Bombardier Inc. (OTCPK:BOMBF) Q2 2022 Earnings Conference Call August 4, 2022 8:00 AM ET
Company Participants
Francis Richer de La Fleche – Vice President, Financial Planning and Investor Relations
Eric Martel – President and Chief Executive Officer
Bart Demosky – Executive Vice President and Chief Financial Officer
Conference Call Participants
Tim James – TD Securities
Benoit Poirier – Desjardins Bank Capital Markets
Stephen Trent – Citi
Robert Stallard – Vertical Research
Chris Murray – ATB Capital Markets
Fadi Chamoun – BMO Capital Markets
Kevin Chiang – CIBC
Cameron Derchin – National Bank Financial
Walter Spracklin – RBC Capital Markets
Noah Poponak – Goldman Sachs
Konark Gupta – Scotiabank
Operator
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. Francis Richer de La Fleche, Vice President, FP&A and Investor Relations for Bombardier. Please go ahead, Mr. Richer from La Fleche.
Francis Richer de La Fleche
Good morning, everyone, and welcome to Bombardier earnings call for the second quarter ended June 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 second quarter 2022.
I would now like to turn over the discussion to Eric.
Eric Martel
[Foreign Language] Good morning, everyone, and I hope you are having a safe and restful summer. Bombardier has certainly had a fantastic second quarter. We have been proactive in strengthening our balance sheet and accelerating our debt reduction. We are executing our plan, meeting our commitment and have further demonstrated our industry leadership with the showstopping launch of the Global 8000 business jet.
In parallel, strong demand for business aviation has carried through and our team has converted opportunities to grow our backlog significantly. If I can sum up Bombardier’s performance in the second quarter with a few words, they would be confidence, predictability and resilience.
I am also delighted to say our ability to execute our plan was externally recognized, most notably with Moody’s upgrading our credit rating. I am particularly proud of this achievement, especially when you look at how Bombardier is performing in the context of the current economic backdrop.
On today’s call, we will indeed touch on the macroeconomic context as well as supply chain pressure. But I would first like to talk about our most significant performance indicators.
When I look at our solid performance on free cash flow, it has clearly demonstrated that we have set the right foundation to be a cash-positive business and deliver on our commitments. Today, we are raising full guidance on free cash flow to greater than $515 million. I am proud to say that our ability to execute on our initiatives to grow margins and leverage our key contributor to solidifying our overall position.
This past quarter saw us continue our margin expansion and reached an adjusted EBITDA of $201 million, this is a 41% better year-over-year. Our adjusted liquidity position also stands strong at $1.8 billion. We’ve been well placed to continue reducing our debt as well as proactively reducing the cost of our debt. Bart will cover our success on these 2 fronts in greater detail shortly. I would like to thank the team for their tireless efforts on this front.
Turning now to demand and the market. A Q2 unique book-to-bill of 1.8 and as backlog increased to $14.7 billion, really tell you a lot in terms of demand remaining at very healthy levels. The backlog number itself is impressive. It is also 1 of the healthiest business aviation backlog we have seen in terms of customer type mix.
When we look at operational predictability, that healthy backlog is where it starts, but also gives us great confidence in raising our cash guidance as well as reconfirming delivery and earning figures for the year.
Looking at industry metrics that shape demand, they remain healthy across the board. We see continuing high flight hours, very low used aircraft inventory with the younger aircraft being scooped up very quickly and finally, improved pricing.
In this quarter, when we’ve observed slowdowns or stabilization in the regions, we have turned our focus to other areas to continue driving the business. Interest and utilization around the world continue to outperform pre-pandemic levels. Demand for business aviation continues to grow to new members of the flying public. With every passing month of airport and flight schedule disruption, business travel becomes a more appealing option.
Utilization has also continued to accelerate our services revenue. They grew 22% versus Q2 last year, generating a healthy $359 million of top line revenue, which totaled $1.6 billion for the quarter.
We see a steady and stable growth path for services as major facility inspection come online. The first of which I was able to personally inaugurate on the last day of Q2 in Singapore, where we have quadrupled our footprint and now operate the largest OEM-owned service facility in the Asia Pacific region.
We are in the process of ramping up expansions in London, England as well as Miami, Florida. To add to this, we will also inaugurate our Melbourne, Australia facility this year.
This worldwide expansion of our service facilities allows us to bring more of our jet home. This is the most effective way to channel our high-quality OEM parts to our installed base of jets. We have been executing on this journey for many years and have proven — and have a proven track record.
Our goal to reach $2 billion in annual aftermarket revenue by 2025 is fully on track. We do face what I would call a crosswind on supply chain. With business indicators and demand still driving in a positive direction, supply chain pressure is contributing to keeping delivery ramp-up at a conservative and steady space in line with our 2025 projections.
The key to managing these cross wins is maintaining agility and consistent execution. As Bart and I have repeated, we have built a plan that is not dependent on significant value upside as we needed to confidently and proactively deal with any macroeconomic fluctuation.
Our current product lineup, beyond being exceptionally designed and reliable, sits in the most stable categories. Our results to date in 2022 have demonstrated that we can perform underscored by our stable deliveries, expanding margins and exceptional cash generation.
That said, dealing with supply chain pressure is a new normal. Having deployed additional personnel early on was a successful strategy as it continuously helps us identify risk. This mindset and proactive approach started as early as 2020. Right at the start of the pandemic, we secured many small work packages that were at risk and brought them to our team. Today, we are benefiting from that decision through production predictability, and it has also helped create 500 new jobs within Bombardier.
Over the last few months, we have been very active in continuing that approach and assessing where it makes sense to repatriate or consolidate smaller work packages or parts to ensure our production line can operate as efficiently as possible. This is a testament to the skill teams we have that can contribute to securing our deliveries while ensuring we take steps to keep any additional action we take within our working budget for the year.
Overall, managing this supply chain pressure does require continuous focus and attention. To date, we have been successful but will continue to work very actively at various tiers of suppliers. In terms of burning down any risk, we will not hesitate to act when needed.
This is a very different economic landscape to previous cycles like 2009, for example. With demand for business aviation remaining high and production rates having been largely reset, we believe we are in a good place to have a healthy balance of pricing and demand going forward. I can only emphasize, again, that we are taking a predictable approach focusing on the steady increase we have begun.
Key to this is having the right product as the market evolves and our product strategy is progressing fully to plan. The Challenger 3500 aircraft will begin deliveries through the back end of the third quarter, and we have secured the key autothrottle certification during the second quarter. This program is well on track, and customers are enjoying the aircraft’s elevated experience, both from a cabin design perspective as well as the sustainable material options.
Our attention is turning to the Global 8000 certification campaign. As we announced at EBACE, we have successfully tested the aircraft beyond the sound barrier. This helps pave the path to certify a maximum operating speed of Mach 0.94, which will make the Global 8000 the fastest business jet on the market. Combined with the platform’s exceptional low-speed ending, it is truly full non-compromised package.
Response from the market has been nothing short of tremendous. I have personally received a lot of positive feedback on our strategy to offer the performance enhancement to Global 7500 customers as retrofits.
All in all, the reshaped Bombardier team has delivered another solid quarter. We stand well placed with services infrastructure expansion, a well-received product road map and positive financial performance that is putting our debt reduction strategy ahead of plan.
On that note, I will now turn the call to Bart to go deeper into our financial performance and balance sheet.
Bart Demosky
Thank you, Eric, and good morning, everyone. Q2 has been another outstanding quarter for Bombardier. Our balance sheet continues to improve ahead of plan, and we find ourselves in an even stronger financial position than when we started the year.
Our team remains focused on delivering our strategic plan and the benefits of executing on our strategies are becoming clearer with every quarter that goes by. So let me begin by touching on some of the highlights.
First, we delivered a fifth consecutive quarter of positive free cash flow with a $340 million result in Q2, bringing our year-to-date free cash flow generation to $514 million. With demand indicators such as flight hours and preowned inventory levels remaining very strong, we are in an excellent position entering the second half of the year and have raised our full year free cash flow guidance to greater than $515 million from our original guidance of greater than $50 million.
From a liquidity perspective, we ended the quarter with a strong cash on hand balance of $1.4 billion, maintaining the same level of cash as of the end of March, and that’s inclusive of the successful execution of our $350 million tender offer. When combining our Q2 tender with actions taken earlier this year, we have reduced our debt by $773 million since the start of 2022, which will reduce cash interest by almost $60 million on an annualized basis.
Debt reduction remains our top priority, as we have clearly demonstrated in the first half of this year. Our work so far leaves us with only $510 million of debt maturing in December 2024. We will continue to be opportunistic in the debt markets and expect to allocate excess liquidity towards further debt repayment.
If we continue to look to deliver on our plan, we should see our credit metrics and ratings improve. As was the case in July with Moody’s rating upgrade into the B category on our senior unsecured notes.
Operationally, we continue to build our backlog, which now stands at $14.7 billion, having grown $1.2 billion sequentially on the back of a 1.8x unit book-to-bill. This also marks a 37% year-over-year increase.
The backlog is high quality. It is well diversified across platforms and customer types. It does not include speculative orders and the orders we have are supported by meaningful deposits and cancellation penalties. To summarize, it is a much stronger backlog than ever before and is a key part of making our business more predictable and resilient.
We also expanded our first half EBITDA margins by 380 basis points year-over-year by delivering on our strategic priorities. It is important to note that even though demand has been stronger than we had planned for, much of the progress we have made in terms of improving our financial performance is the result of executing on the things that we control.
Independent of the demand environment, Bombardier is on a very meaningful earnings growth trajectory as we execute on our strategic priorities, namely on maturing the contribution of the Global 7500, executing on our cost reduction plan, and growing our aftermarket business.
All of our earnings growth initiatives are right on track. And when coupled with our commitment to reduce debt, this means that Bombardier is now structurally cash generative even in a normalized 1.0 book-to-bill environment.
This is an outstanding start for 2022. The accomplishments I’ve just mentioned are only a few of the steps we have taken to improve our financial performance and predictability. Looking ahead, I am equally optimistic that we will continue to deliver and exceed our commitments.
So with that, let’s move on to our Q2 results. Free cash flow was the standout metric with $341 million of cash generation in the quarter. Advance levels increased by approximately $330 million versus Q1 as a result of higher progress payments as well as new order intake, which was partly offset by an increase in inventory levels of approximately $150 million.
From a year-over-year standpoint, we can really see the benefit of our deleveraging efforts as quarterly cash interest for Q2 was reduced by $51 million, to $186 million versus $237 million last year.
Our revenues for the quarter stood at $1.6 billion, resulting from 28 aircraft deliveries and $359 million in aftermarket revenues. Our manufacturing revenues were 2% lower year-over-year due to one less delivery, which was entirely in line with our expectations and production schedules.
Meanwhile, our aftermarket revenues saw 22% growth year-over-year from $295 million last year to $359 million this year. This is supported by growth in flight hours as well as execution of our strategy to gain market share and demonstrates continued progress towards our $2 billion aftermarket revenue objective by 2025.
From a profitability standpoint, our adjusted EBITDA was $201 million, representing a 41% improvement year-over-year. Given the relatively flat revenues, this means that we saw a significant margin expansion as adjusted EBITDA margins rose 350 basis points from 9.4% in Q2 of last year to 12.9% this quarter. Adjusted EBIT also significantly increased year-over-year and stood at $103 million.
Looking ahead to the second half of the year, we are well positioned to meet or beat our full year guidance. In fact, on free cash flow, we have increased our guidance to greater than $515 million, which implies a positive second half of the year. For our other metrics, we are reaffirming our existing 2022 full year guidance.
To that point, we continue to expect deliveries of greater than 120 aircraft for the full year. Supply chain has been difficult. And as Eric mentioned, the actions we have taken since last year have allowed us to proactively manage many issues. We are nevertheless not immune to supplier challenges and we’ll continue to monitor and manage this diligently.
We continue to expect deliveries in Q3 to be relatively flat year-over-year followed by strong output in Q4. With deliveries on track and our aftermarket continuing to be strong, we are well positioned to deliver greater than $6.5 billion in revenues and convert this to greater than $825 million of EBITDA. Looking at Q3, we expect EBITDA margins to be fairly stable when compared to Q2.
So in conclusion, Q2 was another remarkable quarter for Bombardier. Core performance continues to improve year-on-year, and we are in an excellent position to continue delivering on our commitments. This is not by chance.
Our management team has been hard at work executing on the things that we control, and we are very confident that we will continue to produce strong results. With that, thank you very much, and let me turn it back over to Francis to begin the Q&A.
Francis Richer de La Fleche
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, please go ahead.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]
Thank you. [Operator Instruction] And the first question is from Tim James from TD Securities.
Tim James
Just wondering if we could — you could talk a little bit about the strength in demand and just comment on any sort of geographic particular strength you’re seeing or by customer type fractionals, charters, private individuals, that type of context.
Eric Martel
I can certainly do, Tim. Thank you for the question. Actually, the remain — the demand on the market in our Q2 did remain extremely well balanced clearly led by the U.S. The U.S. has been clearly leading the charge for the last 2 years. But also, if you look at the percentage also, we’ve seen Europe also improving quite a bit.
Despite the geopolitical tension right now, we’ve seen good order intake from Europe. And the good news is that APAC is coming back. APAC was slow for the last 2 years, mainly driven by the quarantine situation that they had in some main city like think about Singapore, as an example, not that it’s reopened. We’ve seen good level of activity in that region. And also the flight hours are going up and up, and they’re back and even better than pre-pandemic levels. So this is why we’ re talking about the leading indicator heading in the right direction.
As far as the fleet operator, clearly extremely strong demand. One of the big upside in flight hours comes from the fleet operator. The fleet operator have been extremely busy. As we explained before, a lot of people that used to fly first class on an airline move to our industry and are flying private jet. They are not all buying their own jet, but a lot of them are going to the fleet operator. And so we’ve seen a heavy trend there.
And clearly, today, I think the fleet operator are in demand for more airplanes. So their business has been growing significantly and the demand remains extremely strong with the fleet operator.
Tim James
Great. Thank you very much. And just quick follow-up question here again for Bart. Obviously, free cash flow was outstanding here in the quarter. And I mean, if my simple math is correct, and I just want your confirmation on this
I mean, even if you’d had a book to bill of, of just one times in the quarter, your free cash still, would’ve been up significantly year over year and still positive in the second quarter. Like have I got that.
Bart Demosky
Yes, Tim, you have. And thanks for the question. I think in my comments there, I did mention that we now believe and are actually very, very confident that we’ve reached a structural position with our business, having brought our costs down and growing our EBITDA and revenues where a 1x book-to -bill will be positively cash generative going forward.
Tim James
Great. Thank you very much.
Bart Demosky
Okay. Thanks Tim.
Operator
Thank you. The next question is from Benoit Poirier from Desjardins Bank Capital Markets.
Benoit Poirier
Yes, good morning everyone and congratulations for the free cash flow performance.
Bart Demosky
Thank you, Benoit
Benoit Poirier
Just to come back on the previous question about the — obviously, the fleet operator I was wondering if you could provide more color about whether the uptick in aircraft interest was driven by the widespread delays at the airports around the world this summer. And just wondering if those new customers to the business jet. Any more color about how sticky they are, whether they are here to stay going forward?
Eric Martel
The answer to your question, Benoit, is, absolutely. This has been going on, I would say, since the beginning of the pandemic. You may have really saying that the pandemic was probably an accelerator. I often said that what was supposed to maybe happen over 7 to 10 years happen. So the pandemic was clearly an accelerator for people moving towards private jet.
And there has been study actually that were done actually at the beginning of the pandemic and even pre-pandemic that there’s still a lot of potential there of people that can afford flying on a private jet that were not at the time. So now we’ve seen an acceleration of these people moving towards private aviation.
And as I said briefly earlier to the previous question, it’s been an accelerator and these people are not all buying their own jet, but they’re buying some are, but a lot of people are buying fleet operator hours or cars or whatever the formula is and it’s been great for us because Bombardier is actually extremely well positioned with pretty much all the fleet operator.
I think thanks to the reliability of our airplane, the cost efficiency of our airplane and, of course, the quality of our cabin. So when you put all this together, we become a pretty good choice for the fleet operator which the airplane is well appreciated by their customer. But we’ve clearly seen an acceleration and amazing growth due to the situation at airport and airline.
Benoit Poirier
That’s great color. And maybe just a quick follow-up for Bart. With respect to Moody’s, they recently disclosed the factors that could lead to a potential upgrade, including a leverage ratio below 6x. So could you talk maybe about the visibility you have, maybe the timing to get below 6x? And any color about the potential interest savings that could come on the back of a rating upgrade part.
Bart Demosky
Yes. Thanks, Benoit. So there’s a little bit to unpack there. But first, I would just say that our main focus for all of our excess free cash flow generation is going to be debt repayments in the near and medium term. So you’ve seen us as we’ve generated cash beyond our needs that we’ve been consistent in doing that and having paid another $773 million of notes off this year. I think we’re proving ourselves on that front. .
In terms of next steps, we’re sitting with significant cash on the balance sheet today, $1.4 billion. As we’ve become more and more confident in our financial performance as we’ve been able to structure our progress payments from — the aircraft that we’ve sold to basically be able to finance the working capital needs as we construct our aircraft , fully finance them. Our intra-quarter cash flow needs to have shrunk to very minimal levels.
You probably remember that in past years, they were quite significant at times, and that is not the case for us anymore. So that gives us higher confidence that we could perhaps free up some of that cash to continue to pay down debt. I can’t give you exact timing on that, but just know that it will be our focus going forward over the coming months and years.
Benoit Poirier
That’s great color. Thank you very much.
Bart Demosky
Thank you, Benoit.
Operator
Thank you. The next question is from Stephen Trent from Citi.
Stephen Trent
I appreciate the color on the free cash flow. That’s very helpful. And I know you’ve been spinning off assets in recent years. Are there any possibility that you guys would consider acquiring assets someplace if it would help the company to obtain a critical supply given Europe, what’s going on with the global supply chain?
Eric Martel
Yes, that’s a very good question, Stephen. And we will remain vigilant on whatever opportunity may arise or secure our supply chain. I said earlier in my script that we will do whatever it takes to make sure that we stay on track that we deliver on our commitment. And it may involve actually considering some of it.
Of course, as Bart said, the priority for us is to reimburse debt. But actually, it’s always — the capital allocation discussion is always going on, on a continuous basis. So priority is clearly to reduce the debt. But at the same time, if other opportunity may arise and they make sense for us. We’re not talking about anything significant here, but where it makes sense, we will definitely consider.
Stephen Trent
Okay, I will leave it there. Many thanks gentlemen.
Eric Martel
Many thanks. Thank you.
Operator
The next question is from Robert Stallard from Vertical Research.
Robert Stallard
Thanks so much. Good morning.
Eric Martel
Good morning.
Robert Stallard
I have a couple of questions for you, if I may. First of all, in terms of delivery slots, when is the next 1 currently available for the Challenger or the Globals.
And then secondly, on the supply chain, Eric, you mentioned that there’s clearly some challenges here. I was wondering if you could highlight any areas of particular tightness and whether you see any sort of material risk to that new aircraft delivery target for the year?
Eric Martel
Yes, thank you. So great question here. Clearly, when we look around right now, and I know I won’t comment specifically the timing on every program. But I think overall, you can think about 2 years. When you look at our dollar of backlog and the revenue we’re generating so you can make the math. And the good news for us, it’s pretty well spread across the board. It’s not like one program driving the backlog. Every single program is contributing by about the same length. So I guess you can make your own judgment on this. But we are pretty healthy in terms of backlog.
And as you know, we’ve already said that we almost provide a bit of guidance for next year, talking about a 15% to 20% rate increase. So this takes into account the length of the backlog we may want to have but also the supply chain constraints that are well known and across the board. So we’ve been extremely meticulous in planning in detail every ramp-up taking into account that we don’t want to have too much backlog or not enough backlog. And we are managing a range here of minimum and maximum. But on top of it, we are taking great note of what the strain the supply chains are today.
So to your second question between now and year-end, we feel that — that’s why — that’s the reason why we are reiterating are greater than 120. And the greater than 120 takes into account some of the risk we have ahead of us, mainly driven by engine right now. So we are being careful, but the guidance we’re providing greater than 120 takes those risks into account.
Robert Stallard
That’s great. Thank you very much.
Eric Martel
Thank you.
Operator
The next question is from Chris Murray from ATB Capital Markets.
Chris Murray
Yeah, thanks folks. Maybe a little bit different looking at the aftermarket business. Certainly, as you’re seeing the growth develop in there. I was just wondering if you could talk a little bit about how you’re seeing the margin profile evolve? If it’s really tracking as you expect — or are you guys having to perhaps feel some new business into these facilities as you get started off with them?
Eric Martel
Great question, Chris. Thank you. Clearly, we had a very detailed plan that we put together 2 years ago. And the team has done an amazing job in services right now to execute exactly what that plan was. So we don’t have any surprises, any gaps. There’s always some pretty small variation to a plan that’s normal.
But we are tracking extremely well with revenue are on pace. The benefit from the new facility also are materializing like fairly quickly pretty much gradually over 18 months when they started the operation. And we’ve made the market inauguration in Singapore. The demand was there. We quadrupled the size of that facility that we built in 2013 — opened in 2013.
So great progress there. we are gaining market share on a regular basis. So our market share is going up. The business is growing, and we believe that the 2025 today, there’s no reason to believe that we will not achieve them. So we’re on track to achieve the plan.
Chris Murray
Okay. That’s helpful. Thanks. And then just 1 follow-up for me. Just on the Global 7500, how many deliveries were in the quarter?
Eric Martel
Sorry, can you just repeat your question? I missed that.
Chris Murray
Sorry. For the Global 7500s, how many aircraft did you deliver in the quarter?
Eric Martel
We’re not too specific, but we’ve mentioned about 40 per year, and we’re exactly in line with that right now. So we’ve been pretty much delivering like a block. So you’re talking about 9 to 10 to 12 airplanes a quarter depending on which quarter. But on average, you can think about 10 roughly.
Chris Murray
All right. Thank you. That’s helpful.
Operator
The next question is from Fadi Chamoun from BMO Capital Markets.
Fadi Chamoun
Yes. Good morning. And congratulations on the strong results.
Eric Martel
Thank you.
Fadi Chamoun
I want to talk on the supply chain side. Obviously, the biggest focus is on delivering on the backlog that you have grown nicely. But if I look at the second half of the year, you’re delivering at a rate of 140 aircraft annualized. Is that the right metric to think about the supply chain is able to deliver that kind of delivery rate going forward? Or would that not be the case?
Eric Martel
Yes. I think right now, the way to look at it, first — that’s why we’re reiterating the 120 for this year. We talked about 15 to 20 improvement for next year. And so far, we are on track to do that. There is some tension in some area in the supply chain, mainly I would say at Tier 2, Tier 3 and sometimes Tier 4 supplier, which we are monitoring very proactively and also working with the major OEM on engine to do so. But I think the pace we’re in right now is pretty much in line with what we’ve been communicating before. And we remain that — we still believe that it’s achievable.
Fadi Chamoun
Okay. And a follow-up on that is like are the margins or the inflationary cost pressures that you experienced maybe as a result of the supply chain challenging your margin target at this point? I mean, it sounds like it’s under control, but can you kind of confirm what you are seeing on that front and how you’ve been able to kind of manage some of those pressures with pricing or productivity?
Eric Martel
Maybe the first thing I would say, Fadi, is we are fairly well protected on inflation on our contract for a new airplane. So that’s one. And we have a little bit of exposure. But at the same time, as you know, the pricing of our airplane has improved significantly. So, so far, we’re definitely okay there.
And the same thing in the services group, where we have maybe less protection on the contract, but we’ve been able to improve our pricing according to the inflation that we’ve seen ourselves. So overall, we’re comfortable with our plan there and where we stand.
Fadi Chamoun
Great. Appreciated. Thank you.
Eric Martel
Thank you.
Operator
The next question is from Kevin Chiang from CIBC.
Kevin Chiang
Congrats on a very strong free cash flow first half of the year here. If I could just ask on some of the working capital movements. Obviously, book-to-bill was a nice tailwind. But I also noticed that your trade payables was a nice tailwind.
And I think if I look back, I guess, over your recent history being a BA only or business gen only OEM. It feels like sequentially you typically see a draw on working capital from this line item. Just wondering if there’s something there from a working capital management perspective, has a seasonality change for that specific line items.
Bart Demosky
Yes. Kevin, it’s Bart here. Thank you for the question. Working capital in the past, particularly when the company did not have a deep backlog was more challenging because within a quarter, we’d be using more of our own cash resources to manage the WIP, right? So with a full and deep backlog now and with a change in the way we’ve been working to contract progress payments, throughout the cycle of building the aircraft. We’re now in a place where essentially deposits and progress payments from customers are fully funding our working capital needs. So that puts us in a position where our working capital and our cash on hand remained very, very stable throughout the quarter.
It’s actually become quite de minimis, the cash that we need within any particular quarter. And with a backlog 18, 24 months plus depending on which type of aircraft we’re talking about we’re in a great place to be able to sustain that going forward. So we’re not anticipating large working capital variability going forward. In fact, quite the opposite. We believe we’re in a position now where it will be and remain very stable moving forward from here.
Kevin Chiang
That’s great color. And obviously, great working capital management there. Maybe just turning to services. It’s been a great revenue source for you. We’ve seen good growth and making investments there. You’re stuck around $360 million, give or take, of revenue per quarter.
And I’d be interested in knowing maybe how much of that is being impacted by some of the supply chain issues, getting parts maybe even labor for that matter versus what you’ve seen in the last 3 quarters, kind of hovering around the $360 million in revenue.
Eric Martel
No. The answer to your question, Kevin, is yes, it’s been impacted. The revenue, despite that they are easily good we could have done better if parts would have been available. And so we have a bit of a backlog of parts as we could sell and ship tomorrow if we would ask them in our hands. But so — but despite that, the number have been pretty good. But yes, to answer your question, there is a certain impact here.
Kevin Chiang
Okay. That’s great clarification. Again, congrats on the good first half of the year.
Eric Martel
Thank you.
Bart Demosky
Thanks.
Operator
The next question is from Cameron Derchin from National Bank Financial.
Cameron Doerksen
Just a couple of, I guess, clarification questions on the guidance. Just firstly, on the free cash flow, I don’t want to take anything away from what you’ve done here in the first half, which has been very, very strong.
But if I look at the second half of the year, it sort of implies maybe modestly positive. I’m just wondering what your assumption is around, I guess, the order activity in the second half of the year that gets you to your full year free cash flow guidance?
Eric Martel
I think, Cameron, that’s a good great question. Thank you. We clearly we’re sending a message here with greater than $515 million. $515 million is what we’ve been able to achieve year-to-date because of some unpredictability on supply chain, that’s why we’ve kept our guidance. We’re comfortable with the guidance we provided on the other metrics but we wanted to say greater, there is a few risk ahead.
So I think we’ll be in a better place when we talk about our Q3 results because pretty much all the parts will be under the roof here, and we can build the airplane. We still have a few teams to work out, but it’s heading in the right direction. So that’s why we were careful and I’ve guided for greater than $515 million and maintaining our view on the other metrics.
Bart Demosky
Ken, it’s Bart here. If I could maybe just build on Eric’s response. The other thing I would just emphasize is that while we are projecting positive free cash flow in the back half of the year, as we mentioned, I think as both of us mentioned earlier, if we’re at a book-to-bill of 1 and we’ve been somewhere between 1.5 and 2.5 for a while now.
We still expect to be positive on a free cash flow basis, which is a completely different position for Bombardier now and 1 that we’re very, very proud of, and it puts us in a strong position in almost any kind of market environment going forward to produce free cash flow.
Cameron Doerksen
Okay, that’s very helpful. And maybe it’s the same answer here for my other clarification, just on, I guess, the EBITDA. Because if I look at the second half of the year, the guidance sort of implies maybe a flat to maybe slightly lower EBITDA margin, and you’re going to have higher aircraft delivery. So is there anything other than, I guess, maybe conservatism here that would imply that maybe there’s a bit of margin pressure in the second half of the year even on higher deliveries?
Eric Martel
I think we are consistent with our approach, Cam, and we remain conservative moving forward. I think that’s the thing you need to note. I’m saying it takes into account some of the potential risk we have. But if there is don’t materialize, then that’s why we’re talking about greater than.
Cameron Doerksen
Very good. No, that’s excellent. Thanks very much.
Eric Martel
Thank you.
Bart Demosky
Thanks.
Operator
The next question is from Walter Spracklin of RBC Capital Markets.
Walter Spracklin
Yes. And congratulations again on the quarter. Looking at your pricing and Eric, you mentioned pricing is strong. But unlike many companies whose pricing, the impact of their pricing change can be felt pretty quickly. Your delivery times, obviously, are much longer than many other companies.
And therefore, is it safe to say that the benefit from your higher pricing is still yet to be fully realized given that a lot of the deliveries you’re making now would have been priced pre-pandemic. And therefore, could we see a much larger price increase on delivered product further into the future? And can you quantify if that’s correct, how what is the lead time or lag benefit that you’re going to expect to see in pricing going forward?
Eric Martel
I think, Walter, that’s a great question. And this is something, of course, we’re discussing here on a regular basis. But I would say that the airplanes we’re delivering today, most of them were sold post pandemic. we still have a few. But our backlog was extremely low 2 years ago when we entered into the pandemic. We’ve been growing that backlog significantly.
So I think it’s reflective of some of these pricing improvement. But at the same time, as I mentioned earlier, we also have pressure on the inflation on parts and on a few things, despite the fact that we are extremely well protected for the maturity of those. But there is some pressure there, for sure.
If you move forward, I mentioned, you may want to think about almost 2 years ahead of us right now that we’re selling. So if you’re selling 2 years ahead, you need to take into account that there will be some inflation. And of course, the pricing is defined accordingly.
So we don’t feel any pressure right now in terms of trying to sell and adding another year to the backlog we’re selling. We are extremely disciplined. We are expecting a certain pricing, which will be in line with the expected inflation that we do foresee moving forward. So that’s how we’re thinking about it, Walter.
Walter Spracklin
Okay. That’s great color. And my second question here is on the macro landscape and obviously, a lot of trepidation out there around an upcoming recession. Now large cabin long-range jets have held in much better during recession than their smaller cabin counterparts. I guess my question is kind of twofold.
Has COVID impacts further improve that historical trend where the demand you’re seeing right now might be part structural, not fully impacted by cyclical events.
And related to that as well is the strong demand you’re getting now, allowing you to adjust terms in terms of the level of deposits and the speed in which they come in such that it reduces the risk of cancellation should we go into an economic downturn?
Eric Martel
Yes. We are extremely pleased with the quality of the backlog we have today. They’re mainly individual. And I think pricing is good are — we’re extremely disciplined about making sure that there is a considerable decision to be made by the buyer if they would end up canceling.
But that’s why we believe that our backlog despite — not just — it’s a long backlog, but it’s a pretty good quality and long backlog we have in our end study that — and that’s what makes us believe that if there is a downside in the economy, we are in a great position to be able to absorb the different fluctuation that we may foresee moving forward. But at the same time, we feel that we will not observe like major cancellation and things like that.
So the quality of the backlog for multiyear gives us strong visibility on the revenue through a couple of years, actually.
Walter Spracklin
Okay. That’s great color. Appreciate the time Eric
Eric Martel
Thank you.
Operator
Thank you. The next question is from Noah Poponak from Goldman Sachs.
Noah Poponak
Hi, good morning everybody.
Eric Martel
Good morning.
Noah Poponak
Eric, maybe just staying there and maybe just get more of your thoughts on how you want to manage supply and demand here. The backlog has now increased over $1 billion 3 quarters in a row, and you don’t want to have customers wait too long. But this is still cyclical and discretionary to some degree.
And so are you just trying to maintain that 2 to 2.5 years of production in the backlog? Or are you assuming this $2.5 billion order pace pulls back 20%, 30% at some point into the $1.7 billion, $1.8 billion and so you try to take the production revenue to that?
Or how scientific can you get, I guess, it’s kind of an interesting riddle to solve? And can you even do that? Or do you just have to — you have customers tell you when they want an airplane and you just have to deliver to that.
Eric Martel
I think it’s a great question, Noah. And clearly, we’re discussing this on a daily basis, if not to say hourly here about how we manage the demand and the offer we’re giving. I really like the fact that we have almost 2 — we have 2 years ahead of us. And I think the rate increase that we’re talking about for next year are reflective of keeping that backlog.
I think it’s been proven in the last quarter that despite you have much of a backlog. Sales activity remained very strong. So — but there’s a limit to that. I think at 3 years, it could become problematic for people to buy an airplane and wait for 3 years. So we have — and we go program by program, depending for the large cabin, there’s a bit more patience in waiting 2 to 3 years. But on the smaller just, the medium segment, we’ re trying to be a little bit lower than that.
But I think our rate — production rate increase right now, thinking of 15% to 20% higher than this year for next year. are reflective of how we see the backlog growing. But as Bart said earlier, a book-to-bill of 1 moving forward would be great because we would pretty much preserve you know what we have here, and that’s how we’re thinking about this.
Noah Poponak
Okay. How much does the services business contribute to the backlog? .
Eric Martel
Let me double check that.
Noah Poponak
Or is it primarily new build?
Eric Martel
$2 trillion roughly. So the team is saying about $2 billion here.
Noah Poponak
Okay. That squares up the 2 years that you’ve referred to a little better although it still implies something higher, but I’ll circle back to that. Bart, is 3Q free cash flow positive? And will the advanced payments line item be positive?
Bart Demosky
So no, we don’t project forward free cash flow, but by saying greater than $515 million for the second half of the year, we’re certainly implying that we expect to be a positive free cash flow. I can’t break it down quarter-by-quarter. But just based on a book-to-bill of 1. And if you think about the kind of order activity and market we’re in right now, if it stays as healthy as it’s been, certainly we’d be positive free cash flow .
Noah Poponak
Yes. I appreciate that’s a little bit of a silly question in some ways, but the genesis there is just to the prior question that the $515 million implies basically exactly breakeven for the back half.
And then historically, you’ve been pretty 4Q loaded. Just wanted to basically make sure that there isn’t some unique working capital line item that we all can’t forecast that makes it negative in the third quarter and it’s not modeled correctly and there’s some surprise on that front is basically I was trying to make sure
Bart Demosky
No, yes, there’s nothing strange that we’re forecasting or different really than the way we’ve been performing over the past number of quarters, Noah, Working capital has remained pretty stable through the quarters, and we would expect the same in Q3 .
Noah Poponak
Perfect. Okay. Thank you.
Eric Martel
You bet. Have a good day.
Francis Richer de La Fleche
Operator, we have time for one last question.
Operator
Thank you. And the last question will be from Konark Gupta from Scotiabank.
Konark Gupta
So my questions are just on the balance sheet, a — so you’ve been partially redeeming the debt maturing over the next few years, I guess. What are some of the considerations but and fully repaying the remaining 2024 and 2025 maturities versus refinancing them in this interest rate environment?
Bart Demosky
Yes. Great question, Konark. So you’ll probably have noted as we’ve been undertaking tenders that we’ve been concentrating on the ’24 and ’25 maturities. We did buy some of the 2027, they were quite deeply discounted. So that allowed us to buy more bonds per dollar spent. So as we’ve said, we’ll continue to be opportunistic in the market. And I think that’s a good example of keeping to our word.
You should expect us to continue to focus on the nearer-term maturities. We’ve got just over $500 million left on the ’24s. And assuming we continue to pay down debt here we’ll be in a position where likely be in a position where our next maturity won’t be until ’25.
That’s a considerable amount of debt, though, between the ’24s and ’25s. So our expectation today is just on our — using our own conservative forecasts of the future for cash flow generation. And I say conservative because that’s how we plan. we would need to refinance some of that debt but pay off a bunch of it as well. So I can’t get into more detail on that other than to give you kind of the general guidance of how we see things. .
Konark Gupta
That’s great color, Bart. Then I also noticed in your disclosures that the adjusted net debt is already at $4.5 billion, which is, I think, what you guys were implying in 2025, so congrats on that. But my question is, do you see a higher likelihood of coming in much below 3x net debt-to-EBITDA in 2025, assuming you reach the $1.5 billion EBIT before.
Bart Demosky
Yes. So great question. So when Eric laid out the strategy for the company and we came to the market in March of last year, Konark, we put that target out there that we wanted to get down to 3x. That number was driven by the plan itself. It was not an overly expiratory number. It was here’s the plan. if we execute on this plan, this is where we’ll get to, and it will put our balance sheet in a really, really good place.
But it’s certainly not the end game for us. We would see ourselves wanting to achieve a lower debt-to-EBITDA multiple than that. And if we certainly continue on the pace we’re on. That will be the case for sure.
Konark Gupta
That’s great. Congrats again.
Eric Martel
Okay. Thank you, Konark.
Operator
Thank you. This will conclude the question-and-answer session. I’ll turn the call back over to Eric Martell.
Eric Martel
So thank you again to everyone for joining us today. So as you can appreciate, Bombardier continues to execute on its commitments and deliver a solid performance. I am proud of the results for the first half of 2022 and even prouder of the team behind them.
Raising our cash guidance and reaffirming our other metrics simply does not happen in today’s macro dynamic context without one that is focused on execution and agility. We have excellent line of sight on the months ahead of us and will carry forward our execution mindset as we move through the third and fourth quarter.
Before we sign up, I wanted to wish everyone a safe and restful summer holiday. Thank you all.
Operator
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
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