we've been working at them, and I think they're all on board understanding where we're going with that. And of course, all of this is always to minimize also any penalties that would be associated with late delivery.

I think you need to understand that it was important for us to maintain a target date so that we would get all the suppliers' firm commitment to get an harmonized schedule. And that’s why I've always said our target is December but you can understand that three to five months within this is essentially on schedule in such a big program like this, and it made no sense at all to give a break to any one of our partners by giving them additional time as the date was December and that’s what all we worked on.

In the end, there's some components that are complex, we've seen some challenge and we feel the harmonized schedule the right target to have now with an airplane together is by the end of June. But now its very different than the other date because its really a commitment by individual supplier. When they're coming in you can see a physical being assembled, you can see shortly a flight test vehicle number 2, and I feel confident that we have something solid by the end of June.

Cameron Doerksen - National Bank Financial

Do you get any -- recover any sort of penalties who are late to your schedule?

Pierre Beaudoin

There will be individual discussion. Some may have penalties to face, others are late because we send them the drawings late. At this point, really what our partners is working together at making sure that we get the parts all at the schedule so that we can integrate because you can think that no sense of getting a wing before a fuselage and there's certain parts that come in sequence, and really all of the effort now with suppliers is more about schedule than commercial.

Operator

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

Walter Spracklin - RBC Capital Markets

My question comes back to free cash flow on the balance sheet, I think that’s one of the questions I get most often from investors is, how much a buffer you have in terms of your liquidity position? I just wanted to -- and Pierre Alary, perhaps you can correct my logic or point me the direction I might be wrong here but based on your guidance now for consolidated of $500 million for the end of the year, that is just your view of $1.1 billion or just over a $1 billion free cash flow for the fourth quarter, which should bring your liquidity up to let's call it $4.5 billion. You stated to us, Pierre, in the past that you're comfortable with $2 billion in liquidity at the beginning of every year. Am I right in concluding here that by the end of this year, you'll have $2.5 billion in kind of buffer, and if I look at this year as being kind of a bad year at $500 million down, are we looking at a buffer of measured in years of four to five years or am I missing something in my calculation?

Pierre Alary

I don’t think you're missing anything in the calculation and your calculation is quite right. What I mentioned in the past year in reference to your $2 billion is that I need $1 billion in each of the business as to for working capital and so on. Being at $2 billion I wouldn’t be comfortable starting the year with $2 billion of cash. So, your calculation as being above $3 billion is the right one and if you look at the past four or five years we have always started the year in cash above $3 billion.

Walter Spracklin - RBC Capital Markets

Okay, so $3 billion is pretty much where you would rather be which would then signal maybe three years a buffer is that right?

Pierre Alary

Yeah, because when I look at liquidity given that we are in the significant investment period and the uncertainty in the market you don’t want to be too tight on liquidity. So, if there is one thing I want to hear through Pierre is I will be on the safe side. So, definitely, liquidity always going to look make sure that I have more than enough liquidity.

Walter Spracklin - RBC Capital Markets

And won't some of your government arrangements be kicking in more so in the next year or two then they were in the last year or two?

Pierre Alary

It’s pretty much gradual.

Walter Spracklin - RBC Capital Markets

Right.

Pierre Alary

It’s pretty much gradual.

Walter Spracklin - RBC Capital Markets

Okay, and then if I could just kind a clarification question on the transport you had mentioned, Pierre Beaudoin, that were three factors negatively impacting BTs revenue or emergent being contract mix, project maturity and perhaps as well as the China slowdown or stop and now restart that had been mentioned prior. Of those three things, China to seems to be done in and stated up again now so that I am just trying to get a clarity as to how many of those will be a factor in the fourth quarter and going into 2013, and how many will be less of a drag in that period?

Pierre Beaudoin

Well that’s actually the projects we identified before will be less of a drag to look towards next year because some of them the big deliveries have occurred this year so, but they will be continue to be present through the year, through this year so fourth quarter. We look forward, of course, China right now as we started I think this is a very exciting program or us. Not only are we going the ZEFIRO 250 that we have been doing for quite some time but we have the opportunity to do an variation order to design a new product ZEFIRO 250 next generation which is an aluminum train that for me is very positive because we don’t, we didn’t have an aluminum 250 km train in our portfolio and through this variation order we are able to get into the market. So, that is very positive. And the 380 next year is staring also to become a factor in terms of revenues.

So, I think those are very positive. So, China is back if you want to more to a level we have seen before and even there is some potential growth in that. And what we need to continue through be very close to is the start up of new project, they are big projects, complex projects. Anyhow, there is good things going on there is some challenge, but overall I think transport is well-positioned.

Operator

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

Turan Quettawala - Scotia Bank

I guess my questions also on the CSeries, I was just wondering in terms of testing how much of the airframe static structure is already complete. Can you give us a sense of that and potentially when you expect that test to start?

Pierre Beaudoin

It started, the test article is started testing. We are now installing the appendage on it, which was just received, but the rest of the aircraft is completed and started. I mean, it’s a very complex piece of equipment because there is lots and lots of wires in this aircraft to monitor the structure, and that’s essentially in place and started.

Turan Quettawala - Scotia Bank

And then how long do you think that process will take?

Pierre Beaudoin

That’s several years. You mean the testing?

Turan Quettawala - Scotia Bank

No, I mean for the - you think you need to certify the airframe static structure right before you can do the First Flight.

Pierre Beaudoin

Yeah, we need to get release from a structural perspective before first flight so, it’s sometime I don’t know the exact date, but sometime in the next six month obviously.

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

I had a couple of questions, first one I believe 87 used aircrafts on the balance sheet, is that right? Are those all Bombardier aircraft or taking in on trade other manufacturers aircraft?

Pierre Beaudoin

It’s a vast majority of Bombardier aircraft so I don’t have it in front of me, but it would be above 85%, my view of it. We have a few trades in competitor. When we do that the customer understands that we are also very careful in the value of the aircraft because we are more comfortable of course selling a used Bombardier aircraft, but we have a few definitely.

Ron Epstein - Bank of America-Merrill Lynch

Now that just a reflects in kind of where the market is right now, I mean is that deal is done you really have to take the things and I mean, how aggressive you have to be on the trade, and you feel comfortable talking about - just trying to get a better feel for --

Pierre Beaudoin

Let be careful on this. I always told you that on trade we have a policy that’s more than 30% of our backlog, we’re in fact a 25%. So, we are not doing anything we had that’s all part of the guideline that we established. We are taking trade that’s no more than usual.

Ron Epstein - Bank of America-Merrill Lynch

Fine, okay, good.

Pierre Alary

And the value of the inventory abuse and went down by $100 million in this quarter.

Ron Epstein - Bank of America-Merrill Lynch

And then may be just one last one if I can, and sorry about going back to CSeries, I noticed a lot of questions on it. Can you be any more specific with what’s going on with why about the delay one and I’m going to ask you a question that was asked before, but I think it’s critical. What makes you feel so comfortable about that six months or five months or earlier, I think the fear you probably know among investors get you four, five months out and then another one and when the unknown, unknown and I think it’s a program. How do you what makes you feel very comfortable about knowing the unknown, unknown if that makes sense?

Pierre Beaudoin

Well, yeah, what you are pointing out to which is a very complex product more than 100,000 products come together in these airplanes so there is a lot of things that can happen. But where we are today we are more in execution phase where suppliers have task, we understand what needs to be done, we’ve seen the product introduction, we can monitor the schedule day by day at the suppliers. So, we have more visibility that than when it’s just the drawing stage or just design stage, we can feel and touch part, and the assembly of the parts we have done so far have done extremely well.

So, I feel good about the way we laid out the schedule, the things that need to happen, and we talked about fly by wire before. We are testing some versions of the software, but the idea is that when you go to flight you need to have the latest version that we can released for the safety of flight perspective. So, there will be different drops through time, but it’s not like we don’t have a drop right now that we can work with. So, we have a lot more visibility and it’s more visual and we have commitment from the supplier. Before I was asked when do we complete the test article testing is that schedule for first flight I get note from our CSeries team that’s mid April.

Pierre Alary

If I might add, Ron, the individual system has been tested by themselves, already tested and then with the Aircraft Zero or CIASTA or Arran Bird, which is all seeing the same thing. We have started and have progressed well and to all the various systems interface with one and another and so that’s giving us a lot of confidence.

Operator

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

David Newman - Cormark Securities

Just further to the last question. Potential customers, I mean the campaigns that you have there right now, do you think there will be any sort of delays until you achieve first flight, given I guess, the track record of Airbus and Boeing some of the delays that they face, I mean, do you just leaving some deferral to other campaigns?

Pierre Beaudoin

I do not think so because we are brining the customers, there is a lot of difference. People are saying things about the CSeries, including competitors of course that build stories on the CSeries. Our bestselling point is for them to come to the factory and to the development centers and see the product. And in fact, the customers that had seen our level of investments are very impressed. And what they are most impressed with is the level of testing that we are doing upfront and the amount of integration we have already done to make sure that this aircraft performs as promised and also delivers on overall economic. So, the confidence in the supplier as the customer as they see our hardware is very good right now, so I do not think it will delay any orders.

David Newman - Cormark Securities

And then, just a quick one if I can squeeze it in. Just very holistically, if we look in free cash flow of 2013, our cash has been a big question in the call here today. What do you think are going to be the key drivers I mean, BT obviously we are seeing a recovery there and in some of the campaign -- or some of the whole contracts is delivering on a lower margin, that clears the deck I think in the end of this year, so maybe BT in line of profitability Global maybe a bit of a CSeries draggling. Where do you see the key drivers on free cash flow next year?

Pierre Alary

David, the free cash flow well comes from in terms of the in flow if you like -- the out flow its well understood there being the investment that we are doing. But the in flow is the EBITDA and how do we mange our net asset. So, that means level of inventory and so on and in particular, the level of advances from customers.

David Newman - Cormark Securities

Do you think BT would be a big swing factor in terms of the recovery back to in the line of profitability next year?

Pierre Alary

Well, BT should be in line with profitability.

Operator

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

Anthony Scilipoti - Veritas Investment

Just a quick thing, just following up on Ron's question that above the CSeries. And when I read the comments on page 18 of the release it talks about the engine and it says that the engine is -- I do not quite understand. I read it and it suggests that the engines are not certified yet, is that a big holdup that we are not understanding?

Pierre Beaudoin

Well, the engine is not certified yet but it is planned to be certified shortly. And so, I think I just want to read with you read (inaudible). "Engine anticipated complete engine certification by the end of 2012." Now, that is of course the engine is part of being able to go to first flight but that is not -- I think, this program is progressing very well.

Anthony Scilipoti - Veritas Investment

Okay. So, that is not the thing that has been delayed?

Pierre Beaudoin

And there is no delay as far as I know on the engine. On the contrary, it will be certified by the end of the year. And I understand that tests are going very well, so no.

Anthony Scilipoti - Veritas Investment

With the comments on the credit, the provision for credit and residual value guarantee and I did notice the amount change and you did comment on that already, Pierre. But when I look at the exposure on your contingencies note, the total credit and residual value exposure has been relatively flat, say over the last even six, seven quarters. But now, you have made -- what has exactly changed in your assumptions that has allowed you to reduce that provision that you are recording against that exposure?

Pierre Alary

Well, the exposure is going down in fact. And if you look at the provision it's pretty much in proportion on that exposure. Three years ago it was 2.9 now its 2.6, so it is reduced by $300 million over two years, so it has reduced. And when we look at it, there is different component. Now, we look at the number of component and one of them for example is residual value guarantee. Well, in many cases the window for exercising the residual value comes at a point where the airline still use the aircraft and needs the aircraft and continue to use the aircraft, so the aircraft continues to fly. So, therefore, the guarantee becomes over and we have to reverse the provision we had on that specific residual value for that specific aircraft, and that would be an example. So, it has really done in detail which deal-by-deal and so its reviewed on a quarterly basis. It's very detail analysis that we do.

Anthony Scilipoti - Veritas Investment

I am sure. But you are right if you go back the number of years as you suggested. I am just talking the total exposure I see is $2.7 billion, I look at last quarter that is $2.7 billion, I look at Q1 it is $2.7 billion, Q4 $2.7 billion and then I see the amount of the provision against it, that’s been relatively stable at $580 million, $590 million and now its down as through your adjustment down to $540 million or $539 million. That’s what I'm getting at.

Pierre Beaudoin

It is depending on the specific transaction and the quarter it happened I just explained the residual value guarantee for example on certain numbers of items. That's basically we're at.

Pierre Alary

It's RVGs that has expired. It's very straightforward.

Anthony Scilipoti - Veritas Investment

It just has a positive impact on earnings when you make an adjustment, that’s all.

Pierre Alary

Of course, treat the same way as a negative impact when we set it up.

Pierre Beaudoin

Right. The airplane margins as we put as the reserve that’s when we released it because if not needed anymore has a positive and it had a negative when it came in.

Pierre Alary

And I say where the history of the last five or six years where about maybe six or seven of our customers went through bankruptcy proceeding. As we went through proceeding we always end up that our provision was well established because there was no impact in that given quarter. So that to me that speaks to how we establish our provision and the validity behind it.

Anthony Scilipoti - Veritas Investment

In the note 5 when you talk about the other income there's another line item of $14 million just labeled other as a positive.

Shirley Chénier

Anthony?

Anthony Scilipoti - Veritas Investment

Yeah. So I just wondered what was that?

Pierre Alary

That’s an adjustment in terms of the capital tax.

Anthony Scilipoti - Veritas Investment

Capital tax?

Shirley Chénier

Anthony, maybe we take this offline. Give us a call after the conference call.

Anthony Scilipoti - Veritas Investment

Okay, no problem.

Operator

Thank you. Our next question comes from Tim James from TD Securities.

Tim James - TD Securities

Just want to return to the cash flow discussion for a minute. You mentioned earlier Pierre that the reason for the change in cash flow guidance for the year was primarily related to the lower level of advances coming in. Now, you've dropped the cash flow guidance by I guess about $800 million relative to the previous guidance. Does that account for the entire amount of the change then or are there other factors that play there?

Pierre Alary

Well, you can imagine it is a number of factors that plus $90 million on something minus $50 million on something else. That explains the bulk of it. And its looking forward.

Tim James - TD Securities

So the level of advances that had been expected under previous guidance was $800 million higher than the advances expected roughly under the current guidance. Am I thinking about that correctly? I just want to make sure I've got that straight.

Pierre Alary

Roughly, yes.

Operator

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

David Tyerman - Canaccord Genuity

I just wanted to ask about the credit in RVGs and the net financing expense, both of them are generating significant profit gains as being pointed out. What I'm wondering is whether we're going to just continue to see them generate these kinds of improvements in profitability on a sustained basis? Like are we going to continue to have credit in RVGs running $20 million, $30 million a quarter and are we going to see the net financing expenses continue to run in the positive where they were fairly expensed in the past?

Pierre Alary

On the net financing expense, the answer is that you should not expect or let me put that in a different way. The financial instrument, the variation on the financial instrument can go up or down and its almost impossible to predict. When I look at it forward I put zero in my mind. That’s the variation this quarter is $58 million because last year was negative $18 million, this year its positive $40 million, so its $58 million. So this one don’t, if you were looking forward you exclude that (inaudible).

Well, that’s on the interest. Now, on the contingent liability it goes up and down also depending on what happens in the quarter. So typically you can expect a portion to reverse may be not to the level we have in this quarter.

Pierre Beaudoin

There's some great success stories like the CRJ-200 in Russia. This is a great success story that of course helps the residual value of this aircraft. We have about 100 CRJ-200 operating in Russia.

Pierre Alary

So sometimes the lease come to an end and the lessors calls us and obviously we know when its going to come to an end. So, we prepare market. Russia is a good example as Pierre mentioned. Africa, Mexico, so we do prepare the market and remarket those. And as we remarket those the residual value guarantee goes away.

David Tyerman - Canaccord Genuity

So just to my question, should we expect and model $20 million, $30 million reversals on an ongoing basis per quarter?

Pierre Alary

No, you shouldn’t.

David Tyerman - Canaccord Genuity

What if I --

Pierre Alary

It would be on the high side. In some quarter we add to it and some quarters when we have one of our customers because we look at credit rating, some of the customers to which we sold the aircraft with a certain support, financing support, their credit rating goes down. So, in those cases, our provision goes up but we highlight it in our expiration when the variation is significant. So, if you look at the quarter, previous quarter that will give you a good feel of how it moves up or down. If we don’t talk about it that means it was not significant. You shouldn’t model the significant amount on an ongoing basis.

David Tyerman - Canaccord Genuity

Should not?

Pierre Alary

Should not.

Operator

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

Chris Murray - PI Financial

Just returning to the transportation division, you have indicated a little bit there is out, I think number of the issues that you are seeing over the year should be cleaned up by Q3, Q4. Just looking into early 2013 and also sounds like you are going to starting up to two contracts, I wondered if you can give us some color on your confidence on seeing margin starting to recover in 2013, I mean, you previously talked about an 8% target in BT, and what kind of confidence you have that you'll at least the rationale of moving that way?

Pierre Alary

We are confident the margin kind of go up, but we are only going to be more precise with the Q4 results.

Chris Murray - PI Financial

So, in terms of those contrast coming on, should will be thinking that we may see some timing issues in Q1, Q2 or that will be further out in the year or any sort of idea about that at this point?

Pierre Alary

We anticipate this revenue going up next year.

Chris Murray - PI Financial

Okay.

Pierre Alary

There will be more precision in the Q4 results.

Chris Murray - PI Financial

Okay.

Operator

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

Stephen Trent - Citi Financial

Just another quick question on the transportation division. I noticed that you guys recently increased your activity in the Brazilian market with your transportation ops there. What sort of potential are you seeing beyond the contract I believe you already won for the Sao Paulo Airport Monorail?

Pierre Beaudoin

Well, we think that we are excited about this monorail because we think it’s a right type of product to Brazil. It could be implemented without major time like you would do if you did a tunnel. So, for us we think with this base, we’ll have a great showcase to participate in the market in Brazil. Also, we’ve already had success in signaling in Brazil and has new systems are coming in, I think it could be more so I think Brazil is definitely a growth market for us.

Operator

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

Steve Hansen - Raymond James

With respect to the CSeries you suggested that the potential customer base here will not be attracted by the timeline for this, which I suppose is somewhat comforting, but let me I say in another way, and how would you set the probability of landing incrementally orders of significant between now and first flight?

Pierre Beaudoin

Well, I think it is very good probability and there is a lot of exciting campaigns going on right now with customers. At the same time, this is a decision that the customer’s take, that there is some good discussions going on. So, I think the probabilities are high. Also, when the airplanes flies, it will bring a whole a bunch of other customers that are waiting for that event.

Operator

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

Benoit Poirier - Desjardins Capital

Yeah, just a follow-up on transportation with respect to the closing of the facility in Germany and also with the 1200 lay off, what is the expected impact on the margins going forward?

Pierre Alary

Well, it’s part of our - I would say we are making adjustments of our business to get the more competitive. We are looking at the various footprint we are having and what needs to be adjust. And it’s basically adjustment to make sure we remain competitive in terms of our cost base and we are adjusting and you are seeing that in the past we have been adjusting every year, but obviously not at that level in our closing plans so that’s the…

Pierre Beaudoin

I think in the end, we are always, Benoit, trying to balance to get closer to maximum load in all of our plant. And when we look forward in Germany, we felt we had one to many plant in Germany. With the potential business coming forward and because if you don’t load the plant completely you have under absorption you have the cost and you can’t cover all the cost with the business you got. So, when we look at the projection sales in this country we said what’s we can do what’s ahead of us with one less factory.

Benoit Poirier - Desjardins Capital

Okay, good color and last one if you may, could you may be provide an update on the upcoming marketing campaigns on the regional side especially in the U.S.

Pierre Beaudoin

On the one fact is now and I think we have a good chance is Delta. Delta has operated a products for quite sometime, they like the CRJ. It is a product that has 6% to 16% better operating cost than our competitor. So, these are active discussions with Delta right now. And I think we are well positioned and have a good chance to win this order.

Operator

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

Noah Poponak - Goldman Sachs

Yeah. Just a follow-up on that last question, actually where you expect CRJ and Q400 deliveries to come in for the full-year? And perhaps, if you could also just talk about what campaigning is like outside of the large US1's that everyone is talking about, it seem like it has been fairly light in the rest of the world?

Pierre Alary

You question was the deliveries in terms of the commercial aircraft?

Noah Poponak - Goldman Sachs

Yeah, if you could break it out CRJ Q400 that will be helpful?

Pierre Alary

Well, we do not break it up specifically but our guidance which we had for sometime which remained unchanged is that we would deliver approximately 55 commercial aircraft.

Noah Poponak - Goldman Sachs

Okay. And then, any color on what you are seeing outside of the U.S. on the regional jet side?

Pierre Beaudoin

Yeah, on the regional side, just like -- you are right, it has been slower. We have a lot of smaller campaigns going on but as far as big campaigns they are really focused in the U.S. right now and they are taking some time to get executed. I think, for us what we are trying to find is the right economics for us to go forwards on these campaigns.

Operator

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

Fadi Chamoun - BMO Capital Markets

Yes, just on the business jet. I wanted to take a stab at this. So, you had a good year in terms of orders but a lot has come from fleet customers and that is deliveries that are typically spread out and I think they Learjet there is no really start until 2014. So, on order, is there any initial thoughts at this point that how we should think about 2013 rights verses 2012 given the strong order that you have got and also given that the mix have been mostly towards fleet? How comfortable are you with rates remaining somewhat flattish going into next year or maybe improving little bit?

Pierre Beaudoin

I think Fadi, you said you would take a stab at it. We are not going to give you guidance for next year. As you know, the larger aircraft we are selling very well and the smaller remains difficult. But next year as you know, we are going to start delivering the 7075 also. So, guidance will come in Q4.

Operator

Thank you.

Shirley Chénier

Operator, do we have any more question?

Operator

We have no further questions at this time.

Shirley Chénier

Okay. Thank you. So, this concludes the question period intended for investors and analysts. We will now begin the question period for media representatives. Operator?

Operator

(Operator Instructions)

Our next question is from Sean Silcoff from The Global Mail. Please go ahead.

Sean Silcoff - The Global Mail

I have a couple of questions for you. When you talk about the $800 million shortfall in your free cash and you said it Learjet. How much of shortfall would you attribute to that program and how much of spread out to the other plane types?

Pierre Alary

We did not mention specifically Learjet.

Sean Silcoff - The Global Mail

Well, I was not clear if you are talking hypothetically about Learjet specifically that you (inaudible).

Pierre Alary

Oh, no I gave that as an example.

Sean Silcoff - The Global Mail

Okay.

Pierre Alary

So, basically the level of new orders and more precisely the timing of those new orders and the impact it has on the advances from customers.

Sean Silcoff - The Global Mail

Okay. So, is that particularly skewed to any particular type, like Challengers or Learjets versus Globals?

Pierre Alary

Well, the reference I made to the Lear, for example is that, it has a very short backlog. And having a short backlog that means that when you sign the order you deliver very quickly after. So therefore, we do not have the built up of those advances and that is an example. On the commercial side also it does apply.

Sean Silcoff - The Global Mail

Okay.

Pierre Alary

So, it applies to different models but it is in relation to the backlog, in relation to the built up of the advances through time. But on one side, it is below what we had originally expected. But we are doing very well in terms of signing new orders. We have signed higher level of new order than last year. Our book-to-bill is 1.5 to 1, so that means we are signing 50% more than we deliver. So, it is not that the business is not doing well, business is doing well under circumstances but we were expecting the recovery to have steeper curve, if you like.

Sean Silcoff - The Global Mail

Okay. What is your backlog now in three business jet type versus your ideal backlog?

Pierre Alary

Well, the backlog measure in terms of month of production. The Learjet is at 7 months, the Challenger --

Pierre Beaudoin

The target is what (inaudible)?

Pierre Alary

The target is 6 to 9.

Sean Silcoff - The Global Mail

Target is 6 to 9, okay.

Pierre Alary

The Challenger is at 19 versus a target of 15 to 18. The Global is at 34, okay, target is 24 to 30. And by the way that’s on page 23 of the MD&A so if you want to refer back. The Q400 is at 14 for a target of 18 to 21, and the CRJ is at 47.

Sean Silcoff - The Global Mail

47 months?

Pierre Alary

Yes.

Sean Silcoff - The Global Mail

And what's your target?

Pierre Alary

18 to 21.

Sean Silcoff - The Global Mail

So, if you're at or ahead of your target on all of these, I don’t understand why the dollars are just collapsing anyway?

Pierre Alary

Yeah. These are based on the previous rolling four quarter delivery. And the deliveries in the first three quarter of this year have been lower. So, therefore, your denominator is lower so. When we give that as a proxy to help the investor to understand our backlog but its obviously is not an exact calculation. So we have to take that into consideration. So, there's been a very low level of order in the CRJ, which mathematically show a high level of a backlog in number of months based on the delivery we have.

Sean Silcoff - The Global Mail

So, is that where this free cash flow been coming from the CRJ?

Pierre Beaudoin

Well, we are not breaking out by platform so.

Sean Silcoff - The Global Mail

What are the implications of a lower cash flow? What does this kind of do financially?

Pierre Alary

Well, there are implication of free cash flow is that you have less cash at the end and that’s why we're looking at liquidity on a constant basis but we have -- our level of liquidity is fairly high. It is at $3.5 billion after having used cash for three quarters, and that includes cash and cash equivalent of $2.1 billion and the fourth quarter will generate cash substantially, so that level of liquidity will go significantly higher than the current amount. So we've got a good level of liquidity.

Sean Silcoff - The Global Mail

If I could just ask one final question.

Shirley Chénier

One last? One more and that’s it?

Sean Silcoff - The Global Mail

Yeah, absolutely.

Shirley Chénier

Okay.

Sean Silcoff - The Global Mail

Just about the CSeries supplier issue. You mentioned avionics, is it one supplier in particular or is the issue for the delay? And I heard when you said Pierre by ordering everything and how you seem to happy with the way things are unfolding but, again, does the issue sort of boil down to one or just a handful of suppliers in particular or is this more of an issue of you kind of shuffling the deck around so that things come in at exactly the right time?

Pierre Beaudoin

It's about harmonizing the schedule and getting things at the right time so that we can maximize the use of all the components are coming in to get the first flight. There is some supplier issue but its not -- its really about making sure that things as planned at this point.

Sean Silcoff - The Global Mail

What is the issue particular though? Is it raw material issue or I mean are they unable to actually produce?

Shirley Chénier

Don, I suggest you give us a call after, okay? We have a lot of people waiting in the line, okay?

Sean Silcoff - The Global Mail

All right.

Operator

Thank you. Our next question is from (inaudible).

Unidentified Analyst

I wanted to know for the 1200 positions that will be cut there is a number that are related to plant in Germany but would there be any job cuts else in another countries in Canada in Quebec?

Pierre Beaudoin

The transportation team is putting the plan together and I can't tell you exactly where the job cuts will be, but it will be throughout the transportation organization including North America.

Unidentified Analyst

Now in terms of the strike at La Pocatiere in news, do you think there would be an impact on the Montreal subway contract, on the other contracts you have in North America?

Pierre Alary

Both parties are in discussion and considering it. No, we don’t think this will have an impact on delivering any products that are coming from the plant.

Operator

Our next question is from Scott Deveau from the National Post. Please go ahead.

Scott Deveau - National Post

I feel like you've been asked this a few times but you haven’t quite answered it. Is there a specific problem with any specific supplier on the CSeries that’s causing the delay?

Pierre Beaudoin

Like you said, I have been asked this question a few times. There is some supplier challenge but there is nothing specific. It's more about having an harmonized schedule and integrating all of these parts to get ready for first flight by the end of June.

Scott Deveau - National Post

You said in the past that you're having some issues with the fly by wire and that was the top concern for you. Was there some kind of issue that arose from that that led to this delay?

Pierre Beaudoin

Nothing new, of course you are pointing out to one of the most complex system of the aircraft and that’s what we have done in the past is talked about where we have very complex systems and those are the most challenging one, but there is nothing new to report on fly by wire.

Scott Deveau - National Post

What did it takes you so long going out to delay I mean it seem like everybody on the street had a better sense that you are going to not be able to meet this dead line that needed?

Pierre Beaudoin

I think our job is to manage the schedule in the best way we see fit for our shareholders, for our customers, for our employees, and we felt that was the best way to manage our schedule.

Scott Deveau - National Post

Do you expect any further delays in the program at this point?

Pierre Beaudoin

At this point we feel we are going to first flight by the end of June.

Operator

The question is from Marie Tison from La Presse.

Marie Tison - La Presse

Te gain about the CSeries and the gain about your suppliers, can you tell me if your Chinese supplier is part of the challenges?

Pierre Beaudoin

I think you are aware that a lot of the components for the first systems were built in our own plans in (inaudible) Montreal and the rear fuselage that was built by our Chinese supplier, everything is working very well and that was for the First Test Vehicle so that the parts for the Second Test Vehicle are being expected in Montreal very soon. So, there is -- their part of the project is happening very well.

Operator

Our next question is from Caroline Van Hasselt from Wall Street Journal. Please go ahead.

Caroline Van Hasselt - Wall Street Journal

Mr. Pierre Beaudoin you talked about the test occurring in mid April to complete static testing, could you just elaborate on that?

Pierre Beaudoin

I was asked before when the test article which is a structural test article when the test will be completed is would agree where we could take airplane to first flight and I got feedback from my CSeries team that’s listening to this call that’s mid April.

Caroline Van Hasselt - Wall Street Journal

Okay. And when do you expect decision from Delta?

Pierre Beaudoin

Well, you'd have to ask Delta, I would like a decision very shortly, I think it’s a great opportunity for Bombardier, but our teams having discussion and that’s really a question that the customers needs to have.

Caroline Van Hasselt - Wall Street Journal

Okay and thank you and thank you everyone has asked already the question on the CSeries. When you talk about just on the order side and on the delivery side the – how many campaigns do you have going on? And again do you truly anticipate that you will have another order before the bird takes off?

Pierre Beaudoin

I feel confident that we will because we have some very advance discussion including LOIs that we have announced that needs to we can transform into purchase orders, but now, yes, I feel very confidence that this will happen before first flight.

Operator

Thank you. Our next question is from Vanessa Lu from the Toronto Star. Please go ahead.

Vanessa Lu - Toronto Star

Mr. Beaudoin, before you’ve always indicated that you had no plans to discount the price of the CSeries jet through sales or option. I’m wondering if you remained firm in that position even with this delay that you’ve been announced today, as well as if you could walk through as a number of firm orders and the number of the conditional orders just if there has been any change?

Pierre Beaudoin

Well, we didn’t said before is that we have a good level of orders and we feel confident, we feel confident that we have a level of orders that we need to get production going. In fact, our backlog now stretch quite a bit in time as we look at in our orders, the options that we have plus the LOI that we are working on. So, if you want specific on the orders that on 138 firms and if we look at orders commitments so that will tap options and LOI, the letters of intent that would be above 300.

Vanessa Lu - Toronto Star

Above 300, Okay.

Pierre Beaudoin

Above 300.

Vanessa Lu - Toronto Star

Above, okay and you remained firm in terms of the…

Pierre Beaudoin

The number 352 to be exact.

Vanessa Lu - Toronto Star

352, okay, thank you. And you remain firm in terms of the price numbers on that?

Pierre Beaudoin

Well, what I said before and I remained firm is that that we don’t need to go and be give prices that we will regret and we delivered the airplane. This is a good airplane with a competitive advantage and we can get a value for it so, I remain firm on that.

Operator

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

Unidentified Analyst

If I understand correctly that this six month delay will not incur additional cost?

Pierre Beaudoin

What I spoke about and the answer is yes, what I said that they would not influence the business plan because when we do make a business plan we do consider some contingency and time.

Unidentified Analyst

But I’m trying to understand how you can have a six month delay without it incurring additional cost, I mean that’s going to cost your money.

Pierre Beaudoin

What I was saying to you that was business plan that would not be influenced by this delay.

Unidentified Analyst

So there was a contingency plans for delay built into business plan.

Pierre Beaudoin

Well, every business plan that we do at Bombardier but also, I believe every business plan always considers some contingency in time and in money. And what I am saying to you, we are able to meet our business plan with this first flight by end of June.

Unidentified Analyst

Can you give any sort of details on what the contingency for any eventual delay would have been?

Pierre Beaudoin

Business plans are something that we keep confidential because they are highly sensitive from a competitive perspective.

Unidentified Analyst

Right.

Pierre Beaudoin

But I can tell you that the CSeries plan is a very good business plan.

Unidentified Analyst

Okay. And in terms of penalties, would the penalties that you will receive from suppliers offset the penalties that you are on the hook or from aircrafts sales orders?

Pierre Beaudoin

Like the sales orders and where the positions are in the skyline, so where they would take delivery. And we were very prudent and promising shows a delivery that -- we are just prudent and promising. So, we do not anticipate much penalties from to our customers and off course, our suppliers will work with us on this.

Unidentified Analyst

This is sort of a self perpetuating problem though isn’t it, because if you delay first flight that is six months that first flight milestone bonus I guess, if you would call it, additional charges that you could charge a customer are not going to materialize, right?

Pierre Beaudoin

I am not following your --

Unidentified Analyst

You are not going to get the first flight additional bonuses for until in the end of June now, right instead of December 31st?

Pierre Alary

And when you say bonus do you mean like additional --

Unidentified Analyst

Well, as I understand once the aircraft flies which it was suppose to by December 31st, you can charge customers that little bit more or that lot more for that milestone, is that right?

Pierre Beaudoin

I think Francais what you are referring to is that, when we sell airplanes three or four years before the program off course, we give a discount because the customer is taking a risk on the fact that the airplane is in the beginning. As you accomplish milestones you are able to do a way with those discounts. Of course, once you accomplish first flight the pricing and you are closer to production, the pricing gets better. So, yes, as you delay first flight you delay the orders that we would get at the price after first flight.

Unidentified Analyst

Did the election yesterday put a crimp in your business aircraft projections with the charges that the administration is inclined to impose on business aircraft?

Pierre Beaudoin

We have done well in the U.S. and I think we will continue to do well. Of course, the economic recovery is something that we are monitoring but I can tell you that in the last few months we see a comeback in the economy in the U.S. and we are quite excited about that.

Operator

Thank you. Our next question is from Ross Marowits from The Canadian Press. Please go ahead.

Ross Marowits - The Canadian Press

First, I wonder if you could clarify about this plant closure and layoff. You said that some of it will take place in North America but can you give in order of magnitude out of the 1200?

Pierre Beaudoin

Well, first of all, what is related to the plant is about 350 employees and then the rest is more reduction in overhead across Bombardier transport. Remember that we have 35,000 employees that transport. So, this is a reduction of 1200 employees overall. So, it is significant because it is 1200 employees but on 35,000 it is not a huge adjustment.

Ross Marowits - The Canadian Press

So, in North American then, would that be like 10% or?

Pierre Beaudoin

I can not quantify this as right now. And will give more precision on the actions we have taken in the fourth quarter, provided that it is not competitive and sensitive.

Ross Marowits - The Canadian Press

And the timing of these layoffs would be when?

Pierre Beaudoin

Well, it -- our action is to be taken place next year.

Ross Marowits - The Canadian Press

Next year by end of year?

Pierre Beaudoin

Well, as the plan is being developed, right now it is very hard for me to give you the exact timing, but these will occur my anticipation through next year but the sooner the better, so that we can take advantage of the cost reduction.

Ross Marowits - The Canadian Press

So, it will be several months before these layoffs then?

Pierre Beaudoin

Well --

Pierre Alary

Yes. And again, the other thing to consider is that we have employees that are not permanent employees, they are temporary employee, so they will be the first one to be impacted. But when we look at the total except for the specific plant in Germany, 800 out of 35,000 to 36,000 employees that is not significant. So, in any given site or in any given country it will not be important at all.

Ross Marowits - The Canadian Press

Okay. In terms of the CSeries, you have long talked about working towards the December timeframe. At what point did you realize that you were not going to be able to meet that?

Pierre Beaudoin

Recently, but then what we wanted to do before we talk about a new date was to harmonize our schedule. But I have always said that, December was our target and three to five months within that I would consider that on schedule. So, what we thought in the last recent period was to make sure that we had a harmonized schedule before we talk about another date?

Ross Marowits - The Canadian Press

So, it is what the last two months or so that you realize it would not work?

Pierre Beaudoin

No, it is shorter than that. And we have always been pushing with all our suppliers to meet the December date, but recently it became obvious that some of the components would later and would not come at the right sequence. So, we decided to come up with the announcement today.

Ross Marowits - The Canadian Press

Now, you had extra shifts to try to gain some time in the schedule. Did things get worse as you went on or get better or?

Pierre Beaudoin

Things are going quite well in fact on the CSeries and we do have extra shift. Our team are working seven days a week. There's a lot of enthusiasm in the team of the CSeries and a lot of dedication. So things are progressing quite well.

Ross Marowits - The Canadian Press

And did you have to change any suppliers?

Pierre Beaudoin

Okay. And what guarantee can you provide that you'll actually meet this new schedule, because its longer than some people had expected?

Pierre Beaudoin Pierre Alary

Well, I can understand that and there is no guarantee, but right now the schedule is harmonized and it looks good. We're seeing the components and excited about what I'm seeing as an aircraft. Things are coming together at a good rate and the team is very, very focused on getting it done. So, I feel very confident but there is no guarantee.

Ross Marowits - The Canadian Press

Sir, one last thing. Is there delays to Learjet 85?

Pierre Beaudoin

On the Learjet 85 we're driving to first delivery by the end of '13.

Ross Marowits - The Canadian Press

So no delays there. Thanks very much.

Operator

Thank you. The next question is from Damien (inaudible).

Unidentified Analyst

Could you repeat again in French for my program what you just said about the CSeries? In other words, to what extent are you confident that you'll be able to meet this June date whereas you're missing date, but are you sure?

Pierre Beaudoin

There's a lot that we've done a lot of milestones we've passed for the CSeries. We're starting assembly. The airframe is essentially finished. We've started testing it. We've harmonized schedule with our suppliers so that we get the components as we need them to assemble the aircraft. So, I'm really confident that we will achieve flight before the end of June. That being said, it is a very complex program. There are still risks but I believe that, as far as I'm concerned, I'm confident that we will keep that deadline timeline.

Unidentified Analyst

Another aspect of the CSeries, recently there was talk about the high density 160 seat version. Is that project still live? Are you going to make a decision?

Pierre Beaudoin

The CS-300, this is just a customer option. If a customer wants a 160 seater we have it available. It's more a question of seating density rather than a different aircraft. So, its available.

Unidentified Analyst

Another question about the Q400 in Russia. Can you give us an update where are you at in terms of discussions?

Pierre Beaudoin

Nothing specific about Russia and I think that our marketing team always has to evaluate the best way of selling products in various countries. There are discussions in Russia but elsewhere, but the production of Q400 remains in Canada.

Unidentified Analyst

So there is no plan to sell the Q400, sell a license to the Russians, its not a license you're selling them?

Pierre Beaudoin

There is no plan to sell a license to the Russians.

Unidentified Analyst

And finally, in terms of a potential sale to Delta, when do you hope to see developments?

Pierre Beaudoin

Like I said earlier, this is a decision for the customer to make. We're well positioned I think to get the order from Delta. This is a carrier that is operating the CRJ, they like the CRJ, they've had several hundred for years. And so, for us, we have a very good offer with good discussions with Delta and we hope that we'll get an order very soon, a decision very soon.

Unidentified Analyst

And maybe a final question on the CSeries. You've said a lot or you've said often in the past that you didn’t want to make a plane bigger than the CS300. Is that still true or could you potentially decide to have say 180 seater or something like that?

Pierre Beaudoin

Okay, I think we will focus on executing the two aircraft we have in development, the CS100 and CS300, and for the future we'll see later.

Unidentified Analyst

But you're not ruling anything out.

Pierre Beaudoin

I think our focus right has be to on completing the two aircrafts in development.

Operator

The next question comes from (inaudible).

Unidentified Analyst

You've spoken a great deal about something, but I'm trying to understand the situation with cash flow and the investments in aerospace. And so, if I've understood everything correctly when you try to apply these investments, I think that brings you to $2 billion. So, I think your cash flow should be about $1.2 billion in 2012?

Pierre Alary

Yes, that’s right.

Unidentified Analyst

In 2013, do you think that you'll also be investing $2 billion in aerospace?

Pierre Alary

Yes, roughly that’s what we're looking at investing next year.

Unidentified Analyst

And so the cash flow would be of that order magnitude?

Pierre Alary

We will give a more specific forecast but only when we reach the end of the fourth quarter.

Unidentified Analyst

If I understand well, you have liquidities in the range of $3.5 billion, and is that in terms of lines of credit?

Pierre Alary

Yes, that includes lines of credit and $3.5 billion is at the end of the third quarter and at the end of the fourth quarter. We would like to have a very significant cash flow perhaps, in access of $1 billion and the liquidities that are at 3.5 or 4.5.

Unidentified Analyst

If we are talking about overall liquidities for our both transportation and for Aerospace and could you use all of this in Aerospace, are there ceilings?

Pierre Alary

The liquidities that we have help us to operate on a continual basis in the two groups. They provide us the liquidity that we need to operate.

Unidentified Analyst

I'm trying to see whether you have the $2 billion that you could use within Aerospace because I think the business is normally required to speak respective levels of liquidity?

Pierre Alary

Yes, that's true. And I've seen our documentation. With regard to transportation, we have roughly US$500 million at the end of the term. So, altogether we are talking about $1.2 billion at the end of the quarter for the two groups but we could use that within the quarter.

Unidentified Analyst

With regard to Russia you were talking about a peak interest in regional jets. And there has been a lot of discussion around the Q400.

Pierre Beaudoin

There is a very significant demand for regional jets and for our turboprops in Russia for modern planes, planes that would allow different airlines to modernize their fleet. When we look at the successes that we have had today. And today to the CRJ200, there were roughly a 100 of these in operation. We also think that there is a market for turboprops. There is also market for the 700, 900 and a 1000.

Unidentified Analyst

This is little bit vague in terms of discussion. Is there a possibility that these planes might be assembled in Russia?

Pierre Beaudoin

Our teams are looking at the best way to meet that demand but there is nothing specific that we can mention at this point. We are having discussions throughout the world and we are trying to figure out how we can have the best of business success.

Operator

Susan Taylor from Reuters. Please go ahead.

Susan Taylor - Reuters

Can you give us an update on the total cost of CSeries development, what the figure is at right now, is it $3.5 billion, is it higher?

Pierre Beaudoin

Well, it has been -- sometimes and I do not split non-recurring and recurring cost because as we give you this indication when we started the development program because it gives you a proxy and how we are planning for the program. But as we work through the program, we make choices between the right price of the part and the investment upfront. So, what I can tell you is that, we are meeting the business case when we launched the CSeries and so far, we have -- if you look at our MD&A, we have $2 billion invested in tooling on the CSeries.

Susan Taylor - Reuters

Okay. Would it be accurate to put the total development cost at $3.4 billion or $3.5 billion?

Pierre Beaudoin Pierre Alary

Well, this will vary through time, so I cannot -- I do not want to give you the exact number of non-recurring because you would not have a complete tooling or non-recurring what we call is insight, you would not have the complete information because there has been so many choices made in the last three years, but the business case we are meeting it.

Susan Taylor - Reuters

Okay. And previously, you had said that by the end of 2013 you had expected 300 firm orders, is that figure -- is that target still achievable at this point?

Pierre Beaudoin

I think we are in good shape with the CSeries to continue to get a good order level and meet the targets that we had set.

Susan Taylor - Reuters

So, you think you can meet that target of 300 firms then?

Pierre Beaudoin

Well, I think the target of 300 firm was a number derived from other programs but I do feel we are in a good position to have the orders that we need to cover our skyline, our production schedule for several years.

Susan Taylor - Reuters

And currently the production schedule of skyline extends out to how far, to 2016?

Pierre Beaudoin

We're into '16 at this point. So, we’re going to take our time to ramp up the production in order to make sure that we meet our customers commitment.

Susan Taylor - Reuters

And you mentioned earlier that shifts are now working I guess its at (inaudible) seven days a week. Are they still doing three shifts, 24 hours a day?

Pierre Beaudoin

That depends on the components. Where we need to our employees are very dedicated, very enthusiastic about the program. So, where we need to we have no issues to bring people around the clock. In other areas, it serves no purpose to be there 24 hours a day, but you need to be there seven days a week. So, if you would go to (inaudible) then you will see a lot of cars in the driveway.

Susan Taylor - Reuters

One last question about the harmonizing of the schedule. I guess I need your help in understanding why that wasn’t something that was previously in place? It strikes me with all the components and parts coming in the schedule must have been harmonized before now. But you're telling us today that this is something new that’s happened?

Pierre Beaudoin

Well, you're exactly right. We had an harmonized schedule, but what happens through time is you get a supplier that’s delay and then you get another one that delays and then in the end you're components in the wrong sequence. You keep the pressure on them to meet the date, their latest date, but at one point it serves no purpose to get the parts in the wrong sequence. So, then we reharmonize the schedule based on the reality that we have.

Susan Taylor - Reuters

I know you've been asked about this but give us an idea of what kind of suppliers there were issues or that were affected by these delays? Was it software, was it something else?

Pierre Beaudoin

Well, there's many suppliers on an aircraft. There's 55 tier-1 suppliers on this aircraft, so first level, and then after there's over 300. So, its not a specific system. The most complex systems are the ones we've spoken about in the past an d most complex system have a lot of software in them. So, in software what you will see is that we will get several drops and we need to get the one that we can release that to go to first flight. So, yes, software is a big part of the challenge that we have, but there is software everywhere in a product like a modern aircraft of today.

Operator

Thank you. Our next question is from Molly McMillan from Wichita Eagle. Please go ahead.

Molly McMillan - Wichita Eagle

I have just kind of a two part question. One, I'm wondering the effect of the strike here in the Wichita on your customers and on your production and then also on the 7075 and 85 program.

Pierre Beaudoin

Well, so far we've been managing it quite well. Although we're in strike we have quite a few employees at work. So, I don’t think there's an effect so far. The good news is that we have a mediator now that’s been asked to come in and work with us in trying to find a resolution because what we want is to find a resolution and get all of our employees back to work. But so far there is no impact on our customers or on the Lear 85 program.

Molly McMillan - Wichita Eagle

And then also in the press release you have it that there is 45 net orders in the quarter for business aircraft and that includes 19 for the Global family. How many of those were for Learjet?

Pierre Beaudoin

We didn’t specify it. So, I don’t think we've released this information. If we have it we'll send it to you but I don’t think that’s part of the release.

Molly McMillan - Wichita Eagle

And then what has been the market of Learjets? You mentioned that soft, certainly more difficult for the smaller jets there.

Pierre Beaudoin

Yeah, its like every manufacturer, the smaller end of the business has been difficult. Also, we have two new products the 7075. Our customers are excited about them and on that end its been much better.

Operator

Thank you. Our next question is from (inaudible).

Unidentified Analyst

If the new deadline is June? In June there is the new deadline but you're also talking about April.

Pierre Alary

We were talking about the cast test, the structural test and that is in a facility in (inaudible) there's a static test. And we were looking at doing these structural tests and we believe that tests will be completed by mid April.

Unidentified Analyst

So you're still thinking about an inaugural flight in June?

Pierre Alary

Yeah, that’s it.

Unidentified Analyst

Delivery of planes, would the delivery take place before the end of 2013?

Pierre Beaudoin

We said that it would take place approximately one year after the test flight.

Unidentified Analyst

So, does that mean that the delivery is also pushed back by six months?

Pierre Beaudoin

It is pushed back but that does not necessarily have an impact on the finance because deliveries decline of course is a separate issue.

Unidentified Analyst

Will employees be called back to work six months later? What effects will have on employees?

Pierre Beaudoin

Yes, if production begins later the callbacks for employees for production would also be pushed back later.

Unidentified Analyst

How many employees are we talking about here?

Pierre Beaudoin

I have not looked at the number of employees that we need, so I could not tell you.

Unidentified Analyst

Are we talking about several hundred?

Pierre Beaudoin

We have more than 10,000 employees in Aerospace in Montreal. We are already a considerable employer in the field.

Unidentified Analyst

With the CSeries in particular?

Pierre Beaudoin

As I told you, I do not have that information with me. If you would like to call after the conference call we could try and find it if we have it for you. And we could give you little bit more information.

Operator

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

Unidentified Analyst

Just a quick question again about the CSeries, do you know who the first operator is going to be here?

Pierre Beaudoin

Yes, we do and it is an undisclosed customer.

Unidentified Analyst

Okay. And any particular reason if still undisclosed?

Pierre Beaudoin

That is something -- it is a commercial reason between us and the customer and we are working on that.

Unidentified Analyst

Will that customer be paid a penalty for the delay?

Pierre Beaudoin

Each customers we are discussing on the influence of the delay of six months. But like I said before, we are considered -- when we committed the position, we had considered some contingency. So, I do not expect the penalties to be big.

Operator

Thank you. Our next question is from Caroline Van Hasselt from Wall Street Journal. Please go ahead.

Caroline Van Hasselt - Wall Street Journal

I just wanted to follow-up to clarify. As of now, some party has $2 billion invested in the CSeries program, is that correct? And if the total cost of the entire program is estimated to be $3.4 billion or $3.5 billion?

Pierre Beaudoin

Well, the $2 billion you will find as in our MD&A under where we gave you the information on tooling, so that is correct. We have $2 billion invested in the CSeries. And the $3.4 billion was the original number we gave at the beginning of the program as an indication of the size of this investment that has varied like they always do in programs because we make a choice between tooling and the price of the parts, so that number will be different.

Caroline Van Hasselt - Wall Street Journal

So, is that estimated $3.4 billion or $3.5 billion is that that Bombardier share or the total cost of program?

Pierre Beaudoin

That is what the total cost of the program.

Caroline Van Hasselt - Wall Street Journal

I see, okay. And I just ask on the $2 billion because I previously have been told that it has been $2.5 billion?

Pierre Beaudoin

Well, if you look at our MD&A we're very transparent.

Caroline Van Hasselt - Wall Street Journal

Okay.

Pierre Beaudoin

Page 20, you have that information.

Operator

Thank you.

Our next question is from the (inaudible).

Unidentified Analyst

Just a question on Russia, I like to know what is happening with the CRJ9000 and its certification, is there anything new that to be said on that front?

Pierre Beaudoin

We are expecting certification to come soon, but I can not tell you about the different stages in that process but the things are going well.

Operator

We have no further questions at this time.

Thank you very much everybody for participating with us today. Have a good day.

Operator

Thank you. The conference has now ended.

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