Airbus SE and Bombardier Inc Announce C Series Partnership Call

BBD.B.TO - Bombardier Inc
Airbus SE and Bombardier Inc Announce C Series Partnership Call
Oct 17, 2017 / 05:00AM GMT 

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Corporate Participants
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   *  Harald Wilhelm
      Airbus SE - CFO
   *  Thomas Enders
      Airbus SE - CEO and Executive Director
   *  Thorsten Fischer

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Presentation
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 Thorsten Fischer,    [1]
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 Good morning, ladies and gentlemen. Welcome to this Airbus conference call. Further to the announcement made last night, Tom Enders, our CEO; and Harald Wilhelm, our CFO, will be highlighting the strategic rationale transaction structure and financial implications of the C Series partnership, and we will follow with Q&A.

 This call is planned to last about 1 hour. This includes Q&A, which we will conduct after the initial discussion. This call is also webcast. It can be accessed by our homepage, where we have set a special banner. Playback of this call will be accessible on the website, but there is no dedicated phone replay service. The supporting press release was e-mailed to you last night. We have also uploaded this morning on our website the slides, which we will talk you through now. Throughout this call, we will be making forward-looking statements. The presentation currently webcast contains the safe harbor statement, which applies to this call as well. You should read it carefully.

 Now to Tom Enders.

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 Thomas Enders,  Airbus SE - CEO and Executive Director   [2]
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 Thank you, Thorsten. Good morning, everyone, and thanks for joining our call today on such short notice and early hour. Well, as you've seen we're proud to announce where we have signed a partnership agreement with Bombardier and Investissement Québec on the C Series program. We will acquire a majority shareholding, 50.01% to be precise, in the C Series Aircraft Limited Partnership. And we will take over operational control of the C Series after closing the deal, of course, not immediately and obviously it will take some time to get all the approvals necessary to close the deal.

 We believe this is a very strong partnership, which will combine our global reach and scale at Airbus, our global sales and marketing product support, procurement activities, with a very innovative new aircraft. It will unlock the full potential of the C Series, this partnership, in terms of commercial momentum and profitability. I think there's only a strong upset. I have no doubt that this partnership with Bombardier will boost sales value of the program. And I think and you've probably heard it last night from Bombardier as well that Airbus is uniquely positioned to make all that happen and deliver that value. The deal will indeed deliver significant longer-term value creation for customers, particularly our customers, for our suppliers, but also for our shareholders. And as such, it is and we've said that yesterday a win for everybody. And if I may -- I mean that was kind of a summary.

 Let me explain in a bit more detail the strategic rationale behind the deal. Well, you're all aware the single-aisle market is largest and fastest growing market segment within the commercial aircraft field. And with this partnership, we will benefit from strengthening our product portfolio with the high volume -- within the high volume 100 to 240, 250 passenger single-aisle arena and offering additional value to our airline customers worldwide. Customers, we have informed so far -- customers of the C Series are enthusiastic about this partnership, which will offer them the latest technology, state-of-the-art full range product line starting from 100 seats upwards. And as I said, our broader reach, global reach and scale will certainly help us drive commercial competitiveness. With this partnership, Airbus expands its global industrial footprint also with a new FAL in Canada, in Mirabel. And we also envision a C Series production, that means we plan C Series production Final Assembly Line in the U.S. co-located with our Final Assembly Line in Mobile, Alabama.

 Moreover the combination of the businesses will further strengthen also our supply chain, including China, global supply chain. China, as you know, has a major part, fuselage parts of the C Series. And a question then perhaps is why are we doing it now? Well, there is a simple answer to that question, particularly if you compare our previous efforts some 2, 3 years ago, the timing is clearly favorable. It's all about getting it at the right time and the stars we think for that deal were well aligned. As you know, we already looked into this a couple of years ago, but decided that it was not the right time to move.

 Context has changed a lot, ladies and gentlemen. If you go back 2 years, the C Series is CS100 and CS300 had not been certified yet. We're not in service. That is all changed. We're talking about fully certified aircraft. Aircraft that has a very good customer feedback program. Operational focus is now on execution, and we expect significant customer interest once the program will benefit from Airbus' scale and expertise. That will happen, as I said before, after the closing.

 We, at Airbus, have progressed on our new programs too. As you know, in the meantime that has also changed on our side. We were a bit shy 2 years ago, because we've said, "Oh, my goodness, we have all these challenges ahead of us, particularly the 350 ramp up, the certification and introduction of NEO." The 350 ramp up is well underway. And we're also slowly getting, I think, out of the doldrums on the 320neo. And therefore, the context, since quite a few people have asked that throughout the last hours, why now and not before. The context is a very different one and a much more positive one.

 Let's have a look on the new joint force, so to say, in the single-aisle arena. You know our general market forecast. Over the next 20 years, the market for narrow-body aircraft will drive over 70% of the global future demand. That's equivalent to 25,000 aircraft. And the narrow-body segment is, therefore, obviously, a key growth driver for Airbus and for our supply chain, and we're well positioned. In the higher end of the market segment about 150 seats today. I think everybody can see that if you look particularly at the huge success, the huge backlog we have with the 320 and 321neo.

 The C Series with a really state-of-the-art design, strong economic fits very well with our 320 family i.e., our strength 150 seats upwards. The C Series is 100 to 140, 150 seats. So it's highly complementary to our existing single-aisle portfolio, and we will complement our offerings then in the future. That's the plan, CS100, CS300 address the lower-end capacity segment of the market. And that is by all calculations and different market estimates by different people, say roughly 6,000 aircraft in the next 20 years. And looking at the C Series, by the way, I see no reason why the C Series should not capture the major chunk of that 6,000 aircraft going forward.

 So this is why we're doing this. And the combined aircraft family will then offer our customers those who needed, who also wanted a full spectrum of state-of-the-art products and services. It will allow us to compete more efficiently and successfully against future new products in that range and potential market entrance into the next decade.

 Going forward, this partnership with Bombardier also allows us to continue focusing on the development at the upper end of our narrow-body range, where we have been particularly successful in the last 5, 6, 7 years, while the C Series when obviously can cover the lower end of single-aisle market. We also see a strong potential to develop step-by-step the combined narrow-body aircraft range into a more harmonized product family with a high level of commonality. And you know with Airbus, we are specialists in commonality based on the specific design solutions chosen for the C Series. This will provide significant efficiency potential for our customers. And I think also it will boost the sales for the C Series. So I think this new partnership, we've put together here with Bombardier puts us in an excellent position to further pursue our goals in the single-aisle market with no cost, ladies and gentlemen, no risk for our existing product base. And to perhaps to answer that question that came also yesterday, but what about the A319 and you're going directly against the A319 with the C Series. Well, the answer is we haven't sold the Airbus 319 over the last 5 years. I think that answers that question.

 Now have a look shortly on how we plan to unleash the potential of the C Series, before I then hand over to Harald for what you all are really waiting for, the financials. In -- on the commercial side, so to say, a combined customer relationship and Airbus' proven sales expertise will help the C Series gain traction and strengthen its commercial momentum. From what I've seen so far and, obviously, I mean, we are not C Series specialists, but what I've seen so far there is plenty of potential customers out there, who are convinced that C Series is a great aircraft, but they've been hesitant to engage and to buy these aircraft simply because they were not sure about the future of the program and about the future of the shareholder in the program. The combined business will offer our customers also and everybody knows that is critically important in our business, our customers an excellent level of aftermarket support, which matches the high quality of this aircraft through our worldwide product support networks. So we will progressively integrate then the C Series into Airbus. Airbus will bring to all operators the assurance that the C Series will benefit also from continuous improvements and new technology, state-of-the-art technologies support throughout the program life cycle. And I think as everybody aware, we are working hard to bring more innovations, new innovations in shorter-time cycles into our product. This is what we've done. This is what we pursue ever since we decided for the 320neo family some 7 years ago.

 On the industrial side, the expected increase in commercial momentum combined with our global procurement and scale will, for sure, help reduce current C Series production costs to a highly competitive level, as we have done already for the A320 family. And as you remember, when we again launched the NEO, we run a very successful program called SCOPE at the time to further reduce production costs.

 In addition, we anticipate significant C Series production cost savings from leveraging supply-chain expertise. And as I said before, in the longer run, we also see a strong potential to develop the combined narrow-bodies range into a harmonized product family with a high level of commonality. This will also create certainly further cost-saving potential. So that, in a nutshell, are the -- from a high level, obviously, at this point, the commercial benefit and the industrial benefit, which we are sure we can leverage also in the C Series.

 And Harald will now run us through the financial aspects and the deal structure. Over to you, Harald.

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 Harald Wilhelm,  Airbus SE - CFO   [3]
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 Thank you, Tom, and hello to everybody. Yes, let's have a look at the key financial aspects of the deal. Tom mentioned already numerous elements, which from our perspective have significantly changed since we first took into the C Series back in 2015.

 Let's have a look at them shortly from a financial standpoint. First, the C Series program has been carved out from Bombardier's commercial aircraft division into a new C Series Aircraft Limited Partnership, CSALP. This provides a high level of transparency into the financials of the business which obviously significantly removes uncertainties.

 The second key point, with the successful entry into service of the C Series, most of the development spend is behind. This has removed a large portion of financial risk from our business case. And together with Bombardier, we can now focus on the future and the next steps. Without any cash contribution at closing, we can be more specific if you want later, Airbus has now the unique opportunity to successfully drive the C Series program forward in order to unlock its full potential also from a financials' perspective.

 As you know, typically, we do not provide any detailed program financial information, but we're happy that we give you some key elements on this deal. First of all, any funding needs of the JV, so the program company I mentioned just before, until closing will be fully borne by the current program owner. And upon closing the joint venture, which we will fully consolidate, will be clear of financial debt. To identify the potential financial exposure after closing, we had performed a thorough analysis on the deal. Based on that assessment, we have structured the transaction in a way that up to $700 million of potential funding needs of the joint venture during the first 3 years of the ownership are covered by the seller. And I mean by that, the first cash losses starting after closing.

 Let's now focus on the upside potential of the deal. Tom explained already before that we expect to generate significant longer-term upsides in this joint venture from an accelerated commercial momentum and from production cost savings in the C Series, as we were able to demonstrate on our A320 family. In addition, Bombardier has committed to provide competitive supply to the C Series Final Assembly Line.

 Last but not least, Airbus will be granted warrants in Bombardier, which also allows us to further participate in the upside of the partnership.

 So to conclude on that, the business combination provides significant upside potential going forward at very limited exposure and no upfront investment. Based on that value, we can bring this partnership with a deal, which we believe will create significant value for our shareholders in the core of our business i.e., the narrow-body market.

 Now let's have a look at the deal terms a bit more in detail. So first, we're going to acquire an initial 50.01% interest in the venture and without cash contribution, as I mentioned before. And we will enter into some commercial agreements, which relates to sales and marketing support services for the C Series, management of procurement, which will include negotiations to improve the venture's supplier agreements and also customer support. I already commented the funding commitment of the seller of up to USD 700 million after closing. And that will be secured by issuance of nonvoting participating shares in the venture with cumulative annual dividends of 2%. We will benefit from call rights in respect to all of Bombardier's interest in the venture at fair market value after 7.5 years, with the amount for nonvoting participating shares used by Bombardier kept at the invested amount plus accrued but unpaid dividends. The call right on the nonvoting participating shares is exercisable upon closing. Similar rights are granted in respect of IQ's interest, but exercisable over a shorter period.

 Bombardier will benefit from a corresponding put right, exercisable after 7.5 years following the closing, whereby it could require that Airbus acquire its interest at fair market value. Similar rights are granted in respects of IQ's interest, but exercisable over shorter period. IQ will also benefit from tag along rights in connection with the sale of Bombardier of its interest in the partnership.

 The Board of Directors of the venture will initially consist of 7 directors, 4 of whom will be proposed by Airbus, 2 of whom will be proposed by Bombardier and 1 of whom will be proposed by IQ. Airbus will be entitled to name the Chairman of the venture. I should further mention, but we gave a commitment to Québec that the headquarters of the venture along with primary assembly and related functions will remain in Québec, C Series Final Assembly Line will be in Canada and C Series production for U.S. alongside Airbus Alabama single-aisle FAL.

 Upon closing, the transaction also includes the issuance to Airbus of warrants, exercisable to acquire up to 100 million Class B shares in the capital of Bombardier at an exercise price per share of the equivalent of CAD 2.29. Airbus will also be granted royalty free perpetual licenses for use of all of the venture IP noncompeting programs. Bombardier is committed to competitive supply for the C Series.

 And with that, Tom back to you for some closing remarks.

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 Thomas Enders,  Airbus SE - CEO and Executive Director   [4]
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 Yes. Thank you, Harald. Very quickly to wrap it up. But I think it's -- I can make this short. This partnership with Bombardier, ladies and gentlemen, on the C Series brings together 2 very complementary product line single-aisle aircraft. And I think everybody can see that there is clearly potential to create new commercial momentum in the segment that is anticipated to represent more than 6,000 aircraft over the next 20 years.

 Secondly, we will strengthen our global industrial footprint with the new FAL and program in Canada, roughly 2,000 employees, by the way. The future C Series production for U.S. customers, as Harald just mentioned, in Alabama. And the program will also allow us to expand our industrial activities with our Chinese partners, because China and Chinese industries are a major partner already on the fuselage of the C Series.

 We leverage Airbus supply chain expertise, that's the third point. We anticipate significant C Series production cost savings RC reductions, in other words.

 Fourth, we believe the timing for this partnership was now -- is now -- the stars are all aligned for this, this time around. And the program is significantly derisk compared to what we saw 2 to 3 years ago, and Bombardier does need a partner to build the commercial momentum. I mean, the plane is a great plane, but the plane needs somebody like Airbus to spread its wings around the globe, so to say.

 And last, overall, I think our equity story, and Harald just mentioned it. I guess, that's very important for everybody on the call this morning, remains intact with longer-term upside potential very clearly. What are the next steps from here? Well, as you can imagine, we target to close this transaction as soon as possible once we receive the necessary regulatory approvals. And currently, we are expecting this. I think that's a realistic assessment from where we are today in the second half of 2012, i.e., might be roughly a year between now signing the agreement and the closing of the deal. Okay. That's it.




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