Bombardier (OTC:BDRBF) Inc. (BBD.B) revealed a robust second-quarter performance for 2024, surpassing industry peers in revenue and delivery consistency.
President and CEO Éric Martel highlighted the company's defense sector presence at the Farnborough Airshow and its recent wins in Finland and Germany with the Challenger 650 aircraft. Despite supply chain challenges, particularly with engines, Bombardier achieved significant growth in revenue and deliveries.
The services sector also saw substantial growth, contributing $507 million in Q2. CFO Bart Demosky detailed financial achievements, including a 32% year-over-year growth in revenue, a 22% increase in adjusted EBITDA, and a positive adjusted net income. With credit rating upgrades and a lawsuit settlement, the company is on track to meet its full-year guidance, expecting a stronger Q4 due to seasonal factors.
Key Takeaways
- Bombardier's Q2 revenue grew by 32% year-over-year, with services generating $507 million.
- Adjusted EBITDA rose to $335 million, a $60 million increase from the previous year.
- The company reported a positive adjusted net income of $111 million, with earnings per share of $1.04.
- Cash usage in Q2 stood at $68 million, primarily due to negative cash flow from operations and capital expenditures.
- Bombardier anticipates a stronger Q4, maintaining confidence in their full-year guidance.
Company Outlook
- The company is operating at near full capacity and remains focused on execution.
- Deliveries in Q3 are expected to be slightly lower due to planned shutdowns and reduced customer activity.
- Bombardier's leverage ratio is tracking towards their target, with capital deployment options including debt repayment, shareholder returns, and M&A.
- The strike at the Belfast plant minimally impacted production, with no effect on customer orders.
Bearish Highlights
- Supply chain challenges persist, particularly with engine procurement.
- Cash usage was impacted by negative cash flow from operations and capital expenditures.
- A slight reduction in Q3 deliveries is anticipated due to planned shutdowns.
Bullish Highlights
- Bombardier outperformed peers in revenue growth and delivery consistency.
- The defense sector is showing positive momentum, with potential to reach $1.5 billion in revenues by the end of the decade.
- The company is experiencing double-digit growth in business aviation due to a focused business model and strong execution.
Misses
- The EBIT margin was slightly affected by one-time items related to the divestment of the commercial aircraft business to Airbus.
Q&A Highlights
- Bombardier executives discussed a potential acquisition of assets from Spirit, including the Belfast plant.
- They mentioned around 100 options in their backlog, with orders coming in regularly.
- Labor costs have increased but are expected to normalize, and Q4 is anticipated to be strong for free cash flow.
- Pricing for backlog and new orders is meeting or exceeding expectations.
- The defense sector's revenue potential and compelling margin profile were highlighted, with discussions at the Farnborough International Airshow indicating strong interest from potential buyers.
InvestingPro Insights
Bombardier Inc. (BDRBF) has demonstrated a remarkable financial trajectory over the last several months, which is reflected in the company's real-time metrics and analyst insights from InvestingPro. Here are some key points to consider:
InvestingPro Tips indicate that despite a recent adjustment in earnings expectations, analysts remain optimistic about Bombardier's profitability in the near future. Specifically, the company has shown a strong return over the last three months, with a 43.78% price total return, and analysts predict Bombardier will be profitable this year. Moreover, the company has been profitable over the last twelve months, suggesting a solid financial foundation.
The InvestingPro Data further reinforces this positive outlook. Bombardier's market capitalization stands at a robust $6.54 billion USD. The company's price-to-earnings (P/E) ratio has improved to 19.33 when adjusted for the last twelve months as of Q2 2024, indicating a more favorable valuation compared to the current P/E ratio of 23.18. Additionally, the revenue growth has been impressive, with a 16.08% increase over the last twelve months and an even more striking 31.52% quarterly growth in Q2 2024.
For readers interested in more detailed analysis and additional InvestingPro Tips on Bombardier, visit https://www.investing.com/pro/BDRBF. There are currently 6 additional tips available, which could provide deeper insights into the company's performance and potential investment opportunities. To access these insights, use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. This offer is an excellent opportunity for investors to stay ahead with the latest financial data and expert analysis.
Full transcript - Bombardier Inc Cl B (BDRBF) Q2 2024:
Operator: Good morning, ladies and gentlemen, and welcome to the Bombardier Second Quarter 2024 Earnings Conference Call. Please be advised that this call is being recorded. At this time, I'd like to turn the discussion over to Mr. Francis Richer de La Fleche, Vice President, FP&A, and Investor Relations for Bombardier. Please go ahead, Mr. Francis Richer de La Fleche.
Francis Richer de La Fleche: Good morning, everyone, and welcome to Bombardier's earnings call for the second quarter ended June 30, 2024. I wish to remind you that during the course of this call we may make projections or other forward-looking statements regarding future events or the financial performance of the corporation. There are risks that actual events and results may differ materially from these statements. For additional information on 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, Éric Martel, and our Executive Vice President and Chief Financial Officer, Bart Demosky, to review our operations and financial results for the second quarter of 2024. I would now like to turn over the discussion to Éric.
Éric Martel: [Foreign Language] Good morning, everyone, and thank you for joining us today. I am speaking to you from London where Bombardier is wrapping up a successful and productive week at the Farnborough Airshow. For those who crossed us on the side, you probably saw that our presence was led by Bombardier defense. It's shaping up to be a banner year for that team, as we deepen relationship with government and prime contractor in more geographies. Over the past few months, our ultra-dependable Challenger 650 aircraft was used for a winning campaign to deliver new water surveillance capabilities in Finland. We also won a Medevac deal in Germany that further demonstrates the plane's versatility. We also announced a new line station directly at Farnborough airport. While we have a large-scale, brand-new facility in Biggin Hill, it's important that we balance capacity and convenience for customer. Line stations are important enablers that perform quick tasks. Essentially, this allow our full scale service center to have more availability for a larger maintenance package. Our new Farnborough line station joins a growing network of similar facilities. For example, last year we ramp up the line station in Paris. Today it has more than double its capacity versus our original plan. Clearly, there is significant momentum in the areas where we are diversifying and growing. In just a moment, I will also talk about the solid market we see on the business jet sales side. Before we turn to the excellent second quarter results, I wanted to reflect on the recent labor negotiation we concluded in Toronto. In the current economic context, we have seen a growing trend of workforce disruptions. Negotiations are getting more complex and frankly harder. It's becoming a reality across many industries. We came to a fair solution that that supports our people as well as the company's long-term goals. We did lose 11 working days of production, so as we move through the third and fourth quarters, we are working to address a bit of scheduled pressure that was created on a couple of tails. That being said, in order to land within our guidance range, all the aircraft we need are transitioning to the completion phase and are on track. Overall, we are on plan to meet our guidance. Revenue and deliveries for the second quarter saw impressive growth. We're up for more than 30% year-over-year in both of those columns. I have to say I am proud of the team's hard work to keep us on track to our plan as we continue to grow. We are very clearly outperforming our peers when it comes to consistency and predictability on aircraft deliveries. This has created an environment where we can remain agile and approach any speed bumps in a methodical way. You'll not be surprised to hear me say that supply chain is still a headwind. Ultimately, our biggest survey for intervention remains on the engines. The most important thing to take home on that front is that our plan reflects, what we learn from being very present upstream. We are working very closely with the engine makers. I can qualify their performance to be as we expected and planned for. More concretely, this means there is still work to be done to return to a level that, I would qualify as good. They are getting traction on their recovery plans, but some remain more challenging than others. That said, I'll repeat it again, it's consistent with what we expected and we have adjusted accordingly. To keep our factories running steadily, book-to-bill and backlog is always an important focus, for me and for my team. We've talked about the cruising altitude around one on a full year basis and this is exactly where we are. We have benefited from how well our sales team is spread geographically over the first half of the year. In any given quarter, it's normal for activity to vary from market-to-market, so it's important we're there to seize the moment. The second quarter was a great example of this. We saw some softness in some traditional regions, but we were ready to close deals and seize opportunities in emerging regions. This allowed us to keep our steady pace. If I take a step back, we see market trends supporting our activities, we expect a stronger Q4 than Q3, due to the usual summer holiday period. So overall, taking into account typical seasonality curves, we remain very confident in sustained demand on an annualized basis. Predictability is a central pillar of our services growth. Capacity has been a huge focus for the last two to three years and we have delivered. We are at a stage where we can fully optimize the network to hit the run rates, we need to reach our long-term targets. The year-over-year trends are solid, we generated $507 million in Q2, another significant double-digit jump versus 2023. With that in mind, I can say with confidence that I see the finish line to where we want it to be in 2025, and we're ahead of our plan on it. The services team has incredible momentum, beyond staffing and ramping the facilities, we're also continuing to be very agile in how we evolve the customer experience. This revolves around leveraging the power by the, our model through smart services, this helps us capture long-term revenue streams versus booking revenues from maintenance events one at a time. It's a win-win for us and for the customer. That's also the kind of predictability that will help level our revenue and profitability profile across quarters in not so distant future. On profitability, I am also pleased with our actuals. Bart will cover the remarkable 44% adjusted EPS jump and further metrics. Here I'd like to underscore the 22% growth in the adjusted EBITDA total versus last year we reached $335 million in the second quarter. This is a testament to how well, we have managed our business and no matter the product mix, or other external factors, we have the ability to execute and deliver on our bottom line. I'll now turn the call over to Bart to walk through the detailed financials with you all. I'd like also to take the opportunity to once again congratulate our finance team on two more credit rating upgrades we secured in the past months. Bart, well done, and over to you.
Bart Demosky: Thank you, Éric, and good morning everyone. Again this quarter, Bombardier demonstrated both its strong execution and consistency at raising the bar. We've delivered impressive double-digit growth in deliveries, revenues, services, and profitability. We're on track to meeting our full year guidance, and we have strong momentum as we enter the second half of the year. Our business is continuing to grow rapidly with Q2 revenues increasing by almost a third versus 2023. Our services revenues crossed above the $500 million mark for the first time, and that's a milestone that we've been talking about for the past three years, putting us in the right place to reach our 2025 services revenue objective of $2 billion, but doing it one year early. Our adjusted EBITDA and EBIT both grew double digits, as did our adjusted net income. Last but not least, our free cash flow usage was substantially reduced compared to the same quarter of last year, as well as the first quarter of 2024. As Éric noted, we have observed robust order activity in the first half of the year, as is reflected in our $14.9 billion multi-year backlog. We finished the quarter with a book-to-bill ratio of one, supported by a diversified pipeline of orders across all customer types and geographies. During Q2, we continued strengthening our balance sheet by refinancing $750 million of our 2026 and 2027 notes, extending the maturity to 2032 at a 7% coupon rate. This follows a 7.25% refinancing we executed in the first quarter and brings our average coupon cost down to 7.41% versus 7.5% at the start of the year. We ended the quarter with $1.3 billion in available liquidity, just above the midpoint of our targeted range of $1 billion to $1.5 billion. Our net leverage, which is supported by a 12-month rolling EBITDA of $1.283 billion, was 3.5 times. Building on our recent achievements and following our successful Investor Day on May 1, we were pleased to receive two credit rating upgrades in the quarter. Moody's (NYSE:MCO) upgraded our rating from B2 to B1 on May 2, and on June 4, S&P upgraded it from B to B+. These upgrades underscore the benefits of our deleveraging efforts and reflect our improved operating and financial performance, and as well, the de-risking of our balance sheet. Now, speaking of de-risking our business, we announced on July 1 that we reached an agreement to settle the New York Bondholder Lawsuit. The terms of which are confidential. I will say the settlement is not material to our financial results or consolidated cash position. And let me be clear, while we strongly believe the allegations in this case were completely without merit, we also believe that it is in the best interest of Bombardier to take risks off the table for small amounts whenever we can. Shifting to our financial performance for the quarter, we delivered sales of $2.2 billion, representing a 32% year-over-year growth. This growth is the result of 10 incremental aircraft deliveries, or a total of 39, and an impressive 18%, or $79 million increase in aftermarket revenues, over the same period last year. Our operations team performed exceptionally well and managed to bring in a few aircraft which were originally planned to be delivered in Q3. Our aftermarket business continued to deliver excellent results in the second quarter. Our facilities operated at near full capacity, generating $507 million in revenue, representing 23% of our total sales in the quarter. This is an impressive performance. And as we look to the future, we anticipate more record-breaking performances given the significant long-term growth potential ahead for this business. Turning to profitability, adjusted EBITDA for the second quarter totaled $335 million, representing a 22% or $60 million increase versus Q2 of last year. Notably, the bulk of this growth came from margin on incremental aircraft deliveries. Our adjusted EBITDA margin was consistent with our expectations at 15.2%, albeit lower than the same quarter last year as a result of revenue mix. Adjusted EBITDA was 216 million in the second quarter, a 14% increase from the previous year, with an EBITDA margin of 9.8%. Adjusted net income remains solidly positive at 111 million, representing $1.04 of earnings per share. Looking at free cash flow, our $68 million cash usage in Q2 was the result of negative cash flow from ops of $31 million due to some working capital bill, along with CapEx investments of $37 million. We continued to invest heavily in our inventory in the second quarter, but our net position only slightly increased as this investment was offset by the high number of aircraft deliveries we achieved. Advances were down approximately $105 million as a result of the order and delivery mix. Our CapEx expense decreased to $37 million for the quarter, marking a reduction of more than 50% compared to the second quarter last year. And this was largely driven by the completion of our Pearson facility. We expect CapEx spend to ramp up somewhat in the second half of the year, with the overall expectation to be below the $300 million mark for the full year. Looking ahead to the second half of the year, we are on track with our full year guidance. The first half results have been consistent with our expectations, and as we shared at the start of the year, we expect to have a significant number of deliveries and by association, revenues, profitability and free cash flow coming in the fourth quarter. A quick reminder on the third quarter, we do typically see reduced order activity and delivery activity in the summer months. This is driven by planned shutdowns of our manufacturing facilities, as well as reduced customer activity during the months of the July and August when vacations are taken. As such, we expect deliveries to be downed by a few units versus Q3 of last year, in line with our production plan and factoring in the aircraft deliveries we managed to bring into the second quarter. Combined with continued inventory investments, we expect a modest cash usage again in Q3. Overall, we maintain confidence in our full year guidance and remain focused on our execution. To conclude, I am very pleased with our results at the halfway mark of the year. We've achieved some remarkable accomplishments as a business. The team is performing at a high level, and I'm confident that we will continue to raise the bar in the second half. So with that, let me turn it back over to Francis to begin the Q&A. Francis?
Francis Richer de La Fleche: Thanks, Bart. Operator, we'll begin the Q&A. Please keep one question and one follow-up as you make your questions. Thank you.
Operator: Thank you. [Operator Instructions] Your first question comes from Konark Gupta from Scotiabank. Please go ahead.
Konark Gupta: Thanks and good morning, everyone. It's me by first question. I think you guys noted the strike had some sort of impact on production. For deliveries that are coming up in the second half. It's only a few tails, I think, Éric, but can you just help us understand how the strike impacted the production and what kind of aircraft? And was there also any impact on orders as customers were concerned that the strike may continue for longer?
Éric Martel: Yes. Good morning, Konark. So, great question, first of all, I'll answer your second question right away. Absolutely no impact on customer taking order. You know, these things happen. As I said, it lasts a few more days, but in terms of working days, we lost about 11 days. But what we have to realize is most of the airplane that were delivered this year, were already in Montreal for completion. So there's only a few airplanes that are, that we're still in Toronto that will be flying to Montreal for completion. They already did for the majority of them, there's just a few left. So we had a bit of a delay on a few tails only, and we have a plan to catch up right now in Toronto. We are working heavily during the shutdown in Toronto with about 500 people, even more, and we're going to be also catching up the remaining in Montreal during the completion of the cycle. So that's why we're seeing no impact on our guidance for this year.
Konark Gupta: Okay. Thank you. And if I can follow-up, perhaps for Bart, your leverage ratio is kind of tracking towards your target. Clearly for 2025, is there a possibility that you can prioritize M&A, or new products or shareholder returns as Spirit is looking to divest their non-commercial business, which I think includes the assets that Bombardier sold to them in 2020?
Bart Demosky: I can maybe take the first part and Éric can jump in as well. And thank you Konark. Good morning. We at our Investor Day, I think, really tried to make things very, very clear that we're, with our upcoming expected large amounts of free cash flow that we'll be delivering. As a business, we have lots of flexibility. When it comes to how we want to deploy that capital. Today, we have not come out and provided clear guidance yet. We will after we meet with our Board later this year, probably in the early part of next year, we'll come out with clearer guidance, on how we plan to deploy that. But in the interim, all of the things that you mentioned are open to us. Certainly, debt repayment remains the number one priority for excess free cash flow that, we have at the moment. We are not going to take our eyes off of that. We intend to continue our mission to pay down about another $800 million or so of gross debt, over the next roughly 18, 17 months. So that remains number one priority. And then, as you say, we'll have the ability to look at things like return of cash to shareholders, like investing in our existing fleet and like M&A. But those are things that we'll come up with more information on later, I think.
Éric Martel: Well said, Bart. Clearly, you know, our priority, as Bart said, remain to repay debt. I think we've shown also, though, I don't think you should expect any substantial acquisition until this is done. But we've been. Especially if there is issue in the supply chain, you remember that we bought Latika back in the De Arnes [ph] shop about a year ago. So we will continue if there is any supply chain pressure to consider maybe doing that once more. But our focus is debt repayment and clearly M&A will come after this is done. But again, possible to a lower magnitude to make some M&A. The thing I would say regarding Spirit, as you know, Spirit used to be part of Bombardier for more than three decades. I'm talking about the whole Spirit, but the Belfast portion. I think we've stated very clearly that our priority right now is clearly to make sure that the existing contract will be upheld at the highest standard. For quality, for delivery, respecting the contract, that's our priority. And that's why we have on a regular basis, people in Belfast working on this priority to make sure that the material keeps flowing, because they made basically most of the fuselage on our airplane. We are clearly monitoring the next step. And as a customer, we're willing to provide the appropriate. Whatever operational or structural or legal input to that, but we'll see. There'll be potential buyer at some point, we could consider also to be one of them. We'll see what the market says. But I think what is important to us will be that whoever the buyer is, we need to be comfortable with these guys to be there for the long run. And if there's nobody we could again, be considering that as an option.
Konark Gupta: That's great color. Thanks. Much appreciated, guys. Thank you.
Éric Martel: Thank you so much.
Operator: Your next question comes from Benoit Poirier from Desjardins Capital Markets. Please go ahead.
Benoit Poirier: Yes. Good morning, everyone, and congrats for the strong execution in Q2. Just in terms of booking, could you maybe provide more granularity about any particular strength among the customer type, or geographies that surprise you in Q2 in terms of booking?
Éric Martel: Yes, great question. Good morning, Benoit. Clearly, where I mentioned, you know, during my speech here that we have, we are benefiting from a very significant geographical presence. So we can always adapt and we always seize the opportunity. But if I look at the last quarter on gross order, it was actually very well distributed. North America was still very strong, slightly, maybe a couple of points lower than usual, but not by a lot, a couple of points. But clearly the one place that was strong was Middle East and Africa was strong, but also APAC was strong. So and the other thing that I should say is our defense business, also is getting its fair share of those order in line with, what we are expecting in terms of growth for that business. So again, a well-distributed, our backlog, as you saw, remain very stable. We have 18 to 24 months. We see and more detail on the platform, you saw and in defense, us doing something with Sweden, the Finnish border, Pegasus, Medevac. So we're super pleased. But clearly North America remains strong, Middle East APAC were the driver for the last quarter.
Benoit Poirier: That's great. And just in terms of follow-up backlog is now closer to $15 billion with over 200 options, which obviously provide great visibility. So any desire to deliver more than 150 aircraft in the long-term, or are you sticking to the original plan disclosed at the Investor Day?
Éric Martel: It's still the plan right now. I think we wanted to be disciplined about increasing rates. So I think the 150 range, this is plus or minus a few airplane. But 150 is what we foresee, we will always reassess. You're right, we have a couple of 100 options in our backlog, which are not counting, by the way, in our backlog. I'm sure you know that. But that's also interesting, because those options actually continue to come in on a regular basis.
Benoit Poirier: That's it. Okay. Thank you very much for the time.
Éric Martel: Thank you, Benoit.
Operator: Your next question comes from Fadi Chamoun from BMO Capital Markets. Please go ahead.
Fadi Chamoun: Yes, good morning. Thanks for taking my questions. My first question is on the mix and the margins. So the EBIT margin was off a little bit, and I'm wondering if you can provide some kind of background on mix and what's driving that. And I noticed also you mentioned that there was a mix of orders as well that affected the advances. If you could give us a little bit of background color on that. And the second question is on, I mean, the Belfast plant and the potential for reintegrating some of these assets, like, I don't recall exactly prior, did some commercial stuff. It did some business aviation stuff. How should we think about the scope of that potential acquisition, to you if you end up going into that direction?
Bart Demosky: Yes, I'll maybe take the first part. Fadi. And good morning. It's Bart here. And then I'll turn it back over to Éric to talk about Spirit. But on the EBITDA, EBIT, sorry and the margins looking at adjusted EBIT on a year-over-year basis, just to simplify it. We did have a couple of one timers last year in the same quarter that would not be repeated. They were related to the divestment of our commercial aircraft business to, I guess, when that took place. Yes, to Airbus. Sorry, a couple of years ago at this time. And so those were finally closed out on settlements. So those gave a bit of a difference in year over year comparison. So that explains most of the difference. If you're looking for that there. From a mix point of view, what we had spoken about at Investor Day and earlier this year was that we did intend, because we had such a strong order activity on the challenger front last year that we were going to have more challenger deliveries than globals this year. But this year we were also expecting much stronger new sales activity on the global front. And that also occurred in Q2. So you're seeing the two things, which are contrasting, higher challenger deliveries, which impacts our mix and margin this year, but stronger global sales overall, which will grow, help us grow our margins in 2025.
Éric Martel: Maybe Fadi on the Spirit aspect. So just to refresh everybody's memory, we sold the asset Belfast in 2020, and at the time, basically Belfast was producing. They have mainly three businesses. As I said earlier, we know the facility very well, as we were owning the facility for more than three decades. So, the main business was the fuselage. Fuselage to our airplane. So they provide the fuselage on the both Challenger, and two out of the three global. At the time, they were also building the wing for what has become the A220. And they were also having a nice aftermarket business and nacelle business. So, today you've seen the announcement that were made early July by Boeing (NYSE:BA) and Airbus, basically buying Spirit, but with a carve out of some Airbus activity. So if you look at Belfast specifically, they will be carving out the wing business for the A220, but the, remain core, will be basically what they still haven't sold, is basically the fuselage business, which is basically fuselage being delivered to Bombardier in totality, plus the nacelle business and the aftermarket business. So, that's what will be left. And that's what I said, that remain co. We'll see and we'll make sure we exercise our contractual right about who's buying. But at the end, depending on how this is playing out, we could be interested also, as we would like to make sure that if another buyer can guarantee, as I said earlier, the long-term visibility on pricing, on execution, delivering on time and quality of the product, we're open to that, but we could also be the solution.
Fadi Chamoun: Okay. That's helpful, but on the EBIT margin. Comment, Bart? I was referring to the adjusted EBIT margin. I'm not sure if these items you mentioned were in that EBIT margin, like the adjusted EBIT margin, which was, I think, off like 150 basis points year-on-year. I didn't see kind of like the mix in large and medium is kind of the same versus last year. We have a little bit higher aftermarket, but it feels like maybe within the large there's a mix or the MD&A you talk about lower contribution from large aircraft. I just wanted to understand the background behind that comment?
Bart Demosky: Yes. Yes, yes. Sorry, Fadi thanks. So again, there is mix, as you pointed out, and mix does include and something that over time, will become a larger part of the overall mixed story as our defense business grows. So when you're considering mix, because the EBITDA margins on green aircraft sold in the defense business, are quite materially relative to a fully finished aircraft, there is a nice delta there. That's something else that you need to take into account. So, year-over-year in that quarter, we did have some differences of deliveries in the mix relative to defense aircraft that would make up in large part, to the extra difference that you're talking about on adjusted EBIT.
Fadi Chamoun: Okay, that's helpful. Thank you.
Bart Demosky: Okay, thank you.
Operator: Your next question comes from James McGrail from RBC Capital Markets. Please go ahead.
James McGrail: Hi, thanks for having me on and congrats on the really strong quarter. But I just wanted to ask a question on the services growth that came in really strong in the quarter. You met your 2025 targets, but if we look at Bombardier versus peers, there's still, in my view, some substantial runway looking ahead. So just given that you met your 2025 targets, is it reasonable to think this level of growth that we saw in the quarter could persist into 2025? And just how are you thinking about that a little longer term?
Éric Martel: I think, James, the way we're thinking about this is, first of all, we're very happy with the growth we had this year, something like around 18% year-over-year. It now represent about 23%. And I think, as we mentioned during investor day, there is clearly quite a bit of capability there to grow even further, either by market share could be acquisition also. But you know that five more than 5000 airplanes flying out there, will require more maintenance. So I think it's in line. You remember we said that we foresee that by 2030, we're going to have half of our revenue coming from new aircraft delivery. The remaining 50% will come from defense and services. So to your point, absolutely. There's growth and I think that growth will continue to be strong.
James McGrail: Thank you. And then just going back on margin, you did a good job of kind of highlighting some of the impacts to Q2, but a few competitors earlier this week, they kind of referenced some higher costs related to the supply chain that they're expecting to impact margins a little longer term. So when we look out to '25, the streets expecting EBITDA margins around 17.5%, you have your own targets out there. Are you still comfortable in that number given some of the higher costs we're seeing associated with continuing supply chain issues?
Bart Demosky: Yes, absolutely. I think what we've seen so far, and we said it earlier, even for this year, we knew that the supplier will not turn the corner right in a few weeks. So it's going to take time. I think that's why we've planned, I think, properly this year based on their performance. Right now, we've planned a certain number of airplanes. We are still feeling good, about the recovery we're seeing to, to enable next year's deliveries. The supplier are as I said earlier, they, most of them have traction in their recovery plan and we see an improvement. Still a lot of work to do. We're not in a position where I can say we're in good shape, but eventually we will. But it's actually at least tracking in the right direction to support this year and next year's ambitions.
James McGrail: Thank you. And I'll turn the line over.
Bart Demosky: Thanks James. Thank you.
Operator: Your next question comes from Cameron Doerksen from National Bank Financial. Please go ahead.
Cameron Doerksen: Thanks. Good morning. I just had a question about labor. You made, I guess, a point in the prepared remarks just with regards to labor negotiations becoming more challenging, and obviously you saw that with the situation in Toronto earlier. I'm just wondering if you can talk about your sort of expectation for labor cost inflation. Inflation over the next few years. Has something, I guess, changed materially that potentially impacts your financial targets, or is there an offset to higher labor costs versus what was expectations maybe a couple of years ago? Just any thoughts on that?
Éric Martel: I think we said earlier, our overall costs, of course, have increased over the last couple of years. And I think we all know the situation we were in with COVID and what happened after, but I think it was always offset by better price increase also on our airplane. So I think we've been seeing this coming to sticking together over the last couple of years, and that's we also foresee moving forward that we will be able. Especially with the two years of backlog, we're in a good place to keep pricing and keep increasing it. And yes, labor has increased probably a bit faster in the last couple of years, but we will also see this normalizing. And I think the collective agreement we're renewing reflect that very often there's a bigger increase in the first year and then it's a, I would call it a more normalized increase in further years. So we have visibility because remember, we just negotiated Toronto, but as an example, in Montreal, we had a five year contract the last time. So when we negotiated two more collective agreements earlier this year, one being in Texas in Red Oak and one in Mexico. So we had three to do this year. They're done now, and we're getting ready. There's only one next year, so we're thinking about that in that sense.
Cameron Doerksen: Okay. No, that is very helpful. And just maybe just for the follow-up, just a question for Bart just on your sort of working capital expectations, and I guess the free cash flow guide for the full year. I mean, there was somewhat of a wide variance to begin the year. You've got a little more visibility on what you've needed to invest in inventory. Any further thoughts on that range? On the free cash flow? Is it trending towards the lower end or higher end?
Bart Demosky: Good morning, Cam. Yes, what I would say about free cash flow is it's trending towards the range of guidance we've provided. But just to add a little bit of clarity to that and so that you've got a bit of granularity for Q3 and Q4, I mentioned earlier in my comments that, because we brought a few planned deliveries from Q3 into Q2, that is going to impact our delivery profile in the second quarter. So while we're building aircraft that does mean we'll very likely have a little bit of working capital usage build in the quarter. Q4 is shaping up for a very strong delivery quarter in terms of percentages of aircraft to be delivered in the year, much like last year, so a little bit more than 40%. But as Éric highlighted earlier, all those aircraft, except for a couple, are in Montreal at our finishing centers as we speak, and the team is doing just an excellent job getting all those aircraft to deliver. What that does mean is, like last year, where we had a very, very strong free cash flow quarter in Q4. We're expecting the same type of dynamics this year.
Cameron Doerksen: Okay, that's great. Thanks very much.
Bart Demosky: Okay, super. Thank you, Cam.
Éric Martel: Thanks.
Operator: Your next question comes from Jay Singh from Citi. Please go ahead.
Jay Singh: Hi, thanks for taking my question. It's Jay Singh dialing on for Stephen Trent. Yes, the first thing I want to ask is, you spoke already on defense at Farnborough. Yes. As a follow-up, I want to ask what was the mood like there and any other key takeaways that you could provide us with? Thank you.
Éric Martel: Yes, no, I think. Thanks for the question, Jay. I guess, I spent quite a bit of time with the team yesterday and the day before in Farnborough. Arbut and Chalet were both actually well occupied, mainly for defense business, as you know, over us here, and that's why we have a different presence than before, since we're not in the commercial aircraft anymore. We're focused on defense, and it's never been a show for private aviation. Private aviation have its own show with EBACE and NBAA, where we're attending, of course. But clearly the focus was on defense and the momentum is great, I can tell you, and I said that earlier, the number of countries, geographies, politicians, we're meeting that ambitions, in defense, with better equipment, more civilians, et cetera, is actually very significant. So we are pleased with that, because I think we do offer platforms that are game changers in the industry. Our platforms, are either challenger or global, are very capable. They are cost effective, we have the knowledge also to modify these airplanes in house, working also with mission house on those projects. So clearly a very strong show for us here in Farnborough, with a lot of discussion with different potential buyers.
Jay Singh: Thanks for the color.
Éric Martel: Thank you so much.
Operator: Your next question comes from Myles Walton from Wolfe Research. Please go ahead.
Louis Raffetto: Hi, good morning. You have Louis Raffetto on from Myles.
Éric Martel: Yes. Good morning, Louis.
Louis Raffetto: So maybe just to go back to the margin question, this quarter sort of sets you up very similar, I think, what 2025 will look like, but the margins are still 300 basis points below where you kind of expect them to be next year. So, Bart, I'm sure. Can you give us some sense of a walk to how we're going to get from the 15 to the 18?
Bart Demosky: Sure. So a few things. One, as we look out into 2025 relative to 2024, just one thing to keep in mind is that, because we are expecting very strong revenue, continued revenue growth, strong EBITDA growth. And in our case, EBITDA typically is 100% conversion into free cash flow because we're paying little in the way of any sort of cash taxes. But in terms of what will make up the incremental EBITDA growth for the company year-over-year. We're probably looking at some additional delivery, not only deliveries, but revenues from modification work and others from our defense business. So that's going to be a strong contributor as well. Aftermarket growth. As Éric highlighted in his comments earlier, we expect that to remain strong. The level of activity in our aftermarket business for us is unprecedented. To have basically all of our facilities full at all times allows us for opportunities to not only be growing revenues there, but to take account of efficiencies within the business through our workforce and through continuous improvements. So, we're expecting more growth there, we know, through the aircraft that we have sold and are built into our backlog today that we will deliver next year, that we have a nice pricing tailwind relative to this year and in prior years. And as well as, as I highlighted earlier on in my comments, we are expecting to deliver more globals next year than this year. So if we came in at roughly the same number of aircraft deliveries this year relative to next year, that's a nice mix improvement as well. And that will add to both EBITDA and EBIT growth. So those are the key building blocks for next year Louis.
Louis Raffetto: Thank you. Maybe just to that point on globals, I know you reiterated the entry into service of the 8000 next year. Is there just not enough of those to be of, I guess, concern in a sense from a margin point of view?
Éric Martel: No. We're still planning to have the first 8000 delivering next year in q four. They change our planning, or tracking well and no. So we feel that we're going to deliver, as Bart just said, more global going into next year.
Louis Raffetto: Thank you very much.
Louis Raffetto: Thank you, sir. Thanks, Louis.
Operator: Your next question comes from Noah Poponak from Goldman Sachs. Please go ahead.
Noah Poponak: Hi, good morning, everyone.
Éric Martel: Yes, good morning, Noah.
Noah Poponak: Bart, what's your latest thinking on what this working capital change looks like next year versus this year? I know you have a decent amount of build this year related to the expectation to deliver more globals next year. Maybe just remind us what other moving pieces there are this year. And, and yeah, how's that shaping up to look next year just since it's been such a big swing factor in '24?
Bart Demosky: Yes, it's a good question, Noah. It was a big swing factor in '23 as well. So we've been working our way through two years of growing production levels to meet the growth in demand and higher deliveries. Next year once we line out, what our delivery schedule looks like and plan, we'll be able to give a bit more clarity on that. But as it stands today, working capital neutral, if we're delivering about the same number of aircraft next year relative to this year. Albeit we might have a bit of change in there depending on what the '26 delivery profile looks like from a mix point of view. And as you highlighted, the other thing we've been working through this year is, because global order activity is higher, that does use a little bit more working capital than if we're building challengers. They're just larger aircraft with more dollars of bill and material that goes into each plane. So aside from that, because we don't anticipate we'll be having to absorb considerably more growth in production. Relatively neutral. And as we see it today, from a free cash flow point of view, we're firmly on track to achieving our stated goal of $900 million or better.
Noah Poponak: Okay. Great. And then I also wanted to ask about defense. The Investor Day, you sort of laid out the 2030 possibilities, and I've been thinking of that as a longer dated opportunity. But maybe can you just level set us on how much defense revenue is there in the business now? Like what's in 2024, or what was it in '23? And I guess, is it a lot of just campaigning for a few years and then it's really ramping closer to 2030? Or how big can this be? I guess in '25? '26 to the extent it's in high demand and maybe moving faster than I had appreciated.
Bart Demosky: Yes, I think, Noah, when we came out a little over a year ago and spoke for the first time about our ambitions for defense, we highlighted then that we felt that roughly a 300% growth, by the end of the decade was possible. That would get us to somewhere close to $1 billion in revenues. And keep in mind, this business, because of the nature of it, for us, has a very, very compelling margin profile as well. So strong margin contributor. When we spoke on May 1, this year, we had an additional year under our belts of being in the market with a full sales team, and all of the support staff. We need to be meeting with all of the right constituents around the globe, where there's opportunities for us, either through primes or directly with defense departments to be selling. And so, it gave us a lot more clarity around what the market potential was, for the areas that we are participating in. So delivery of aircraft modifications and engineering work, so not adding anything on next. And we highlighted that we felt, hi, the potential is greater, probably another 50% higher than what we had thought. So going from $1 billion to $1.5 billion by the end of the decade, we see no change there. In fact, as we work through our strategic planning, we're looking at ways to perhaps even grow that further. But the $1.5 billion is where we're targeting now. The exciting thing is, as Éric highlighted, with the number of campaigns we've participated in already, we're starting to fill in the slots on a quarterly basis going forward. And, we'll go from a handful of aircraft per year to multiple aircraft deliveries per quarter is the ultimate goal. So this could become a very consistent business as well in terms of delivering, both revenues and profitability, and that's our expectation. But aside from that, it's a little bit difficult till we get all the orders in, no matter how many campaigns we're participating in to give you greater clarity than that.
Noah Poponak: Okay. I appreciate all the detail. Thank you.
Bart Demosky: Okay, super. Thank you. Thanks, Noah.
Operator: And our last question for today comes from David Strauss from Barclays. Please go ahead.
Josh Korn: Hi, good morning. This is Josh Korn on for David. Just wondering if you would comment on the pricing of what's in the backlog and new orders coming in, anything on the pricing environment? Thanks.
Éric Martel: Yes, maybe I can start Bart and feel free to carry on. But the pricing is exactly to our expectation, if not better in some cases. But overall, we're meeting the target that we had, which are involving some slight increase year-over-year. But we're selling, as you know airplane already. We have clear visibility for the backlog this year and next year as we have 18 to 24 months. So we have good line of sight for that on the pricing, because they're already sold for a majority. But also what we're selling as we add a - we just had a pretty good quarter. Most of these airplanes are going to be selling in '26, if not in '27. So which gives us great level of comfort on pricing year-over-year. Josh, are you still there?
Josh Korn: Just one from me. Thanks.
Éric Martel: Okay. Thank you, Josh. Thank you.
Operator: And this concludes the Q&A session for today. I will turn the call back over to Éric for closing remarks.
Éric Martel: Right. So thank you, everyone for joining us today. The company is clearly well into the fourth year of our journey centered on business aviation. Our being able to post double-digit growth year-over-year underscores, I think, our focus business model. The strength of our plan also stands out and I need to highlight also the team's unwavering ability to execute. So at the same time, for those of you who will be taking some time to rest, and recharge in the coming weeks. I wish you a pleasant and safe summer holiday, and thank you again for participating this morning.
Operator: Ladies and gentlemen, this concludes your conference call for today. You may now disconnect. Thank you.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.