Q3 2021 Bombardier Inc Earnings Call
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This conference is being recorded.
Of course, the house at all or would you say.
All participants please standby your conference is ready to begin.
Good morning, ladies and gentlemen, and welcome to the Bombardier third quarter 2021 earnings Conference call. Please be advised that this call is being recorded.
This time I'd like to turn the discussion over to you Mr. Foster.
Vice President F Peony, and Investor Relations from Bombardier. Please go ahead, Mr. What you should do it after that.
Good morning, everyone and welcome to Bombardier is earnings call for the third quarter ended September 30th 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.
There are risks that actual events or results may differ materially from these statements for.
For additional information on forward looking statements and underlying assumptions. Please refer to the M. D N 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.
And our executive Vice President and Chief Financial Officer, Bart Dymovsky to review, our operations and financial results for the third quarter of 2021.
I would now like to turn over the discussion to Eric.
It all makes me Coufal says Bulls, who have yet to us. Thank you for joining us this morning.
I am delighted to share that the Bombardier team once again delivered a solid quarter.
The team executed our plan very well and delivered on our committed commitment across the board.
When we last spoke three months ago, we raised guidance based on our solid execution to date and favorable market condition.
To date, we are well on track to meet that raised guidance.
Before Bart and I go into Bombardier financial detail I want to take a moment to congratulate and thank the national business Aviation Association for bringing our industry back together in person earlier. This month bombard you what the problem was proud to attend and witnessed firsthand the IND.
Trees enthusiasm.
Most importantly, our new Challenger 3500 jet was very well received and this comes a great moment in time.
This plane is a clear example of all of our investments in product development can bring significant value to customers in the measured and disciplined way.
Our order book is filling up fast for a challenge or 3500.
Its strong value proposition and market, leading status was cemented by 820 aircrafts firm order closed in Q3.
Our unit book to Bill ratio remains very healthy I think reached approximately $1 seven this past quarter that contributed to our backlog increasing by approximately $500 million to $11 2 billion.
This momentum also translated to a 17% year over year increase in business jet related revenue, reaching one 4 billion in Q3.
Flying hours and the industry continue to trend positively.
So we're at the end of the summer we observed levels surpassing 2019.
This has also led to an increased top line contribution from our iron margin service business.
On services, our infrastructure expansion is progressing well smoothly.
We are also looking beyond brick and mortar solution to diversify and grow.
Digital application like smart sparkling plus and our recently signed Mou with signature aviation Oh.
All willfully as Bart in maximizing our earnings potential and meeting our long term service revenue objectives.
That drove is also occurring with sustainability top of mind.
Sustainable Aviation fuels for example are a significant factor in our collaboration with signature.
But our approach will go well beyond that in fact, it has been detailed in our newest environmental social and governments governance report, we published just yesterday.
The report charts, our path to emission reduction and best practices to ensure we lead all facets of sustainability by example, locally and within our industry at large.
Communities in which we operate are a key focus staying on the topic of our service growth. We are hiring technicians. The relationship we have with many technical college across.
The world.
We are also seizing opportunities to retrain and redeploy staff as we are doing in Wichita for example.
Wichita and it's been a strong aviation ecosystem, and we will come to you to contribute to its health.
Beyond giving production staff new career, a fortunate these and our service network. The site has also been selected to serve as our main hub or center of excellence for our special mission, but the vacation offering.
We will leverage our engineering talent to deliver more success story similar to the Bacon program with the U S Air Force.
Turning back to our overall business I can tell you to date that we are in the right place.
We are delivering consistently on the what we set out to do especially when it comes to deleveraging the balance sheet.
Bart will detail our specific actions in his remarks in a few minutes.
For now I would like to simply express how pleased I am with the team behind US we cleared the debt maturity runway on plan and with meaningful cash interest savings.
We had a very positive response on the market and that's giving ourselves flexibility to manage our business.
As we continue on to the next phase of our capital structure plan, we will remain a poor Tennessee.
We are working toward our 2025 objective to reach a net debt leverage ratio.
Approximately three times.
We are confident in getting to these levels, while remaining disciplined and strategic with our product investment.
We have done well in cascading technology from program like the global 7500 through the entire global family and now the challenge for 3500.
This type of <unk> Genuity will sort of help maintain our product portfolio at the top of a very competitive landscape.
Like stability and focus are really key going forward.
Flexibility will also come into play as we monitor the worldwide supply chain.
It is clear the world is facing pressure when it comes to transportation of goods or sick or being labor not to mention fluctuation costs and availability of raw materials.
I can absolutely report, we have not seen any assembly line interruptions.
But this is not by luck it is hard work.
To date, we are deploying more staff to suppliers' sites to maintain clear visibility.
As far up our supply chain as possible.
We are another waiting for issue to reach us and the team is extremely proactive and vigilant.
We see a lot of tension in the system that does not seem to go away.
We will remain very cautious and conservative throughout 2022.
With regards to the short term. The good news is we are largely sold out and have everything we need umbach through to next year.
The people I mentioned, we are sending into the regions will help us deal with any longer term threat, but again vigilant and proactive approach Archie.
When it comes to production ultimately we need to keep the right balance we want to avoid adding too much backlog on certain program. That's really the equation it comes down to pricing supply chain and backlog.
The plan, we build this based on stability and consistency not having the bank on the large market upswing to meet our numbers.
Whether it's this year or our 2025 objectives.
We are in the sweet spot right now and continue to benefit from a better pricing environment.
Short term we were.
Will not overreact to one market indicator alone or precipitate a major change that would create unnecessary pressure on logistic or the bottom line.
When it comes to profitability, we have seen a good acceleration on the global 7500.
The team is doing an excellent job driving the learning curve down and we have strong visibility on the unit cost of aircraft that will be delivered well into next year.
We are very focused on driving what we control.
Have good tailwind on the 75 global 75 under our learning curve, and we are bringing equal energy and focus to our $400 million recurring saving objectives.
The last 20% or so of the plan to really focus is on productivity gains and our operational excellence program.
On that front, we are delighted to welcome back they've been married.
It's a record and deep understanding of bombard you will ensure we segment our productivity efforts.
In a thoughtful and cohesive manner.
David will be looking at all facets of our technology infrastructure and company wide processes to ensure we unlock the most value from lean operating principle.
Through this we will further our continuous improvement mindset and I look forward to sharing more on this next year.
With that I'll turn it over to Bart to dive deeper into our key performance indicators and balance sheet.
Bart.
Thank you, Eric and good morning, everyone.
The last three months have certainly been a very exciting period for Bombardier as we continued to demonstrate solid operational execution.
At the same time, making considerable progress towards our strategic objectives and.
In short our path forward is clearer than ever.
Financially, we had another solid performance, including free cash flow generation of $100 million.
<unk> sequential EBITDA margin expansion.
On the back of this we are well positioned to meet our 2021 revised guidance on both revenues and profitability.
And we are already within our objective of better than 300 million free cash flow usage with one quarter to go.
Q3 also saw us achieve a major milestone in our deleveraging plan with the clearing of debt maturities through to December of 2024.
We have also made considerable progress on our other key strategic initiatives, which are the building blocks of our 2025 financial objectives.
It's important to emphasize that much of our year over year margin expansion is the result of our focus on the things, we control and not market momentum.
We are pleased with our execution to date and our team remains focused on the work ahead.
In particular.
The global 7500 learning curve continues to perform to plan and we remain on track to our objective of 20% unit cost reduction between the 50 and 100 aircraft.
In fact, the 100 aircraft a global 7500 is currently going through interior completion, which means we have excellent visibility on the cost of this aircraft.
Our $400 million cost reduction initiative continues to track ahead of our initial plan.
And we are incorporating the remaining transformative initiatives within our ongoing budget and strategic planning process.
On services as flight hours begin to exceed those of 2019, our aftermarket business is reacting as we expected our facilities, including the additional footprint. We've added are filling up fast.
Our parts and pay per hour revenue streams are picking up momentum.
We expect aftermarket growth in the coming quarters, we will continue to be progressive as new facilities become operational.
Finally, we have achieved a major milestone in our deleveraging plan with the clearing of debt maturities through to December 24.
Here is where our key capital metrics stand today.
Gross debt now stands at 7 billion, which represents a full $3 billion reduction since February of this year.
We have increased our average debt years to maturity by approximately 50% from three four years in December 2020 to $5 two years currently.
Annual interest costs have been reduced by more than $225 million on a go forward basis.
And our liquidity position is strong with approximately $1 9 billion of pro forma liquidity at our disposal.
No.
We are very pleased with the steps we have taken to date. We know there is more work to do on our capital structure going forward.
That's why we will remain vigilant in our tracking of changing market conditions.
And be opportunistic in our future future capital market transactions.
With that let's move on to our Q3 results, which continued to build on our strong first half performance.
First total revenues for the quarter reached one 4 billion, resulting from 27 aircraft deliveries at $310 million in aftermarket revenues.
This represents a year over year improvement of 17% when adjusting for the impact of the divestitures, we've made in commercial aviation and Aerostructures.
Our business aircraft manufacturing year over year revenue growth was the result of three incremental deliveries and better mix.
Large cabin aircraft accounted for a higher content of deliveries going from 13 in 2020 to 15 in 2021, including nine global 7500 aircraft.
Which puts us on pace for 35 to 40 deliveries.
For the full year.
For the aftermarket business revenues continued their quarter over quarter uptrend, increasing from $295 million in Q2 of last year to $310 million in Q3 of this year.
Year over year revenues increased by $76 million or 32%.
As flight hours have now recovered from last years lows, we are seeing activity ramp up across our aftermarket revenue streams in line with our expectations.
Divestitures did have an impact when comparing year over year reported results rep.
Revenues from Aerostructures and commercial aviation accounted for approximately $160 million year over year reduction in revenues in Q3.
And approximately $740 million year to date.
Because the sale of the Aerostructures business was concluded in October of last year, we will see a much smaller year over year impact in Q4.
Moving to earnings total adjusted EBITDA for the quarter was $142 million, representing an EBITDA margin of nine 8%.
Adjusted EBIT was $49 million for an EBIT margin of three 3%.
Our adjusted EBITDA increased $58 million year over year, and our EBITDA margins have improved by 380 basis points to nine 8% versus 6% in the same quarter of last year.
The year over year improvement is attributable to the following factors.
First we have delivered more aircraft with a better delivery mix to last year.
On top of this the global 7500 aircraft margin contribution as well as our cost reduction efforts continue to be a significant tailwind versus 2020.
In addition, our aftermarket business contributed to a larger portion of the total revenue having increased from 17% in Q3 of 2020% to 21% this year.
Moving on to free cash flow, we saw consolidated cash generation of $100 million in Q3.
Inventory levels reduced by approximately $100 million versus the previous quarter.
Partly offset by lower accounts payable.
Advanced levels were up $50 million as our unit book to Bill reached approximately one seven times and our overall backlog group grew by 500 million to $11 2 billion.
We are also seeing meaningful reductions to our interest costs as we started to benefit from the deleveraging actions we have taken.
Our cash interest costs, which stood at 101 million represent a year over year improvement of 28% or $39 million for the quarter.
As we enter the final stretch of 2021, we are very well positioned to meet our revised full year guidance.
Planned deliveries will increase in Q4 to reach approximately 120 aircraft for the full year.
Driving incremental revenues and margin conversion.
The global 7500 learning curve and our cost reduction actions will also continue to contribute incrementally.
Further expanding our margins versus Q3.
Turning to cash flow our year to date performance already meets our full year guidance.
Our focus will continue to be centered on building backlog. So at a minimum we replenished the advances associated with Q4 aircraft deliveries.
Should we see continued strong demand, we will be well positioned to capture.
Cash interest expense will increase in Q4 versus Q3.
But we will be well below last year's levels, given all of the debt repayment actions taken this year.
We also do not expect any significant nonrecurring expenses.
Overall, we are on our way to deliver another positive free cash flow quarter and meet our free cash flow guidance.
So in conclusion, we have achieved a great deal so far in 2021 and are confident in maintaining our strong performance through the end of this year as we head into 2022.
The longer term plan, we have shared in early March remains on track and we continue to focus on becoming a more predictable profitable and resilient business Aviation company.
With that thank you very much and let me turn it back over to Frances to begin the Q&A session.
Thanks Bart.
To remind everyone that the minority 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 up for questions on the call operator.
Thank you.
If you have a question. Please press star one on your Touchtone telephone.
If you are using a speaker phone. Please go ahead, and then press star one.
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Allocated time for all participants please limit yourself to one question and one follow up.
Our first question is from Noah <unk> from.
From Vishal Bank capital market. Please.
Please go ahead.
Yes, thank you very much and good morning, everyone.
Could you maybe provide some color about the context of a potential increase in production rates.
Where we are right now and maybe talk about the ability for the supply chain to endo.
Production increased in the current context of the global supply chain.
Okay.
Good morning, everyone. Thanks for the question so clear.
Clearly and I think we've laid this out.
Clearly at the beginning of the year. Our main objective this year was to rebuild backlog.
So this is clearly progressing extremely well.
We will be remaining prudent as I, just mentioned and clearly the vigilant in our in our evaluation and I said this is a bit of an equation you need to consider your backlog, we need to consider what will be the impact on pricing if we increase the rate.
And we need to of course assess properly the supply chain. So we're taking measure on the supply chain as I mentioned, we are redeploying extra resources right now in order to be proactive. So so far the team has done an amazing job, we don't have a impact right now or minimal impact. So we are.
Feeling pretty good about where we are but this is all about anticipating issue early in the supply chain that we can resort resolve to date.
So we're working with our supplier also we're of course very closely.
And of course, we will have I think been wet in terms of our decision here further color. When I think we provide you with our 2022 guidance in a few months from the early next year.
Okay, and just for the follow up obviously, a strong free cash flow performance after nine months versus your current guidance for the year. So just wondering what could maybe dragged down free cash flow a bit in Q4, even if it's in the positive territory or is the guidance for the year.
On the free cash flow side overly conservative.
Yes, Thanks, Ben what's it's Bart here and good morning.
Just a couple of metrics to help.
Kind of shape up the picture of our year to date usage has been $214 million versus our guidance of free cash flow usage of better than $300 million. So we're already in a place where we're probably a bit ahead of where we thought we would be.
We are staying with guidance, there's obviously still a lot of time to go here in the in the fourth quarter, but we do tend to see higher new order activity on deliveries in the fourth quarter than we do in the third quarter typically at least in past years. So.
This this quarter.
We saw strong new order momentum that obviously helped us.
Performed very very well on free cash flow and to answer your question on what might be helpful. In the fourth quarter. If we do see another strong quarter of order activity certainly that would have an impact in a positive direction.
As could order mix.
If we are selling more of our large aircraft.
Cash on the contrary cash interest cost in Q3 will be higher that's just simply a than it was in I'm sorry in Q4 than it was in Q3, that's simply a.
A timing thing on our coupons and we do expect to have a little bit higher capex in Q4 than we did in Q3.
Hopefully that helps to give us a little bit of color of NOL.
Great color. Thank you very much.
Okay. Thank you.
Thank you all following question is from Myles Walton of UBS. Please go ahead.
Thanks, Good morning, Martin Eric.
Maybe to talk a bit about the 7500 margins or have they turned the points.
Now in the fourth quarter, where we are that they are accretive to the overall EBITDA margins of the enterprise.
Yes, I can.
Right now we are exactly on the right path as we suggested.
Early this year, we are seeing our learning curve, improving and getting better exactly on plan. So clearly.
We had some some less now we are in the positive territory.
You know in Q3, and we will be also in Q4.
And we expect of course this to carry on so theres two phenomenon, where getting the learning curve and also launch customer also pricing is going to be improving so all these impact is exactly in line with what we were anticipating earlier this year when we had.
The Investor day, so right on track and clearly we've turned in Q3 as we were expecting on the positive side.
And of course that is going to become more and more positive as we as we progress.
Okay Annie.
Any offsets to that looking into 2022, obviously that should be a priority in Israel.
Margin expand or any other offsets you throw out there.
No not not not in this case smiles with with this with the 7500.
The visibility that we have on the margin improvement largely due to the to the learning curve.
It's very very clear to us I think as Eric and I, both said in our comments we've.
We have.
Visibility on the 100 aircraft.
Which is very near the end of of its build cycle. So we're in a great position and we see continued steady and progressive margin expansion on the platform.
Okay I'll leave that one thank you.
Okay perfect.
Thank you.
<unk> question is from Ronald Epstein from Bank of America. Please go ahead.
Hey, good morning, guys.
Good morning.
Growing up on a.
A couple of points what are you seeing in terms of supply chain.
Raw materials labor that kind of thing I mean across industries. Those are the factors just curious what youre seeing now and how you're thinking about managing that managing that into next year.
So we see a couple of things.
Clearly there is pressure right now on the logistic.
And as I mentioned earlier, our guys here I've done a fantastic job in getting through with a different board in transportation and everything to get the parts on dock on time here. So we're pleased with that but this is an everyday battle as you can imagine so logistic.
We will continue to do what we've done and so far we are seeing some small improvement in some area.
Dan after clearly there is availability of raw.
<unk> and pricing of raw material is also of.
Of course.
As an impact and will have an impact I think it's everybody is.
<unk> depth right now.
But we're well positioned there.
We are redeploying it is through our resources.
In the field right now to work with not just the tier one supplier, but also the tier two and tier three supplier by region to make sure because one of the fit the phenomenon I'm also that we are seeing is some of our tier two and tier three suppliers.
Are facing.
Manpower shortages and challenge to bring people in so we are working with them to make sure that this in the long run will not affect our our supply chain, but clearly we are in a very competitive market right now on the supply chain side.
Not just amongst ourselves in the aerospace industry with everybody.
So clearly we have always sold the majority of our supply chain is based here in North America, and Europe, which is probably helpful right now for us.
Logistics are a little bit less complex since the beginning of the pandemic in that regard. So so we'll be working closely with our supplier.
And we are already but we will even beef up our team right now to provide good to have better visibility of course into 2022, but as I said earlier. So far we have parts of the dock, we know exactly where this is going into Q4, and we're going to continue to monitor that situation closely.
Ron It's Bart here.
One point to maybe build on.
Eric's response.
In addition to all of the work that is being done to address the supply chain challenges, we are seeing as well very constructive pricing on new aircraft orders as well.
So if we see a situation where were higher costs are coming into our supply chain.
On the revenue side things are progressing well.
Great. Thank you.
Thank you.
A following question is from Chris Murray from <unk>.
<unk> capital markets. Please go ahead.
Mr. Murphy. Your line is open you May proceed with your question.
Yes.
Yes.
So Mr. Murray, we cannot hear you at this time, if you own a speaker phone can you pick up the handset on.
On mute your line.
We'll move to the next question Mohan.
Some of it comes back in queue.
Our next question will be from Cameron Dukson from National Bank Financial. Please go ahead.
Thanks, very much good morning.
Good morning Cameron.
If you could talk a little bit more about the order activity in Q3, obviously, a pretty good book to Bill.
Could you just maybe touch on model type.
Are you seeing the strongest demand.
And also geographically where you're seeing the demand.
Yes.
Good question so.
The activity level as being extremely great in North America since the beginning of the year.
But the positive news here is we see and it was fairly slow I would say in Q1 and Q2 in Europe, but we've seen a major rebound of Europe in the third quarter. So this is positive. So we see you know basic.
Basically.
North America, keeping momentum, we see Europe now since Q3 coming back in.
And in Asia remains a little slower there is activity, but it's been slower than you know.
Clearly the rest of the world and clearly related to the border and the restriction that they are facing right now that are probably a little bit more strict so we've seen that.
In terms of the order activity.
As we were I would say readjusting, our backlog rebuilding backlog on some of the program.
And we've seen good level of activity to be honest across the board.
For us bombard you too.
We are seeing good activity level with the fleet operators since the beginning of the year and even late last year. It started which is a positive for us because a lot of people coming in and using business jet today for the first time or starting to are very often going to the fleet. Operator, you know that we have.
Bombardier extremely extremely well position.
With the fleet operator.
So this is.
We are clearly gaining there in terms of.
Being able to capitalize on this phenomenon thats happening during the pandemic. So so we are in a good place and for us delivering airplanes in the fleet. Operator also is a great news for our service business.
And airplane delivered to a fleet operator will fly I don't know call. It a thousand hour a year versus a regular operator will fly to underwrite 200 hours a year. So of course generating more revenue for our service business.
Okay.
Very helpful and if I could just squeeze one very quick one in for Bart maybe maybe you can just update us with all the various.
Actions, you've taken on the balance sheet here what the.
Run rate interest expense expectation is at this point.
Sure, Yes by all means Cameron so we've.
Actually while obviously been very very busy over the last six months.
In total we have.
We've repaid or retired.
Approximately five point to $2 billion of debt.
Reduction on a gross basis is down.
Or is $3 billion in total so we're now sitting at at $7 billion of gross debt.
With $1 9 billion of pro forma cash on hands were that were in a very good position in that respect as well and interest run rate interest cost savings.
From now going forward are going to be about 220, just over $225 million per annum. So hopefully that.
With the <unk>.
The question there camera.
Okay. No that's very helpful. Thanks, very much okay perfect. Thank you.
Thank you. Our following question is from Chris Murray from <unk> capital markets. Please go ahead.
Yes, thanks folks.
Apologies earlier.
Just looking at the aftermarket business I was wondering if you can walk through the progression of the development of your.
Facilities, and just trying to get a gauge on your thoughts around your ability to continue to grow the business as we go into next year and through 2025.
Yes.
Great question, Chris Thanks.
Clearly.
We have a strategy right now of putting in place that capability and capacity, which is not just the brick and mortar but it's also.
<unk> the right skill set at the facility. So we are ramping up our facility are extremely busy right now the flying hours are raising across the world.
And clearly in the U S and even in Europe. It's actually ahead of 2019. So so the Bombardier plane flying our almost 5000 airplanes flying in the world are pretty pretty busy.
Which brings work to our facility, which you know right now we are looking to grow that get paid capability. As you know we are building our new facility in <unk>, where we're already there, but we're moving on the other side of the of the runway with a bigger facility because the business is super busy. We are we've done the same thing in Singapore, Singapore.
Or was that was actually built like a six seven years ago and right. Now we are growing like by about three to four times, our square footage over there to be able to accommodate so so clearly the customer wants to come back to the OEM what their airplane if youre if youre not there then they can but if you are around they will.
Clearly go through our facility Miami also and the Opelika facility in the Miami Fort Lauderdale area is coming together, we should get this up and running sometime next year, which also again will generate new demand for us. So so this is this is amazing.
What's happening right now in terms of having that capability available right on time, because we believe that the market.
It's going to be flying a lot again next year and those facility are coming and becoming available right at the right time for us.
Alright Thats helpful. And then just one follow up question I was wondering if you could just give us a bit of an update on the Lear jet program.
Appreciating that its probably winding down, but I'm trying to maybe gauge.
Should production.
This year should we be expecting some some production a little bit into next year.
So there will be a few airplane remaining to deliver in the first quarter next year. So that's been the plan. So are those airplanes will deliver in Q1 and we are.
Clearly burning down our work in process right now and the team is fully engaged the team working on the line right now we are going to be redeploying. These people.
Within the Wichita facility on the service business. So again, our timing is great here, because we're reducing the rate we're stopping the production and.
The need for.
No.
<unk> skill set is a challenge right now across the world in a lot of field. So for us to have the ability to redeploy these employee into our service center in Wichita and also as you know we have.
I've mentioned that earlier, we're growing our mission ice business quite significantly I've mentioned as an example, the beacon program.
The U S Air Force that is in which it though right now we are of course redeploying people very capable and talented people we have in Wichita on these program, which as you know our good revenue generator in EBIT creation for us.
Okay. That's helpful. Thank you.
Thank you. Our following question is from Tim James from TD Securities. Please go ahead.
Thank you good morning.
I'm wondering if you could give us your.
David thoughts on the long term.
Earnings volatility of the business.
And you've talked about this in the past some of the kind of revenue initiatives in your view.
Michael and how the businesses position, but I'm just wondering if you can maybe again kind of update us on how you think about that going forward and what you can do with the business too.
You'd never takeaway, but limit the earnings volatility over the long term.
So so first of all the.
We've highlighted I think a very detailed plan.
Our global 7500, right now is clearly the biggest earning driver contributor for US, we've mentioned somewhere around or maybe a little bit more than $400 million. We also have our $400 million cost reduction plan, which will be fully recurring by 2023, which we are making great progress there.
Again. So this is also going to be another one that.
<unk> will stabilize.
And it will be a lever for our earning growth that we are we are expecting the other one is the growth of our aftermarket business.
We've laid out a plan, where we want to grow our business from 1 billion to about $2 billion of revenue. This is going to be like more so we'll basically bring the revenue portion of the full company.
On the service from about 17, 18% to about 27%.
By getting to about $2 billion. So our revenue from the services group.
And that business is of course, you know bring a good margin for us that's why I was answering a question earlier that we are growing our capabilities. So that we can attract.
A truly are.
Our customer back into into our service facility, so clearly reducing our costs brings less volatility.
And that's important because there's fees that we don't want we don't fully control, but that one we do control it and where we're at we're in a good place right now with our plan. The other piece also is having backlog brings stability. So this is why you know, adding a bit of headwind and we're pretty.
<unk>.
Disciplined about this we like for every program, we have a target of minimum backlog and maximum backlog because having too much backlog is not good either adding too low of a backlog is not good. So we have clear targets for every program in terms of where we are and we feel pretty good about our situation today. So that will also bring pre.
<unk> ability and stability moving forward and our hernia.
Great. Thank you very much.
Thank you. Thank you. Thank you.
Our next question is from Noah <unk> from Goldman Sachs. Please go ahead.
Hi, Good morning, everybody good morning, good morning.
When we're looking at next year.
What makes the margin progression towards the 2025 target.
Better than a linear or worse than linear.
Next year as you move to the to the out year target.
Thanks, though as far here I'll, maybe I'll maybe start.
The.
The margin expansion for us.
In our in our plan going out to 2025 is it.
Is more concentrated in the early years 2021 'twenty two and 'twenty three that's when we see the largest benefits from the learning curve on the 7500.
We expect to deliver our full $400 million of cost reduction activities.
During during that time period as well so the full run rate.
<unk> consistently been saying, we will achieve that by by 2023.
As we move forward beyond that we do anticipate or have modeled in for ourselves at least modest growth in new order activity going from 100, 520 aircrafts to something more like 135 ish towards the back end of our program. So we do expect.
And with with growth across the platforms in new orders.
Benefit from spreading fixed costs across more airplanes, which which gives us some margin expansion as well.
We will slowdown.
It's almost three times 2020, EBITDA in 2021, which is very very significant growth that pace will slow down.
Major contributor in the back half of the planning period will be the continued growth in our aftermarket business as it starts to make up more and more of the revenues of the business and we anticipate growing from 17% I think.
Revenues in 2022.
<unk>, 22% to 27% by 2025, so it is a bit skewed it's not linear in the first over the entire five years more concentrated through 'twenty three and then.
Slower growth in the back half of the plan.
Excellent that is helpful and just to follow up quickly on on the services plan that you've mentioned a few times now.
Is pretty ambitious.
I guess, maybe what are the next steps you're rolling out there that we can follow and does that is that easier or harder.
Given the current environment.
As their overflow.
Sort of easily come to you or are things just so busy that it makes it tougher to make those inroads.
I think it's very busy right now airplanes are flying. So this is always the first leading indicator that we looked at so airplanes are flying a lot, especially in North America, and Europe right now actually over the level of 2019.
Which is very encouraging for us because you know our profitability come from different different field, but one is our smartcard program. So the more airplanes flying and the more the more revenue and profit we can make on this program.
And also the availability, having people coming with their jet home at the OEM and making this possible right now is clearly.
You know a good a good place to be I also mentioned I think earlier that it's not just.
Putting this service center our strategy is also a bit more elaborated and Doug. We also have the smart link plus program. So those are new technology that we're putting out there to bring revenue. We just signing a detailed agreement with signature also to to to help us in that regard. So all these things Jim <unk>.
Bring more revenue and more profit to the aftermarket expansion.
Thank you.
Thank you.
Thank you. Our following question is from George Shapiro from Shapiro Research. Please go ahead.
Hi, This is Ed in for George.
Good morning.
I was noticing that RMB gross R&D has ticked up just a little bit this quarter.
And while it's still insignificant.
What's capitalized I was wondering if you wanted to comment on the competitive climate in terms of the new product offerings that have been announced and whether or not that's impacted your long term development plans and the investment. Thank you okay.
We feel pretty good.
Above where we are right now the 75 Andre This is a brand new airplane performing extremely well in service well receive also from from the customer base.
We always made the assumption that we're going to have competitors.
So this but theres been launch of new products.
Which were to be honest exactly what we were anticipating so there was no surprise for us.
You know some of the platform are derivative of our new platform, we will see how.
They are being received by the market base, but clearly our 75 hundreds today remains the flagship airplane from us and from from.
From from the whole industry.
And we are.
Simply delivering airplanes, we have.
80% 80 airplanes delivered today, we're going to deliver 100 airplanes sometime in Q1. So so clearly this is heading for us in the right direction. So we feel pretty solid about our offering today and of course, we are always reevaluating.
<unk> made me, what our customers are saying and what our customer needs are we okay with what we're offering or is there any new needs out there and we will readjust accordingly, our capex envelope and same thing I can say the same thing across all the platforms. So no surprises, we feel pretty strong about our product offering today and yes, we are thinking about what are we.
Doing next based on the current market environment, but we are we have promised to be very disciplined with our capex level and we feel that we can manage the business extremely.
Extremely well with with this envelope eventually there'll be a day, where we're going to think about a new program, but we're not there yet, but we're thinking about it we're looking at when what technology and we will do it but to date, we have a very comprehensive portfolio of products and they are competing extremely well in the market.
Thank you.
Thank you.
Thank you. Our following question is from Cornell <unk> Gupta from Scotiabank. Please go ahead.
Thanks, and good morning, everyone.
Results so.
Maybe just to follow up on the previous question on <unk>.
New products and <unk>.
Competition.
Like I think Gilead general dynamics.
Talking about the kind of a good amount of interest you are seeing in the new bonds, they're bringing out a desk. So obviously you have another two products out in the market over the next three or four years themselves right.
A lot of new products coming out.
Like you said.
Anticipated some competition sandy, but just kind of be the norm in the industry.
But I'm just kind of curious as to you know like if you are kind of keeping your.
Palio kind of asked this but 7500, obviously being the best in class right now.
And these new products come out and the customer into its kind of suggests that maybe you need to invest some money.
And to a new model of something like what some of you. We are preferred course of action would you prefer to go the path of new clean sheet design or are you looking at more sort of refresh us to keep the capex intensity, though.
I think every platform is different.
I think we just clearly with the 35 right now and if I'm looking at the customer base of reaction.
Which is very positive.
This is this is basically refreshing our cabin, adding some new feature which were exactly where the customer base. We're looking what was looking for so I think when you were listening carefully to your.
Our supplier base and that suppliers, sorry about customer base.
And you respond to their needs and demand then you get the type of reaction that we got on the challenging 35, I'd, rather right now which is extremely strong and positive so.
Sometimes other other platform will probably maybe require a bigger could be a clean sheet, but to date.
Got everything going on in our competitors move.
I feel I still feel pretty good about our challenger.
<unk> hundred 50.
First of all of this is still the biggest cabin in that category of airplanes. This is the lowest.
Cost operating airplane, if you look at the deal will see at about $2100 compared to everybody else, we're competing with which could be up to 3000, we feel pretty strong and the airplane is about $10 million less than the last one that just got announced from our competitor.
You'd have to look at it. So this is as an example, the medium market segment is a big segment.
I think our competitor now just positioned themselves right at the top of that segment, leaving a lot of room in the mid sized segment.
For us to be so we feel pretty good about the actual airplane and we'll see what we do moving forward and again on the global and the large segment.
You know there is one constant on it comes on a regular basis, we are discussing with our customer.
What they need so they need right now for a long range airplane you know at four zone is what the customer base is saying.
<unk> to me is a question Mark.
And because if you fly for 17 18 hours youre going to need a second crew a pilot.
Going to need no more flight attendant, meaning that youre going to give one of your three zones that you approved so.
Making the case for our Ford Zone.
So clearly.
This is what the customer base is telling us and this is where we are what we're thinking today is the right solution.
That's very helpful. Thanks, so much and Bob maybe if I can squeeze a quick one for you so I'm free cash and like we've seen you guys.
Beat expectation last few quarters, and maybe perhaps your own expectations as well given you have seasonality in Q2 and Q3.
I'm just kind of curious like where you already saw order activity was.
Strong momentum heading into Q3.
If any surprises to you on the positive side came from in Q3 on free cash in <unk>.
What kind of keeps you basically.
We are raising guidance on free cash given Q quarter hugely positive.
Yeah sure Conor thanks very much.
Obviously.
With year to date usage of $214 million were already within our free cash flow guidance for the year of usage of $300 million. So so yes, we've seen very positive momentum on the free cash flow side.
The third quarter as we saw with the second quarter, we had.
More orders.
Then we would have planned for which which are quite helpful. There was a little bit of a mix benefit as well if we continue to see the same kind of order activity.
Given the fact that we've had strong customer deposits on the aircraft that we've been selling.
That would definitely be upside for us so.
To address your.
Your question about why we haven't raised guidance I think we've said from day one that.
We want to stay focused on delivering the performance of the business and use conservative assumptions.
To make our decisions when it comes to deploying capex when it comes to our forecast and guidance for the year, we made a major upside revision to all of our guidance metrics at the end of Q2.
Comfortable obviously with the guidance that we have now in our ability to achieve it across the board in Q4.
If it was just me sitting here I would say, yes, there's probably upside to what the guidance is on free cash flow, but.
As I said in response to a question earlier on the call.
It's the first month of the quarter and there's a long way to go so we'll stick with our conservative approach for the time being hopefully that helps.
That's very helpful. That's the right approach for sure. Thanks. Thanks, so much for terrific. Thanks have a good day.
Thank you. Following question is from Stephen Trent from Citi. Please go ahead.
Commercial aircraft and coming to business jet.
And either via the fleet, operator or buying their first airplane.
Has been accelerated by depend Debbie.
No flight available either a commercial or people started to realize that.
Started to realize that there was a premium to pay to come to business jet, but maybe it was not as significant between flying a premium on a on a commercial aircrafts then they tossed.
And the second thing is of course safety the obvious as you can fly with I don't know your family on the airplane and you feel safer. So if all of these reason there was an acceleration of people I will sit this week coming our way.
And then I think the second question will be how sticky will that be we know when when things come back to a more normal will be state. We do believe that there will be some leakage, but we do believe that the majority will continue to fly business aircraft. So that's your question number one question number two about the taxi I think it's a very different market than.
Then what we're not competing in that market today, we are a long range and the taxi market can also be of interest for us as we can probably team up with these people and when somebody Atlanta and <unk>.
They're not always.
The exact destination they need to be so those possibility will actually probably make even business jet more more attractive.
Okay very helpful. Thanks, very much for the color.
Operator, we have time for one last question.
Our last question is some Jack Hanger Cowen and company. Please go ahead.
Hi, guys. Good morning. This is Jack on for Akai today.
I guess I guess, just a quick question around pricing.
Obviously, you alluded to.
Does jet being very strong deliveries going.
I just wanted to maybe get your take on.
The pricing environment.
Or checks or.
Used as jet.
Available for sale are extremely low.
Maybe get your perspective on what you see.
On pricing going forward.
Yeah.
So.
As we said clearly pricing is improve.
Significantly through the year.
The fact that the pre one.
Airplane availability is at the lowest level that we've seen in this industry clearly.
People are looking for a solution.
The fleet, operator, or one solution, but even themselves right now you've heard them quoting very often 30, 40% more customer on their list. So of course there is need.
Also from these guys. So so we believe right now with what I just said also previously.
If the new.
Customer base.
Stick to business jet Aviation clearly you know this is going to change the infrastructure and that we were doing it and will clearly require more airplane. So as we said earlier, it's a balance between you know that we want to accelerated rate right now what's going to be the impact on pricing in the supply chain follow and what.
Backlog are we targeting so so this is always a bit of a complex situation is you know we're in an industry, where you know when we make a decision to accelerate right.
It's not happening that next day, it takes a little bit of time as a supply chain needs to react. So it's all of this that we are thinking right now and make sure that we.
We can achieve our plan, we can keep the pricing that we see right now without affecting the price aim because we've increased their right and then maybe the supply chain cannot follow so all of these questions are on the table, but clearly we foresee right now pricing, we see better pricing locally owned event. There is clearly a driver.
For us in terms of demand.
And the pricing improvement will also help us to win upset cost inflation pressure, we see right now clearly on the bulletin material as as I'm sure you would imagine and raw materials. So we're focused right now on building the backlog at the right price basically.
Perfect. Thank you.
Thanks Jack.
Thank you that's all the time, we have a question back to you.
Okay. Thank you so much so thank you again, everyone for joining us. This morning, I am very encouraged by the market our team's performance and also the quality of our product offerings, we will carefully manage any obstacle that come up but.
Set the right fundamental so far and I am pleased to see that are consistent performance as reflected.
We have a busy few weeks remaining ahead of us to close out this year and I look forward to sharing what's next when we meet again in the new year in the meantime, please stay safe and stay healthy. Thank you.
Thank you.
Thanks.
Till nine at this time.
Hi, Thanks.