Good morning, ladies and gentlemen, and welcome to the Bombardier third quarter 2022 financial results 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 of FP&A and Investor Relations for Bombardier. Please go ahead, Mr. Richer de La Fleche.
Good morning, everyone, and welcome to Bombardier's earnings call for the third quarter ended September 30, 2022. 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 Executive Vice President and Chief Financial Officer, Bart Demosky, to review our operations and financial results for the third quarter of 2022. I would now like to turn over the discussion to Éric.
Alors, merci beaucoup, Francis, et, bonjour et bienvenue à tous et à toutes. Good morning, everyone. You need to know that I'm speaking to you today from Miami, Florida, where we have just finished a very successful week. We inaugurated the latest addition to our service network, a brand-new ultra-modern service center. This is one of the key pillars to our aftermarket growth strategy. I'll speak to how this event marked a key milestone in our expansion in a moment because it illustrates the types of initiative we have put in place to deliver service revenue growth. First, I wanted to reflect on the month that just passed. The center opening came at the end of a busy October.
We introduced an innovative new interior option for the Global 7500 and Global 8000 called the Executive Cabin, which was very well received by corporate customers. Finally, we made one of the biggest commitment in business aviation to sustainable fuels. Sustainability is at the heart of all discussion when it comes to business aviation and the future. This is why we took the bold and decisive step to transition all of our flight operation to SAF. Yes, we pay a slight premium to do so, but it is well worth the 25% annual net carbon emission reduction that will come with it. We have found a capable partner in Signature Aviation to help us on this journey.
For anyone saying that we need higher demand before broader SAF production can begin, let me make it clear, demand is here and companies like Bombardier are signing the check when it comes to preserving our future. We are all very passionate about this topic within our company, and I can talk about it all morning. First, let's get to third quarter result, as I am also eager to show how well the team performed in the context of our greater plan. You know, when we began Bombardier's journey as a company focused on business jet, you heard me repeat that we were going to focus on building backlog and remaining disciplined.
We have done just that, and that's why I can confidently tell you today that we are well equipped to face any market condition that will be ahead of us. I am even prouder to say that the fundamentals you will see in our Q3 results, things like liquidity, free cash flow, profitability, our debt management, have all showed that the foundation for how we expect to perform in 2025 as being firmly set. First, let me start with debt. Simply put, we have less of it. We have less costs associated with it, and we received another credit rating upgrade since we last spoke in August, this time from S&P upgrading us to B- with a stable outlook. Bart's team has done an excellent job managing maturities and setting us up for success.
Bart will speak to some of this in detail shortly, but being able to pay CAD 100 million back during a quarter that is traditionally light on deliveries due to seasonality, to me is very noteworthy. Overall, we are on track to deliver more than 120 jets this year. We saw a healthy and stable CAD 1.5 billion in revenue in Q3, and I would like to particularly highlight the contribution from our service business. We grew by 20% year-over-year. A portion of this can for sure be attributed to flight hours continuing to increase, but we are starting to see the benefits of our newly built or expanded facilities coming online.
The team has kept all these complex projects on track through the pandemic, and we are ready for them to continue to give us tailwind as customers continue to choose to bring their jets home to the OEM. We have also seen very positive feedback on market acceptance on our certified pre-owned offering. Each aircraft is carefully cared for by Bombardier expert who create a product that is very appealing. They have been on average selling 50% faster than other jets, helping keep our inventories at good levels and balance sheet clean in turn. This is a margin-accretive business and we will keep steadily progressing once again with discipline.
When it comes to the market as a whole, we have seen activity stabilize after a huge surge the past quarters, and we are reaching what I would call a cruising altitude of around one on our book-to-bill going forward. This is right where we want to be to maintain a good balance of operational predictability and aircraft availability. We now have the luxury of looking to the future with a $15 billion backlog to work with and can continue to make prudent and disciplined decisions when it comes to production to continue protecting pricing. When it comes to macroeconomic factors, we see a lot of varying predictions on what the coming months and year will bring. Remember that we built.
We have gained some upside this year, especially on free cash flow, where we ended at million for the quarter and are well on track to meet the guidance we raised just last August. We have further given ourselves flexibility by securing a revolver facility that Bart will detail shortly. All in all, we are well-positioned to maintain our growth curve steadily as outlined in our investor day this year towards 2025. If you look at Bombardier's Q3 adjusted EBITDA, it's another encouraging statistic that boils down to execution. It rose $210 million, which represent a 48% year-over-year improvement. With an adjusted EBITDA margin of 14.4%, we are in a great place and are seeing our hard work on the Global 7500 learning curve mature. We are seeing service contribution grow and finalizing and implementing recurring savings initiatives.
I do want to reiterate that when it comes to capital allocation, debt reduction remains our top priority. When you factor our restricted cash, which we expect to have access to early next year, we're already at $4.5 billion of adjusted net debt, which we initially thought we would reach in 2025. We are well ahead of schedule. In regards to supply chain, we have a good visibility on what we have to achieve to meet our commitment. This includes our planned 15%-20% production increase next year, which we have previously discussed together. Our teams continue to be deployed around the world to identify and mitigate risk. It is not without its challenges, but bold and decisive moves to bring work in-house continue to pay off for us in terms of stabilizing our product. I am very proud of our performance.
Looking at our balance sheet, it reflects the vision we set out for our company, and we have demonstrated we can perform. I'll now hand it over to Bart to dive deeper into the detail.
Thank you, Éric, and good morning, everyone. This is certainly an exciting time for Bombardier. When I look at the state of our business, I feel very good about how we've performed to date, and I feel equally good about the road ahead. Again, in Q3, we had an outstanding quarter on many fronts. First, from a product and market standpoint, we continue to lead the industry and drive innovation, as demonstrated by the announcements of our groundbreaking sustainable aviation fuel strategy and the three-zone executive cabin option on our Global 7500 and 8000 platforms. We took another major step forward this quarter towards achieving our long-term liquidity objectives through the establishment of our inaugural syndicated revolving credit facility.
This $300 million secured facility, when combined with our greater than $1.7 billion of adjusted liquidity, puts us at more than $2 billion in pro forma liquidity. Our new revolver is a five-year committed facility, and as I said, of up to $300 million, to be secured by working capital collateral. We have been working on this for some time, and I would like to thank all the teams involved as well as our banking syndicate. This is an important step in continuing to strengthen our financial position and speaks to the work we have accomplished over the past two years. Continuing with our balance sheet, we have remained active on debt management since our last earnings call, having repaid an incremental $100 million of our bonds through open market repurchases.
Our gross debt has now been reduced to $6.2 billion, and we are now approaching annualized savings of $300 million in cash interest via our debt reduction activities compared with December of 2020. As Éric said earlier, we have already reached our 2025 objectives in terms of net debt. We have over $2 billion of pro forma liquidity, including restricted cash soon to be returned to us, versus $6.2 billion of gross debt. We are not done here, and we expect to continue being active and opportunistic on our debt repayment in the coming quarters. Operationally, we delivered very strong results in the quarter. We continue to execute on our strategic priorities as planned, and I am particularly pleased with the pace of growth in our aftermarket business, where revenues are up 20% year-over-year.
Our margins also continue to improve, as exemplified by our 460 basis point year-over-year adjusted EBITDA margin expansion, contributing to our sixth straight quarter of positive free cash flow and putting us on track to deliver our full-year guidance across all metrics. Finally, our backlog continues to grow. After having another strong 1.3x book-to-bill in Q3, our backlog now stands at $15 billion, clients and aftermarket. This represents a 34% year-over-year increase and gives us plenty of visibility and predictability into our 2023 top line and financial performance. With that, let's move on to our Q3 results. Our revenues for the quarter stood at $1.5 billion, resulting from 25 aircraft deliveries and $372 million in aftermarket revenues.
Our manufacturing and other revenues were 5% lower year-over-year, mainly due to two fewer large aircraft deliveries, in line with our expectations and production schedules. Meanwhile, our aftermarket revenues saw 20% growth year-over-year from $310 million in 2021 to $372 million this year, and represented 26% of our overall revenues in the third quarter. This is supported by growth in flight hours as well as execution of our expansion strategy to gain market share. With our Miami facility inaugurated this week and the earlier openings of Australia, London and Singapore, we now have the required footprint to deliver our 2025 growth objectives. We will be aggressively ramping up these facilities over the next 12-18 months. We had a very impressive quarter in terms of profitability.
Our adjusted EBITDA of $210 million is an increase of 48% year-over-year. Even more impressive is our EBITDA margins, which rose 460 basis points to 14.4% versus 9.8% a year earlier. This margin expansion clearly demonstrates that our plan is working to significantly increase our profitability without the need for large increases in aircraft deliveries. Free cash flow was also strong, coming in at $52 million and bringing our year-to-date cash generation to $566 million. Our working capital for the quarter was relatively neutral with higher inventories tied to our planned rate increases, essentially offset by an increase in customer advances, as well as an increase in our accounts payable balance.
Looking at the last months of this year, we are in a great place entering Q4, and we are absolutely on track to meet or exceed our 2022 full year guidance. We continue to expect deliveries of greater than 120 aircraft for the full year. With 74 aircraft delivered in the first three quarters, we expect a strong output of at least seven deliveries in Q4. With deliveries in line with our expectations and aftermarket continuing to perform, we fully expect to meet our revenue and profitability objectives, though Q4 adjusted EBITDA margin percentage should retract a bit versus Q3 as new aircraft is expected to have a larger share of the revenue mix versus aftermarket. Free cash flow has already met the revised guidance we provided in August, and we expect to be cash positive in Q4.
In conclusion, Bombardier continues to deliver on its commitments and is well prepared to manage through potential volatility. We are focusing on the things that we can control and are confident we will continue to see upside to our financial performance in the future. Thank you very much. With that, let me turn it over to Francis to begin the Q and A.
Thanks, Bart. I'd like to remind you that the Bombardier investor relations team is available following the call and in the coming days to answer any questions you may have. With that, we will open it up for questions. Operator?
Thank you. If you have a question, please press star one on your touchtone telephone. If you are using a speakerphone, please lift your handset and then press star one. Should you wish to cancel your question, please press star two. To allocate time for all participants, please limit yourself to one question and one follow-up. Our first question is from Noah Poponak from Goldman Sachs. Please go ahead.
Hi. Good morning, everyone. I wondered, you know, now that we're approaching the end of 2022 here, and you have, you know, the degree of backlog and visibility that you do, if you might just refresh us on how you plan to load the delivery profile over the medium term?
Okay. You know, probably definitely for Q4, we're in a solid position. I would say we have pretty much everything under the roof of our facility right now to be capable of delivering what we said we were gonna do. Greater than 120-
I'm sorry. Go ahead.
Still in reach on both, on both sides. About next year, I think we've reiterated earlier and a few weeks ago that we were still aiming, you know, for a 15%-20% increase in terms of delivery. Despite all the challenges that the supply chain is offering, you know, we've been extremely proactive for the last two years and a half, you know, managing the situation, and we're looking forward with that confidence, you know, in terms of our deliveries.
Okay. Éric, you mentioned kinda landing around book-to-bill of one. You know, I'm sort of trying to map out, you know, where the bookings go from here versus the revenue. If I take the bookings in the quarter and annualize that would approximately equate the manufacturing or the new aircraft revenue for the year. You would therefore need to grow bookings from the level they landed at in the third quarter to keep the book-to-bill at one as you grow production. Is that correct? I guess, you know, how much visibility do you have at this point into the future bookings?
You know, you've extended backlog and gained visibility into production, but, you know, do you now have a customer set that plans further in advance and gives you more visibility on that front end of the process as well?
Yeah. No, we clearly have some of our customers that are planning more ahead even than what the booking we have today, you know? Some, you know, especially fleet operator, will have conversation about 25, 26, and even further. In terms of, you know, we are being prudent, you know, going into when we forecast the future, especially, you know, starting next year. We are planning for a book-to-bill of one, okay? That's what we've been thinking of. We do have today, which is, you know, close to two years, pretty much on all platform. We're in a very good place. This gives us the confidence that if we maintain a book-to-bill of one, we'll preserve the backlog that we have today.
also when I say that, you know, we are ready to face any situation ahead of us, is that if we would have a book-to-bill lower than one because there's a major recession going into next year, then, you know, we would probably use some of the backlog. Okay? you know, make an assumption that we may, let's say, it's just an hypothesis here at 0.75, then you would lose probably three months of the two years so which is still, you know, pretty good and gives you the visibility you need to manage the business with confidence and predictability.
Okay. Thanks very much.
Thank you.
Thank you, Noah.
Thanks, Noah. Thank you.
Thank you. Our following question is from Walter Spracklin from RBC Capital Markets. Please go ahead.
Yeah. Thanks very much. Good morning, everyone, and congrats on a good quarter. I wanna zero in on the certified pre-owned market. I know you covered this a lot, Éric, on at NBAA, but this is a really interesting opportunity and correct me if I'm wrong. I mean, this has been made possible by your investment in the aftermarket and the footprint that you've created, hangar space that you've created with that investment is now giving you the opportunity to go into a market that you couldn't address before. I'm just curious, what level of revenue opportunity are you targeting here?
You mentioned margin accretive and particularly, what timeframe do you think you could ramp up to that level of whatever market addressing, whatever addressable market you're targeting, how quickly could you get to that level?
You know, thanks, Walter, for the question. I think you're aware if I talk about the business a bit that we're creating here. First of all, it's important to know that we have 5,000 airplanes flying out there. Which creates an opportunity, an enormous opportunity, and we know from history, and even during this pandemic, there's around 400 airplanes of Bombardier every year that are, you know, involved in a transaction. From those 400 pre-owned transactions and then to capture a fair market share of those by bringing these airplanes to us, and you're absolutely right highlighting that today, adding additional capacity. You know, we added 1 million sq ft this year to our facility and service.
We're giving ourselves the ability to bring these airplanes, and as an OEM, you know, refresh the interior, put a new avionics in and, you know, basically take these airplanes after, I don't know, 15 years or 20 years or 10 years they've been in service, refresh them, and put them back on the market because these airplanes have a long life cycle. We are uniquely positioned to offer that significant value to customer. I'm not going to state a percentage, but think about a market of 400 airplanes a year that are involved in a transaction, and we intend to take a market share, you know.
Of those transactions. This brings a strong margin contribution. You know, we launched a program, as you know, about 18 months ago now in July 2021, and you know, we're starting to reach today double-digit deliveries. That's a nice indicator. We are well-positioned. We do believe in that business. We're gonna continue to grow that business. We have the capability to do so, and that's how we're thinking about it.
Yeah, that's great. A follow-up question here is on cash flow. This one's from Bart. Obviously, you know, you hit your free cash flow guide, your multi-year free cash flow guide for 2025 in year one. You kinda indicated when you raised your guidance last time that, look, there was a lot of good events that happened this year that helped you on that. Naturally, I think by maintaining your $500 million free cash flow guide for 2025, I think you're implicitly saying, "Okay, you know, we had a bit of a windfall this year.
Maybe go back down to some normalized level and then back up to 2025 on a more sustainable level." My question, I guess is, A, you know, is it the things that allowed you to get that free cash flow benefit this year, won't a lot of those factors be in play going into next year as well? And secondly, how soon, if that's happening, how soon could you hit your leverage target? If you're getting your 2025 free cash flow target well in advance, how much sooner do you see yourself as being able to achieve your leverage target, your 2025 leverage target?
Yeah, great questions, Walter. Let me just start by saying, you know, we've been quite aggressive on our debt reduction plans and strategies to date. We're well ahead, and I'll give you a couple of metrics here in a moment on our debt reduction plan. You're right, the market dynamics certainly helped accelerate our debt reduction relative to, you know, the original targets that we produced or provided to the market about a year and a half ago, just over a year and a half ago. Proud to say that we've reimbursed almost $900 million of debt today from cash generated from the business, which is the most important thing.
I mentioned last quarter that we believe we've now reached a place where we will be cash flow positive at a 1.0 book to bill quarter-over-quarter going forward. Obviously, we can do better than that as our earnings continue to grow because the earnings growth is primarily coming from the things that we control, taking cost out and growing our aftermarket business. In terms of the 2025 objective, we had said that we wanted to get to $1.5 billion of EBITDA and $4.5 billion of net debt, sorry, in order to have a 3x debt to EBITDA.
We have already achieved the $4.5 billion of net debt this quarter, $6.2 billion of gross debt less about $1.4 billion of cash on hand, $400 million of restricted cash, and $300 million of the new revolver in place for us. We have liquidity now in excess of $2 billion. We've already achieved, in fact exceeded our 2025 target. The expectations for us from here with higher deliveries coming, as Éric mentioned, next year, and continued progress on all of the not only EBITDA, but cash flow improvement activities that are underway right now that will, in all likelihood, well exceed our 2025 targets by 2025.
To be clear, the $500 million of free cash flow target that we set for 2025, the actual target is much higher than that. We highlighted this in our investor day in March of this year, that when you think about $1.5 billion of EBITDA, less about $100 million of sustaining CapEx a year, and I'll call it $400 million of interest cost, annualized, that leaves us with $1 billion of cash flow that we can put to work. We're very excited about what the future is bringing and particularly about how the balance sheet and the free cash flow is shaping up. Hopefully, that helps, Walter.
Yeah, it does indeed. Thanks very much. Thanks for taking my question.
Terrific. Thank you.
Thank you, Walter.
Thank you. Our following question is from Myles Walton from Wolfe Research. Please go ahead.
Thanks. Good morning. I was hoping you could drill in a little bit on the aftermarket enterprise. In particular, I don't know if you can do this, but I'll ask the question. On a same store's basis that is sort of considering or taking aside the expansion of your aftermarket enterprise, do you have a sense as to how much of the growth is being driven by transactional expansion versus square footage expansion? Broadly, into 2023, how much square footage expansion you know on a net basis would there be under a flat utilization criteria? Thanks.
That's a great question. Clearly, you know, the aftermarket profitability is driven by parts sales and our strategy I think has been coming into from one fold mainly was about having a presence. We are growing the market share of the entire availability. If you look at all the hours in maintenance and parts sales possible on the 5,000 airplane flying out there, we are basically growing. This year, we added, sorry, 1 million sq ft, you know, to our facility in order to bring more airplane in and channel more parts, of course. That's how we are, we've been able to grow. We, as you know, this year, we've announced 1 million, you know, always looking at further opportunities.
We are thinking about other region where we may do that. This is, you know, you saw the result this morning. We grew by 20% year-over-year versus 3%. There's also the Smart Parts program that is growing as we have a bigger installed base. Most of our customer, you know, when airplane is new value of the program, that's another area where we are growing also, our, you know, our presence. This program has been at Bombardier for many, many years, but it's been very successful in the last few years in terms of of growing as people understand that it also helps the residual value of the product.
Labor is a constraint, you know, basically for incremental parts sales, and that's been our strategy, and it's working extremely well. Just to picture that a little bit, you know, we usually have an average number of airplanes, and that number of airplanes since we've added the capacity, you know, the capacity has been fulfilled and you know, very rapidly, meaning that there is a demand out there and that demand, you know, people like to come to the OEM. On top of it, I think a leading indicator, as you know, is clearly the flying hours. The fleet is today flying around 15%-20% more hours than it was pre-COVID in 2019 if we compare pre-COVID. Anyway, we are in a very good place.
All the indicators are heading in the right place, and we do believe that we will achieve the target we have for growing that business.
Okay. Bart, maybe just a quick one for you. With the $300 million revolver, does that point you to being comfortable carrying just $1.2 billion in cash versus the $1.5 billion I think you had a placeholder for previously?
Yeah, Myles. Thanks. Yeah, you've got it right. The target for us for, I'll call it liquidity on hand, now rather than just cash on hand, remains at about $1.5 billion. We've been staying pretty close to that and but with the standby facility we now have in place, committed facility, it's a five-year commitment of $300 million. That means we require less cash on hand to maintain that $1.5 billion. So you're right, it's $1.2 billion + $300 million. That would be the general target we would carry forward from here.
Awesome. Thank you.
Okay. Thanks, Myles.
Thank you.
Thank you. The following question is from Konark Gupta from Scotiabank. Please go ahead.
Thanks, Éric and Bart . Good morning, everyone. We just wanted to dig into the inventory levels here. I think Q3 inventories went up by more than $300 million sequentially from Q2. How much of that do you think could reverse in Q4? Are there any other notable cash flow items we should be mindful of in Q4?
Yeah. We're as you're probably aware, Konark, and good morning, and thanks for the question. As we're ramping up production to meet the higher delivery targets that we've set for 2023 and probably beyond as well, but we'll come to that when we get to guidance, that requires us to build some inventory. You're definitely noticing that happening. In terms of free cash flow, Q4, we do expect to be positive in the quarter. We've got about $250 million of profit to go and get to our $825 million minimum for the quarter, and we've made it clear that we expect to exceed that number.
Interest costs, just to kind of break it down for you here, are about CAD 170 million, including debt and other lease accounting interests. CapEx spend will be a bit greater in the fourth quarter than Q3, which was CAD 70 million, but in line with our expectations because we're continuing to build out our brand-new world-class production facility in Toronto. Working capital-wise, inventory will decrease on stronger deliveries, but that's as you would expect, I guess, with a strong delivery and book in Q4. I mentioned at least 47 deliveries, so some of that should be reversed.
Ultimately, the working capital will again be influenced by advances depending on you know how many new aircraft orders we get and where our book to bill lands. Those are all kind of the key factors that'll influence things in the fourth quarter. That's a lot of moving parts, but should be quite positive from what we're seeing.
That's great color, Bart. Thanks so much. Then just one quick follow-up on the leverage ratio. I noticed you had a pro forma. You guys say 5.5x net debt to EBITDA, I think. But obviously, I mean, if you look at the EBITDA, the trailing EBITDA, which is not a true reflection of your kind of current operations. Would you say your EBITDA margin today, you know, after baking in all the improvements you have achieved so far, not withstanding, you know, the future improvements, would you say the EBITDA margin would be closer to 15% today for the operation?
I hate doing math on the run, Konark. Directionally, yep, yeah, it's probably a little bit higher. A trailing is about $800 million, just over $800 million, I believe, $810 million trailing. Yes, if you look at the greater than $825 million, it would be a bit higher as a margin. That is correct. You know, as we've outlined, we're looking to continue to grow. Margins have been improving year-over-year, and we expect to continue to that would be a continuation from here on out. I did mention Q3 will be a little bit lighter just based on you know, the significant delivery book that we have for the quarter.
That's good color. Sorry to put you on the spot here, but thanks for the.
No, no. That's okay, Konark. All good. Thank you.
Thank you. Our following question is from Benoit Poirier, Desjardins Capital Markets. Please go ahead.
Yeah, good morning, and congratulations for the good quarter. When we look at the quarter, we've seen some SPAC IPOs, so I would be curious to know about the booking activity in Q4 and whether the SPAC IPO we've seen will translate into a strong booking activity. Maybe if you could provide some color about the new entrants that you're still seeing so far, Q3, Q4.
I think it's worth noting that we've seen quite a bit of consolidation among fleet operators. I think in the last year or so you've seen acquisitions. There's been a lot of, you know, small operators that, you know, got consolidated under the bigger one. I think, Benoit, that this could be, you know, a trend moving forward also as everybody is looking for capacity right now. Fleet operators, I've seen a huge surge in demand, so they're looking for capacity to buy airplanes, to operate airplanes, to charter them. I think the good news for Bombardier in this is that we are extremely well positioned with the biggest fleet operators. I'm thinking about Flexjet, VistaJet, and NetJets, and a few others.
You know, it's been, I've said that before, it's a fair percentage of our growth. They are happy with our product, you know, whatever, if it's reliability, the performance of it, our ability also to maintain their airplane. All this to say that, you know, we are in a good place, but I think we have to anticipate that there will be probably further consolidation, which could be to our advantage.
Okay. That's great color. Yeah, just as we head into 2023, I understand you have not released any numbers so far, but how should we be thinking in terms of free cash flow expectation versus 2022? It looks like obviously there will be higher deliveries, higher EBITDA, but potentially softer book-to-bill. Without being precise, should we expect free cash flow to be up or potentially down versus 2022?
Hi, Benoit. It's Bart here. Yeah, look, we’re gonna stick to our guns and bring out our guidance in the first quarter of next year, and we'll look forward to sharing it with you then. Okay, Benoit?
Yep. Perfect. Okay, thanks.
Okay, perfect. Thank you.
Thanks, Benoit. Thank you.
Thank you. Following question is from Cai von Rumohr from Cowen. Please go ahead.
This is Spencer Breitzke, on for Cai von Rumohr. Thanks for taking the question. What impact should we expect on Bombardier's results from the U.S. dollar appreciating versus the Canadian dollar? Thank you.
Yeah. Cai, thanks. As we do outline in our financials, kind of a sensitivity to each $0.01 move in the exchange rate. It's about a $15 million tailwind when the Canadian dollar is or the U.S. dollar is strengthening against the Canadian dollar. That's $15 million per $0.01 . We have a hedging program in place. We've had it in place for many years, so we do try to manage our currency exposure going forward. We do hedge a fairly considerable amount, so while we expect to see some benefit starting in 2023, it'll move to a more full benefit of the stronger Canadian dollar starting in beginning in 2024.
Thank you.
Okay. Thank you, Spencer. Thanks.
Thank you. Following question is from Tim James from TD Securities. Please go ahead.
Thanks very much. Good morning. Thank you for taking my call. Just one question here.
For Éric, I guess. I'm wondering if you can talk, and it's a little bit open-ended, but I'm curious to get your thoughts. As you look at 2023, what are, if you had to pick the two most significant kinda watch items for you in terms of of risks as you enter 2023? I guess I'm thinking of the question just, because the company is obviously the momentum is strong. You're executing. You're hitting your results. And obviously there are kinda clouds on the horizon for many other industries. What are you thinking about or watching most closely as you go into 2023?
I think it's a great question, Tim, and we're asking ourself that question every day. The two that are definitely coming on top of mind are geopolitical. Okay. Clearly, you know, this could change, but I guess it could change the world for Bombardier, but for everybody else, probably. I think this one is clearly a risk that we are all facing that is ahead of us. You know, despite this one, this is one that we don't have much control. The other one that we have partially control is supply chain. I think, you know, we've took the step, as I said earlier, we need to watch.
You know, there was quite a bit of shock induced in the supply chain the last two years because of COVID, and we are still created other situation. Anyway, I think this is recovering slowly but surely. We are always watching if there's gonna be further, but I think those are the two main one that, you know, are keeping us on our toes and making sure that, you know, we're gonna be managing them proactively as much as we can. Those were the two that, yeah, that could have an impact. Still, you know, the supply chain, we feel comfortable, and that's why we are reiterating our 15%-20% increase.
The other one is, I would say, I think we can claim altogether that it's out of our control, but we'll see what happened there.
Great. Thank you very much.
Thank you.
Thank you. The following question is from Stephen Trent from Citi. Please go ahead.
Good morning, gentlemen, and thanks very much for taking my question. Apologies if I missed it, but I was just curious if you could provide a little more color on what you're doing with sustainable aviation fuel, kind of, you know, what's the size of the investment, and what sort of, you know, operational guideposts should we be watching in the coming years. Thank you.
Perfect. No, this is a great question, and this is something that is brings a lot of interest in my management team, including myself. We've been extremely proactive, you know, on reducing our greenhouse emissions ourselves. First of all, we're looking at a 25% reduction from 2019 to 2025 within our company, and we're well on our way to do that. We had, I think it was a big announcement we made at the NBAA in Orlando about sustainable aviation fuel.
We had just announced a partnership with Signature and basically Bombardier all our demo flight that we do for, you know, when we sell airplane, all the test flight that we do when we either test new program or test an airplane because we just built it, all the certification flight will be running with SAF. We have a very comprehensive program with Signature, which we call it Book and Claim, which is a. I like it because it's fair. It's pretty smart. It means, you know, sustainable fuel availability is always the challenge. Not every airport has sustainable fuel available, but what we're gonna do is we're gonna be paying, you know, a premium to put sustainable fuel.
It doesn't mean it's gonna go into our airplane, but somebody else close to a factory where they're producing the fuel will be putting it into another airplane. Overall, the benefits are there, and you avoid, you know, transporting the fuel, you know, throughout all North America or Europe. I think it makes a lot of sense that helps to reduce emissions, and we were doing that. Then in terms of the investment, I would say it's not material. It is something we've put into our budget for next year. It doesn't change anything in the big scheme of things, but we thought it was an investment that was worth to do as we are all facing a challenge that we all need to contribute to.
That's super helpful. Really appreciate that.
Thank you.
For my one follow-up, I was, you know, thinking about longer term, it seems that, you know, you guys might get down to a relatively low financial leverage fairly quickly. You know, any high-level thoughts with respect to capital allocation, whether you think about new products down the road or maybe another big investment in aftermarket? Thank you.
No, I think that's a great question. You know, clearly, I think we've been extremely clear. Capital allocation priority today remains reducing debt, and we will do that, continue to do that. Eventually, you're right. You know, in the long run, we're gonna have to think about a new program. We're gonna have to decide, first of all. But I think we as a management team have been extremely disciplined, and we would only launch a new program under certain condition in terms of leverage ratio, cash availability, liquidity, and I think that's gonna be criteria number one. We will not launch a program if we haven't achieved these parameter that we gave ourself to do so.
Of course, there's other question, you know, that come into play, like availability of technology, of course, the market and everything, and our ability to execute. Clearly the discipline
that I think we've been showing as a management team for the last two years will also remain, when it's gonna be time to face a new
Okay. Appreciate that.
allocate our capital to reduce debt.
Super, sorry to interrupt. Thank you very much for that.
You're welcome. Thank you.
Thank you. The following question is from Chris Murray from ATB Capital Markets. Please go ahead.
Yeah, thanks. Good morning, folks. Bart, maybe this is one more for you. A couple thoughts around just near-term debt repayment. I guess, first of all, we didn't see a tender offer for the $100 million, so just wondering if you're actually buying stock back in the market or, sorry, bonds back in the market, or if you've got, call it, a roster of folks who sell back to you. If you can also provide us with a little more color around that restricted cash and timing and when you think that it'll become available to you, that would be helpful.
Yeah. Thanks, Chris. You're right. This past quarter, we didn't come out with a formal publicly announced tender. Instead, we purchased or repurchased bonds in the market, in the open market, through open market purchase activities. It was a very productive repurchasing of bonds. As you can imagine, there was quite a bit of volatility in all capital markets in the quarter, which gave us the opportunity to buy $100 million of face value of notes back for less than that amount. It was a very productive repurchasing of bonds. We're very pleased with being able to execute on that in the quarter.
In terms of the roughly $400 million of restricted cash that's out there right now, the letters of credit that cash is supporting expire right towards the end of January of next year. That's the timing of when we would expect to receive that cash back.
All right. That cash, I'm assuming, once you've got it, you can use it for debt repayment or any other corporate purposes as you see fit, right?
Yeah. Yeah, absolutely. We'll stick to our plan of trying to stay about $1.5 billion of liquidity now available, and assuming that cash is excess, certainly it could be used for debt repayment.
Okay. Just looking forward, just wanna make sure on the timing of it. It sounds like at least from your indications, you know, you've opened, I guess, a few of the service centers. I think if I read it correctly in your notes, you thought London should be kind of fully up maybe towards the end of this month or early in December. You know, any updates on timing on the Toronto facility and any thoughts on any additional capital needs into next year, or should it be fairly modest?
No, I think, everything is on track right now. We got, you know, you're absolutely right. We're gonna be officially announcing London in the next month. You know, the facility has already started. Actually, it's filling very nicely, with airplane right now. We will officially announce the facility in a few weeks. In regards to Pearson, you know, we're right on track. I visited the facility myself, you know, a few weeks ago. You know, we've built a structure. We're closing the wall right now, and we have a detailed plan to start moving, you know, our equipment station by station starting, you know, sometime, next year in the summer or in the fall.
The plan is still to have everything moved and open it, you know, early in 2023.
All right.
Early in 2024. Sorry.
That's great. Yeah. Okay. Thanks very much.
Thank you.
Thank you. Our following question is from Cameron Doerksen from National Bank Financial. Please go ahead.
Thanks. Good morning. Maybe just a quick, I guess, clarification question for Bart. Just wondering if you can sort of indicate what your run rate interest expense is today based on that kind of $4.5 billion in net debt.
Yeah. Run rate today, so we've got $6.2 billion of gross debt. Our interest rate average coupon rate on that debt is just under 7.5%. The run rate is about $465 million interest expense.
Okay. Perfect.
you know, pleased to say that that's down almost $300 million from December of 2020. We're very excited about all that extra cash that is coming back to the business now.
Yeah, absolutely. Maybe just a question for Éric. Just on the, I guess, the backlog composition, I wonder if you can maybe just talk a little bit how it breaks down today between, you know, fleet operators versus high net worth individuals versus, I guess, corporate customers. Maybe more importantly, has anything kinda changed in the last quarter as far as the composition of that backlog or the split?
Yeah. That's a great question. You know, it's pretty similar to what we said at Investor Day. We're in the zone of about 18% or 20% for fleet operator. As I said earlier, we are extremely well-positioned with these guys, and these guys have the capability probably to continue growing. It's about 20%, I would say, of our backlog. You know, it's around the same number that it was probably earlier this year.
Okay, perfect. That's very helpful. Thanks very much.
Thank you.
Thanks, Cameron.
Thank you. Our following question is from David Strauss from Barclays. Please go ahead.
Hi, this is Brad Barton for David. Good morning. I just wanna talk, you talked about your targets for 2025 from the free cash flow side, but you appear to be progressing a little ahead of the target for $7.5 billion revenue. Can you just talk to that?
Well, I can certainly do, and Bart can chip in, but you know, clearly, you know, we are doing extremely well right now on what we committed we were gonna do for 2025. We're ahead on the deleveraging, and I think right now we're in a situation where you know, we have also built backlog, have visibility. We're gonna be reassessing as we do every year, you know, our 2025. I think that you can expect that probably early next year when we talk about our guidance, of course, and do investor day, that we will be providing an update for the 2025 outlook.
Okay, great. Then just on deliveries for this last quarter. Last quarter, you had said Q3 was gonna be flat year-over-year, but came in a little lower versus 2021. Just what happened there?
Yeah. I think in Q3, the devil's in the detail. We delivered 25 airplanes. If you compare to last year, we delivered 27, but that was including four Learjet airplanes. The reality is, if you compare apples to apples, we for the Challenger and Global total delivered two more airplanes, and that was basically what the plan was ± one airplane. We had one airplane at the end of the quarter that, you know, we ended up with, you know, a financing discussion or something happened and the customer decided to do it differently. Anyway, there's nothing to take away from this right now. We're happy with where we ended up in Q3, and Q4 looks solid and we're looking forward to the quarter.
We have a lot of airplane in Q4, but they're all in a good place right now to deliver.
Great. Thank you.
Thank you.
Operator-
Thanks, Brad.
We're out of time for more questions, so we'll pass it to Éric to make some closing remarks.
Perfect. Merci beaucoup, Henri. I would like to thank you all for joining us today. As you know, we have a very busy fourth quarter ahead of us, and we are committed to closing out the year on a high note. I look forward to reconvening with you all in the new year to discuss what 2023 will bring for Bombardier. Also to take the opportunity to sincerely thank every one of you on the call who I was able to meet with during the NBAA-BACE show a few weeks ago. It's a real pleasure to get to interact in person. It is essentially what business aviation is all about. I wish you all safe further travel and a productive close out to 2022. Thank you.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.