Bombardier Inc. (BBDB) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to the Bombardier strategic announcement call. Please be advised that this call is being recorded. At this time, I'd like to turn the discussion over to Mr. Patrick Ghoche, Vice President, Corporate Strategy and Investor Relations for Bombardier. Please go ahead, Mr. Ghoche.

Good afternoon, everyone, and thank you for dialing in. We're excited to share with you today a defining step in Bombardier's turnaround journey. With me this afternoon is our President and Chief Executive Officer, Alain Bellemare; and our Chief Financial Officer, John Di Bert, to share a vision for the future of Bombardier. Please note that a slide deck is available to accompany this call on our Investor Relations website. 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 Page 2 of the presentation. I'm making this cautionary statement on behalf of each speaker on this call. I would now like to turn over the discussion to Alain.

Thank you, Patrick. Good afternoon, everyone, and thanks for joining us today. As you saw in our press release, we just announced a very significant industry-defining transaction, the sale of Bombardier Transportation to Alstom. This deal is valued at USD 8.2 billion with total proceeds of $6.4 billion to $6.8 billion. After netting out the CDPQ preferred equity in BT of approximately $2.3 billion, net proceeds to Bombardier are in the range of USD 4.2 billion to USD 4.5 billion. This transaction simplifies and significantly reduces the cost of our capital structure. From an industry perspective, we believe that the combination of Alstom and Bombardier Transportation will create significant value for our shareholders and our customers and will provide exciting opportunities for our employees. It is a transformational deal for Bombardier. It marks the end of our turnaround and the beginning of a new and bright chapter for the company. It really changes the game for us. It positions Bombardier to accelerate our deleveraging by reducing our pro forma net debt from slightly more than USD 5 billion, down to roughly USD 2.5 billion, as well to simplify our capital structure with the buyout of CDPQ at approximately USD 2.3 billion. Moving forward, we will focus on our amazing Business Aircraft franchise. I will talk more about our exciting future in just a few minutes. But first, John will walk you through the deal terms and what this means for Bombardier.

Thank you, Alain, and good afternoon, everyone. Today's announcement is transformational for Bombardier's capital structure. It accomplishes 2 important goals: it eliminates the most expensive part of our capital structure, CDPQ's preferred participation in BT; and it creates significant cash proceeds and deleverages the business. Before I take you through the transaction details and time line, let me share some insights to value. The transaction was done on the basis of normalized earnings for BT, meaning we used the 3-year adjusted EBIT average for 2016 to 2018. On this basis, the USD 8.2 billion enterprise value represents approximately a 12x multiple on EBIT in line with comparable transactions. Let me now go through some of the highlights of this transaction. Bombardier and the CDPQ have entered into a Memorandum of Understanding to sell 100% of BT to Alstom. This MOU grants exclusivity between the parties and includes a fully negotiated purchase agreement that will be executed following the completion of required works council review. After taking into account pension and other liabilities, net of cash retained in the business, this agreement results in the total net proceeds within an agreed band, from a floor of USD 6.4 billion to a ceiling of USD 6.8 billion, based upon the business' operating performance through closing and certain other adjustments. As part of the deal, CDPQ has agreed to receive a value between USD 2.1 billion and USD 2.3 billion for its share in BT, payable in Alstom shares. Bombardier expects to receive USD 4.2 billion to USD 4.5 billion of net proceeds, including 550 million of Alstom shares, monetizable after a 3-month lockup post close. Financing of the transaction by Alstom is fully committed, resulting in no financing conditions. The transaction would be subject to certain conditions including regulatory approvals and Alstom's shareholder approval of the capital increase associated with the deal. In that regard, Alstom's largest shareholder, the Bouygues family with approximately 25% voting rights, has agreed to and enter into an agreement to vote in favor of this transaction. Finally, we expect the transaction to close in the first half of 2021. Now let me go over the time line and how we get there. As I mentioned, we signed an MOU subject to the approval of works council, which is a 4- to 5-month process. Once complete, the purchase agreement would be automatically executed. This will allow us to begin formal regulatory approval process. And by the end of October 2020, we expect Alstom to call a shareholder vote. We then wait for regulatory approvals expected in the first half of 2021. Let me now highlight how this transaction allows us to reshape and redefine our capital structure. First, the transaction eliminates the CDPQ instrument, which carried a minimum 15% annual return. While this investment contributed to strengthening our balance sheet back in 2015, we now needed to find a solution to normalize our cost of capital. This is now solved, and we have simplified our capital structure. Second, by adding the proceeds from announced divestitures net of some exit costs and liabilities and the cash required to operate BT, we expect cash on hand to be between USD 6.5 billion and USD 7 billion on a pro forma basis. Let me walk you through how we get there. Before announcing this transaction, we expected approximately $4 billion of cash on hand at the end of 2020. Remember, this includes our 2019 cash of $2.6 billion, to which we add approximately $1.6 billion from the previously announced transactions expected to close by mid-2020. And we deduct the $200 million of RBG payments expected this year. It also reflects our recent cash positive guidance for 2020. From the $4 billion, we will add the low end of proceeds of $4.2 billion from the sale of BT, less an estimated $1 billion of cash on hand at Transportation that will remain with the business. Altogether, we now anticipate more than $7 billion of cash on hand on a pro forma basis. Once netted for up to $500 million of remaining commercial aircraft exit liabilities, we expect cash in the range of USD 6.5 billion to USD 7 billion. This allows us to direct proceeds from the sale of BT towards debt paydown after closing. Furthermore, after netting the pro forma cash from the $9.3 billion of debt, we expect to have net leverage of approximately $2.5 billion, significantly reducing our net leverage ratio. With this stronger balance sheet and with an improved cost of capital, we are properly positioning aviation to compete from a position of strength. Before I turn it back to Alain, I want to say that since the beginning of our turnaround journey, we've always been proactive and committed to a stronger balance sheet and creating long-term shareholder value. With the proceeds from this divestiture and with a strong aviation business, we will evaluate the most efficient debt reduction strategies to retire maturities early and to lower cash interest. This will position our aviation business to deliver solid financial performance and create shareholder value. With that, I'll turn it back to Alain.

Thanks, John. We're very excited about Bombardier's future. While it has been a demanding 5-year turnaround journey, we are now lending Bombardier in a great place. The strengthened balance sheet that John just described positions us to compete and win in the business aviation market. Bombardier is a world leader in business aviation with demonstrated performance and a clear path for growth and margin expansion. Having just completed a major product investment cycle, we have the best product portfolio in the industry. Our flagship aircraft, the all-new Global 7500, is the largest, longest range and most advanced business jet in the world. In 2019, we also brought into service the new Global 5500 and 6500 with better than promised performance. And our industry-leading product portfolio also includes the Challenger 350 and 650 aircraft, best-selling in their respective class as well as the new Learjet 75 Liberty. With a $14.4 billion backlog, the largest in the industry, we are very well positioned to compete, win, grow and create shareholder value. Bombardier also continues its commitment to exceptional customer service, having announced major expansions to our service and support network. We are currently executing on this growth agenda through projects around the world, including new and expanded facilities in Singapore, London and Miami. As you can see, we have a rich legacy of innovation. And over the years, we have developed amazing capabilities to bring new technology and new aircraft to market. We are extremely proud to be the strong anchor of the aerospace cluster in Québec in Canada. Looking ahead, we are now fully focused on being the best business aircraft company in the world. And we have all the pieces in place. We have the best people, the best products and the best technology. And with our new capital structure, we can compete from a position of strength. We're very excited about the future of Bombardier Aviation.

With that, operator, we'll take our first question, please.

[Operator Instructions] Our first question is from Kevin Chiang from CIBC.

Maybe just to clarify on the transaction with Alstom. Just wondering if there are any guarantees on your end regarding these problem contracts you've had. Or have all these liabilities or any future liabilities that might stem from these contracts with those still with Alstom -- Alstom moving forward once the deal is closed?

Kevin, this is John. So we've set basically a range for proceeds on the business, as we've mentioned, $6.4 billion to $6.8 billion, and essentially that accounts for any variability on operating performance and customary type of closing adjustments, balance sheet adjustments. So in our view, we feel good about the fact that there is both a floor and a range, and of course, we're going to be focused on operating and completing those projects for our customers. But in terms of the transaction, it's all within the anticipated proceed band.

And with a better balance sheet, once this is all said and done, how do you look at your portfolio within aviation? And maybe specifically on the Challenger front, is that something you'd look at more closely in terms of investing in that program to refresh that? Or are you happy with where things are now, and we can expect kind of a multi-year CapEx holiday?

We're very pleased with what we have today. I mean, we are a world leader in business aviation, as you know. And we have invested massively in the past few years. So we're just coming out of a massive investment cycle. And we feel today that we have the best product portfolio in the industry. I mean, our Global family is strong, actually #1, and our Challenger 350 and 650 are still best-selling in their class. So when we look at this right now, we feel very good about where we are. We have a very large installed base, and we've spent a lot of money expanding our customer support network, and we will continue to grow our aftermarket business moving forward.

Our following question is from Benoit Poirier from Desjardins Capital Markets.

Could you talk a little bit about the free cash flow profile and the sustainable CapEx requirement for BA in 2020 and beyond 2020?

So Benoit, this is John. So in terms of CapEx, I think it's fairly stable. When you look at all the businesses combined, as we mentioned during the last call, probably in the neighborhood of about $550 million, and I'd say a good chunk of that is aerospace, less so on the train side of that $550 million. And that's going to be pretty stable and more or less, we're looking at the CapEx to depreciation. It's a pretty good level to run this business. Remember also that we've indicated that both businesses are generating cash flow in 2020. And BA has really started to generate momentum in that regard, exiting the development cycle and now into deliveries and margin growth. So we'll give you guys probably more color as the year here kind of moves on and as we start to look forward to BA on a stand-alone basis. But for today, I would tell you that stable CapEx allows us to do the right things with the business at the same time, generating cash flow now, and that cash flow is continuing to grow going forward.

Okay. And last one for me, John. Could you talk about the sustainable level of corporate costs for BA going forward and your ability to reduce that with the transaction? And also, would you consider selling BA if value is maximized through a potential offer in the coming weeks or months?

Yes, Benoit, it's Alain. Let me start with the second piece of the question. The answer is no. I mean, we have -- we've completed the turnaround. We wanted to ensure that we would have like the right tools to deleverage the business, and this is what we're announcing today. We really like our business -- aircraft business, and we will continue to focus on this. We have a very solid base, and we see significant opportunity for growth and margin expansion moving forward.

And maybe just a quick comment on the first question. So I would tell you, first, recall that at USD 7 billion of revenue for Bombardier Business Aviation, this is still a very significant franchise, CAD 10 billion in that regard listed TSX. So of course, we're going to still need to do some of the same things that we're doing now from an overall corporate structure. There is definitely going to be over time in 2020, I think it's just focused on the 2 businesses and deliver to our customers and get through the transaction. After that, there'll be an opportunity to optimize and make sure that we have the overall appropriate structure with the right talent. And we have, I'm sure, plenty of time to take care of that, and we will make this a very strong business going forward.

Our following question is from Myles Walton from UBS.

In terms of the $440 million of upward adjustments, is that predicated on you overachieving versus your guidance in a material way? Or is that achieving your guidance in a straightforward way?

I'd say the simple answer to that is that it would be -- remember, when we provided color on the call, the commentary we said, we're being cautious with respect to some of the BT performance. So I would say that it's kind of midpoint to over-delivering the guidance.

Okay. And then in terms of running BA as a stand-alone, can you talk, Alain or John, about both the cash on hand you'd need as well as your flexibility in new product development in general? Do you think you'll have restraints on the product development side and/or what the kind of cash on hand needed to run that kind of businesses?

Yes, I'll take that, Myles. So I would say that honestly, we think that this is going to be a business with all of the operating flexibility it requires to compete and win and be very strong. And it is part of the thinking that we had as we've completed all of this work, and so very well positioned. I believe that's going to have solid flexibility. With respect to commentary on the minimum cash, what I would say, I mean these are early days here. So we'll spend some of our time in 2020 optimizing the right debt and credit structure for the business. But I will say this, that we see now between $4.2 billion and $4.5 billion of net proceeds from this transaction towards Bombardier, specifically for the sale of BT. You can assume those to be directed towards debt reduction. And then from there, we will evaluate with the opportunities to optimize cost and flexibility for the business. But really from a position of strength now that we're looking closer to a $2.5 billion net debt number. Maybe to add on to that is that we are, from here, cash generative as well as, I think, EBITDA growth. So those will be helpful in terms of a net leverage ratio as well.

Our following question is from Walter Spracklin from RBC Capital Markets.

I just have the one, obviously, with the regulatory issues that Siemens and Alstom had and the similarity between your businesses. What kind of -- how do you view your combination as having a more likely or a higher likelihood of passing regulatory approval in Europe?

Walter, there is a great fit between Alstom and BT. There's very minimal overlap. And there's a lot of work that has been done on both sides to assess that the process, the antitrust approval process, it's likely that there will be remedies associated with that. But we feel confident that Alstom will be able to obtain the antitrust approval process -- the antitrust approval.

And just related, I didn't see any break fee or anything like that? Is there any terms for around any break fees? Or...

Well, we have been negotiating with them. I would say there's normal break fees that have -- that are being -- that are -- that have been negotiated. They're in the range of $75 million.

Our following question is from Seth Seifman from JPMorgan.

Congratulations, Alain and John. Just on the leverage level, it sounds like, I mean, based on the guidance from last week for the Aviation business, maybe $900 million of EBITDA, maybe a little bit less with corporate costs. So you're mid-2s pro forma leverage on a net basis. Is that -- is that a sustainable level of leverage in your view for Business Aviation? Or would there be a desire to bring that lower? And if so, kind of where is the target leverage for a bizjet-focused business?

Seth, you're always very good at your math. So I will say that, yes, I think, I mean, for us, this is a story of continually improving strength here. I think that 2020, obviously, transitioning through all of this with respect to divestitures and solidifying then the basis for a go-forward aviation. Coming out of that, I think, with significant flexibility and strength and with respect to your parameters, I'd say that, one, we expect to be generating cash going forward, especially as we exit into '21; and two, we would be growing EBITDA. So it bodes well for the trend, I would say, from coming out of the gate with the net leverage ratio that will key off of this $2.5 billion and whatever your estimate for EBITDA is, just below $1 billion there, but improving as we go forward as EBITDA will, I think, accelerate and cash generation from the business will improve that net debt number.

Okay. Okay. And just as a quick follow-up, current Global 7500 rate that you guys are looking at, it seems like kind of mid-30s per year, at least. How far are you sold out on that in the backlog right now?