By Frederick K. Larkin | August 5, 2021 Estimated reading time 6 minutes, 18 seconds.
Bombardier has reported better than expected financial results for its second quarter ended June 30, 2021. As a result, the company has raised its full year 2021 guidance.
On June 2, Skies reported on Bombardier’s prospects as a pure play biz jet company. We concluded that strong orders for new aircraft, improved operational efficiencies and a disciplined debt reduction program could result in strong revenue growth, improved earnings, enhanced cash flow and a healthier balance sheet. The results reported for Q2/21 show that progress is being made on all of these fronts – at a slightly faster than anticipated pace.
Total revenues during Q2/21 were up 25 percent year-over-year to US$1.52 billion from $1.22 billion. Revenues related to aircraft sales increased by an impressive 57 percent year-over-year to $1.21 billion from $0.77 billion. During Q2/21, Bombardier delivered 29 aircraft, a 45 percent increase from the 20 units delivered in the year-earlier period. The product mix played an important role in the revenue growth, as 17 of the 29 units were Globals – including 11 flagship Global 7500s.
That product mix was also reflected in the company’s improved profitability. The gross margin increased to 14.1 percent in Q2/21 from 7.7 percent in Q2/20. The higher margins of the Global models were a key contributor. Operational efficiencies were assisted by the production cost reduction learning curve on the important Global 7500 program. The cost to build the 100th unit was expected to be 20 percent less than that to produce the 50th unit. Incidentally, the 100th Global 7500 should soon be performing its flight tests before being delivered to the completion center.
The enhanced earnings performance enabled strong free cash generation during Q2/21. In fact, it improved by $841 million year-over-year. The improved cash flow, and proceeds from previous divestitures, has enabled a meaningful improvement in the health of Bombardier’s balance sheet over the past six months. The net debt (defined as total long-term debt less cash and equivalents) has declined from approximately $8.3 billion at Dec. 31/20 to about $5.7 billion at Jun. 30/21.
The outlook for Bombardier continues to be encouraging. The order backlog at Jun. 30/21 stood at $10.7 billion, up from $10.4 billion three months earlier. The Q2/21 book-to-bill ratio was an impressive 1.8x, reflecting strong sales of new Challenger and Global aircraft. Orders came from both traditional customers and first-time buyers. The COVID-19 pandemic has resulted in a significant increase in interest in private aviation from high-net-worth individuals around the world, and this has translated into increased purchases of aircraft by people who have never owned an aircraft.
The company’s optimism about the business aviation market is supported by the fact that corporate jet utilization within North America has almost returned to pre-pandemic levels. Europe is still catching up, but a rebound is underway there. Asia remains a challenge, but is expected to recover in due course.
A key metric used to forecast future corporate jet sales is the number of aircraft for sale. Today, between four to five percent of the world’s bizjet fleet is on the market. This is the lowest level in two decades and reflects the increased demand for jets. Security, avoidance of crowds, flexibility, privacy, and convenience are some of the attributes of private aircraft that are attracting first-time buyers. Demand for large cabin, long-range jets, including all the Global models, has increased significantly, and therefore even fewer of those aircraft are currently available for purchase.
In light of the order activity and the strong market conditions, Bombardier has raised its guidance for its full year 2021 financial performance. It had been looking to deliver between 110 and 120 aircraft, and is now forecasting that 120 is a more realistic target. Full year revenues are now forecast to be approximately $5.8 billion, rather than the previously stated $5.6 billion. Improved earnings and cash flow performance is now also anticipated by management.
While the Q2/21 financial results were strong, it should be noted that the Q3/21 performance will likely be less so given the traditionally slower summer months. Q4/21 is expected to provide a strong finish to the year, thereby enabling the company to achieve its upgraded financial targets.
With an increased order backlog; the buoyant market environment; its enhanced profitability and cash flow generation; and the continuing deleveraging of its balance sheet, Bombardier’s financial turnaround remains an impressive story.
