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, 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 8th, 2018. 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. Listeners are cautioned not to place undue reliance on these forward-looking statements. Please refer to slide two 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 Parent, CAE's President and Chief Executive Officer, Sonya Branco, our Chief Financial Officer, Nick Leontidis, CAE's Group President of our Civil segment. After remarks from Marc and Sonya, we'll take questions from financial analysts and institutional investors. Following the conclusion of that Q&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 investor section of CAE's website or by clicking the link in this morning's press release. Let me now turn the call over to Marc.
Thanks, Andrew, thanks to everyone for joining us on this early morning call. It's an exciting day for CAE. This morning we announced that CAE 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. Then Sonya 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 that we will 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 2038. The acquisition provides CAE with talented people, our portfolio of customers, and an established recurring training business, which is highly complementary to CAE'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 5500, 6500, and 7500 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 CAE global network. The customer install base will now have the benefit of accessing training in seven locations worldwide. Currently, the Bombardier Business Aircraft Training business operates from two locations, one in Dallas and one 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 in business aviation are strong, with increased aircraft utilization and higher expected deliveries of new aircraft. The business we are acquiring is well supported by a large installed base. We are 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 CAE to acquire an established business with a high growth profile and attractive margins. The transaction will provide CAE with positive earnings and free cash flow accretion beginning in the first full year following the closing of the acquisition. With that, I will now turn the call over to Sonya to take us through the transaction summary.
Thank you, Marc, 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, 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 FY 2022. There are two main components to the transaction. The first being the acquisition of Bombardier Business Aircraft Training, or BBAT, for an enterprise value of CAD 645 million. Using forecasted one-year forward EBITDA, this represents a purchase multiple of about 9x. This takes into account about CAD 6 million of annual cost synergies that we expect to reach within our first year. On a trailing 12-month basis using an adjusted EBITDA, this equates to about 10x multiple. It is important to note that of the 12 full flight simulators acquired as part of the BBAT business, one of them for the Global 7500 was just recently deployed, and another 7500 will be deployed in December.
One additional simulator for the Global 6500 is scheduled to be deployed in our FY 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. The second part of the transaction involves the monetization of existing future royalties and the extension of our ATP agreement to 2038. We have agreed to pay CAD 155 million 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 to 150 basis points, and for CAE overall, for it to be high single-digit % accretive to earnings in the first year following closing. It will also be free cash flow accretive in the first year. Financing for the transaction is fully committed, and we are financing it with a combination of new committed term loans of up to CAD 400 million, as well as cash on hand and our existing credit facility. CAE's target leverage ratio is 35%-45% net debt to total capital, and with this acquisition, it will remain within this range at approximately 42% pro forma 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 BBAT acquisition by the second half of calendar 2019. 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. Please note the first segment will be open to the financial analysts. Ladies and gentlemen, for the financial analysts, please feel free to press the one followed by the four on your touch-tone phone. You'll hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, press the one followed by the three. Once again, ladies and gentlemen, please press the one followed by the four now. One moment, please. Our first question comes from the line of Chris Murray with AltaCorp Capital. Please proceed.
Thanks. Good morning, folks. A couple 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 will there be a mix of different equipment that you'll be acquiring?
It's Marc here, Chris. They're all CAE except for one, which was built many years ago. Actually, it was still Bombardier at the time. It was built by NLX, which is a company that no longer exists as a separate entity.
Okay, great. No problem with the equipment then. All right. The other question for you on the-
Most of them are from a flight recent.
I could just add, most of these, as Marc 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.
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 concern business.
No, I appreciate that. 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% ROC. Any thoughts around or guidance around what the discount rate looked like to justify the taking the royalty stream and turning it 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 until 2038. These were existing contractual cash flows and not incremental cash flows. The prepayment allowed us to discount that at a discount that is higher than our cost of capital, and so attractive value for CAE. This, in addition to the business, which provides a strong free cash flow, accretive earnings will contribute to ramp up the ROIC to our target return on capital of 13%.
Okay, thank you. That is all my questions.
Thank you.
Thank you for your question. Please go ahead, sir.
Good morning, CAE, and 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 the number one competitor in this space? Also talk about the synergies, quantify the number of synergies that could exist with your current training footprint in Dallas and Montreal. Thank you.
Why don't we just start with the synergies one maybe. Sonya, you want to take that one?
On the synergies, we've specified that we expect to have about CAD 6 million in annual synergies. This really comes from the fact that both operations are highly complementary. We're buying this business to support our growth. We expect a good integration due to the fact that the operations are co-located, and we're also very close on the operations. 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. 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 in positions.
Yeah. With regards to market share, maybe we'll just cover in terms of the amount of business aircraft simulators. Nick.
Yeah. Today we have 18 Bombardier model simulators in the network, and we're going to add 11, so that'll bring us up to 29.
There's one to follow.
There's one to follow, so that takes us to 30, and that's out of a fleet of about 80 simulators. A pretty significant amount of our sims already have been Bombardier, so just a little bit more. Okay. What about the average fleet of Bombardier's training simulators? What's relatively the average age?
The average age of the simulators?
Oh, yeah. Just wondering, is it a pretty new mark?
Yeah. It's a very new fleet. The average age is about seven years. Very new, modern fleet.
Okay, perfect. Okay. Congratulations again. Thank you.
Thanks.
Thank you very much.
Thank you. Our next question comes from the line of Kristine Liwag, Bank of America, Merrill Lynch. Please go ahead.
Good morning. Sonya, I think on your prepared remarks, you mentioned that the deal is margin accretive to the civil segment. I just wanted to confirm that first, that's what you said. 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? Let us know what's driving the difference there.
To your first question, what we see is strong growth. Double-digit EBITDA growth on demand from a large install base of business jet operators and a ramp-up of newly deployed and soon to be deployed to the new aircraft, as well as leveraging and expanding these training platforms across our global network. What we see on the civil side is an expansion of margin about 100-150 basis points. Really what that reflects is a higher preponderance of that on the civil portfolio. Business aviation training is generally a multiple more in revenue and margin, given that it's all wet, so instructor-led training, and so therefore a higher yield.
Is there a customer overlap between your customers today and the new business you're buying?
Yeah. This is Nick. There is definitely a lot of overlap between the customers that this business serves and ours. I think just to your previous question, acquiring this business expands the addressability that we have. 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. Typically, a customer will come to one provider for all of these. 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. Last question for me. Can you guys provide some color on how the deal came about? Is this something that you approached Bombardier to acquire, or is this something that they approached you to sell?
No, we approached Bombardier. It's a natural extension of the ongoing relationship that we've had with Bombardier. We are their authorized training provider on essentially all of their business jets. This is an extension of the relationship, and we proposed it. As you've seen us do in the market overall for CAE, we just recently acquired 50% of the joint venture of AirAsia's training center on the commercial side. 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 in this business, a much expanded scale across business aircraft, which is right in the sweet spot of our business, especially on large cabin business jets.
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 followed by the four 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, thanks for taking my question here. Just in terms of the assets you acquired, I'm wondering, are the two 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 calling about 10 times EBITDA, so that's about, let's call it $65 million 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.
We don't have the number offhand, but suffice to say that the utilization of simulators is pretty high.
Marc, I would just add that we have nine simulators in the network today that are, I think, running a pretty good utilization rate. One was just installed recently on the 7,500. Another 7,500 goes in this coming December. There's a 12th simulator going in in our fiscal 2021. A lot of headroom on those very high-value, large cabin models coming into the mix.
Yeah, 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. Just a housekeeping one here. I think your normalized CapEx has been around CAD 125 to CAD 150 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. This would not have a significant impact.
Okay. I know you maintain, the last one here, I know you maintained your 13% return on capital employed outlook by fiscal year 2022 there. 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 pierce above the 13% over the next three to four years here, given the attributes of the assets you're acquiring today.
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 and tangibles to digest. 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 2022.
That's it for me. Congrats on the deal.
Thank you.
If I may add, the free cash flow will help us also delever back to the lower end of the target range within 24-36 months.
Thank you.
Thank you for your question. We're now going to proceed to the question and answer session for the press and media. Ladies and gentlemen, if you'd like to register a question, press the one followed by the four for the press and media section. One moment, please. Please go ahead.
You'll be the first to know. The business is going well.
The business is going well.
Thank you.
You know, there are many CEOs who say that their company is a leader in its field. In CAE's case, it is the only leader in its field. Can you explain to us a little bit, in the years to come, if you are still open to other acquisitions from OEMs or companies, to buy training centers that are everywhere around the world? Has that always been part of CAE's strategy?
Yes. Obviously, we will continue our vision, which is to be the partner of choice for clients in aviation, whether in the commercial aviation, helicopter, business aviation, in the defense and security sector. Obviously, it has to make financial sense.
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Merci.
[Non-English content] As a reminder, this session is for the press and media. Feel free to press the 1 followed by the 4. [Non-English content]
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 CAE'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 CAE'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. [Non-English content ] Have a great day.