Bombardier Inc.

Thank you. Good morning, everyone, and welcome to Bombardier's second quarter 2019 earnings call.

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 risk that actual events or results may differ materially from these statements.

For additional information of forward-looking statements and underlying assumptions, please refer to the MD&A. I’m making this cautionary statement on behalf of each speaker on this call.

With me today is our President and Chief Executive Officer, Alain Bellemare; and our Chief Financial Officer, John Di Bert, to review our financial results for the second quarter ended June 30, 2019. I'd now like to turn over the discussion to Alain.

Thank you, Patrick. Good morning, everyone and thank you for joining us today.

As you saw in the press release this morning, we continue to make solid progress on our turnaround journey. We are pleased with our momentum in aerospace, where our transformation is progressing ahead of plan.

At transportation, we continue to make good progress transforming the business as well. Over the next 12 to 18 months, we have more work to do to compete what we started.

We are working through our challenging projects as well as the ramping up to make sure that we delivered on that backlog successfully. As a result, we are going through an intense phase where we need to make additional investments over the rest of the year, including adding engineering and manufacturing capacity.

Although this will have an impact on our 2019 financial results, these are the right actions to complete the journey and to position BT to deliver sustainable financial performance. I will come back to BT in a few minutes, but first an update on aerospace.

As I mentioned, we are pleased with our progress in aerospace. Our focus now is on creating value with our new Bombardier Aviation by leveraging our investments.

With the closing of the Q400 transaction and the agreement to sell the CRJ program to MHI, our three underperforming commercial aircraft programs have been successfully addressed. This allows us to fully focus on business aviation, one of our two strong pillars.

As a result of the actions that we've taken with our aerospace portfolio, we have retired major risk with the certification and EIS of the C Series, now the Airbus 220 and of our new Global 7500. We have created shareholder value by monetizing underperforming and non-core assets.

We have improved our financial position by reducing the residual value guarantee exposure on the CRJ program by $2 billion since 2015, and we have strategically positioned the Airbus 220 for commercial success. One year into our partnership with Airbus, the A220 program has gained strong momentum.

Cost-reduction efforts are on track and the order book has grown significantly with close to 300 new orders and commitments. This includes the latest exciting order from Air France for 60 aircraft.

So, again, good momentum with more to come as Airbus continues to leverage its global reach and scale. Turning now to business aircraft were our financial performance was right on plan for the second quarter and is tracking to our full-year guidance.

Our growth programs remain on track as does or aftermarket strategy, which is benefiting from investments to expand our service network and capabilities. In the second quarter, we led the industry with 35 aircraft deliveries, including two Global 7500, and we expect to achieve our full-year delivery targets including 15 to 20 Global 7500, which are mostly in our completion center now.

The aircraft is performing very well in service. It's unmatched performance capabilities are being recognized across the industry.

We are also seeing strong interest in our new Global 5500 and 6500, both of which remain on track for certification later this year. Book-to-bill was 1.24 a quarter and well above 1 for the first half of 2019.

Our industry-leading backlog has grown by more than $1 billion this year to $15.3 billion. So very good momentum at Business Aircraft.

We expect this to continue as the business jet market outlook remains stable and as we continue to enhance our product portfolio. This includes the launch of the Learjet 75 Liberty, which improves our competitive position in the Light jet segment as well as the latest performance enhancement package for our Challenger 350, which increases the value of the segment leading aircraft.

The conservation and streamlining of our aerospace assets into a single Bombardier Aviation segment is moving forward as planned. And John will walk you through the guidance for this new segment, which is largely consistent with our previous guidance.

Turning now to Transportation, where we are focused on completing our 5-year transformation. Since 2015, we have made significant progress on both of our key objectives: reshaping the business to fully leverage our global scale and addressing our portfolio of large complex projects.

The reshaping of BT is tracking well. We now have regional customer organizations and power to provide world-class service to our customers.

We have standardized product platforms, driving reuse innovation and economy -- economies of scale, and we have global operations focused on our core activities as we continue to optimize our footprint and our supply chain. We’ve also made significant progress with our large complex legacy projects, all are nearly complete.

In many cases, the trains are build and ready for entry into service upon completion of software development, final certification and customer acceptance. When complete, these new innovative platforms will significantly strengthen our portfolio.

But first we do have some challenges to resolve, mainly in the U.K., Germany and Switzerland. Completing these projects will take at bit longer than expected and are consuming more resources.

To protect the schedule and the backlog, we will invest an additional $250 million to $300 million over the course of this year. We are driving specific actions, including adding engineering resources to work on software development, increasing manufacturing and assembly capacity at several sites and working hand-in-hand with customers to rebase delivery schedules and to reach commercial settlements.

John will walk you through the details of how these investments and cost will impact our 2019 guidance in just a few minutes. Let me assure you that we fully understand what needs to be done and we're taking the right actions.

Danny and the team are aggressively driving their detailed action plans. When we complete our turnaround plan in 2020, we will transform BT into a global business capable of delivering strong and sustainable financial performance.

With that, I will turn it over to John to review Q2 and our revised full-year guidance.

Thank you, Alain. Good morning, everyone.

As we ended the second half of 2019 and look to complete the fourth year of our 5-year turnaround plan, Bombardier is well positioned to transition to a leaner, simpler and stronger industrial enterprise, focused on business jets and trains. As part of this journey, we closed in the quarter the sale of the Q400, improving our earnings profile, while generating $300 million in additional liquidity.

We also recently announced the planned sale of our CRJ program to Mitsubishi, which includes $550 million in cash and complete the reshaping of our aerospace portfolio. During the second quarter, we also continued to make progress on the completion of major train innovation projects.

As we have shown in the past, we remain proactive and action oriented in addressing the challenges we are facing as we transition the train backlog over the next 12 to 18 months to a more balanced project portfolio. Although 2019 will prove to be more financially challenging than anticipated, we're very confident that our actions will lead to a business that generates sustainable earnings and cash flows.

Finally, as we entered the last year of the turnaround, we have also done so by protecting our strong liquidity position throughout the journey. At the end of Q2, we carried $3 billion of cash on hand and approximately $700 million of available credit facilities.

Now before I discuss our updated full-year guidance, which includes the go forward consolidation of our aviation business into a single reporting segment and the impact of the increased cost in transportation, let me first turn to the highlights of our Q2 financial performance. Our second quarter results feature a healthy 9% organic growth across the portfolio.

As aircraft deliveries increased, as our aftermarket activities continued to be fueled by the footprint expansion and as you make progress across the real portfolio. In absolute dollars, consolidated revenues were $4.3 billion posting a nominal growth against a comparable period in 2018.

The reported flat revenues masked the 9% growth as last year's results included the full contribution from the C Series and Q400 programs, as well as from the aircraft training business. Those businesses have been sold or deconsolidated as we reshape the portfolio.

On the earnings front, profitability is tracking well for business aircraft at 7% adjusted EBIT, while commercial aircraft recorded a second consecutive quarter above breakeven. On a consolidated basis, adjusted EBITDA Of $312 million and adjusted EBIT of $206 million were lower year-over-year as a result of transportation 5.1% margin for the quarter.

Turning to free cash flow. Usage for the quarter was $429 million in line with our target of $1.5 billion or better for the first half of 2019.

Free cash flow performance in aviation units was solid, offsetting some weaker performance at BT. Looking back at our cash usage during the last six months, working capital consumed one in a quarter billion dollars including significant investments in aerospace inventory, mainly to support the intense ramp-up of the Global 7500 and continued growth in train finished goods, while the expected release of inventory is back end loaded.

While we continue to see cash usage in the third quarter, we do expect higher than normal cash conversion of working capital in the fourth quarter as we plan to deliver a significant number of Global 7500 and reached delivery milestones on key train projects. Moving to business unit performance.

Let me start with business aircraft. Revenues were up 6% to $1.4 billion in the quarter on 35 deliveries.

Activity this quarter reflects a slightly higher proportion of Global deliveries versus last year. This result also emphasizes a strong performance from our aftermarket business, which has grown double-digit when normalizing for the sale of training activities earlier this year.

Looking at BBA's operating performance. Adjusted EBITDA for the quarter was stable year-over-year at $146 million even as production ramps up on the Global 7500.

On a year-to-date basis, adjusted EBITDA margin is up 50 basis points to 11.1%, driven by aftermarket growth and cost reduction initiatives. Adjusted EBIT was closer to $100 million or 7% for the quarter, including the dilutive effect of higher non-cash amortization associated to the entry-into-service of the Global 7500.

On a year-to-date basis, the margin was 7.3% trending to our expectations. Moving to commercial aircraft, were activity was strong during the quarter with CRJ and Q400 deliveries meaningfully higher than last year at 17 aircraft and reflecting a catch up with lower output in Q1.

Revenues totaled $560 million and notwithstanding the higher deliveries were $100 million lower year-over-year as the previous year included the C Series operations. Additionally, Q2 only reflects two-months of Q400 revenues as we completed the sale of the program at the end of May.

So for this year, BCA recorded positive adjusted EBIT of approximately $42 million before accounting for the A220 equity pickup loss of $8 million. This strong performance results from solid aftermarket growth as well as from the positive RVGs settlement gains, which are not expected to occur in the second half.

A word on CRJ activities through the closing of the transaction and subsequent wind down at the end of 2020. In 2019, we're reducing our delivery outlook by five aircraft as we are mutually agreeing with the customer to cancel an order.

These aircraft which are already in production will be redirected to 2020 deliveries. Further, our remaining aircraft in the backlog will be manufactured by Bombardier over the next 12 to 15 months.

Some will be delivered prior to closing, the remainder will be sold by Mitsubishi and delivered by the end of 2020. Bombardier's CRJ revenues and earnings from post closing manufacturing activities are expected to be marginal.

Now looking at Aerostructures. Revenues for the quarter totaled $565 million, a 24% increase over 2018 as production accelerates on the Global 7500 and its wings, as well as on 8 to 20 components.

On the profitability side, second quarter adjusted EBIT was 6.5% consistent with the ramp-up of large programs. On a year-to-date basis, adjusted EBIT margin is 10%.

If we take a quick look at Bombardier Aviation, as if all three aerospace units were combined for the first six months, revenues would have totaled $3.5 billion net of eliminations for Aerostructure intercompany sales. Pro forma adjusted EBIT would be $295 million or 8.4%.

This strong performance trend above expectations in the first two quarters principally as BCA recorded a profit. BA margins in the back half of the year will reflect a dilutive effect of lower CRJ profit and a significant increase in revenue from early Global 7500 deliveries.

Altogether BA adjusted EBIT margin is expected to be approximately 7% on a full-year basis. Let me now turn to our rail business, which recorded revenues of $2.2 billion in the quarter, slightly higher than the first quarter and consistent with the production synchronization announced earlier in the year.

This represented a 2% organic growth year-over-year, offset by an unfavorable currency impact. For the first six months, revenues were $4.3 billion, tracking to full-year guidance of $8.75 billion.

Adjusted EBIT at BT was $111 million for the quarter or 5.1%. These results include additional cost pressure on some of the five large late stage projects we're driving to completion.

For the first half of 2019, BT's cost pressure totaled approximately $150 million or 350 basis points of margin dilution against our reported 4.5% year-to-date margin. We're now adjusting full-year EBIT margin guidance from 8% to approximately 5% as we will take additional measures to deploy resources to stabilize projects mainly being impacted by the intensity of the efforts in the U.K., Germany and Switzerland.

We see 2019 as a pivotal year for transportation. Although increased costs and lower cash generation are a short-term setback in financial performance, we are confident that the allocation of resources will produce longer-term benefits for the portfolio.

In total, we see an earnings adjustment of $250 million to $300 million from our previous guidance and it can be summarized as follows: $50 million to $75 million in incremental costs to complete our big five projects, particularly in Switzerland and the U.K. As they’re taking more time to complete, these projects will consume more costs.

We also expect delivery milestones in those regions to occur closer to year-end creating a timing risk to this year's cash flows. The balance of the earnings adjustment is largely driven by the increase in manufacturing and engineering capacity and the various costs of disruption to the schedule.

This includes summing efficiencies in the form of overhead under absorption and customer settlement costs. A significant portion of these costs are expected to be incur this year.

And as a result, we will adjust Bombardier's free cash flow guidance downward for full-year 2019. In summary, BT is actively managing its complex legacy projects.

As we execute the improving contract mix, its creating a path to higher margins. Let me now provide you the details of our 2019 guidance under the two new reporting segments: Bombardier Aviation and Bombardier Transportation.

Starting in the third quarter, we will report our results under this structure as we’ve already integrated our internal operating model at BA. On revenues, the consolidated guidance is expected to be between $16.5 billion and $17 billion, largely in line with previous guidance.

At BA, the role off of these three segments net of eliminations, results in revenue guidance of approximately $8 billion. This amount is close to the low-end of the original range as we adjusted for fewer CRJ deliveries.

At BT, revenue guidance is unchanged at approximately $8.75 billion. Consolidated adjusted EBIT is revised downward to a range of $700 million to $800 million, largely tied to the reduction at BT to approximately 5% margins.

At BA, adjusted EBIT guidance for the year is approximately 7%. This includes a dilution coming from CRJ and Global 7500 in the second half of the year, but excludes the A220 equity pickup loss.

It's important to note that going forward the A220 partnership will be classified as a corporately held investment and therefore excluded from the Aviation segment and reported separately with corporate costs. Finally, as earnings and cash flows at BT are revised downward, we're adjusting consolidated free cash flow usage to approximately $500 million.

The revised outlook accounts for $250 million to $300 million BT action plan and also reflects to the best of our knowledge the cash flow timing risk of some key projects with delivery milestones near the end of the year. With cash on hand of $3 billion midyear and cash generation in the second half, we have the right liquidity to absorb any working capital volatility.

To sum it up, we've come a long way in Aerospace, streamlining and simplifying the organization. We are now squarely focused on our growth programs with -- while expanding our margins.

At Transportation, the goal is the same, to transition to a stronger portfolio of projects and in 2019 despite the challenges we're making clear progress transforming the business. The path to stronger financial performance includes decisive actions in the short-term that position us for the value creating opportunities in the rail sector.

And with our strong cash position combined with the absence of significant debt maturity through the end of 2021, we can take the right long-term actions and complete the 2020 turnaround. With that, operator, we are ready for our first question.

Sorry about that. I was on mute.

Good morning, gentlemen.

Good morning.

First question, obviously on the transportation side. Can you just talk about what happened between the last update and this time.

I mean, you had an opportunity to raise your cost before [indiscernible]. And then relating to that, I mean, how comfortable are you that these costs will be contained to this year and you will see some margin improvement as we go into next year.

[Indiscernible] probably would assume that there's 5% or so margins may hold going forward as you start to enter into new contracts and so on.

Yes. So let me take a stab at that, Rajeev.

So I think a couple of things. Number one, is that when you look back, I mean, we were focused very squarely on accelerating and completing the five large projects we’ve been updating you on over the last few quarters and months.

And the team with we’ve asked Danny to do as he has come on board and start to really get a clean strong roadmap to completion on those projects. And by the way we made a tremendous amount of progress there.

We’ve also asked them to look across the portfolio more deeply and really get us ahead of any other vulnerabilities that may have been created, given the fact of the intense efforts we are putting in, particularly with the U.K. and parts of Europe, Germany, particularly Switzerland as well.

What we're doing there's we're actually, I would say, practically putting some resources to play in engineering, lots of software work that we’re doing right now is concentrating a lot of effort on the big five projects, which means that we want to now double back and put more energy and resources on the rest of the portfolio. It's really a proactive effort that we are taking here.

We believe very strongly in the business long-term and that what we’re doing now is we’re managing the intensity of the effort to complete these large projects which hold a lot of inventory as you very well know and at the same time protect the remainder of the backlog. So this is something that continues to progress and frankly I would say that over the last 4 to 6 weeks, this is where we’ve asked Danny to focus.

And he and team have come back with a plan. Alain and I want to support that plan and we’re providing in the flexibility to really stabilize the portfolio because the long-term prospects for business are very good.

And we want to make sure the franchise grows going forward.

And as a follow-up on the jet side, you had some pretty good book-to-bill figures. Can you talk about where the strength in the market was within your portfolio and whether or not the pricing environment is holding overall?

Thank you.

I would say -- good morning, Rajeev. I would say it was probably driven mostly by the upper end of our segment in the large cabin, so the Global 6000.

And the company landscape is intense, I would say, right now. So we continue to do well.

We have a very good product offering and we are doing what needs to be done to win in the marketplace, while we are driving costs here internally.

Thank you. We will go to our next question.

Thanks. Good morning.

Just want to follow-up on the free cash flow guidance for the year. And I would think that maybe the -- one of the biggest wildcards here is the SBB contract.

Just wonder if you can update where things stand there and does your updated guidance here assume that deliveries will be fairly meaningful on that contract in Q4, or does it assume that something has been slipped into 2020?

Let me -- maybe I will take a quick view on the cash flow and then we can update you on the actual project itself. But I would say that we made a lot of progress at the trains now.

I think there's 16 that are in service. We continue to bring new trains into service that are improving performance.

We are back-end loaded here. And so part of the adjustments to earnings side and what the, I guess, lengthening of some of the big five projects to a completion.

That’s still within the air, but like I said, during my commentary, I think that we do have some timing risks here that’s kind of hard to call to be honest with you in terms of calendarization. Notwithstanding, I mean, whether it's going to be end of this year or something slips into next year, the good news here is that we have trains completed in inventory, some in service and we are working through with SBB to make sure that we can accelerate as much of that inventory into passenger service as possible and then with that complete cash collection.

So I would say, Cameron, it's going to be end of the year loaded with some risk to slip the next year. We try to guide with the best of our ability here and that's what we’ve said approximately $500 million.

$250 million to $300 million of that is straight for really supporting the business and the remainder of the variability is to account for what may be some timing challenge.

When it comes to SBB, Cameron, we’re making significant progress. We’ve got 16 train right now in service and the production process is going very well.

We are going through a number of teething issues, I would say, but fundamentally the train is performing well. It's going to be an amazing platform once we are done with that.

From a delivery standpoint, this is not the only one. It's important to know that there's we are expecting deliveries on multiple projects this year.

So as John said, I mean, there could be some timing issues associated with that, just to be very clear and very transparent. But today we feel that we understand what needs to be done.

The team has a good plan in place and are driving it. So really we are guiding today with the best of our knowledge when it come to unleashing inventory that we have built over the past like two years.

Just as an update on some of our other key projects maybe that we’ve, since we're on it. New York, should be complete this year.

Crossrail should also be very close to fully complete this year. LOTRAIN that we've been talking about, we’ve about 80% -- a little bit more than 80% of the cars built right now and we started to deliver trains as we have six in service today and [indiscernible] we are so progressing as per plan.

So we are making solid progress with these five projects. And as John said, that has put a bit of pressure in the system and that is the reason why we are adding capacity both in engineering and manufacturing.

And on engineering it's mostly on the software side and mostly in the U.K as well as Germany.

Okay, great. Thanks for the color.

Thanks very much.

Thanks. Good morning.

Alain, you’ve obviously gone through a few of this resets on the plan, particularly at transportation over the last nine months. Is there some incremental confidence you’re getting to the point where you’ve scrubbed everything, because it sounds like this most recent charge of this $200 million just associated with under absorption, I guess across the business and required investments across the business.

And so is there any seedlings that it's not just five programs, it's actually broader than five programs that are kind of be -- can be trouble for the next few years?

No, first just what the -- that’s what the first piece of your question, Myles, is that we feel confident today that we do understand the problems. We do understand what needs to be done to make sure that we deliver to our customer commitments.

And obviously the five big projects, I mean, these are by and large new platforms that are going to be shaping the future of product portfolio that we will have at BT. These big projects have put pressure in the system.

And as a result of that I think that what we’re going through right now is an accumulation of projects which as like put pressure as I said, it has created a bit of a bubble and we're going through a bottleneck, So to address this bottleneck, that’s the reason why we decided to really add resources in engineering as I said mainly -- it's mainly on the software development side. I mean, that's where we have like the biggest challenge in terms of achieving milestones so that we can start unleashing on the trains and delivering the trains to customers, but as well as on the manufacturing sites.

And its across the board, it's on very specific sites where we add -- where we have to add capacity and the team is doing that. And the last piece is in the supply chain with specific suppliers that we are working closely with, so that they can increase their capacity.

So we are growing, the business is growing and one of the thing that has happened here is like with these five projects there was a lot of focus on that which kept on winning new projects and all of this has accumulated to the point where we now have to address this bottleneck. But I would say to conclude with the first piece of your question, yes, today we feel very confident that we have a clear view of what needs to be done to put to complete these five big projects which are tracking well, still tracking well today, but also protect the rest of the backlog.

And just to clarify, maybe Patrick, I don’t know the $200 million its overhead of under absorption customer settlements. Did I get that right that these are costs that are being leveled onto programs outside of the five that we've talked about over the last year though?

Yes. So let me -- it's John.

I will just give you some color on that. So basically the adjustment covers the fact that there's $50 million or $75 million of that that's associated with the big five projects, specifically that part of the question and those are largely negative margin contracts.

And then the remainder is really an investment across the portfolio that does include some absorption and it does include some customer settlements as well as the fact that we are proactively adding the costs and investments which will benefit all the portfolio, but also affect their margins, correct.

Okay. All right.

Thank you.

Good morning. I wanted to just, I guess, stay on the topic, but maybe as from a slightly higher level given that this if we use a baseball analogy that this sort of nine inning transformation now looks like it's an extra innings.

John, you referred to finishing up the transformation in 2020, but clearly the numbers or the originally targeted numbers are extending to the right. So the question is this, either for you or Alain.

When's our first breakeven free cash flow year and can you get that original target of $750 million to $1 billion at some point even with the divestitures that you had?

Yes. So, let me take a stab at that, Rob.

So I see a couple of things. First of all, let me put 2019 in some perspective.

So during the year, we will have deployed some restructuring spend across the portfolio including the fact that we're now integrating the aviation units and we started some reshaping as we announced last year. So I would say that that's putting some nonrecurring sort of stress on cash flow this year.

We also integrated the wing and that's been probably a quarter of billion dollars or so some $250 million of total ramp-up to integrate that into our own supply chain internally. And that's going well by the way.

At the same time we're building up to probably rate at 35, 40 aircraft in the system by the end of the year, this year. So lot of stress on that side of the house where you are basically deploying cost I think will level out in terms of cash and performance.

On trains, obviously when we take down the earnings number here and adjust also for the implication of adding some investments to cash, that put some pressure. I don't expect that to be a recurring type of cost as well.

So I think it's -- it gives you some color on the fact that although this year we do see pressure down to about plus [ph] $500 million of cash usage a lot of that does hide some of the performance in a nutshell both be used whether it's BT or BA, will generate cash this year and meaningfully as well. So I think that I would say that, I mean, nothing to make light of anything or [indiscernible], but the reality is, it's been a lot of transformation, lot of turnaround accomplished here.

And we feel good about both businesses, I would say that the aerospace is accelerating very nicely through what we’ve intended to do here. We’ve a great franchise now.

It's getting synergy. On the BT side, we’ve accomplished a lot.

I know that this project setback here is a little more difficult, but the reality is we appreciate that franchise who have standardized platforms. We have a global commercial organization, we’ve leveraged the skill of that business.

And at the same time, we are putting a lot of energy into empowering the regions to work directly with customers. And so, all of those things are very positive.

To your question about 2020, not be cute, but we are not going to get into 2020 guidance today here. I think it's time for us to just to work through the year.

We’ve got a lot going on, but I will say that we still believe very strongly that the business is cash generating capabilities that are significant. And that those two business units are well-positioned to do exactly that.

We have started to do so in '19 and as we manage through some of the wrap up, it's a growth challenge here and basically a synergy generating challenge. We can then leverage that to a very positive and strong performance for a while to come.

Alain, let me come at this from a slightly different angle maybe since -- I know you don’t to get ahead of yourself on the guidance, but for us we want to get some sense of your confidence level given that we have had a number of guidance resets here and a few disappointments. So, Alain, can you characterize for us your level of visibility and confidence today in the next 2 to 3 years versus prior points when you've given us guidance?

Is it really that much clearer than it's been?

It is, Rob. Aerospace, I mean, it's clear today -- very clear and we're largely done on the Aerospace side.

It's all about business aircraft, Bombardier Aviation, ramping up the Global 7500 and making sure that we will continue making the right investment to keep growing. Its great franchise moving forward.

The train has been a little bit of a setback. It took us little bit of time to really understand fully what need -- what needed to be done on these big projects.

Now we have it and we get it. We have good action plans in place.

We also, in a proactive way, [indiscernible] Danny to dig deeper on all project. I told him to go wide and deep and really understand what is happening across the board and today we have that.

So we’ve got a full assessment of what needs to be done at BT. It will take about like 12 to 18 more months.

That's the reason why we keep saying that we will complete the turnaround journey as per plan at the end of 2020 and we will have BT in a much stronger position with a fully refreshed product portfolio. It is a good business.

I mean the fundamentals are still solid. Its solid growth, its countercyclical, actually it's not really cyclical.

We have a very strong backlog and the thing that we're doing here, Rob, is we're taking actions to make sure that we protect the backlog moving forward. So, yes, we have better visibility today.

It's clearer. It comes with volatility to this train business.

You have like big projects that come with very specific milestones. In our case, I mean, the key milestones that we have to go through, the most critical one our software development, that's the reason why we're adding a lot of capacity to this we’ve redeployed.

A lot of people to these functions and we then have go through obligation of these trains and then customer acceptance of these trains. So we know what we need to do and for that reason, John and I are fully supporting Danny.

And we're investing in capacity, because it is a great business and in the long run it is the right thing to do and we want to make sure that we will put this business at the right place. And we want to see this business performing in the long run.

Thank you.

Thank you.

Good morning. John, a little bit more clarification on some of these numbers in BT.

So, you said the cost pressured from these handful of contracts kind of amounted to $150 million in the first half. And you’re saying you’re picking another $250 million to $300 million investment in the back half to kind of stabilize the portfolio of these contracts as well.

Are these -- I’m just trying to understand like if we exclude these handful of contracts, is the remaining business running at your targeted levels? And are these numbers -- the cost you incurred in the first half and you expect to incur in the second half, do they reoccur going forward, or are these just one-time shots that we’re seeing this year?

Yes, thanks, Fadi. So I think part of the answer there is that what we do when we assess the investments and the overall added costs is we apply those through the obviously the cost centers, but then they flow into the project margins.

So what you’re going to see here is the mix of these difficult contracts that we had is bringing down significantly by the end of this year, probably about a $1 billion or so left for 2020. And that’s kind of the big fives, they do have a -- still a dilutive effect on margins in the overall scheme of things.

And then the additional cost that we’re putting in the year does have some impact on the portfolio margins, obviously. Now that being said, I think as Alain said, it's the right thing to do here and it does protect the overall portfolio.

So the answer to your question is that obviously the big five and some of the adjustments that we’ve taken are nonrecurring. At the same time as the mix flows through it, probably 12 to 18 months between now and the time we kind of work through the impact of the investments we are making.

So that will have some implications through '20. That said, I would say that -- and I say this today and we will obviously go through a whole planning process here, but I think that this would be the low point where we see these now.

So better from here.

Okay. And just one follow-up question.

Do you expect to incur any cost in the RJ program, because at the end of 2021 when you would have completed the aircraft deliveries, are there any costs associated with ramping those deliveries down that are beyond what is disclosed in the transaction with MHI?

Yes, I think we took some restructuring money in the end of second quarter just to cater for what we believe [indiscernible]. I would say in the big scheme of things, manageable by us in the business.

So not super material. The [indiscernible] manufacturer and assemble the aircraft on behalf of Mitsubishi through the year next year, built basically a manufacturing feet.

And then after that we will wind down production. The real positive here is that Mitsubishi has obviously a great interest and a lot of the capabilities and knowledge with people, the talent that we have at CRJ and willing to corporate them into their business.

So obviously the implication of the restructuring is much lighter and at the same time we also have needs across our business. So I think balancing all those things makes for a very manageable restructuring costs.

At the end it's a fully learned out asset, right. So a lot of the cost is the business [indiscernible] not so, nothing material, I would say.

Thank you.

Thanks very much and good morning. I think, John, you mentioned during the prepared remarks continued cash outflow through Q3 and then kind of outside inflow in Q4.

Did you size the cash outflow so that we should know kind of what it would be through the nine-month period versus the 1.5 year-to-date?

Yes. I mean -- let me start with Q4 and calendarizing and kind of putting hot spots on the stuff is that, it's nothing game right now, right?

I mean, a lot of the stuff is its fairly chunky payment for huge delivery outputs and we’ve some 700 train units, cars in finished inventory that are waiting some very final steps here. So kind of hard to calibrate perfectly, which is why I do believe that between some completing investments on the 7500 as we -- in terms of working capital, completing big delivery aircraft in the fourth quarter and obviously the lumpiness of BT and some of these additional investments.

I do at this point believe that Q3 will be negative. It's hard to call, but I mean, I would say, $200 million, $300 million is -- and this is not guidance that I want to be careful, but couple of hundred million dollars or so of cash burn is probably likely.

So we do -- we finished at 1.5 at the midpoint. I'd say anything up to 1.8, 1.9 is probably a reasonable look.

And then we will need to come back in the Q4. I think Q4 presents $1 billion of just natural typical capability within the business.

And then there's lots of trains out the door and lots of 7500s and I would say that we do see both happening. The quantum is going to vary a little bit.

But I think that’s where you get back to the minus 5.

Okay. Okay, great.

And then, I guess, just understanding a little bit better sort of qualitatively, what's happening in the train business. I guess, we know a lot of the work is done.

The trains are there, they need to be delivered by kind of need more software and engineers at this point. So, for the more Aero oriented among us.

In terms of what those software engineers are going to be doing on these projects that are close to completion, like how do they come into the mix here?

Its -- good morning, Seth. It's no different than what we're seeing on the Aero new design, new aircraft.

Its same typical industrial engineering challenge, the last piece of completing the engineering on a project is related by and large by software. In this case, you need to have full integration of the train with the infrastructure.

So I mean, there's a lot of work collaboration with the customer and all that has to go through. But there are no -- it's not different than what we’re seeing on the Aerospace site on an aircraft.

Actually if there's anything we took a lot of our aerospace software engineers and we move a lot of them to the train side and they’re making a big difference today. I think it's important to your question, maybe a broader question to understand what has happened at BT.

We've made huge progress in reshaping BT since 2015. When you think about that, we have an organizational structure that is clear now.

I mean, we have empowered the regions, we have leveraged our scale, we’ve centralized some of our supply chain activities. We have -- I mean, it's not a small task, but we’ve standardized our product platforms.

So we have [indiscernible] for example in the U.K., it's one platform for multiple application. We have [indiscernible], which is another regional commuter that is now a standardized an old platform that can be used on multiple projects.

And that is the reason why we're saying that, out of this when we’re done completing these projects, we’re going to have a refresh product portfolio that will be able to use and leverage on other projects moving forward. So a lot of work has been done.

The good thing and we don't talk much or enough about that is our trains are performing extremely well. Once we get them in service reliability is very good and the feedback from customers is unanimous.

Once they’ve the train and their service, really like the performance of the train. So we have from a design standpoint, we don’t have major significant issues, we’ve like normal [indiscernible] EIS entry-into-service issues, SBB, [indiscernible] is a brand new train.

And what we're facing now is that the last phase of an engineering development cycle which is largely related to software. So that is in a nutshell what we're going through.

And what has happened is all these big projects we're going through our pipeline, we have kept on winning. So there has been an accumulation of projects in the system and I would say which created a significant need to add more capacity across the board.

And that is what we are doing now. I mean, we are putting more capacity to address these bottleneck and unlock the inventory that we've built into the system.

And we have a lot of finished trains into the system that are waiting for key last milestones, software, customer acceptance or in other cases [indiscernible] of the train in specific countries.

Okay. Thank you very much.

Yes, thanks. Good morning.

One big picture question and a small -- question. So let's start with the smaller detail question.

John, in the free cash flow outlook for this year, I mean there's like so many moving parts. What do you have in there [indiscernible] sales?

Like can you just review like what’s in that free cash flow outlook for this year?

No, there is no asset sales in free cash flow, nothing that is of any meaning anyway. That -- its all the investment, all that stuff is separate and the benefit is cash on hand.

Okay.

But free cash flow is really the operational activity and the impact of restructuring outflow cost cash as well as the integration of the wing, which was done early in the year and really accounts for us internalizing that supply chain which was previously external to us. So now the guys are well [indiscernible] hand in building 2020 and beyond wings.

So we are carrying that and that impact is about $250 million for the year. So between the two of those that’s the real nonrecurring stuff that’s, I would say, not standard.

Got you. And then just sort of a bigger picture question, I mean, this whole call you guys have been peppered with questions around transportation and trains.

And I think really kind of the elephant in the room is why should anybody believe this is an 8% margin business sustainably, right. I mean, a lot of this is filed with the company for very long time and this is like an ongoing cycle, right.

What change just recently on contracts that went in place maybe five years ago. Put it this way, right, so there is a whole backlog of contracts [indiscernible] to say in three years, there is not going to be 5 more contracts that are problem and three years after that there is not 5 more contracts that have a problem, and that this is just sort of an ongoing cycle in this business.

I mean, it's the way it's been for a very long time and it seems still to be that way. So it's how is any outsider is suppose to believe ultimately that this is an 8% margin business?

So I will take, I mean, start with this and then I will pass to Alain as well. But I think that there's a couple of things, Ron.

I mean, it's not so potentially evident from the outside here, but there's been a lot of progress and Alain mentioned this a few minutes ago in terms of reshaping this business. I mean, we have made significant investments in new train technology.

We have tremendous platforms that do very well in service and we are winning with those platforms. If you look at the order book over the last two years or so and you flip through the announcements, you will see very nice backlog buildup, which includes platforms that have been developed and are being reused, so it derisks.

So to your question about longer-term, there is a derisking component of that time to market improvement. There is the fact that we've also been improving the mix towards service and signaling and we’ve done so with purpose and aggressively.

And I think that those are all elements that provide stability to the project portfolio. They have better margins typically.

The work we are doing here, albeit a little bit painful in 2019. I think it also allows us to put the resources in the right places.

And we are continuing to work at cost reduction improvement and we made a lot of progress in that in the last two years, including the fact that when you do standardized platforms, you can go back to the supply chain and you have more leverage because you’ve standard components and so on and so forth. And then we continue to improve industrially and I think those are we have great leadership that is very strong industrially and they’re continuing to make the right decisions.

So in the longer term I think better backlog, better industrial operational execution and cost reduction and derisking with respect to engineering and time-to-market. I think those are all attributes and I think we have demonstrated.

I know that 2019 the margins off a little bit here, but the reality is we’ve demonstrated this business can perform 6%, 7%, 8% or I think that’s still part of the plan.

There is no reason, Ron, to believe that this business cannot deliver solid high single-digit performance. This is a good business.

You’ve got a very large backlog at EU, you’ve got volume. So you can do something with this.

And I think there are significant opportunities at BT when you compare to the way we’re doing it on the Aerospace side. So I mean, it is opportunities for certification across the board.

It has opportunities to increase the level of proficiency in our engineering and capability, especially on the software side, which relates to train control and signaling, where there's also good margins to be made on that. As John said, great opportunities now that we have standardized platforms and we're competing the entrance -- the design and entrant to service of these trains will be both to reuse that somewhere out and then leverage the service contract, but there was like two major fundamental opportunities is on the project management side.

To answer your question and as to all you present, future similar situation is that the project have to be managed not out of the gate perfectly. So it means like you have to add like very strong project management and that is exactly what we're doing right now.

We’ve been very disciplined in our bidding process. We have added a lot of discipline in the way that we go-to-market.

And then the next thing that we are doing is we're synchronizing demand bids with our production system and that is also very critical. So it's from demand to engineering to production system to make sure that we have the right capacity across the board.

That’s how you protect margins on these projects. And it's -- it has to be managed very carefully every step of the way.

So we believe that this is a good business. It's a stable business and we -- it's a business that can deliver as I said in the range of 8% or less moving forward.

Okay. Thank you.

Hey, Noah.

Hello. Hello.

Hi.

The free cash flow outlook reduction is larger than the EBITDA reduction. So can you square the variance there for me.

And then when I read the release on the free cash reduction, it describes the incremental costs, but then also timing risk on some of the projects and the milestones on the projects, but I feel like I hear you on this call stating that there's the potential for deliveries and milestones to move around relative to this range. So I’m just trying to figure if you're telling us there is also additional risk from the uncertainty around that even relative to the new range.

Hey, Noah. So, yes -- so to be clear, as you said, $250 million to $300 million is kind of the additional cash outlay.

And then I'm also adding to that some variability with respect to end the year milestones. So I am adding approximately $250 million if you want to call it that to the bottom end.

And essentially that to be the new guidance is approximately $500 million. Look, we have looked at this up down sideways.

Alain, mentioned it, I’ve mentioned it as well, there's a lot of train deliveries and there are milestones or I would call it triggers to each of those deliveries that include software completion then certification and customer acceptance. It will make it difficult to perfectly predict the calendarization.

So I would say that the best of our knowledge today is approximately $500 million of usage considering all that we know and see and that we will continue to work towards the completion and then the eventual cash generation of those milestones and deliveries. But there is risk because a lot of these triggers will occur November, December and as a result that does put some pressure on calendarization.

And I don't pretend to be perfect in terms of -- to see that. So it's a timing conversation.

At the end of the day, what's I think vary is stabilizing and give me and Alain confidence is that this is finished goods in inventory and that they are trains that are ready to go. And whether we get collection fully in November, December or we still [indiscernible] earlier next year, the cash will come out.

The $250 million to $300 million that we're applying to the portfolio, that's really the cash that we eat up. and the rest of its timing and it will come through.

When we complete and my expectation is to the best our knowledge $500 million this year and we will see it from here, we will give you guys updates in Q3.

Thanks. Thanks, Noah.

And operator we will take our last question, please.

Yes. Thanks very much and thanks for squeezing me in here.

Let me focus here on the BBA or the business jet division, and specifically on the Global 7500. Alain, you mentioned that you are reiterating your guidance for 15 to 20.

Having only delivered two so far, it certainly implies a quite a ramp up here either later quarter or particularly in the fourth quarter. What confidence do you have around that ramp up and any if successful, with everything you see so far, you are at 35 to 40 for next year.

Is there any reason why that wouldn't still hold?

Yes. Good morning, Walter.

Like I said, we are so confident delivering between 15 to 20 aircraft this year. We delivered 3 so far.

Another probably 3 to come in the third quarter and the rest will be in the fourth quarter. We have 16 aircrafts right now that are in our completion center right here in Montréal and it's really progressing well.

Actually completion is progressing little bit better than planned. So, our level of confidence is good.

Obviously, I mean it's a brand-new aircraft, so it might come with like a bit of a swing in this, but right now, I mean, we're making very good solid progress. We understand it's a bit backend loaded, but we've always said that and we [indiscernible] I mean, it was designed this way to make sure that like the aircraft that we bring into service are performing well and minimizing the risk for potential retrofit.

But the aircraft in service is performing extremely well. Actually performance of the aircraft is way above expectations as you've seen.

I mean, we are establishing new records everywhere in terms of range, in terms of speed, so it's an aircraft that’s got tremendous capabilities. And this year we think that we will be in the range.

So the team, David and the team feel confident that they will deliver 15 to 20 aircraft and we are ramping up right now to 35 to 40 aircraft next year. And we have a lot of within the system in Toronto.

We have over like 20-ish aircraft in our -- in the system in Toronto that are in different stage of completion for a dream before we move them to Montréal for completion. So progressing well, but it's a new aircraft.

It is a beautiful aircraft and with that -- a bit of complexity. But so far, so good.

We are going down the learning curve as per plan.

On the margin that you had pegged for next year of 8% to 10%, given that 35 to 40 based on your early take on the ramp up so far, are you directionally within that range or would you feel you're able to do better or worse than that initial range?

Yes. So, thanks Walter.

I think that again with the caution that it's early to make any comments about 2020 and love to -- be able to go through the next couple of months with David and the team and see how we push through 2020. But I would say that, generally speaking, that’s still the right kind of performance.

We will have a consolidated aviation unit which is one of the reasons I want to take the time with the team. There is the divestitures as well to account for.

And so as a result, my expectation here is that we will still get good performance which means margin accretion and growth year-over-year.

I appreciate the time.

Thanks, Walter.

Thank you.

Thanks, Walter. That concludes the call.

Thank you everyone.