Good day, ladies and gentlemen. Welcome to CAE Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Andrew Arnovitz. You may now proceed, Mr.
Arnovitz.
Good morning, everyone, and thank you for joining us. Before we begin, I'd like to remind you that this morning's remarks contain forward looking statements, including without limitation as it relates to our proposed acquisition of Bombardier's Business Aviation Training Business as well as certain expectations with respect to the same. These forward looking statements represent our expectations as of today, November 8, 2018, and accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward looking statements.
Please refer to Slide 2 of our investor presentation, which can be downloaded on our website for a detailed description of the cautions and risk factors pertaining to the proposed acquisition and related forward looking statements. On the call with me this morning are Marc Parran, CAE's President and Chief Executive Officer Sonia Branko, our Chief Financial Officer and Nick Lian Titus, CAE's Group President of our Civil segment. After remarks from Mark and Sonia, we'll take questions from financial analysts and institutional investors. Following the conclusion of that Q and A period, we'll open the line to questions from members of the media. Please link to the investor presentation that we've prepared for your reference.
You may wish to use it to help guide this morning's discussion. It's available in the Investors section of CAE's website or by clicking the link in this morning's press release. Let me now turn the call over to Mark.
Thanks, Andrew, and thanks to everyone for joining us on this early morning call. It's an exciting day for CAE. This morning, we announced that CE will acquire Bombardier's Business Aircraft Training business to expand our position in the large and growing business jet training market. This marks another important step in realizing CAE's vision to be the recognized worldwide training partner of choice. I'll first say a few words about the strategic rationale behind our decision and describe how this will benefit CAE shareholders and then Sonia will walk us through a summary of the transaction details.
This agreement between Bombardier and CAE is a win win that enables both companies an even greater focus on our respective core businesses. One of the main benefits for CAE in this transaction is this as that we'll have a significantly expanded ability to address the training market for the active fleet of more than 4,800 Bombardier Business Jets, many of them in the higher value medium and large cabin segment. The acquisition gives us a well established and growing business for the provision of all flight and maintenance training for business jet operators worldwide. Also as part of our agreement, we will extend our authorized training provider status with Bombardier out to 2,038. The acquisition provides CAE with talented people, our portfolio of customers and an established recurring training business, which is highly complementary to CA's network.
The Bombardier Business Aircraft Training business includes a modern fleet of full flight simulators and training devices covering the Learjet Challenger and Global product lines, including the latest large cabin Global 5,500, 6,500 and 7,500 business jets. From a strategic standpoint, the transaction fits right in our core and aligns very well with CAE's larger training strategy. One of our main strategic objectives as a company is to grow recurring revenues and in Civil specifically to increase wet or instructor led training. The acquisition gives us exactly that, an expanded addressable market for business jets, which is 100% wet training and the ability to leverage our expanded position on Bombardier Business Jet Platforms across the entire CA global network. The customer installed base will now have the benefit of accessing trading in 7 locations worldwide.
Currently, the Bombardier Business Aircraft Training Business operates from 2 locations, 1 in Dallas and 1 in Montreal. The operations are already co located within CAE's training centers, which makes for a smooth plug and play integration. In summary, we look forward to addressing a large and growing market of Bombardier Business Jet operators and to providing them with a world class training experience. Market fundamentals of Business Aviation are strong with increased aircraft utilization and higher expected deliveries of new aircraft and the business we're acquiring is well supported by a large installed base. We're expanding our position in the largest and fastest growing segment of business aviation training at an opportune time.
And this is an attractive opportunity for Sea to acquire an established business with a high growth profile and attractive margins. The transaction will provide CE with positive earnings and free cash flow accretion beginning in the 1st full year following the closing of the acquisition. With that, I'll now turn the call over to Sonia to take us through the transaction summary.
Thank you, Mark, and good morning, everyone. This transaction aligns well with our capital allocation strategy, which prioritizes accretive growth investments in our core, cash returns for shareholders and a strong financial position. With this transaction, our capital allocation strategy remains unchanged and we maintain our visibility to 13% return on capital employed within our guided timeframe by fiscal 2022. There are 2 main components to the transaction. The first being the acquisition of Bombardier Business Aircraft Training or BAT for an enterprise value of US645 $1,000,000 Using forecasted 1 year forward EBITDA, this represents a purchase multiple of about 9 times.
This takes into account about $6,000,000 of annual cost synergies that we expect to reach within our 1st year. On a trailing 12 month basis using an adjusted EBITDA, this equates to about 10 times multiple. It's important to note that of the 12 full flight simulators acquired as part of the VAS business, one of them for the Global 7,500 was just recently deployed and another 7,500 will be deployed in December. And one additional simulator for the Global 6,500 is scheduled to be deployed in our fiscal year 2021. We expect the business to generate double digit growth, driven in large part by demand from the existing large installed base of Bombardier Business Jet Operators Worldwide and the ramp up of the recently deployed or soon to be deployed high value training platforms.
Involves the monetization of existing future royalties and the extension of our ATP agreement to 2,038. We have agreed to pay US155 $1,000,000 as a discounted sum of CAE's royalty obligations to the OEM for the next 20 years. The opportunity to extend the ATP and prepay these obligations at a discount provides good value for CAE and its shareholders. We expect the transactions to be accretive to the Civil segment operating margin by about 100 basis points to 150 basis points and for CAE overall for it to be high single digit percentage accretive to earnings in the 1st year following closing. And there will also be free cash flow accretive in the 1st year.
Financing for the transaction is fully committed and we are financing it with a combination of new committed term loans of up to US400 $1,000,000 as well as cash on hand in our existing credit facility. CE's target leverage ratio is 35% to 45% net debt to total capital and with this acquisition it will remain within this range at approximately 42% pro form a at closing. These assets generate a high level of free cash flow and our plan is to bring leverage back down to the lower end of the target range within 24 to 36 months post closing. CAE is and will remain an investment grade profile which enables us to maintain our financial flexibility and access to debt markets at attractive terms. In terms of timing, the transaction is subject to customary regulatory approvals.
We expect to close on the monetization transaction by the end of our fiscal year and to close on the VAC acquisition by the second half of calendar twenty nineteen. With that, I thank you for your attention. We are now ready to answer your questions.
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Our first question comes from the line of Chris Murray with AltaCorp Capital. Please proceed.
Thanks. Good morning, folks. A couple of quick questions for you. The first on the simulators that you're acquiring, is it fair to think that all of those are actually a CAE build or
are there will there be
a mix of different equipment that you'll be acquiring?
There is Mark and Chris. They're all C except for 1 which was built many years ago, actually I was still at Bombardier at the time. It was built by NLX, which a company that no longer exists as separate entity.
Okay, great. So no problem with the equipment then. All right. And then the other question for you is on the Most
of them are quite recent.
I could just add though, so most of these, as Mark just said, are CAE manufactured simulators, very complementary to our existing network and they're very modern young simulators that are quite cutting edge and don't expect a lot of maintenance CapEx going forward.
Okay. But what
I would direct is, in addition to these simulators, really what we're buying is a business. We're buying a stream of incremental revenue and EBITDA cash flows, an existing portfolio of contracts and customers that are growing at a double digit base. They happen to be served by 12 simulators, but really we're buying an ongoing going concern business.
No, I appreciate that. And I'm assuming that all the staff
and everything will transfer with it as well? Yes. Yes.
Okay, perfect. If you could, can you give us any indication you talked about getting back to a 13% ROCE. Any thoughts around or guidance around what the discount rate looked like to justify the taking the royalty stream and turning into a lump sum payment? Is there something that actually helps you hit that target that comes from that decision?
I think this was a very attractive transaction for us because it allows us to extend our ATP agreement for until 2,038. And these were existing contractual cash flows and not incremental cash flows. So the prepayments allowed us to discount that at a discount that is higher than our cost of capital and so attractive value for CE. So this in addition to the business which provides strong free cash flow, accretive earnings will contribute to ramp up the ROCE to our target capital return on capital of 13%.
Okay. Thank you. That's all my questions.
Thank you.
Thank you for your question.
Congratulations for the announcement this morning. Could you talk a little bit about Business Jet in terms of market share that you will have post this transaction in terms of number of simulators versus your the number one competitor in space? And also talk about the synergies, quantify the number of synergies that could exist with your current training footprint in Dallas and Montreal? Thank you.
Well, let me just start with the synergies. Well, maybe, Sonya, you want to take that one?
Yes. So on the synergies, we've specified that we expect to have about $6,000,000 in annual synergies. And this really comes from the fact that both operations are highly complementary. And we're buying this business to support our growth. So we expect a good integration due to the fact that the operations are co located and we're also very close on the operation.
Now, there will be some synergies mostly coming from cost efficiencies in infrastructure and back office costs like IT costs. There are some redundancies in positions, but we are a growing company and have many open positions. So we're confident that there are plenty of opportunities across the organization for any of the impacted people positions.
Yes. With regards to market share, maybe I'll just cover in terms of the amount of business aircraft simulators. Nick, maybe Yes.
So today, we have 18 Bombardier model simulators in the network and we're going to add 11, so that will bring us up to 29.
And then there's one to follow.
And then there's one to follow, so that takes us to 30 and that's out of a fleet of about 80 simulators. So a pretty significant amount of our sims Already have been Bombardier, so just a little bit more.
Okay. And what about the average fleet of Bombardier's training simulators, what's the relatively the average age?
Yes, age of the simulators?
Yes, yes. Just for kind of a pretty new mark.
Yes, it's a very new fleet. The average age is about 7 years, so very new modern fleet.
Okay, perfect. Okay, congratulations again. Thank you.
Thank you very much.
Thank you. And our next question comes from the line of Kristine Liwag, Bank of America Merrill Lynch. Please go ahead.
Good morning. So yes, I think on your prepared remarks, you mentioned that the deal is margin accretive to the Civil segment. So I just wanted to confirm that first that's what you said. And then second, can you give us an understanding of why this business would be accretive to what you already have? Is there a difference in mix?
And let us know what's kind of driving the difference there?
So to your first question, what we see is strong growth, double digit EBITDA growth on demand from a large installed base of business jet operators and the ramp up of newly deployed and soon to be deployed to the new areas, as well as leveraging and expanding these training platforms across our global network. So what we see on the Civil side is an expansion of margin about 100 basis points to 150 basis points. And really what that reflects is a higher preponderance of that on the civil portfolio. And Business Aviation Training is generally a multiple more in revenue and margin, given that it's all WEX, so instructor led training and so definitely for higher yield.
And then is there a customer overlap between your customers today and the new business you're buying?
Yes. So this is Nick. We there is definitely a lot of overlap between the customers that this business serves and ours. I think just to your previous question, the business acquiring this business expands the addressability that we have. And so it's all about being able to serve all the different platforms that Bombardier has either in production today or had in production in years gone by.
So typically a customer will come to one provider for all of these. So when we bought this business, we expand what we have and we call that halo, but it's really our halo, but very many common customers.
Sure. And last question for me. Can you guys provide some color on how the deal came about? Is this something that you approach Bombardier to acquire or is this something that they approach you to sell?
No, we approach Bombardier. We've had I mean, it's a national extension of the ongoing relationship that we've had with Bombardier. We are their authorized trading provider on essentially all of their business jets. And so this is an extension of the relationship and we propose it. I mean, as you've seen us do in the market overall for CAE and we just originally acquired the remaining 50% of the joint venture of AirAsia Training Center on the commercial side.
So it's something that we've been doing, again, along the way of fulfilling our vision to be the training partner of choice and acquiring scale and this gives a much expanded scale across Business Aircraft, which is right in the sweet spot of our business, especially on large cabin business
Great. Thank you very much.
Thank you.
Thank you for your question. Just as a reminder, we'd like to ask the financial analysts to feel free to press the one below by the floor now to register for a question for this segment. We now have a question from the line of Kevin Chiang from CIBC. Please proceed with your question.
Hi, good morning and thanks for taking my question here. Just in terms of the assets you acquired, I'm wondering are the 2 sites that you're folding in, what's the utilization of those sites today? I guess if I look at the trailing multiple, you're about 10x EBITDA. So that's about, let's call it, US65 million dollars of EBITDA you're acquiring on a trailing 12 month basis. Just wondering what that infers from a utilization perspective for those two sites?
I know utilization is very high. Do you have any numbers by any chance, Nick, yourself? No, we don't have a number. No, we don't have the number off hand. It's suffice to say that the utilization of simulators is pretty high.
Except Mark, I would just add that we have 9 simulators in the network today that are, I think, running at pretty good utilization rate. One was just installed recently on the 7,500. Another 7,500 goes in this coming December. And then there's a 12 simulator going in our fiscal 2021. So a lot of headroom on those areas, high value large cabin models coming into the mix.
I think what we would say is it's pretty comparable to what we have in the numbers that you see in our utilization.
Okay. That's helpful. And then just a housekeeping one here. I think your normalized CapEx has been around like $125,000,000 to $150,000,000 of let's call it maintenance CapEx. Does that change dramatically with this acquisition?
No, it doesn't. As we mentioned, it's a pretty young fleet. And so this would not have a significant impact.
Okay. And then I know you maintained the last one here. I know you maintained your 13% return on capital employed outlook by fiscal year 2022 there. But if I were
to think of
the fact that you're folding in a more profitable business that doesn't seem like it's adding to the capital intensity. I'm just wondering when you look at that target, the opportunity to reach that target earlier or to have that target peers above the 13% over the next 3 to 4 years here given the attributes of the assets you're acquiring today?
So we've taken that into consideration in the guidance that we've provided. We've seen significant progress in the past few years, climbing up to 12.6% last quarter by deploying market led capital to our network. That becomes accretive in short order. Of course, in the very short term, there'll be a bit of a headwind given acquisition simulators, intangibles to digest. But as you said, the strong accretion of this business and the cash flow it brings will allow us to ramp up to that target by FY 'twenty two.
Okay. That's it for me. Congrats on the deal.
Thank you.
And if I may add, the free cash flow will help us also delever back to the lower end of the target range within 24 to 36 months.
Thank you.
And thank you for your question. We're now going to proceed to the question and answer session for the press and media.
Operator, if there are no other questions, we can conclude this morning's call. I want to thank everyone for joining us, especially so early and remind you that a transcript of today's call can be found on CA's website as well as a supplemental investor presentation, which is linkable from this morning's press release or found in our investor section of CA's website. Thank you very much.
Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines.