Bombardier Inc. (BDRAF) CEO Alain Bellemare on Q2 2018 Results - Earnings Call Transcript

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About: Bombardier Inc.A (BDRAF)
by: SA Transcripts

Bombardier Inc. (OTCQX:BDRAF) Q2 2018 Earnings Conference Call August 2, 2018 8:00 AM ET

Executives

Patrick Ghoche - Vice President, Investor Relations

Alain Bellemare - President and Chief Executive Officer

John Di Bert - Senior Vice President, Chief Financial Officer

Analysts

Fadi Chamoun - BMO Capital Markets

Noah Poponak - Goldman Sachs

David Strauss - Barclays

Seth Seifman - JP Morgan

Cameron Doerksen - National Bank Financial

Ronald Epstein - Bank of America

Walter Spracklin - RBC

Turan Quettawala - Scotiabank

Operator

Good morning, ladies and gentlemen, and welcome to the Bombardier Second Quarter 2018 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 bombardier.com. All dollar values expressed during this call are in US 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 2 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'm making this cautionary statement on behalf of each speaker, whose remarks today will contain forward-looking statements.

In a moment, Alain Bellemare, our President and Chief Executive Officer, will address our performance for the first half of the year. John Di Bert, our Chief Financial Officer, will then review our financial results for the second quarter ended June 30, 2018.

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

Alain Bellemare

Well, thank you, Patrick, and good morning, everyone, and thank you for joining us today. As you saw in the press release this morning, we continue to make solid progress executing our turnaround plan and positioning the Company for the future. Halfway through the year and more than halfway through our five-year turnaround plan, we are on track to achieve our full-year 2018 and 2020 targets.

We are reaching an important inflection point where our heavy investment cycle is winding down and our new programs are ramping up. The focus is now on increasing production capacity, improving operational efficiency, and accelerating growth.

In Q2, we had solid financial performance. Top-line grew by 3%, earnings grew by an impressive 18%; margins expanded by 80 basis points; and our backlogs increased across all businesses. Cash usage also continues to improve, keeping us on track to achieve free cash flow breakeven for the year, and John will go through it in more detail.

In addition to achieving our financial goals, we concluded a number of strategic actions, setting the stage for strong growth well into the next decade. We successfully closed the Airbus partnership well ahead of schedule. The transition has been flawless. The team hit the ground running on day one. New orders from JetBlue and the start-up airline led by David Neeleman clearly demonstrate the power of our partnership. We have the best aircraft in the 100 to 150-seat class. And with Airbus scale and reach to accelerate sales and drive costs down, we have the best partner to create value for all shareholders.

In the second quarter, we also closed the Downsview sale. The $600 million of cash infusion strengthens our balance sheet. This is a big deal. It positions us well as we approach a deleveraging phase of our turnaround plan. It also gives us flexibility to look at value creating opportunities in the near term and it allows us to further optimize our business aircraft operations with a new center of excellence at Pearson airport in Toronto.

Today, we have the best business jet portfolio in the industry. And we're making it even stronger with the launch of our new Global 5500 and 6500 aircraft and by increasing the range of our Global 7500 to 7,700 nautical miles. Together, these new aircraft solidified our leadership position in the large cabin business jets. Our Global family meets all customer missions and requirements. We have the longest ranges, largest cabins, basic amenities, and by far, the smoothest rides in the industry.

On the Global 7500, flight testing is nearly complete. We expect certification shortly with first delivery before year end. With EIX on the horizon and nearly 20 aircraft at different stages on the production line, David and the team are laser focused on the ramp up and coming down the running curve. In addition to the great work on our development programs, Business Aircraft posted another very strong quarter. We delivered 34 aircraft, the best in our industry segment. We also grew the backlog to $14.1 billion, again the best in the industry.

Overall, the business jet market continues to show signs of recovery. Sales activity is improving in North America, Europe and Asia. Pre-owned inventories are lower, residual values are up, and aircraft utilization levels and market sentiment continue to trend in the right direction. In the aftermarket, our past investments to expend capacity and enhance service offering are paying off.

In the second quarter, aftermarket revenues grew 21% year-over-year. Aftermarket will continue to be an important part of the BBA growth story as we look to capture a greater share of our in-service fleet of more than 4,800 aircraft, one of the largest in the industry. Today, we only service about a third of this fleet. So, this is a tremendous growth opportunity for us. Along with this growth potential, we have the best product portfolio, market leading deliveries, and the largest backlog in the industry. Bombardier is clearly the premium brand in business jets.

Turning now to Commercial Aircraft. Well, we have two clear goals: First, to work closely with Airbus to make the A220 a huge commercial and financial success and second, to create value with our original platforms. Fred and the team are focused on reducing our cost structure, increasing volumes, optimizing the aftermarket, and returning the segment to profitability.

With respect to increasing volumes, in the second quarter, we announced two significant CRJ orders, 15 from American and 20 from Delta. These aircraft feature our new ATMOSPHÈRE cabin which we publicly displayed at Farnborough. The feedback from customers and industry was very positive. Today, our firm CRJ backlog is 60 aircraft and the Q400 backlog is 56 aircraft.

Turning now to our train business which continues to deliver. For the third consecutive quarter, Bombardier Transportation posted strong organic revenue growth, 6% for the quarter. Revenues reached $2.3 billion, putting us on track to achieve our full-year $9 billion target. We saw growth across all segments, rolling stock, signaling and services, demonstrating our strong competitive position and ability to win major contracts in markets around the world. Significant recent wins include being selected to provide the new automated people mover system at Los Angeles International Airport and winning a very large contract and Singapore to provide 396 MOVIA metro cars.

Today, Laurent and the team are focused on execution and delivering on our strong and growing backlog. Recently, Laurent named Jim Vounassis, as a Chief Operating Officer to help drive operational efficiency across BT. Looking ahead, we continue to see a strong pipeline of opportunities. BT's solid order book combined with the strong market outlook give us clear visibility to our $10 billion revenue target for 2020 with further margin expansion opportunities.

Okay. Let me stop here and conclude by saying that Bombardier delivered strong performance in the first half of 2018, and we have great momentum heading in the second half of the year. Our foundation is solid, the path forward is clear, and we have a great team.

With that, I will turn it over to John to review our second quarter performance.

John Di Bert

Thank you, Alain. Good morning, everyone. Our second quarter financial performance produced one of our best quarters since launching our turnaround plan. Revenue growth, earnings strength and free cash flow improvement are all tracking to plan. And we delivered on our 2018 priorities. We booked strong orders across all businesses. We closed the value creating partnership with Airbus. We completed the Downsview sale, injecting $600 million of cash. We continue to make rapid progress towards the Global 7500 certification. And, we are strengthening our Global family lineup with the unveiling of the 5500 and 6500.

Our solid performance positions us to achieve our free cash flow breakeven target for this year and more importantly, to sustain cash generation well into the future. Now, let's review the second quarter results and 2018 guidance on Slide 4.

Consolidated revenues totaled $4.3 billion, growing 3% year-over-year. This increase is led by an 11% increase at transportation as it continues to industrialize several major projects in preparation for the acceleration and deliveries. On a year-to-date basis, revenues reached $8.3 billion, 7% higher than prior year, driven equally by organic growth and currency translation benefits at transportation.

Revenue guidance for the full-year now stands at $16.5 billion to $17 billion, including C Series results for the first six months of the year. With the Airbus transaction in place, we will no longer consolidate C Series results, starting in the third quarter. On the earnings front, profitability was particularly strong with EBIT before special items growing 18% year-over-year to $271 million. This produced 6.4% margin, our best quarterly performance in years.

Profits were strong across all business units. BT's margins reached an impressive 9.2%; BBA trends at around 8.5%; and Aerostructures delivered 12.5%, mainly from strong operating performance. At Commercial Aircraft, we reduced the loss to $66 million compared to last year's $118 million loss on higher volumes.

Looking out to the full year. We recently increased the 2018 EBITDA outlook by $100 million to reflect the deconsolidation of a portion of the C Series losses. This is net of the equity pickup, reflecting our 33.55% share of CSALP's results going forward. With year-to-date EBIT before special items of $472 million, we are well-positioned to deliver on our $900 million to $1 billion guidance for 2018. This range excludes any gains and losses from the C Series partnership and the Downsview sale.

Further, year-to-date EBITDA was $601 million before any special items, also tracking to the updated guidance for the full-year of 1.25 to $1.35 billion. Free cash flow usage for the quarter was exactly as planned at approximately $370 million, improving materially versus last quarter and initiating our shift towards sustainable free cash flow generation. When including approximately $600 million in proceeds from the Downsview sale, reported free cash flow was $232 million of cash generation.

Turning to Slide 5. As planned, the $1.1 billion free cash flow usage in the first half 2018 was to support the C Series ramp-up, the Global 7500 certification and as well as $400 million investment in BT project inventories. As we go forward, we are moving out of this investment phase and naturally transitioning to growth and strong cash conversion. Our free cash flow breakeven target for 2018 implies second half free cash flow generation of more or less $1.1 billion with most of that cash inflow expected in the fourth quarter, supported by seasonally stronger months at BT and BBA and working capital conversion to cash.

The free cash flow goal for the year includes approximately $1.4 billion in tooling CapEx and excludes any investment made towards the C Series partnership capped at $225 million. With cash on hand of approximately $2.8 billion, we aim to finish the year even stronger with cash between $3.25 billion and $3.5 billion, reflecting our free cash flow expectations by year-end, as well as certain non-free cash flow items such as any investment in C Cell and the payment of dividends to CDPQ from BT. This would position us well for the third phase of our planned deleveraging. In fact, with net debt of approximately $6 billion and full year EBITDA growing, our leverage ratio is already improving.

Finally, we delivered $0.03 EPS in the second quarter on an adjusted basis, fueled by stronger earnings performance. Before I turn to review of the business units, I want to touch on the special items recorded in the quarter, mainly associated with the Airbus and Downsview transaction.

Upon the closing of the CSALP partnership, we recorded a net after tax charge of $535 million, including the fair value of the warrants issued to Airbus, and the off market return expected on future equity investments Bombardier will make in the C Series partnership. This charge is a non-cash item. In addition, offsetting the charge, we recorded an accounting gain of $561 million on the sale of the Downsview land.

Now, let me turn to each unit's performance review on Slide 6. Starting with our rail business which recorded revenues of $2.3 billion in the quarter and $4.6 billion year-to-date. Organic growth during the first two quarters of the year was 8% and 6%, respectively, coming from all parts of the business. Transportation is well positioned to reach or exceed the $9 billion revenue guidance for the year. Taking into account normal seasonality and assuming a stable €1.15 to USD exchange rate for the balance of the year. As a reminder, after six months, positive currency translation added approximately $300 million to BT's revenues.

Earnings are also trending positively with EBIT before special items of $207 million for the quarter, representing a margin of 9.2%. This quarter's EBIT includes better margins from services, and lower JV income versus last year. Year-to-date margin is 8.6%, in line with guidance for the full year. Book-to-bill in the quarter was 1.1, contributing to the $34 billion backlog. As the backlog continues to improve by rolling off low margin projects and by increasing the share of signaling and service contracts, we are enhancing the business's future margin potential. In summary, BT continues to perform while positioning itself well for future growth.

Business Aircraft also continued strong performance and execution, delivering 34 aircraft in the quarter. Future deliveries included two Learjets, 20 Challengers, and a 12 Global's. At 65 aircraft deliveries at the halfway point, we are on plan and tracking to the 135 aircraft full year target. Revenues for BBA totaled $1.3 billion in the quarter, reflecting a slightly higher proportion of Challenger deliveries versus last year. This result also emphasizes a strong performance from our aftermarket business, which has grown 21% in Q2, sustaining a double-digit growth trend for the fourth consecutive quarter.

While our business jet unit is positioned for growth, we are seeing lower revenues from pre-owned aircraft. With a minimal effect on our profitability, the current limited supply remains very positive for new aircraft demand. With year-to-date revenues of $2.4 billion in line with last year, we continue to expect full year revenues at or above $5 billion, including the first Global 7500 as it is expected to enter service towards the end of this year.

Looking at BBA's operating performance during the quarter. EBIT before special items was $111 million or 8.5%, supported by higher aftermarket revenues. With year-to-date margin at 8.7%, we are comfortably above the low end of guidance - of 8% guidance for the year. Looking forward to the rest of the year. The normal margin dilution associated with the introduction of the Global 7500 will bring us closer to our full-year guidance. We expect the Global 7500 ramp up to further pressure BBA's EBIT margin in 2019 as volumes rise, adding significant revenues with low, early unit profitability.

For 2020, the second year of production after entering to service, we maintain BBA's margin target of 8% to 10% with further upside as we move along the learning curve. From a market demand perspective, orders exceeded revenues by $200 million in the quarter, leading to an industry leading backlog of $14.1 billion. This implies our revenue book-to-bill approaching 1.2 for the quarter. We are encouraged by the ongoing market activity combined with our strengthening portfolio.

Moving to Commercial Aircraft where order flow was the highlight of the past few months on the CRJ and C Series platforms. We delivered a total of 18 aircrafts in the quarter including 8 C Series, 5 CRJs and 5 Q400s. This was a C Series best quarterly output since the aircraft entered into service. With regards to our regional aircraft, we are well on track to deliver 35 aircraft this year, as per guidance.

For the second quarter and year-to-date, our revenues totaled $616 million and $1.1 billion, respectively, in each case, including the C Series. As previously indicated, starting in Q3, we will no longer report those revenues and simply account for our share of the partnership's net results in Commercial Aircraft EBIT. As such BCA's revenue guidance for the year has been revised to $1.7 billion.

After six months BCA's EBIT loss is $139 million, improving as expected, relative to last year on significantly more C Series volume. And with the deconsolidation of the C Series going forward being replaced by the equity pickup, we see BCA's EBIT loss for the year reducing by $100 million to approximately $250 million. Moving forward, we are working to improve our regional aircraft business cost structure to drive better volumes and gradually restore its profitability.

Now, looking at Aerostructures. Revenues for the quarter totaled $455 million, 3% increase year-over-year, driven by internal programs. On a year-to-date basis, revenues were $900 million, tracking to full year guidance at approximately $2 billion. Growth in the second half of this year is mainly driven by the Global 7500 award packages. For the first six months, intersegment revenues increased from approximately 75% to 80% as C Series and Global 7500 production ramped up. This is expected to reduce to approximately to 70% by year-end as C Series revenues became third-party sales starting July 1st. Consequently, revenue eliminations will be closer to $1.4 billion for the year being $2 billion dollar revenues times 70%.

On the profitability side second quarter EBIT before special items was particularly strong at 12.5%, including a 200 basis-point one-time intersegment gain associated with the closing of the C Series partnership. With normalized margins around 10% year-to-date and integrating the early ramp-up cost of the Global 7500, we are confident Aerostructures will deliver better than 8.5% margin for the full-year.

Let me now provide you with color on the outlook for the rest of the year. On revenues, in addition to the deconsolidation of the C Series, we expect a typical Q3 reduction, particularly at BTA before the seasonal pickup in deliveries in the last few months of the year. Further, with demonstrated EBIT margin performance of 5.7% through June 30th, we are well on our way to maintain this level of profitability in the second half of the year with typical Q4 strength on stronger volumes.

Finally, as we head towards free cash flow breakeven, we expect sequential and year-over-year cash flow improvement in each of the next two quarters. This is driven by improving earnings and working capital reductions, particularly towards year end. We are reiterating the guidance updated last month.

To conclude, we are demonstrating our focus on executing our plan. This past quarter highlights our commitment to grow the business, profitably and with discipline. The flexibility we are building, positions us well to create further shareholder value.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Robert Spingarn with Credit Suisse. Please go ahead.

Unidentified Analyst

Good morning, everyone. This is Joe on for Rob. Thanks for taking my questions. First, on Commercial Aircraft, very impressive order haul for the CRJ product in the quarter. It's nice to see that momentum. I think the backlog more than doubled in the quarter, now stands at roughly three years of production at the current rates, give or take. What I really wanted to ask about is what you both alluded to in your remarks, which is the future profitability of the segment. And specifically, part one of my question is, if you're contemplating at this point raising the production rates on the CRJ, now that the backlog is expanded? But I also know, the volumes are only part of that equation. So, part two is really what you both said that the team is very focused on, which is reducing costs. Can you give us some more specifics or examples of the kinds of things that you're looking at? I think right sizing the footprint with Downsview is clearly a part of that. But what else can be done?

John Di Bert

So, I'll take that in a couple of pieces. First is that this year we are looking for 35 regional jets and props together. That's our guidance and we feel confident we will achieve it. So, my expectation on CRJ next year is that, yes, likely, we will have some additional volume added to production. And I think that reflects the good work that Fred and his team have done here in gaining market share and really position amateur cabin for a more growth. I think that the equation on profitability - I mean, there is going to be some typical playbook here. We are going to really look at the footprint, the BCA business now that it is ex C Series. So, we will make sure we have a lean structure across both programs. And I think that adding a little bit of volume here also is very beneficial to those programs. As you add units, especially at the current rates, that does bring improved cost structure.

Don't forget also that we have a very impressive installed base, over 1,200 CRJs in service today. And we also have over 1,000 Q series aircraft on the prop side. So, that also is an opportunity for margin expansion and top-line growth. In both cases that will be good for profitability. So, across the board, I think it's really about continuing to focus on adding volume and the team's well on their way there. It's about leaning out the cost structure, make sure we have very efficient programs, really focusing on that aftermarket, and then we'll take it from there. But, that's where we are spending the next several months of our work.

Unidentified Analyst

Great. I appreciate the color there. If I may just another quick one on transportation. You said the strength is pretty broad based growth across the different lines of business. Can you just give us a quick update on those various pieces individually, the trends that you're seeing in rolling stock versus signaling versus services, and just the latest on the competitive behavior that you're seeing in the marketplace?

Alain Bellemare

Clearly, as I said, I mean, it's pretty much across the board. It's on the rolling stock, on signaling and service. Clearly, signaling is a growing part of that business, there is no doubt about that, and service as well. So, we are focused on all three pieces to make sure that we keep on growing successfully. And this is a very competitive market. We are seeing industry consolidation. We are focused on improving productivity, making our operations more efficient, so that we can compete successfully in the marketplace. You are seeing the significant margin expansions over the past three years. We are very pleased with that. At the same time, we are making sure that we're going to provide the right resources to the team to keep on growing top line as well. So, that's kind of where we stand right now. So, good business, strong backlog, execution with a focus on growing it moving forward.

Unidentified Analyst

Great. Thank you both very much. I'll hop back in the queue.

Operator

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

Fadi Chamoun

Couple of questions on business jet. So, can you give us an idea about the demand that you're seeing across the various kind of family of aircraft? Is it more tweeted toward kind of higher end? And secondly, when we think about the introduction of the 6500 and 5500 at the end of 2019, are you seeing upgrades from the current book of business? I'm just wondering whether the production rate, as it relates to the old 5000 and 6000 will come off a little bit, as you kind of go to ramping up the newer aircraft. And how are these aircraft received generally in terms of orders this quarter?

Alain Bellemare

So, I think that what we're seeing is like very strong activities, the best we've seen in the past four years, and we're seeing that in North America, Europe and Asia. And if you look across the product mix, obviously, super midsize, large cabin and long range aircraft stronger, and at the bottom end for us at Bombardier. So, the good news there is we keep on increasing the backlog. So, we have a very strong backlog right now. And we are - we've just launched the 5500 and 6500. So, I mean, we're just starting to get traction. The response from the market was very positive. We're getting significant customer traction. In terms of all this phase from the 5000, 6000 to the 5500, 6500, I think it's too early to tell. So, we will see how we build the backlog on the new family, the 55 and 65. And at that time, I mean, we'll be in a better position to understand what the production mix will be.

Fadi Chamoun

Okay. But, are you seeing conversion of order from 5000 to like upgrade to the new upgraded aircraft?

Alain Bellemare

Right now, we're not seeing that. I mean, obviously, what is available is 5000, 6000. They bring a real good value proposition to customers. And 55, 65, they bring a different value proposition to customers. So, we're not seeing any shift right now. That's the reason why I'm saying it's a bit too early to tell. I mean, we just made the announcement at E-Base, [ph] so I mean just a few weeks ago. So, I think that we need to get a little bit more traction here on the 55, 65 before we really understand how this thing will move from one to the next, if it does; maybe it will not. So it's too early to tell.

Fadi Chamoun

Okay. One more question on Business Aircraft. So, you've mentioned the aftermarket was up 21% and you're kind of serving about a third of your active installed base. If you look at this kind of three to five years out, what is the potential that you can achieve in terms of service of the installed base? Is this typical for an OEM to do, what, half of the installed base, more than half? I'm just trying to understand the scope of the opportunity here.

Alain Bellemare

I think the scope is significant. I mean, we can do much better than this, and we can probably go easily about, 40%. And to do that, we're investing. I mean, we're investing in building our customer support network. And we have opened operation in London City and [indiscernible] we have some in Tianjin, China, and we're looking at more investment around the world. So, we have some good expansion ongoing as well in Singapore. So, all-in-all, we are positioning our self to be able to capture more of our own aircraft and growing it, and we are confident that we can double sales on aftermarket sales from where we are today by 2020.

Fadi Chamoun

Okay. And are the margins on these revenue kind of what we understand them to be in the higher teens or these investments you're making now, take time to mature the margin over time.

John Di Bert

Yes. I think that it's typical aftermarket margins, right, which are typically solid and often better than OEM margin. So, for us, this is a margin expansion opportunity. And the investments we're making, really, it's about bringing the feedback home, which allows us to offer all kinds of services and our engineering capability and upgrade. And those typically have good margins and also create a lot of value for customers.

Fadi Chamoun

Thank you.

Operator

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

Noah Poponak

John, it looks like, you maybe had about $100 million, maybe little more of outperformance and free cash ex-Downsview versus what you said just a quarter ago. If that's true, could speak to the drivers of that? And does it make you feel like you're more likely deposit of 150 than the negative 150 for the year or is it just back-end loaded enough to just kind of think breakeven? And then, I also wanted to ask on free cash, as we move out of '18 into '19, you have pretty specific '18 guidance and pretty specific '20 guidance. Starting to wonder, if you'd maybe speak to some finer points on '19 because, even if not a specific number, just some of the bigger moving pieces we should be calibrating for that kind of transition here in the free cash?

John Di Bert

I'm going to try to take a stab at the two parts of your question. So, I'd say that the performance in the front end or the first half of 2018 our free cash flow, I would say is bang on plan. When we talked last year, we said with the first half of '18 we'd look at the first half of '17. First half of '17 I think was 1,160, so 1160 of usage or somewhere. So, we come in at 1.1. I feel very good about that. Obviously, these things hard to calibrate down to $50 million or $100 million. So, the strength in Q2 is really about just us doing what we set out to do. And the annual, what I like is that for example in the 7500 driving the program very well. So, disciplined on development, progressing nicely. You saw that we even improved the performance characteristics of the aircraft at E-Base [ph] with better range. So, all of that is working as planned.

In addition, I'd say that team is doing a good job in terms of advances on the 7500. So, that was an important piece. And we have the right level of investment in BT. So, I'd say, part for the course doing what we said we wanted to do, and that sets us up very nicely for second half strength and then really Q4 finishing strong to drive that breakeven. So, as a comment on the full-year, no changes. We still expect the range breakeven, plus or minus 150. I think, that's still the appropriate guidance. And we will focus on execution and deliveries in the second half. I think that when we talk a little bit further out for '19 as an example, as we said for 2020, we remain very focused on our objectives and targets, which you can expect I guess very broadly. We will get into the guidance later this year, but we have development reduction that should be good for free cash flow. So, that means that CapEx will come down. The 7500 will start to deliver aircraft. So, we will continue to add inventory there, but I expect 7500 then to start to stabilize over time with respect to investment and inventories.

And then, overall, I mean, the key takeaways I think are that you can expect some incremental cash flow year-over-year. You can expect improved earnings to continue year-over-year, and margins continue to get better. Most of the businesses, like I said in my commentary, I think that you will see some dilution from the 7500. But other than that, I think we continue to do what we're doing, which is growing profitability.

Noah Poponak

Between EBITDA from the program and then customer advances coming in seemingly offset by, I would guess, working capital building, maybe not. Is the 7500 cash flow positive '19 versus '18?

John Di Bert

This one, I'd rather take later in the year. I mean, we're going to figure out exactly what production rates we want, not only for '19 but the '20 as well. I think, that's going to have an impact on cash generation from the program next year as we will be adding volume obviously in 2020 towards maturity. So, we will work through all those things. And I would say that what you can expect from the 7500 likely is EBITDA growth. So, we will be adding EBITDA for sure. I think from overall margins and all that that will be a de minimis kind of the contribution. So overall, for the program, I think where we expected it to be today and also online where we expected to produce for 2020, which is strong top-line, improving margins and then obviously, a cash contribution in that 2020 plan.

Noah Poponak

And I just had one more which is when you were speaking to the BA margin, you talked about the ramp of 7500 next year, maybe being a little dilutive, getting in the eight to 10, 2020. And then, I think you said upside beyond that. And I think you've spoken to that a little bit in the past. But, I wondered, if you could maybe just provide a little more detail on what you mean there? What are the moving pieces? I'm guessing this 7500 fully ramped added to run rate margin is pretty accretive to the margin, given the price of the airplane. But, can you put a little more color around that comment?

John Di Bert

Yes, for sure. I mean, I think the franchise at BA has runway, past 2020. We are not going to introduce new guidance here, but the reality is we have given our self a range of 8% to 10% that makes, that contemplates a little bit of volatility or a range for us to be able to have a full mature 7500 in production 2020. But once you get beyond that, you've got a business adding aftermarket revenues that's going to be accretive to margins in the longer term. You've got a business that has sized itself very efficiently, nice lean at about 135, 140 aircrafts a year. You've got scale coming from the 7500. And then, you potentially have at some point in time some improvement in overall volumes. So, this 5500 and 6500 another good example of what we think can be margin creative. We've got two premium value aircraft there in the sense that they will add customer value, and with that I think obviously better pricing. So for us, BBA is very well positioned to work right into double digit margins.

Noah Poponak

Thank you.

Operator

Thank you. Our next question is from David Strauss with Barclays. Please go ahead.

David Strauss

John, did I hear you say CapEx this year at $1.4 billion? Was that correct?

John Di Bert

Yes, you did.

David Strauss

Is that higher than - I thought before you were kind of talking $1.2 billion, did something change there?

John Di Bert

I think, we had indicated something around $1.3 billion if I recall correctly. One thing that you'll expect that Q4 will probably have in excess of in the $100 million to $200 million range of what we call vendor non-recurring or essentially there is a non-cash CapEx where developments in the supply chain yet capitalized at certification of program, and then becomes part of the long-term part pricing. So, essentially, vendors pay for developments of components and then after that receive a premium on part delivery. So, there is capitalization that happens there as non-cash. So, in the end, I mean, for us, for all intents and purposes still talking 1 to 1.3 of cash outlay for the year on CapEx.

David Strauss

And then, what about incremental investment to get the global 5500, 6500 to market? Have you already funded a fair amount of that or how does that profile look?

John Di Bert

Yes. Quite a bit of that's behind us. And so, we - I think, whatever remaining CapEx required here over 18 months is well contemplated in our cash flow guidance. It's also within the shape of our CapEx curve which will come down.

David Strauss

Okay. And last one for me on the global 7500 certification. Recently, we've seen some slippage in expected certification dates for some other programs from some other manufacturers, and they cited paperwork just being more complexity in the process. Are you seeing anything similar to that from your standpoint? Are you seeing - I know you're still on track to get certification this year? But are you seeing any sort of slippage at all within that?

Alain Bellemare

Right now, we're in final phase of certification. We've almost done in with flight testing. We're going through the paperwork, as you just said. So, I mean certification is expected soon. We are getting ready for full production. So, the team is hard at work, ramping up. We have about like almost 20 ship set on the production, on the assembly line right now. So, we still are tracking for certification very soon and entering to service by the end of the year.

David Strauss

Okay, thanks guys.

Operator

Thank you. Our next question is from Seth Seifman with JP Morgan. Please go ahead.

Seth Seifman

Alain, in the MD&A, you guys discussed trying to sort of improve or come to better arrangement with Triumph, the wing supplier on Global 7500. And it's not that typical to see suppliers mentioned by name. And so, I was wondering if you could talk a little bit about the dynamics there and what the opportunities might be.

Alain Bellemare

Yes, for sure. So, I mean, the first here, Seth, is we have a great wing and the design is complete. The performance is solid. And in fact performance of the aircraft, including the wing, was such that we expanded the range of the aircraft to 7,700 nautical miles. So, this is a very good. We are in business discussion with Triumph. That's the reason why you're seeing this in our MD&A. We are working with them in a very collaborative way to make sure that we find the best long-term solution for the program and for both Triumph and for us. The good news right now is like - as I just said, we have almost 20 wing sets at different stages of completion in our production facility. And we are all focused, Triumph and us, on ramping up the program successfully.

Seth Seifman

Great. Thanks very much.

Operator

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

Cameron Doerksen

Just a couple of quick questions for me on the BT margin. For the first half of the year, the margin's been quite strong and really trending ahead the full year target. I'm just wondering if there is anything in the back half of the year in BT that would from a mix perspective that would result in margins that are lower than what you've been reporting in the first half of year.

John Di Bert

So, I think that I mean, the one thing that we have been doing very intensely here is building out capability and capacity to get into intense deliveries. And in there, you know that we have a product mix that relates back to some more challenging, larger projects in the past. And those are coming into intense delivery phase. So, you do see a little bit of that. And you'll continue to see some balanced product mix over '18, '19 as we go into '20 and we kind of complete some of these large framework agreements. I think that guidance still here is right. We've got the expectations of being over 8.5% margin for the business and the second half coming down little bit, seasonally Q3 obviously little bit lighter and Q4, typically stronger. But, we feel good about the business. So, we will see where we end up at the end of the year. For now greater than 8.5 [ph] still feels right I'm pleased with the performance in the front half for sure.

Cameron Doerksen

Okay. And are we actually seeing sort of the full impact yet of the transformation that BT's undergone? I'm just thinking about some of the workforce, the changes you've made there. I mean, is that fully flowing through yet, or is there more to come from that and later this year into 2019?

John Di Bert

I'd say that at BT, we're about 70% through the restructuring, so probably better than two-thirds back end of '18 but certainly into '19, still some additional work to do. This is really about the center of excellence optimization, and that takes some time, find it right, and obviously we have alignments with labor and we have some really good plans for a lot of major centers. So, working through all of that just takes a little bit of time. The good news there is that's balancing factor, it's what we add continuous productivity and improvement to the cost structure we get better, focused on delighting customers and ramping up production and growing the top-line and at the same time, working through some of the more challenging contracts. Overall, what it really leads us to is the 2020 targets, which is $10 billion franchise, 9% plus margins, and delivering a cash, a dollar of cash, or a dollar earnings, and the like that business.

Cameron Doerksen

Okay, thanks very much.

Operator

Our next question is from Ronald Epstein of Bank of America. Please go ahead.

Ronald Epstein

I have a couple of quick questions for you. So, one for John first. How do you think about closing the funding gap with the case, right? I mean, there is about a $1 billion funding gap and it's pretty expensive? How do you think about closing it? And if you were, how would you financing it?

John Di Bert

We are going to work on that, Ron. So, maybe I want to do the whole deep briefing right here, but I think there is opportunities for us in the sense that I think capital markets are open to us, obviously. And certainly here, we are going to look at our own ability to generate organic cash, our own cash. And then, we have a good relationship as well in the case. So, depending on how they see things, maybe there is a conversation there to have as well on how to do this, in phases. But ultimately, these are all options are open to us. And as we have said, the current cost of that capital is little bit high. So, 50%, there are I think a multitude of options open to us that are more cost-effective. And we will look at all of them. So, we have a first opportunity in the spring of '19. So, right now, we are going to focus on making sure we finish the year strong, get the job done on free cash flow breakeven. That will put us in a position where we've got about $3.25 billion, maybe $3.50 billion of our own cash on the balance sheet. And that's a lot of agility for us. So, to your point, I think there is options out there to finance it for worth of the case you're asking.

Ronald Epstein

And then, Alain, just following up on one your comments. You mentioned in the prepared remarks that you are seeing increasing - in the signaling contracts in BT. What's going on there? Why you are seeing that? And then, B, if you were to really try to focus more on signaling, what could you do?

Alain Bellemare

More and more when you bid for packages, I mean, the signaling comes a significant piece of the contract. So, we are seeing that increasing from contract to contract. We are focused on signaling. We have a good solid signaling business today and working Laurent, we are looking at all that we keep growing it. So, it's too early to tell, but we are clearly looking at making this, our signaling business stronger moving forward.

Ronald Epstein

And then, finally back to biz jet, everybody is kind of talking biz jets, but nobody is talking about Lear. So, you delivered a couple airplanes. Lear seems like it's sort of limping along. What's the plan with Lear? I mean are you seeing any increased demand for the Lear product? Do you want to invest in that business to revitalize it? Do you want to sell it? How do we think about Lear, because it seems to be sort of the forgotten piece of the portfolio? At least externally, it looks that way.

Alain Bellemare

Yes. This is a great franchise, to start with. And as I said, I've been saying this many, many times, we have over 2,000 aircraft and all 2,000 Lears flying today. So, it brings a very strong aftermarket revenue stream, and we like that. And that is part of our plan to keep growing aftermarket moving forward. So, as for the production line itself, as I said, I mean, there's clearly some pricing pressure in the light category. And we have kept the production line going at a much lower rate. And we've been pretty successful at balancing supply and demand at that - at the level where we are right now, we'll produce about a dozen aircraft a year. It is the best aircraft and its class known by all, [ph] it costs a little bit more. So, I mean, our customers are bit more price sensitive. I mean, they might be looking at other options. But if they're looking for the best aircraft in the light category, the Lear is. So, that's the reason why, I mean, we haven't made a decision yet. The decision that we've made effectual by not doing anything else is to keep it going. And we are keeping it going at a lower rate and we're leveraging our great installed base.

Ronald Epstein

Okay. Great. Thank you.

Operator

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

Walter Spracklin

I'd like to come back to just to your - on the regional side, you revised your BCA targets ex deconsolidation of the C Series for 2018. Can you give us your - the same targets now, just so we have them for the 2020, ex the BCA or ex the C Series?

John Di Bert

Yes. So, there will be no change, right? I guess, if you recall, Walter, let me just calibrate here. We had called for a breakeven program on the C Series in 2020, which would then suggest that consolidated or unconsolidated the impact on the long-term is the same. We have franchise here that I think now is positioned to gain a lot of momentum with Airbus. So, the contribution of profitability will likely come post 2020. And then, as you know, we have put call feature that allows us to essentially generate a lot of value from the program in the longer term. For BCA itself, of course, there is going to be an impact on the top-line. So, you should expect revenue in the $1.5 billion range. And at the time we called breakeven BCA, I would suggest now that it would be positive to earnings at that time as Fred and the team restructure and grow the business.

Walter Spracklin

And just going back to the business jet commentary, your prepared remarks, John, you kind of indicated that with a ramp-up, we would see margins kind of dip in the fourth quarter, the ramp-up. And then, probably trend, we'd see that same kind of pressure in 2019. But, I think you still said you're going to hit the 8% to 10% despite the pressure. So, can you frame that to me in that or you - are you probably coming in at the low-end of that 8% to 10% range in 2019 and then get to the high-end of the range by 2020? Is that - I'm just looking at the cadence so that we frame expectations appropriately, given some of the moving parts between aftermarket service contribution and the offsetting impact to the ramp-up of the new aircraft?

John Di Bert

Sure. So, Walter, so, I think this is just some math here. Essentially, you're going to have a production rate in 2019 that will probably be somewhere in 15, 20 aircraft, in that range for the 7500. That's going to bring some significant top-line when we talk about $70 million aircraft. And I would say that the profitability on those aircraft should be very limited, particularly the front end of deliveries. So, I expect an EBITDA contribution, not so much from an EBIT point of view in '19. And then, as we get to a mature production rate and obviously we get to more standard unit costs in 2020 and beyond, you'll see profitability and then, you will see accretive profitability and margin expansion in the program. So, the 8% to 10% for 2020 stands. And I would say that at this point in time that's still a good range and it could be up or lower end, we were not differentiating at this point. I think it's too early. But, I feel good about the high single-digit. For 2019, expect that the BBA will continue to grow profitability. But margins will dilute. So, I would say that yes, you could conceivably come in below the 8% for '19. But that's okay because the earnings and cash flow will continue to grow and will position the program for mature production thereafter. And like I said, when I spoke to Noah about BBA, we see tremendous opportunity, past 2020.

Walter Spracklin

And I guess that's just to kind of reflect, I mean, I think when you provided your 2020 targets, many announced back in 2015, and investors looked at those targets as a means of valuing the company, given how strong they were, those 2020 targets relative to where you were in 2015. Now, that you're delivering on that and the share price has been reflecting. And I think as we go into 2020, many of the divisions within your 2020 targets are at a run rate basis. But, I would put the exception there being on your business jet division, given some of the trends that you just mentioned with respect to the ramp-up of the 7500 and the aftermarket contribution. It's also ramping. So, just to say that - I know you're not prepared right now to give post 2020. But, that would be a great number to have, given that it will - 2020 is not a normalized basis for business jet and any indication is to long run EBIT margins in that division, which again I think are depressed in 2020, given where you are. Just that even a target range or what you would consider a normalized EBIT margin on that post 2020 be very helpful.

John Di Bert

We're in a very I think the dialogue when we have our investor days and typically have a good chance to talk about those kind of longer term goals and objectives. I'd say, for now, to be very honest, we feel really good about where we are at the midway point that lots of progress. You mentioned it in 2015, not lot of people wrote down the numbers we gave for 2020. And I think now, people can feel pretty confident that we are well on our way. And that's a great foundation for post 2020 performance. And you can see that a lot of the things that we're doing do have runway past 2020. So, you guys are also pretty smart and you can sort of I guess anticipate some of the potential, but we'll keep the conversation for our investor day where we can get into little bit more broader detail.

Walter Spracklin

Okay, looking forward to it. Thank you very much.

Patrick Ghoche

Operator, we will take one last question, please.

Operator

Thank you. Our last question is from Turan Quettawala with Scotiabank. Please go ahead.

Turan Quettawala

I guess, John, if I could just talk a little bit about margins again, I understand that the margin target or the dilution in margin at BB obviously next year because of the 7500. But did I hear you correctly in saying this consolidated margin is still potentially going to be flat to up next year, I think in one of your comments? And if that's the case, can you talk a little bit about maybe the offset because it probably implies a pretty strong margin at BT?

John Di Bert

So, you guys really want to get to this investor day event today, you want - it's clear. So, let's focus on where we are, which is great first half, honestly right on the track for '18. And Turan, I'll keep my comments light on this but yes, I do expect margins to improve into '19 across the business, as I said, not withstand dilution at BBA. We will have a very well positioned BCA franchise now given deconsolidation of C Series. Team is going to be working very effectively here on trying to improve profitability with our Q and our CRJ that should be a contribution. Of course, we do continue to see strength at BT, and we would like to continue to see another step forward there. But, that's to be determined at investor day. And overall, the business will continue to focus on productivity, cost effectiveness and top-line growth that usually brings some scale as well. So, all those things I think are pushing us in the right direction. And we will give you guys a little bit more color in December. In fairness to everybody, I think, by then, we will consider our planning cycle and we'll better authority on what we can see for '19.

Turan Quettawala

Perfect. That's really helpful. Thank you very much. And if I may ask just one more quickly here, I don't know if you can really comment on it. But, Alain, do you want to talk a little bit about maybe potentially Boeing's potential involvement her in E-jets, and how you are thinking about the competitive environment maybe on the CRJ?

Alain Bellemare

Honestly, I'm not going to comment, Turan, on our competitors. I would just say that the first thing is, I'm very pleased with the partnership we have with Airbus on the 100 to 150-seat class aircraft. It is the best Airbus, 220 is simply the best, better aircraft out there. So, there is a great opportunity there. There is potential value creation for all. So, we are excited by that. So, I mean that has been the focus.

On the CRJ, this is a market that we know. We have a large installed base. We have great customer base. And we now have improved the cabin to provide passenger with a great experience. It has been very well received by airlines. And we as John said earlier, Fred and the team, they are focused right now on creating value by increasing volume and reducing costs. And that's what we will keep doing. So, I think there's not much more to add to this.

Turan Quettawala

Okay, perfect. Thank you so much. Thank you for filling me in there.

Operator

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