Bombardier Inc. (BDRBF) CEO Éric Martel on Q2 2021 Results - Earnings Call Transcript
Bombardier Inc. (OTCQX:BDRBF) Q2 2021 Results Conference Call August 5, 2021 8:00 AM ET
Company Participants
Francis Richer de La Fleche - Vice President of Investor Relations
Éric Martel - President and Chief Executive Officer
Bart Demosky - Executive Vice President and Chief Financial Officer
Conference Call Participants
Cameron Doerksen - National Bank Financial
Konark Gupta - Scotiabank
Benoit Poirier - Desjardins Capital Markets
Walter Spracklin - RBC Capital Markets
Robert Spingarn - Credit Suisse
Noah Poponak - Goldman Sachs
Seth Seifman - JP Morgan
Stephen Trent - Citi
Operator
Good morning, ladies and gentlemen, and welcome to the Bombardier Second Quarter 2021 Earnings Conference Call. Please be advised that this call is being recorded.
At this time, I would like to turn the discussion over to Mr. Francis Richer de La Fleche, Vice President of Investor Relations for Bombardier. Please go ahead, Mr. Francis.
Francis Richer de La Fleche
Good morning, everyone. And welcome to Bombardier’s earnings call for the second quarter ended June 30, 2021.
I 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 financial performance of the corporation. There are risks that actual events or results may differ materially from these statements. For additional information on forward-looking statements and underlying assumptions, please refer to the MD&A. I’m making this cautionary statement on behalf of each speaker on this call.
With me today is our President and Chief Executive Officer, Éric Martel; and our Executive Vice President and Chief Financial Officer, Bart Demosky, to review our operations and financial results for the second quarter of 2021.
I would now like to turn over the discussion to Éric.
Éric Martel
Thank you, Francis. Good morning, everyone. And thank you for joining us. We certainly have a lot to cover today, and we are excited to share our progress. In a few moments, Bart will provide more detail about the improved guidance we issued earlier this morning, and talk about our proactive debt management actions.
But first and foremost, I’m proud to share that the second quarter was exceptional on all fronts. I want to particularly - I like the $91 million in free cash flow the business generated. Besides the fact it is an improvement of more than 840 million year-over-year. It is a window into the longer term potential of our business as we continue to drive our strategic plan, grow earnings and reduced interest costs.
So year-over-year over year, Q2 can be summarized simply as much better, better revenue, better profitability, better cash generation, better service revenue, and perhaps most importantly better aircraft sales. Reaching an in core book-to-bill of 1.8 on units is something we haven't seen in a few years.
I have had activity within all our customers segment to achieve this, demand in North America with traditional customer is strong. We are also very engaged with our fleet customers who are seeing new customers of their own. And finally, we are very active on the specialized aircraft front.
I have kept a close eye on rebuilding backlogs across our portfolio. It is the foundation to predictable success. Just as much as the better cost base we are creating through our work on the global 7500 learning curve and our targets for $400 billion in recurring saving by 2023. I’m very proud of the team's performance, resilience and engagement in weathering the storm throughout the pandemic.
The market now is certainly starting to give us tailwind. I will speak to this in a few moments because there is room for optimism. But our plan, as we mentioned at Investor Day is designed to perform without extra market boost. We will continue to focus on being predictable and discipline in our operation.
That said, the market landscape has maintained an upward trend we noted when we last spoke, macroeconomic indicator continued to point to favorable condition. In certain cases, the trends have evolved into strong rebounds.
We have seen a strong rebound in business line. But border restrictions are still in place between key country payers that larger aircraft typically connect. There is still room for activity to improve in market like Asia. All signs point to further potential in business aircraft utilization as we progress through the next few months.
At this stage though, it is important we continue to maintain a prudent approach, and focus on what we control. We do however had increased confidence both in our plan and the market's availability to sustain this momentum. We are confident in our path to deliver approximately 120 aircraft as well as higher margin than planned this year.
This stems from our all around solid execution in the first half of the year. Our greater confidence in market momentum and most importantly our ability to accelerate our cost reduction initiative implementation.
Before I speak to the rest of our plans, I would like to circle back to one of the most loadable markets indicator, which is pre-owned aircraft availability. It is now out-performing pre-pandemic levels with most recent reports showing around 4% to 5% of the worldwide fleet for sale, we have reached a two decade low in availability with very little, if not in the younger vintage aircraft being available.
We see this pre-owned trends as an important leading indicator to new aircraft demand. It is also else creates a better pricing landscape for new transactions, all while helping asset value retention for its existing aircraft owners. We also see the pre-owned segment as an unfortunately to further diversify our revenue, as we outlined in our Investor Day.
To that end, we have recently launched a certified pre-owned aircraft program, which is a win-win in this market place. This program sees Bombardier leveraging our service network to seek out and transform available aircraft into a more desirable offering for customer shopping in that fear.
We also can choose to expand our service network reach and footprint. During the second quarter, we received keys to our Singapore service center expansion with construction complete. We are now turning our focus to staffing and operationalizing the center nearly quadruple physical capacity in-line with strong demand. Our similar project into UK, Miami and Australia also remain on-track.
Before I pass the floor to Bart, I would like to quickly touch on progress toward the other opportunities we outlines at Investor Day. We have excellent line of sight on our cost reduction target. The 100 Global 7500 aircraft is moving toward the completion phase now, and we liked the progress we are seeing from the team. If anything, we are working the learning curve slightly ahead of plan.
On our recurring cost savings plan, as we previously mentioned, we had a small portion of the 400 million left to identify. We have made great progress on that front. We also have begun identifying and actioning further ties on projects.
But more importantly, this will become the foundation of our continuous improvement to lean mindset. With all of this, the team's work is already contributing more than originally planned to our bottom-line this year, as you will see when Bart detail the guidance.
And finally de-leverage, we have spent a lot on this over the past three months. We have responsibly deployed capitals towards clearing the three-year runway we set out with only one billion left to go toward that objective. We have also seen refinancing opportunities, where it makes sense.
So, let me stop here and turn it over to Bart to provide the details of our exceptional second quarter results, our raised full-year expectations. And what we have accomplished in terms of deleveraging, our balance sheet. Bart, over to you.
Bart Demosky
Thank you very much, Eric. And good morning everyone. As we turn the page on the first half of 2021, I’m very pleased with what we have achieved so far this year. As Eric just outlined, we have made considerable progress on all of our priorities.
Financially, we had strong performance to-date, which includes a 9.3% first half adjusted EBITDA margin, and positive free cash flow generation in the second quarter. We have also announced today that we are revising our full-year guidance upwards across all metrics. And I will provide you with a little bit more color on this shortly.
That said, we are taking nothing for granted. Our management team knows there was a lot more work ahead of us. And we remain fully focused on creating long-term value and reaching our 2025 objectives. Our strategic plan remains intact and we are confident that we will continue to generate strong results in the future.
Before we dive into our Q2 results and guidance revision, I would like to begin by adding to Eric's comments regarding the progress on the four strategic priorities we outlined during our Investor Day.
First the goal of 7500 learning curve is performing to plan. We remain on-track to our objective of 20% unit cost reduction between the 15th and 100th aircraft. And we continue to have cost visibility well into next year. Program margins are improving quarter-over-quarter, and we expect margins to be accretive by the end of the year.
Second, our $400 million cost reduction plan is continuing to pick up speed. We are now expecting to exceed the $100 million objective we set for ourselves this year, and remain on-track for the full 400 million and run rate savings by 2023.
To that end, we have already identified and are implementing actions to capture 325 million of the 400 million target. And we expect to launch a number of initiatives in the coming months to close the remaining $75 million gap.
Regarding our aftermarket expansion, our plan remains on-track. Our fleet flying hours are back to pre-COVID levels. Which bodes well for our business entering the second half of this year, as flight hours translate to more service events, as well as an increase in pay for our revenue streams. Finally, we have continued to make significant progress over the last few months on deleveraging our balance sheet.
Now, I do know that there have been many press releases in the second quarter with regards to our capital structure. So, let me give you a summary of where we stand as of today. First, we have reduced our gross debt by 2.7 billion since the start of the year, and have also cleared 75% of the maturities we were facing in the 21 to 23 window.
As Eric said, we now have approximately one billion remaining to clear a maturity runway that will be there until December of 2024. Our bondholders have been very supportive of our plan, allowing them to successfully issue 1.5 billion of new debt, of which 1.2 billion matures in 2026 and 260 million matures in 2034.
When combining all of the actions taken so far, we have increased our average years to maturity almost 50% from 3.4 years to five-years currently. We have also reduced annual interest costs by more than 200 million so far, and we still have room to further optimize.
With over 2.1 billion of pro-forma liquidity at our disposal, we have optionality going forward. Overall, our plan continues to progress. Our objective is to build a three plus year maturity runway, seek opportunistic refinancing of our existing debt and work to optimize liquidity.
Now during our Investor Day, I mentioned that our capital structure approach would be phased. We continue to consider all of our options and also take into account changing market conditions, as well as the performance of our own bonds, and you should expect us to continue this methodical and phased approach in the future as we progress towards our long-term goals.
So with that let's move on to our Q2 results, which continue to build off our strong Q1 performance. Total revenues for the quarter reached 1.5 billion resulting from 29 aircraft deliveries and 295 million in aftermarket revenues. Reported revenues are up 25% year-over-year, and more importantly, up to 50% when adjusting for the impact from the divestitures we made in commercial aviation, and aero structures.
Our business aircraft year-over-year revenue growth was a result of nine incremental deliveries, as well as improved mix. Large cabin aircraft accounted for a higher content of deliveries going from nine in 2020 to 17 this year. This includes 11 Global 7500 aircraft demonstrating that we continue to smooth out the delivery profile for this platform.
For the aftermarket business revenues continued their quarter-over-quarter recovery towards pre-COVID levels increasing from 269 million in Q1 to 295 million in Q2. This represents an increase of 29% versus Q2 of last year, demonstrating a strong recovery year-over-year, overall flight hours for the Bombardier fleet and to Q2 back at pre-COVID levels with North America going strong and ours in Europe starting to ramp up.
As I mentioned earlier, divestitures did have an impact when comparing year over your reported results. Revenues from aero structures in commercial aviation accounted for a 225 million year-over-year reduction in revenues in Q2 and 625 million year-to-date.
Moving to earnings total adjusted EBITDA for the quarter was 143 million, representing an EBITDA margin of 9.4%. Adjusted EBIT grew 32 million from EBIT margin of 2.1%. Our adjusted EBITDA increased 112 million year-over-year.
When looking at EBITDA margins, this marks an improvement of 690 basis points to 9.4% versus the 2.5% in the same quarter of last year. We also saw sequential quarter improvements versus Q1 of this year.
The year-over-year improvement is attributable to the following factors. First, on the new aircraft side, we delivered more aircraft than in 2020. We also benefited from an improved delivery mix due to the higher content of large cabin aircraft, which typically come with higher margins.
On top of this, the Global 7500 aircraft margin contribution is a significant tailwind versus 2020, and continues to sequentially improve versus the first quarter of this year, on-track with our objectives from margins to be accretive to Bombardier by the end of the year.
Turning to our cost reduction efforts, we have already seen more than half of the 100 million savings targeted for this year to materialize. And we now expect savings from the cost reduction efforts to be approximately 115 for the full-year, partially contributing to the increase in our EBIT and EBITDA guidance.
Continuing with free cash flow, we saw consolidated cash generation of 91 million in Q2, which included approximately 60 million of non-recurring charges, adding to the 100 million we spent in Q1. As a reminder, we are planning for approximately 200 billion in no-recurring cash charges for the full-year of 2021.
Our Q2 free cash flow result was underpinned by strong earnings, as well as positive working capital performance, stemming from strong quarter activity and disciplined inventory management. Advanced levels increased by 318 million in Q2, as our unit book-to-bill build reached approximately 1.8. And our overall backlog grew by 300 million to 10.7 billion.
As expected global 7500 deliveries continue to outpace orders. But we expect this to stabilize as we near the targeted 18-months to 24-month backlog window. It is important to also note that the interest payments remained high at 237 million in the second quarter, which is comparable to the 243 million we paid in Q2 of last year.
This is a result of paying the accrued interest on debt which was being retired. However, we will begin to see meaningful reductions to our cash and interest costs in the second half of this year, as we start benefiting from the deleveraging actions we have taken.
Now on to full-year objectives. After a strong first half based on solid execution and positive market momentum, we have made tremendous progress on building backlog and also find our production nearly sold out for the remainder of the year. As such, we expect aircraft deliveries to come in at the high end of our original guidance at approximately 120.
Impacts with seasonality over the summer months will result in a calmer Q3 versus Q2 before and expected strong delivery output in Q4. This increase in deliveries coupled with the positive trends and aftermarket flying hours is driving an increase in our top line expectations to now be greater than 5.8 billion up from prior guidance.
Looking at EBITDA margins, the combination of nearly sold out skyline for the second half of the year. Faster achievement of our cost reduction actions, and year-to-date EBITDA margins of 9.3% give us increased confidence in our full-year EBITDA performance.
As a result, we are raising the expectation to greater than 575 million and EBIT to greater than 175 million. And this implies EBITDA margins for the full-year in the 10% range, versus 9% based on our original guidance. Q3 EBITDA margins should again be in the 9% range, as mentioned last quarter, before a stronger finish to the year.
Finally, we have raised our free cash flow guidance by 200 million to better than 300 million of free cash flow usage, which does include the 200 million in non-recurring outflows. This is a product of the increase in our profitability guidance, coupled with stronger working capital performance and increased certainty surrounding interest costs.
Given our year-to-date free cash flow usage is 314 million we expect to be positive for the second half of the year. Now, despite all the encouraging signs we are seeing, there does remain many uncertainties mostly around economic recovery and reopening.
And for this reason, we continue to be prudent in our free cash flow estimates. Again, considering the summer seasonality, we expect Q3 to be quieter than Q2 before a stronger finish to the year.
So to conclude, we have achieved a lot so far this year, but it remains a transition year. The plan shared in early March remains on-track and we continue to focus on becoming a more predictable, profitable and resilient business aviation company.
We remained focused on executing our strategic priorities and have made significant progress this year. We will keep clear, transparent communication with all of our stakeholders as we continue to reach milestones in the future.
Thank you very much. With that, I will turn it back over to Francis to begin the Q&A session.
Francis Richer de La Fleche
Thanks Bart. I would like to remind you that Bombardier Investor Relations team is available following the call to answer any questions you may have. With that, we will open up the line. Operator we are ready for our first question.
Question-And-Answer Session
Operator
Thank you. [Operator Instructions] Our first question from Cameron Doerksen from National Bank Financial. Please go ahead.
Cameron Doerksen
Thanks very much. Good morning. So just wondering, if you could talk a little bit more about, I guess, the new order activity that you are seeing for business jets. How has that trended, I guess, into Q3, are you seeing similar strength? And I'm also wondering if you can comment a little bit about the pricing that you are seeing on new orders and how that compares to what is in the backlog.
Éric Martel
Great question Cameron. So, first of all, we are foreseeing the same momentum in Q3 that we have seen in Q2. So, the level of activity, especially in North America remains very strong. The rest of the world is picking up.
I think we have mentioned also, all successful, I think the fleet operator are in the current environment and as you know Bombardier is probably better positioned than any OEM with the fleet operators. So clearly for us, it has been an interesting journey in that sense.
And in terms of pricing, on your question on pricing, we are very happy to what we are seeing right now. So, pricing is firming up. We have seen it going through Q2 and clearly the backlog that we have been able to generate in the last quarter, which was over 50 airplanes is giving us good confidence. That is one of the reasons today that why we are capable of improving our guidance, towards the rest of the year.
Cameron Doerksen
Okay, great and just to follow on that, I just also wonder what you are seeing on kind on trade-ins. Is there any kind of changes that you are seeing there, are you being less aggressive or you are feeling you have to be less aggressive on taking trade-ins?
Éric Martel
There is not many airplane as I said earlier being available out there. But when we have an opportunity to trade in, we look at them one-by-one. And if it makes economical sense for us especially with the new pre-owned program that we have just launched a couple of weeks ago. We show probably interest there of bringing an airplane in, re-certifying that airplane for the market which means it is right now.
So, clearly, it is a case-by-case depending on the state of the airplane. But again, there is not that many available, but we are very selective and being careful there, but we believe that we are probably better positioned than anyone to add value to those legacy airplanes.
Cameron Doerksen
Okay, great. Thanks very much.
Operator
Thank you. The next question is from Konark Gupta from Scotiabank. Please go ahead.
Konark Gupta
Good morning, and thanks for taking my questions. So, I'm wondering the book-to-bill ratio of 1.8 times was pretty strong. And as you mentioned, Eric, being the best year I have seen in many, many months or years, maybe how much of this strong demand is driven by you think travelers, who were previously flying commercial and what are your customers especially fleet customers telling you about sustainability in the demand?
Éric Martel
So, as we indicated before, thanks Konark for your question. We clearly see new customer, a bigger percentage probably than usual on new customers. But clearly, I think where there is much more momentum right now was with the fleet operator.
So, I think that the people that use to fly commercial, right now, for safety reason maybe and also availability of connection, I think and those that can afford it, they are shifting towards fleet operator more and more which creates quite a bit of demand for the fleet operators.
So, I would say probably, that this is where there is a strong momentum right now. And as I just said, we are very well positioned Bombardier towards the major fleet operator across the globe. So, that is great for our business, but also the same time on those non fleet operator, personal user, we see new entrant, but we also see people renewing their fleets, and they have been with us for a long time and refreshing airplane in that markets.
Konark Gupta
Great, thanks, Eric. And then just to follow-up on the backlog here. So it was up $300 million sequentially, the book-to-bill ratio and units was pretty strong and assuming there has been more order activity perhaps and the smaller or medium sized jets versus global so is that correct. And if you can provide any color on this? Thanks.
Éric Martel
Okay, so clearly we are extremely happy with our backlog strengthening. And I think I have said it before we had clearly some program where our backlog was very low. Now, right in front of us we have good backlog on every single program, which gave us that predictable level and better visibility.
And again, I think having better visibility is giving us predictable success on the delivery on pricing on a lot of fronts. So, clearly the backlog right now is better distributed, I can see it this week on all fronts on all programs.
Konark Gupta
Okay. Thank you.
Éric Martel
Thank you.
Operator
Thank you. The next question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.
Benoit Poirier
Yes. Good morning, everyone. Good morning. So, first question. On the back of the good backlog and good visibility you have on all specific programs, what do you need to see before revisiting your production rates upwards?
Éric Martel
A great question. We are asking that question everyday but to be fully transparent with you. I think right now we are very focused on growing our backlog. And there is that we have internal target in terms of number of months of backlog that we like to see on airplane.
Of course, there is the minimum numbers that give us more comfort and more predictability. But having too much backlog also can become a problem. Because you don't have the availability for customers if the market is strong.
So we have a clear target of a minimum and a maximum, which obviously for competitive reasons, I'm not going to share. But clearly, we will revisit, if we ever achieve those maximum or exceed those maximum targets of backlog. So clearly, we are having a conversation, but there is no decision.
Right now, we are really focused on filling the backlog, making us more predictable. At the same time in parallel to that and I think we have mentioned that earlier on this call, we have to be humble also.
The market is very strong right now, but you have been following that industry long enough where that sometimes things can change rapidly. So, we have to be careful and assess also the impact of what is happening right now. We see as we all know, a way four fairly picking up clearly in some other countries, starting here. So we have to assess what this could mean.
So far, it gave momentum, the pandemic has given momentum to the business jet industry. But at the same time if the economy is being affected at large then we have to assess that. So between adding our own target on backlog, but also our view on the long-term of the market and especially on the financial point of view will be key in that decision.
Benoit Poirier
Okay. That is great color. And just for the follow-up, could you maybe talk a little bit about the strategy for the remaining [$1 billion] (Ph) over the next three years and whether the free cash flow we should expect somewhat of a reversal in Q3 before seeing a strong finish toward the year end Q4?
Éric Martel
Yes. So I think that the way you were alluding to our cost saving program in the next three years in your first question. So, if that is the case, we have made a great progress on our cost saving program and the remaining part is getting smaller and smaller. So, we have clear visibility on how we will be achieving the majority of that $400 million saving.
In terms of maturity and I wasn't too sure if you were also covering the maturity, we have a $1 billion less to be addressed, so that we cleared the whole runway up to the next maturity of 2023, which will put us in a great position.
That was what we have announced and that was our intent and our target when we had Investor Day in early March, and we are inside of achieving this. So, clearly that will make us, put us in a great position because if we achieve that and that is our goal that the next maturity will be at December 2024 now.
Benoit Poirier
Perfect. Thank you very much.
Éric Martel
Thank you sir.
Operator
Thank you. The next question is from Walter Spracklin from RBC Capital Markets. Please go ahead.
Walter Spracklin
Yes, thanks very much. Good morning, everyone. So, I would just like to follow-up on Benoit’s question on production rates and assuming that the strong book-to-bill continues and demand continues despite any challenges regarding the fourth wave and so on.
What is the highest production rate that you can deliver without any major CapEx spend. I know there was some indications before about what that level might be. But obviously you have done a lot of reconfiguration. Just looking for the new production capacity that exists with your current footprint without any major CapEx spend to change it.
Éric Martel
I would suggest that we do have - and of course Walter, I won't give a precise number here for competitive reason, but I'm sure you understand. But if you look at the challenge we have without investment capabilities to improve quite a bit our production rates.
As you know we have always kept the space, we have minimized our space in the last year and we can sort of do that but we still have quite a bit of room on the challenger. It is a bit last on the global, but we still have room - there is years where we used to produce 80 global a year, and we still have that footprint.
And so overall, we are in a good position and we have other site also that we could always use, if we would like to do more than that. So, the capability is there to answer your question to increase the rate with the actual systems.
Walter Spracklin
Okay, that is very encouraging. And looking at your guidance in 2025 and given your trajectory here, in the early part in the early year of that path, you are achieving results ahead of expectations ahead of your own guidance on the near-term. Does that mean that the curve is just - the shape of the curve is changing? And the end result is the same in terms of 2025 or are you seeing new avenues that were unexpected that is now pushing or putting upward pressure - upward support to your 2025 guidance and what would have to happen before you adjust your 2025 guide?
Éric Martel
So those are great question. I believe right now it is probably too early to assess, 2025 is still four years away. You and I know that there is a lot of things that can happen between now and then. But to your point, it is great to be on the positive side of the curve we have already designed. But to answer also your next question, which is what would that take.
Of course, if we would see that momentum, on the positive side for a couple of years in a row, then I think there is a case to be made that we should revisit potentially that is guidance. But I don't think we are there yet. Right now, we are happy to be ahead of the curve, if I may say it this way. But in the long run, it is too far ahead right now to be able to predict that. So, that would take a boost of the market really and to early with this right now.
Walter Spracklin
Okay, thank you very much for the time Éric and congratulations on a good quarter.
Éric Martel
Thank you sir.
Operator
Thank you. The next question is from Robert Spingarn from Credit Suisse. Please go ahead.
Robert Spingarn
Hi, good morning. Nice numbers today. I do have a few questions or clarifications I wanted to ask about. Bart, just on the backlog being flat December to June I know it is up for March. And I'm sure you talked about this last quarter. But could you just remind us what happened there given that the book-to-bill has been good all year so far? Is it the services business that is included there?
Bart Demosky
Yes, yes, absolutely. So, we started the year with a strong backlog of close to where we are currently at 10.7 billion. We did see an increase in that level over the quarter, now that was on the back of strong new order activity. In the first quarter and the second quarter, we did have a significant number of deliveries of our larger aircraft. So that is why we see a bit of the shape of the curve that you are probably looking at.
However, we also have been able to now build strong backlog on all of our other platforms. As Eric was mentioning earlier, we have got good distribution across all the platforms now, and with book-to-bill at 1.8 being across all of them.
We aren't going to speculate on targeting backlog level Rob, as you can probably appreciate for competitive reasons. But, we are very pleased with where we are at. Hopefully that gives you a bit of a color as to why the shape of the curve is what it is.
Robert Spingarn
Got it. It sounds like, it is mixed. So the next thing to ask Eric, just high-level strategically, obviously the high end of the market is very attractive. And now [DASO] (Ph) is going to jump in with the 10x. You have got the 700 coming and all of this happens toward the end of your forecast or your guidance period, but what do you think about the high end of the market? Maybe getting a little bit crowded and does that perhaps affect the profitability at some point not in the near-term but down the road.
Éric Martel
Down the road, that is a fair question. But first of all the Falcon 10X right now is a paper plane. So, we are still years away before we really see this hit the ground. But, the more important part is we are very much pleased with the performance of our Global 7500.
So the Global 7500 right now is receiving a very favorable - is very favorable to our customer. This is the airplane that is the leading edge airplane of the industry right now, not just the Bombardier but of the industry. So, it is flying higher, faster, further than any other airplane.
And the most important thing too is a reliability wise we are outpacing pretty much all airplanes. So that airplane, even if it is a young program, it is already performing extremely well in the reliability front. So, we do believe also that our airplanes specs are outperforming everything that is available right now to compete with us.
Customer buys the airplane, the principle most of the time that buys the airplane the interior design is always one of the most important thing. So, there is the airplane performance and this, we still continue to lead. But also, Bombardier has a clear trade. It is part of our trademark that, we do the best interior.
We always refresh our design. We always offer the best technology on board and that is something that is extremely important. So, we are planning also with new entrance coming in and yes there will be, but it was already taken care of and made as an assumption part of our plan for 2020.
Robert Spingarn
Okay. And then just, thank you for that. Just to finish up, I wanted to delve into this pre-owned venture that you are talking about just to make sure I understand, what it is you are going to do. Is this simply a focus on some trade-in aircraft? Are you actually going out into the secondhand market?
Éric Martel
Now, we are going to do both actually. So of course, we have access more easily on what is coming our way with trade-in. But you do believe and we have studied that and we actually did a couple of airplanes this year, and there is things that are exclusive in terms that OEM can do on an airplane that nobody else can in terms of resetting a few things on the airplane, so that it creates value.
So we are positioned to create value on every one of those airplanes, more than anyone and we believe as an OEM there is a market for that. And people like the idea that airplane came to the OEM was completely reset and refreshed with new technology put on board. And we have the capability, of course in our service center across the world to do that. So that is what we are having on mind.
Robert Spingarn
This will be strictly Bombardier aircraft, not anything else.
Éric Martel
That is strictly Bombardier airplane.
Robert Spingarn
Okay, excellent. Thank you very much.
Éric Martel
Thank you.
Operator
Thank you. The next question is from Noah Poponak from Goldman Sachs. Please go ahead.
Noah Poponak
Hey, good morning, everybody. Hey, it wasn't clear to me what the answer was there to the unit backlog being considerably higher than - units book-to-bill, versus the book-to-bill implied by the change in the backlog. There is a big differential there. Is challenger stronger than global or is it just having the 7500 and the denominator but not the numerator? I just want to make sure I understand that?
Éric Martel
So, one of the things that we said earlier and in this meeting and earlier in the year, is that we had a very strong backlog, multiyear backlog on the Global 7500. The reality is that we also said that the delivery on the 7500 will be outpacing the growth order this year.
So, if you strictly look at the 7500, and as everyone of those airplanes have more value than any of the other airplanes on the backlog, it will be the bleeding a little bit this year. But this was something that we saw in Q1 and in Q2, but we see every other single platform increasing. So, that is the reality.
But as I mentioned earlier, we are always - we have a minimum and a maximum target in terms of number of months for every product. And the good news right now is on the 7500 we have a long backlog. Now we are getting into the zones, where people would be more comfortable, because the delivery date is in reach, I would say this way and more visible to them.
So, it was normal, when we have a huge backlog, you are starting delivery to see that backlog depleting for a couple of quarters even a couple of years. But now, as I mentioned, we are getting into the zone that we like to be. And we believe that between now and year end, we are going to see order picking up on the 7500.
Noah Poponak
So Éric it sounds like putting the 7500 aside, it doesn't sound like you are seeing a big difference in mid versus large X7500 in Challenger versus 5500 to 6500. It sounds fairly broad based. Is that fair?
Éric Martel
If you are talking about the gross order, it is well distributed.
Noah Poponak
In terms of new order demand. Yes.
Éric Martel
Yes. The new order demand, we are in the medium and large business right now. And we see the order demand strong on both categories.
Noah Poponak
Okay. And then just on the cash flow. It has been a while since the company had positive free cash flow in a second quarter. The guidance for the year implies that the back half is kind of breakeven, although I think it is maybe said slightly positive. Could you maybe just talk us through if there was any advances or other working capital helping the second quarter maybe it is third quarter stay positive and fourth quarter doesn't have its usual seasonality or 3Q go negative and 4Q does have a seasonality. Any incremental color on that pacing would be really helpful.
Bart Demosky
Sure. It is Bart here. I think you have hit actually all of the themes and it is a bit of all of that. So, let me try and just walk you through this a little bit. So, we have 91 million of free cash flow positive generation in the second quarter.
And you are right, that was ahead of our plan so, a very positive outcome. That does include the absorption of about 60 million in non-recurring charges. So, if you think of future years going forward, it translates more into like a 150 million of positive cash flow.
Now, if I just kind of walk you through it, if you look at the guidance, we had originally said, we have better than 500 million of usage. We are now forecasting incremental profit of about 75 million. To your point, we did have a strong working capital in the quarter better than planned. So, better inventory management, as well as the strong new order activity, and that contributed to higher working or better working capital than we had planned.
And we are now looking at increased certainty in the back half of the year and going forward on interest costs. So, that is the remaining 125 million approximately that gets us to the better than 300 million usage.
You are correct in the assumption. I think I said this in my comments as well that we expect to be breakeven in the back half, so you have got that right and with the 7500 deliveries outpacing strong performance on the other platforms, that thing we are focused on still is our goal of are to building backlog and we expect to reduce inventories in the second half of the year as well. So, hopefully that gives you a color on it.
Noah Poponak
I appreciate it. Thank you.
Bart Demosky
Okay. Thank you Noah.
Operator
Thank you. Your next question is from Seth Seifman from JP Morgan. Please go ahead.
Seth Seifman
Thanks very much and good morning, and good results. I guess Eric when you spoke a little while ago and you spoke about kind of taking a long-term view and that market demand is fairly strong right now, stronger than in a while. But, have to think about then kind of through cycle - and through cycle business jets has been in the industry about times it seemed like it has had over capacity. So I guess maybe, if you update us on any thoughts you have kind of a long-term without the potential for or need for consolidation in the industry.
Éric Martel
Okay. Good point. So, I don't want to speculate about consolidation of the industry. Those are things that are being looked into by a lot of people all the time. But at this stage, we do remain focus on our own. We do have an amazing portfolio of products ourselves, in the field where we are competing and we are competing in the large, medium, but also our services business as you know, we have great ambition there of growing that business significantly over the next coming years.
So, that remains our focus. Our plan is clear and clearly, we will continue to as I said earlier to monitor the long-term trend of the industry. But so far the trends are positive which we are super happy with and we will see, I think in the next two, three quarter if that trend solidify. And then we hit those targets that we give ourselves internally in terms of backlog, we will be reassessing, what we do moving forward.
But we are happy we are ahead of the curve right now in the plan, we communicated. And we are not speculating on any potential consolidation at this stage, because we believe the market is strong, there is a lot of new customer coming in, the fleet operator are growing. And I think there will be room for a lot of business aircraft - airplane in the next five-years.
Seth Seifman
Great. Thanks very much. And then just to follow-up real quick on the cash flow dynamics from those questions. With regard to the second half so, when we think about Q4, especially with, some improvements in deliveries, interest costs, it seems like should be better, cash flow is positive in the second quarter, is there - with good performance maybe there is potential to be better than breakeven in second half. But is there anything that I'm omitting there in terms of headwind versus the quarter that we just had?
Bart Demosky
Yes, thanks Seth. So, what I would say is that when we came out with our Investor Day in March of this year, one of the things that we said we wanted to try and do for our company and for the market was to be reasonable and be somewhat conservative in providing our outlooks and guidance.
And so I would say that on free cash flow, we are in our current guidance probably being a bit conservative, we are being consistent with that strategy. We do feel very confident on executing on our plan for the remainder of the year.
I think as Eric highlighted in his comments earlier, we are basically sold out on our aircraft for the year. We are very near that and so having the high confidence in our aircraft sales and deliveries as well puts us in a great position.
We have executed on plan for our debt reduction and recapitalization strategies. So you are right, that will give us tailwind on cash flows going forward, because we are going to start to see lower interest expense contributing in the second half of this year and go forward.
We are now over 200 million in reduced interest expense. And in the first half of the year, we didn't really get to see the benefit of that just yet, because we had to pay accrued interest on some of the bonds that we were retiring. So, all of those things are contributing.
Now, I will say as well, I think we are being prudent by being a bit conservative. We all know, there is uncertainty still out there. Eric is quite right volatility can occur. And so we want to remain a bit conservative with Delta variant for example. So, we will continue to monitor markets but very confident in our forecast for the back half of the year.
Seth Seifman
Okay. Thanks very much.
Bart Demosky
Okay. Thanks Seth.
Operator
Thank you. The next question is from Stephen Trent from Citi. Please go ahead.
Stephen Trent
Yes. Good morning. And thank you for taking my question. I guess one of the things further out. So certainly, you have presented a compelling trajectory 2025 and what do you think about the investment cycle? Looking across global aviation, certainly on the commercial airline side. There is a lot of discussion about sustainable aviation fuel, and new generations of aircraft, electric takeoff vehicles and what have you. It just from a high level perspective, I would love to get your thoughts on kind of how you have come down in all of that.
Éric Martel
No. This is a great question, Stephen, and thanks for asking that. But, I rejoined the company a year ago and clearly my focus with the team here was the first five-year in our first strategic planned cycle.
Now, we are in the middle of the second one, and clearly we are now thinking about year, I will call it the year five to 15, and all those great question are in front of us right now and we already spend money on research and development on how can we get an airplane flying with using a lot less fuel than it is today.
And there is different answer to that, yes we are working with the engine people. But us Bombardier there is a lot we can do there. And I'm not even thinking here of sustainable fuel and also engine performing better. I'm just thinking about the airplane itself.
So, our aim right now is fairly focused. Pretty much all our R&D money spend right now is focused on thinking about airplane of the future being greener and being made more favorable to the environment. So, that is clearly how we are approaching it at this stage to shape up the future and having a greener business aircraft contribution, a better contribution than we have today.
Stephen Trent
Okay. I appreciate that. And just as a very quick follow-up, I believe Mr. Gupta asked earlier if I'm not mistaken. When we think about let’s say non-traditional business jet customers, any sort of high-level sense kind of roughly what proportion of your new business is coming from customers you usually - typically wouldn't see?
Éric Martel
I think that percentage was traditionally in the 5%, 6% zone. But clearly this year, in terms of new entrants we have seen that number increasing to a larger extent. But we also have, as I said, a lot of new entrant are using the channel of going through a fleet operator, which end up being good for us too.
So, it is difficult for me to put a precise number, but we clearly see that we do ourselves add some sales that are coming from people that are joining. I would say the business aircraft a way of traveling and also probably the majority of them are going towards a fleet operator.
Stephen Trent
Okay. That is very helpful. Let me leave it there and thank you.
Éric Martel
Thank you.
Bart Demosky
Thank you sir.
Operator
Thank you. There are no further questions at this time. I would like to turn the meeting back over to Mr. Martel.
Éric Martel
Okay. So, thanks to all of you for attending this morning, and it is a real pleasure for us to exchange with you all. We are building good momentum and like I said many times our main focus is transparency and predictability. We are very excited about the market and the product we are competing in the space. But, the heart of our plan is our customer and our people. We will continue to remain disciplined and prudent, and I look forward to speaking with you all soon. So, stay safe and healthy and thank you for attending again.
Operator
Thank you. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.
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