This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Good morning, ladies and gentlemen, and welcome to the Bombardier second quarter 2022 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. Francis Richer de la Fleche, Vice President, FP&A and Investor Relations for Bombardier. Please go ahead, Mr. Richer de la Fleche.
spk07: Good morning, everyone, and welcome to Bombardier's earnings call for the second quarter ended June 30th, 2022. 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 am making this cautionary statement on behalf of each speaker on this call. With me today is our President and Chief Executive Officer, Eric Martel, and our Executive Vice President and Chief Financial Officer, Bart Demoski, to review our operations and financial results for the second quarter 2022. I would now like to turn over the discussion to Eric.
spk09: Thank you very much, Francis. Hello and welcome everyone. Good morning, everyone, and I hope you are having a safe and restful summer. Bombardier has certainly had a fantastic second quarter. We have been proactive in strengthening our balance sheet and accelerating our debt reduction. We are executing our plan, meeting our commitment, and have further demonstrated our industry leadership with the show-stopping launch of the Global 8000 business jet. In parallel, strong demand for business aviation has carried through, and our team has converted the opportunities to grow our backlog significantly. If I can sum up Bombardier's performance in the second quarter with a few words, they would be confidence, predictability, and resilience. I am also delighted to say our ability to execute our plan was externally recognized most notably with Moody's upgrading our credit rating. I am particularly proud of this achievement, especially when you look at how Bombardier is performing in the context of the current economic backdrop. On today's call, we will indeed touch on the macroeconomic context as well as supply chain pressure, but I would first like to talk about our most significant performance indicators. When I look at our solid performance on free cash flow, it has clearly demonstrated that we have set the right foundation to be a cash positive business and deliver on our commitments. Today, we are raising full guidance on free cash flow to greater than $515 million. I am proud to say that our ability to execute on our initiatives to grow margins and leverage our key contributor to solidifying our overall position. This past quarter saw us continue our margin expansion and reach an adjusted EBITDA of $201 million. This is a 41% better year over year. Our adjusted liquidity position also stands strong at $1.8 billion. We've been well-placed to continue reducing our debt as well as proactively reducing the cost of our debt. Bart will cover our success on these two fronts in greater detail shortly. I would like to thank the team for their tireless efforts on this front. Turning now to demand and the market, A Q2 unique book to bill of 1.8 and backlog increase to 14.7 billion really tells you a lot in terms of demand remaining at very healthy levels. The backlog number itself is impressive. It is also one of the healthiest business aviation backlogs we have seen in terms of customer type mix. When we look at operational predictability, That healthy backlog is where it starts, but also gives us great confidence in raising our cash guidance, as well as reconfirming delivery and earning figures for the year. Looking at industry metrics that shape demand, they remain healthy across the board. We see continuing high flight hours, very low used aircraft inventory, with younger aircraft being scooped up very quickly, and finally, improved pricing. In this quarter, when we've observed slowdowns or stabilization in regions, we have turned our focus to other areas to continue driving the business. Interest and utilization around the world continue to outperform pre-pandemic levels. Demand for business aviation continues to grow to new members of the flying public. With every passing month of airport and flight schedule disruption, business travel becomes a more appealing option. Utilization has also continued to accelerate our services revenue. They grew 22% versus Q2 last year, generating a healthy, $359 million of top-line revenue, which totaled $1.6 billion for the quarter. We see a steady and stable growth path for services as major facility inspections come online, the first of which I was able to personally inaugurate on the last day of Q2 in Singapore, where we have quadrupled our footprint and now operate the largest OEM-owned service facility in the Asia Pacific region. We are in the process of ramping up expansions in London, England, as well as Miami, Florida. To add to this, we will also inaugurate our Melbourne, Australia facility this year. This worldwide expansion of our service facilities allows us to bring more of our jets home. This is the most effective way to channel our high-quality OEM parts to our installed base of jets. We have been executing on this journey for many years and have a proven track record. Our goal to reach $2 billion in annual aftermarket revenue by 2025 is fully on track. We do face what I would call a crosswind on supply chains. With business indicators and demands still driving in a positive direction, supply chain pressure is contributing to keeping delivery ramp up at a conservative and steady space in line with our 2025 projections. The key to managing these crosswinds is maintaining agility and consistent execution. As Bart and I have repeated, we have built a plan that is not dependent on significant volume upside as we needed to confidently and proactively deal with any macroeconomic fluctuation. Our current product lineup, beyond being exceptionally designed and reliable, sits in the most stable categories. Our results to date in 2022 have demonstrated that we can perform underscored by our stable deliveries, expanding margins, and exceptional cash generation. That said, dealing with supply chain pressure is a new normal. Having deployed additional personnel early on was a successful strategy as it continuously helps us identify risks. This mindset and proactive approach started as early as 2020. Right at the start of the pandemic, we secured many small work packages that were at risk and brought them to our team. Today, we are benefiting from that decision through production predictability, and it has also helped create 500 new jobs within Bombardier. Over the last few months, We have been very active in continuing that approach and assessing where it makes sense to repatriate or consolidate smaller work packages or parts to ensure our production line can operate as efficiently as possible. This is a testament to the skilled teams we have that can contribute to securing our deliveries while ensuring we take steps to keep any additional action we take within our working budget for the year. Overall, managing this supply chain pressure does require continuous focus and attention. Today, we have been successful, but we'll continue to work very actively at various tier of suppliers. In terms of burning down any risk, we will not hesitate to act when needed. This is very different economic landscape to previous cycles, like 2009, for example. With demand for business aviation remaining high and production rates having been largely reset, we believe we are in a good place to have a healthy balance of pricing and demand going forward. I can only emphasize, again, that we are taking a predictable approach focusing on the steady increase we have begun. Key to this is having the right product as the market evolves, and our product strategy is progressing fully to plan. The Challenger 3500 aircraft will begin deliveries through the back end of the third quarter, and we have secured the key auto throttle certification during the second quarter. This program is well on track and customers are enjoying the aircraft's elevated experience, both from a cabin design perspective, as well as the sustainable material options. Our attention is turning to the Global 8000 certification campaign. As we announced at EBACE, we have successfully tested the aircraft beyond the sound barrier. This helps pave the path to certify a maximum operating speed of Mach 0.94, which will make the Global 8000 the fastest business jet on the market. Combined with the platform's exceptional low-speed handling, it is truly full, non-compromised package. Response from the market has been nothing short of tremendous. I have personally received a lot of positive feedback on our strategy to offer the performance enhancement to global 7,500 customers as retrofits. All in all, the Reshape Bombardier team has delivered another solid quarter. We stand well placed with services infrastructure expansion, a well-received product roadmap, and positive financial performance that is putting our debt reduction strategy ahead of plans. On that note, I will now turn the call to Bart to go deeper into our financial performance and balance sheet.
spk11: Thank you, Eric, and good morning, everyone. Q2 has been another outstanding quarter for Bombardier. Our balance sheet continues to improve ahead of plan and we find ourselves in an even stronger financial position than when we started the year. Our team remains focused on delivering our strategic plan and the benefits of executing on our strategies are becoming clearer with every quarter that goes by. So let me begin by touching on some of the highlights. First, we delivered a fifth consecutive quarter of positive free cash flow with a $340 million result in Q2, bringing our year-to-date free cash flow generation to $514 million. With demand indicators such as flight hours and pre-owned inventory levels remaining very strong, we are in an excellent position entering the second half of the year and have raised our full year free cash flow guidance to greater than $515 million from our original guidance of greater than $50 million. From a liquidity perspective, we ended the quarter with a strong cash on hand balance of $1.4 billion. maintaining the same level of cash as at the end of March, and that's inclusive of the successful execution of our $350 million tender offer. When combining our Q2 tender with actions taken earlier this year, we have reduced our debt by $773 million since the start of 2022, which will reduce cash interest by almost $60 million on an annualized basis. Debt reduction remains our top priority, as we have clearly demonstrated in the first half of this year. Our work so far leaves us with only $510 million of debt maturing in December 2024. We will continue to be opportunistic in the debt markets and expect to allocate excess liquidity towards further debt repayment. If we continue to deliver on our plan, we should see our credit metrics and ratings improve as was the case in July with Moody's rating upgrade into the B category on our senior unsecured notes. Operationally, we continue to build our backlog, which now stands at $14.7 billion, having grown $1.2 billion sequentially on the back of a 1.8 times unit booked to bill. This also marks a 37% year-over-year increase. The backlog is high quality, It is well diversified across platforms and customer types. It does not include speculative orders. And the orders we have are supported by meaningful deposits and cancellation penalties. To summarize, it is a much stronger backlog than ever before and is a key part of making our business more predictable and resilient. We also expanded our first half EBITDA margins by 380 basis points year over year. by delivering on our strategic priorities. It is important to note that even though demand has been stronger than we had planned for, much of the progress we have made in terms of improving our financial performance is the result of executing on the things that we control. Independent of the demand environment, Bombardier is on a very meaningful earnings growth trajectory as we execute on our strategic priorities, namely on maturing the contribution of the Global 7500, executing on our cost reduction plan, and growing our aftermarket business. All of our earnings growth initiatives are right on track, and when coupled with our commitment to reduce debt, this means that Bombardier is now structurally cash generative, even in a normalized 1.0 book-to-bill environment. This is an outstanding start for 2022. The accomplishments I have just mentioned are only a few of the steps we have taken to improve our financial performance and predictability. Looking ahead, I am equally optimistic that we will continue to deliver and exceed our commitments. So with that, let's move on to our Q2 results. Free cash flow was the standout metric, with $341 million of cash generation in the quarter. Advanced levels increased by approximately $330 million versus Q1, as a result of higher progress payments as well as new order intake, which was partly offset by an increase in inventory levels of approximately $150 million. From a year-over-year standpoint, we can really see the benefit of our deleveraging efforts as quarterly cash interest for Q2 was reduced by $51 million to $186 million versus $237 million last year. Our revenues for the quarter stood at $1.6 billion resulting from 28 aircraft deliveries and $359 million in aftermarket revenues. Our manufacturing revenues were 2% lower year over year due to one less delivery, which was entirely in line with our expectations and production schedules. Meanwhile, our aftermarket revenues saw 22% growth year over year, from $295 million last year to $359 million this year. This is supported by growth in flight hours, as well as execution of our strategy to gain market share, and demonstrates continued progress towards our $2 billion aftermarket revenue objective by 2025. From a profitability standpoint, our adjusted EBITDA was $201 million, representing a 41% improvement year over year. Given the relatively flat revenues, this means that we saw significant margin expansion as adjusted EBITDA margins rose 350 basis points from 9.4% in Q2 of last year to 12.9% this quarter. Adjusted EBIT also significantly increased year-over-year and stood at $103 million. Looking ahead to the second half of the year, we are well positioned to meet or beat our full-year guidance. In fact, on free cash flow, we have increased our guidance to greater than $515 million, which implies a positive second half of the year. For our other metrics, we are reaffirming our existing 2022 full-year guidance. To that point, we continue to expect deliveries of greater than 120 aircraft for the full year. Supply chain has been difficult, and as Eric mentioned, the actions we have taken since last year have allowed us to proactively manage many issues. We are nonetheless not immune to supplier challenges and will continue to monitor and manage this diligently. We continue to expect deliveries in Q3 to be relatively flat year over year, followed by a strong output in Q4. With deliveries on track and our aftermarket continuing to be strong, we are well positioned to deliver greater than $6.5 billion in revenues, and convert this to greater than $825 million of EBITDA. Looking at Q3, we expect EBITDA margins to be fairly stable when compared to Q2. So in conclusion, Q2 was another remarkable quarter for Bombardier. Core performance continues to improve year on year, and we are in an excellent position to continue delivering on our commitments. This is not by chance. Our management team has been hard at work executing on the things that we control, and we are very confident that we will continue to produce strong results. With that, thank you very much, and let me turn it back over to Francis to begin the Q&A.
spk07: Thanks, Bart. I'd like to remind you that the Bombardier Investor Relations team is available following the call and in the coming days to answer any questions you may have. With that, we'll open it up for questions. Operator, please go ahead.
spk00: Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your device's keypad. To cancel the question, please press star 2. Please press star 1 at this time if you have a question. There will be a brief pause while participants register. Thank you for your patience. And the first question is from Tim James from TD Securities. Please go ahead.
spk13: Thank you. Good morning, everyone. I'm just wondering if you could talk a little bit about the strength and demand and just comment on any sort of geographic particular strength you're seeing or by customer type, you know, fractionals, charters, private individuals, that type of context.
spk09: I can certainly do them. Thanks for the question. You know, actually, the demand on the market in RQ2 did remain extremely well balanced, clearly led by the U.S. The U.S. has been clearly leading the charge for the last two years. But also, if you look at the percentage also, we've seen Europe also improving quite a bit. Despite the geopolitical tension right now, we've seen good order intake from Europe And the good news is that APAC is coming back. APAC was slow for the last two years, mainly driven by, you know, the quarantine situation that they had in some main city, like think about Singapore as an example. Now that it's reopened, We've seen good level of activity in that region and also the flight hours are going up and up and they're back and even better than pre-pandemic levels. So this is why we're talking about, you know, the leading indicator heading in the right direction. As far as the fleet operator, clearly extremely strong demand. One of the big upside in flight hours comes from the fleet operator. The fleet operator has been, you know, extremely busy. As we explained before, a lot of people that used to fly first class on an airline moved to our industry and are flying private jet. They are not all buying their own jet, but a lot of them are going to the fleet operator. And so we've seen a heavy trend there. And clearly, today, I think the fleet operator is are in demand for more airplanes. So their business has been growing significantly, and the demand remains extremely strong with the fleet operator.
spk13: Great. Thank you very much. And then just a quick follow-up question here, I guess, for Bart. Obviously, free cash flow was outstanding here in the quarter. And, I mean, if my simple math is correct, and I just want your confirmation on this, I mean, even if you'd had a book-to-bill of just one times in the quarter, your free cash still would have been up significantly year over year and still positive in the second quarter. Have I got that correct?
spk11: Yeah, Tim, you have. And thanks for the question. I think in my comments there I did mention that we now believe and are actually very, very confident that we've reached a structural position with our business having brought our costs down. and growing our EBITDA and revenues, we're at a one-time spook to bill. We'll be positively cashed in with going forward.
spk13: Great. Thank you very much.
spk11: Okay. Thanks, Tim.
spk00: Thank you. The next question is from Benoit Parier from Desjardins Capital Markets. Please go ahead.
spk05: Good morning, everyone, and congratulations for the free cash flow performance.
spk00: Thank you, Benoit.
spk05: Just to come back on the... Yeah, just to come back on the previous question about obviously the fleet operator, I was wondering if you could provide more color about whether the optic in aircraft interests was driven by the widespread delays at the airports around the world this summer. And just wondering if those new customers to the business jets, any more color about how sticky they are and whether they are here to stay going forward?
spk09: The answer to your question, Benoit, is absolutely. You know, this has been going on, I would say, since the beginning of the pandemic. You may have heard me saying that the pandemic was probably an accelerator. I often said that, you know, what was supposed to maybe happen over seven to ten years happened in two. So the pandemic was clearly an accelerator for people moving towards private jets. And there's been study actually that were done actually at the beginning of the pandemic and even pre-pandemic that there's still a lot of potential out there of people that can afford flying on a private jet that were not at the time. So now we've seen an acceleration of these people moving towards private aviation. And as I said briefly earlier to the previous question, It's been an accelerator, and these people are not all buying their own jet, but they're buying – some are, but a lot of people are buying fleet operator hours or cars or whatever the formula is. And it's been great for us because Bombardier is actually extremely well positioned with pretty much all the fleet operator. I think thanks to the reliability of our airplane, the cost efficiency of our airplane – and, of course, the quality of our cabin. So when you put all this together, we become a pretty good choice for the fleet operator, which the airplane is well appreciated by their customer. But we've seen clearly an acceleration and amazing growth due to this situation at airport and airline.
spk05: That's great, caller. And maybe just a quick follow-up for Bart. With respect to Moody's, they recently disclosed the factors that could lead to a potential upgrade, including a leverage ratio below six times. So could you talk maybe about the visibility you have, maybe the timing to get below six times, and any color about the potential interest saving that could come on the back of a rating upgrade part? Thanks.
spk11: Yeah, thanks, Benoit. So there's a little bit to unpack there, but first I would just say that our main focus for all of our excess free cash flow generation is going to be debt repayments in the near and medium term. So you've seen us as we've generated cash beyond our needs, that we've been consistent in doing that, and having paid another $773 million of notes off this year, I think we're proving ourselves on that front. In terms of next steps, we're sitting with significant cash on the balance sheet today, $1.4 billion. As we've become more and more confident in our financial performance, as we've been able to structure our progress payments from the aircraft that we've sold, to basically be able to finance the working capital needs as we construct our aircraft, fully finance them. Our intra-quarter cash flow needs have shrunk to very minimal levels. You probably remember that in past years they were quite significant at times and that is not the case for us anymore. So that gives us higher confidence that we could perhaps free up some of that cash to continue to pay down debt. I can't give you exact timing. on that, but just know that it will be our focus going forward over the coming months and years.
spk05: Okay. That's great, Collier. Thank you very much.
spk11: Thank you, Benoit.
spk00: Thank you. The next question is from Stephen Trent from Citi. Please go ahead.
spk02: Good morning, gentlemen, and thanks very much for taking my question. I appreciate the color on the free cash flow use. That's very helpful. And I know you've been spinning off assets in recent years. Are there any possibility that you guys would consider acquiring assets someplace if it would help the company to obtain a critical supply given what's going on with the global supply chain?
spk09: Yeah, that's a very good question, Stephen. We will remain vigilant on whatever opportunity may arise or secure our supply chain. I said earlier in my script that we will do whatever it takes to make sure that we stay on track, that we deliver on our commitment, and it may involve actually considering some of it. Of course, as Bart said, the priority for us is to reimburse debt But actually, it's always, you know, the capital allocation discussion is always going on on a continuous basis. So priority is clearly to reduce the debt, but at the same time, if other opportunities may arise and they make sense for us, we're not talking about anything significant here, but, you know, where it makes sense, we will definitely consider.
spk02: Okay, I will leave it there. Many thanks, gentlemen. Many thanks. Thank you. Thank you, Stephen.
spk00: Thank you. The next question is from Robert Stallick from Vertical Research. Please go ahead.
spk01: Thanks so much. Good morning. Good morning. I have a couple of questions for you, if I may. First of all, in terms of delivery slots, when's the next one currently available for the Challenger or the Globals? And then secondly, on the supply chain, Eric, you've mentioned that there's clearly some challenges here. I was wondering if you could highlight any areas of particular tightness and whether you see any sort of material risk to that new aircraft delivery target for the year. Thank you.
spk09: Okay. Yeah, thank you. So, great question here. Clearly, when we look around right now, you know, and I know I won't comment specifically the timing on every program, But I think overall you can think about about two years when you look at our dollar of backlog and the revenue we're generating. So you can make the math. And the good news for us, it's pretty well spread across the board. It's not like one program driving the backlog. Every single program is contributing by about the same length. I guess you can make your own judgment on this, but we are pretty healthy in terms of backlog. And as you know, we've already said that we almost provide a bit of guidance for next year, talking about a 15% to 20%. rate increase. So this takes into account the length of the backlog we may want to have, but also the supply chain constraints that, you know, are well known and across the board. So we've been extremely meticulous in planning in detail every ramp up, taking into account, you know, that we don't want to have too much backlog or not enough backlog. And we are managing our range here of minimum and maximum. But on top of it, we are taking great note of what the strain on the supply chains are today. So to your second question between now and the year-end, we feel that's the reason why we are reiterating our greater than 120. And the greater than 120 takes into account some of the risk we have ahead of us, mainly driven by engine right now. So... We are being careful, but the guidance we're providing greater than 120 takes those risks into account.
spk01: That's great. Thank you very much.
spk09: Thank you.
spk00: Thank you. The next question is from Chris Murray from ATB Capital Markets. Please go ahead.
spk03: Yeah, thanks, folks. Maybe a little bit different looking at the aftermarket business. Certainly, as you're seeing the growth develop in there, I was just wondering if you could talk a little bit about how you're seeing the margin profile evolve, if it's really tracking as you expect, or are you guys having to perhaps incent some new business into these facilities as you get started off with them?
spk09: Great question, Chris. Thank you. Clearly, we had a very detailed plan that we put together two years ago And the team has done an amazing job in services right now to execute exactly what that plan was. So we don't have any surprises, any gap. There's always some pretty small variation to a plan that's normal. But we are tracking extremely well with, you know, to revenue on our own pace. uh the benefits from the new facility also are materializing like fairly quickly uh pretty much gradually over 18 months when when they uh they started the operation so uh and and you know we've made the market inauguration in singapore the demand was there we quadrupled the size of that facility that we built in 2013 open in 2013 so so great uh great progress there we are gaining market share on a regular basis. So our market share is going up, the business is growing, and we believe that the 2025 to date, there's no reason to believe that we will not achieve them. So we're on track to achieve the plan.
spk03: Okay, that's helpful. Thanks. And then just one follow-up for me. Just on the Global 7500, how many deliveries were in the quarter?
spk09: Can you just repeat your question? I missed that.
spk03: For the Global 7500, how many aircraft did you deliver in the quarter?
spk09: You know, we're not too specific, but we've mentioned about 40 per year. And, you know, we're exactly in line with that right now. So we've been pretty much delivering like a clock. So you're talking about, you know, 9 to 10 to 12 airplane a quarter, depending on which quarter. But on average, you can think about 10 roughly.
spk03: Okay. Thank you. That's helpful.
spk09: Thank you.
spk00: Thank you. The next question is from Fadi Shamoon from BMO Capital Markets. Please go ahead.
spk04: Yes, good morning, and congrats on the strong results. Thank you. I want to talk on the supply chain side. Obviously, the biggest focus is on delivering on the backlog that you have grown nicely, but if I look at the second half of the year, you're delivering at a rate of 140 aircraft annualized. Is that right metric to think about the supply chain is able to deliver that kind of delivery rate going forward, or would that not be the case?
spk09: Yeah. I think right now, you know, the way to look at it, first, that's why we're reiterating the 120 for this year. We talked about 15 to 20 improvement for next year. And so far, we are on track to do that. There is some tension in some area in the supply chain, mainly, I would say, at Tier 2, Tier 3, and sometimes Tier 4 supplier, which we are monitoring very proactively and working also with the major OEM on engine to do so. But I think the pace we're in right now is pretty much in line with with what we've been communicating before. And we remain that we still believe that it's achievable.
spk04: Okay. And follow up on that is like, are the margins or the inflationary cost pressure that you experience maybe as a result of the supply chain challenging your margin target at this point? I mean, it sounds like it's under control, but
spk09: uh can you kind of confirm what you are seeing on that front and how you're been able to kind of manage some of those pressures with pricing or productivity maybe the first thing i would say is we are fairly well protected on inflation on our contract you know for a new airplane so that's uh that's one and we have a little bit of exposure But at the same time, as you know, the pricing of our airplane has improved significantly. So far, we're definitely okay there. And same thing in the services group, where we have maybe less protection on the contract, but we've been able to improve our pricing according to the inflation that we've seen ourselves. So overall... you know, we're comfortable with our plan there and where we stand. Great. Appreciate it. Thank you. Thank you, Fadi.
spk00: Thank you. The next question is from Kevin Chang from CIBC. Please go ahead.
spk14: Good morning. Congrats on a very strong free cash flow first half of the year here. If I could ask just on some of the working capital movements, obviously the book to bill was a nice tailwind but I also noticed that your trade payables was a nice tailwind and I think if I look back I guess over your recent history being a BA only or business jet only OEM it feels like sequentially you typically see a drawn working capital from this line item just wondering if there's something there from a working capital management perspective has a seasonality change for that specific line item
spk11: Yeah. Hi, Kevin. It's Bart here. And good morning. Thanks for the question. You know, working capital in the past, particularly when the company did not have a deep backlog, was more challenging because within a quarter, we'd be using more of our own cash resources to manage the WIP, right? So with a full and deep backlog now and with a change in the way we've been working to contract progress payments throughout the cycle of building the aircraft. We're now in a place where essentially deposits and progress payments from customers are fully funding our working capital needs. So that puts us in a position where our working capital and our cash on hand remain very, very stable throughout the quarter. It's actually become quite de minimis, the cash that we need within any particular quarter. And with a backlog, 18, 24 months plus, depending on which type of aircraft we're talking about, we're in a great place to be able to sustain that going forward. So we're not anticipating large working capital variability going forward. In fact, quite the opposite. We believe we're in a position now where it will be and remain very stable moving forward from here.
spk14: That's great, Colin. Obviously, great working capital management there. Maybe just turning to services, it's been a great revenue source for you. You've seen good growth in making investments there. You've been stuck around $360 million, give or take, of revenue per quarter, and I'd be interested in knowing maybe how much of that is being impacted by some of these supply chain issues, getting parts and maybe even labor, for that matter, versus what you've seen the last three quarters, kind of hovering around this $360 million in revenue.
spk09: The answer to your question, Kevin, is yes, it's been impacted. The revenue, despite that they are amazingly good, we could have done better if parts would have been available. And so we have a bit of a backlog of parts we could sell and ship tomorrow if we would have them in our hands. But, you know, despite that, the numbers have been pretty good. But, yes, to answer your question, there is a certain impact here. Okay. That's great clarification.
spk00: Thank you.
spk14: That's a good first half of the year.
spk00: Thank you.
spk14: Thanks.
spk00: Thank you. The next question is from Cameron Dirksen from National Bank Financial. Please go ahead.
spk08: Thanks very much. Good morning. Just a couple of clarification questions on the guidance. Firstly, on the free cash flow, I don't want to take anything away from what you've done here in the first half, which has been very, very strong. But if I look at the second half of the year, it sort of implies maybe modestly positive. I'm just wondering what your assumption is around, I guess, the order activity in the second half of the year that gets you to your full year free cash flow guidance.
spk09: I think I'm wrong. That's a great question. Thank you. We clearly, you know, we're sending a message here with greater than 515. 515 is what we've been able to achieve year-to-date. Because of some unpredictability on supply chain, that's why, you know, we've kept our guidance. We're comfortable with the guidance we provided on the other metrics, but we wanted to say greater. There is a few risks ahead. So I think, you know, we'll be in a better place when we talk about our Q3 result because pretty much all the parts will be under the roof here and we can build the airplane. So we still have a few things to work out, but, you know, it's heading in the right direction. So that's why we were prudent and I've guided for greater than 515 and maintaining our view on the other metrics.
spk11: Ken, it's Bart here. If I could maybe just build on Eric's response. The other thing I would just emphasize is that while we are projecting positive free cash flow in the back half of the year, as we mentioned, I think as both of us mentioned earlier, if we're at a book-to-bill of one, and we've been somewhere between one and two, one and a half and two and a half for a while now, we still expect to be positive on a free cash flow basis, which is a completely different position for Bombardier now and one that we're very, very proud of, and it puts us in a strong position in almost any kind of market environment going forward to produce free cash flow.
spk08: Okay, that's very helpful. And maybe it's the same answer here for my other clarification just on, I guess, the EBITDA. Because if I look at the second half of the year, the guidance sort of implies maybe a flat, maybe a slightly lower EBITDA margin, and you're going to have higher aircraft delivery. So is there anything other than, I guess, maybe conservatism here that would imply that maybe there's a bit of margin pressure in the second half of the year, even on higher deliveries?
spk09: I think we are consistent with our approach, Cam, and we remain conservative moving forward. I think that's the thing you need to note. I'm saying it takes into account some of the potential risk we have, but if the risks don't materialize, then that's why we're talking about greater than.
spk08: Very good. No, that's excellent. Thanks very much.
spk09: Thank you.
spk08: Thanks.
spk00: Thank you. The next question is from Walter Spracklin from RBC Capital Markets. Please go ahead.
spk10: Yes, thanks very much, and congrats again on the quarter. Looking at your pricing, and Eric, you mentioned pricing is strong, but unlike many companies whose pricing, the impact of their pricing change can be felt pretty quickly, your delivery times obviously are much longer than many other companies, and therefore pricing Is it safe to say that the benefit from your higher pricing is still yet to be fully realized, given that a lot of the deliveries you're making now would have been priced pre-pandemic, and therefore could we see a much larger price increase on delivered product further into the future? And can you quantify, if that's correct, how – you know, what is the lead time or lag benefit that you're going to expect to see in pricing going forward?
spk09: I think that's a great question. And this is something, of course, we're discussing here on a regular basis. But, you know, I would say that the airplane we're delivering today, most of them were sold post-pandemic. We still have a few. But, you know, our backlog was extremely low two years ago when we entered into the pandemic. We've been growing that backlog significantly. So I think it's reflective of some of these pricing improvements. But at the same time, as I mentioned earlier, we also have pressure on the inflation, you know, on parts and on a few things, despite the fact that we are extremely well protected for the maturity of those. But there is some pressure there for sure. If you move forward, I mentioned, you know, you may want to think about almost two years ahead of us right now that we're selling. So if you're selling two years ahead, you need to take into account that there'll be some inflation. And, of course, the pricing is defined accordingly. So we don't feel any pressure right now in terms of, you know, trying to sell and adding another three years, another year to the backlog, we're selling, we are extremely disciplined. We are expecting a certain pricing, which will, you know, be in line with the expected inflation that we do foresee moving forward. So that's how we're, we're thinking about it, Walter.
spk10: Okay. That's great color. And my second question here is on the macro landscape and obviously a lot of trepidation out there around a upcoming recession. Now, large cabin long-range jets have held in much better during recession than their smaller cabin counterparts. I guess my question is kind of twofold. Has COVID impacts further improved that historical trend where the demand you're seeing right now might be part structural not fully impacted by cyclical events. And related to that as well is the strong demand you're getting now allowing you to adjust terms in terms of the level of deposits and the speed in which they come in such that it reduces the risk of cancellation should we go into an economic downturn.
spk09: We are extremely pleased with the quality of the backlog we have today. You know, they're mainly individual, and I think, you know, pricing is good. LDs are, you know, we're extremely disciplined about making sure that, you know, there is, you know, considerable decision to be made by the buyer if they would end up canceling. But that's why we believe that our backlog, you know, despite not just it's a long backlog, but it's a pretty good quality and long backlog we have in our ends today that And that's what makes us believe that if there is a downside in the economy, we are in a great position to be able to absorb, you know, the different, you know, fluctuation that we may foresee moving forward. But at the same time, we feel that, you know, we will not observe, like, major cancellation and things like that. So the quality of the backlog for multi-year gives us strong visibility on the revenue gap. through a couple of years, actually. That's great color. Appreciate the time, Eric. Thank you. Merci.
spk00: Thank you. The next question is from Noah Popinak from Goldman Sachs. Please go ahead.
spk06: Hi. Good morning, everybody. Good morning. Eric, maybe just staying there and maybe just get more of your thoughts on how you want to manage supply and demand here. The backlog has now increased over a billion dollars three quarters in a row, and you don't want to have customers wait too long. But this is still cyclical and discretionary to some degree. And so are you just trying to maintain that two to two and a half years of production in the backlog? Or are you assuming this two and a half billion dollar order pace production you know, pulls back 20, 30% at some point into the, you know, billion seven, billion eight, and so you try to take the production revenue to that, or, you know, how scientific can you get, I guess? It's kind of an interesting riddle to solve, and can you even do that, or do you just have to, you know, you have customers tell you when they want an airplane, and you just have to deliver to that?
spk09: I think it's a great question, Noah, and clearly we're discussing this on a daily, if not to say hourly here, about how we manage the demand and the offer we're giving. I really like the fact that we have almost two years ahead of us, and I think the rate increase that we're talking about for next year are reflective of keeping that backlog i think it's been proven in the last quarter that despite you have you know that much of a backlog sales activity remain very strong so but but there's a limit to that you know i think at three years it could become problematic for people to buy an airplane and wait for three years so so we have and and we go program by program You know, depending, you know, for the large cabin, there's a bit more patience in waiting two to three years. But on the smaller jets, you know, the medium segment, you know, we're trying to be a little bit lower than that. But I think our production rate increase right now, thinking of 15% to 20% higher than this year for next year, are reflective of how we see the backlog growing. But, you know, as Bart said earlier, you know, a book-to-bill of one moving forward would be great, you know, because we would pretty much preserve, you know, what we have here, and that's how we're thinking about this.
spk06: Okay. How much does the services business contribute to the backlog? Let me see. Double check that. Or is it primarily new build?
spk09: Two billion, roughly. So the team is saying about two billion here.
spk06: Okay. That squares up the two years that you've referred to a little better. Although it still implies something higher, but I'll circle back to that. Bart, is 3Q free cash flow positive And will the advance payments line item be positive?
spk11: So we don't – no, we don't project forward free cash flow, but by saying greater than $515 million for the second half of the year, we're implying certainly that we expect to be a positive free cash flow. Can't break it down quarter by quarter, but – Just based on a book-to-bill of one, and if you think about the kind of order activity and market we're in right now, if it stays as healthy as it's been, certainly we'd be positive for cash flow.
spk06: Yeah, I appreciate that's a little bit of a silly question in some ways, but the genesis there is just to the prior question that the 515 implies a basically exactly break-even for the back half, and then historically you've been pretty 4Q-loaded. Just wanted to basically make sure that there isn't some unique working capital line item that we all can't forecast that makes it negative in the third quarter and it's not modeled correctly and there's some surprise on that front is basically what I was trying to make sure.
spk11: Yeah, there's nothing strange that we're forecasting or different really than the way we've been performing over the past number of quarters, Noah. Working capital has remained pretty stable through the quarters, and we would expect the same in Q3.
spk06: Perfect. Okay. Thank you.
spk00: You bet. Thank you. Have a good day.
spk07: Operator, we have time for one last question.
spk00: Thank you. And the last question will be from Conor Gupta from Scotiabank. Please go ahead.
spk12: Thanks, and good morning, everyone. Thanks for squeezing me in here. So my questions are just on the balance sheet for now. So you've been partially redeeming the debt maturing over the next few years, I guess. What are some of the considerations in fully repaying the remaining 2024 and 2025 maturities versus refinancing them in this interest rate environment?
spk11: Yeah, great question, Conor. So you'll probably have noted as we've been undertaking tenders that we've been concentrating on the 2024 and 2025 maturities. We did buy some of the 2027s. They were quite deeply discounted, so that allowed us to buy more bonds per dollar spent. So as we've said, we'll continue to be opportunistic in the market, and I think that's a good example of keeping to our word. You should expect us to continue to focus on the nearer-term maturities. We've got just over $500 million left on the 24s, and assuming we continue to pay down debt here, we'll likely be in a position where our next maturity won't be until 2025. That's a considerable amount of debt, though, between the 2024s and 2025s. So our expectation today, just using our own conservative forecasts of the future for cash flow generation, and I say conservative because that's how we plan, we would need to refinance some of that debt but pay off a bunch of it as well. So I can't get into more detail than that other than to, you know, give you kind of the general guidance of how we see things.
spk12: That's great, Kilobot. Thanks so much. And then I also noticed in your disclosures that the adjusted net debt is already at $4.5 billion, which is, I think, what you guys were implying in 2025. So congrats on that. But my question is, do you see a high likelihood of coming in much below three times from that debt to EBITDA in 2025, assuming you reach the $1.5 billion EBITDA goal?
spk11: Yeah. So, yeah, great question. So, you know, when Eric laid out the strategy for the company and we came to the market in March of last year, Conor, we put that target out there that we wanted to get down to three times. That number was driven by the plan itself. It was not an overly aspirational number. It was, here's the plan. If we execute on this plan, this is where we'll get to, and it'll put our balance sheet in a really, really good place. But it's certainly not the endgame for us. We would see ourselves wanting to achieve a lower debt-to-EBITDA multiple than that, and if we certainly continue on the pace we're on, that will be the case for sure.
spk12: That's great. Congrats again. Okay. Thank you, Conor. Thank you, Conor.
spk00: Thank you. This will conclude the question and answer session. I'll turn the call back over to Eric Martel.
spk09: So thank you again to everyone for joining us today. So as you can appreciate, Bombardier continues to execute on its commitments and deliver a solid performance. I am proud of the results for the first half of 2022 and even prouder of the team behind them. Raising our cash guidance and reaffirming our other metrics simply does not happen in today's microeconomic context without a team that is focused on execution and agility. We have excellent line of sight on the months ahead of us, and will carry forward our execution mindset as we move through the third and fourth quarter. Before we sign off, I wanted to wish everyone a safe and restful summer holiday. Thank you all.
spk00: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
Disclaimer