Bombardier Earnings Call Insights: Program Development and Aerospace Margins

Bombardier (BBD.B) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Program Development

Walter Spracklin – RBC Capital Markets: So, my first question is, I guess, surprise to you will be on the CSeries. I know when (Gee) actually was talking about the program development at your Investor Day, he’d indicated that April was kind of make or break or highest risk month during the coming months at that time due to the testing – the type of testing that was going to be happening in April. We are now in May, so presumably does that mean that we have passed that key April month. Would you consider the development risk profile on this to be substantially lower than it was when you made the statement at your Investor Day?

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Pierre Beaudoin – President and CEO: The general answer to this is, yes because we made substantial progress. We are just getting ready to move the aircraft in a few – very shortly to the test center so that means the aircraft is essentially completed. We are very advance in the structural test. As (Gee) said this morning, there is 8 of the 9 tests that are gone and we are very advance in the aircraft zero testing. So, the risks of development as preparing the aircraft for first flight are advance. Now, what we need to do is once we pass the aircraft through flight test there is quite a few process needs to go through and we are expecting those to go well.

Walter Spracklin – RBC Capital Markets: Okay, I do have other questions, but I will queue up. But before I just want to say this. You’re in the final stretch for the CSeries. I must be a very exciting time. I just want to wish you the best of luck.

Pierre Beaudoin – President and CEO: I just want to correct what you said. We’re at the beginning of – we’re about to starts like this.

Walter Spracklin – RBC Capital Markets: Good correction. Thanks.

Aerospace Margins

Fadi Chamoun – BMO Capital Markets: So, I wanted to go into the Aerospace margins a little bit. So, you had a pretty substantial increase in manufacturing revenues and with a bit of a positive mix too on the delivery side was the global that you delivered this quarter and yet your gross margins were weak. I mean, we anticipated that it will be a slow start. But just given the strength in revenue, I’m surprised that the margins weren’t a little bit better. Can you walk us through the items that are keeping that or holding back the margin at this point?

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Pierre Alary – SVP and CFO: Yes. Well, first of all, our results are in line with our guidance and expectations. So, from our perspective, there is no surprise, but one could expect that given the increase in volume, the percentage could have increased. There are two or three elements that makes a difference at the margin level and at the EBIT level. One of them is that we’ve sold more used aircraft, close to $100 million more quarter-over-quarter and as you know, margin on used aircraft is fairly low and in fact, it’s one of the explanation that we had lower margin in this particular quarter. And if you look at the inventory note where we disclose, for example, the provision we are taking on for inventory, it includes an amount $30 million where it was $14 million last year, so high level of volume in the used aircraft and the inventory to provision was higher, so double impact on that side. We also had less liquidity damages on cancellation, so that has an impact. But on the other side we had better or higher absorption of lower SG&E as could have been expected and it was also a negative variance and when you look at the provision on the credit individual value guarantee, we had a benefit last year and this year we have a – it’s a small cost on this side. So that the elements that explain most of the variation, but again it was a result that we have is according to our expectation and our guidance.

Fadi Chamoun – BMO Capital Markets: What was the delta on the residual value guarantees this year compared to last?

Pierre Alary – SVP and CFO: So, look at the variance on the financial instrument, it’s mostly under the other expense and other income, so we have an expense of $6 million this quarter and was $21 million last year.