Bombardier Inc
TSX:BBD.B
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Bombardier Inc
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Good morning, ladies and gentlemen, and welcome to the Bombardier Second Quarter 2020 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. Patrick Ghoche, Vice President, Corporate Strategy and Investor Relations for Bombardier. Please go ahead, Mr. Ghoche.
Good morning, everyone. And welcome to Bombardier's earnings call for the second quarter ended June 30, 2020. 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 or 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 Chief Financial Officer, John Di Bert, to review our operations and financial results for the second quarter of 2020. I would now like to turn over the discussion to Éric.
[Foreign Language] Patrick. Good morning, everyone, and thank you for joining us this morning. Let me start this morning by recognizing at first how difficult the past quarter has been for all of us. I certainly did not expect my first quarter back to be so challenging with the COVID-19 pandemic affecting nearly every aspect of our operation, our end markets and our financial performance. The first half of 2020 also marked a number of historic low points for our industries. We saw the sharpest decline in passenger rail traffic ever and business jet usage fell to levels far worse than during the financial crisis or after the 9/11 terrorist attack. During this time, our #1 concern, of course, was the health and safety of our employees and communities. And I'm extremely proud of how the Bombardier team responded to this challenge. So this morning, I want to thank our employees for their support and dedication to the company, to each other and to our customer during this extremely challenging period. I also want to highlight and recognize how quickly our employees have embraced the 6 near-term priorities that I set out when I joined Bombardier in April, and which I shared with you during our last call. Before John goes through the details of our second quarter financial performance, I want to share my perspective on our progress in achieving these priorities. In the second quarter, we made significant progress on our first priority, proactively managing the business through the COVID-19 crisis to secure our long-term sustainability. This includes taking swift actions to reduce costs and preserve our cash, as our operation were temporarily shut down. It also included a complete reset of our production rates and global supply chains when we resume our operation to align with the new market condition and customer requirements. This was a massive undertaking. It requires close daily coordination with thousands of supplier and customers as well as the rapid implementation of a new set of safety protocol at all our sites and extensive employee training. Today, we are operating at our targeted rates in all 51 of our manufacturing sites and across our service center network, and we are cautiously optimistic about some of the early positive trends we are seeing across our industries. We recently secured major rail contract in India, North America and Europe. Passenger rail traffic is starting to recover in Europe and business jet utilization in the U.S. has rebounded from its record-setting low in April and May. However, even with these early signs of stabilization, we expect the next few quarters will be challenging and difficult to predict, as it is still unclear how the pandemic will unfold and what path at the economic recovery will take. While we can't control the course of the pandemic, there are many things that are within our control. And that is where we are focused in. And the results of our efforts are clear, our significantly better-than-expected cash usage in Q2, combined with our new $1 billion credit facility, provide us with additional flexibility, allowing us to continue to execute on our priorities during the ongoing pandemic. Turning to our second priority. Last quarter, I told you that making our rail business more predictable was a top priority. And the new charge we took this quarter highlight the urgency of achieving this objective. While we are disappointed with the need to take additional write-downs on our well-known legacy project, clear progress is being made addressing the remaining challenges. Moreover, we are making the right structural changes to allow us to deliver more predictable performance in the future. This includes going back to the basics and ensuring that we have the right project management tools and processes in place to proactively manage the business. We're also relooking at how we deploy project management talent across the organization, and we've established a new senior project management position, reporting directly to Danny, to help us better manage resources, risks and opportunities across the portfolio and to ensure we regain clear visibility and control of project costs. As I conduct my own deep dive reviews of our large legacy project, it's clear that we became a build and retrofit operation, either because of late issue identification, a lack of clear accountability or because we cut engineer resources too deeply in certain area to meet misguided headcount targets. As a result, we incurred significant cost overruns and customer penalties. Going forward, and with our new a platform now reaching maturity, our goal is clear, eliminate rework and build trains right the first time to fully leverage past investment and unlock the value of BT's $34 billion backlog. Turning now to Bombardier Aviation specific priorities. In the second quarter, Bombardier Aviation successfully resumed all manufacturing operation and was able to manage onerous travel restriction and border closure to deliver 20 aircraft, including 5 Global 7500. We also took the difficult step of announcing a significant workforce adjustment as we needed to realign our production rate to the current COVID-impacted market condition. To date, we still see 2020 business jet deliveries industry-wide, down approximately 30% year-over-year. Longer term, the emerging trends are encouraging. Business jet traffic is recovering at a much faster rate than commercial traffic. Preowned inventory level remain healthy. Cancellation are very limited, and new interest in private air travel is generating sales activity. At Bombardier, we delivered 46 airplanes including 11 Global 7500 in the first half of the year, despite losing 2 months of production. We expect to do better in the second half of the year, including delivering at least twice as many Global 7500 as we did in the first half. This, of course, assumes new business -- no new business interruption from a potential second COVID-19 wave. From an aftermarket perspective, our service centers remain full and are operating at normal capacity with most maintenance activities being performed on schedule. Longer term, we remain committed to pursuing aftermarket growth opportunities as we complete our transition to a pure-play business jet company, and expect how your business jet utilization rates due to new demand for private air travel and the enhanced safety it provides. A few words on our fifth priority, where we continue to make steady progress. As you know, we closed the sale of the CRJ program to MHI in the second quarter as planned. And we now expect that the Aerostructures business sale to Spirit to close later through this fall. We also continue to make very good progress working with Alstom to complete the sale of our Transportation business. Despite the pandemic, our senior leaders and planning teams have remained in constant contact and have kept the process moving forward to its original time line. Last week, we achieved a significant milestone when the European Commission provided their conditional approval of the sale, clearing one of the biggest regulatory hurdles. With the milestone behind -- with this milestone behind us, our attention is now focused on completing the work console consultation, which will allow us to convert to current -- the current nonbinding MOU into a definitive sales and purchase agreement. Our final near-term priority involves defining a clear vision for the future and building a winning culture, a culture that is above all, people-centric. And given the current conversations happening around the world on the need to confront systemic racism, I think it is appropriate to use this opportunity to reaffirm our commitment to diversity, inclusion and equality as an integral part of Bombardier's culture. Let me be clear, fully embracing these principle: diversity, inclusion and treating people -- all employees with the utmost respect, are requirement for working at Bombardier. Moreover, we are committed to the following actions: we will intensify our focus on recruiting and developing a more diverse workforce; we will further invest in creating a workplace environment where all employees feel supported, respected and included; and we will continue to evolve our community relation program and partnership to promote greater opportunities for all. This is an area where I am personally committed. And in my new position, I will ensure that we put this commitment into action. Okay. Let me stop here and turn it over to John to discuss the detail of our second quarter results and provide more color on our outlook for the remainder of the year. John?
Thank you, Éric, and good morning, everyone. As you heard from Éric, the first half of 2020 was very challenging. We managed through COVID-related shutdowns and disruptions and implemented a whole new set of safety protocols across our operations. We also reset our production levels and delivery schedules with customers and suppliers around the world. At the same time, we took actions to ensure we added additional flexibility and liquidity to execute our strategic plan despite the ongoing and unpredictable situation. As I shared with you in early May, gaining financial flexibility was one of our key priorities going into the second quarter. We achieved this objective in different ways: by tightly managing the resumption of our activities to limit Q2 cash usage to $1 billion; by working on a new $1 billion secured credit facility announced a couple of weeks ago; by further amending our banking covenants, notably to extend financial relief into the third quarter; and finally, by closing the sale of the CRJ with net proceeds of $575 million and making progress towards our remaining divestitures, which position us to reshape our capital structure next year. As we start the third quarter, pro forma liquidity stands at $3.5 billion. With this liquidity and assuming continued recovery of our operations and markets into the back half of the year, we feel we have the financial flexibility to operate our business through the challenges caused by the COVID pandemic, as well as complete the sale of BT to Alstom. Let me now provide some details on the new $1 billion working capital facility. This is a secured loan guaranteed by certain aviation subsidiaries to be used by aviation mainly to manage working capital as we realign production to market demand. Closing is expected in the coming days, and we expect to draw the minimum amount of $750 million adding to our balance sheet cash. An additional $250 million is available to us on a delayed draw basis, should it be required for operations and subject to having the right borrowing base. It is important to note that the facility carries no financial covenants, supporting our objective of increasing our financial flexibility. While half of the amount drawn will be repaid from the transportation sales proceeds at closing, we have the flexibility to continue with the remaining portion of the facility for up to 3 years. This loan is meant to be a temporary facility to allow us to bridge to a stronger capital structure following the sale of BT. Should more attractive sources of capital be available after the closing, we could choose to repay the entire facility early. Turning now to Q2 results, which reflect the significant impact from COVID-19 on our businesses. Consolidated revenues reached $2.7 billion, 37% lower year-over-year and a significant shortfall to our plan as we originally expected, double-digit growth for the full year 2020. For aviation, these revenues include 20 business aircraft deliveries compared to 35 1 year earlier as demand declined and travel restrictions postponed deliveries. Specifically, on the Global 7500, the production ramp-up returned to plan as operations restarted in May, and we managed to deliver 5 aircraft during the quarter. On aftermarket services, lower revenues were due to lower customer flying hours although the service centers remained fully operational even during the crisis. At BT, revenues for the quarter were approximately $700 million lower year-over-year mainly due to lost production time. These revenues largely remain in the backlog and are simply deferred in time. On earnings, adjusted EBITDA was in a loss position at $319 million, and the adjusted EBIT loss was $427 million, driven materially lower by a $435 million charge recorded at transportation, mainly on late-stage loss-making contracts. Before the impact of the charge of transportation, consolidated EBIT was closer to breakeven mainly due to facility shutdowns across both businesses. This caused a reduction in revenues, produced higher-than-normal unabsorbed costs and generated significant disruption costs. The Q2 charge reflects continued cost pressure as we move key transportation projects, mainly in the U.K. and Germany, past critical engineering and operational milestones. Specifically, on these contracts, we achieved or are in the process of achieving, this quarter, the homologation and entry to service on 2 more applications of the Aventra platform in the U.K. and on certain other projects in Germany. Further, during the quarter, we recorded a restructuring charge of $28 million as we adjusted our workforce to new production levels. This charge was recorded as a special item. Our free cash flow usage was $1 billion for the quarter, and again, includes a significant shortfall associated with the pandemic, estimated to add between $700 million and $900 million. Over the last few weeks, we were able to mitigate the impact of COVID on our cash flow usage, which came in approximately $500 million better than initial expectations. We achieved these by temporarily reducing our workforce while plants were idle; followed by a timely recovery of operations once the situation has stabilized, resulting in higher-than-expected deliveries; and by benefiting from wage subsidy programs in multiple jurisdictions as well as by reducing our inventory intake as we adjusted rates and finally, by tightly managing costs. On a year-to-date basis, free cash flow usage totaled $2.7 billion, of which an estimated $1.5 billion is COVID-related. While a small portion of this shortfall, approximately $90 million, is the net impact of direct and incremental costs in our operations for managing the pandemic, a larger share sits in higher inventory and contract assets on our balance sheet. This higher working capital is directly attributable to lower deliveries and lower advances on lower orders. Looking closer at sources of cash shortfall. BT accounts for 1/3 of this amount and is expected to recover most of the lost production time and deferred orders over the next 18 to 24 months as operations return to normal and production schedules are fully realigned. The other 2/3 of the cash shortfall is related to the current lower demand environment in business aviation markets. In this case, we lowered our production rates, and will maintain them at this level until we see clear signs of improving demand, which remains is relatively difficult to assess at this stage. We also entered into new -- the new credit facility to support this working capital buildup. Looking at the remainder of the year. While the global situation continues to be difficult to predict, we are continuing to prudently manage our business towards breakeven free cash flow in the second half of the year. This assumes that our operations continue to stabilize and implies that we are carrying the benefit of better free cash flow from the second quarter into the full year. Our free cash -- our full year free cash flow is expected to include an impact of approximately $2.25 billion from COVID, $1.5 billion of which is now behind us. Of the estimated $750 million impact remaining for the second half of the year, approximately half is due to the wind down of a reverse factoring facility originally created to support inventory ramp up on the Global 7500. Disruptions to the financial markets have rendered this facility too expensive. While a drag on 2020 free cash flow, this wind down should benefit our financial flexibility as a stand-alone aviation business in 2021 and beyond. In addition to the $2.25 billion COVID impact, we also now expect $300 million to $350 million of cash outflows against the charge recorded this past quarter at BT. It also includes, as originally anticipated, paying out approximately $200 million against the remaining CRJ RBG balance, reducing these non-trade liabilities to less than $200 million by year-end and this to be paid over the next 3 years. This will reduce free cash flow drag by approximately $100 million or more starting in 2021. Now breaking down the outlook by quarter and consistent with prior years, the third quarter cash flow usage should improve sequentially over Q2. We then expect free cash flow to turn positive in the -- into the last 3 months as we release working capital mainly at BT. At BA, the typical working capital release in the fourth quarter is expected to be lower than prior years, given recent disruption and rate adjustments. So to wrap up. As we stabilize operations following the successful restart of facilities worldwide, we remain cautious in our approach. We are focused on managing end market volatility by staying close to our customers and delivering on our backlogs. We are also working to protect the level of liquidity and the financial flexibility that we have built. And we are dedicated to executing on the strategic road map we created by completing the remaining 2 divestitures and emerging with a stronger balance sheet. With that, operator, we're ready for our first question.
[Operator Instructions] The first question is from Seth Seifman from JPMorgan.
I was wondering if you could talk a little bit about the reduction that you made to the workforce in aviation. And how that makes you think about what the appropriate level of production should be, going forward, as we head into 2021?
Yes. So Seth, maybe -- thanks for your question. Clearly, as I stated earlier, we see the market being reduced by roughly 30%. We made that decision early June after furlough to reduce, on a more permanent basis, our rates to align to that market. So far being a couple of months into it, we think that we are at the right place right now. It is still a little early to call for a long-term outlook right now, as I stated earlier, because we still have a bit of uncertainty ahead of us. But as of today, I would say that we feel comfortable with the rates we have adjusted last June. There is nice activity. As I said earlier, the airplanes are flying again. We're not exactly back to pre-COVID, but getting very close to in terms of the flying of the business jet. And at the same time, there is sale activity. Not further than yesterday, I was in touch with our salespeople, and we've seen activity more than expected in Q2, and this continue also. So we are encouraged by that because as the first priority will be to fill our backlog, make sure we have enough airplane. But so far, we feel comfortable to where we stand then.
Okay. Great. And then, I guess, as a follow-up, if we think about probably in 2021, 2022, a little bit less level of activity on the business jet side in terms of sales than maybe was expected at the beginning of the year and a little bit different cash flow profile this year that kind of changes the cap structure a little bit, how do you think about when a stand-alone business jet entity can be free cash flow positive?
That's a fair question. I would say that our intent here is to have our businesses moving forward regularly on a free cash flow positive. I don't see reason unless we have major investment going or major ramp up, why our business should not be in a position to deliver free cash flow on a regular basis. We've made major investment. We have an amazing portfolio right now in every segment where we are competing. And I think that, moving forward, our airplane are extremely attractive, as I mentioned earlier. Despite the COVID-19, we still have a lot of activity in sale. And we expect -- if we have made the right rate decision and operating with the -- an optimal backlog, that our business should be producing cash on a regular basis. There'll be exceptions as we ramp up or do adjustment of the rates, but I guess that's the plan we have in mind.
The next question is from Walter Spracklin from RBC Capital Markets.
It's Ryall Stroud calling in for Walter Spracklin, RBC. I just wanted a quick -- I just wanted to quickly touch on the Global 7500. You had mentioned expectations to deliver at least twice in any Global 7500 in the second half. So looking at what you guys are on in the first half, it looks like at least 22 in the second half. Looking forward, should we expect that kind of the full -- or the prior full production run rate of roughly 40 is achievable, potentially as early as next year?
So I think that we've always indicated that our desire was to get to a ramp rate of 35 to 40 aircraft. And that would be kind of a steady-state mature production line, and also well matched with our current backlog and the expectations we have for current customer deliveries. And I think that the aircraft has an extremely bright future, and it's well positioned to continue to be able to sustain that kind of a mature rate. So, to your point, I mean, we're looking at something over 30 aircraft this year. That's all from the backlog. And I would say that, that 35 plus aircraft mature rate is clearly our objective.
Okay. Awesome. That's helpful. And then one last one for me. Just on the timing of the Aerostructures sale. You had mentioned in the call, but just for modeling purposes, do you think that sale is more likely it to occur in Q3 or during Q4?
Yes, I think it will be probably somewhere in the late fall, which could straddle the 2 quarters. I'm not sure. I mean, we're working with Spirit, and I think transaction -- September, October time frame is probably realistic.
The next question is from David Strauss from Barclays.
So following up on Aerostructures and the sale there. I think Airbus has made some announcements with regard to what they're going to do with the 320 thrust reverser program, which I think was supposed to go to Aerostructures. Can you comment on that and how that could potentially impact the sale process?
Yes. So clearly, Airbus has not made any -- completely public yet, and there's still -- there is discussion. We are monitoring that situation, and we are, as we speak, remaining in discussion with either Airbus and Spirit. But there is not much right now. You know what the commercial aircraft status is right now. There's a lot of moving parts. And I think there's a lot of discussion happening at the -- in all kind of platform. So that's one of those discussion taking place. But right now, I would say the discussion -- the things remain in discussion with Airbus and Spirit.
Okay. John, I guess, a follow-up for you on working capital and an improvement that you expect there in the second half. Can you maybe give us some help of what to expect in terms of some of the moving pieces? I know in the first half, you saw a big drag on the advances side and payable side, what happens there maybe along with inventory and specifically in the second half?
Sure. So you know that even seasonally, typically, we have a build of -- of working cap in the current end of the year, or in the second half of the year. Particularly in Q4, we do reduce working capital significantly. I think what you can expect is that delivery rate should -- especially on the BA side, assuming kind of a normalized return of markets here, to start to improve. With respect to trains, we've been building a significant amount of inventory, and this also precedes 2020, and that is an important part of us moving through the backlog. I mean, it's all still backlog with a significant train and finished trains in inventory, which are now awaiting homologation, in particular, in places like the U.K. and Germany. And so our view there is that BT will be able to, as they've not resumed operations, start to deliver product to customers in a more rapid way, which would then release some important delivery payments. So I guess, I mean, for us, at this point in time to be frank, the target is to drive a breakeven second half. We're typically better in Q3 than we are in Q2, even on a normal basis, cash comes down. In this particular situation, given the stress on Q2, we do expect to see [ some additional ] improvement. And then Q3 and Q4, we've been in the past, somewhere between $750 million and $1 billion of cash generation. I think that in this case here, I mean, there's going to be a muted impact probably from what kind of a release we have. But certainly, we are expecting to be able to recover whatever burn is in -- in Q4.
The next question is from Ron Epstein from Bank of America.
So maybe a couple of questions. It seems like going in business aviation, you guys have benefited from a large installed fleet, right? And that fleet is aging, right? Do you -- I mean, how do you think about that? One of the things we worry about is, as that fleet ages, your aftermarket for that is going to slow down. I mean, your maintenance repair overhaul, all the services that you do on that fleet. I mean if you think about that, particularly in being the case, with Learjet, that fleet hasn't been renewed in a while. So first question, how do you think about that?
So Ron, let me -- so there's a couple of points here that are important to me. We have about an installed base of roughly 5,000 airplanes flying out there. And I think I clearly indicated that one of our priority was to grow our services business. And you're absolutely right. A lot of the airplane are starting to be more mature right now. They need some major C check inspection, and we are planning to attract those into our service center. Our service center have shown amazing resilience. I was just sharing with you earlier that our service center will hold pretty much through the whole COVID period. We've maintained a high level of activity everywhere. And the revenue, mainly on over-the-counter air parts also, we were doing extremely well there during the COVID period. So we are also looking at new service center expansion. As you know, we are building right now capabilities in other countries to better serve our customer, but to also capture a biggest share of those revenue and service. So we are moving full steam ahead. Sorry, there's a bit of a buzz. So we are moving full steam ahead on this clearly. And at the same time, we have renewed our portfolio. So we are in a position also, especially on the Global, especially on the Challenger, we are refreshing our product. We've been refreshing our Learjet also as things move along to have more new avionic upgrade and different things like that. So we feel that we've always been refreshing our cabin. So we are extremely happy with the position, product-wise, that we're in. And we believe that we have an amazing product portfolio to offer for those customers who will want to replace their aging airplane. But we also have the base to capture the aftermarket more and more over the next few years.
Okay. And maybe next, just more of an accounting question for John. It seems like every quarter you guys report, you burn $1 billion of cash. And we hear a lot of the same narrative. We're going to see working capital release. It's going to fix. It's going to change. But I think if you asked any of this sell-side analysts who follow you, if we were to throw -- starts with the Board and the target was $1 billion burn in a quarter, that's probably what you guys are doing. I mean, how can we have any confidence that in the second half that it's actually going to get better? Because if you look back at recent history, I mean, the cash burn for you guys has been pretty astonishingly awful and surprising. So I mean, how are you going to get the investment community to believe that you can actually do this?
Well, listen, I think, Ron, I mean, for -- I'm not going to do a historical here, but I think that we've come out of a major investment cycle that did take a toll on cash burn, and that's clear. I mean, with respect to our biggest challenge has been clearly releasing the train inventory and finished goods to customers. And we've built a significant amount of finished trains that do -- are depressing our ability to it to convert cash at rail. And the real catalyst for that is completing the homologation, the customer acceptance and then the entry into service of those trains. And that's what we're focused on. With respect to I'd say, the aerospace side of the house, aero has actually delivered the expected cash flows for the business over the last 3, 4 years. And really it's been a question of investment cycle in aerospace programs. And so that's really -- I mean, the cash flow profile that we've carried and we've baked that cash flow profile with the investment cycle.
And just maybe just one last follow-on, on that. On the train side, is there a way to restructure the contracts that you guys don't have to carry all this working capital? When you -- when I think about some of the defense companies that some of the analysts who follow you like myself follow, I mean they structure their contracts with their customers, so they don't have to carry all that working capital and so on and so forth. I mean like on a go-forward basis, is there a way to change how you do your contracts, so if there's a delay on the customer side, you guys don't have to carry it? You know what I mean? Like it just seems like you're getting unfairly penalized in some of these cases, for issues that you're having with your customers because then you have all these trains that are piled up and -- you understand what I'm saying, John? I mean, is there a way you can read to your contract that the burden of this isn't so much on you guys?
Look, I mean, of course, we've got like 300, 400 contracts in the backlog. And -- so by and large, they do track spend and inventory with inflows. And so we do typically get a deposit on signing. We do get some payments for -- or heavily engineered projects, and then we get paid for milestones. The hard reality is that over the last 18 months, as some of that -- some of those milestones have, for various reasons, and yes in some cases, working with our customers and they may or may not be part of that. But the reality is that, that's what's hurting us. What's hurting us is the buildup of the trains and the delay in hitting homologations and critical engineering milestones. And that's left us carrying, to your point, fairly or unfairly, significant amount of inventory. The ability to change? Yes. Of course, there's probably significant lessons learned that have already been put into our contracting. But at this point in time, I think we've got to work through what we have.
And I think [indiscernible] to what John is saying, it's very important to understand the issue we're facing right now at BT that we face are not related really to the contract structure. Usually, when you signed the contract at the beginning, those are either cash neutral or they become positive. But clearly, we did face, and I said it earlier, some major performance issue. And then when you have those performance issue and you're getting late and you have to do a rework, this is when you create inventory and you don't get the cash because you don't deliver the car. So we are -- we have a major push in the next coming quarters to unlock exactly what I just said, because we've been successful on the 3 to 4 program that were -- on which we were sitting on a lot of inventory to be able to deliver our first car. So now it's unlocked, and we're going to be capturing that cash inflow.
The next question is from Noah Poponak from Goldman Sachs.
Just staying on free cash flow. In 2 years, so you're out of this year, you're beyond next year, which is maybe a transition year, at least to a degree. When I'm looking at just the remaining aerospace business, and it's a more normal environment. You've reset production, the 7500s ramped, its margin is ramped. So everything is reasonably normal. Presumably, there's not still work working capital build at that point in time. What's the free cash flow margin of the aerospace business in that environment?
I think it's early to make that call, Noah. I think it's a bit hypothetical for me to look at that now. I'd rather see what our rates are, what we set our production and market demand looks like. I think the second half of this year is what is going to give us some color as to how we actually work out '21 and then enter 2022.
But John, you've had all those inputs that I just described in the business before. And to Ron's point, it's just impossible to model the cash flow statement.
Yes, I understand that. But you're asking me to give you a speculative number for 2022. I mean we're in the middle of a pandemic.
Well, I'm not really specifying 2022. I'm just saying when things are normal again. And I'm sure you have some visibility into production and cost, given the business jet market isn't -- I mean, it's obviously bad this year, but it's not nearly as bad as the last downturn. And you have a product cycle that's actually growing. So I appreciate it if it's too speculative, but I was -- the question was assuming it maybe wasn't that speculative.
I think, Noah, the fundamentals, as you mentioned earlier, we have refreshed our portfolio of product. So we have a very competitive product, if not, in most of them being the leader in that category, in terms of performance, in terms of availability, in terms of many aspects. So we are starting on the right foot, clearly when you look at the next coming years. The 7500 is ramped up, so we have the inventory we need to carry on with that platform. And I think what John is alluding to is we need to better understand right now what's ahead of us in terms of the pandemic, the cycle. So which will help us to better understand the rates, pricing that we'll be able to get. And those are 2 still important variables that we need to sort out before being in a position to provide more accurate guidance.
Okay. I respect all of those uncertainties. Just one other question. Can you speak a little bit to the bifurcation, or what are you seeing between your high net worth individual customer versus your corporate customers and speaking to some of the folks that transact in your airplanes in the secondary market? And it sounded like that the former was really moving significantly positively, but it sounds like maybe the latter is off completely. And so it sounds like in the near term, if it's still a net negative, maybe -- I don't know if you think that high net worth change is sustainable to be a net positive long term. But we'd just love to hear what you're seeing across the 2 customer sets. And if you can also just remind us your split in your business, that would be helpful.
So right now, we see amazing activity, I would say, in the large and medium segment. A little less, but still a little bit in the smaller -- in the lighter jet. So that's what we've been expecting here. Interesting, in Q2, our assumption was that we're going to have a net order of 0. And we've been doing better than that. As you know, we've delivered 20 airplane with roughly a book-to-bill which is gross minus cancellation of about 0.3%. So this was better than expected. And that momentum still carries on in this quarter. So we see activity -- amazing activity actually at the large segment, amazing activity at the medium segment, which is, again, a good place to be. So we've reduced the rate we are foreseeing, the opportunity to rebuild some backlog in those businesses. And then we continue to monitor that. But so far -- and the activity is good and also actually very strong on the used airplane. So used airplane are also at levels that are very normal right now, even slightly improving in some of the segment.
The next question is from Cameron Doerksen from National Bank.
Just a couple of quick questions just on the sale of BT to Alstom. Can you just run through what the remaining regulatory approvals are now that you've got the EU, what's left that needs to be completed?
So first of all, I'll say that you're aware that the EU commission was a major milestone and an important one. So we are still expecting a deal closing in H1 2021. We had the EC approval, which was a positive. We still have other regulatory to achieve. So we're working diligently with Alstom. We have U.S., Canada, Australia and other countries like China, but we need to get those approval, too. But it's heading everywhere in the right direction without speculating here. But we're having very capable people on both side, working these through. We have also, later this summer, we are expecting the work council approval. So this is also tracking well. And in the coming months, we are expecting signing a purchase agreement. Because you realize that today, we are still working on an MOU. And again, when we have those condition, we are -- we should get to an SPA in the coming months. I think after that, also an important milestone will be Alstom shareholder vote and we'll -- we're getting through that. So far, things are progressing super well as per plan.
Okay. And so if things sort of progress as per the schedule that you've got right now, is there any reason why this couldn't close in Q1 of 2021? I mean you've indicated H1, but it seems to me like an earlier close might be possible.
Well, this is speculative at this stage. So we're not in full control of all those things. And there's a lot of things to do. As you know, we -- as an example, regulatory approval, we may consider that it's going to take 1 month, but it may take 4. So there's too much things that are out of our control, but I can tell you that the team are engaged to make this happening as soon as possible. But we still -- it's too early right now to predict. And we are looking into H1 next year still. And we'll be happy to report if we can do better than that, of course.
Thank you. The next question is from Robert Spingarn from Crédit Suisse.
Two questions, one for Éric first and then one for John. Éric, in answering Noah just a moment ago, you mentioned positive trends for mid, heavy jets and used. The only thing you didn't talk about was light. I'm just wondering if COVID is bringing some new customers to private jet travel through, let's say, charter, card, fractional, might we see renewed interest in the light jet and renewed interest for the first time in maybe a decade at Lear?
It's a very good question, Rob. So you are absolutely right that I did not maybe mention light. Light is -- there is activity, but not as much as medium and large right now. So that's a reality. But what you are exactly right, is to point into the direction of the fleet operator. So as you know, we are a major supplier to the fleet -- to those fleet. And I know for a fact that those fleets right now are doing extremely well. So they are still recovering. But at the same time, they have a lot of activity in terms of sales, in terms of interest for their business, which has not translate yet into new order for us. But if that momentum and there's a theory here that we are studying very carefully, that if you know people that used to fly commercial are now considering, and we believe it's going to happen, will be probably starting at the -- working with the fleet operator, which will eventually translate in orders probably for our business. And eventually, these people often they fly for a while with the fleet operator and then sometimes they become -- they want to own their own airplane. So it's too soon to assess and visualize that right now. But clearly, the one piece that we can visualize today is the level of sales activity at the fleet operators. So more and more, and we see also their flight picking up a little bit everywhere. So it's a fair assessment and we'll continue to monitor that. But eventually, we think that this could translate into more business for us.
Okay. Okay. And then, John, I'm afraid I'm going to take another crack at the question that both Noah and Seth were attempting to ask you, but I'll be a little more specific. Down the road when things normalize, is it reasonable to look at Bizjet as a $6 billion revenue business, maybe 120 to 130 or 140 deliveries per year, plus aftermarket, with a free cash flow return of about 4% to 5% on sales?
I mean, look, it's not that -- I mean I can do the math with you guys, and that's fine. But I think what I'm trying to tell you is that I am not going to make a call on a 2, 3-year business projection today. It's -- I mean, we're going to go through what we're going to go through here and look at the second half of the year. It might be a $6 billion business, it might be a $7 billion business. It might be 150, or it might be 120. Today is not the day for those comments. And with respect to the ability of the business to generate cash, the business generates cash. It does today. We have a balance sheet that needs to be deleveraged, that's going to come with an interest cost reduction. The size of that reduction needs to be assessed. We need to be able to manage through these transactions and the current year to be able to do that. The ability for us to go out and then identify rate reduction opportunities against the cost of our debt is important as well. And with respect to the ability of the aircraft business to generate cash, this is a business that has and can show the ability to be certainly a double-digit EBITDA margins as it goes forward with the 7500. And with a disciplined capital allocation plan, should be able to convert eighty, ninety cents on the dollar of earnings to cash. And I think that's really what the future of that aircraft business will look like. But it's dependent on rates. As Éric said, the environment that we're operating in, pricing and the variables around our balance sheet.
The next question is from Myles Walton from UBS.
I was hoping, John, you could maybe give us a little bit of color underlying the 2020 numbers we're looking at, the $2.7 billion cash burn you're implying for the year. How much relatively would you attribute to business aviation in that burn? I think you said the COVID impact would be $2.25 billion for the year, is BA $1.5 billion of that? So maybe if you could parse the $2.7 billion this year by 2 segments?
The way I would think about it is that you've got about $1.5 billion that comes out of BA. Now don't forget, part of the reason that we went out and secured the financing facility was to absorb a lot of that working capital build. We came into the year, obviously, with higher expectations for deliveries, and that creates a production rate and a working capital build that gets adjusted with a pretty severe adjustment to demand that's occurred. So we've managed out some of them of it, but not all of it will be absorbable. I also mentioned in my comments that we're unwinding some supplier extension and financing solutions that we had in place to support the 7500 ramp up. So that does create a drag on the BA number. So as I mentioned, about $1.5 billion and order or advances that contribute to that, working capital build contributes to that, probably, I would say, 1/3 to the advances, 2/3 to the fact that reduced deliveries and as we manage the production rates. And then, of course, within that, the implication of the wind down of the extension facility. When you look at the train side of the house, again, if you kind of just look overall, we're at $2.7 billion, midyear now, and we're trying to drive a breakeven second half, which would suggest the $2.7 billion in full year. So the train side of the house is probably, I don't know, $750 million of the COVID-related impact. And then you've got the drag from the train projects that we described this quarter. So that's another $300 million, $350 million of kind of cash funding of that charge, so think about something approaching $1 billion.
Okay. So roughly 1/2 to 2/3 is BA-driven in terms of the cash burn for the year that you laid out all the reasons. And then just the factoring piece, is that a headwind to '21 as well? Or is this 1 quarter or 1.5 effect? Or does that then add increased seasonality to your cash performance such that 1H next year would be impacted?
No, the way we're managing this is that as things kind of got dislocated in April and May, we decided to wind down the facility. And so that's going to take the remainder of the year, given the fact that whatever payable extensions are in there, get paid out normally. We're not introducing new ones in there. So it's kind of got an effect largely in the second half of the year. And as a result, I would say that, by and large, as we go into 2021, you're -- it's pretty much wound down. I mean there may be some small residual left, but that's kind of it. So I would say the impacts are to the current year in that kind of a onetime effect. And then for '21, '22, it would be neutral.
The last question will be from Cai Von Rumohr from Cowen.
Yes. So to follow-up on Myles. You mentioned $2.2 billion COVID impact, $300 million, $350 million basically goes to the charges you took at BT. But you also talked about a lot of those inventory buildup that will be released next year. How much of the remaining $1.9 billion of full year COVID is just expense, which you will not recover? And roughly how much is inventory that could turn into cash next year?
So on the earnings side, I would say that, by and large, you've got the direct costs associated with the actual pandemic. And then there's, probably in the neighborhood of another few hundred million dollars that comes from the loss revenue, right? So you're looking at probably somewhere in the neighborhood of $2.5 billion, $3 billion of lower revenue. And you've got probably mid-teen gross margins on that. So the component of that, that is, I would say, earnings impact is somewhere in the neighborhood of $400 million, $500 million. There's a component of this, which is about the order book as well. So I'm not going to forecast a kind of a full recovery of our backlog. In other words, we -- in 2020, are going to have significantly less orders than we would have expected. That's going to contract the backlog. That cash that typically in the backlog is going to be, at this point in time, assumed to be a kind of a permanent reduction. When we come back, we'll see if we can outpace deliveries with orders but that's to be seen. So in terms of inventories themselves, if you think along the lines of the working capital facility that we went out and secured, we're looking at again $750 million to $1 billion of usage on that facility. And I think, by and large, that's what's going to be the inventory that will have to come out of the system over the period of probably the next 12, 18 months or so. And it's really a question of what we do with production rates next year and how we see the market and what we want to do with respect to fully burning off the excess.
Okay. Thanks for your question. So I'd like to thank you again for joining the call this morning. We do appreciate your continued interest in Bombardier. And as always, Patrick will be available if you have further questions about today's release. We look forward to talking with you again in the next quarter. And until then, please stay safe and healthy. Thank you.
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