Bombardier raises cash flow target, sees minimal write-offs in recession

“If there is a downturn in the economy, we are in a great position to be able to absorb the different fluctuations.”

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Bombardier Inc. raised its cash flow target for the year, expressing confidence in its ability to weather a possible economic downturn thanks to a growing order book.

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Free cash flow for all of 2022 will top $515 million, up from a previous target of more than $50 million, Bombardier said Thursday in its second quarter financial report. Net loss for the period ended June 30 was $129 million, or $1.22 per share, on revenue of $1.6 billion, Bombardier said. Its future order backlog rose 37 percent year over year to nearly a record US$14.7 billion.

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Although many analysts, such as WINGX, market intelligence company based in Germany — say record demand for luxury jets has peaked, appetite for private jets remains strong around the world. Last month was the busiest July on record for globally operated business jet flights, and the sixth busiest month overall, data from WINGX shows.

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Bombardier’s order volume “gives us strong revenue visibility for a couple of years,” Chief Executive Officer Éric Martel said in a conference call with financial analysts. “If there is a downturn in the economy, we are in a great position to be able to absorb the different fluctuations. At the same time, we feel that we will not absorb major cancellations.”

Sales of long-range, large-cabin commercial jets, like those made by Bombardier, have traditionally held up better than smaller models during previous economic downturns.

Orders between April 1 and June 30 exceeded deliveries by a factor of 1.8 times, a rate that Martel acknowledged is unsustainable. A more normal order-to-delivery ratio is 1 to 1.1 times, he said in a separate conference call with reporters.

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After delivering 49 planes through June 30, Bombardier reaffirmed its full-year target, saying it still plans to ship at least 120 planes in 2022. Next year’s production will rise 15 percent to 20 percent, Martel said.

At current aircraft delivery rates, Bombardier’s backlog represents about 2.5 years of production, Cam Doerksen, an analyst at National Bank in Montreal, wrote in a note to clients. Since the orders carry “significant” cancellation penalties, “in our view, concerns about the potential impact on Bombardier of a recession are overblown,” he said.

Currently, demand for new business jets is driven by fleet operators, which allow customers to charter aircraft or purchase guaranteed access through a fractional ownership plan.

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“A lot of people who used to fly first class on an airline are moving into our industry and flying private jets,” Martel said. “Not everyone is buying their own plane, but a lot of them are going to fleet operators. Clearly today I think fleet operators are in demand for more aircraft. Their business has been growing significantly and demand remains very strong.”

Bombardier’s Class B shares rose 4.8 percent to $24.56 in midday trading on the Toronto Stock Exchange. That reduced the stock’s decline for the year to about 44 percent.

Lower interest payments helped Bombardier generate $341 million of free cash flow in the second quarter, more than triple the $91 million reported a year ago. Bombardier has reduced debt by $773 million since the beginning of the year, which will help reduce cash interest by nearly $60 million a year, Chief Financial Officer Bart Demosky said.

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“Debt reduction remains our top priority,” said the CFO.

Still, Bombardier will also consider acquisitions to help safeguard its ability to assemble planes, Martel said. Given “stresses” in the supply chain, the company is in the process of buying a “small supplier” in California, the chief executive said without naming the target.

“If other opportunities come up and they make sense to us, we’re not talking about anything significant here, where it makes sense, we’ll definitely consider it,” he said.

When the first reports of supply chain dislocations emerged at the start of the pandemic, Bombardier began repatriating some of the work done elsewhere by suppliers to ensure it would have enough parts to assemble planes. As a result, employment at the company’s St-Laurent factory has risen from 900 to about 1,400 people before the pandemic, Martel said.

“We used to have up to 3-4,000 people in some of these facilities,” he said. Based on current staffing levels, “we still have a lot of room to grow.”

For Bombardier, bringing the job back in-house “is about protecting our supply chain,” Martel added. “But we always have to make sure we can do it at competitive costs.”

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